Storm in the sky

In an effort to mitigate the effects of the tariff hike announced by the Donald Trump administration , Brazil needs to pay special attention to the medium- and high-tech sectors, which are essential for the incipient shift in development toward an economy with greater productive and technological autonomy. This is the case with aircraft manufacturing and industrial machinery production, key items on the trade agenda with the United States, which accounts for 60% of Embraer's exports. It is also necessary to consider a vision of production chains and the interconnections between sectors in the most affected activities. Another important point is the possibility of adopting a targeted countercyclical fiscal and monetary policy to mitigate the short-term effects. The recommendations come from economists interviewed by this magazine regarding the Brazilian economy's ability to cope with the tariff escalation and the most appropriate strategies to address the problem.
Until the announcement of the tax hike, which takes effect on August 1st, if nothing changes, the economy displayed a rare confluence of positive indicators. The harvest of positive indicators, enabled by the appreciation of the real, with effects on moderating inflation and improving fiscal results, includes record foreign investment, continued GDP growth above forecasts from financial institutions and the IMF, a significant increase in tax revenue, a surge in labor force employment, and the departure of nearly 1 million Bolsa Família beneficiaries. The tariff hike, however, could cause losses of R$175 billion in the long term, with a 1.49% contraction in GDP and the loss of 1.3 million jobs, according to estimates by the Federation of Industries of Minas Gerais.
"The research group I coordinate analyzed the evolution of Brazil's trade agenda between 2020 and 2024 and found a resumption of growth in the medium- and high-tech industrial sectors, which had been declining in recent years, from an export perspective. They have begun to recover, and a highlight, once again, is the export of aircraft and machinery. This is the beginning of a recovery. The share of these products in the trade agenda hasn't changed yet, but we're starting to see some progress," says economist João Prates Romero, a professor at the Center for Regional Development and Planning at the School of Economics at the Federal University of Minas Gerais.
Embraer and the medium-complexity industry need government attention
The team's conclusions, which will be released in a technical note, include a reduction in exports of primary products associated with environmental impact, such as timber, which demonstrates the return to more sustainable development. "This is the general perspective of the Lula administration's policies. We're beginning to see a shift, a return to industrial policy, environmental protection policies, and the beginning of a change in the development path," Romero continues. Two years is too short, the economist emphasizes, for a significant change. This context of the tariff imposed by Trump, however, tends to harm some of these higher-tech sectors, those that the government should prioritize in relief operations and potential policies to mitigate the effects of the tax.
Because Brazil has a relatively small trade volume with the US, the impact of the tariff hike will not be significant, but certain sectors, such as aircraft, require caution, Romero continues. "The area is strategic, not only because it is an industrial sector, but also because it is a high-tech industry, a segment that could be harmed if the 50% tariff is maintained," notes the UFMG professor. Machinery exports are also involved, in addition to oil, iron, and steel. In some affected sectors, the initial tendency is to reallocate supply internally. This may even have an initial positive impact on the population in the short term, especially in the case of food products that would otherwise be exported but will no longer be able to be. Subsequently, companies will tend to reduce production if they have no other export market in sight.
Good news. The International Monetary Fund improves its projections for Brazil – Image: iStockphoto
Economist Júlia Torracca, a professor at the UFRJ Institute of Economics and a researcher in the Industry and Competitiveness Group, mentions the significant intra-industrial trade related to aircraft sales. "We export aircraft parts and components, but we import many intermediate products. The tariff hike disrupts the entire chain." According to the economist, due to the US's influence in these transactions, significant revenue losses are unavoidable in the short term. "It would be difficult for any country to be prepared for a disruption, a structural break as significant as the one expected with the tariff hike. So much so that other countries are waiting, in some way, to understand what Brazil will do," the professor assesses. Diplomatic and business actions are the most important, while any potential global political-economic response of retaliation and reciprocity would have a "very high" cost.
There will be significant losses in the short term. Perishable food products cannot be stored, and it is difficult to ship production to other destinations. Other sectors can store and maintain prices, but this is not the rule, warns Rafael Ribeiro, professor of Economics at UFMG and researcher at Made/FEA-USP.
The situation becomes more complicated if Trump attacks the country's financial system.
From a fiscal and monetary policy perspective, Brazil has the option of adopting strategies to mitigate these effects, such as fiscal instruments like granting subsidies and expanding credit to companies in the most affected sectors. This would be a countercyclical policy. "Of course, fiscal space in Brazil today, due to all the restrictions, whether due to the framework or the debate with the financial market, is very limited, but in a context like this, I think the government shouldn't have that much difficulty implementing such a policy. As long as it's timely and well-communicated regarding its duration and the magnitude of the volume to be deployed, I think it's possible." Ribeiro doesn't recommend that Brazil pursue retaliation in the form of reciprocal tariffs. "That would be shooting itself in the foot; it would raise domestic price levels, which could force the Central Bank to tighten monetary policy even further."
Other possible White House sanctions appear to be on the table, but it's difficult to know how they will be implemented, if adopted. They could affect the financial market, in terms of restricting Brazil's participation in the international exchange system and other measures, with greater impacts as they extend throughout the economy. "It's difficult to make a prediction on this, but I think that potential sanctions on the country that affect the financial and banking systems could have serious impacts. And, of course, potential Brazilian reactions to this US escalation could have other effects, but this hasn't been discussed, and it's difficult to make predictions," concludes Ribeiro.
Published in issue no. 1372 of CartaCapital , on July 30, 2025.
This text appears in the print edition of CartaCapital under the title 'Storm in the sky'
CartaCapital