Ethnic identity is a consistent predictor of positive youth adjustment, whereas discrimination has been associated with negative outcomes among Latino/a youth. Scholars have proposed associations between ethnic identity and discrimination; however, directionality of effects remains unclear. Addressing this gap, the current study examined the directional relationship between ethnic identity and discrimination and their effects on psychosocial functioning utilizing a random-intercept cross-lagged model spanning 3 waves of data among 1,613 Latino/a adolescents (M[subscript age] = 13.99, SD = 0.40 at baseline; 51.2% female). Results support a bidirectional association between ethnic identity and discrimination. Specifically, adolescents who reported higher levels of perceived discrimination reported higher levels of ethnic identity exploration 1 year later. Further, higher levels of ethnic identity belonging predicted more reported discrimination 1 year later. No differences in the longitudinal associations between ethnic identity and discrimination were found based on generational status. More experiences of discrimination were also associated with more alcohol and cigarette use and more depressive symptoms. Additionally, ethnic identity belonging was indirectly associated with increased substance use and depressive symptoms via elevated discrimination experiences. Implications for promoting coping strategies for perceived discrimination in efforts to promote ethnic identity are discussed.