Brazil Could be Collateral Damage in Trump Trade War

• Few countries have been hit harder by the soaring dollar and U.S. bond yields than Brazil. However, the country has one thing going for it - as U.S. President Donald Trump prepares to levy punitive tariffs on many of America's major trading partners, Brasilia is unlikely to be in his protectionist line of fire.
• Brazil is once again the classic case of an emerging economy under pressure. Financial conditions are the tightest since 2016, according to Goldman Sachs, real yields above 10.0% are the highest in more than 15 years, and its currency has never been weaker.
• Brazil's central bank is actively intervening to stabilize the real, raising interest rates and spending US$28Bn of reserves in December—the largest decline in 19 years. Despite a healthy primary fiscal balance, high interest burdens strain public finances, while investor anxiety drove a US$12.6Bn net outflow from debt and equity funds in December, the second-largest since 1995.
• Brazil's unique trade position with the U.S. contrasts with other emerging economies, as it does not run a bilateral trade surplus. While Trump's earlier policies benefited Brazil's agriculture sector by reducing China's reliance on U.S. soybeans, his protectionist rhetoric and threats to disrupt global trade could severely impact Brazil, particularly if Chinese demand slows.
• Ideological differences between President Lula and Trump, as well as tensions with figures like Elon Musk, could exacerbate friction. Additionally, Brazil risks collateral damage from U.S.-driven global instability, and Lula's potential populist response could worsen Brazil's economic vulnerabilities.

(Source: Reuters)