Dear investors,
On January 20, Trump took office for his second term as President of the United States and began a management shock that is shaking the world. The attention is well justified. The US gross domestic product (GDP) represents ~25% of global GDP, the United States is the world's largest importer (U$ 3 trillion), the second largest exporter (U$ 2 trillion) and 58% of foreign exchange reserves are held in dollars. In addition to its economic relevance, it is the political leader of the West and the greatest military power on the planet, responsible for ~38% of global defense spending.
Trump signed more than 70 executive orders in his first 45 days in office. Analyzing the impact of this set of actions is quite complex, due to their scope and because many orders may remain in effect only temporarily. The best we can do is try to understand the philosophy behind these actions, imagine what scenarios this philosophy will likely lead us to, and investigate what risks may arise for our investments.
Historical context
The global geopolitics we are accustomed to was designed after the Second World War, when the ideological dispute between capitalist countries and revolutionary communist countries emerged. The Soviet Union became a military superpower and aimed to convert the entire world to its political model, either militarily or by supporting communist revolutions in vulnerable countries. To counter this plan, the West created a large bloc of allied countries that would cooperate economically and militarily to defend the “free world.”
In the economic sphere, the costs of the war had forced most countries to abandon the convertibility of their currencies into gold, which disrupted international finance and trade. The solution was the Bretton Woods Agreement, signed in 1944, which created a new international monetary system in which the US dollar would be the reference currency and would maintain its convertibility into gold. The other currencies would have a fixed exchange rate in relation to the dollar, adjustable only in cases of imbalance. The Agreement also created the IMF and the World Bank, with the mission of supporting post-war reconstruction and the development of the poorest countries.
In 1945, the UN (United Nations) was created with the aim of promoting international peace and security, fostering cooperation for economic, social and humanitarian development, and defending human rights and fundamental freedoms. Originally, 51 countries were members. Today, the UN has 193 members and continues to act as a major multilateral forum for discussion and coordination of efforts that go beyond national borders.
In the military sphere, the main concern was to prevent the Soviet Union from advancing into Europe, which was weakened by wars and divided between several countries much smaller than the Soviet Union. The defense strategy was the creation of NATO (North Atlantic Treaty Organization) in 1949, a military treaty in which allied countries would collaborate to protect any country in the bloc that was attacked. Despite the differences in military power between the member countries, NATO adopted the principle that the sovereignty of each country would be respected and the main decisions would be made by consensus, so that no country would be forced to act against its will.
All of these agreements were negotiated under strong American influence, as Europe was in debt due to the costs of the war, faced with the arduous task of rebuilding its infrastructure and unable to invest heavily in defense and development. The United States, much less affected by World War II and already the world's largest economy, assumed most of the burden of protecting and developing the West. With its navy, it began to guarantee the security of sea routes around the world to allow for the growth of international trade (before World War II, cargo ships ran the risk of being attacked by pirates or by the navies of rival countries) and became involved in wars far from its territory, such as the Korean and Vietnam wars, to prevent the advance of the communist bloc. The counterpart for all of these initiatives, at the expense of the United States and beneficial to all allied countries, was to maintain the dollar as the global reserve currency, turning several countries into creditors of the American government.
This configuration remains the same today. The United States still bears the majority of NATO's military budget, accounting for ~70% of defense spending even though it represents ~50% of the total GDP of member countries, the dollar is still the main international reserve currency, and international relations between Western countries still follow the tradition of making important decisions in a multilateral manner.
Where does “America first” come from?
The guiding principle behind Trump's policy changes is "America First." Trump claims that the United States is at an unnecessarily disadvantageous position in several international agreements, subsidizing other countries in trade relations, bearing disproportionately high defense spending, and sponsoring numerous projects around the world without any compensation for Americans.
Any high-impact political act tends to have deeper roots than it appears in press conferences. There are huge teams of politicians and technicians discussing the best course of action, from their point of view, before the conclusions of this internal process reach the public through the political leader who acts as the group’s spokesperson. Knowing this, what analysis could result in the “America First” principle? One possibility is the interpretation that the geopolitical order designed after World War II is no longer adequate to the current situation.
During the Cold War, the big question was which economic and social model would prevail in the world. If the United States failed to help Europe and the underdeveloped countries, it would be vulnerable to the influence of the communist revolution in the Soviet Union. If communism spread throughout the world, at some point the communist bloc would become militarily superior to America and dominate it. Under this threat, supporting the military defense of the West and offering aid to the underdeveloped countries was not an act of American altruism; it was a strategy of self-preservation. Today, the scenario is quite different.
After the fall of the Soviet Union, there is no longer any dispute as to which economic model is superior. Russia itself has opened up its economy and adopted market dynamics similar to those of Western capitalism. The popular appeal that the communist promise of prosperity for all once held no longer exists. The main difference today is in the political model: while the West remains predominantly democratic, Russia and China, the new Eastern superpower, are governed by authoritarian regimes inherited from the revolution made under the communist promise.
The authoritarian government model has a much lower potential to spread through popular support, and military expansion is currently unlikely in highly strategic territories due to the existence of nuclear arsenals, which have created the dynamics of Mutually Assured Destruction: if a nuclear power attacks another nuclear power with atomic bombs or with exaggerated aggressiveness, the act would trigger a nuclear war that would lead to the annihilation of both sides. The possibility of this catastrophic outcome acts as a deterrent to major conflicts between superpowers.
Today, the Western way of life seems to us to be much less threatened by Eastern powers. This interpretation, and the fact that the United States now has US$36 trillion in public debt, may have led Republicans to question whether it makes sense to maintain the policies of military protection and subsidies offered to other countries since the Cold War.
Trump administration's main actions on the economy
The United States currently has a fiscal problem. In 2024, the US fiscal deficit was US$1.8 trillion, equivalent to 6.4% of GDP, and the US debt of US$1.4T36 trillion is equivalent to 124% of GDP (in comparison, Brazil had a fiscal deficit of 8.4% in 2024 and ended the year with a debt of 76% of GDP). The US fiscal situation has been worsening rapidly since the subprime crisis in 2008. Before that, at the end of 2007, the US debt was 63% of GDP. Almost half of the current level. As a result, there are discussions about the sustainability of the dollar as a global reserve currency.
The Trump administration's response was a plan to reduce public spending, through the Department of Government Efficiency (DOGE – for those interested, we recorded a discussion on the topic, available in this link) and the prioritization of American economic development, with deregulation projects and the abandonment of environmental agendas. An illustrative example is the return of incentives for the exploration of fossil fuels to make American energy cheaper, promoted by Trump under the mantra “drill, baby, drill”.
In international trade, the United States announced that it will increase import taxes on several countries, based on two principles. The first is reciprocity, with American import taxes being equal to the taxes that other countries charge on imports of American products. The second is the use of taxes as an instrument of pressure in specific situations, such as in the case of countries that refused to take back illegal immigrants deported from the United States.
The issue of tariffs is quite delicate. While several countries denounce this measure as protectionist, almost all adopt similar measures. In cases where the tariff increase is based on reciprocity, we understand that the argument as to why the imbalance should continue is difficult. There are three possible scenarios for each bilateral relationship.
The first is that the affected country simply accepts the new tax and adapts its trade relations with the United States to the new reality. In this case, American inflation would increase along with federal government tax revenue. In Trump's proposal, this increase in revenue should be used to reduce public debt and, subsequently, to reduce the American tax burden. Ultimately, the result could be a shift in the source of tax revenue to tariffs and greater protectionism of American industry.
The second is for the affected country to negotiate with the United States a reduction in its own import duties to avoid having its exports affected by the increase in US tariffs. This would tend to increase US exports to that trading partner and thus stimulate domestic industry. US revenue would increase due to the growth in export volumes, but the impact is likely to be more limited.
The third scenario is that the United States and the affected country enter into a trade war and raise tariffs to a level higher than that currently practiced by both countries. This would lead to a reduction in bilateral trade flows and would tend to harm both countries.
The final outcome of Trump’s tariff policy is impossible to predict because it depends on the response of each country. We believe the first two scenarios are more likely than the third, because trade wars, while damaging to both sides, tend to be temporary and end with the negotiation of a more beneficial agreement.
Overall, what we have seen in the Trump administration’s recent actions is a pragmatism that is well-known in the business world. There is a lot of noise in the announcements, particularly amplified by Trump’s style, but it seems to us that the strategy is to scour the main agreements in force in search of points where it is possible to improve some terms. It is likely that these efforts will bear fruit, even if below expectations, and that the final impact on the American economy will be positive.
Change in geopolitical strategy
For the past 80 years, since the post-war treaties, the United States has led the West through multilateral negotiations and collaboration with allied countries. Now, the Trump administration appears to be breaking with this tradition and pursuing unilateral strategies that prioritize American interests over a shared worldview with allied countries.
The central issue in this area is the war between Ukraine and Russia. Since its beginning in 2022, NATO member countries have been firmly supportive of Ukraine. They have not sent their own fighters, to prevent the conflict from escalating into what could become a third world war, but they have financed the war and sent military equipment that has allowed Ukraine to resist Russia to this day. The main reason for this support is to prevent a precedent for territorial expansion into Europe through military action, which could lead to Russia advancing on additional territories in the future.
Trump comes with a different interpretation. He understands that the United States is financing a war far from its territory, with no immediate benefits for the Americans, and that the best solution is to negotiate an end to the war, even if the principle of not allowing any territorial expansion by military means is not fully preserved. Ukraine, and European countries in general, accuse the United States of betraying the NATO mutual defense agreement, and the Trump administration retorts that the allies are abusing the disproportionate support from the United States to prolong a war that is not in its best interests from an economic and humanitarian point of view.
The United States is also distancing itself from the European bloc on other issues: it has withdrawn from the WHO (World Health Organization), withdrawn from the Paris Agreement (to combat global warming) and has harshly criticized the immigration policies adopted by Europe in recent decades.
The course that the Trump administration seems to be taking should boost the development of the US domestic economy and improve its fiscal balance, but it should also shake up political relations with Europe, at least initially. It is unpredictable how these relations will evolve. If Europe elects predominantly right-wing governments in its next elections, it could lead to a realignment of European countries with the United States. Otherwise, Europe could become a less aligned bloc for the longer term.
There is also an expansionist tone to Trump's statements. Some acts are merely symbolic, such as renaming the Gulf of Mexico the Gulf of America, but the ideas of incorporating Canada, Greenland and regaining control of the Panama Canal signal practical intentions to expand, if not American territory, at least the area under strong US influence.
The intention may seem strange in modern times, but this expansionist drive is the standard behavior of empires throughout history. The Macedonian Empire, of Alexander the Great, began in Greece and expanded as far as northwest India (and only stopped due to Alexander's premature death from illness). The Roman Empire began in what is now Italy and came to dominate almost all of Europe and the other territories bordering the Mediterranean Sea. The Mongol Empire, of Genghis Khan, began in Mongolia and came to dominate almost all of Asia. Portugal and Spain launched great voyages to expand their territories to lands beyond the Atlantic Ocean. The British Empire, at its peak, had more than 70 colonies. Today's China and Russia also behave like empires.
The multilateral geopolitics established after World War II and followed by the United States until then is an exception in the longer historical line. It would not be surprising if the United States began to exercise its power and influence more blatantly, as empires of the past did and as other empires do today.
Even if this is the route taken, it is still difficult to predict whether the results will be good or bad for the world. There have been tyrannical empires and virtuous empires. There is also the fact that in the modern democratic world, everything can change in the next election.
How Brazil could be affected
Our country is a supporting player in global geopolitics. We are not involved in military conflicts. We are not involved in technology races. We are simply a large commodity-exporting country with a peaceful people who are always busy with their own internal problems. We are certainly not a threat to the United States and should not be high on the list of strategic priorities on the American agenda.
Of Brazil's exports, 12.0% are made to the United States, while 28.5% go to China, our main trading partner. Of imports, 15.5% come from the United States and 24.6% come from China. Furthermore, foreign trade represents only 25-30% of Brazil's GDP, compared to a global average of 50-60%. In other words, the impact of a possible increase in US tariffs would not be catastrophic for Brazil. It is not even clear whether we will be the target of any US protectionist measures, since Brazilian exports to the United States are predominantly mineral and agricultural commodities.
If relations between other countries and the United States deteriorate, the effect for Brazil could be positive. If, for example, the United States and China enter into a trade war, a portion of Chinese exports would be redirected from the United States to other trading partners, causing prices offered to the rest of the world to fall, while American inflation would rise. China could also decide to buy products that currently come from the United States from other countries. For example, China buys ~US$15 billion worth of soybeans from the United States annually. Part of this demand could be met by Brazil.
Another effect could be a weakening of the dollar due to the reduction of international dollar reserves held by other countries. Today, about 30% of the dollars issued are in international reserves, so this eventual reduction could have a significant impact on exchange rates. Some countries are already increasing their gold reserves, motivated by these geopolitical issues.
There is also a potential indirect impact of the new American policies. If the fiscal austerity being implemented there brings positive results for the United States, the case could become an example for other countries facing the same problem of fiscal deficit and growing debt. At the risk of being yet another vain hope, perhaps the Brazilian government elected in 2026 will not implement its own austerity plan and rebalance the public accounts.
Investment risks
The most obvious risk is for companies that depend on exports to the United States, as any increase in tariffs could suddenly affect the volume of exports. If tariffs are maintained in the long term, there would be the possibility of moving production to the United States and avoiding import taxes, but this would probably imply increased production costs and demand from the United States could be reduced anyway.
If Brazil starts a trade war with the United States and increases import tariffs in retaliation, companies that depend on American inputs would see their costs increase, potentially losing sales volume due to price increases or having to absorb part of these extra costs, reducing their margins. Trade wars with other countries could also harm Brazilian companies by redirecting products previously destined for the United States to Brazil at lower prices, increasing competition with the domestic industry and putting pressure on their margins.
Another point of attention is the possibility of a devaluation of the dollar, as mentioned above, which could affect dollar-denominated investments and, once again, companies that export to the United States. Note that the dynamics of the dollar's decline in this case would be different from what we usually observe in Brazil. Generally, the weakening or strengthening of the real against other currencies is what causes the dollar's variation for us. In the case of a weakening of the dollar against other currencies, commodities with prices expressed in dollars, for example, would not necessarily become cheaper for Brazil. Their prices could rise in dollars at the same time that the USD/BRL rate would fall, neutralizing the practical effect. In other words, we might not have any significant benefits from this decline in the dollar, other than the reduction in the cost of imports made directly from the United States.
This currency risk should be viewed with caution, as a strengthening US economy and fiscal balance could backfire and push the dollar higher. In the event of geopolitical turmoil, its effect is likely to be more immediate than that of economic strengthening, so we could see an initial depreciation followed by a recovery.
Despite the comments, our philosophy is not to invest based on projections of complex scenarios. We prefer to avoid the uncertainties associated with this level of complexity and maintain our portfolio in simpler and more assertive theses. Today, our invested companies depend mainly on domestic markets and are out of the shock range of possible trade wars. We see a low risk of our investments being harmed by the changes brought about by the Trump administration to date.
Check out the comments from Ivan Barboza, manager of Ártica Long Term FIA, about this month's letter in YouTube or in Spotify.
