Finding a New Way for Brazil

The impeachment dynamics against Dilma Rousseff went through, and now Michel Temer is president of Brazil.

Many of the economic time bombs (fiscal largesse, overlooking inflation targets, protectionist trade, and industrial policies) now going off were actually devised in the last two years of her predecessor’s second term. President Lula used the global crisis of 2008 as an excuse to introduce a level of government economic intervention that has produced disastrous consequences.

Michel Temer has indicated to Congress and some state governors that he won’t seek reelection in 2018. This will give him an aura of ‘statesmanship’. This aura, associated with a ‘short honeymoon’ (which in itself won’t last more than 100 days) with market forces and public opinion may bring about a ‘rainbow effect’ for Brazil.

Apart from foreign exchange reserves (currently at $370 billion), most fundamental indicators in Brazil are quite bad (inflation, unemployment, output, debt/GDP ratio, etc.). But if perspectives improve by Temer saying and doing the right things, he will be given a grace period to deal with deteriorated fundamentals and get structural reforms going.

Trust and structural reforms are what Brazil needs to resume a trajectory of social and economic development. And one the most important – and often least talked about – reforms that must take place is one aimed at a strategy to deal successfully with the evolving contours of globalization. A new approach to global trade and investment is central to what Brazil needs in resuming a trajectory of social and economic development.

Brazil’s strategy for growth over the past dozen years has favored more than just consumption over investment, and more than ad-hoc fiscal incentives for companies and sectors blessed by the country’s ‘local-content’ industrial policy. At its core, Brazil’s economic strategy has been the expression of an approach that is mostly insular and which prioritized its domestic market over a more incisive interaction with the global economy.

From an international relations perspective, this approach reveals a great deal about Brazil’s lack of a sophisticated project in terms of both influence and prosperity.

Present-day Brazil, where significant economic expansion has been at bay for more than five years, is the result of a political economy of ideological preferences, with a strong accent on political affinities and less attention to economic pragmatism.

Globally, Brazil’s political discourse has sounded much louder over the past decade than its cross-border economic achievements. Its idea of its global reputation is intertwined primarily with bringing the United Nations system up-to-date; becoming a permanent member of its Security Council; strengthening ties among Latin American countries; and praising the benefits of South-South cooperation. In short, a foreign policy permeated by ‘good intentions’ and ‘balanced’ relations with the world’s top players.

But the fact is, recent attempts by Brazil to build strategic political partnerships that could bring economic benefits, such as with China, have been unilateral in most cases. Brazil’s bilateral trade with China has increased tenfold in the past decade and a half. But that has been mostly driven by dramatic growth in China’s infrastructure, consumer market, and consequent voracious appetite for the mineral and agricultural commodities in which Brazil has clear comparative advantages. The result? One ton of Brazilian exports to China is worth about $200, while one ton of Chinese exports to Brazil is worth more than $2,000. That could hardly be called a ‘partnership’.

Brazil’s interests in Africa are overshadowed by the expanding outreach of Chinese corporations. UN reform is nowhere near the horizon. And the various geometries fostered by Brazil in Latin America, either using Mercosur, the Union of South American Nations, or the Community of Latin American and Caribbean States, yield plenty of speeches on how the world should be made more equitable and few – if any – tangible economic results.

Brazil’s global agenda has prioritized its political objectives – modulated by the ideological preferences of the day – over economic initiatives that might have included more bilateral free trade agreements. Since Mercosur was created in the early 1990s, Brazil has only concluded three FTAs (with Egypt, Israel, and Palestine), while Mexico, since NAFTA, has put more than 40 FTAs in place. Brazil’s ideological biases of the past decade – coupled with the finest breed of protectionism-prone conservatives in the US – have helped put the idea of a Free Trade Area of the Americas to rest.

The low priority Brazil has put on its foreign economic goals has prevented a more aggressive stance in trade and investment promotion. Brazil should have strengthened and expanded its ambitious APEX – a trade and investment promotion agency founded during the Fernando Henrique Cardoso administration in the 1990s – which now consists of a few dozen officials based mostly in Brasília. Instead of setting up strong business bureaus in the global cities of North America, Europe, or Asia, Brazilian strategists believed themselves to be taking steps toward greater global stature by opening diplomatic posts in cities like Baku, Belmopan, Basse-Terre, Castries, Conacri, Cotonou, Khartoum, Gaborone, Malabo, Nouakchott, Roseau, St. Georges, St. John’s, and Ouagadougou.

Seemingly clueless of – or oblivious to – the forces driving the global economy, Brazil was surprised to learn that the US and European Union were working towards a major trade agreement of their own. As news of the plan came out, a high-ranking official at Brazil’s presidency told newspapers Brazil had been following ongoing negotiations ‘without the hastiness of a subordinate’.

Brazil should decide whether it wants trade to be a driver of its economic development. Economic relations with its Latin American cousins, given their small scale as buying markets, represent a low ceiling. Meanwhile, the more dynamic economies of Latin America – Colombia, Peru, Chile, and Mexico – are reconfiguring their strategies and joining forces in an FTA of their own, the Pacific Alliance, one that will entertain an open trade dialogue with the US and other markets.

As for further access to Europe’s markets, Brazil’s negotiating position is rendered less mobile by the limits imposed under its membership of Mercosur. The diametrically opposed views of the Mercosur and European Union countries – especially when it comes to agriculture – prevent negotiations from advancing to other areas. Were Brazil to make its local-content requirements more flexible, particularly in areas related to infrastructure, transport, and logistics, a new phase in Brazil’s economic relations with Europe could be launched. That would be going against what Brazil’s industrial policy mantra has been for the past 13 years, but it is certainly the time to do it.

When it comes to the BRICS, Brazil certainly revels in China’s demand for its low value-added exports. But Brazilian industry lacks the stamina to face China’s hypercompetitiveness – so no FTA in sight here. Russia and India have great potential as trading partners, but they lack the complementarities in both geography and natural resources that are conducive to forming economic blocs.

The BRICS will no doubt coordinate common positions in economic and political forums. They will certainly trade more among themselves. They may even come up with preferential credit lines offered by the New Development Bank (NDB) to help finance infrastructure projects. But given the scale of the items in which their interests do not converge, the BRICS will never form an FTA, much less a vertical, deeply-integrated economic zone.

As a consequence, Brazil, especially in comparative terms, tends to keep a low profile in global economic statistics. The country’s share of international trade is only about one percent. The sum of all its imports and exports represents 20% of Brazil’s GDP. Its share of world GDP, at 2.9%, is unchanged since 2002. With the watershed event of the US-EU Transatlantic FTA now in the making, Brazil should get its act together and add some urgency to the idea of defining its place on the map of 21st century trade and investment.

If Brazil made the right choices now, it could no doubt use the productivity and competitiveness of its agro-energy sector to help foster a tech-intensive, globally-connected economy. Otherwise, if it continues to shun interaction with the most important markets of the world, it will be rendered an ever less relevant, ‘bloc-less’ economic player.

The question then is directed to the ability of Brazil’s organizational structure to deal with foreign trade and attract productive investment.

This is a big change for Brazil, which has traditionally looked to its domestic market as a driver of growth. This was praised as largely responsible for the way Brazil brushed off the ‘Great Recession’ that broke out in September 2008. The economy’s impressive 7.5% growth in 2010 led some analysts to conclude that internationalization of Brazil’s economy would be a mistake.

But that is not true. China and South Korea also faced the crisis with comparative success – and both boast more that 50% of their GDP related to international trade. Brazil’s disappointing growth since 2011 caused disenchantment with the idea of an ever-expanding, inward-oriented growth trajectory for Brazil, immune to events in global markets.

Many believe the slim participation of Brazil in world trade is the result of protectionism in rich countries, and that this ‘injustice’ may only be corrected through negotiations of the ‘government-to-government’ type, like those carried out between the European Union and Mercosur, or at the World Trade Organization.

Undoubtedly, ‘government-to-government’ negotiations are very important. Industries in which Brazil presents clear competitive advantages, such as biofuels, agriculture, and many others, are being held back by unfair trade rules. But in many trade talks, Brazil now seems to be losing the moral high ground. Its local-content rules and seasonal import tax hikes are increasingly seen by its partners as disguised – and often flagrant – forms of protectionism.

However, there are decisions – that are Brazil’s alone to take – which are more relevant than the outcome of those slow-paced negotiations. For example: Does Brazil see trade as one of its main roads towards a larger role in the global economy? Does Brazil want foreign trade surpluses to become a means of building up domestic savings and, therefore, the resources needed for investment?

If the answers to these questions are affirmative, asymmetries in international trade should not represent a ‘paralyzing excuse’ for inaction in Brazil’s trade promotion efforts. Multilateral ‘government-to-government’ agreements were not the main reason why some emerging economies expanded exponentially over the past 30 years.

South Korea, China, and Chile have increased their national incomes dramatically without placing multilateral agreements at the center of their economic and business strategies. Concentrating on the pursuit of a ‘happy ending’ for multilateral negotiations makes Brazilians lose focus. Brazil must replace simplistic notions such as, “Overseas markets might be of interest to Brazil if protectionist barriers were lifted,” with questions like, “What is our trade promotion strategy in a world where trade rules remain unfair?”

Brazil must redefine how it approaches foreign trade. Formulating, negotiating, and promoting trade policies, as well as resolving disputes, is extremely complex. Brazil needs more people, more coordination, and more focus if it wants to increase its share of global trade.

South Korea, China, and Chile have increased their national incomes dramatically without placing multilateral agreements at the center of their economic and business strategies. Concentrating on the pursuit of ‘happy ending’ for multilateral negotiations makes Brazilians lose focus. Brazil must replace simplistic notions such as, ‘overseas markets might be of interest to Brazil if protectionist barriers were lifted,’ with questions like, “what is our trade promotion strategy in a world where trade rules remain unfair?”

In this context, it is key to promote coordination at the top and enlargement at the bottom. Today, responsibility for trade and investment strategies is scattered throughout a myriad of ministries. More of Brazil’s states and cities should undertake trade and investment promotion. If it were a country, the state of São Paulo would be South America’s second-largest economy. But it doesn’t have the network of people and offices it needs to promote itself abroad.

And Brazil should make better use of its embassies and consulates around the world. They should become true ‘showcases’ of the best Brazil has to offer. They could also be ‘antennae’ of scientific and technological opportunities, especially as the imperatives of innovation seem to have definitely registered on Brazil’s radar.

Recent decades show us that countries that have sought internationalization have been more successful than those tied to their domestic markets. Brazil must learn that lesson.

Alongside multilateral negotiations, Brazil must enact urgent labor, social security, and tax reforms. However, there is a also quartet of additional priorities:

• facilitating domestic legislation for export-oriented firms;
• improving the country’s logistics infrastructure;
• training specialized human resources in the public and private sectors for trade promotion and attracting foreign direct investment;
• strengthening the international presence of small and mid-sized enterprises through the establishment of export consortia.

These initiatives focused on a project for prosperity are much more important for Brazilian society than the uncertain entry of Brazil into the exclusive clubs of the multilateral system, such as the UN Security Council.

It is therefore essential that the new competitive level of Brazilian currency be accompanied by an updated and more robust structure for Brazil’s business objectives. These are much-needed – and yet basic – steps towards a new global competitiveness for Brazil.