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Steel waits to be processed at a facility in Leipsic, Ohio.

Jeff Kowalsky/Bloomberg

Brazil's government will attempt to negotiate an exemption to steel tariffs announced by U.S. President Donald Trump on March 8 – but trade experts warn here that if that fails, Brazil may hit back with retaliatory duties, starting with the coal industry that is a key Trump constituency.

Brazil is currently the second-largest supplier of steel to the United States, after Canada, supplying 13 per cent of volume in 2017, according to the U.S. Commerce Department. But unlike Canada, Brazil was not offered an exemption to the new duties that Mr. Trump imposed, and could well lose its market share to Canada if the tariffs take effect.

"The measures will cause serious losses to Brazilian exports and will have a significant negative impact on bilateral trade flows, which have been largely favourable to the United States over the past 10 years, and on trade and investment relations between the two countries," Brazil's ministries of foreign affairs and industry said in a joint statement.

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The new dispute over steel is a remarkable reversal of the historic trade friction between Brazil and the United States – in which protectionist Brazil resisted American pressure to open its markets and drop trade barriers.

While the United States buys only 12 per cent of Brazilian exports (China and the European Union are far more significant markets) these tariffs could nevertheless hit hard here. Combined, Brazil's steel and aluminum industries employ 200,000 people; the unemployment rate remains stubbornly above 12 per cent and there are only tentative signs of recovery from the worst recession in nearly a century.

The proposed 25 per cent tax on steel and 10 per cent tax on aluminum imports are slated to take effect March 23 – giving Brazil just a brief window to try to convince Washington to reconsider, said Lia Valls, an expert on foreign trade policy at the Getulio Vargas Foundation.

Federal negotiators must point out that the balance of trade has broadly favoured the United States (although Brazil had a US$2-billion surplus in 2017, the first in eight years), and that the two countries' industries are tightly linked in ways that mean new duties could have negative repercussions in the United States. "Otherwise, we are going to head into an environment of retaliation and responses, and everyone can lose," she said.

Brazil is the largest market for the U.S. metallurgical coal, or "met coal" as it is known, a low-sulphur coal used to produce coke fuel for steel-making. Brazil uses it to make semi-processed steel, which it then sells back to the U.S. steel industry – products of which are then bought by Brazil. The integrated nature of that relationship seems to be lost on Mr. Trump, said Prof. Valls.

But while Brazil does not have much leverage on the United States, given that it supplies less than 2 per cent of U.S. imports, the coal industry has an outsize importance to Mr. Trump, as a key constituency to which he promised new jobs during his election campaign.

Brazil's acting Trade Minister Marcos Jorge did not rule out an appeal to the World Trade Organization (WTO), in an interview with Reuters in Asunción, Paraguay, where he was meeting with U.S. Secretary of Commerce Wilbur Ross.

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"I don't rule out, if necessary, resorting to any other measure to protect the national interest."

But Diego Bonomo, who manages the international trade file for the National Confederation of Industry in Brazil, said that route might be little help. "We also have to consider retaliation outside of the WTO because the U.S.A. is squeezing the ability of the WTO to resolve cases – the appellate judges are overwhelmed and even if we start a case it could be [a long time] before there is a judge to hear it," he said. The third option, failing a negotiated exemption or a possible WTO appeal, is going solo on retaliatory tariffs – that's risky, but might be the only choice, he said.

Lucia Maduro, an international trade consultant who advises the industry federation, said she fears a spiral in which far more than the steel sector is affected. "Say the European Union decides to retaliate to the U.S. and puts duties on orange juice," of which Brazil is a major exporter, she said. "Then that hurts Brazil … this is happening just when Brazil was moving to multilateral agreements, and now it seems this was a bad idea, and we should be staying with bilateral ones."

The whole situation is ironic, Mr. Bonomo noted, given that the United States has for years pushed Brazil to open up its markets.

The tariff news came on the same day that Canada announced it would open free trade negotiations with the Common Market of the South (Mercosur), the regional trade bloc of which Brazil is the largest member. The bloc is also in free-trade talks with the EU, Mr. Bonomo said.

"The positive aspect is that it creates an incentive for Brazil and other countries to get together and create alternatives," he said.

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Asia's biggest exporters, including China and Japan, bristle over U.S. tariffs on steel and aluminium imports, fanning trade war fears. Reuters
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