Brazil Lula and Trump engage in a trade arm wrestle

US president Donald Trump turned his attention to Brazil on July 9 as he threatened to impose a 40% tariff hike to US imports from Brazil in an open letter, topping the 10% levy applied on April 2 this year. The effective tariff hike is said to take effect on August 1 this year. The letter could trigger negotiations, hinting that the tariff hike could rise by much less.

What you will learn:

• Our Global Economic Model simulations suggest that a permanent 40ppt tariff hike on US imports from Brazil would have limited impacts to the Brazilian economy.
• This reflects the fact that Brazil is a relatively closed economy and yet well diversified in international trade, only about 10% of total Brazilian exports, or 2% of GDP, go to the US.
• A key risk, however, is that tensions could flare further. Brazilian incumbent president Lula da Silva countered the US announcement by threatening to retaliate using Brazil’s Economic Reciprocity Law, which could risk a full-blown trade war.