Latin American economies are facing a dual crisis as US trade tariffs and surging global oil prices from the US-Iran conflict trigger regional inflation, fiscal volatility, and supply chain disruptions.
Latin American economies are currently absorbing two negative supply shocks: tariffs and oil prices.
Countries in the region have experienced disruptions to trade patterns since April 2, 2025, when the United States imposed a 10-percent tariff on most of Latin America. Major regional economies such as Argentina, Brazil, Chile, and Colombia saw this tariff increase to 15-percent in February 2026, after the US Supreme Court struck down the original “Liberation Day” tariffs and the administration re-imposed them under Section 122 authority. Mexico, the largest US trading partner, faces a 25-percent tariff on goods not covered by the US-Mexico-Canada Agreement.
While the tariff shock has significant implications for aggregate supply and demand across countries in the Western Hemisphere, there is now a second shock: the energy and input price pressures stemming from the US-Iran conflict.
Using daily West Texas Intermediate (WTI) crude spot prices (the US benchmark, which tracks closely with Brent, the international benchmark), monthly average closing prices increased 42-percent between February and March 2026. Even with ceasefire negotiations in progress, oil prices remain high, with a month-to-date April average price of $99 per barrel through April 13. Oil prices in this period have ranged from $96 to $114, well above February's monthly average price of $65 per barrel.
Given that some countries in the region are net oil exporters while others are net oil importers, and oil is often a state-dominated sector in most countries, the rise in oil prices has differential impacts across Latin America. Net oil exporters are likely to see higher government revenues from elevated oil prices, while net oil importers are likely to experience negative economic pressure from higher fuel costs.
Among net oil exporters, such as Brazil and Colombia, government revenues will increase as oil prices rise, potentially improving their fiscal positions. However, there is skepticism about the true benefit of this oil price windfall and whether it will actually translate to greater economic growth in these countries.
Central American countries, including Guatemala, El Salvador, and Honduras, are likely to experience a significant increase in production costs due to high oil prices, as they rely heavily on imported oil for their energy needs.
Mexico is a particularly interesting case. Although Mexico is one of the world's largest crude oil producers, it imports 70-percent of its refined petroleum products (gasoline, diesel, and jet fuel) from the United States. Mexico is expected to see higher fiscal revenue from elevated oil prices. Still, the higher price of refined petroleum products is likely to trigger a negative supply shock.
The US-Iran conflict has asymmetric impacts on government revenues across the Latin American region, based on each country's position as a net oil importer or exporter. On the supply side, however, higher fuel costs are likely to increase production costs across the region. All countries in the region, even net oil exporters, will see the negative impact of rising prices for consumers and businesses.
With oil prices rising, all Latin American countries are expected to see higher production costs, which will translate into higher prices for households. Oil and its derived products are crucial for the production and transportation of a large share of goods across the region's economies.
There is already evidence of inflationary pressures in March, driven by elevated oil prices resulting from the US-Iran conflict. Mexico's annual inflation rate rose to 4.6-percent in March, up from 3.8-percent in January. Colombia saw the annual inflation rate move from 5.3-percent in January to 5.6-percent in March. Brazil's annual inflation rate rose to 4.14-percent in March from 3.81-percent in February, due to an increase in gasoline and food prices. While net oil exporters may have some fiscal buffer from oil revenues to provide subsidies to consumers to accommodate this increase in prices, most countries in the region do not have that option.
These inflationary pressures are creating difficult trade-offs for central banks in the region, constraining their ability to conduct monetary policy to promote economic growth while ensuring price stability. Central banks might need to tighten monetary policy and raise interest rates to contain inflation, even as the broader economy requires stimulus. The Central Bank of Colombia, in its last meeting, raised its interest rate by 100 basis points, where inflationary pressures due to the war influenced this decision. The Bank of Mexico, in its March 26 meeting statement, reduced the overnight interbank interest rate by 25 basis points but revised its headline and core inflation forecasts upward, citing geopolitical conflict as a cause for this increase.
In parallel with the oil shock, another negative supply-side shock is developing from reliance on fertilizer imports from the Middle East. In 2025, Brazil and Argentina relied on Middle East suppliers for 17-percent and 26-percent of their consumption of nitrogen-based fertilizers, respectively. Thus, as the war continues to disrupt the movement of goods through the Strait of Hormuz, agricultural export prices from Latin America are likely to rise – due to both lower yields and higher fertilizer costs – affecting food prices for consumers across the Western Hemisphere.
The US-Iran conflict can weaken cooperation among Western Hemisphere countries. The current US focus on the Middle East reduces the economic, political, and diplomatic resources available for cooperation initiatives with Latin American countries. At the same time, given current inflationary pressures across the region, monitoring macroeconomic conditions and policy responses is necessary to promote macroeconomic stability.
Beyond macroeconomic monitoring, fostering long-term cooperation is necessary to reduce the region's vulnerability to negative supply shocks. Geopolitical instability, which translates into inflationary pressures, is likely to persist. Positioning Western Hemisphere cooperation as a national security priority can help reduce the vulnerability to external supply shocks. Specifically, cooperation on alternative clean energy initiatives can help reduce the region's exposure to oil price shocks. Similarly, regional cooperation to increase agricultural productivity among Latin American exporters can protect food supply chains and reduce inflationary pressures from external shocks.
In the current global environment, Western Hemisphere countries need to recognize the need to cooperate to make the region more resilient to external shocks.
The author thanks Isabella Elias, MPP candidate at Pepperdine School of Public Policy, for research assistance.
