INSIGHT: US mulls reciprocal tariffs on Brazil ethanol, cabinet hopes steel quota is to be kept

SAO PAULO (ICIS)–Although the new US administration has so far only imposed tariffs on China, President Donald Trump keeps using the tariff threat as a form of negotiation and in the latter part of this week it was the turn of Brazil’s ethanol.

Earlier in the week, Brazilian officials had already been in damage limitation mode after the US said it would impose higher tariffs on steel on 12 March.

Brazil’s still strong steel sector is now hoping the two countries will agree, just like they did in 2018 during Trump’s first term, a quota so Brazil can have an outlet for its excess steel.

ETHANOL IN THE SPOTLIGHT
The Brazilian government has so far kept a low profile in the issues presented to it by the new US Administration; first, it was deportation flights and the rather discrete row caused by the fact that Brazilians returning home did so handcuffed in the aircraft.

Brazil’s President Luiz Inacio Lula da Silva, however, was wary of how his Colombian counterpart, Gustavo Petro, reacted to the first deportation flights – taking to social media to say Colombia’s sovereignty could never be curtailed, after he ordered two flights to return to the US.

Trump’s furious reaction on a Sunday afternoon in his first week in the White House sent the signal to allies – Colombia is a firm ally of the US in the region – and enemies alike about the new winds blowing in Washington.

As already said, Brazil’s cabinet also kept a rather low profile about the tariffs on steel. The week started with a report by Folha de S. Paulo citing an unnamed cabinet official saying Brazil could retaliate by raising taxes on the US technological majors operating in the country.

The Finance Minister Fernando Haddad was quick to deny such a possibility a few hours later, and what could have become a big row died down.

But then came a White House announcement on reciprocal tariffs later in the week, and the US intention to analyze country by country all tariffs and end “unfair trade practices.”

The US mentioned specifically Brazilian ethanol as a prime example of those unfair trade practices, something the US trade group for the sector, the Renewable Fuels Association (RFA), was quick to grasp after years of lobbying.

“The US is one of the most open economies in the world, yet our trading partners keep their markets closed to our exports. This lack of reciprocity is unfair and contributes to our large and persistent annual trade deficit,” said the White House.

“There are endless examples where our trading partners do not give the US reciprocal treatment. [For example] The US tariff on ethanol is a mere 2.5%. Yet Brazil charges the US ethanol exports a tariff of 18%.”

The White House went on to say the US posted a trade deficit with Brazil of $148 million in 2024, which it attributed to the effect of the country’s higher import tariff. Brazil’s exports to the US totaled $200 million last year, while US shipments stood at $48 million.

With Brazil featuring so prominently in one of the White House’s dozens of weekly press releases, it was difficult for the cabinet to remain in the background, aware that ethanol is an important employer and, in a way, Brazil’s own success story.

In the 1970’s crude oil prices shock, the country took the strategic decision to encourage ethanol as a motor fuel, propping up at the same time what was then a nascent agribusiness which became one of the world’s breadbaskets, owing to Brazil’s vast arable land and abundant water and warm weather.

Ethanol, therefore, required a stronger response, and the cabinet’s measured statement decided to focus on sugar.

The minister for energy and mines – a heavyweight in any Brazilian government – was the one in charge to remind the US that if all tariffs should be reciprocal, Brazil would very much like to see the hefty tariffs on its sugar lowered.

Alexandre Silveira argued that Brazil’s sugar had to pay an 81.16% import tariff to enter the US, without offering anything in return.

“To have a fair and reciprocal plan, as stated by President Trump, it would be necessary, in fact, to eliminate import tariffs for Brazilian sugar,” he said, as quoted by CNN Brazil.

“Trump’s decision is unreasonable, as there is no counterpart in expanding Brazilian sugar exports to the US. This type of stance weakens multilateralism and will have negative consequences for the US economy itself.”

As soon as Brazil’s ethanol featured on the White House’s communication, the US trade group RFA’s CEO issued a statement celebrating that after a decade spending “precious time and resources fighting back against an unfair and unjustified tariff regime” imposed by Brazil on US ethanol exports, the lobbying had finally paid off.

“What’s more ironic is that these tariff barriers have been erected against US ethanol imports while our country has openly accepted – and even encouraged and incentivized – ethanol imports from Brazil,” said Geoff Cooper.

STEEL TARIFFS
Just like everyone else, the Brazilian cabinet is trying to adapt to the fast pace of another Trump presidency. For much of the first half of this week, ministers in public and steel industry players in private went from panic mode to talks mode as the 12 March implementation date offers room for that.

Brazil’s officials are hopeful a new quota can be agreed with the US, after pressure from manufacturing companies in the US persuaded Trump during his first term to establish a 3.5-million tonne quota for steel semi-finished products and slabs, and a 687,000 tonne quota of rolled products.

In the current environment, the repetition of that deal would a be a resounding success for Brazil’s steel producers.

Brazil’s produces around 32 million tonnes of steel annually, according to trade group the Steel Brazil Institute, but the country’s demand stands at 24 million. This means the sector must find markets overseas, and for the past few years nearly half of that has been going to the US as per the quota agreed.

The large US trade deficit in steel is shown by the 20-25 million tonnes/year imported. In the nine months to September 2024, the US had imported 20.2 million tonnes, according to the US International Trade Administration.

Brazil, with 16.7% market share in those imports entering the US, is the second largest supplier only behind Canada (22.5%), followed by Mexico (11.4%), South Korea (10.1%), Vietnam (4.6%), and Japan (4.0%), according to the official data.

If the universal tariffs on steel are finally implemented on 12 March, Brazil’s quota would also come to an end. This is where Brazilian officials will put much of its efforts in the next four weeks, an attempt which may well end up being successful if US manufacturers are listened to.

Earlier this week, an economist at ICIS warned that higher steel tariffs would likely increase prices in US manufacturing and could potentially reduce levels of capital expenditure (capex) in new plants. The US is heavily reliant in steel imports to cover its demand.

“A tariff raises the price in the market as domestic steel producers raise the price for steel to match the tariff… Higher price lowers quantity demanded (law of demand) but does increase quantity supplied by domestic producers. Tariffs allow inefficient domestic products to produce when then they could not have done so without the tariff,” said Kevin Swift.

“Steel tariffs will raise the cost of building a chemical plant, for ongoing maintenance, etc. These will especially hurt when government policy is to foster re-shoring and FDI [foreign direct investment] in the US.”

US manufacturers likely to be lobbying for exceptions to the steel tariffs are set to be Brazil’s best ally in the next four weeks, considering Trump’s chauvinistic approach to most things.

Lula’s Workers’ Party (PT) re-election in the presidential election due in 2026 hangs in the balance. While manufacturing had a bumper 2024, more formal and better-paid jobs in industry have been hard to come so far.

The PT’s main constituency is industrial workers, and a blow to the steel sector now would come to represent actual jobs being lost but also, given steel’s unique role in supposedly representing a strong and self-sufficient industrial fabric, a blow to the credibility of the government.

The government came into office in 2023 promising to create more jobs by reviving manufacturing. Just like so many other cabinets had done before it in the past 50 years.

Insight by Jonathan Lopez