Brazil has few exit routes from Trump tariff but feels less pain

BRASILIA: When U.S. President Donald Trump linked 50% tariffs on Brazil to the trial against his ally, the country's former far-right leader, Washington left Latin America's largest economy with few options to deescalate but may have overestimated the country's vulnerability to the levies.

AI Brief

Lula cannot legally interfere in Bolsonaro's coup case; US tariffs appear politically motivated.
Brazil's economy is less vulnerable due to low US trade dependence, though some sectors like coffee may be hit.
The tariffs may harm US consumers too and create limited room for Brazil to negotiate, unlike other nations.

Brazil President Luiz Inacio Lula da Silva has neither the political will nor the legal authority to interfere in the case against his predecessor Jair Bolsonaro, who faces charges of plotting a coup in the aftermath of a fierce and bitter 2022 election which Lula won.

Brazil is in a stronger position than many developing nations given the country's relatively lower trade exposure to the U.S., even if high tariffs would still be painful.

Unlike most countries in the world, Brazil actually has a trade deficit with the U.S.

The U.S. takes in some 12% of Brazil's exports, less than half what China buys, and worth only around 1% of GDP. Mexico - Latin America's second largest economy - sends 80% of its exports to the U.S.

"We are a long way from having the same vulnerability that other countries have in regards to the U.S.," said one Brazilian diplomat on condition of anonymity as they are not authorized to speak publicly on the matter.

"We regret this measure has been taken but... we won't suffer in the short term the brutal impact other economies would."

The tariffs would also cause pain in the U.S.

Brazilian coffee in particular is a huge U.S. import and a 50% tariff could send coffee prices soaring. Other products like orange juice could also be hit.

ARX investment firm said it saw only "marginal and manageable macroeconomic impact on the Brazilian economy," though others like Goldman Sachs said they expected the tariffs could shave 0.3% to 0.4% off Brazil's GDP if maintained.

POLITICAL TARIFFS

With the U.S. tariffs more clearly politically motivated than other levies threatened by Trump, Lula is bereft of clear negotiating options.

The political motivation behind the tariff threat makes it “harder to see an off-ramp for Brazil compared with other countries that received tariff letters,” wrote William Jackson, chief emerging markets economist at Capital Economics.

In Trump's letter outlining the Brazil tariffs he decried what he described as a "witch hunt" against far-right ally Bolsonaro, saying the levies were imposed due "in part to Brazil's insidious attacks on Free Elections, and the fundamental Free Speech Rights of Americans."

Lula threatened reciprocal measures in a feisty note posted to social media on Wednesday, and on Thursday sources said the government could be looking to change tack and exploring how to deescalate the situation. It was unclear what that might look like.

But Lula is not a politician to back down from a fight. Forged in the union movement of the 1980s, the 79-year-old lost three presidential elections before finally winning in 2002 and has dominated the country's leftist politics ever since.

While many other world leaders have gone out of their way to placate Trump, Lula called him on Monday an "emperor" that the world did not want.

In his Wednesday response, he said: "Brazil is a sovereign nation with independent institutions and will not accept any form of tutelage."

Another factor is Lula's domestic woes, with polls pointing to a likely defeat in next year's election. Some experts say he could use the scrap with Trump to rally support.

Trump stepping in to defend Bolsonaro in such an overt way could also backfire on the Brazilian far right, seen by many as having invited this action that could hurt Brazil's economy.

“The most probable scenario is that this will end up fostering nationalism in Brazil,” said Oliver Stuenkel, a professor of international relations at Fundacao Getulio Vargas, in Sao Paulo.

“If Lula knows how to respond well to this, it could end up strengthening him, just as it also strengthens other leaders of countries that suffer this kind of interference.”