Brazil World Trade

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Chris Hernandez

Bruce Lusignan

EDGE Final Paper


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 tariff-rate 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.

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