Assessing Trump’s trade targets, and Brazil as a case study

US trade policy is preoccupying companies and financial markets globally. As part of an ‘America First’ agenda, US import tariffs now target economic allies and rivals with whom the US perceives that it has an unfair trade balance. The Trump administration’s policy, outlined on President Donald Trump’s first day in office, aims to redress these trading conditions, although specifics including how tariffs will be applied, remain unclear.

The Trump administration’s ‘reciprocal’ tariff policy is founded on “whatever they tax us, we will tax them,” as Mr Trump told Congress on 4 March. It is not yet clear whether US tariffs, due to be applied to foreign imports from 2 April 2025, will be applied as a uniform duty across all categories of goods from a target country, with some specific exceptions, or whether different duties will be applied to different goods from the same exporting economy. Nor is it clear whether lower tariffs might apply to countries who run a trade deficit with the US, in other words, those already importing more goods from the US than they export.

We have ranked US trading partners using two factors: size of trade surplus/deficit with the US, and average level of tariff difference. We measure the size of trade surplus/deficit in goods, but adding trade in services would preserve the same ranking of the largest economies. While this excludes other factors like existing non-tariff trade barriers and Value Added Tax differences, it indicates which countries are exposed to the threat of high, or relatively low, US tariffs, and a middle ground of medium risk economies. This assumes that the US administration makes some differentiation across different economies. It also assesses the negotiating room that each may have within trade, and conversely the leverage the US may apply through other negotiation areas.

Our ranking splits the world of US trading partners into four groups (see charts 1 and 2, page 2):

1) countries with large surpluses in their trade with the US and wide average tariff differences (China, Mexico, Japan, Thailand, India),
2) countries with large surpluses but narrow tariff differences, or even tariff advantages (including Germany, Switzerland, Canada, Vietnam among others),
3) countries with small trade surpluses or even trade deficits, but large tariff differences (Colombia, Brazil, South Africa for example), and
4) countries with small trade surpluses or deficits and small tariff differences or even tariff advantages (a number of European countries, Turkey, Australia and New Zealand to name a few).

Should the US pursue a policy of high, “middle-way” (as Secretary of Commerce Howard Lutnik for example floated for Canada) and low (or no) tariffs to account for these differences, Group 1 countries would be at risk of high tariffs, at least in a first step. Taking the cumulative tariffs slapped on China since February and those threatened for Canada and Mexico, we think of 20-25% average tariffs for Group 1 countries. Leverage applied through trade by the US to settle other priority projects could then lead to eventual relief in a second step.

Japan, Mexico and India might be in such a situation. In his joint address to Congress for example, Mr Trump referred to the Alaska Liquified Natural Gas (LNG) pipeline project, and to its funding by South Korea and Japan. This may provide negotiating room for these two economies to reach a middle ground with the US administration – especially given the existence of a 2007 free trade agreement with South Korea, as well as a 2019 FTA with Japan, the latter signed during the first Trump presidency.

Brazil could be among the countries that can weather US tariffs relatively well

Canada and Mexico, both highly exposed to trade with the US, may eventually end up in different groups, with relatively fewer concessions needed by Canada than Mexico to avoid high tariffs. Brazil could be among the countries that can weather US tariffs relatively well, even if some medium-ground tariffs (we think of 10-15% tariffs) were applied as a first step, and relatively little leverage could stem from its trade with the US. A number of European countries (the UK in particular, Nordics) and Australia/New Zealand in the Asia-Pacific region might in turn attempt to push back harder against US tariffs invoking little justification (provided other existing non-tariff barriers to trade which we have not reviewed in this analysis do not expose them).

Brazil as a case study

Brazil falls into our Group 2 category. The country was singled out in President Trump’s recent address to Congress, along with the European Union, China, India, Mexico and Canada, as imposing “tremendously higher tariffs than we charge them.” While Brazil has a relatively high tariff difference with the US, it runs a goods trade deficit. Brazil might therefore have room to negotiate ‘middle ground’ tariffs.

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The pain that Brazil may feel from US tariffs is likely to be moderate. Brazil’s goods exports to the US represent only 1.7% of its GDP. This contrasts with Mexico’s 26.1% share of GDP going to the US (see chart 3). Brazil’s key export destination and key trading partner has long been China, which accounts for around 30% of total Brazilian exports. Hence Brazil is more exposed to the risk of China substituting some Brazilian farm and food products, such as soybeans for example, for US suppliers in any renegotiation of the US-China “phase 1” deal on agricultural trade than it is to the risk of US tariffs. For now, we do not foresee major shifts and expect a small current account deficit of 2% of GDP for Brazil in 2025.

We nevertheless expect slower economic growth in 2025 of 2% as interest rate hikes take effect; economic activity has already slowed and retail sales growth stalled. With a tight labour market and still relatively high wage growth in the face of rising inflation, we expect the Banco Central do Brasil’s benchmark target rate (or ‘Selic’) to peak at 15.25% this year, 200 basis points higher than today’s rate.

Brazilian bonds offer some of the most attractive sources of income among similarly rated peers in emerging markets

With 10-year inflation-linked bonds in local currency offering a yield close to 8%, Brazilian bonds offer some of the most attractive sources of income among similarly rated peers in emerging markets (see chart 4, page 4). For domestic Brazilian investors, inflation-linked bonds provide a source of income that compensates for the loss of purchasing power that investors face through the Brazilian real’s weakness. This sets a hurdle for investors to consider other asset classes such as equities, or foreign markets. Clearly investors remain sceptical of Brazil’s fiscal budget, which targets a moderate primary surplus. Even if the target were achieved, it would not be enough to prevent the ratio of public sector debt to GDP from rising further.

Brazil’s equity market is highly concentrated around the financial sector and commodities. We expect net interest income and margins to increase and continue to support Brazilian financials. For commodities-related sectors, we hold a neutral view on energy and a positive view on materials. Valuations of Brazilian stocks are cheap at 7.4 times 12-month forward price-to-earnings ratios, compared with an average of 13.1 times for emerging market stocks overall, and 11.1x for Mexico.

A brighter earnings outlook

These undemanding valuations reflect the high cost of capital in Brazil. We do not expect any relief from Brazil’s monetary policy as interest rates will continue to tighten. Earnings growth for the fourth quarter of 2024 is on track for a 68% decline year-on-year, driven by weakness in commodity-related sectors. The picture for 2025 looks brighter; consensus outlooks point to earnings expanding by 53%.

As for the Brazilian real, we have a neutral stance in contrast to our negative stance towards the MSCI EMFX index, which is dominated by Asia, and the Mexican peso. This reflects the relative closed nature of the economy that keeps the currency relative insulated to shocks from tariffs or global interest rates, compared with other emerging markets. Instead, Brazil’s domestic fiscal and political story matters more, and can lead to bouts of volatility, as seen in the underperformance over the last quarter of 2024. Our current USDBRL forecasts stand at 6.00 and 6.20 over three and twelve months respectively, below the levels implied by forward markets, on account of the Brazilian real’s high carry yields.

While Brazil is unlikely to be completely shielded from the many pressures on international trade, we expect reasonable stability over the months ahead. This should allow investors to benefit from the still-attractive yields available in Brazilian government and corporate bonds.