Lula's Firm Stance Against Trump's 50% Tariff Threat Yields Initial Success

Brazil's President Luiz Inácio Lula da Silva's firm stance against Donald Trump's 50% tariff threat has shown initial success. The extensive list of exemptions has provided relief to both the market and businesses, at least in the short term. Key Brazilian exports to the United States, ranging from civilian aircraft to orange juice, will not face tariffs exceeding the previously implemented 10%, mitigating the impact of Trump's planned tariffs, which were initially set to take effect the following week rather than the Friday as initially announced.

This development came as a surprise to the Brazilian government, which had limited contact with the White House in recent weeks and relied on a group of business leaders, including those from Embraer, to advocate for Brazil in Washington. The left-wing Lula maintained a firm position against U.S. demands to intervene in the judicial system and halt prosecutions against the right-wing Jair Bolsonaro. Lula's defense of the Supreme Court, which he argued was beyond his jurisdiction, seemed to make the tariff increase inevitable. However, Trump softened his stance, stating for the first time that the 50% tariff would not apply to all goods.

The conflict with Trump has significantly boosted Lula's approval ratings, tipping the scales in his favor. According to a survey conducted by AtlasIntel and released on Thursday, slightly over 50% of Brazilians now support him, up from 49.7% two weeks prior. Lula now faces the challenge of turning this breathing room into a long-term easing of relations with the country's second-largest trading partner. Bolsonaro is set to face trial for alleged attempted coup, which could further anger Trump and potentially lead to the revocation of the exemptions.

Brazilian officials are concerned that the U.S. sanctions against Supreme Court Justice Alexandre de Moraes, announced just hours before the tariff order, could lead to punitive measures against other government officials. Additionally, key industries not exempted from the 50% tariff, including coffee and beef, may require economic assistance to help Lula buy time and win public support while he continues to stand firm against the larger northern economy.

The Central Bank of Brazil maintained interest rates on Wednesday, with policymakers planning to keep the benchmark Selic rate unchanged in the face of inflation above target and the imminent tariff threat. Despite this, Lula declared a cautious victory. "Today," he proclaimed at an event in the presidential palace, "is a day of sacred sovereignty."

In the days following Trump's initial tariff threat, Brazilian government officials had resigned themselves to their fate. Finance Minister Fernando Haddad and Vice President Geraldo Alckmin were outraged by the U.S. demands, repeatedly arguing that unlike most countries facing Trump's tariffs, Brazil has a trade deficit with the U.S. Lula capitalized on this dispute, positioning himself as a defender of Brazil against foreign interference, viewing Trump as determined to provoke a conflict over Bolsonaro while showing little interest in trade negotiations.

Even as the White House prepared to release the exemption list, Brazil remained largely in the dark. On Wednesday afternoon, Brazilian Foreign Minister Mauro Vieira met with the U.S. Secretary of State in Washington, expressing regret over the politicization of the two countries' 200-year relationship. He told reporters that he reiterated Lula's position: Brazil is willing to negotiate on tariffs but will not compromise on sovereignty. According to two informed sources, upon learning of the new order from the Brazilian ambassador in Washington, Lula immediately convened an emergency meeting with Alckmin and other officials in Brasília.

The Brazilian government had been developing plans to help businesses and key industries mitigate the impact of increased tariffs, with estimates suggesting this could deal a 1% blow to the Brazilian economy. However, informed sources now believe that while risks remain, the threat is no longer as severe. One official stated that the government has paused the release of these plans and is revising them while seeking new negotiations with the U.S. A Brazilian official familiar with the situation noted that, in Lula's view, Trump's decision has at least brought some trade rationality back to the negotiations, although he still sees the dispute as fundamentally political.

An informed source close to Haddad's thinking (who, like others, requested anonymity to discuss internal matters) predicted that the issue would not be resolved quickly. Haddad has not yet spoken directly with U.S. Treasury Secretary Janet Yellen and expects negotiations to drag on for the next two to three months, similar to those with other countries. However, one official revealed that the Lula government now believes it may be able to secure exemptions for other goods not produced in the U.S., including beef and coffee. For Brazil, the world's largest exporter of these products, any exemption would be a significant victory.

Companies in Brazil that were initially expected to be hardest hit by the tariffs have expressed optimism. For weeks, major companies with significant U.S. operations have warned the Trump administration that such high tariffs would severely impact the U.S. economy. This includes Embraer, the world's third-largest aircraft manufacturer, which employs over 2,000 people in the U.S. and has been advocating for exemptions similar to those granted to the European Union. According to multiple informed sources, Embraer's CEO Francisco Gomes Neto has been deeply involved in the negotiations, jokingly referring to himself in private conversations as the company's "CTO"—Chief Tariff Officer. The company issued a statement saying, "This news confirms the positive impact and strategic importance of Embraer's business on the economies of Brazil and the United States."

According to the Brazilian Mining Institute, the exemptions will cover 75% of Brazil's mineral exports to the U.S. State-owned oil giant Petrobras and mining giant Vale will benefit from exemptions on oil and iron ore. Suzano SA, a pulp manufacturer, avoided a significant tariff increase as pulp was excluded from the list. Trump's order even surprised markets that had largely dismissed the economic impact of the tariffs. Fernando Gonçalves, chief economist at Itaú Unibanco, stated in an interview that the bank now estimates Brazilian goods will face approximately 30% in actual tariff rates. Previously, the bank had been calculating based on a tariff rate 10 percentage points higher and had not anticipated such extensive exemptions. Gonçalves noted that Trump's change also reduces the likelihood of the Lula government imposing trade restrictions in retaliation, further mitigating the economic impact.

The wildcard in this situation is Bolsonaro. The has been barred from participating in the upcoming elections and is set to face trial later this year for alleged attempted coup. It is widely expected that he will be convicted and arrested. In recent weeks, Trump and the U.S. have repeatedly commented on the case, with the sanctions against Justice Moraes under the Magnitsky Act being the latest escalation in a conflict that has seen Moraes clash with Trump's media and technology group, Rumble, and Elon Musk's X platform, among other U.S. social media platforms. The Supreme Court has stated that Moraes has no assets or funds in the U.S., making the current measure seem more symbolic, aimed at appeasing Bolsonaro and his supporters. "The delay in implementation and the lengthy exemption list indicate that Trump wants these sanctions to be 'symbolic,'" said Thierry Wizman, a macro strategist at Macquarie Group in New York, "The goal is to send a signal that his aim is to persuade, not to punish."