By Todd Martinez, Senior Director, Co-Head of the Americas, Sovereigns, Fitch Ratings
Amidst the gloomy mood at this year’s Spring Meetings of the International Monetary Fund (IMF) and World Bank Group (WBG) in late April, views around Latin America were less downbeat. In numerous meetings with governments and investors, we talked about the downside risks facing the global economy. While there was broad agreement that Latin America is by no means immune to these risks, there was plenty of talk about opportunities for the region as well. That said, at Fitch Ratings, we maintain a cautious view about how much of a bright spot the region will be.
Without a doubt, trade protectionism was the topic on everyone’s minds in Washington, D.C., after weeks of whiplash from US tariff actions, suspensions and clarifications. U.S. Secretary of the Treasury Scott Bessent’s comments about a “de-escalation” with China did calm investors’ nerves, but underlying worries have persisted around a new era of protectionism that will have negative consequences for the world’s economy. Economists, including our own at Fitch, have been working furiously to model out tariff scenarios and what they could mean for global growth and specific countries. The results don’t paint a rosy picture. These models are based on time-series data spanning many years of gradual tariff reduction during the globalisation era and thus may not be fully apt to predict the negative consequences of a shift in the opposite direction—and a much more abrupt one.
However, against this gloomy backdrop, there was cautious optimism that Latin America could emerge as a winner—at least in relative terms. Most Latin American countries fared well in U.S. President Donald Trump’s “Liberation Day” tariff actions compared to peers in Europe and Asia, facing only the minimum 10-percent tariff, before the 90-day suspension kicked in. There was hope that Latin America was in a sound position to negotiate with the United States, given that many of its countries run bilateral trade deficits with their northern neighbour and/or specialise in goods that the US needs and is clearly not inclined to try to produce back home. And there was hope that US-China trade tensions could incentivise “nearshoring” investment into the region or create trade-diversion opportunities should China source agricultural imports from Latin America as opposed to the US.
While these arguments have merit, for now, we think they could mitigate the downside for Latin America rather than ensure a clear upside. We already expect that the escalation in protectionism between the US and China will significantly reduce economic growth in both countries in 2025, to 1.2 percent and 3.9 percent, respectively. This could have negative spillovers for Latin America’s economies, almost all of which count on these two countries as their top export markets. And it could weigh on the prices of the commodities that the region produces, as has already been the case with oil. As a result, we’ve cut our growth forecasts to varying degrees in most major emerging markets, have kept them unchanged for others and have raised them only in rare cases that reflect idiosyncratic circumstances (for example, Argentina) rather than global trends.
In our view, an assured “nearshoring” upside remains difficult to discern, at least for now. Looking at FDI (foreign direct investment) and broader investment data over the past few years, not many Latin American countries have emerged as obvious nearshoring beneficiaries, except perhaps Costa Rica. And there is a sense that the “genie is out of the bottle” regarding US trade protectionism that could limit the nearshoring upside, even for countries that secure preferential US tariff treatments. For example, even Latin American countries with longstanding free-trade agreements with the US were not spared from tariffs, calling into question the permanency of the rules and institutions on which many exporters have come to rely. And nearshoring prospects hinge on a host of other “pull” factors beyond tariffs in which Latin America has been lacking, including infrastructure, human capital and institutions.
Mexico clearly has the most at stake at this momentous juncture in US trade policy, as a country that has made exports to its northern neighbour—a massive 27 percent of its gross domestic product (GDP) in 2024—a centrepiece of its economic model. The fate of its trade relationship with the US is unlikely to become clear until the completion of the review of the USMCA (Agreement between the United States of America, the United Mexican States, and Canada) trade agreement, scheduled for 2026. That said, the uncertainty alone is already weighing heavily on Mexico’s economy, having manifested in the suspension of production by companies such as carmaker Stellantis. We project a 0.4-percent recession this year.
Mexico’s recovery prospects hinge on how long the uncertainty persists and the outcome of the USMCA talks. Most observers have been impressed with President Claudia Sheinbaum’s adept and cooperative tack in negotiations with the US so far and expect it will help Mexico to keep the USMCA broadly intact and avoid harmful outcomes. At the same time, we think it’s harder to see these negotiations ending in an outcome as favourable for Mexico as the last time—in 2020, when the USMCA emerged out of NAFTA (North American Free Trade Agreement). After all, a through-line in Trump’s policies and rhetoric so far has been “reshoring” as opposed to “nearshoring”, which is keeping us cautious for now.
US migration policy was also top of mind during the D.C. discussions about Latin America, but there seemed to be greater confidence that this wouldn’t result in bad economic news for the region. While the Trump Administration has completed high-profile deportations of migrants, it has yet to do so by a large enough magnitude to move the needle significantly for local economies, namely in Central America. Remittance flows have also proven to be remarkably resilient in past economic slumps, even serving a counter-cyclical function. The surge in remittances in the first quarter of 2025, ranging from 18 percent to 25 percent year-over-year in the Northern Triangle (El Salvador, Honduras and Guatemala), suggests a possible front-loading due to concerns around US migration policies.
That said, the Trump Administration’s focus on clamping down on migration flows is an obvious challenge for Central America, given how remittances have been drivers of its economic outperformance in the past five years, since before the pandemic. This highlights the importance of reforms to foster homegrown economic opportunities and job creation.
Finally, the US’ eagerness to counter Chinese influence in Latin America and the question of whether countries may feel pressured to “pick a side” were other hot topics of conversation. Surprisingly, Panama has emerged as the hot spot at the centre of the China-US geopolitical theatre in the region. Several US cabinet secretaries have already visited Panama amidst Trump’s allegations of Chinese influence on the Panama Canal, coinciding with the country’s decision to exit China’s Belt and Road Initiative (BRI).
However, whether this increased geopolitical attention is an upside opportunity versus a downside risk remains to be seen. China is no longer a major financial lender to Latin America. Its foreign direct investment into the region has not been massive in recent years and is surprisingly low even in some countries, such as Chile, for which it is the top export market. But it has been behind some key investments seeking to unlock the region’s export potential—the most high-profile being Peru’s mega Port of Chancay. So far, the Trump Administration has not adopted a “carrot” approach to enhance its geopolitical influence with foreign investment. USAID (United States Agency for International Development) was dismantled. The fate of the U.S. International Development Finance Corporation (DFC), created during Trump’s first term as an answer to Belt and Road, will be key to watch, as it is due for reauthorisation this year.
So, in short, Latin America shouldn’t take too much comfort from being a relative winner amidst these rising global trade and geopolitical tensions. Despite all the uncertainties, there could be some upside for the region. But such an upside is not assured, and governments would be unwise to count on it, lest their attention be distracted away from the homegrown efforts needed to brighten the region’s economic prospects more durably.