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

BRASILIA - When US President Donald Trump linked 50 per cent 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.

Brazil’s 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 Mr Lula won.

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

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

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

“We are a long way from having the same vulnerability that other countries have in regards to the US,” said one Brazilian diplomat on condition of anonymity as they are not authorised 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 US.

Brazilian coffee in particular is a huge US import and a 50 per cent 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 per cent to 0.4 per cent off Brazil’s GDP if maintained.

Political tariffs

With the US tariffs more clearly politically motivated than other levies threatened by Mr Trump, Mr 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 Mr 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”.

Mr Lula threatened reciprocal measures in a feisty note posted to social media on July 9, and on July 10 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 Mr 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 Mr Trump, Mr Lula called him on July 7 an “emperor” that the world did not want.

In his July 9 response, he said: “Brazil is a sovereign nation with independent institutions and will not accept any form of tutelage.”

Another factor is Mr 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 Mr Trump to rally support.

Mr 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 Professor Oliver Stuenkel, who teaches 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.” REUTERS