The Five Keys to Understanding the Impact of US Tariffs on El Salvador

When former US President Donald Trump announced sweeping tariff hikes—ranging from a base of 10% up to nearly 50%—he triggered a new era of global trade uncertainty. Dubbed by many as a “trade war,” the policy targeted virtually all of the United States’ trade partners and marked a significant pivot from free trade to protectionism. Although the spotlight often remains on large economies like China or the European Union, smaller nations like El Salvador are not immune to the ripple effects. Understanding the impact of these tariffs requires a closer look at five major areas: macroeconomic stability, microeconomic effects, emerging opportunities, the role of CAFTA-DR, and the US’s fiscal strategy.

Macroeconomic Impact: A Shrinking Horizon

Institutions such as the International Monetary Fund have sounded the alarm at a global level. “We are still assessing the macroeconomic implications of the announced tariff measures, but they represent a significant risk to global outlooks at a time of slow growth,” said Kristalina Georgieva, the IMF’s managing director. The US economy, which has long been a locomotive for global growth, now faces higher risks of recession.

According to analysts, including those at JPMorgan Chase, the odds of a US recession have surged, with some placing the likelihood at 60%. A downturn in the United States would almost certainly lead to reduced consumer demand, job losses, particularly among Hispanic workers, and disruptions to financial markets. This would directly affect exports and remittances in El Salvador, two key sources of income for the Salvadoran economy.

The IMF had projected 2.5% GDP growth for El Salvador, but given the potential domino effect of US economic contraction, that figure may no longer be realistic. A Salvadoran economist noted that “given the strong correlation between the U.S. and Salvadoran economies, any recession in the U.S. would lower growth prospects here.” In this context, US tariffs on El Salvador could further strain the country’s economic outlook by reducing external demand and impacting the flow of foreign capital.

Higher tariffs could also lead to inflationary pressure in the US, prompting the Federal Reserve to increase interest rates. This, in turn, would mean more expensive external financing for El Salvador, which would compound fiscal stress and increase the cost of servicing its national debt.

Microeconomic Impact: Cost Pressures and Supply Chain Strains

On the ground, Salvadoran businesses and consumers are likely to feel the effects in tangible ways. As the cost of imported machinery, vehicles, and equipment from the United States rises, due to more expensive components, local businesses could face reduced margins and higher production costs.

In industries where the US supplies a significant portion of inputs, such as the automotive and agricultural sectors, price increases may lead to postponed investments or shifts toward less efficient alternatives. For individuals, higher prices on everyday goods, such as vehicles, electronics, and processed foods, will impact household spending. These microeconomic factors feed a broader sense of uncertainty and may lead some businesses to freeze hiring or delay expansion.

Analysts argue that US tariffs on El Salvador are not a direct imposition. Still, the secondary effects—such as inflation and reduced consumer confidence—could chill business activity across the country.

Opportunities: A Competitive Edge in Global Trade

However, it’s not all doom and gloom. Trade wars often create unexpected winners, and El Salvador may be in a position to benefit from shifting trade dynamics. As one analyst pointed out, “When you buy clothes in the US, you’ll find that much of it is made in Pakistan, Jordan, Bangladesh, or India. All of these countries now face high tariffs.”

Tariffs on goods from those nations can reach as high as 49%, which gives Salvadoran textile and apparel exports a competitive edge. El Salvador is one of approximately 100 countries still subject only to general tariffs, which are significantly lower. This opens up opportunities to expand market share in key sectors.

If Salvadoran exporters can ramp up production quickly and meet the necessary quality standards, they may capture some of the demand previously filled by now more expensive imports from Asia. Increased demand could stimulate job creation, attract foreign investment, and improve the country’s balance of payments.

Indeed, the Salvadoran Association of Industrialists (ASI) president noted that “some countries in the region have been hit harder, like Nicaragua. In that case, there could be investment currently in Nicaragua that decides to move to El Salvador and set up operations here.”

The US imposed an 18% tariff on Nicaragua—the highest for any country in Central America—prompting investors to look for alternative, tariff-friendly destinations. US tariffs on El Salvador may, therefore, indirectly benefit the country by attracting investment away from its regional competitors.

CAFTA-DR: Still in Force, But Not Immune

El Salvador is likely shielded from these shocks thanks to its participation in CAFTA-DR, the free trade agreement with the United States, Central America, and the Dominican Republic. Technically, the agreement remains intact and facilitates duty-free access for most goods. However, all trade agreements include an emergency clause—sometimes called a “safeguard” or “escape” clause—which allows for temporary measures during periods of national distress or significant trade imbalances.

This is the clause President Trump invoked to justify the tariff hikes. While CAFTA-DR prevents permanent tariff increases without mutual consent, the emergency clause gives the US leeway to implement short-term actions. As a result, US tariffs on El Salvador may not breach the letter of the agreement but could undermine its spirit, creating friction and legal uncertainty.

Moreover, even temporary measures can disrupt supply chains, delay shipments, and force companies to renegotiate contracts or seek alternative sources of supply.

Fiscal Policy and the “Parallel Deficit”

The broader economic motivation behind Trump’s tariff policy is rooted in the United States’ twin deficits: the trade deficit and the fiscal deficit. According to one Salvadoran economist, “The US has been running a significant trade deficit for years, which requires financing. This gives rise to a parallel fiscal deficit.”

The Trump administration sought to tackle these imbalances in two primary ways: first, by increasing revenue through tariffs, and second, by reducing government spending through efficiency measures. The goal, analysts say, was to reduce the fiscal deficit before the expiration of Trump’s corporate tax cuts enacted in 2017, which lowered the corporate tax rate from 35% to 21%.

These tax cuts significantly reduced government revenue, even as defense and infrastructure spending continued to rise. Tariffs, therefore, served as a political and economic tool to offset revenue shortfalls without raising direct consumer taxes.

But this strategy came at a cost. Global trade tensions escalated, supply chains were disrupted, and many of America’s allies, including El Salvador, found themselves caught in the crossfire.

Conclusion

While El Salvador is not the primary target of the US tariffs, the country is deeply intertwined with the American economy through trade, migration, and investment. As such, the macroeconomic and microeconomic consequences of these tariffs are likely to be felt acutely. At the same time, there may be silver linings in the form of increased competitiveness in sectors like textiles and the potential to attract diverted investment.

The broader lesson is clear: US tariffs on El Salvador—whether direct or indirect—underscore the importance of economic diversification, regional integration, and proactive policy planning. As the global trade order continues to evolve, El Salvador must stay nimble, innovate, and position itself to withstand external shocks and seize emerging opportunities. In an interconnected world, even small policy shifts in Washington can create waves that travel thousands of miles, and US tariffs on El Salvador are no exception.