Lula's retaliation against US tariffs could eliminate 5 million jobs in ten years

An escalation of retaliation in the trade war between Brazil and the United States could cost up to 6% of Brazil's GDP—at least R$667 billion—and the loss of 5 million jobs over a period of five to ten years, according to estimates from the Federation of Industries of the State of Minas Gerais (Fiemg).

Brazil faces its biggest trade dilemma in decades. The tariff hike announced by Donald Trump, to take effect on August 1st, represents much more than a trade obstacle.

According to analysts, the situation could pose a major obstacle to the country's economic future if President Luiz Inácio Lula da Silva (Workers' Party) opts for retaliation. Currently, the government's efforts are focused on diplomatic negotiations.

"The Ministry of Foreign Affairs will need to be very skillful in negotiating and, perhaps, suspending this tariff before August 1st," says legal scholar Ives Gandra da Silva Martins, professor emeritus at Mackenzie University.

The US decision is surprising not only for its magnitude, but also for its timing and justification. Washington describes the tariff hike as "reciprocal" and claims to seek to "correct barriers imposed by Brazil."

However, analysts see motivations that go beyond trade. They see a political component to the decision, with disagreements over the Supreme Federal Court's (STF) treatment of former President Jair Bolsonaro and heated debates over social media regulation in Brazil serving as a backdrop for the instrumentalization of bilateral trade.

The Cost of Retaliation: Why Would Responding Be Worse?

The Minas Gerais business association points out that if Brazil responds with a 50% tariff on American products, as Lula considered last week, the effects would be substantial.

The national GDP would contract by 2.21%, equivalent to R$259 billion in current values. This contraction would mean the elimination of 1.9 million jobs, both formal and informal, resulting in a R$36.2 billion reduction in Brazilians' total income.

Government revenue would also be severely affected, with estimated losses of R$7.2 billion. This would occur in a scenario in which the government has little concern about getting its finances back into the red. In the 29 months of Lula's administration through May, there were deficits in 23 of them, according to data from the Central Bank (BC). As a result, public debt jumped from 71.7% of Gross Domestic Product (GDP) in December 2022 to 76.1% in May of this year.

"A poorly planned retaliation could generate significant side effects for the Brazilian economy. Sectors with high exposure to the foreign market would be directly impacted, and with them, jobs and entire production chains. For consumers, this translates into more expensive inputs, inflation, and potential supply disruptions," says Felipe Vasconcellos, partner at Equus Capital.

Escalation in tariffs would lead to tougher sanctions in the trade war

The situation worsens considerably in an escalation scenario. If the United States raises its tariffs to 100% in response to Brazilian retaliation, even if Brazil maintains its tariff at 50%, the GDP decline would reach 2.49%.

The possibility has already been considered by Trump, in the event that Brazil retaliates against the United States. And it could be applied in another context: maintaining strong trade relations with Russia. According to the White House, purchasing petroleum products from that country helps its war efforts in Ukraine, a conflict that began in February 2022.

Brazilian imports from Russia were US$5.1 billion in the first half of the year, 4.6% less than in the same period in 2024.

Any confirmation of tougher sanctions would result in approximately 2.2 million Brazilians losing their jobs over a period of five to ten years and a reduction of R$40.8 billion in total income.

The most catastrophic scenario studied by Fiemg would involve a "double retaliation," with both countries imposing 100% tariffs. Adding to this a likely decline in foreign direct investment—estimated at 40% for American investments and 30% for other countries—the impact would be devastating.

Brazilian GDP would plummet 5.68%, a loss of more than R$667 billion. Nearly 5 million Brazilians would lose their jobs, household income would fall R$93 billion, and tax revenue would be reduced by R$18.5 billion.

"The United States is a traditional and geographically strategic partner for Brazil," says Flávio Roscoe, president of Fiemg. "Both countries stand to lose significantly from this measure. Responding with the same currency could have devastating inflationary effects in Brazil. Therefore, diplomacy is the smartest path."

The sectoral impacts of a trade war would not be evenly distributed across the economy, the federation points out. The entity identified that, although the effects begin in export sectors, they would quickly spread throughout the economy, even affecting sectors focused on the domestic market.

Transportation equipment manufacturing would face a 21.6% contraction, virtually paralyzing investment and expansion in the sector. Steel and pig iron production, crucial to national industry, would see their production fall by 11.7%. The wood products sector, a major employer in several regions of the country, would suffer an 8.1% decline.

The effects wouldn't stop there. Sectors seemingly distant from the trade conflict, such as real estate, private education, domestic services, and private healthcare, would experience contractions of close to 3%. This is because, in an interconnected economy, reduced income and employment in export sectors quickly contaminates domestic consumption and demand for services.

Trump's tariff hike and the immediate impact on the economy

Even before considering any Brazilian retaliation, the initial 50% tariff hike imposed by the United States already represents a significant shock to the national economy. Studies by the Federal University of Minas Gerais (UFMG ), corroborated by analyses by the National Confederation of Industry (CNI) and XP Investimentos, project substantial impacts in the short term.

The Federal University of Minas Gerais (UFMG) estimates a 0.16 percentage point reduction in Brazilian GDP, seemingly small, but representing R$19.2 billion in lost wealth. Even more worrying: 110,000 Brazilians would lose their jobs with this initial measure alone, without any retaliation. The five hardest-hit states would be São Paulo, Rio Grande do Sul, Paraná, Santa Catarina, and Minas Gerais.

Most vulnerable sectors in the trade war: from Embraer to agribusiness

The impact on companies details the situation. Embraer, the world's third-largest commercial aircraft manufacturer, would face significant challenges. With nearly 25% of its revenue coming from exports to the United States, a 50% tariff would add up to US$450 million in annual extra costs, according to XP Investimentos.

Other industrial giants would also be severely affected. WEG, a leader in electric motors, would have to rethink its production and pricing strategy. Randoncorp and Frasle, major players in the auto parts and road equipment sectors, would see their margins squeezed and their international competitiveness threatened.

Smaller businesses may also feel the severe effects, emphasizes Joseph Couri, president of the Micro and Small Industry Union (Simpi). "The main consequence is a reduction in demand, as prices rise substantially, inflation increases, and this reduces household purchasing power. With lower consumption, especially in seasonal and non-essential goods sectors, companies' first reaction is to cancel temporary contracts, cut shifts, and lay off employees."

Brazilian agribusiness, responsible for about 25% of the country's GDP, would be vulnerable. Exports of animal protein and the sugar and ethanol industry would be reduced. Brazilian coffee sales to the United States would fall by 6%, forcing producers to seek alternative markets under unfavorable conditions.

The most dramatic impact would be on the orange juice segment . With the United States being a crucial buyer, the imposition of tariffs could cause a collapse in international prices, as it would be extremely difficult to quickly redirect such large volumes to other markets.