Brazil Could Win Big from the FTAA

by Jerry Haar

When President Luiz Inácio Lula da Silva meets with President George W. Bush in Washington on June 20, trade—specifically the Free Trade Area of the Americas (FTAA)—will be the central issue the two leaders will discuss. In anticipation of this presidential meeting, U.S. Trade Representative Robert Zoellick visited Brazil at the end of May and reached an agreement with senior government officials on a multi-track process (FTAA, WTO, U.S.-Mercosur) for addressing and resolving the most sensitive and contentious issues impeding progress toward a hemispheric free trade agreement: agricultural subsidies, market access, anti-dumping measures, and intellectual property rights.

The Politics of Trade

Some of Brazil’s most distinguished economists, such as Marcos Sawaya Jank and José Alexandre Scheinkman, acknowledge that the benefits of the proposed FTAA will far exceed any adverse consequences. However, deep concerns remain among a wide spectrum of the Brazilian populace, who fear that the FTAA will not be good for the nation. Among their concerns are possible negative impacts on labor, employment, living standards, and the environment; increased exploitation of natural resources; and foreign domination of local industry, coupled with widespread bankruptcies of local businesses. The organized opposition to the FTAA has many of the same constituents as the anti-globalization movement: labor unions, church groups, environmental activists, leftists, ultra-nationalists, and domestic businesses that are afraid of external competition. The doomsday proclamations of these groups are rooted far more in political beliefs and unfounded fears than in economic truths.

The reality is that Brazil can not only win from the FTAA, it could win big. First, contrary to popular belief, the U.S. market is the most open in the world to Brazilian exports—far more so than European and Asian markets. (Even in agriculture, where U.S. tariffs in selected categories such as sugar, citrus, and soybeans are punishingly high, overall agricultural tariff levels are one-third those of the European Union (EU) and one-quarter of Japan’s.) The United States is the principal destination for Brazil’s exports. Moreover, Brazil sells manufactured goods to the United States, whereas Europe buys mainly commodities from Brazil. During the past two decades, Brazil’s manufactured exports to the United States have followed an upward trajectory in both dollar amount and volume, reaching US$13 billion in 2002. While it is true that steel and agricultural products are subjected to U.S. trade barriers, most Brazilian exports are not. Even in the steel area, 88 percent of Brazilian exports were exempted from the 30-percent U.S. tariff increase announced last year. As for agriculture, the United States has no choice but to resolve this in the World Trade Organization (WTO) process, not in the FTAA, because the European Union subsidizes both its production and exports of agriculture to a far greater extent than the United States does. EU subsidies are 36 percent of gross farm receipts compared to 18 percent for the United States, and the ceiling for EU agricultural subsidies is $62 billion—more than three times that of the United States.

FTAA Benefits

The FTAA will force Brazil to reform its longstanding structural and institutional impediments—labor, tax, regulatory, and pension policies—in order to compete more effectively in export markets. These are reforms Brazil should implement even if there were no FTAA. Both domestic and foreign businesses operating in Brazil continue to suffer from administrative and regulatory barriers that debilitate their performances. The two most notorious are the seemingly incurable ailment known as the custo Brasil, a corporate taxation system that is complex, convoluted, and repressive, as well as barriers to accessing credit. With appallingly low levels of exports to gross domestic product (GDP), at 10 percent, and public and private investment in research and development at 0.3 percent, Brazil needs to address these constraints head-on through comprehensive reforms.

Another benefit of the FTAA is that it will lessen Brazil’s dependence on the Southern Common Market (Mercado Común del Sur--Mercosur). The common external tariff (CET), a key part of the Mercosur agreement, robs manufacturers of sourcing cheaper, higher quality, and more varied capital goods inputs from outside Mercosur and drives up costs of final goods to both consumers and industrial buyers. One should not overlook the tremendous gains of Mercosur in its early years and the political, foreign policy, and fiscal benefits that continue to accrue from the accord. The advocates of a strong and dynamic Mercosur encompass a broad political spectrum of those who fear "U.S. hegemony"—economically and politically—and believe that a union of Southern Cone neighbors can serve as a buffer to outside influence. For them, collectively fortifying the normative and operational features of Mercosur will provide regional and global strength to the member nations. Stimulating intra-regional trade and investment and coordinating monetary policies to ensure currency stability are two prime policy objectives of the Mercosur partners. Nevertheless, the costs of Mercosur to its members’ national, industrial, and corporate competitiveness are enormous. The FTAA will open up other large hemisphere markets, such as Mexico, where the United States and Canada enjoy greater access than Brazil due to NAFTA. (One should also note that the NAFTA countries together currently buy more from Brazil than the total amount of purchases by its Mercosur neighbors.) In general, the FTAA is likely to smooth out economic cycles for Brazil’s exports by diversifying the nation’s export markets.

The FTAA will also stimulate small and medium-sized firms as well as larger, domestic-focused companies to increase exports and boost their productivity and competitiveness to take advantage of new opportunities that hemispheric market liberalization will bring. Brazil has had laudable success in penetrating nontraditional markets with its manufactured goods. For example, from 2001through 2002, Brazil’s exports to India jumped 83 percent; to Singapore, 77 percent; and nearly 50 percent to both Nigeria and the United Arab Emirates. Additionally, the FTAA will bring social benefits to the nation in the form of increased employment, consumer choice, low inflation (due to increased competition), and increases in tax revenues from economic activity.

The FTAA is not a "made in USA" venture but a 34-nation, negotiated agreement that will be based on consensus. Indeed, Brazil currently co-chairs the current and final phase of the negotiations. Brazil has always overestimated the United States as an adversary and underestimated its own capacity to challenge the United States successfully. In multilateral forums, such as the WTO and in the marketplace, Brazil has triumphed over the United States on many occasions. Brazil is a global competitor in automobiles, shoes, textiles, steel, furniture, industrialized goods, airplanes, cellular phones, and software—product lines responsible for 75 percent of the nation’s exports to the United States. Brazilian multinationals such as AmBev, Gerdau, Duratex, Embraer (which recently won a $3 billion contract from JetBlue Airways for 100 regional jets), Alpargatas, and Perdigão are world-class competitors. Moreover, foreign multinationals such as Nokia, DaimlerChrysler, and General Motors are capitalizing on Brazil’s assets as an export platform. Brazil’s poorer regions, such as the sertão (the northern part of the country), where exports of tropical fruits and vegetables currently exceed US$500 million yearly, possess limitless opportunities, thanks to market globalization.

Negotiating Consensus

The journey toward the FTAA has been an arduous one, as one would expect in attempting to forge an agreement among 34 nations with disparate levels of development and significant differences in economic policies, cultures, and political organization. While the United States and Brazil are at cross-purposes on trade remedy measures and a host of other issues, a new spirit of understanding, flexibility, and cooperation has unfolded during the last several months. The latest round of discussions marks a quantum leap forward, as both nations agreed that each issue would be addressed in its most appropriate forum—whether that be the FTAA, U.S.-Mercosur, or the WTO. Despite any difficulties that may arise from a hemispheric free trade agreement, the bottom line is that the FTAA provides a concrete opportunity for Brazil to be in the vanguard of a process that will surely benefit the majority of its citizens, thus furthering its national interests on a global scale. Brazil can win big from the FTAA.

Jerry Haar, Ph.D., is director of the Inter-American Business and Labor Program at the Dante B. Fascell North-South Center.