Brazil investors fear US tariffs will hurt economy and aid Lula's reelection bid

Brazilian investors are more concerned about the political impact of US tariffs than the economic impact. The threat has boosted leftist President Luiz Inacio Lula da Silva's popularity, but investors fear his potential return could lead to deteriorating finances, a negative impact on the currency and inflation, and restrictive monetary policy. The real has weakened 2% since the tariff threat, but the impact on growth is expected to be minimal. Some companies, such as Embraer, may suffer a severe blow.

Brazilian investors are increasingly focused on the political implications of the impending US tariffs rather than the economic impact. The threat of the tariffs has significantly bolstered the popularity of leftist President Luiz Inácio Lula da Silva, but investors are apprehensive about the potential consequences of his return to power. The tariffs, set to take effect on August 1, 2025, could have far-reaching effects on Brazil's economy, particularly in the state of São Paulo, which generates nearly 32% of the national GDP [1].

The real has weakened by 2% since the tariff threat was announced, but the impact on growth is expected to be minimal. However, the political climate surrounding the tariffs has created uncertainty among investors. Lula's potential return to power could lead to deteriorating finances, a negative impact on the currency, and restrictive monetary policy. This political instability has the potential to disrupt business operations and deter foreign investment.

The aviation industry, represented by Embraer, is particularly vulnerable. With 48% of its commercial jets sold to US carriers, each plane will now cost American buyers an extra $9 million. This could result in a severe blow to Embraer's revenue, potentially mirroring the pandemic-era losses that triggered a 15% workforce reduction [1].

The Brazilian government has implemented emergency measures to mitigate the impact of the tariffs, including R$5 billion in low-interest loans for exporters and accelerated trade diversification talks with the EU and China. However, the effectiveness of these measures remains to be seen. The political firestorm surrounding the tariffs is likely to persist, further complicating the economic landscape.

The US tariffs are not permanent and could be reversed through bilateral negotiations or Congressional action. However, the August 2025 deadline creates a sense of urgency. Without urgent diplomatic resolution, São Paulo's factories may idle, groves may decay, and families may face ruin, while Americans pay more for everyday goods [1].

References:
[1] https://inews.zoombangla.com/us-tariffs-on-brazil-sao-paulo-faces-120000-job-losses-1-3b-economic-blow/