The dark side of the moon

BRAZIL ECONOMICS - Report 14 Jul 2025 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

The surprising imposition of 50% tariffs on Brazilian exports to the US is expected to have negative effects on economic activity, particularly on the manufacturing sector. The US absorbs 12% of Brazilian exports, accounting for just under 2% of GDP, but almost 18% of manufactured exports, equivalent to 12.4% of manufacturing GDP. This suggests a more severe impact on this sector.

We estimate that the negative effects on the output gap should lead to some deceleration in inflation ahead, with a median estimate of 0.15% over 12 months. However, exchange rate movements point in the opposite direction, so the final effect on inflation, though uncertain, will likely be modest.

The political motivation behind the tariff imposition has given the Lula government an opportunity to break free from political pressure and corner the opposition. While it is impossible to know how durable or effective this strategy will be for next year’s election, this development seems to be weighing on asset prices.

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