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Brazil's Trade Policy 2004: The Good, the Bad and the Uppity

January 17, 2005

Three major trade agreements with implications for Brazil’s social and economic future were scheduled to conclude on or by 31 December 2004: the FTAA, the Mercosur-European Union and the WTO’s Doha Round. All three failed to meet their deadlines. It was not all Brazil’s fault as, by definition, it takes two “to trade” and even more, occasionally, to reach trade agreements. It would not be an exaggeration to say, however, that Brazil was a major influence in the regional blunders. By contrast, at the multilateral forum - the WTO - Brazil led a coalition which in the end kept the system alive despite strong inertia to the contrary. The year closed with the government’s bravado regarding South America and the “new geography of world trade”: agreements with Andean countries, India and South Africa as well as a “South American Community of Nations”, a newly-devised approach to getting the sub-continent to at least appear together on a number of political issues.

There is no denying that Brazilian foreign trade policy is active and that it can contribute to successes or failures, depending on the deal at hand. Brazil has gotten a lot of attention for its activism and has raised questions and eyebrows around the world. A country exposes itself when it “shoots in all directions” and pursues a heavy negotiating agenda. The real proof of the pudding, however, is at the grassroots level - the integration into the world economy, effective market success, greater competition and productivity, and bullish figures to show for it. Overall, the jury is still out on the Lula administration and the picture is somewhat mixed, despite the pomp and circumstance.

The good

The numbers speak for themselves. Brazil has gone from a trade deficit of $7 billion in 1997 to a surplus of close to $34 billion in 2004 – a reversal of over $40 billion in seven years. The current account has followed the trend but with even greater vigor, registering a turnabout of $35 billion in only four years, from a deficit of $24 billion in 2000 to a $11 billion surplus in 2004.

The trade flow now represents 27% of the country’s gross domestic product, almost double the level it was ten years ago (14%). Brazil has also maintained a much diversified trade distribution, with the E.U. accounting for 25% of the overall trade flow, trailed by the U.S. with roughly 20%, Latin America with 19% and Asia with 17%. China has been the rising star in Brazil’s trade, having quickly come close to rivaling Argentina as Brazil’s second most important individual trading partner. Trade with China, in addition, is only 50% “commodity-intensive” so far; that feature may, however, change in the not-so-distant future.

Export promotion policies dating back to the end of the last decade, coupled with official visits to a myriad of countries and regions of the world, are now paying off, working in tandem with the floating but very competitive exchange rate Brazil has grown into since the devaluation in 1999. An authentic “export culture” seems to have taken root, as opposed to the residual approach of the past when firms only looked at exports as a means to drain “excess production”. An interesting fact in that regard is the considerable increase in Brazilian exports to “non-traditional” markets in 2004 – over 70% to over 100 countries.

Brazil’s foreign trade also has spurred example-setting champions. The textile sector has been overhauled and revamped, has invested billions and now wants the FTAA and the end of the Multi-Fiber Agreement. The steel sector has jumped over trade barriers to establish mills in the U.S. market. Embraer has had enormous success in all prominent markets. Brazil’s agriculture is perhaps unrivalled in the world, ranking as the world’s first exporter in a number of items (soybeans, sugar, beef, coffee, orange juice, and tobacco) and accounting for two thirds of the country’s current trade surplus, or $20 billion.

The Bad

Much ado about 1% of the world’s trade: that is Brazil’s persistent plight. The grassroots effort has been commendable but Brazil continues to account for only around 1% of the world’s exports and imports – which places it pretty low in the ranking of world traders. Clearly, however, agriculture is where Brazil looks like a real giant. Its potential continues to be impressive, but the current government needs to be careful not to spoil the good with the bad.

The Lula government has operated under a “market-seeking consensus.” It has only moved aggressively and with determination when the objective was to open foreign markets. There is not, however, a government-wide consensus on the opening of the national market. Promoting exports by financing, visiting places and striking business relationships is easy to agree on. Opening markets to increase competition, quality and integration into the world economy has proven to be quite a different story and the administration has had to spend a lot of political capital mediating between at least two major “factions” within the government itself – one on either side of the internationalization debate. Brazil needs an “efficiency-seeking” consensus that is broader and less one-sided if it intends to move forward as a major global player.

Ideology has indeed been an important part of Brazil 2004 trade policy. Shunning agreements with the world’s (not just Brazil’s) most important trading partners has raised suspicion regarding the government’s “ideological” approach to trade, as it does not seem to reflect either “public opinion” or the state of Brazil’s industry. Pursuing alignments, or even formal agreements, with China, India and South Africa has its “strategic” sophistication but not if hailed as a means to “replace,” or even combat, trade with “the North.” That simply isn’t making the best use of trade since the U.S. and the E.U. will continue to be important destinations for Brazil’s value-added production for a very long time. In any case, Brazil competes with the “Chinas” and the “Indias” of the world on the upper production chains and could not compete with these countries on a level playing field at home or in third markets. If Brazil is supposedly not ready for the FTAA, why should it be for India and/or China? Ideological premises may not be the best foundation for “sensible” trade after all.

The Uppity

The fact is that the good numbers have nothing to do with the risky approach to trade agreements characteristic of the first two years of the Lula administration. The numbers have to do instead with the consistent “cultural” and regulatory work undertaken by the previous government and, wisely, continued by the present one. It is completely fallacious to assume that the activism one sees in the Lula international trick-or-treats of the moment has much to do with the blossoming trade surplus. Devaluation in 1999 is the real marker and consistency in policy ever since takes the credit – thus spanning two governments, and not just two years. Lula’s approach to trade negotiations may in fact come to obstruct Brazil’s evolving integration into the world economy if it bypasses the benefits of combining greater export access to OECD markets with greater productivity gains from increased, world-class, import competition at home. South-south trade cannot do it all by itself.

The buck does not stop here, however. The private sector, those with their “pockets” on the line in the evolving trade drama, is simply not happy with the government’s taking important decisions in the absence of comprehensive prior consultations – particularly when coupled with sophisticated ex-post-facto diplomatic explanations that do not amount to much. It is no secret that the agricultural community feels that the government has been too timid in making concessions in the FTAA and the Mercosur-European Union negotiations, thus rendering it impossible for the major countries to concede on tariffs and other barriers to agriculture. It is also no secret that the industrial sector has abhorred the government’s decision to grant China market-economy status for trade remedy purposes – something that neither the U.S. nor the E.U. have conceded. And the services sector, a crucial sector in all negotiations, feels it is not consulted on trade issues.

The perception that the government is willing and able to continue to act “unilaterally,” without seeking internal support on matters as sensitive as China, Mercosur or the FTAA is a source of weakness in Brazil’s current trade policy regime. The perception that the government will invariably sacrifice trade interests in the presence of even loose support for crucial elements of its geopolitical agenda – such as a possible seat at the U.N. Security Council or a benevolent leadership in Mercosur – has undermined the very necessary trust it needs to engage in such high-pitched pursuits. The perception that the government has been arrogant in purporting to know better than those directly involved in trade and trading has done great damage to its image, strategy and the sustainability of its trade policy.

Conclusion

Brazil will continue to be an important protagonist in the global trade agenda. It will lead the G-20, it will fight to keep Mercosur together, it will explore common agendas with the rest of South America, with China, India, and South Africa, and it will play hardball in regional (FTAA) and interregional (Mercosur-E.U.) negotiations. It has the stature to be very successful and achieve positive economic and political results on all those fronts. It has to be mindful, however, of the risks of confusing trade with geopolitics or, worse yet, of failing to take into account internal realities when forging a consistent external agenda – in trade or elsewhere.


*Mario Marconini is a senior partner at MM Associated Consultants in Rio de Janeiro, and a former Foreign Trade Secretary.