Brazil Before the Runoff:
What 25 October decides for European supply chains and plants

Around 1,600 companies with German capital produce or sell in Brazil and account for roughly a tenth of the country’s industrial value added; the Bundesbank counts 675 Brazilian subsidiaries of German investors with 246,000 employees and 65 billion euros in turnover.³⁹ The EU holds the largest stock of foreign direct investment in Brazil at 276 billion euros, and Austria is present with around a hundred subsidiaries of its own, 35 of them manufacturing. The weight sits in the industrial belt from Minas Gerais to Rio Grande do Sul: the ABC region around São Paulo, where Volkswagen has been building cars since 1957, Campinas and Sorocaba, Curitiba as the country’s third largest automotive cluster, Joinville with its metal and automation industry. That belt voted for Bolsonaro in 2022 except for Minas Gerais. In the first round on 4 October Flávio Bolsonaro led in all six states of that belt. In São Paulo he took 51.9 per cent of valid votes against 38.2 for Lula, in Minas Gerais 48.2 against 43.3. Lula passed 50 per cent only in the Northeast, where he won all nine states, Bahia by 66.2 to 28.5 per cent, and that is where BYD’s plant has stood since 2025.³⁴

For a plant in that belt the runoff decides four lines of the cost sheet.

Working hours

The Chamber of Deputies voted on 27 May, 472 to 22, to abolish the 6x1 rule. The working week falls from 44 to 40 hours over five days with two paid rest days, with no cut in pay. Two months after promulgation the limit is 42 hours, twelve months later 40. Employees already below 40 hours, graduates earning more than two and a half times the social security ceiling, and the 12-hour shifts in health, security and transport are exempt; collective agreements may allow longer days during the 42-hour phase so that the five-day week holds.¹⁴ The industry federation CNI puts the extra cost at up to 11.1 per cent of the industrial wage bill, between 58 and 88 billion reais a year; the research institute Ipea arrives at 7.8 per cent higher labour costs and less than one per cent of operating costs in industry and commerce.⁴⁰ For a plant with 300 people in Joinville that is the difference between overtime and an additional shift, and it falls due within 14 months.

In the Senate the judiciary committee approved the text on 2 September. The government counted 53 votes for the floor against the 49 required, the opposition left the chamber, and Flávio Bolsonaro, himself a senator, led the blockade. He has not committed himself to this day and promotes a constitutional amendment of his own under which working hours would be negotiated between company and workforce. Lula has written the 40 hours into his government programme. The Senate president has moved the vote to after the first round; there is no date yet.¹⁴ With Lula in the Planalto the 40 hours come. Under Flávio the timetable hangs on a Senate whose 54 new seats were also filled on 4 October.

The real, the policy rate and the debt ratio

Gross government debt stood at 82.9 per cent of GDP in August, the highest since March 2021, with interest costs at 8.7 per cent of GDP.^41,42 The central bank cut the policy rate on 16 September for the fifth time in a row, to 13.75 per cent; the market expects 13.50 by year end. The euro cost 5.85 reais on 1 October, after an annual average of 6.31 last year.^36,41 Neither programme deals with the debt burden in concrete terms, the Peterson Institute noted at the end of September. Lula wants to keep the 2023 fiscal framework and raise the minimum wage above inflation. Flávio wants to replace it with a rule that stabilises the debt ratio, plus primary surpluses, ten fewer ministries and a cap on subsidised credit from the Treasury.⁴² The currency markets have positioned themselves. Hedging against a weaker real was as cheap in mid-September as at any time since February 2020, because traders expect an appreciation if Flávio wins. Goldman Sachs sees the dollar between 4.50 and 4.80 reais under credible fiscal policy and around 5.80 if the fiscal premium of December 2024 returns; JPMorgan puts the negative case at 5.50 and the positive one at an appreciation of roughly six per cent.⁴²

For the subsidiary in Brazil the exchange rate works twice. A stronger real raises the euro value of earnings and of the balance sheet and makes every part exported from Brazil dearer; a weaker real does both in reverse. The range since 2018 runs from 3.92 to 6.72 reais per euro.

The Chinese neighbours

Since 1 July 2026 assembled electric and hybrid cars carry an import duty of 35 per cent; knocked-down kits stay at 14 per cent until the end of the year and move to 35 from January 2027, cushioned by a duty-free quota of 463 million dollars for six months.⁴⁵ The schedule has brought the Chinese manufacturers into the country. BYD has assembled in Camaçari in Bahia since July 2025, built its hundred-thousandth vehicle in July 2026, employs 5,500 people and aims for 10,000; capacity is to rise from 150,000 to 600,000 vehicles a year, with a press shop, body shop and paint shop by year end and 50 per cent local content. GWM has built 50,000 vehicles a year in Iracemápolis near São Paulo since August 2025 with a 60 per cent localisation target; Caoa Chery is doubling Anápolis to 160,000 and adding Changan.⁴⁶ In August electrified vehicles held 22 per cent of the passenger car market, and in hybrids BYD and GWM sit ahead of Toyota.

For a European supplier in São Paulo the Chinese carmakers are a potential customer and at the same time a competitor to its existing customers. In August 2025 BYD canvassed suppliers with the associations Sindipeças and Abipeças, has brought 47 companies to Bahia and is negotiating with around 150 more; the first approval went to Continental.⁴⁶ Under Lula that continues, the tariff is his instrument. Under Flávio Chinese investment comes under review; the tariff schedule itself sits in a decision of the foreign trade chamber Gecex and in no election programme.

Credit, local content and the tax reform

Whoever sells a machine in Brazil usually sells it with Finame credit from the development bank BNDES: up to ten years, two years’ grace, interest from the long-term rate TLP, whose fixed component stands at 8.12 per cent in October, plus 0.95 per cent for the bank and the margin of the local institution. Access is limited to products in the manufacturer register, and for that at least 50 per cent of the product must be Brazilian value added, 30 per cent from the bill of materials alone.⁴³ BNDES disbursed 169.7 billion reais in 2025, 27 per cent more than the year before, and a further 74.8 billion in the first half of 2026; the industrial programme Nova Indústria Brasil was given an additional 140 billion reais in June, to run until December, and the automotive programme Mover pays tax credits of 3.5 to 4.1 billion reais a year until 2028 to manufacturers that develop and build in the country.^43,44 Lula keeps BNDES president Mercadante in office and continues the programme. Flávio’s programme wants to cap subsidised credit from the Treasury and relaunch the privatisation programme. A machine builder whose Brazilian sales depend on Finame loses part of its financing under Flávio.

The tax reform runs regardless of the result. 2026 is a test year with 0.9 per cent CBS and 0.1 per cent IBS on every invoice, in 2027 the CBS replaces the PIS and Cofins levies, and from 2029 to 2032 ICMS and ISS are phased out. The management committee named a reference rate of 27.91 per cent in July for the 2027 budget planning, against a statutory ceiling of 26.5; the Senate sets the rate. Split payment, under which the tax is remitted straight out of the payment, arrives for business-to-business transactions only in 2028.⁴⁷ The election decides who staffs the management committee and writes the implementing rules for the transition, while the calendar is fixed by law.

For the components a subsidiary sources from Europe, the first tariff reduction step of the EU-Mercosur agreement has applied since 1 May, 1.3 to 1.7 points on machinery, alongside the capital goods tariff schedule reorganised in February at 7.2, 12.6 and 20 per cent. Which rate applies is set per tariff line in Annex 2-A-2 of the agreement, and the importer needs the European supplier’s statement of origin.⁴⁸

Three weeks remain until the runoff, and that is enough to run the 2027 budget twice, once with a 40-hour week, Finame credit and a weaker real and once with working hours open, capped credit and a stronger real.

What a plant manager does with this

What Europe actually depends on in Brazil

Europe’s sharpest dependence today is on niobium. Brazil produces around 93 per cent of world supply, almost all of it from the open pit at Araxá in Minas Gerais.²⁶ Some 83 per cent of European ferroniobium imports come from Brazil, the remainder from Canada, and the EU has no production of its own.²⁷ Niobium goes into structural steel, pipelines and body panels as a microalloying addition of a few hundred grams per tonne of steel, and in those grades it is hard to substitute. The EU’s Critical Raw Materials Act lists niobium as a critical raw material. For strategic raw materials it sets the benchmark that no third country should supply more than 65 per cent, and at 83 per cent niobium has been above that for years. The new Brazilian minerals law lists niobium by name, which puts the raw material with the highest European concentration under the same review regime as the rare earths.

In agricultural goods the dependence spreads across more suppliers, and the volumes are larger. In 2025 Brazil supplied around half of the soybean meal the EU imports, 11.7 million tonnes, which is the protein base of European livestock farming.²⁸ Brazil supplied 41 per cent of German green coffee in 2024, out of annual imports of more than a million tonnes.²⁹ Three quarters of the orange juice traded worldwide comes from Brazilian harvests, and the EU is the largest buyer.³⁰ In iron ore Brazil ranks second behind Canada with 19 per cent of EU imports.³¹

These shares hold whichever way 25 October goes. The terms on which those goods reach Europe can move, and three of them have a date inside the next twelve months.

The agreement and the ban

The trade pillar of EU-Mercosur has applied provisionally since 1 May 2026. Over 15 years, tariffs fall on 91 per cent of EU exports to South America, the 35 per cent duty on cars among them, along with machinery and chemicals; in return the EU liberalises 92 per cent of its imports from Mercosur. For sensitive farm goods the agreement caps the volumes: 99,000 tonnes of beef at a 7.5 per cent duty, 180,000 tonnes each of poultry and sugar, and 650,000 tonnes of ethanol.²⁰ The political pillar of the agreement needs the consent of the European Parliament and of all 27 national parliaments. Argentina and Uruguay have ratified; in Europe the process has started and will take years.

Since 3 September the EU has accepted no beef, poultry, eggs or honey from Brazil, because in the Commission’s view Brasília has not sufficiently documented its rules on antibiotics in livestock farming. In May the EU removed Brazil from the list of compliant countries, under pressure from its own farmers and four months after the agreement was signed. In 2025 Brazil was the EU’s second largest beef supplier with 92,000 tonnes and 713 million euros.²¹ The dispute predates the campaign, and the ban marks the point where ratification is exposed. A Bolsonaro in the Planalto hands the farm associations back every argument they used against his father in 2019. The Peterson Institute expects that under a Flávio presidency, European capitals would again see the Brazilian government as the main obstacle to ratification.²²

The proof that falls due on 30 December

The second is written into European law and does not depend on Brasília. From 30 December 2026, large and medium-sized companies must prove, for soya, beef, coffee, cocoa, palm oil, rubber and timber, that the goods do not come from land deforested after 31 December 2020; for small operators the date is 30 June 2027. The proof runs through geolocation coordinates for every plot of production, submitted in a due diligence statement, and Brazil is classified as standard risk, which means the full due diligence obligation.³² A German roaster or compound feed producer must have the chain down to the farm documented before the first container is unloaded after the cut-off, and that applies to goods already in transit or in storage today.

Brasília has no say over the deadline, though it staffs the institutions that produce the evidence. The proof rests on Brazilian land registry data and on the satellite analysis of the research institute INPE, and both depend on budgets and staff. Under Jair Bolsonaro the environmental agencies and the publication of deforestation figures came under political pressure; under Lula, INPE has reported falling rates for the Amazon since 2023.³³ Liability for what the due diligence statement says rests with the company that submits it.

The tariff path to Washington

For the DACH region Brazil matters mainly as a source of imports. Germany bought goods worth 9.3 billion US dollars in 2024, of which 2.1 billion was coffee, 1.5 billion ores, 700 million pulp and 600 million animal feed.²³ Coffee showed how fast these flows can turn. When the United States hit Brazil with 50 per cent in the summer of 2025, Germany became the largest buyer of Brazilian coffee with 5.4 million bags and 13.5 per cent of Brazil’s coffee exports.²⁴ In November 2025 Washington took coffee off the tariff list again, and the advantage disappeared within a season. For sugar, steel, footwear and farm machinery that reversal is still pending, and it depends on a tariff compromise that only one of the two camps is seeking.

What a buyer does with this

Just over two weeks after the runoff, on 10 November, China’s suspension of its rare earth export controls expires.²⁵ If Beijing does not extend it, the decision on Brazilian oxide falls in the same weeks in which a government is being formed in Brasília.

Let us talk about your suppliers in Brazil

Run your supplier base, contract terms, tariff paths and site costs against both camps before 25 October settles on one of them.

Request a conversation contact@pangea-intelligence.eu

Dr. Matheus de Freitas Cecílio Political Economy, Latin America & China

Dr. Matheus de Freitas Cecílio

Sanctions, KYC and credit risk analyst at Danske Commodities and research analyst at Eurasia Strategy Insights. PhD in International Political Economy from UFRJ, with doctoral research on China’s development model and its relationship with the United States. Based in São Paulo.

Felix Kleiner Supply Chain & Geopolitics

PangeaIntelligence

Felix Kleiner

Leads Pangea Intelligence and writes on how geopolitics reaches supply chains, with a focus on critical dependencies and nearshoring dynamics.