Navigating U.S. Tariff Shocks and Uncertainty: Can Latin America Turn Nearshoring into Sustainable Growth?

Latin America and the Caribbean (LAC) face a complex global landscape characterized by geopolitical shifts, trade fragmentation, and heightened uncertainty. Within this environment, the growing trend of nearshoring—the relocation of production activities closer to consumer markets—emerges as a potential source of economic dynamism. However, realizing this opportunity in a sustainable manner requires more than just geographic proximity. It demands sound macroeconomic fundamentals, institutional capacity, and strategic vision.
These were the key themes discussed during the workshop “Geopolitical Shifts and Economic Integration in Latin America and Europe”, jointly organized by the Bank of Spain and the World Bank on May 9 in Madrid. Below is a summary of the main messages.

The nearshoring narrative has gained momentum in recent years, particularly following the imposition of tariffs by the United States and the escalation of trade tensions with China. In the region, Costa Rica stands out as a success story, where strong institutions, skilled human capital, and effective public-private coordination converged to attract foreign direct investment (FDI). Investment flows not only brought capital but also triggered structural transformations and productivity gains, dispelling concerns about immiserizing growth.

However, conditions across the region vary significantly. While Mexico and parts of Central America exhibit deep integration into U.S.-centered value chains, others face more substantial challenges in attracting and retaining FDI. The region’s potential to benefit from nearshoring remains highly heterogeneous.

Uncertainty as a Binding Constraint

Amid the optimism surrounding nearshoring, it is essential to acknowledge the prevailing environment of elevated global uncertainty. Our recent research in FLAR (U.S. Uncertainty Shocks, Credit, Production, and Prices: The Case of Fourteen Latin American Countries) shows that political and economic uncertainty shocks originating in the United States have a significant impact on Latin American output, primarily through trade and investment channels.

These shocks—persistent even after the partial reversal of tariffs—tighten credit conditions and deter private investment. Indeed, countries well-positioned to benefit from nearshoring, such as Costa Rica and Mexico (see Chart 1), are among the most exposed to these external risks.