Brazil’s Trade Perspectives: Avoiding the “Flight of the Chicken”

Brazil 's results from international trade took off in recent years, reaching US$96.5 billion in exports and US$63 billion in imports in 2004. Together, those totals amount to 25 percent of the country's GDP. While these results are worth celebrating, it is also necessary to understand the reasons behind them.

At a glance, it's easy to spot measures and circumstances that had a significant effect on today's trade numbers: the sharp devaluation of the Brazilian currency in 1999, an underperforming internal market and vigorous growth rates in global trade quickly come to mind – Brazil's gains are visible primarily in its growing exports to the United States, the European Union, China , Argentina , Mexico and Chile .

Certain structural variables must also be considered, like the sharp productivity gains observed in several export-oriented sectors of Brazil 's economy. The agribusiness sector in the country's center-west region is a prime example of continued positive performance, which solidified over the last three decades thanks to the boldness of local entrepreneurs and major industries that pursued up to date "tropical" technologies, and gains through economies of scale. Similar strategies brought benefits to other dynamic sectors, such as the steel, automotive, farm equipment, motorcycle, aircraft, textile and cosmetics industries, among others.

It is vital, therefore, that macroeconomic policies not be allowed to harm the success of Brazil's trade picture, particularly through a perverse equation in which excessive government spending leads to high interest rates, which inevitably cause the Brazilian real to increase in value against foreign currencies. Continuing with my "feathered" analogies, which I explored in my last article on sitting ducks and high-flying geese*, Brazil now needs to concentrate on avoiding any harm to its increasingly successful international trade by a phenomenon often described as the "flight of the chicken". For Brazil to stay "airborne", a series of short, medium and long-term measures must be adopted.

Beyond short-term macroeconomic fundamentals, the success of Brazil's trade performance depends on the quality of the infrastructure behind exports, and a reduction of trade barriers – not just those eventually imposed by Brazil, which, for example, affect capital goods imports, but also those imposed by some of the most important destinations for Brazilian products.

Trade policy is that area of economic policy which focuses on just these types of discriminatory measures, both imposed by Brazil and by other nations against Brazil , which involve tariffs, subsidies, safeguards, sanitary restrictions and the like. So, to attribute positive short-term trade performance strictly to trade policy would appear to be a dangerous misconception.

Trade negotiations tend to produce long-term results, not rarely after at least a decade of persistence. In Brazil 's case, that's easily confirmed through simple observation: which significant changes involving trade barriers faced by Brazilian products were introduced in the current decade? Or, which specific trade agreements generated quantifyable trade results in the past five years? The answer to both questions, of course, is none.

The fact is that over the last five decades, Brazil 's trade policies only produced concrete results from the mid-1980s to the mid-1990s. Like it or not, three almost simultaneous events came together during that relatively short period, and rearranged Brazil's competitive position on the international scene:

-The unilateral opening of the Brazilian economy, which sent the average import tariff tumbling from 55 percent to today's 12 percent;

-The Uruguay Round of GATT, the General Agreement on Tariffs and Trade, which established new multilateral references for at least half a dozen vital topics in international trade; and,

-The first five years of Mercosur's existence, which elevated the region to priority status in terms of Brazil 's regional policies.

Since 1995, trade policy results might be described as timid or incomplete at best. But, without question, presidents Fernando Henrique Cardoso and Luiz Inácio Lula da Silva managed to expand the horizons of Brazil 's foreign policy, each in his own way and through different sets of priorities.

For example, presidential trips abroad, and trade missions involving entrepreneurs and business leaders, have been extremely positive factors of Brazil 's external agenda. These are vital activities, particularly for a country that spent decades admiring its own navel, unwilling to leave the comfort of its own back yard to face the deep blue circumference of our planet.

Nonetheless, there is still much that needs to be done. Three specific measures are crucial if Brazil 's positive trade performance is to continue. The first, short-term step, is necessary to ensure that the export surge of the past few years doesn't become the proverbial "flight of the chicken", complete with an awkward landing once favourable international prices and exchange rates that marked the five-year period ending in 2004 come to an halt. Secondly, in the medium-term, a positive atmosphere must be in place for badly needed, heavy investments in trade-related infrastructure to be undertaken, especially where logistics and sanitation are concerned.

Finally, in the long-term, Brazil must get involved with the ongoing wave of trade agreements sweeping the Americas , Europe and Asia . A specific focus on markets that are most relevant must be combined with new formats and strategies, that allow for finely tuned, well coordinated initiatives involving the government and the private sector.

It is time for Brazil to concentrate its energies and efforts on preventing a major setback for the Doha Round of the World Trade Organization. This will be a vital year for the Round, with definitions expected on parameters to be utilized to reduce tariffs for agricultural and manufactured products, cut subsidies, expand access to services and set guidelines for the introduction of antidumping measures.

Currently, there are storm clouds over Geneva on all these fronts: the US is resisting the idea of reducing its agricultural subsidies, Europe and Japan want no part of expanding access to their agricultural markets, offerings in the service sector are pitiful, and poorer nations are refusing to give up long-standing prefferential treatment on tariffs, thus boycotting the idea of multilateral flexibilization.

There's a feeling in the air that the Doha Round will end up serving only to etch in stone the status quo of trade policies in place around the world today. But if cuts of current world applied levels of tariffs and subsidies don't materialize, trade will not grow, and a golden opportunity will be lost. It could take 20 or 30 years to get back on the launch pad.

So the "chicken" took off, hit a low ceiling imposed by huge protectionist lobbies spread around the world, and might be stunned into a forced landing. If that happens, it's not just Brazil 's efficient poultry industry that will miss out on the possibility of propelling itself towards a world featuring more even-keeled international trade practices. At least 40 percent of Brazil 's exports depend on concrete results that must come from the country's trade policies.