Brazil could be collateral damage in Trump trade war
Brazil is once again the classic case of an emerging economy under a lot of pressure. Financial conditions are the tightest since 2016, according to Goldman Sachs, real yields above 10% are the highest in more than 15 years, and its currency has never been weaker.
The central bank has sought to prop up the real, hiking rates by 100 basis points last month and promising another 200 bps to come. Brazil’s primary fiscal balance is healthy, but the soaring interest burden is a drain on the public finances.
The central bank also has intervened heavily in the FX market to support the real, spending $28 billion of reserves in December alone. That was 9% of its total reserves, the biggest drop in 19 years.
Investors are understandably anxious and pulled a net $12.6 billion from debt and equity funds in December. That was the second-biggest outflow since the central bank series began in 1995.
Will Trump’s return to the White House add more fuel to the fire?
SPECIAL CASE
On the one hand, Brazil position among large emerging countries is unique. America’s top 20 trading partners in 2023 included nine emerging economies of which Brazil was the only one that didn’t export more than it imported, according to U.S. government data.
While Brazil last year posted a hefty trade surplus of $74.6 billion, its second largest on record, its bilateral trade balance with the U.S. was flat. Indeed, until last year, Brazil had run a trade deficit with the U.S. every year since 2007.
So Trump cannot claim Brazil is “taking advantage” of the U.S. or treating it “unfairly”, accusations he has fired at many other countries including Germany, Canada, China, Mexico and other emerging economies that run huge trade surpluses with the U.S.
COLLATERAL DAMAGE
However, there is scope for tension in a number of areas.
First, Trump and Brazil’s left-wing leader Luiz Ignacio Lula da Silva could not be further apart ideologically, and there is deep friction between Brasilia and Elon Musk, Trump’s efficiency czar, about control over social media.
Brazil was also already a target of Trump’s public salvos, albeit indirectly, when he took aim at the BRICS group of nations in November for supposedly having plans to back away from or replace the “mighty” dollar.
Perhaps more worryingly, Brazil could suffer collateral damage if Trump makes good on his threats to disrupt global trade. As Elizabeth Johnson at TS Lombard points out, if blanket tariffs destabilize the global economy – and especially if they slow activity in Brazil’s largest trading partner, China – there will “almost certainly” be a hard economic landing in Brazil next year.
HISTORY LESSON
Brazil’s experience with Trump 1.0 offers reasons for both hope and anxiety this time around.
In Trump’s first presidency, tit-for-tat tariffs led Beijing to take permanent steps to reduce its reliance on U.S. agriculture goods, which was a boon for Brazil. In 2016, China sourced 40% of its imported soybeans from the United States. In the first 11 months of last year, that figure had more than halved to 18%. Meanwhile, Brazil’s share grew to 74% from 46%, according to Chinese customs data.
On the other hand, China could acquiesce to Trump by agreeing to increase U.S agricultural imports in exchange for lower tariffs. This would have a knock-on effect on Brazilian exporters, just when Brasilia is hoping higher exports on the back of a weak exchange rate will be a key source of growth this year.
There’s also the risk that Lula responds to Trump’s disruptive moves with populist, protectionist measures of his own. The U.S. economy – and especially its markets – are likely strong enough to withstand a period of Trump-led disruption. Unfortunately for Lula, Brazil’s almost certainly are not.
