How do U.S. tariffs affect nearshoring dynamics in Central America and the Dominican Republic?
May 28, 2025
Lower competitiveness, increased costs and a slowdown in investment are among the consequences of the measure taken unilaterally by the Donald Trump administration.
Nearshoring Momentum and Regional Positioning
Central America and the Dominican Republic have emerged as key destinations for nearshoring and corporate relocation, prompting investments in free trade zones and logistics infrastructure. In the case of the Dominican Republic, the country is actively positioning itself as a regional logistics hub. “The government has modernized strategic ports like Caucedo and reformed the Customs Law (Law 168-21) to streamline trade processes,” explains Urania Paulino, partner at Pellerano Nadal.
In the case of Costa Rica, the free trade zone regime has been growing systematically since the 1980s as a special tax regime. Last year the country attracted 73 new investment projects, including 21 new companies and 52 reinvestments in sectors such as services, life sciences, and advanced manufacturing, according to data from Promotora de Comercio Exterior (Procomer). Panama also registers important private investment initiatives, particularly in strategic sectors such as logistics, technology and manufacturing.
Countries such as Nicaragua and El Salvador offer tax benefits to sectors in free zones and, due to its geographical location, Guatemala has taken advantage of the global dynamics of Foreign Direct Investment (FDI) through nearshoring, this location allows foreign companies to relocate their commercial or productive processes closer to their main markets, which implies a reduction of costs in the productive and logistic chain, as Carlos F. Camacho, investment and international trade partner of Arias - Costa Rica, points out.
But, according to Paulino, this dynamic has been disrupted by the imposition of tariffs by the United States, which is the main trading partner of many of these economies.
The Dominican Republic, El Salvador, Guatemala, Honduras, Honduras, Costa Rica, Panama and Belize were applied an additional 10% tariff with the executive measure of President Donald Trump on April 2, with the intention of protecting US industry, reducing its dependence on foreign trade and reducing its trade deficit. The exception was Nicaragua, which was imposed an 18% tariff on products purchased by the US.
Thus, the countries covered by the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR), signed in 2004, saw how the trade panorama changed drastically, with an increase in costs, an impact on the profitability of operations and the loss of competitiveness of the products they exported to the US market, among its main consequences.
Impact on several fronts
Camacho warns about the impact of the tariff increase on sectors such as agribusiness (pineapple, bananas and coffee) and medical devices, forcing companies to rethink their global production strategies.
In addition, he assures that the measure will also translate into imported inflation, since by depending on imports from the United States, Central American countries may experience an increase in the prices of essential goods, which will affect the local economy.
According to the specialist, industries such as agro-exports and manufacturing could also see a decrease in their sales due to the new tariffs and foresees a reconfiguration of markets through the diversification of export destinations to Europe, Asia or regional markets to mitigate the impact. However, he warns that this last option will not be possible for all industries.
Tariffs Undermine Nearshoring Incentives
The imposition of blanket U.S. tariffs on all countries—including the Dominican Republic and Central American nations—disrupts the core logic behind nearshoring, warns Urania Paulino, partner at Pellerano Nadal. “Nearshoring traditionally relied on preferential, tariff-free access to the U.S. market. These new trade barriers erode that strategic advantage.”
Paulino notes that for export-dependent economies—particularly those anchored in Dominican free trade zones or Central American maquila operations—higher tariffs raise operating costs and weaken their competitive edge compared to countries that, though geographically distant, can negotiate more favorable bilateral terms.
The immediate consequence is a drop in competitiveness, she explains. “Sectors with narrow margins and direct U.S. market exposure—such as textiles, light manufacturing, and electronics—are especially vulnerable. In the short term, we may see a slowdown in new investments and a reassessment of existing supply chains.”
The weight of CAFTA-DR
Among the agreements signed by Central American countries and the Dominican Republic with their trading partners, the Free Trade Agreement between Central America, the Dominican Republic and the United States (CAFTA-DR), which covers Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic and the United States, stands out as the most important if one takes into account the share it has in relation to total exports.
According to the report on the current state of Central American economic integration published last year by the Secretariat for Central American Economic Integration (Sieca), in 2023, CAFTA-DR was the most used if one considers the value of exports of the countries of the region (62.4%) and the Dominican Republic (2.6%), 21,490.1 million dollars, followed by the agreement with the European Union (23.4%, equivalent to 7,740.1 million dollars).
Paulino emphasizes that, despite the new tariff measures imposed by the US, DR-CAFTA continues to be one of the region's main legal and commercial shields in the face of nearshoring, as it provides:
A clear and predictable regulatory framework, fundamental for attracting foreign direct investment. For Arias' partner, the commercial stability offered by DR-CAFTA has been a key factor in attracting direct investment in strategic sectors such as manufacturing, technology and services.
Dispute settlement mechanisms, which offer legal guarantees to investors in the face of unilateral decisions.
Preferential access to the U.S. and other markets in the bloc, which, although it may be limited by new tariff policies, still represents an advantage over non-member countries.
Camacho reinforces that, thanks to CAFTA-DR, Central American countries and the Dominican Republic have favorable conditions for exporting to the U.S., which makes them more attractive for companies seeking to relocate their production. Among other advantages, he mentions:
Export diversification: The treaty has boosted the creation of new value chains, allowing sectors such as textiles, auto parts, specialized services and medical devices, among others.
Competitiveness vis-à-vis Asia: With the rise of nearshoring, companies are seeking alternatives to China and other Asian countries. Central America, due to its geographic proximity and trade agreements, is positioned as a viable option to those markets affected by punitive tariffs, long delivery times and rising logistics costs, according to Paulino.
Opportunities and barriers
The specialists consulted agree that nearshoring opportunities in Central America and the Dominican Republic are concentrated in sectors that combine high demand in the United States with productive advantages in the region, which can boost the economy and attract foreign investment. They stand out:
Light and advanced manufacturing: textiles and apparel, medical devices, and electronic component assembly. In the latter, Costa Rica leads the way due to its skilled labor force and political stability. Honduras and El Salvador have strengthened their textile industries, taking advantage of their proximity to the U.S. to reduce logistics costs.
Agribusiness: Food processing, packaging and fresh produce exports. The export of agricultural products such as coffee, fruit, and sugar remains a key opportunity, with improvements in logistics and international certifications.
Outsourced services (BPO/KPO): Call centers, accounting, technical support, and software development.
Logistics and transportation: Regional distribution centers and air and ocean freight services. The region's strategic location and access to the Panama Canal facilitate trade and the distribution of goods globally.
“The diversification of sectors also allows Central American economies to reduce their dependence on traditional export products, increasing the value added of their industries,” adds Paulino.
Despite the logistical and geographic advantages mentioned above, there are still structural barriers that hinder a more agile adoption of nearshoring:
Infrastructure: While some countries such as the Dominican Republic have made significant progress in ports, free zones and connectivity, others face deficits in land transportation, energy or customs and even roads.
Bureaucracy and regulations: Slow issuance of permits, lack of tax harmonization and legal uncertainty in some jurisdictions generate doubts among potential investors. In others there are concerns about political stability and fragile security.
Technical training of human capital: Although there is a young labor force, the region still needs to expand technical and professional training in specific sectors such as logistics, advanced manufacturing or technology. The demand for specialized skills in technology and manufacturing remains a challenge. Each country has its strengths depending on the market niche.
In addition to the concern raised by the imposition of tariffs by the US, Paulino adds the stability of tax incentives and, especially, the continuity of special regimes such as free trade zones, which are fundamental for attracting investment, apart from investment security, marked by the need for clear rules, consistent application of the law and efficient solution of commercial disputes as an indispensable condition for any nearshoring project.
Camacho mentions that Costa Rica is working on a reform of the labor code to formalize the 4X3 workday (work four days and rest three), which many companies already use in practice, but which are not legal, especially in manufacturing and service companies that have a non-stop work methodology.
He points out that due to Panama's privileged geostrategic position, legislators have historically sought to maintain a regulatory framework that is at the forefront of business growth and aligned with new international trends, allowing the country to adapt quickly to emerging opportunities such as nearshoring, and among the tools that point in that direction are the Special Economic Zones (SEZ).
Nearshoring and M&A
The nearshoring trend has positively impacted M&A operations in the Central American region, according to Arias' partner - Costa Rica, for whom it is more attractive for the industry to acquire existing operations than to develop greenfield projects.
"We have seen interest in the region in acquiring manufacturing and technology companies that allow faster access to production".
Paulino notes not only a positive but also a growing effect, especially in sectors related to manufacturing exports, logistics, technology and industrial real estate.
In the Dominican Republic, for example, there has been greater interest from regional funds and foreign companies in acquiring or partnering with local companies that already operate under the free trade zone regime or have well-positioned logistics assets, and he points out that the increase in tariffs in the United States has encouraged this dynamic, as many companies seek to integrate vertically or gain scale in markets close to the end consumer.
He also explains that the phenomenon has stimulated the revaluation of strategic assets, such as industrial parks, warehouses with port access or logistics service companies that already have permits and operational experience in international trade.
In this new cycle, M&A activity isn’t driven solely by expansion—it’s increasingly a tool for mitigating risk in a more restrictive trade environment, concludes Urania Paulino, partner at Pellerano Nadal. “Nearshoring has accelerated corporate decisions that, under normal circumstances, might have taken years. It’s become a strategic trigger for reconfiguring operations and securing supply chain resilience.”
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Free translation by Pellerano Nadal Law & Consulting