Trump's tariffs could scare away foreign investment in emerging markets, including Brazil.

NEW YORK — The wave of protectionism that has swept global trade due to U.S. President Donald Trump 's tariffs threatens to spill over into a key source of growth for emerging markets: foreign direct investment .

In Brazil, which was taxed at 50% , the highest rate announced so far, this could be the main risk if tension with Washington takes on even greater proportions.

Since the Great Global Financial Crisis, rich countries have moved towards protectionist policies such as the adoption of tariffs.

The number of new restrictions imposed by advanced economies on imports from emerging markets grew at an annual average of 8% between 2009 and 2023, according to a warning from the Bank for International Settlements (BIS) in its most recent annual report.

The total number of impacted products jumped from around 5% to 62% in the period.

"As trade protectionism continues to rise, less foreign direct investment will flow from advanced to emerging economies, reducing the growth potential of these countries and worsening the prospects for economic convergence between these two worlds," warns the BIS, considered the father of central banks, based in Basel, Switzerland.

This week, the global spotlight returned to Brazil, with President Trump imposing a 50% tax on all Brazilian products starting August 1st.

Although the US is Brazil's second-largest trading partner, its trade balance is small, accounting for less than 2% of Brazil's Gross Domestic Product (GDP) , which should limit the economic damage to the country, according to economists. In a worst-case scenario, it could shave up to 0.4 percentage points off Brazil's growth, predicts Goldman Sachs .

However, the BIS warns that greater protectionism could have an impact on foreign direct investment from emerging countries, which, in turn, would also be another source of risk to the GDP growth of these economies.

Nations that received a greater share of Foreign Direct Investment (FDI) than those that adopted trade restrictions on at least 50% of their imports experienced slower average growth, according to the organization.

"Everything in the economy is related, so a major fundamental shift in global trade policies could certainly affect many other variables, such as foreign direct investment," says Todd Martinez, co-head of Latin American sovereign bonds at Fitch Ratings , in an interview with Estadão/Broadcast .

For Alexandre de Ázara, chief economist at investment bank UBS BB, the main concern regarding the impacts of the escalation of tensions between the US and Brazil is precisely Foreign Direct Investment (FDI).

"If Brazil is labeled as 'unfriendly' by the US, that's clearly the risk," he assesses in an interview with Estadão/Broadcast . But despite this, he does not foresee a collapse in FDI volume.

Brazil had a net inflow of more than US$30 billion in foreign direct investment in the year to May, a drop of almost 1.90% compared to the same period in 2024.

The Central Bank expects a net inflow of US$70 billion in FDI in 2025, equivalent to 3.2% of GDP and below the more than US$71 billion recorded last year. The record was in 2022, when US$74.6 billion entered the country.

Americans account for approximately a quarter of all new foreign investment in Brazil. The country, along with Spain and Portugal, stood out in terms of foreign investment appetite between 2018 and 2024, according to Citi's FDI Confidence Index.

"Brazil has always had robust FDI flows despite many competitiveness challenges. The country's attractiveness stems from its large domestic market, and this will not change as a result of trade policy," says Martinez of Fitch.

A recent survey by Bank of America indicates that companies do not intend to reinforce their reshoring strategies, that is, bring operations back to their home countries, above the recent trend due to Trump's tariffs.

In turn, there may be more nearshoring (trade between closer countries) or friendshoring (centralization of business between more friendly nations).

"That's where some countries can benefit," says Claudio Irigoyen, head of Global Economic Research at Bank of America (BofA), citing Mexico and India as examples.

For former New York Federal Reserve (Fed) President William Dudley, it is still too early to make an assessment, because no one knows where the US tariff regime will end up.

But one thing is certain: companies will diversify their production sources in search of more flexibility to respond to outbreaks of trade protectionism, he says.

"Investments have a lifespan that extends over many years. And who knows how long these tariffs will actually be in effect?" asks Dudley.