Trade war of choice: Brazil in the crossfire of US-China tensions

The intensifying global trade war, initiated by the Donald Trump administration, is starting to worry Brazilian business leaders as it amplifies economic risks.

Last week, the Trump administration imposed tariffs on almost every country, and initially, analysts believed Latin American countries like Brazil got lucky with a 10% floor, which was lower than the measures the EU or many Asian nations are facing.

Also read Latin America Avoids Harsh Tariffs, but Unease Over US Moves Persists

However, the mood is shifting as China is becoming the focus of US trade attacks.

"The more negative reading by market participants now regarding the implications of the trade war on Brazil is happening because we are seeing a tariff dispute between Brazil's two largest trading partners, China and the US, escalating," Luciano Rostagno, chief strategist at EPS Investimentos, told BNamericas

"If China, amidst this trade war, experiences an economic slowdown, it will directly impact Brazil. Moreover, in the midst of such uncertainty, companies across all sectors may begin to postpone their investment decisions, and we could start seeing the effects of this on economic activity [in Brazil] in the coming quarters," added Rostagno, who is still maintaining his projection of 2% GDP growth for Brazil this year.

Starting April 9, China faces 104% US tariffs following a 50% increase in response to retaliatory measures it implemented against the 34% Trump announced on April 2, which was on top of a previous 20%. Beijing has since announced it will also apply an extra 50% on US imports, raising the initial 34% rate to 84%.

Brazil's mining and metals sector is highly dependent on China and could see severe impacts.

"I really hope that the leaders of the world's largest countries, the US and China, use common sense and at some point try to find a negotiated solution for these tariffs. I still see room for tariff negotiations," Gustavo Emina, the CEO and founder of New Wave, a technology holding company that provides solutions for the mining and metals sector, told BNamericas.

Currently, two-thirds of Brazilian iron ore is exported to China, a share that was projected to remain stable because of the ore's quality, which is helping Asian steel mills reduce emissions. 

But "the trade war could significantly alter the dynamics of global trade on an as-yet-unknown scale. In the case of the steel chain, we see the main potential impacts as the expansion of the oversupply in export markets outside of the United States, especially steel from China, whose surplus had already been directed to other markets due to weakened domestic consumption in recent years," BB Investimentos, the equity arm of Brazilian state lender Banco do Brasil, wrote in a report.

"The weakening of the Chinese steel sector due to the cumulative effect of reduced steel exports and industrial products that use the raw material, could result... in (i) a reduction in steel production and consequently, a decrease in iron ore imports by the country; (ii) in a drop in steel prices due to higher supply, and therefore, in a reduction in sector profitability; and (iii) in the search for lower-quality ore, especially in the short term," the report said.

On the upside, some sectors stand to gain.

"The trade conflict presents inflationary risks for the global economy, so this increases the attractiveness of assets that have contracts with automatic inflation adjustments, as is the case in many concessions and PPP contracts in Brazil's infrastructure sector. Given the current scenario, we may see these types of assets gaining even more appeal in investors' portfolios," Frederico Turolla, a partner at infrastructure consultancy Pezco, told BNamericas.