Lula's reaction to Trump's tariff hike could harm Brazil more than US measures

The reaction of the Luiz Inácio Lula da Silva (Workers' Party) administration to the 50% tariffs on Brazilian products announced by US President Donald Trump could have a greater impact on the economy than the tariff increase itself. One of the main effects could be inflation. Trump has already threatened to react harshly and double the tariff if Brazil retaliates, deepening the diplomatic and trade impasse.

After signaling that it would seek negotiations before retaliating, the government confirmed on Thursday (10) the use of the Reciprocity Law , which allows provisional retaliatory measures against countries that impose trade barriers on Brazil. The law was approved by Congress after Trump announced, in April, tariffs on Brazilian products. The government is also considering appealing to the World Trade Organization (WTO).

On Thursday (10), while digesting the specific impacts for the various export segments, the market assessed the macroeconomic impact as "marginal" and "manageable," due to the profile of our exports. XP Investimentos even predicted a deflationary impact with the measure.

"If Brazil doesn't retaliate by increasing tariffs on imports of American products, the inflationary impact would be practically zero. There could even be a deflationary effect if the surplus of exportable products, which are now not going to the US, remains in the domestic market, potentially reducing prices slightly," the brokerage noted.

With the possibility of Brazilian retaliation increasing, the scenario changes. "The United States has said it will respond in kind, meaning tariffs will go up to 100%," says Alessandra Ribeiro, director of macroeconomics at Tendências Consultoria.

“Then the effects will be even more significant, not only from a sectoral perspective and the risk-aversion environment, but also domestically, for economic activity, with inflationary repercussions.”

XP Investimentos' chief economist, Caio Megale, says that chemical products, medicines, and jet fuel will be primarily affected, putting a slight upward pressure on inflation. This should lead the Central Bank to postpone the start of the interest rate cuts initially forecast by the consultancy firm for January. "The Central Bank will have to become, at the very least, more conservative." Market signals were that the Selic rate cut would begin between the end of this year and the beginning of next year.

BTG Pactual also warns of "significant risks" posed by Brazilian retaliation, particularly increased uncertainty. "Retaliations tend to be ineffective and could trigger an escalation of trade tensions that would be difficult to reverse, in addition to putting pressure on inflation," the institution's report states.

Impacts on growth are considered “manageable”

Market analysts are still processing the full extent of Trump's tariff hike. Brazil is a relatively closed economy, with exports and imports accounting for only 18% of GDP in 2024. Only 16% of Brazil's total exports—or 2% of GDP—are destined for the US.

Although the 50% tax could represent a blow to specific products, such as semi-manufactured iron and steel, aircraft , construction materials, ethanol and wood and related products, the overall impact on the Brazilian economy is considered "manageable", economists say.

There is also skepticism about the possibility of the tariffs becoming permanent, as UBS WM noted in its report. Therefore, attention will now focus on political and diplomatic developments and actions.

Even with uncertainty over whether the tariffs will continue, major banks and analyst firms in Brazil and abroad began revising their projections for Brazilian economic growth downward following the announcement. Considering the current scenario, estimates indicate that the tariffs could reduce Brazil's GDP growth by up to 0.6 percentage points over the next two years.

Until Trump's tariff hike announcement, the median expectations of banks, brokerages and consultancies for GDP growth signaled a 2.2% increase this year and a 1.9% increase in 2026, according to the Central Bank's Focus bulletin.

BTG Pactual estimates that the new US tariff will reduce GDP by 0.3 percentage points in 2025, equivalent to approximately US$7 billion in exports, and by 0.6 percentage points in 2026, with a cumulative impact estimated at up to US$13 billion. XP Investimentos also predicts a slowdown, reducing its growth projection for this year from 2.5% to 2.2%, and its 2026 projection from 1.7% to 1.2%. Meanwhile, the US bank Goldman Sachs predicts a drop of between 0.3 and 0.4 percentage points, depending on the duration and intensity of the barriers.

Retaliation can create a more hostile environment

The tariffs announced by Trump primarily affect industrialized and manufactured goods—sectors with the highest added value in Brazilian exports. Although the United States accounts for about 11% of Brazil's total exports, the economic impacts are concentrated in the most technologically sophisticated segments, with the risk of industrial slowdown and the loss of established markets.

Analysts at Citi and RBC BlueBay say Brazil still has some room to redirect some of its exports to other markets, although the process is slow. "Even with a weaker real, foreign trade will not react immediately, which worsens the impact on GDP," says an XP report.

With the retaliation, financial market expectations are that the situation will worsen. "The biggest risk is not only the direct economic impact of the tariffs, but also the signaling of a more hostile international environment for Brazil, especially if Brazilian retaliation is poorly calibrated," BTG noted.

Economists predict volatility and uncertainty

According to the director of Tendências, the impact on Brazilian growth is not certain, as the government may resort to fiscal expansionist measures to maintain economic activity, especially considering the electoral calendar. This scenario could also contribute to higher inflation.

The economist believes that the fact that Trump's tariff spree combined political and economic factors to justify the tariffs adds another element of uncertainty . "We can't bet on any other scenario than market volatility and a certain paralysis of the economy, not only in Brazil but globally, in the short term," she says.

Austin Ratings' chief economist, Alex Agostini, points out that Trump's tariffs were announced chaotically and with distorted justifications. The measure generated market volatility and opened a new front of diplomatic and trade tension between the two countries.

"It's a measure that could be adopted by any country, from an economic standpoint, but it was done in a regrettable manner. First, because Trump used false arguments, such as the idea that the United States has a deficit with Brazil, which hasn't been true since 2009. Second, because he inserted political elements into the announcement that have no place in a trade decision," said Agostini.

For him, the tone adopted by the American president contributes to a deteriorating global climate. "Mixing the Supreme Court, Lula, BRICS, and other geopolitical issues into a tariff announcement is unacceptable. This not only tarnishes Trump's image as president but creates instability at an already delicate time."

According to the economist, in addition to the impact on inflation and domestic activity in Brazil, the announcement and retaliation could increase production costs in the United States itself, which depends on Brazilian raw materials. "With Brazil retaliating, the effect is doubly damaging, both here and there. Trump is fueling a domestic recession, not in Brazil."