Currency, Competition and Constraint: A Closer Look into how U.S.-China Competition has Locked in Latin America's Monetary Policy

Credit: Eric Prouzet, Unsplash

As the U.S.-China trade war continues to unfold, the extent to which this geopolitical conflict is reverberating in developing regions is also evolving. One of the most notable cases is the way in which Latin America has positioned itself between the two global powers, facing a dual dependency that severely constrains monetary policy autonomy. While some countries demonstrate different approaches to managing these pressures, the region faces mounting challenges to independent economic policymaking. As tensions continue, along with the shifting interests and policies of the U.S. and China, Latin America is being pushed into new scenarios that could potentially threaten the region’s economic stability.

China’s Growing Footprint

U.S. partial retrenchment in Latin America during the 2010s pushed the region to diversify its commercial ties and foster key trade linkages with China without significant constraints. Today, China is the top trading partner for Brazil, Chile, and Peru, as well as the second largest for Latin America as a whole. This has created a strong exposure of the region’s economy through commodity dependence: Latin American economies export raw materials like soybeans, copper, and petroleum to China, tying their economic fortunes to Chinese demand cycles.

The increasing impact that China’s economy has on the region creates strong effects for the financial cycle and stability of emerging economies, with spillovers for Latin America being the strongest among developing regions. When China’s growth slows, or its property sector faces stress, Latin American commodity prices decline, capital flows reverse, and financial stability comes under pressure. Simultaneously, the expansion of cross-border yuan settlements is slowly increasing yuan reserves in the region. China has persistently expressed interest in a shift in the global monetary system, highlighting its desire to reduce global dependency on the dollar.

America’s Enduring Grip

The region’s increased dependency on China does not mean it has become more independent from the U.S., which remains the region’s largest trading partner. Consequently, Latin America remains highly dollarized and is primarily impacted by the U.S. monetary cycle. Federal Reserve interest rate adjustments and dollar fluctuations largely determine liquidity and capital conditions across the region, constraining the effectiveness of independent monetary policy driven by central banks.

When the U.S. Federal Reserve (FED) raises interest rates, dollar-denominated debt becomes more expensive to service, capital flows out of emerging markets toward higher U.S. yields, and Latin American currencies depreciate. This depreciation makes imports more expensive and can fuel inflation, forcing regional central banks to raise their own interest rates even when domestic economic conditions would call for stimulus. The LA5 countries (Brazil, Chile, Colombia, Mexico, and Peru) are particularly exposed to these dynamics, though the degree of vulnerability varies with each country’s specific debt structure and capital account openness.

Caught Between Two Powers

Latin America has cultivated a dual dependency, creating a more complex scenario for its developing economies as they simultaneously attempt to rely on both economic powers. This results in increasing vulnerability to the U.S. monetary cycle and Chinese demands, creating exposures in its financial and exporting channels. The inescapable links between the region and the two global powers increase the costs of aligning with either and minimise the space for monetary policy manoeuvring. Even if institutional and social issues are set aside, true monetary independence remains impossible, even with sound economic principles.

As a region in development, Latin America has little room to reduce the costs of alignment, even in cases where monetary independence and a strong domestic market act as buffers. Peru stands out with the most stable currency in the region, coupled with growing interest in regional and international investment, whilst maintaining close ties with both China and the U.S. However, this stability and economic diversification have been under significant pressure stemming from high commercial tensions between the U.S. and China. Among the pressures, the Central Reserve Bank of Peru (BCRP) stated that the tariff war between the two economic giants created a heightened risk for the region.

In contrast, Brazil’s deep domestic capital market acts as insulation from these swings in policy. Having a more prominent role in geopolitics than its neighbours, the reaction to Trump’s tariffs has been predominantly negative, deepening its relations with China. Yet, Brazil continues to have a prominent “multi-alignment” foreign policy, deliberately maintaining productive relationships with both Washington and Beijing. This directly drives into security linkages, in addition to its economic reliance.

A Future of Constrained Choices

New policy and technology developments continue to intensify pressures on Latin America. The U.S. GENIUS Act creates regulatory frameworks for stablecoins, dollar-denominated digital currencies that can be transferred instantly and globally. Stablecoins could facilitate capital flight, making monetary conditions even more volatile and difficult to manage via policy. This creates a new pathway for capital to exit more freely from Latin America, a region currently lacking regulatory frameworks for digital assets. Under the Trump administration, the U.S. National Security Strategy demonstrates that Latin America has become a key ground for great power competition, on top of systemic monetary dependence. 

Meanwhile, China’s push for its digital currency (the digital yuan or e-CNY) and the internationalisation of the yuan remain top priorities. Beijing seeks to establish a multipolar financial system, which could lead to higher transaction costs and increased market pressure. Regarding Latin America, China maintains its commitment to deepen relations in the region despite U.S. pushback, signalling it as a key area. Beijing seeks work with Latin America in order to reform multilateral financial institutions, such as the IMF and the World Bank. China’s development finance has achieved significant advancements in financing strategic partners within the context of a collapse in global lending, especially from the West. Still, it continues to be questioned on the long-term effects of debt repayments on the financial independence of developing countries.

Conclusion

As peripheral actors in a trade war context, Latin American countries find their monetary policy significantly susceptible to economic shocks, caught between two forces currently dictating that currently dictate the global financial cycle. This structural position locks the region into vulnerability. While individual countries employ different strategies to manage these pressures, the fundamental issue remains that monetary independence is severely constrained for economies caught between competing global powers. The region’s options are limited as Latin America’s position in the global economic hierarchy is that of a commodity-supplying actor in the periphery, dependent on external capital and subject to policy subordination. Regardless of technical competence in central banking or the soundness of domestic economic management, capital markets and trade dependencies limit the strategies individual countries can attempt to develop.

Written by Alexandra Puertas

Edited by Val Reguera