Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The 50 per cent tariffs President Donald Trump imposed on Brazil last week are among the highest he has applied on any country thus far in his trade wars.
The reason had nothing to do with Brazil’s trade policies. In fact the US runs a surplus with Brazil. Instead, Trump is using trade policy to make political demands. He wants Brazilian authorities to drop charges against former president Jair Bolsonaro, who is accused of plotting a coup after losing the 2022 election.
Yet despite the escalating tension — with Brazil’s current president Luiz Inácio Lula da Silva accusing Trump of infringing on the country’s sovereignty — Brazilian assets are barely flinching. The real is still up nearly 13 per cent against the greenback this year. The country’s benchmark Ibovespa stock index, home to oil major Petrobras and mining company Vale, is hanging on to an 11 per cent gain.
The muted response underscores the relatively closed nature of Latin America’s largest economy. Exports accounted for less than a fifth of Brazil’s GDP last year, according to the World Bank. Of this, only 12 per cent of its exports went to the US, compared with the 82 per cent of Mexico’s exports that go to its northern neighbour. Analysts at Capital Economics reckon in the worst-case scenario, a blanket 50 per cent levy on all of Brazil’s exports to the US would shave between 0.3 and 0.5 per cent off Brazil’s GDP over three years.
In any case, it turns out the tariffs announced by Trump on Brazil are not as dire as they appear. For starters, nearly 700 products will be exempt from the tariffs. These include oil products, iron ore, wood pulp, fertiliser, natural gas, aeroplanes and aircraft parts.
Taken together, this means almost half of Brazil’s exports to the US would be exempted from the new tariffs. As a result, the actual hit to GDP should be smaller than what Capital Economics had penned in.
Some sectors will feel more pain than others. Aside from fresh orange juice, most agricultural products are not exempt from Trump’s tariffs. But even here, Brazil is not shackled to the US. It can find other buyers for key agricultural commodities such as soyabeans, beef and coffee. Major developing countries — a group that includes Brazil, Russia, India, China and South Africa — have been working to make it easier to trade with one another in response to Trump’s tariffs.
With the Ibovespa trading at about eight times forward earnings, below the 10-year average of 10 times, this could be an attractive entry point for investors looking for different ways to play the “Trump Always Chickens Out” trade. Even when he forges ahead, tariffs don’t always bite.