Caribbean & Central America - May 2025

Tariffs imposed by US President Donald Trump on 2 April on all imported foreign goods have set alarm bells ringing throughout Central America, with key economic sectors likely to be negatively affected.

Trump imposed a blanket 10% tariff on Guatemala, Honduras, El Salvador, Costa Rica, and Panama, with Nicaragua hit by an 18% tariff, although this was later paused. This means Nicaraguan exports are currently subject to the same 10% tariff as those from the rest of the region, but the swift retraction demonstrates how volatile Trump’s trade policy has been so far, adding to the uncertainty that is already affecting the regional economy.

According to figures from the secretariat for Central American economic integration (Sieca) obtained by Bloomberg Línea, a multi-platform business news brand, the US receives 32.1% of Central American exports. Significant sectors include textiles, which represent 29% of total regional exports to the US, and medical equipment, which make up 15% of the total, according to an analysis from international consulting firm Deloitte published in January, as well as agricultural products such as nuts and fruit, coffee, sugar, vegetables, and tobacco.

Analysis by US multinational investment bank Citi shared with Bloomberg Línea found that Honduras, El Salvador, and Panama are the most vulnerable Central American nations, given their trade imbalances with the US, migration, drug trafficking, and dependence on remittances.

In Guatemala, local private sector lobby Cámara de Industria de Guatemala (CIG) estimates that tariffs will cost businesses more than US$40m per month. This will affect the competitiveness of Guatemalan exports compared to those from countries not subject to tariffs, such as Mexico, CIG vice president Enrique Font was cited by national daily Prensa Libre as saying in an article published on 21 April. 

According to Ricardo Barrientos, the executive director of regional thinktank Instituto Centroamericano de Estudios Fiscales (Icefi), tariffs will likely deepen the region’s dependence on remittances sent by migrants living in the US. As Trump’s trade policy has so far led to a weakening of the dollar against a basket of currencies, these remittances will likely be worth less to those receiving them, weakening their purchasing power and potentially pushing those that rely on them for basic necessities closer to poverty.

Tariffs and the surrounding uncertainty could lead to job losses in the worst affected sectors, potentially increasing hunger and poverty while increasing the risk of social unrest. There are also widespread concerns that the tariffs will increase prices for US consumers, leading to a collapse in demand for imported products as people tighten their belts in the face of the rising cost of living, as well as tipping the US economy into recession. This would have important second-order effects on the service sector in Central America, including tourism and customer service call centres that cater to the US market.

Business groups have pressed national governments to negotiate with the US, and officials have reacted cautiously so far. Even those countries that have had more difficult relations with the US in recent years, such as Nicaragua and Honduras, have not retaliated with their own tariffs.

The Guatemalan government has criticised the tariffs for violating the terms of the Dominican Republic-Central America free trade agreement (Cafta-DR) with the US, but President Bernardo Arévalo has ruled out imposing retaliatory tariffs and said he will negotiate with the US. Arévalo also met with representatives of the country’s leading private sector lobby, Comité de Asociaciones Agrícolas, Comerciales, Industriales y Financieras (Cacif) on 8 April, and the government published a statement promising to work together with the private sector to deal with tariff-related challenges.

In Costa Rica, Rodney Salazar, president of the Costa Rican chamber of foreign trade (Crecex), was cited by national daily La República as calling for calm, saying “This could temporarily dent our competitiveness in the US market, but we must avoid rash moves that disrupt supply chains or trade agreements”. The Costa Rican government led by President Rodrigo Chaves has said that it would attempt to secure better terms in negotiations with the US, but Salazar has also suggested that the government should look to other export markets to offset risks. “Diversifying markets is key to reducing our dependence,” he said.

This will remain the case even if Trump eventually rows back on his tariffs completely, because Washington’s reputation as a reliable and rational partner has been dented. There are also further risks that Trump could impose tariffs on specific countries or industries in order to extract concessions on certain issues. For example, he continues to threaten to “take back” the Panama Canal, and he could use the threat of tariffs to achieve this aim, or to force President José Raúl Mulino to allow US ships to transit for free or at reduced rates.

As things stand, it appears that Central American governments will continue to try and appease Trump so as not to draw his attention and antagonise him further. If they can succeed in securing more favourable terms, the impact on national economies could be lessened. However significant damage has already been incurred due to the uncertainty surrounding tariffs, which will have delayed investment decisions by both households and businesses.

With many Central American economies already struggling to drive growth, this uncertainty will likely reduce economic activity and deepen issues surrounding stretched public budgets and unmet demands for social spending

Building costs

US tariffs on steel and aluminium will increase building costs in the region by up to 20%, the Centro de Estudios del Negocio Financiero e Inmobiliario (Cenfi), a Costa Rica-based thinktank, told Bloomberg Línea in an article published on 2 April. This will affect both private housebuilding and much-needed infrastructure projects in the region, increasing the price per square metre for both residential and commercial buildings and increasing rental costs, soaking up money which could otherwise have been spent in the wider economy or reinvested in businesses.