The Difficulties Facing Brazil's New Export Plan

6 MINS READJan 19, 2015 | 10:15 GMT
The port of Santos in Brazil.
The port of Santos in Brazil.

Following her Jan. 1 inauguration, Brazilian President Dilma Rousseff appointed a new economic team. Among other goals, Rousseff has prioritized the expansion of the country's export market. Brazil's economic growth is slowing as commodity prices fall and exports to major markets in China and Argentina decrease. To offset these declines, Brazil hopes to increase trade relations with the United States, EU member states and the countries of the Pacific Alliance. Each of these areas targeted for trade expansion, however, will present challenges for Brazil's strategy.

In recent years, Brazil has experienced a significant slowdown of its once-strong economic growth. In 2010, Brazilian gross domestic product growth was 7.5 percent. By 2014, it had dropped to an estimated 0.1 percent. One of the key drivers of this decline has been a decrease in Brazil's exports. Brazil's 2014 trade deficit was $3.93 billion, down from a $2.5 billion surplus in 2013. It was the country's first annual trade deficit since 2000 — when it posted a deficit of $731.7 million — and its largest since 1998.

Unlike export-driven countries such as Germany and China, Brazil's exports are equivalent to only around 13 percent of GDP. They are, however, still a significant driver of the national economy in terms of providing external revenue sources. Among its exports, commodities are essential. They constitute 60 percent of total exports, led by iron ore, crude petroleum and soybeans. The destinations for Brazilian exports, though, are diverse — China is the top export market at 18 percent but is closely followed by the United States at 11 percent, Argentina at 7 percent, the Netherlands at 5.4 percent and Germany at 4 percent.

Several factors have contributed to Brazil's falloff in exports in recent years. Prices on world markets for iron ore, crude oil, soybeans and other commodities have fallen, with China playing a particularly strong role in Brazil's slowdown. In 2013, nearly 83 percent of Brazil's exports to China were in commodities, including soybeans, iron ore and crude oil. But from 2011 to 2013, exports of these commodities to China rose by only $1.5 billion, or 3.8 percent overall. In 2014, the overall value of trade between Brazil and China was down by 6 percent compared with the previous year.

Another factor is that Brazil's main economic partner in Latin America, Argentina, has been gradually decreasing its imports from Brazil. Argentina has imposed restrictions because of its own economic problems. Brazil's exports to Argentina declined by 27.2 percent in 2014, and overall trade with Argentina dropped by 21.2 percent. Brazil's automotive sector was hit particularly hard and was responsible for over 60 percent of the drop in bilateral trade. Brazil has also expressed concern about the size of Chinese exports to Argentina. The Brazilian government complained that while Brazilian exports to Argentina have dropped over 20 percent, Chinese imports dropped only 4 percent. There is a sense in Brazil that Argentina has not been imposing trade restrictions on Chinese imports to the same degree as those imposed on Brazil.

Brazil's Political Shift

Rousseff won re-election in October in one of the most closely contested polls in recent history — the economic slowdown played a major role in the narrowness of her victory. As a result, Rousseff has acknowledged the need for a shift in economic policy. She has, as a result, appointed several officials to lead a new economic strategy in her second term, including Finance Minister Joaquim Levy and Foreign Minister Mauro Vieira. Levy set a target of achieving a 1.2 percent budget surplus in 2015 and a 2016 goal of 2 percent. Vieira has said he will focus on attracting foreign investment whenever possible.

In the interest of expanding Brazil's export markets, Rousseff has appointed Armando Monteiro Neto to head the Ministry of Development, Industry and Foreign Trade. Monteiro, who was previously president of Brazil's National Confederation of Industry, has called for the government to expand trade beyond the Mercosur member states of Argentina, Uruguay, Paraguay and Venezuela. Monteiro has also said that the Brazilian Agency for Export and Investment Promotion has prepared a plan to open new markets for Brazilian companies and that the government will soon announce a new export promotion plan.

The trade ministry's key 2015 priorities are to increase trade with the United States, implement a trade agreement between Mercosur and the European Union and increase trade with Mexico and other Pacific Alliance members, which includes Chile, Colombia and Peru. Several factors work in Brazil's favor in these markets. The Brazilian real is currently weakening and the government has plans to offer greater financing insurance on exports to minimize the political risks for Brazilian companies pushing into new markets. Brazil is also in an advantageous diplomatic position — the country will hold Mercosur's rotating presidency in the first half of 2015, and Rousseff plans to visit the United States in September this year, with trade talks on the agenda.

Challenges to Brazil's Export Strategy

In spite of these favorable circumstances, Brazil will have trouble expanding into new markets. Negotiations between Mercosur and the European Union have faced major obstacles because of Argentina's unwillingness to come to the negotiating table on protectionist policies and efforts to rein in imports. The European Union has also been reluctant to advance talks because of Paraguay's previously suspended status within Mercosur. As a result, Brazil has been among Mercosur countries that have pushed for a multi-track EU free trade agreement, which would allow for separately negotiated agreements.

In terms of the Pacific Alliance countries, Brazil's main constraint has been Mercosur's common external tariff. This tariff prevents Brazil from signing free trade agreements or lower trade tariffs in bilateral deals, except in the case of Mexico, which is exempt by Mercosur legislation. Mexico presents its own problems, however, and several Mexican industries — including the agribusiness and automotive sectors — oppose a deal with Brazil. Brazil also fears Mexico's more competitive manufacturing sector in areas like electronics and textiles. With the other Pacific Alliance countries the current plan is to eliminate over 90 percent of trade tariffs by 2019, although Brazil would prefer to fast-track this initiative.

The main limitations for Brazil to expand trade with the United States are U.S. demands that Brazil open its market more to U.S. imports and allow U.S. companies to participate more fully in Brazilian government auctions of infrastructure and energy assets. At the moment, however, Brazil has a law that limits the participation of foreign suppliers in state-owned companies and government contracts, making foreign participation difficult. For its part, Brazil has called for the United States to open its market more to Brazil's agricultural exports, and the two countries have had trade disputes related to cotton, orange juice and ethanol.

Ultimately, certain conditions like a weaker real and greater government support will benefit Brazil's new export plan. However, each of its target markets face certain constraints that will limit the country's ability to export out of its slowdown, at least in the short term, as the prices for Brazil's main commodity exports remain low.

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