(Bloomberg) — Brazilian President Luiz Inacio Lula da Silva didn’t back down in the face of Donald Trump’s daunting threat of a 50% tariff, and his resilience seems to be paying off. This Wednesday, a wave of relief swept through the markets and businesses as several exemptions from the tariffs were revealed.
Major exports from Brazil, such as civilian airplanes and orange juice, will only see a hike to the previously established 10% tariff instead of being hit hard by Trump’s looming tariffs, which are scheduled to roll out next week instead of this Friday.
This surprising twist caught many in Lula’s government off guard, especially after weeks of minimal communication with the White House and relying instead on key figures from the business sector, like the head of Embraer, to advocate for Brazil.
Sticking firmly to his principles, leftist Lula resisted U.S. calls to interfere with the legal proceedings against former President Jair Bolsonaro, who aligns with the right. Lula can do nothing about the top court’s decisions, and his protectiveness over it seemed to make the impending tariff increases more tenable.
Contrary to expectations, Trump blinked first, mentioning for the first time that his 50% tariff wouldn’t be applied uniformly across all products.
This confrontation seems to have boosted Lula’s standing; recently published data suggests that a little over 50% of the Brazilian populace now approves of his leadership, which is a bump from 49.7% just two weeks earlier, according to LatAm Pulse from AtlasIntel.
However, Lula knows he’s got more work ahead to ensure this temporary relief turns into something more sustainable with his nation’s second largest trading partner. The upcoming trial of Bolsonaro on coup-related charges has the potential to further aggravate Trump, who holds the power to rescind exemptions at any moment.
Officials in Brazil are on edge as recent U.S. sanctions against Supreme Court Justice Alexandre de Moraes may set off further repercussions for other public officials.
Additionally, crucial sectors that weren’t granted exemptions — namely coffee and beef — might need some economic backing to help Lula win the goodwill of Brazilian citizens as he continues to navigate the tricky waters in discussions with the significantly larger U.S. economy.
On a different note, Brazil’s central bank remains in a waiting game stance, keeping interest rates steady while grappling with inflation that surpasses their targets amid looming tariff threats.
Despite all the hurdles, Lula openly claimed a cautious victory. “Today,” he stated at a presidential palace event, “is a sacred day for our sovereignty.”
A Sudden Turn of Events
After Trump’s initial huff over tariffs, Brazilian officials were bracing for the worst.
Finance Minister Fernando Haddad and Vice President Geraldo Alckmin voiced their frustrations over U.S. demands, highlighting Brazil’s trade deficit with the U.S. in contrast to many other nations confronting Trump’s tariffs. Lula, grounded by this clash, crafted his image as Brazil’s fierce protector against outside interference in this tangle over political matters rather than trade.
Despite uncertainty, discussions regarding exemptions moved forward. Foreign Minister Mauro Vieira met with Secretary of State Marco Rubio in D.C., expressing dissatisfaction with how the U.S. had entangled the two-century relationship between the countries. He reinforced Lula’s stance that negotiations would happen over tariffs but not sovereignty, according to remarks made to reporters.
Back in Brasilia, news of the new tariff order reached Lula through the embassy, prompting him to convene an emergency meeting with Alckmin and other officials.
The government had laid out plans to support businesses roiled by imposing tariffs, which Bloomberg Economics anticipated could shave off 1% from the economy. Now, however, while risk remains, the threat seems less daunting, prompting the government to reevaluating the steps they’d previously charted out for tackling this economic issue and focusing on potential negotiations with the U.S.
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Lula perceives Trump’s latest move as a restoration of some logical trade discussions, although he thinks the crux of this matter is more political than anything.
Haddad isn’t banking on a quick fix, his reluctance revealed in comments to insiders. He hasn’t yet spoken directly to Treasury Secretary Scott Bessent and predictions hint at negotiations taking a grueling two to three months as seen in discussions with other nations.
Nevertheless, Lula’s administration now holds hope for winning exemptions for goods like beef and coffee — Brazilian specialties and top export categories.
Playing a Risky Game
Companies anxious about tariffs are feeling a flicker of hope. For some time, major players who primarily operate in the U.S. have cautioned the Trump administration about the sweeping consequences such broad tariffs could unleash on the American economy.
Take Embraer, the world’s third-largest plane manufacturer, which directly employs over 2,000 people across the U.S. Their push for an exemption, akin to the one granted to the EU, made CEO Francisco Gomes Neto chuckle about his role, dubbing himself the company’s “CTO” or Chief Tariff Officer in informal discussions.
They noted, “This outcome underscores the strategic importance of Embraer’s contributions to both the Brazilian and U.S. economies,” having seen a 11% increase in their stock following the news.
Exemptions are set to touch upon about 75% of Brazil’s mineral shipments to the U.S., thanks to insights from Brazil’s mining institute, Ibram. Oil giant Petroleo Brasileiro and the mining titan Vale will be positioned advantageously owing to the exemptions for crude oil and iron ore. Suzano, a wood pulp manufacturer, also found reprieve as they evaded significant tariff increases.
This unexpected turnaround surprised markets that were generally unfazed by the tariff implications. Itau has recently revised its estimates and now sees Brazilian products facing around a 30% effective tariff rate, 10 points lower than what they had formulated earlier with a considerable number of exemptions introduced. Fernando Goncalves from Itau noted that this adjustment diminishes the chances of retaliation from Lula’s end, likely easing the overall reeconomic strain.
What’s Next for Bolsonaro?
Of course, an unpredictable variable lingering is Bolsonaro himself. No longer eligible for future elections, the former president is under impending trial for attempt of coup-related offenses, exposing him to possible conviction and arrest later this year.
In recent weeks, Trump and the U.S. have expressed continual interest in this judicial matter. The American administration’s sanctions implemented against Judge Moraes Alexandre de Moraes demonstrate escalating actions targeting the prominent judge previously at odds with U.S. social media entities linked to Trump wrapped businesses.
To this date, it appears such actions seem symbolic more than severe, suggested by market strategist Thierry Wizman at Macquarie Group. His observations indicate that Trump’s motivations may sway more towards persuasion than punishment in this unfolding narrative.
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