Brazil: Shaping a New Strategy for Global Trade & Investment

By Marcos Troyjo

Brazil’s economic strategy is the expression of an approach that is mostly insular, privileging through every angle its domestic market over a more incisive interaction with the global economy. Below, Marcos Troyjo argues that becoming more of a big player in the global economy would definitely represent a major change for Brazil, which has traditionally looked to its domestic market as the driver of growth.

Brazil’s economy is at a crossroads. The country’s recurrent pattern of trying to boost growth in the past decade by favoring consumption over investment has run out of steam. Punctual fiscal incentives and government procurement for companies and sectors are blessed by the country’s “local-content” industrial philosophy, over horizontal policies that are not turning out the positive results they aimed to achieve.

At its core, Brazil’s lack of economic strategy is the expression of an approach that is mostly insular, privileging through every angle its domestic market over a more incisive interaction with the global economy.

Current local content policies, if not followed by the necessary parallel investments in training, education and R&D, will have less to do with enhancing an endogenous capacity to compete and more to do with protectionism plain and simple. While there has certainly been improvement in the lives of the poorest, the low productivity of the Brazilian worker is setting lower ceilings for future income gains.

Avoiding a scenario in which competitiveness is lost and the country deindustrialises faster than it re industrialises (in sectors where local content rules have fostered investment) is key for Brazil. If that proves to be the case, a high level of employment can only be maintained with new paternalist protection for local industries. Even more so as prices and production costs are high compared to international standards.

Brazil counts on the voracious appetite of its domestic market as a countercyclical advantage. Recently, industrial policies based on “local-contentism”, the hosting of mega-events such as the FIFA World Cup and the Olympics and its status as an energy superpower-to-be have added to the “Brazilmania” hype. They are certainly not the magic ingredients of a miracle. But they allow for more than simply a mirage of economic growth. In this overall picture, a new approach to global trade is absolutely essential.

 

Devising a New Strategy Towards Trade and Investment

One thought the global crises of both 2008 and 2011 might cause Brazil’s development strategies to embark on new paths. Its currency, the real, could be further depreciated, thus increasing Brazil’s emphasis on exports. That is actually happening. In May 2011 the US$ traded at R$ 1.6 – now (March 2014) it has climbed up to R$ 2.3. Brazil can longer blame the “currency wars” for its economic ills. An important part of Brazil’s capacity to compete therefore shifts to the ability of its organisational structure, particularly at government level, to deal with foreign trade and attracting productive investment.

Becoming more of a big player in the global economy would definitely represent a major change for Brazil, which has traditionally looked to its domestic market as the driver of growth. Such an inward-looking approach 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 per cent growth in 2010 led some analysts to conclude that internationalisation of Brazil’s economy would be a mistake.

But that is not true. China and South Korea are also faced the crisis of comparative success – and both boast more than 50 per cent of their GDP related to international trade. Brazil’s disappointing growth of 2.7 per cent in 2011, 1% in 2012 and 2.3% in 2013 caused disenchantment with the idea of an ever-expanding, inward-oriented growth trajectory for Brazil, immune from events in global markets.

Avoiding a scenario in which competitiveness is lost and the country deindustrialises faster than it re industrialises is key for Brazil.

Many in Brazil believe the country’s slim participation in world trade (less than 1 per cent of everything bought and sold worldwide) and of international trade in Brazil’s economy (export + imports make up only about 17 per cent of GDP) 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 (WTO). Hence the emphasis the Brazilian government placed in the campaign that ended up electing Roberto Azevêdo as Director-General of the WTO.

Undoubtedly, “Government-to-Government” negotiations are very important. Industries in which Brazil presents clear competitive advantages, such as bio-fuels, 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?

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” by questions like “what is our trade promotion strategy in a world where trade rules remain unfair?”

In a currency environment that could facilitate Brazilian exports higher value-added goods, it is high time to redefine how Brazil 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.

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 does not have the network of either people or offices it needs to promote itself internationally.

Brazil must replace simplistic notions such as “overseas markets might be of interest to Brazil if protectionist barriers were lifted” by questions like “what is our trade promotion strategy in a world where trade rules remain unfair?”

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 the “antennae” of scientific and technological opportunities, especially as Brazil implements programs such as “Science without Frontiers” and the theme of innovation seems to have definitely registered on Brazil’s radar screen. Recent decades show us that countries that sought internationalisation 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. In addition, however, there is a quartet of priorities: facilitating domestic legislation for export-oriented firms; improving the country’s logistics infrastructure; training specialised human resources in the public and private sectors for trade promotion and attracting foreign direct investment; and strengthening the international presence of small and mid-sized enterprises through the establishment of export consortia. These are much needed, and yet basic steps towards a new global competitiveness for Brazil.

 

Changing Brazil’s Economic DNA Towards Value-Addition

The future for Brazil lies in making its companies tech-intensive in various industries. There is nothing more strategic for Brazil than the challenge of transforming its creative people into a society of entrepreneurship and innovation.

And that is why Brazil has to keep changing its economic DNA. The timid expansion of Brazil’s GDP since 2011 deals a hard blow to the notion that its policy makers had devised an economic model uniting high growth with social inclusion. It is wrong to assume that the set of policies Brazil has put in place in the past few years to boost its economy and upgrade its social data are pillars of a new development model.

What does exist in Brazil, stretching back beyond current President Dilma Roussef (2011-present) and her predecessor Luiz Inácio Lula da Silva (2003-2010), is a cyclical attempt to promote growth that constitutes a “pattern”. It is based on the appetite of Brazil’s domestic market for high levels of consumption. The pattern has indeed been accompanied in the past 10 years by income distribution mechanisms that lifted the lives of millions. They are however, targeted at poverty alleviation – not increasing productivity – and therefore, are not engines for sustained development over time. This pattern made Brazil fall in love with the present.

Brazil has to choose a development model and adopt it wholeheartedly. Interest payments, pensions, public sector wages, government inefficiencies and intricate business regulations keep Brazil from pursuing a development road paved by science, technology, innovation, start-up capital and entrepreneurial spirit. The country has a hard time putting together a priority list and sacrificing for it. But Brazil presents clear potential for the old economy of commodities to build new competencies in tech-intensive sectors.

The current reinterpretation of import substitution policies in Brazil is a good example of the difference between a development model and a growth pattern. Nearly all experiences in industrial development around the world have resorted to some sort of import substitution. This is almost a necessary stopover to local capacity building. Import substitution however, cannot be seen as an ever-lasting golden rule. It is only to be applied at an infant-industry level so as to enable a particular sector of the economy to compete internationally.

Brazil must raise domestic savings and investment as a percentage of GDP and direct more resources to education, science and technology, the indispensable tools to fight crises and promote sustained prosperity. Embarking on a serious effort to enact much-needed structural reforms will free Brazil from the current microeconomic straitjackets. They would be the best stimulus the Brazilian government could offer all those willing to help the country develop its potential to the fullest.

 

Brazil’s (Lack of) Economic Road Map from an International Relations Perspective

From an international relations perspective, such an insular approach to its economy reveals a great deal about Brazil’s lack of a sophisticated projects, in terms of both influence and prosperity. Present-day Brazil, with significant economic expansion at bay now for more than two years, is the corollary of a political economy of ideological preferences, with a stronger accent on “political affinities”; a lesser attention to “economic pragmatism”.

Globally, the past decade has heard Brazil’s political discourse sound much louder than its cross-border economic achievements. Recent attempts undertaken by Brazil to build strategic political partnerships that could influence positively on economic spheres, such as with China or France, have been unilateral in most cases. Brazil’s bilateral trade with China has increased tenfold in the past decade. But that has been mostly the outcome of China’s dramatic infrastructure and consumer market growth, and the ensuing voracious appetite for mineral and agricultural commodities in which Brazil presents clear comparative advantages. One ton of Brazil’s exports to China hover around US$ 200. One ton of Chinese exports to Brazil exceed US$ 2,000, That could hardly be called a “partnership”.

Globally, the past decade has heard Brazil’s political discourse sound much louder than its cross-border economic achievements.

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

Clearly enough, Brazil’s global agenda has privileged its political objectives – modulated by the ideological preferences of the day over a set of economic initiatives that might have included more bilateral FTAs (Free Trade Agreements). Since Mercosur was created in the early 1990s, Brazil has only concluded 3 FTAs (with Egypt, Israel and the Palestine), whereas Mexico since NAFTA counts in excess of 40 FTAs in place. Brazil’s ideological biases of the past 10 years, coupled with the finest breed of protectionism-prone American conservatives, have helped put the idea of an FTAA (Free Trade Area of the Americas) to rest.

The lower rank status awarded by Brazil to structuring its foreign economic goals have prevented a more aggressive stance in trade and investment promotion. Brazil should have strengthened and expanded its brave APEX (Brazil’s trade and investment promotion agency) founded during the Fernando Henrique Cardoso Administration in the 1990’s, which now houses a few dozen officials based mostly in Brasília. Instead of setting up muscular business bureaus in the global cities of North America, Europe or Asia, Brazilian strategists believed to be taking steps towards 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 even oblivious to – the major trends driving the global economy, Brazil was taken by surprise with the announcement that the US and Europe are working towards an FTA to come into force in 2015. As news on the future transatlantic deal came out, a high-ranking official of Brazil’s presidency told newspapers Brazil had been following ongoing negotiations “without the hastiness of a subordinate”.

But Brazil should better decide whether it wishes international trade to be one of the prime sources for its desired economic development. Brazil’s economic relations with its Latin American cousins, given the comparatively small scale of these economies as buying markets, represent a low ceiling for Brazil’s needs. Furthermore, the presently more dynamic economies of Latin America (Colombia, Peru, Chile and Mexico) are reconfiguring their strategies and joining forces in an FTA of their own, one that will entertain an open trade dialogue with the US.

As previously discussed, further access to Europe’s markets means Brazil’s negotiating maneuverability is rendered less flexible, as it lives up to the limits imposed by its membership of Mercosur. The diametrically opposed views on the part of both Mercosur and European Union countries – especially when it comes to the agricultural agenda – also keep negotiations from expanding 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. But that would be going against Brazil’s current industrial policy mantra.

When it comes to the BRICS, Brazil certainly revels in China’s demand for its low value-added exports. But Brazil’s industry has no stamina to face China´s hyper-competitiveness – so no FTA is in sight here. Russia and India also carry great potential as Brazil’s trading partners. But they lack both the geographical circumstance and natural complementarities that are conducive to forming economic blocs. BRICS will coordinate common positions in economic and political fora. They will definitely trade more among themselves. They may even come up with preferential credit lines, or even a BRICS Bank, to help finance infrastructure projects. But given the scale of the items in which their interests do not converge, BRICS will never constitute an FTA, much less a vertical, deeply-integrated economic zone.

As a consequence, Brazil, especially in comparative terms, keeps a low profile in global economic statistics. The country´s share of world GDP today is at only 2.9%, the same it had in 2002. With the watershed event of the US-EU Transatlantic FTA now in the making, Brazil should get its act together and add a sense of urgency to defining its place in the map of 21st century trade and investment.

Without a privileged interaction with the most important markets of the world, Brazil would be rendered a less relevant, “blocless” economic player. Alternatively, if Brazil makes the right choices now, it can no doubt use the productivity and competitiveness of its agro-energy sector to help foster a tech-intensive, globally connected economy.

 

About the Author

Marcos Troyjo is co-founder and director of BRICLab at Columbia University, a special forum on Brazil, Russia, India and China, where he teaches international affairs. He is an op-ed columnist for Folha de S. Paulo, Brazil’s biggest circulation newspaper, and a regular commentator for global media outlets such as CNN en Español, Latin Business Chronicle and Financial Times. Professor Troyjo is also the president and founder of BTI Business Diplomacy, a global advisory firm. He holds a PhD in sociology of international relations from the University of São Paulo with postdoctoral studies at Columbia. He is a lecturer at Ibmec Business School in Brazil and a Visiting Professor at the Russian Presidential Academy (Ranepa). He is the author of books on economic development and global affairs, including Trading Nation (listed by Americas Quarterly one of the hemisphere’s best books in 2007). His new book, The Coming of Reglobalization, will appear in October 2014.