The FDI angle

• Trump's threats of tariffs and deportation resonated deeply across Latin America and the Caribbean.
• The region has reaped the benefits of nearshoring so far. Its outlook hinges on Mr Trump's commitment to follow through with his campaign pledges.

Why it matters: Trump's proposed tariffs and immigration policies could disrupt nearshoring gains, reshape trade dynamics, and strain remittance-dependent economies. FDI in Latin America hinges on geopolitical and economic recalibrations.

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atin America is holding its breath as Donald Trump gears up to take office on January 20. Mr Trump’s inflammatory rhetoric around tariffs and immigration has resonated deeply across the region. The US is the biggest market for exporters based in Latin America and the Caribbean. It is also home to millions of Latin migrants, who send back billions of dollars in remittances to their home countries every year: $155bn in 2023 alone. If the president-elect walks the walk, the region will have to brace for impact. 

“Universal tariffs may have a big impact on Latin American economies, particularly on those that have a free trade agreement (FTA) with the US,” says Silvana Amaya, a geopolitical expert based in Santo Domingo, Dominican Republic, on the sidelines of the annual gathering of Azfa, the association of free trade zones of Ibero-America. 

Mr Trump has threatened to impose levies of up to 20% on all imports and tariffs of up to 60% for goods originating from the US’s main geopolitical rival, China.

“At the same time, US producers cannot just substitute imports overnight, particularly Asian imports,” Ms Amaya continues. “In this light, nearshoring will continue to be important. Also from a friendshoring perspective, some countries whose governments are aligned with Trump may see benefits. One of them could be Argentina, despite its geographical distance from the US.” Argentinean president, Javier Milei was the first head of state to meet Mr Trump after his re-election on November 5. 

Mexico’s “delicate position”

If Argentina has a chance to leverage the alignment between its president and Mr Trump, so far Mexico has been the celebrated winner of the wave of nearshoring triggered by the first Trump administration and extended by the current administration led by Joe Biden. Its proximity to the US market , infrastructure and workforce gave the country a chance to dethrone China as the largest exporter to the US, ahead of China for the first time since 2003, according to US government data.  

Its nearshoring success, combined with its role as a door to the US for Latin migrants, puts Mexico in a particularly “delicate position”, Ms Amaya points out. Mr Trump has already threatened to leverage tariffs to strongarm his southern neighbour into complying with his “zero tolerance” immigration platform. A review of the US-Mexico-Canada free trade agreement, which Mr Trump himself brokered during his first term in office, is scheduled in 2026.  According to the Trump Risk Index by the Economist Intelligence Unit (EIU), Mexico is the world’s most exposed country to the policies of the incoming US presidency. 

Nearshoring hangs in the balance

Nearshoring did not stop in Mexico. Free trade zones in Central America and the Caribbean, a region that has had an FTA in place with the US since 2004 — known as Cafta-DR FTA — have witnessed strong nearshoring investment over the past few years. Exports to the US from Cafta-DR countries almost doubled from 2016, when Mr Trump was first elected, to $35.6bn in 2023, according to US government figures. 

“US governments tend to be careful not to undermine domestic consumption, which accounts for more than 60% of the GDP,” says Cesare Zingone, CEO of property developer Grupo Zeta, which operates free zones in Costa Rica, Guatemala and Nicaragua. “Demand will continue to grow and the closer production to final customers, the better. On top of that, geopolitical tensions push companies to shorten their value chains and reduce transport costs. This will favour Latin America. Having said that, it’s not black and white and it’s about marginal impacts. Our economies are relatively small when compared with China or south-east Asian countries. A small shift of production out of Asia can have a big impact on our region.” 

Free zones in Colombia, another country that has an FTA in place with the US and that piloted a “Back to the Americas” initiative with the Interamerican Development Bank (IDB) in 2020, have benefited from nearshoring too. One of the companies that decided to nearshore to Colombia was US-based StepUp, a producer of scaffold products. The company pursued a China+1 strategy by investing in the La Cayena free zone in Barranquilla after Mr Trump introduced tariffs against Chinese imports during his first term. The new facility opened in 2023. 

“Ahead of the new Trump administration, we still see an opportunity to export to the US market from our Colombian facility at lower duties than producers in China,” says David Gasull, the company’s managing partner for Latin America. “Ultimately, our product is almost a commodity, margins are low, and any tariff measure has an impact on our competitiveness.” 

Colombia’s exports to the US increased to $15.4bn in 2022, from $10.2bn in 2016, according to the World Bank’s latest available data. 

Overall, nearshoring could add an annual $78bn in exports of goods and services in Latin America and the Caribbean in the near and medium term, the IDB estimated in 2022. The depth and breadth of Mr Trump’s new tariffs proposal will affect this potential either way. 

The deportation threat

His promises of mass deportations will do it too. On the one hand, they may exacerbate the labour shortages US manufacturers are already facing, which would make the case for nearshoring even stronger. On the other hand, it will affect the inflow of hard currency remittances to Latin America and the Caribbean, and present the region with the daunting challenge of absorbing millions of expelled migrants, with the social, economic and security implications this engenders. 

Six of the 10 countries most exposed to the risk of a Trump presidency are in Latin America and the Caribbean, according to the EIU’s study, which looks at its impact through the lenses of trade, security and immigration.  

Ultimately, however, “I don’t expect the relationship with Latin America to be a priority of the incoming administration”, Ms Amaya argues. For once, that may not be necessarily a bad thing at all.

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