Lula's reaction to Trump's tariff hike could cost the industry dearly

President Lula's (Workers' Party) reaction to the 50% tariff hike that the US will apply to Brazilian imports starting August 1 could harm the national industry. On Thursday (10), the Secretariat of Communications of the Presidency of the Republic (Secom) informed GloboNews that the president should apply the Brazilian Economic Reciprocity Law, including retaliatory measures such as equivalent tariffs and restrictions on intellectual property contracts.

"If he charges us 50%, we will charge them 50%," commenting on the trade war, the president said in an interview with TV Record .

According to the Secretariat of Foreign Trade (Secex), last year Brazil imported US$40.6 billion from the United States, 7.1% more than in 2023. 88% of this was from the manufacturing industry. In the first half of the year, this share rose to 91%.

Between January and June of this year, the share of items from the manufacturing industry reached 91% of imports, which already totaled US$21.7 billion, an increase of 11.5% compared to the same period last year.

Brazil primarily purchases intermediate industrial goods from the United States, i.e., those used in domestic industrial production. This occurs in export sectors such as aeronautics and essentials such as pharmaceuticals.

Retaliation to Trump's tariff hike could increase industry costs

One of the possible impacts of retaliation, according to Claudio Considera, coordinator of the National Accounts Center at the Brazilian Institute of Economics at the Getulio Vargas Foundation (FGV Ibre), is a possible increase in costs for national production, if the government decides to apply an equivalent tariff on imports.

If Brazil continues to import these products from the US, production costs will increase, making our industry less competitive, he stated.

Industrial growth could also be affected, emphasizes José Augusto de Castro, president of the Brazilian Foreign Trade Association (AEB). Through May, industrial production had increased 1.8% in 12 months.

According to him, the government needs to respond based on rational and practical criteria, not political ones.

Within the government, there is fear of more inflation in response to Trump's tariff hike.

The Ministry of Development assessed that the application of reciprocal tariffs would be counterproductive, as it would increase the cost of domestic production. The analyses were conducted after Trump's first "tariff hike," announced on April 2.

In addition to the immediate impacts on inflation, XP analysts predict that reciprocity with equivalent tariffs, by increasing inflation, could lead to the adoption of an even more conservative monetary policy by the Central Bank, increasing caution regarding the interest rate cut, estimated for early 2026.

BTG Pactual notes that retaliatory measures by the Brazilian government could partially offset the deterioration in the trade balance resulting from additional tariffs on exports. However, such measures would entail significant risks: increased regulatory uncertainty, higher import prices, and a possible escalation of trade tensions, with negative effects on inflation and investment.

"In practice, the biggest cost of this new round of tariffs is less the potential direct impact on trade flows and more the worsening of the economic environment, the deterioration of the historic partnership between the two countries, and the uncertainty generated," the bank's economists emphasize.

Another point highlighted by the bank is that multiple retaliations tend to be ineffective and can trigger an escalation of trade tensions that are difficult to reverse, in addition to putting pressure on inflation.

Companies call for rationality and diplomacy to avoid further escalation

Private sector representatives have emphasized the need for rationality in Brazil's response. Bradesco notes that Donald Trump's own letter to Lula already contains a possible response in the event of retaliation: an additional 50% increase in tariffs.

According to Roberta Portella, a professor at FGV, although the legislature granted the Executive broad powers of action, the need for proportionality and private sector participation in the response was maintained, which minimizes the risk of purely political manipulation of the countermeasures.

Another point she highlighted is that, depending on how the countermeasure is designed, there may be a risk of violating rules against third parties or affecting products from countries not directly involved in the dispute.

João Kepler, CEO of Equity Group, stated that it is essential for the country to react with strategic intelligence and seek to expand trade agreements with other nations, in addition to strengthening the local business ecosystem. "High tariffs require more than a political reaction; they require an economic response based on innovation, diversification, and leadership," he stated.

Volnei Eyng, CEO of asset management firm Multiplike, said Brazil needs to avoid hasty retaliation. "Diplomacy is the best path. Less trade between the two countries means less growth, and the sectors with strong foreign exposure are the ones who lose the most," he stated.

Alternative for industry is to change suppliers

One possibility for the industry, given the adoption of tariff reciprocity and a potential increase in the cost of industrial inputs from the United States, would be to diversify its suppliers, seeking out industries in other countries. However, Castro, of AEB, explains that this is a strategy that takes time to develop.

"At this point, it would be difficult to find new suppliers because no one would have the flexibility to replace them overnight, which would take time. And this time ultimately leads to increased costs because you end up paying for a more expensive product to meet a localized demand," he said.

Another point concerns the long-term contracts signed by Brazilian industry, for which the impact of retaliation is still unclear. In other words, even with the forecasts, it is necessary to await the measures the government will adopt to understand the actual effects.