U.S. Trade Tariffs and the Reality of Brazilian Economy

AgriBrasilis – How do US tariffs impact agriculture?

Guilherme Abbud – The tariffs impact approximately US$ 11 billion in Brazilian products, with approximately US$ 3 billion in agriculture.

AgriBrasilis – Do you believe that Brazil will be able to redirect its exports?

Guilherme Abbud – Although it takes time and effort, international experience and Brazil’s own experience with specific, sectoral, or sanitary sanctions in the past show that exports are eventually redirected, resolving much of the anxiety and challenges imposed by sanctions.

AgriBrasilis – What are the risks of excessive dependence on the Chinese market?

Guilherme Abbud – Brazil is indeed quite dependent on the Chinese market, but given the inescapable worldwide need for food products, this dependence is less dangerous for agriculture than, for example, for the metal commodities sector. 

“…Brazilian Central Bank has not followed the evolution observed in other emerging countries over the last 15 years… ”

AgriBrasilis – How does the tariff affect exchange rates, inflation, trade balance, and other variables in Brazil?

Guilherme Abbud – The effect is temporary. The exchange rate has already recovered and should continue to appreciate towards BRL5.0/USD. There is no evidence of inflationary pressure in Brazil resulting from tariffs, and there is still significant room for interest rates to fall. The effect on GDP growth is quite limited.

AgriBrasilis – What are the most widespread myths about the Brazilian economic situation?

Guilherme Abbud – That Brazil is heading toward a situation of fiscal chaos. The numerous mechanisms and laws approved in recent years, especially during the years when Henrique Meirelles and Paulo Guedes were ministers, have made primary fiscal chaos much less likely than in the past. As a result, we will have a period of greater exchange rate stability and much lower inflation and interest rates ahead.

AgriBrasilis – Why are interest rates still so high?

Guilherme Abbud – Because the Brazilian Central Bank has not followed the evolution observed in other emerging countries over the last 15 years, where a more independent, gradualist interest rate policy with better communication has replaced the brutality and exaggeration of the mechanical use of the Selic rate. Other countries have interest rate cycles. Brazil has interest rate shocks.

There are four classic explanations that seek to justify why Brazil needs nominal and real interest rates of a different magnitude compared to its peers. According to these, Brazil would have:

• the largest gap between observed inflation and target among emerging countries;
• higher inflation than its peers;
• a higher primary fiscal deficit than its peers;
• and by far the largest public debt among its peers.

These justifications, however, are no longer valid. This scenario has changed significantly over the last 15 years. Even so, Brazil has real interest rates that are three or four times higher than other emerging countries.

There is a need for an institutional environment with less political dispute and less noise and discourse about constant desires to increase public spending, which would make the environment conducive to a technical rather than political discussion about monetary policy governance in Brazil.