Washington is set on leveraging US market access to punish or reward governments that don’t meet its standards of good governance.

On December 10, after an unprecedented year-long investigation, the United States Trade Representative issued one of the most consequential decisions on Central America since the implementation of the regional free trade agreement two decades ago. Given the Donald Trump administration’s renewed focus on the Western Hemisphere, channeled through its “Trump corollary” to the Monroe Doctrine, the new tariff announcement on Nicaragua will link trade to rule of law and human rights, having direct effects on regional migration, prosperity, and diplomacy. 

Here’s the context: on October 20, the USTR concluded the Section 301 investigation on Nicaragua, which started under the previous Joe Biden administration. It focused on violations of labor, human rights, fundamental freedoms, and the rule of law, and concluded that the Nicaraguan government’s behavior imposes a burden on US commerce. Washington will now respond with phased tariffs on Nicaraguan exports that do not qualify under the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) origin. This is the first time in CAFTA-DR’s history that the United States applied Section 301 to a fellow FTA partner based primarily on such violations.

For non-trade wonks, Section 301 of the 1974 Trade Act is the United States’ broad, unilateral authority to retaliate against “unjustifiable, unreasonable, or discriminatory” foreign practices. It is the same legal justification for the tariff escalation against China in 2018 under the first Trump administration, and it is still used today. Deployed against Nicaragua over humanitarian concerns, this investigation has created a precedent for tying US market access to the rule of law and democracy in the Western Hemisphere.

This case stood out for three reasons. First, human and labor rights were front and center, as the investigation documented the dismantling of independent unions, expropriation, the shutdown of NGOs, universities, press, and even Catholic institutions. It treated these violations as competition distortions that burden US commerce, trade, and democracy. Second, it targeted a modest and regionally integrated US-export dependent economy, as more than half of Nicaraguan exports enter the US market. Third, it sits atop an extensive package of sanctions, visa bans and revocations, and restrictions on access to international financial institutions. Trade measures remain the last major leverage tool with these scenarios factored in.

After receiving over 2,000 public comments and consulting with experts and USTR advisors, the final action establishes a conditional three-stage tariff schedule on non-CAFTA-origin goods: a 0 percent tariff beginning January 1, 2026, a 10 percent tariff beginning January 1, 2027, and a 15 percent tariff beginning January 1, 2028. In addition, any tariff would stack with others, including the existing 18 percent Reciprocal Tariff.

According to CAFTA-DR rules of origin, a product qualifies if it’s produced using sufficient inputs from the free trade area of participant countries, including the United States, and that undergoes substantial transformation within the CAFTA-DR region. Although commodities have clear origins, the major Nicaraguan exports of textiles and apparel do not. 

For example, a garment assembled in Nicaragua with non-CAFTA fabric can still claim CAFTA status if it undergoes “substantial transformation.” Since Nicaraguan customs and US Customs and Border Protection (CBP) lack robust communication, these claims are difficult to verify, providing openings for abuse. Despite these gaps, textiles and apparel remain classified as CAFTA-origin to avoid disrupting the US companies and supply chains that rely on them. Having non-CAFTA origin exports excluded from tariffs avoids penalizing US firms, protects regional neighbors that rely on Nicaraguan commodities, and maintains CAFTA-DR production stability across Central America.

Under the administration’s latest corollary, these enforcement gaps make conditionality urgent and give the United States full authority to implement trade measures almost immediately, leaving room for negotiation and escalation. The ruling includes a key sentence stating that the USTR may modify rates “should Nicaragua show a lack of progress in addressing these issues.” This announcement represents a first stage of conditional pressure that can tighten over time.

Nicaragua joined CAFTA-DR during its last period of democracy. Then, the Sandinista National Liberation Front, led by Co-Presidents Daniel Ortega and Rosario Murillo, strictly opposed the agreement. Ironically, Nicaragua’s exports are now heavily concentrated in CAFTA-enabled apparel, agriculture, and gold. In 2023, the country exported $1.15 billion worth of gold, the nation’s primary export, a sector now saturated with opaque Chinese mining companies.

From an “Americas first” vantage point, the choice is not just between hard and soft. The decision concerns how to structure conditionality to punish a hostile regime, protect US firms from distorted competition, and strengthen the broader logic of nearshoring to the Americas, thereby reducing reliance on extra-regional partners.

Over the past few years, Washington has begun to treat trade preferences as revocable, performance-based instruments. Some countries fall into the “friends” category, and those on the list of “enemies.” For Central America, the writing on the wall is clear: CAFTA-DR is not unconditional. For a trade agreement with no clear rules on expulsion, the current situation can serve as a reminder that alignment with US standards brings tangible benefits. For countries on a more ambiguous trajectory, like Honduras, the message is sharper. This section 301 action on Nicaragua puts every Central American capital on notice that preferential access can be rolled back if governments swing too far toward authoritarianism or alignment with Beijing.

Critics argue that potentially expelling Nicaragua from CAFTA-DR would simply “throw it into China’s arms.” Co-presidents Ortega and Murillo have already done that. Nicaragua is China’s main ally in Central America. With the regime switching recognition from Taiwan to the People’s Republic of China in 2021, signing onto a free-trade agreement and the Belt and Road Initiative, and re-engineering the Sandinista legislature to accommodate Chinese-style “special economic regimes” and swaths of mining concessions, China ranks as a direct benefactor of a crucial US free-trade system.

Economically, the story is more nuanced. The United States remains Nicaragua’s primary market by a wide margin. Chinese demand is unlikely to absorb large volumes of displaced exports or recreate the logic of US-oriented supply chains. For example, in neighboring Honduras, the shrimp industry thrived when the country maintained diplomatic ties with Taiwan. Still, it is now in crisis because China is buying fewer volumes of shrimp at lower prices. Beijing can mine gold and leverage a handful of debt-financed infrastructure projects in Nicaragua. Still, in the end, near-exclusive commercial ties with China are a race to the bottom. 

In the short term, punitive trade measures are expected to prompt the dictatorship to double down on partnerships with China, Russia, or Iran. In the medium term, the risk is less that Nicaragua becomes a fully-fledged Chinese economic satellite and more that overuse of tariffs on small countries makes Chinese manufacturers inadvertent winners by eroding the competitiveness of CAFTA-DR-based production relative to Asia. An “Americas first” approach must grasp the nuances of that unintended consequence.

The December 10 announcement demonstrates Washington’s choice to calibrate rather than risk a rupture, based on a foundational tariff schedule that signals consequences while safeguarding US firms and Central American economic stability. If Section 301 is continuously deployed as part of a sequenced and coherent strategy, with targeted measures tied to clear benchmarks, this “technical” 301 case could become a template for an “Americas first” economic statecraft that strengthens US influence in the hemisphere and beyond.