The second Trump administration began with threats of a new wave of protectionism and disruption of global trade governance, with further weakening of the World Trade Organization (WTO). China remains the primary target of American actions, given its often unfair competitive practices and rapid technological catch-up.

The effects of this on Brazil and its industry are uncertain, as not all threats may materialize and there are doubts regarding the scope (by product type and/or origin) and the magnitude of the import tariffs to be applied. Additionally, there are direct and indirect effects that may offset each other.

At first, Brazil should not be an object of concern for the Trump administration. First, the US has a trade surplus with Brazil. In 2024, Brazil-US trade generated a positive balance for the US of US$286.8 million. If we consider only manufacturing products, the surplus for the Americans is even higher: US$15.3 billion.

Second, Brazil’s applied import tariffs are lower than they appear. Although Brazil has consolidated an average import tariff of 11.2% at the WTO, in practice, the actual tariff applied is only 3.9%, according to the CNI, due to special import regimes and trade agreements that grant tariff preferences. In the specific case of the US, our actual rate is lower: 2.7%.

The decision taken in Feb'25 to tax all steel imports at 25% suggests that origin may not be the largest or the only criterion guiding current US protectionism. However, it is undeniable that the Trump administration emphasizes its discontent with the trade relations with its main partners, such as Mexico, Canada, and notably China.

For this reason, this Letter IEDI provides an initial assessment of the potential effects of US protectionism for Brazil, assuming that Chinese exports are the target of the tariff increases.

It should be noted that the rise in US trade protectionism could affect Brazil through at least two transmission channels.

The first is the financial channel and its effects tend to be negative. Higher tariffs are expected to have an inflationary effect, leading to less loosening of US monetary policy (or even a return to a phase of rising interest rates). This would attract capital to the US market, causing outflows from emerging economies, including Brazil.

In this context, the dollar would appreciate and the real would tend to lose value, which may result in additional inflationary pressure and consequent maintenance of higher interest rates by our Central Bank. It is worth mentioning that, currently, most analysts believe that the dollar's appreciation will not be sufficient to offset the inflationary pressures from Trump's import tariffs.

The second channel is the trade channel, which will be dealt with in this Letter. The effects may be negative, as seen with steel and aluminum in Feb'25, and due to a potential slowdown in world trade. But they could also be positive, since Brazilian exports may fill the market share lost by Canadian, Mexican, and especially Chinese products. This analysis focuses on the potential positive effects.

In this study, the IEDI examines the size of the US market served by Chinese products that could be more readily occupied by Brazilian products in the face of tariffs on imports from China.

It is worth emphasizing that, given the uncertainty surrounding the US strategy, this is a preliminary approach to the topic, considering only the possible direct effects on US-China and Brazil-US bilateral trade flows.

The exercise relies on certain assumptions. The first is that there would be an increase in tariffs for Chinese products only, not affecting our exports. The second is that the imposition of tariffs would erode the competitiveness of Chinese products compared to Brazilian products. In practice, there is the possibility that China remains more competitive than Brazil despite tariffs on its exports to the US.

Another assumption is that it would be easier for us to occupy the space left by reduced Chinese exports in products we already export to the U.S. In other words, expanding sales of existing exports is easier than starting to export new products to the US.

In addition, despite the differences in quality, design, after-sales services, etc., so important when it comes to manufacturing, the goods we already export to the US indicate that we have sufficient competitiveness compared to other countries and tariffs on Chinese goods could create a real opportunity for market share gains.

Based on TradeMap data, we identified a set of 2,863 products (at the 6-digit HS - Harmonized System classification) that both China and Brazil export to the US. Given our assumptions, these are the products in which Brazil could most readily gain market share due to the taxation of products imported from China.

These products, worth US$457.2 billion in Chinese exports, indicate the scale of opportunities that can be explored if Chinese products lose competitiveness. The figures are for 2023, which is the most recent year available on TradeMap.

Our matching (overlapping) products are numerous because Brazil's export basket to the US is more diversified and includes many manufacturing goods, expanding opportunities. This clearly illustrates the importance for the country of having a basket with many items.

It is worth noting that we export a high number of products to the US, but we export little of them, mainly due to the "Brazil Cost." The set of matching products correspond to 68% of our export basket to the US, totaling US$25.4 billion in 2023.

We also detailed the analysis by sectors, considering those that are significant in value for Brazilian exports of manufacturing products to the US and have more products matching Chinese exports. We selected a total of nine sectors and for each of them highlighted five products, which were classified by technological intensity.

Two sectors are high-tech: aircraft and their parts, and optical, photographic, cinematographic and measuring instruments. In the first case, there are 13 matching products, accounting for US$676.2 million in Chinese exports.

It is the only sector in which we export much more than China (almost triple) and therefore, a priori, the potential for additional gain derived from import tariffs is lower. However, it is important to recognize the centrality of innovation in the sector and the Chinese effort in building expertise in the area. Thus, in a long-term perspective, the potential is not negligible.

In the second case, there are 114 matching products that accounted for US$11.5 billion in Chinese exports to the US in 2023. In this case, the potential is much greater, since Brazil exports only US$293.4 million of these goods.

Next, organic chemicals include high- and medium-tech products among the top five selected. In this case, there are 117 matching products and US$5.4 billion in Chinese exports to the US market. Brazil’s exports in 2023 were only 9% of China’s and could increase more.

The medium technology sectors are predominant, accounting for four of the nine selected. They are: electrical machinery and appliances (US$122 billion in matching products exported by China in 2023), nuclear reactors, boilers, mechanical machinery and appliances (US$86.5 billion), vehicles, automobiles and tractors (US$14.6 billion) and inorganic products (US$525.9 million).

In electrical machinery and equipment, we export far less than China. The matching products we export from this sector account for only 1% of the US imports from China. For the two other sectors, this ratio is 5%. In other words, there is significant room to gain market share if China exports less of these goods.

In inorganic products, there are items of medium and high technological intensity, as well as primary commodities (such as aluminum oxide). In this sector, Brazil also exports more than China. Displacing Chinese exports from the US market could increase Brazil’s exports in this sector by 40%.

Then, iron and steel articles feature low technological intensity goods in the five selected by the study. In 2023, China exported almost US$13 billion of matching products from this sector, while Brazil exported only 3% of that, providing room for market gains if our products become more competitive.

The wood and wooden articles sector concentrates products intensive in natural resources and labor. In this case, China exported US$2.7 billion in 2023, a higher share, but not too far from our exports to the US (US$1.4 billion).

Significant effort is required to realize the potential identified earlier.

This will demand, for example, a skillful foreign trade policy that keeps us out of the focus of US protectionist actions and supports strategies to increase the market share of Brazilian producers abroad.

In parallel, the agenda of reducing costs in our economic environment, which make up the so-called "Brazil Cost," has long been urgent and now becomes even more critical. Not only to compete better abroad but also to counter the competitive pressure that trade diversion from China may cause domestically.

In this agenda, there are major problems to be solved, such as the high cost of capital in the country. There are problems whose solutions take time, such as the complete implementation of the new taxation of goods and services, but there are also regulatory improvements and trade facilitation actions that also bring benefits and tend to be more immediate.

For the industry, the relevance of integrating industrial policy with foreign trade policy to strengthen the sector and make it internationally competitive is widely recognized. The change in the global environment that tends to be promoted by the Trump administration makes this integration even more strategic.

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