MNI INTERVIEW: Brazil Must Keep Negotiating On Tariffs -Barral

Brazil should continue negotiating for better trade terms with the United States even if its announced 50% trade tariff takes effect on August 1, former foreign trade secretary Welber Barral told MNI, adding that Brazilian companies have already begun to feel the impact of the new measure even before its implementation.

"If the tariff is applied, negotiations will continue under much greater pressure. Brazilian companies are already being affected by order cancellations, rising inventories, and other issues that are putting significant pressure on the government," said Barral, now a partner at BMJ Associated Consultants and Barral Parente Pinheiro Advogados, in an interview.

He said Brazil is now trying to send the message that it is willing to negotiate on trade matters, but that there is little it can do regarding political issues.

The international trade specialist emphasized that another concern is the possibility of retaliation by Brazil.

"Brazil will likely not retaliate against all U.S. imports, especially since most of them are inputs for Brazilian industry. Most likely, Brazil will retaliate in areas such as intellectual property and services, which have less impact on domestic industry," he stressed. 

DESINFLATIONARY MEASURE

He noted that in the short term, the tariffs could have a disinflationary effect in Brazil, as some products will have to be sold in the domestic market, increasing supply and pushing prices down, also due to a slowdown in activity. A potential inflationary impact could come from currency depreciation, which seems unlikely, he added.

"Seventy percent of Brazil’s orange juice exports, for example, go to the United States. There’s no alternative market to absorb that. You can’t develop a new market overnight. Most of it will likely be redirected to the domestic market. So, in the short term, you’ll see a drop in domestic prices."

The measure is unlikely to lead the central bank to resume rate hikes, he said. "The Copom would only need to raise rates further if there were a significant depreciation of the exchange rate, which doesn’t appear to be the case."

The BCB raised its Selic rate by 25 basis points last month to 15.00%, indicating the end of its tightening cycle. 

"Industries that are highly dependent on the U.S. market will be severely affected. Some may be able to redirect supply to other countries, but that’s not easy, it requires reorganizing logistics and creating new routes, which is difficult in the short term," he concluded. (See MNI INTERVIEW: No BCB Shift After U.S. 50% Tariffs - Volpon)