Donald Trump’s trade war has been tumultuous. The revisions to the tariff rates on different countries have unleashed chaos on global markets and, despite apparent room for negotiations, the final outcome remains unclear. That said, certain countries face greater risks than others, while some, like Brazil, might actually benefit from the trade war.
Concerned about the US running large trade and budget deficits, Trump has promoted tariffs as the perfect solution to address both deficits at the same time. The US president apparently believes raising tariffs will decrease imports by making them more expensive, while raising revenue for the fiscus on any imports that still flow into the US.
Despite its simplicity, there are obvious risks associated with such a strategy. For one thing, as other countries retaliate, US exports could fall by just as much as imports, resulting in no major change in the overall balance of trade. Similarly, if the trade war leads to an economic contraction in the US, overall tax revenues may decline, offsetting the revenues generated by the tariffs.
Perhaps that’s why some have argued that Trump’s tariffs are just a negotiating tactic to coerce countries to cut ties with China and move manufacturing back to the US. However, high levels of uncertainty risk making large-scale investment decisions even less likely, and few states are likely to cut themselves off from lucrative Chinese trade and investment.
While Mexico and Canada, which rely heavily on the US economy, might have buckled if they’d not been excluded from the worst of the tariffs, more than 100 countries count China as their largest trading partner. As such, most nations are unlikely to break off relations with Beijing, especially as the US continues to carve out tariff exemptions for itself.
This means that no-deal scenarios remain a possibility, which could see Trump’s “Liberation Day” tariffs reinstated. Vietnam is a notable example. Despite running the third-largest trade surplus with the US after China and Mexico and facing a 45% “reciprocal” tariff, Hanoi recently welcomed Chinese President Xi Jinping for an official state visit during which 45 agreements were signed.
In contrast, Brazil, which faces just a 10% tariff regardless of the outcome of negotiations, could benefit from the disruption and already has some experience in this regard. While the US once accounted for more than half of China’s soybean imports and still held a third of the market in 2017, this share dropped to just 10% by 2019 due to trade tension during Trump’s first term. Brazilian farmers quickly replaced their US counterparts, capturing 80% of the Chinese market.
Japanese beef consumption could face similar shifts if Trump’s 24% “reciprocal” tariff on all Japanese exports goes into effect after the 90-day pause expires. In 2024 US beef exports to Japan reached $2bn, accounting for half of Japan’s imports. However, Brazil is the world’s top beef exporter and is in advanced discussions to recommence beef shipments to Japan.
Brazil’s potential trade windfall isn’t just limited to agricultural produce either. Producing 900-million pairs of shoes annually, Brazil is already the world’s largest footwear producer outside Asia and the world’s fourth-largest exporter. If Trump reinstates his hefty tariffs on the major Asian producers, this could boost Brazilian footwear makers.
The US has been a key export destination for Vietnam’s footwear manufacturers in recent years, helping the nation emerge as the world’s second-largest footwear exporter after China. But with Trump imposing enormous tariffs on China and threatening onerous levies on Vietnam, Brazilian footwear manufacturers are well positioned to capture a greater share of the US market.
These are just a few examples of the kinds of trade shifts that might occur as a result of Trump’s extraordinary measures, unless the recently announced 90-day pause is made permanent. While Brazil finds itself in an enviable position, the same cannot be said for some of its fellow Brics partners. India, which has been hoping to increase its market share in the US for years, faces 26% tariffs, while SA exports face levies of 30%.
Meanwhile, some Brics states, like Russia and Iran, face lower US tariffs than key American allies such as Israel (17%) and Norway (15%). This is because Russia’s and Iran’s trade volumes with the US are extremely low due to existing sanctions. Nevertheless, along with the constant on-again off-again tariff announcements, these discrepancies illustrate the unpredictability of US trade policy and make long-term investment decisions challenging.
While Trump has publicly urged companies to relocate manufacturing to the US to escape his threatened tariffs, the reality is that America’s high construction and labour costs may make such a shift commercially unfeasible and businesses will be wary of investing billions into new US production facilities under conditions of such uncertainty.
The safer bet, for now at least, is to increase production in places like Brazil, where companies can take advantage of a relatively modest 10% maximum tariff rather than gambling on volatile US policy shifts. As such, the most likely response to the tariffs may not be a flood of investment into the US but rather an increase in production in countries such as Brazil.
Some businesses may simply seek new export markets for their goods and give up on the US market entirely. Not many small businesses can afford to relocate their production facilities and it may prove far simpler to sell into new markets. This goods surplus that used to flow to the US could in turn have disinflationary effects in emerging markets, lowering interest rates and leading to higher levels of consumption and economic growth.
In contrast, the US faces the risk of higher inflation, lower growth and higher interest rates, with a weakening dollar worsening the effects of the tariffs. The US could end up being one of the most badly affected nations as a result of its own trade war as emerging market economies boost trade with one another while states such as Brazil benefit from trading with all sides.
With its government investing billions in infrastructure and embracing trade diversification, the largest economy in South America is well positioned to thrive. A pact between Mercosur and the Asean countries is set to be finalised later this year, and in light of recent events a similar free trade agreement with the EU may also find greater support from initial holdouts like France.
While Brazil could profit under these conditions, it must still tread carefully. If Brazil’s trade with the US shifts too dramatically from deficit to surplus, the country could face higher tariffs itself. Meanwhile, close ties with the Brics and China could still see Brazil incurring Washington’s ire.
• Shubitz is an independent Brics analyst.
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