Download Brazil World Trade

Chris Hernandez
Bruce Lusignan
EDGE Final Paper
3-12-04
Brazil World Trade
From the 1500’s to the 1930’s the Brazilian economy relied on the production of
primary products for exports. For three centuries Brazil’s economy was heavily curbed
because since Portugal discovered Brazil, they subjected it’s economy to an imperial
mercantile policy or a strictly enforced colonial pact. Even though Brazil received its
independence in 1822, Portugal’s phase of decisions left a lasting, powerful imprint on
Brazil’s economy and society. In the late eighteenth century, when wage labor was
adopted and slavery was eliminated considerable changes finally began to occur. Only
starting in the 1930’s were the first steps taken to convert key structural changes by
changing Brazil into a semi-industrialized, modern economy. The intensity of these
transformations caused the growth rates of the economy to remain distinctively high and
a diversified manufacturing base was instituted between 1950 and 1981. Substantial
difficulties such as slow growth and stagnation have plagued the economy since the
early 1980’s, though it’s potential enabled itself to regain it’s large and quite diversified
economy in the mid-1990s still with its share of problems. After World War II, Brazil’s
inhabitants that resided in towns and cities grew from 31.3 percent to 75.5 percent. The
146.9 million inhabitants living in the cities by 1991 caused Brazil to have two of the
world’s largest metropolitan centers in Sao Paulo and Rio de Janeiro.
Despite the reduction of the share of the primary sector in the gross national
product from 28 percent in 1947 to 11 percent in 1992, the agricultural sector remains
important. It’s primitive and intensive, yet also modern and dynamic parts make Brazil
of the largest exporters of agricultural products.
The industrial sector offers a variety of products for the domestic market and for
export, consisting intermediate goods, capital goods and consumer goods. By the early
1990s, Brazil was producing about 1 million motor vehicles annually and about 32,000
units of motor-driven farming machines. It also was consistently producing 1.8 million
tons of fertilizers, 4.7 million tons of cardboard and paper, 20 million tons of steel, 26
million tons of cement, 3.5 million television sets, and 3 million refrigerators. In
addition, about 70 million cubic meters of petroleum were being developed yearly into
fuels, lubricants, propane gas, and a wide range of petrochemicals. Furthermore, Brazil
contains 161,500 kilometers of paved roads and more than 63 million megawatts of
installed electric power capacity.
Despite the respectable figures, the economy is not considered developed.
Although the economic changes since 1947 increased the countries per capita income
above US$2,000 in 1980, per capita income in 1995 was still only US$4,630. Structural
change and growth have not distorted drastically Brazil's awfully unequal distribution of
opportunity, wealth and income. Even with striking increments in economic growth and
output, the number of poor has increased sharply. The rural area of Brazil’s Northeast
Region, or in the country's large cities or metropolitan areas is where the greatest
concentration of the poor reside. The mission of fixing the country's development
pattern has only been complicated by the political and economic troubles of the 1980s
and early 1990s.
U.S and Brazil trade: Although the U.S and Brazil have a history of focusing on
a “positive agenda” when trying to cooperate on the economic front, these positive
efforts have quickly deteriorated into conventional arguing on subsidies or antidumping
or discriminatory government regulations. U.S. officials encouraged the
macroeconomic reforms of the great Brazilian economist Mario Simonsen in the late
1970’s, which started to wean Brazilian industry off expensive export subsidies. In the
1990’s, the previous Bush administration encouraged regional reform and integration in
the Mercosul and commenced new “4+1” talks in parallel with the Enterprise for the
Americas Initiative. A few years later, the EAI presaged the wide-ranging initiatives
including negotiations on a Free Trade Area of the Americas. Robert Zoellick, the
current US Trade Representative, was a key player in launching the “4+1” process in
the early 1990’s, and following through has revived that process to try to advance the
goals of both the United States and its South American partners.
Presently, both Brazil and the US have significant interests in advancing
economic growth and employment in their societies by expanding their exports and
imports. Closer ties between both countries would serve both economic and political
interests. When US trading partners are economically thriving and democratic
governance is spreading in the hemisphere the US is going to certainly benefit. The
same concept could be applied to Brazil. Since it borders eleven countries in South
America it gains from political stability and economic health of partner countries and is
negatively affected when these partners experience political instability and undergo
economic hardship. By working together in the hemisphere and the World Trade
Organization to increase trade, economic growth could be jump-started and additional
resources produced that could be invested in the social and economic infrastructure of
each country.
Looking at the trade and investment between the U.S. and Brazil provides an
example of the jump-start that these countries could build off of. Manufactured goods
that the U.S. exports to Brazil would be high valued goods such as computers,
electricity machinery and aircraft, where as Brazil would export small aircraft,
petroleum, mineral fuels, footwear, iron and steel. Seventy percent of these
manufactured goods account for U.S. exports to Brazil and close to seventy-five percent
of Brazilian exports to the United States. Therefore, the high percentages of export
interest of Brazil are significantly different from its Mercosul partners; for example,
Argentine’s manufacture shipments to the U.S. in 2001 were only thirty-five percent. In
this respect, you could conclude that in negotiating the conditions of agricultural
restructuring in the FTAA Brazil could be flexible, where as Argentine most likely
would need to attain a good result in that area for the trade pact to be considered a
success. Unlike the Foreign Direct Investment however, in 2002, the US documented a
4.4 billion dollar merchandise trade deficit with Brazil due to the economic crisis facing
Brazil at this time; this concludes that this area of their relationship needs much
improvement.
The FDI of the US in Brazil has increased drastically over the past decade. US
firms held a mere fourteen billion dollars in direct investments in 1990 with Brazil, but
this number increased to thirty-six billion by 2001. A portion of this progress can be
credited to the contribution of US firms in the privatization of Brazilian energy and
telecommunication companies, but a vital share as been placed in manufacturing plants
that aid other exports markets as well as the Brazilian market. The bottom line is that
US firms have a thirty-six billion dollar bet on the future of the Brazilian economy.
To put the value of trade and investment into perspective, consider that US trade
with Brazil is close to one-eighth the value of US trade with Mexico (about $232 billion
in 2002). Bilateral trade between the US and Brazil could easily double, or more, if
they had access to each other’s market similar to that present in the NAFTA region
(adjusted for market size, per capita income, and geography). So what’s holding them
back? Bilateral trade frictions including Mercosul tariffs on manufactured goods and
other products as well as reduced protection for sensitive farm products.
Compared to average US tariffs against Brazilian exports Brazilian tariffs
against US exports are high. Excluding tariffs on beverages and tobacco as well as
manufactured products that are high, the simple average Brazilian tariff against US
exports is 13.8 percent. It can be concluded that Brazil tends to import US products that
deal with tariffs at the low end of the range by the fact that trade-weighted average
Brazilian tariffs are lower than the simple average tariffs. In contrast, excluding
tobacco, beverages and a few manufactured products, US tariffs against Brazilian
exports are low.
Another area of friction, that’s non-tariff related, involves obtaining a license to
export certain products such as beverages and pharmaceuticals to Brazil. The problem
is that registering with the Brazilian government and asking whether an import license
is needed imposes major expenses on US exporters. Though the US still lists licensing
and customs valuation as major non-tariff barriers, Brazil has made a little progress with
this issue in recent years.
The blockage of exporting poultry and seed potatoes in regards to supposed SPS
issues from the US to Brazil is another problem area. It does not help the US that it is
the world’s largest producer of genetically modified (GM) products because the
Brazilian government is suspicious of them. For example, Roundup Ready soybeans
are not legally allowed to consist of more than four percent of the Brazilian soybean
stock, but since Brazilian soybean producers supposedly elude this requirement and buy
GM seeds in Argentina the actual share is most likely greater. The US is working at
getting a World Trade Organization case against the European Union to indicate its
resolve to the rest of the world.
Similar to most developing countries, Brazil discriminates against foreign
bidders for government contracts and has not signed the WTO Plurilateral Agreement
on Government Procurement. PROEX, a program that Brazil subsidizes its exports
through is reported to be countervailing under US law and conflicting with Brazil’s
WTO obligations in a case involving aircraft. The US also has issues with Brazil’s
intellectual property rights (IPRs). It claims that multiple of Brazil’s practices are
probably inconsistent with its WTO obligations. For example, acquiring a patent in
Brazil is an extremely sluggish process, and the regulation of Brazil’s copyright law is
inconsistent. Due to Brazil’s copyright piracy in 2002, reports have estimated that US
firms lost $771 million. Lastly, Brazil bounds foreign investment in specific sectors and
locations. US firms are unable to establish themselves in Brazil to sell goods and
provide services because of these foreign investment limits.
Brazil is not the only party at fault in this relationship as they too have many
complaints about the US’s trade barriers. The essential disagreements of Brazil are
against US subsidies and quotas in the agricultural sector, countervailing duties
(CVD’s), antidumping (AD) orders, safeguard measures in the manufacturing sector,
and barriers to services investments and imports.
Although the US has numerous agricultural trade barriers, the most atrocious are
the quotas on sugar imports. Brazil states that its quota allocation is without doubt
undersized, and because it is a major producer of sugar would be able to sell and profit
much more if the US quotas were lifted.
Another agricultural trade barrier to Brazil is the US’s Farm Security and Rural
Investment Act. In 2002, Congress passed this act, which increased trade-distorting
subsidies above measures presented under the previous farm bill. This act directly
affected Brazil because the change in subsidies caused the prices of Brazil’s cotton,
soybeans, and corn to be lowered. Reversing this act to the original level of subsidies is
a Brazilian fixation in both regional and WTO negotiations. The most logical path to
take in this matter would be through WTO negotiations because that would cover
European and US subsidies rather than just the US in bilateral or regional agreements.
Unusual tariff peaks on Brazilian products is a problem that adversely affects
Brazilian exports. The most apparent of the Brazilian exporters facing these potent US
import barriers are exporters of ethanol, tobacco, textiles and footwear. On top of all of
these issues, Brazilian firms are charged or threatened with countervailing duties and
antidumping on a variety of products.
Tariff and nontariff barriers, countervailing duties (CVDs) and antidumping
(AD) orders account for a significant portion of political turmoil in the bilateral trade
relationship, but safeguard measures also cause problems being the most contentious
trade remedy. One of the major measures that affects Brazil was the one the US
imposed in March 2002 in imported Steel. This safeguard measure instituted a tariffrate quota on uncompleted flat steel products (slabs), and increased tariffs on imports of
completed flat steel products by 30 percent. Though, this measure did not affect steel
slab exports from Brazil because US officials arranged for special exceptions to Brazil
for 275,5573 short tons of extra slab to supply a Brazilian subsidiary in the US.
In reality, this change of composition did more harm to Brazil than it benefited
them. Brazil has been limited on the amount of exports on high-value completed steel
products because of US AD duties on hot-rolled flat products in 1999 and the US
safeguard in 2002. Thus, the majority of shipments in 2002 were steel slab. This
reflects the fact that more and more US producers have realized that by outsourcing the
initial stages of steel production firms save money and therefore, the demand for
Brazilian slab has grown significantly. As a result, the average nominal price of
Brazilian steel exports to the US, excluding tariffs, dropped from $299 in 1998 to $212
in 2002. In short, Brazil’s profits have decreased while its exports continue to increase.
In addition, the safeguard measure has blocked an important Brazilian steelmaker from
supplying its US subsidiary as much as it wants to and has caused it to delay
investments in other joint ventures.
To help overcome the dominating western powers of the United States and the
United Kingdom, Brazil has made a point to establish strong ties with other countries.
One of these countries is the Republic of China. In 2001, former Brazilian President
Fernando Henrique Cardoso stated that he wished that the strategic cooperative
relationship with China would be strengthened and the bilateral economic and trade ties
improved as well. In addition, Cardoso claimed the successful cooperation on
telecommunications, satellites and other fields, has helped the relationship between
Brazil and China become stronger. The former president also added his expressed
satisfaction with both countries tight cooperation in international forums, and stressed
that his government will support Brazilian entrepreneurs to invest more in China. In
response, Chinese State Councilor Ismail Amat expressed that Chinese President Jiang
Zemin’s recent visit to Brazil has established a landmark in the process of increasing
strategic cooperation between the two countries.
“ ‘China is encouraging its entrepreneurs to invest in Brazil, while welcoming
Brazilian enterprises to invest in China, and especially to participate in the exploration
of China’s Western Region,’ said the senior official”(People’s Daily).
In 2002, the cooperation between China and Brazil began to take shape. Both
countries began negotiations on technology exchanges on the use of alcohol as fueling
internal combustion engines. These negotiations could entail equipment, alcohol
technology and production claims Brazilian Development, Industry and Foreign Trade
Minister Sergio Amaral. He also stated that Brazil and China would proceed to
negotiate on formalizing joint-venture investments to assemble Brazilian Embraer
aircraft in China. The Vice Minister of the State Development Planning Commission of
China, Zang Guobao, expressed emphasis of Brazil’s importance as a rising country and
again said that bilateral trade cooperation has become closer. He stated that China
received 18 million tons of iron ore in Brazil, and there were talks signaling to raise this
volume. In 2002, exports between the two countries increased by more that 75 percent.
As recently as February 2004, China not only continues to do business with
Brazil for fuel, but now they have extended to more Latin American countries. Excite
from all parties involved escalated when Brazil’s Banco Santos opened a China Desk at
its Sao Paulo headquarters. This opening went through because of China’s need for the
food and raw materials it must have to import to feed its population and continue to
push its powerful economy in a positive direction. China’s economy rose 9.1 percent
last year and is anticipated to expand to 8.5 percent by the end of 2004. Government
official, analysts and businessman said Chinese companies are increasingly curious in
chances to invest in raw goods such as soybeans, oil and iron despite the relatively low
investments to date. China’s head steel maker Baosteel stated this past month that it
was brainstorming the production of a steel plant, in Brazil with local group Companhia
Vale do Rio Doce, the worlds top iron ore miner; if completed, this would be the
biggest overseas investment by a Chinese company ever. Though the project is
anticipated to cost $2.5 billion, it should help Baosteel trim costs, lock in supply of raw
materials and maybe export more to the US market.
“ ‘China is very interested in trying to invest in areas where they can obtain the
products they need,’ says Charles Tang, a Chinese entrepreneur who is the president of
the Braizl-China Chamber of Commerce and Industry. ‘China is growing so fast it
needs resources’”(Daily Times).
Latin American governments have been extremely eager to woo because they have
forever been dependent on foreign investment to substitute a low rate of domestic
savings.
President Hugo Chavez of Venezuela has made it clear that he wishes to
strengthen his oil-rich country’s links with China in efforts of a policy to diversify its
foreign relationships beyond its strained ties with the United States. Ju Yijie, China’s
ambassador to Venezuela, states that he believes China will invest close to $500 million
over the next couple of years in Venezuela. Among other projects, Chinese firms are
already proceeding to produce fuel and reactivate a gold mine in Venezuela.
Last year in South America, Chinese state oil trader Sinochem Corporation
made its first investment by making a $100 million deal to purchase a 14 percent stake
in an Ecuadorian oil field. China’s largest oil group, The China National Petroleum
Corporation, has also made investments in Ecuador and Peru and they are searching for
other opportunities in the region.
Though it is Brazil that has been gaining China’s favor recently. Chinese direct
investment in Brazil amounted to only $17.3 million in 2003, despite the fact that trade
between these two countries has been on an upward slope since 2000. That number is
predicted to increase as other firms like Sinochem Corp. are looking for opportunities in
Brazil. Brazilian officials recently stated that the China Minmetals Group was
researching a $2 billion investment and iron miner CVRD has claimed that the China
Aluminium Co. could possibly participate in the future expansion of its Alunorte
alumina refinery.
“ ‘The trend (for investment) is for growth because Chinese companies have
become stronger and they are clearly going to invest in countries with economies that
are complementary to China’s, and Brazil fits that bill,’ said Antonio Correa de
Lacerda, president of the SOBEET”(Daily Times).
Some of this money will be targeted at producing goods such as air conditioners and
tractors for the Latin American and Brazilian markets. Analysts feel that China’s desire
for purchasing not only the means of production, but the raw materials as well will be
underscored by others.
Chinese companies have proposed to invest in ports, railways and other
infrastructure in substitute for payment in commodities such as cane-based ethanol,
cotton and soybeans. Upon arrival of Brazil’s President Luiz Inacio Lula da Silva to
China this May, it is possible that the first letters of intent to proceed with such a deal
could be signed. The Chinese are even implicating interest in Argentina, a country
investors have avoided since its economy hit rock bottom in 2002. Luis Bussio, head of
the Argentina-China Chamber of Commerce and Industry, has stated that Chinese
companies invested close to $15 million before the crisis but investments are likely to
surge in areas like tourism, agriculture and mining. Experts feel that if Argentina
improves some issues, like legal safeguards and economic stability, that number is
predicted to triple or quadruple by the end of 2006.
In September of 2003, in Cancun Mexico, World Trade Organization talks failed
horribly. Though, there was one party who walked away with something to look
forward to. Brazil, India, and China are at the forefront of a new alliance of 21
developing countries emerged from this meeting as powerful force that seems evident to
stay a power in world trade politics. This meeting was set to search for a way to end
stalled global free trade negotiations. The main issue dividing many states is how fast
and over how far to reform world farm trade to slice gigantic subsidies that rich states
pay their farmers and which developing countries feel prevent them from competing.
What concluded from this meeting were the new additions of Nigeria and
Indonesia, the world’s most populous Muslim state, to the initial 21 countries in the
group. As mentioned earlier, talks fell apart which meant that G21’s newfound
influence was not put to the test. African countries turned down a rich state demand to
begin negotiations on new rules to eliminate red tape and corruption in trade, which
ruled out the chance of any deals elsewhere.
The G-21 grouping represents more than half the world’s population and about
two-thirds of its farmers. This group is an informal forum that tries to encourage an
open and constructive relationship between emerging-market countries and industrial
nations on important issues parallel to the international financial and monetary system.
On top of that, it’s in the process of helping strengthen the international financial
architecture. This is all possible because it provides its members – a range of major
countries at different stages of development- with a platform for discussing current
international economic questions.
The G20 creates a common platform on issues relating to further development of
the international financial and currency systems, looking to provide stimuli both for
decisions in the Bretton-Woods institutions (International Monetary Fund and World
Bank) and for national economic policies. In addition, G21 countries aim to advance
the establishment of internationally recognized standards in practice through leading by
example in the form of, for instance, combating money laundering and the financing of
terrorism. The philosophy of this group is the united commitment of to force the west to
lower subsidies running close to $1 billion a day. The success of this group came from
combining a hard line towards the rich states with pleas for more understanding of the
problems of the world’s poor farmers, which countered the massive weight the US and
European Union brandish within the WTO.
“Australian Trade Minister Mark Vaile, whose country shares many of the
group’s criticisms of the EU and the United States, said the emergence of the G21
marked ‘a significant shift in the dynamic’ of the WTO”(Waddington-India News).
The fact that Argentina and Brazil are efficient farm good exporters, and appeared to
have few things in common with India (a protectionist nation of 650 million poor
farmers), Western representatives have expressed disbelief that the G21 would last long.
Given the most severe problems with trade barriers of Brazilian exporters of
steel, sugar, citrus and agricultural subsidies; and the problems with trade and
regulatory in service sectors for the US, the key challenge for US-Brazilian trade
relations is to find a way to reap the prospective trade gains that would result from free
trade. A way to start doing this is to focus more keenly on the significant market access
issues. This entails both liberalization of existing tariffs and quota plus reform of
regulatory and administrative practices that effectively impede the ability to sell in
foreign markets (including discriminatory standards and customs procedures, and
contingent protection policies).
Many different transactions are possible if a deal in the FTAA can be achieved
for both Brazil and the United States. Cutting all tariffs is could be the basis of the deal,
with some balance struck between US farm trade reforms and enhanced access to Latin
American procurement and service markets. Regarding procurement, FTAA
negotiators must be able to agree on principles that give transparency for guidelines for
open tendering and for public tenders. Also, such guidelines must be complemented by
a promise to negotiate within 5 years or so a list of entities whose purchases would be
covered by these new obligations. The desired outcome would be a deal on a negative
list that would cover all service under FTAA restrictions excluding ones explicitly
written- hopefully these exceptions would be kept to a minimum.