The future of regional integration: Can Latin America thrive in a new era?

Introduction

Donald Trump’s trade war is set to reverberate across Latin America.¹ The region sends over 40% of its exports to the US,² making it especially vulnerable to any disruption in trade ties—with Mexico particularly exposed to these changes. The Economist Intelligence Unit forecasts that rising US protectionism will dampen trade and investment in Latin America, dragging regional growth down to 1.9% in 2025 from 2.4% in 2024.³ Yet there may be gains amidst the fallout. If the region can harness trade diversion and push for tighter regional integration, could it emerge stronger?

Latin America and the Caribbean offer abundant natural resources and an enviable geography between the Pacific and Atlantic. The region holds nearly 20% of global oil reserves and vast stores of key minerals, including over half of known lithium⁴, 37% of copper and 35% of molybdenum, which are all critical for the global green transition (Fig 1).⁵ The region also accounts for 19% of global crop output and 36% of forest biomass carbon—meaning it contains enormously important global carbon sinks, such as the Amazon—as well as 31% of total global fishing area.

Yet, despite accounting for roughly 6% of global GDP and 5% of total world manufacturing value added,⁶ the region continues to experience significant economic fragmentation. With companies and countries rethinking supply chains and geopolitical alliances, Latin America has a rare opportunity to reimagine regional integration.

Regional integration: Progress made, potential unfulfilled

Latin America hosts several integration schemes, including Mercosur, the Pacific Alliance, the Andean Community and the Central American Integration System. These initiatives signal ambition, yet substantial challenges persist and unity remains elusive.

Mercosur was created to boost economic collaboration among South American nations, but is mired in discord, primarily between Brazil and Argentina.⁷ While it helped contribute to a tenfold increase in trade within the bloc during its first decade,⁸ recurring rows over tariffs and trade rules have stalled momentum.⁹ Regardless, the recent signing of a free trade and cooperation agreement with the EU, 25 years in the making, could spell a new era for the bloc, if Europe ratifies it.¹⁰ The agreement would be Mercosur’s first with a major trading bloc and could mark the start of a more outward-facing trade orientation—one that would support internal unity through economic integration.

The Pacific Alliance—comprising Mexico, Colombia, Peru and Chile, and soon Costa Rica¹¹—has successfully lowered tariffs, courted investors and partially integrated members’ stock markets.¹² But deeper structural integration remains out of reach. Financial harmonization and labor mobility are stubborn hurdles, limiting the Alliance’s full potential. Enhanced cooperation on regulatory frameworks and labor policies would support the Alliance’s objectives of enhancing global competitiveness. There is also no clear path forward for integrating the Pacific Alliance with other regional blocs, such as the Andean Community.¹³

Nonetheless, the region has made headway elsewhere. Notable examples include sustainability-focused pacts, including the 2018 Escazú Agreement regarding the right to access environmental information, the 2021 Eastern Tropical Pacific Marine Corridor, and the 2023 Belém Agreement, which focuses on conserving the Amazon and sustainable mining.¹⁴

Intra-regional trade: Assessing missed opportunities

Intra-regional trade accounts for around 15% of Latin America’s total exports—a paltry figure when compared with the roughly 50% seen in markets like East Asia and the Pacific (Fig 2).¹⁵ Intra-regional services trade has also faltered, its share slipping from 12% in 2005 to 9% in 2021 as service exports to Asia and the US grew faster.¹⁶ Central America represents one bright spot. From a trade perspective, it is the most integrated subregion within Latin America and the Caribbean.¹⁷ Intraregional exports account for nearly 30% of total shipments, second only to the US.

Persistent protectionist policies, complex regulatory structures and political instability exacerbate trade barriers,¹⁸ inhibiting deeper regional integration and integration into global supply chains. Overall, Latin America's involvement in global trade remains limited and highly reliant on commodities,¹⁹ underscoring significant missed economic opportunities.

Recent geopolitical developments present opportunities for Latin America to capitalize on trends such as nearshoring. Mexico has already emerged as a winner, attracting manufacturers keen to relocate from Asia.²⁰ A few Central American countries have led in nearshoring as well: Costa Rica, home to 20 Fortune 100 companies and 250 multinationals, has long been the subregion’s leading exporter.²¹ Panama is another nearshoring hub, particularly in the Colón Free Trade Zone, which is America's largest free trade port. However, the US is the primary destination for Mexican and Central American exports,²² presenting increased risk amidst a new trade dynamic.

Potential economic gains from strengthened regional integration

Deeper regional integration promises substantial economic rewards through increased trade volumes, foreign direct investment, enhanced productivity and global market positioning. The current chaos makes these objectives more urgent regarding improved economic security, even as it complicates them by upending the status quo. According to a recent Economist Impact study, South American executives are hopeful that expanding regional trade agreements could increase market access and reduce tariffs, and lead to new opportunities for partnerships and alliances.²³

While the tariff structures and tax schedules of Latin American and Caribbean countries have converged significantly compared with previous levels, non-tariff trade barriers—such as sanitary measures related to agricultural inputs and regulatory hurdles to prevent foreign firms from effectively accessing domestic markets—have remained high across most of the region.²⁴ Reducing these obstacles (when used for non “legitimate objectives” such as national security, or protecting human safety or the environment²⁵) could lower transaction costs and stimulate intra-regional commerce. A fully integrated market would also facilitate specialization and economies of scale across sectors, enhancing competitiveness in agriculture, manufacturing and technology.

Greater integration could also drive innovation and growth in emerging sectors,²⁶ such as biotechnology, renewable energy, digital technology and financial services. Collaborative regional strategies in innovation and digital transformation are essential for fostering sustainable economic development and employment opportunities.²⁷

Infrastructure deficiencies as a barrier to integration

Latin America’s patchy infrastructure—roads, railways, ports—keeps logistics costs high and undercuts integration and regional competitiveness. The region’s performance on the World Bank’s logistics performance index, for example, is on par with South Asia and Sub-Saharan Africa, but far below its income-level peers in other regions (Fig 3).²⁸ Digital gaps compound the problem, especially for small businesses locked out of regional and global markets.²⁹