LatAm tariff-induced hit to growth to be recouped only by 2028

SAO PAULO (ICIS)–Latin American economies face mounting economic pressure as new global trade conflicts emerge and the region’s growth could be 0.3 percentage points lower than expected in 2025 and 0.4 percentage points lower in 2026, analysts at US credit rating agency Moody’s said on Wednesday.

• Mexican tariffs likely as migrant flows to continue
• Brazil’s aim to increase non-dollar payments angers Washington
• Hit to growth due to tariffs and trade conflicts to be felt until 2028

The region, which narrowly avoided a direct impact in previous trade disputes, now confronts a more complex landscape where traditional economic buffers appear increasingly fragile.

“The opening salvos of the global trade war have already been exchanged, and while Latin America has narrowly stepped out of the firing line, difficult days are ahead. While we expect Latin America to ultimately avoid recession under our baseline forecast, further tariff escalation could nudge the region into a broader downturn,” said Moody’s.

“Using our Global Macroeconomic Model, we simulate the effects of an additional 10-percentage point increase in the US effective tariff rate for Mexico and the rest of Latin America above and beyond what we are anticipating in our baseline. The result is a broad-based downturn in the region, with a contraction in output, elevated unemployment, surging inflation, and a collapse in trade.”

The analysts said those decreases in output and employment caused by trade conflicts would only be recouped by 2028.

MEXICO ON FIRING LINE
Mexico stands to bear the brunt of US trade measures, given its deep economic ties to its northern neighbour and heavy reliance on remittances to support consumer spending at home.

Moody’s analysts expect the US to implement broad tariffs on Mexican exports, though at rates lower than the 25% initially proposed in early February, proposals which are on hold for a month.

The US administration has focused on Latin America since taking office, targeting Mexico, Colombia, and Brazil over trade imbalances, immigration concerns, and efforts to reduce dollar dependence in international trade.

While recent tariff threats against Mexico and Colombia have been postponed or retracted, Moody’s expect effective tariff rates on US imports from the region to rise significantly.

Core disputes between Washington and Mexico centre on the trade deficit and immigration flows, issues unlikely to be resolved through negotiation alone.

“These [migrants’] inflows will remain a focal point of the Trump administration and are a potential wild card in US tariff policy. With inflows of undocumented migrants unlikely to fade as fast as Trump would like, the stage is set for higher tariffs on Mexico,” said Moody’s.

“If the tariff spat between the US and Colombia is any guide, any Latin American nation that refuses to cooperate with US deportations could find itself on the receiving end of tariffs regardless of the proximity of diplomatic and economic ties.”

Moody’s forecasts US tariffs on Mexican imports will rise to 10% in coming months, with Mexican retaliation expected, and the measures will likely remain in place until early 2026, when mounting economic pressures could force a policy reversal.

Moreover, the combined impact of Mexican and Chinese tariffs is expected to also strain the US economy, said Moody’s, which in turn would also affect Latin American economies further.

BRAZILIAN CHALLENGES
Brazil faces separate challenges, as tensions rise over its attempts to develop alternatives to dollar-based trade within the BRICS group of countries, of which China and Russia are leading members.

This week, the Brazilian government said it would be hosting the annual BRICS summit in Rio de Janeiro in July.

BRICS founding members were Brazil, Russia, India, China and South Africa; later the group expanded to include Egypt, Ethiopia, Indonesia, Iran, and the UAE.

Despite limited progress in establishing alternative payment systems – with the Chinese yuan accounting for a minimal share of global reserves – Brazilian President Luiz Inácio Lula da Silva’s promotion of BRICS currencies has drawn criticism from Washington.

The China Investment Information Platform, proposed as an alternative to Western-led global payments, still relies heavily on SWIFT infrastructure.

Federal Reserve data shows minimal advancement in global yuan usage across trade, debt issuance, international banking claims, and reserves, with most BRICS nations continuing to invoice predominantly in US dollars.

Steel and aluminium tariffs, set to take effect in March, present additional risks for Brazil and Mexico, the second and third-largest sources of US steel imports.

However, the direct economic impact may be limited, said Moody’s, as steel comprises less than 1% of Mexican exports and under 5% for Brazil.

Mexico directs almost 90% of its steel exports to the US, while Brazil sends just under 50%.

Last week, the US also said it was mulling increasing tariffs on Brazilian ethanol.

“More concerning for the Brazilian economy will be the broader-based slowdown of the Chinese and global economies. Brazil boasts the whole market basket of commodities, from industrial metals to agricultural products and even oil, with iron ore and metals exports accounting for around 15% of Brazil’s total exports alone,” said Moody’s.

“While the US is Brazil’s most important export market for steel, most Brazilian steel production is destined for domestic consumption. It is not unreasonable to think that steel exports priced out of the US could find a home elsewhere.”

Unlike during the 2018-2019 trade tensions, when Latin American nations offset slower global growth by increasing commodity exports to China and Asia, the region now faces fewer alternatives, said Moody’s.

Chinese dietary shifts, which previously drove demand for agricultural products, have largely stabilised, while metals producers Chile and Peru confront weakening Chinese property markets.

Brazilian agricultural exports to China surged during previous trade disputes, with soybean exports nearly doubling US levels, even after China lifted retaliatory tariffs following the Phase One trade agreement. However, analysts suggest such trade diversification opportunities may prove more limited in the current climate.

SEVERE SCENARIO
Moody’s went on to say that in a more severe scenario where US tariffs on Mexican and Brazilian imports reach 20%, and Chinese import tariffs hit 40%, a full-blown recession in Latin America could take place.

Mexico would face the heaviest impact due to US exposure, while Brazil would suffer from Chinese economic contraction.

Under such conditions, Chile, Peru and Colombia would experience significant downturns, with recovery potentially extending to 2028.

Chile’s concentrated commodity exposure makes it particularly vulnerable, with projections showing three consecutive quarters of GDP contraction and a recovery period exceeding one year.

Focus article by Jonathan Lopez