US Tariffs May Have Limited Impact on Latin America Now, but the Future Hinges on China's Macro Policy Response

The US tariffs announced on April 2 aim to penalize countries with which the US has large bilateral trade deficits. According to a formula provided by the Office of the United States Trade Representative, the larger the US bilateral deficit as a proportion of US imports from a partner country, the higher the tariff. This explains why many Asian countries are facing the highest tariffs. However, the imposition of a tariff floor of 10 percent means that no country or region has been spared (Canada and Mexico are under a different tariff regime, and Russia was excluded for geopolitical reasons). This includes Latin America (excluding Mexico), with which the US has been running trade account surpluses for many years.

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The effective new tariff rates for the region are generally lower than the announced rates…

To assess which Latin American and Caribbean countries are most affected by the tariff increases, we need to consider the goods exempted from the tariffs. According to Annex II of the April 2 Executive Order, exemptions primarily include metals, minerals, energy products, semiconductors, and pharmaceuticals. Additionally, products such as articles and derivatives of aluminum and steel, as well as automobiles and automotive parts, remain subject to a 25 percent tariff as outlined in Presidential Actions 10895, 10896, and 10908, announced earlier this year. Taking these factors into account, we estimated the effective tariff rate using trade data from the USITC Dataweb, following the Harmonized Tariff Schedule of the United States nomenclature.

Table 1. Announced and effective new tariffs

The countries in the table above are ranked from highest to lowest effective new tariff rates. Except for Nicaragua, Guyana, and Venezuela, with whom the US has a bilateral trade deficit, all countries face an increased tariff of 10 percent. However, the picture changes when exceptions and specific tariffs on aluminum, steel, and auto parts are considered.

First, Central American countries are hit the hardest. In Nicaragua, certain exports exceptions lower the effective tariff rate to 17.5 percent, remaining the highest in the region. There are few tariff exceptions for goods exported by Honduras, El Salvador, and the Dominican Republic, but their exports of steel (El Salvador and the Dominican Republic), aluminum (El Salvador and Dominican Republic) and auto parts (El Salvador, Honduras, and the Dominican Republic) increase their effective tariff above 10 percent.

Second, with the addition of Costa Rica, these countries are also the most affected in terms of the share of tariffed exports relative to their GDP.

Third, because of exemptions, the remaining Latin American and Caribbean countries face an effective tariff rate under 10 percent.

Fourth, despite the sharpest increase in new tariffs, Guyana faces one of the lowest effective tariffs in the region. This is because nearly 90 percent of Guyana’s exports to the US are oil, which is exempt from the tariffs. The situation is similar for Venezuela, where oil constitutes 95 percent of exports to the US, leading to a minimal effective tariff. Consequently, Guyana and Venezuela have the lowest effective new tariffs among Latin American countries. Similarly, Bolivia, Ecuador, Colombia, and Chile benefit from lower effective tariffs due to their exports of tin (Bolivia), oil (Ecuador and Colombia), and copper (Chile).

Examining the last column of the table, it appears that for most countries in the region, the direct impact of the new tariffs is not substantial. In all South American countries, the share of exports subject to tariffs as a percentage of GDP is 2 percent or less and, in some countries, such as Bolivia, Argentina, and Paraguay, the share is less than 1 percent.

…But that’s where the good news end: The China factor

Here is the catch: While the United States has traditionally been the primary trading partner for Mexico, Central America, and the Caribbean, this is no longer the case for South America. Over the past 25 years, increased trade and investment flows between South America and China have positioned China as the main trading partner for most South American countries. As of 2024, China accounted for around 28 percent of South America’s total exports, surpassing the United States’s share of 16 percent. This shift indicates that developments in China have a significant effect on the subregion.

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Minerals, metals, and energy products are key South American exports, and China is the primary destination for these commodities. For instance, in 2023, China consumed over 50 percent of Chile's non-precious mineral exports. Similarly, China was the main destination for mining exports from Argentina's Northwestern provinces region in 2024, capturing 44.9 percent of total exports during the first 11 months of the year.

A significant slowdown in China’s economy would likely reduce its demand for such commodities, potentially lowering commodity prices and adversely affecting South American economies. Given that all recent forecasts project a significant slowdown in US growth, or even a recession, due to its new tariff policy, it is improbable that the US could compensate for reduced Chinese demand. The most likely scenario if China slows down significantly is a negative terms-of-trade shock for South American countries, impacting their economic stability.

How probable is a severe China slowdown? The recent increase in US tariffs on China is huge. Even when the effective new tariff rate is estimated, it reaches 27.4 percent. Add to this the 20 percent fentanyl-related tariff imposed in March and the existing 11 percent average tariff at the end of 2024, and China will face the highest effective tariff rate in the world. Without an adequate policy response, analysts estimate that these tariffs could decrease China's GDP growth by up to 2.5 percentage points over 2025-27.

​China has already announced retaliatory measures, including a 34 percent tariff on all US imports effective April 10, and export restrictions on rare earth minerals. However, these actions will not alleviate recessionary pressures and could potentially exacerbate them by increasing the costs of critical inputs. China’s ability to mitigate the economic impact will depend on its choice of countercyclical policies. Will China depreciate its currency in an attempt to preserve competitiveness, potentially prompting similar reactions from other emerging markets and developing economies? Such competitive devaluations could contribute to a persistently strong dollar, further harming Latin American commodity exports.

Alternatively, will China be able to implement substantial fiscal stimulus to bolster economic growth without exacerbating concerns about debt sustainability in an already highly indebted economy? To be effective, fiscal policies would need to be accompanied by structural reforms addressing local governments’ heavy reliance on land sales and debt accumulation. But if successful, these initiatives would support global trade and the demand for Latin American exports.

Stay tuned. China’s policy decisions in the near future will significantly influence global trade and growth dynamics, with notable implications for Latin America.