Understandable, But Does That Make It Wise?
economics | by Edward Hugh | 06 Feb, 2004 at 12:51 PM | comments (25) | trackback (0)

With today's deadline looming larger than ever, the future of the FTAA (Free Trade Area of the Americas) negotiations between Brazil and the US still seems far from clear. Still separated by a wade of issues, with market access and agriculture at the top of the list, agreement seems as far away as ever. Some measure of the atmosphere might be gained from the attitude of Adhemar Bahadian, the Brazilian co-chair of the negotiating team, who described the FTAA as "a stripper in a cheap cabaret.........At night under the dim lights, she is a goddess............But in the daytime she is something different. Maybe not even a woman.''

Brazil being the largest Latam economy with a GDP of around $550 billion, participation in the FTAA is seen by the US crucial to its success. But right now things don't look too promising.

In fact while Lula is pushing the negotiations, joining the FTAA doesn't appear to be especially popular inside Brazil, with a non binding vote last year revealing that 9 Brazilians out of 10 do not want in. And meantime China and India beckon.

For the past two decades, Brazil's export performance has been pitiful. When rising debt and falling foreign finance threatened the country's financial stability, Lula's predecessor launched an export drive. Mr da Silva himself has pledged to increase exports by 10% a year. Last year, helped by a weaker currency and rising world prices for commodities, they rose by 20%. That helped to turn a current-account deficit, which peaked at $33 billion in 1998, into a surplus of $4 billion in 2003. This provides Brazil with more dollars to pay its external debt, which in turn leads to a higher credit rating, lower interest rates, faster economic growth and, Lula devoutly hopes, more jobs and higher wages.

Brazil's exports to developing countries have risen by 35% over the past five years—nearly double the rise in sales to rich countries (see chart). China has become Brazil's third-biggest trading partner. Although exports to India were just $550m last year, Brazil spots opportunities for cosmetics, medical equipment and Embraer's regional jets.

Certainly, these are welcome new sales. But the United States, the European Union and Mercosur remain Brazil's main markets. And while Brazil's biggest export to China is soyabeans, to the United States it is aircraft. But this is where the wariness creeps in. Lula probably reflects a majority at home in seeing more threat than opportunity in the FTAA, which is supposed to be ready by the end of this year.

In Puebla, as The Economist went to press, Brazil was lobbying for an “FTAA-lite”, as it had at a meeting of hemispheric trade ministers in Miami in November. This would impose few obligations on countries to open up such areas as government procurement and services or to impose yet-tougher rules on intellectual property. Such commitments, Brazil fears, could kill big sectors of its industry and prevent others from being born. Besides, the United States has banished from the FTAA the issues that Brazil cares most about, such as farm subsidies and anti-dumping measures. It insists that these be dealt with by the slow-moving WTO talks. The United States has gone along with an “FTAA-lite” while simultaneously offering a dozen countries deeper bilateral or “plurilateral” deals.

Brazil's timidity could be costly. An FTAA without South America's economic giant is “not worth signing,” says Jeffrey Schott of the Institute for International Economics, a think-tank in Washington DC. And a Mercosur consigned to second-class status within the FTAA risks isolation and lost investment. For example, Brazil's hopes for a trade deal with the EU depend in part on the scope of the FTAA.

The World Economy Centre of the Fundação Getúlio Vargas, a Brazilian business school, reckons the FTAA and an EU-Mercosur deal could allow Brazil to increase its exports by 20% a year, cutting by half the ratio of debt payments to exports, and lifting Brazil's credit-rating to investment grade. This could be the foundation for a new stage of sustainable growth, according to Carlos Langoni, the centre's director, and “much more important” than any industrial policy which the government might pursue.

South-south trade is unlikely to pay off so handsomely soon. China will be a fierce competitor for Brazil's manufacturers, as well as a promising market for its commodities. India is one of the world's most protected economies. Even Argentina, Brazil's closest diplomatic friend, is trying to reduce imports of Brazilian textiles without flouting the rules of Mercosur. Lula's wariness in dealing with the United States is understandable, especially in the absence of progress in the global trade talks. But that need not make it wise.
Source: The Economist

" comments

The Economist article got a bit of play on the radio this evening, with the comment being that Brazil's growth was more by accident than by anything the government has done. If it was the soya harvest that turned Brazil's tides, it could certainly be claimed that the seeds were planted pre-Lula.

The government comment (not directly to the article, but to the issue) is that there is no "4-year-plan", no "Lula" plan, no "Palocci" plan. There is simply a lot in the works that will take time to bear fruit. I've noted before that there are lots of critics of Lula who are questioning why he doesn't do more with his mandate, but I also have commented that it's tough here - the federal system really only works with consensus, and that ensures gradual change, if change comes at all. Headline grabbing proposals usually grind to a halt in the congress, and come election time, it makes bad politics to have let loose with them very often.

FWIW, the "referendum" that rejected ALCA/FTAA last year was not only "non-binding", it was not an official referendum. Sponsored by a broad coalition of trade-unions, church groups and other anti-ALCA interests, it is little surprise that the result was as profoundly negative as it was. I think it had about 10m participants. Impressive for a coordinated effort, but remember that voting in Brazil is compulsory and any real expression of the Brazilian attitude to ALCA would certainly have been more balanced.

ALCA is tainted by its association with the 800-lb US behaving in its usual weasely way. Brazil has a fair whack of that global anti-US malaise, and cheap shots at the easy US target are crowd-pleasers. Still, no one seems to really doubt the long-term importance of the real-life association with the US economy, and few yet seem particularly optimistic about the payoff of "south-south" trade, or maybe as Lula would have it "G20 trade".

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