Long abstract

About Statistics Publications & Documents Information by Topic

The objective of this paper is to introduce an initial broad set of Brazilian trade and trade related issues for discussion within the OECD enhanced engagement context. Accordingly, the paper takes an historical perspective as an aid to understanding some current trade policy settings in Brazil. The breadth of the approach necessarily means that, in this initial trade paper, depth needs to be sacrificed in the interests of brevity. This approach seems to be appropriate within the OECD context of enhanced engagement which is designed to start a process of discussion with Brazilian authorities over the next few years.
Brazil has faced a number of challenges over the last 60 years in its search for a high sustainable rate of economic growth and a dramatic improvement in its distribution of income. The Brazilian import substitution program after World War 2 stimulated periods of high but unsustainable growth, OECD (2006). From 1988, the Government began a process of general economic reform that included major trade policy liberalization from around 1990. Successive governments have continued this policy stance in spite of the fact that a number of external and internal economic shocks have delayed reform dividends in the form of high sustained economic growth.  In short, Brazil has not had the spectacular economic growth record over the last decade that has been seen in China and India – in spite of its policy reforms. In this sense the Brazilian economy can be said to be in transition. However, policy continuity over the last fifteen years has had very good results in establishing macroeconomic and balance of payments stability coupled with strong employment growth and an improving distribution of income.
Brazil has reinvigorated its trading relationship with world markets. Trade is now twice as important as it was just a few years ago. In 1988 trade constituted 14% of GDP, it was 30% in 2006. Inflation has been driven down to around 3% while growth has recovered to the 4-5% range in recent years. Successive governments have succeeded in cultivating strong renewed hope for economic success on all fronts. For all these reasons Goldman Sachs nominated Brazil in its Brazil-Russia-India-China (BRIC’s) grouping of emerging nations that promised high sustained growth.
There is hard evidence that the distribution of income has begun to narrow as a result of the trade and industry policy liberalisation programmes. This is because Brazil’s economy is fortunately structured in such a way that the tradable industries with the strongest comparative advantages are also the sectors that are intensive in their use of low wage workers.
One of the puzzles of economic performance in Brazil since the trade reform process began in 1990 is the slow rate of trend GDP growth. Over the import substitution era (1961-88) real GDP growth averaged 5.9%. It has averaged 2.2% since 1989. It is possible that the economy is still in the process of adjusting to the more open environment created by the reforms and that this period has been extended by the economic shocks. Another possibility is that research and development activity is too low in some sectors of the economy (aside from agriculture and aircraft) and that this is holding back productivity growth. Gravity model analysis conducted here shows that Brazil’s trade performance is modest compared to other emerging countries.
The economic reform programs have coincided recently with a marked rise in the relative prices of natural resource based products. This factor coupled with the more open trading environment in Brazil has led to some changes in the trade mix. Exports of primary sector goods have expanded to some extent at the expense of some non-food manufactures. However, the international competitiveness of selected machinery and equipment manufactures remains strong (however, this may be due partly to continuing high effective protection for the machinery and equipment industries).  Continued fast growth in emerging economies will continue to provide with consumer benefits from lower priced imports and growing exports for Brazil’s competitive sectors.
There has also been some reorientation of Brazil’s export markets towards China, particularly, and at the expense of lower export shares to the EU and to a greater extent, the US. Mercosur trading partners continue to be very important export earners for Brazil.
The competitiveness of China in selected manufactures and agricultural products is a timely reminder that a country cannot have a comparative advantage in everything, by definition. In other words, while Chinese exports of certain products are stimulating some resource reallocation in Brazilian manufacturing, many areas of Brazilian strength in manufacturing are increasing – particularly in machinery and equipment products. These latter industries have not only survived trade reforms and international competition but have maintained their export performance. Their future competitiveness may depend on removing residual protection.
There are a number of trade and trade related policy challenges facing Brazil and there are important constraints on the tradable sector. First, infrastructural improvements have a high priority in terms of port and airport systems and facilities (including roads). Second, the value-added taxation system continues to be biased against exporters. Third, high payroll taxes tend to reduce firm competitiveness and simultaneously reduce employment incentives.
The imbalances in international capital markets are proving a major challenge for the tradable sector, particularly for those industries that are on the cusp of having a comparative advantage. It is proving difficult for such industries to hold resources in the volatile exchange rate environment.
Brazil is amongst those countries with the most to gain from a successful DDA Round outcome because it confronts the high remaining barriers to agricultural and food trade of the OECD countries. Brazil has been prominent in these negotiations and has acted as a spokesman for developing country interests. These pressures provide a major challenge for Brazil in drawing out consensus approaches from like-minded countries on the one hand and then managing change within the WTO environment itself to cope with the increased presence of emerging countries.
On the basis of recent empirical research Brazil has a strong incentive to liberalise further – trade reform in Brazil has improved the distribution of income, productivity has increased markedly across the tradable sector and many protected industries continue to be competitive internationally post-trade reform. Remaining service sector protection needs attention and traditional exporters have much to gain from liberalisation. All this can be achieved unilaterally. However, WTO multilateral liberalisation would involve larger benefits and lower adjustment costs for Brazil. A successful Doha Round outcome would benefit Brazil in efficiency and distributional terms.
Brazil also has challenges with respect to regional trade agreements, especially Mercosur. A great deal of work will be required to develop a coherent well-functioning arrangement. High on the list of needed priorities will be policy changes to ensure Mercosur is outward looking and not trade diverting in economic terms. Paraguay and Uruguay have relatively small non-food manufacturing sectors where Mercosur has established relatively high MFN duties. On the other hand, Mercosur’s larger partners (ie. Argentina and Brazil) are more likely to advocate protectionist developments in manufacturing on political economy grounds. However, as the empirical evidence is showing for Brazil, a liberalization approach appears to be the best way to confront the globalization challenges facing the country.
In spite of the unilateral trade liberalisation carried out to date, it is highly likely that Brazil’s remaining trade barriers continue to constrain both economic efficiency in the economy and prevent the country achieving more equity gains for the poor. On both counts, further trade liberalisation would be beneficial.