In the Current Round of Global Trade Talks, Brazil Aims for Center StagePublished: March 01, 2006 in Knowledge@Wharton
As trade ministers from the world's leading industrial nations scurried to get ready for crucial meetings in Hong Kong this week (December 13-18) that could decide the fate of the World Trade Organization's Doha Round, they made sure to establish contact with a handful of the largest, most influential developing countries, including Brazil, China, India, Russia and South Africa. To no one's surprise, the Brazilian government of President Luiz Inacio Lula da Silva is leading the Latin American trade delegations. "Brazil is trying to present itself as a big superpower," says Mauro Guillén, professor of international management at Wharton. "Brazil's GDP is about 35% of the entire Latin American GDP, or about $1.4 trillion of the $3.9 trillion total."
With its vast size (a population of 186 million) and even greater potential for further growth, it seems natural that Brazil would represent the nations of Latin America, which are pushing the U.S., Europe and other industrialized nations to make deep cuts in their agricultural tariffs and subsidies that traditionally make it hard for developing countries to sell their agricultural exports in rich countries. Launched shortly after September 11, 2001, at a WTO summit in Doha, Qatar, the "Doha Round" of trade talks was soon christened the "development round" because of the widespread perception that economic development is more urgent than ever.
The goal of the Doha Round, which is scheduled to be completed by the end of 2006, is to reach sweeping multilateral agreements that remove long-standing barriers to trade and help reduce poverty. "The Doha Round offers an important opportunity for developing countries because there is still substantial protection against their products in the markets of industrial countries," notes William R. Cline, a senior fellow at the Institute of International Economics, in a recent edition of Foreign Affairs. This is especially true in agriculture, where the combined impact of subsidies and tariff protection is the equivalent of a tariff of 20% in the U.S., 50% in the E.U. and 80% in Japan, writes Cline. He argues that removing these tariffs could lift 500 million people out of poverty over the next 15 years. The impact would be especially large in India, China, Pakistan and sub-Saharan Africa, but it would also be felt in Brazil.
Although agricultural subsidies and tariffs are only one area under discussion in Hong Kong this week, they are expected to attract the lion's share of attention because they are such a red-hot political issue in the leading developing nations. The major industrial nations have insisted that developing countries first propose deep cuts in the tariffs that protect industrial markets in highly populous countries such as Brazil, India and Russia. For their part, the developing nations, led by Brazil, India, Russia and China, have been reluctant to grant concessions for improving access to their markets before the developed countries offer sufficiently deep cuts in their own agricultural subsidies and tariffs.
"Brazil clearly has a leadership position in the Doha Round," says Philip M. Nichols, professor of legal studies and business ethics at Wharton. "The country is in a position to make or break the Doha Round with respect to subsidies." Gordon Brown, Britain's Chancellor of the Exchequer, spoke shortly before the Hong Kong meeting of the need for "progress in trade that allows countries like Brazil and India to positively support the liberalization of services and greater market access for them."
When it comes to representing Latin America, Brazil offers other strengths beyond its sheer size, such as "a stable macroeconomic situation, with inflation under control," says Guillén. "And it has pockets of excellence, in sectors like aerospace, autos and steel where Brazilians have proven they can be the best." Outside of manufacturing, Brazil's stature has also been bolstered by its growth as an exporter of agricultural products. From January through October 2005, Brazilian agricultural exports registered a record high $36.2 billion, up 9.6% from the same period in 2004 (in dollar terms). A year earlier, Brazil's agricultural exports grew by a spectacular 29.5%. The European Union now buys 41% of Brazil's agricultural exports, but other emerging markets, including China and Russia, are fast becoming profitable for Brazilian agribusiness. For example, Brazilian exports of soybeans to China jumped from 15,000 tons to 6,000,000 tons between 1996 and 2003.
According to a recent report by the prestigious Paris-based Organization for Economic Cooperation and Development (OECD), which comprises the 30 leading developed countries in North America, Europe and Asia, Brazil's economy has been radically transformed over the past 15 years, paving the way for the boom in agricultural exports. Traditional Brazilian exports, such as orange juice and coffee, have declined in importance, while higher-value soybean products, sugar and alcohol have become increasingly dominant. During 2005, soybean products, sugar, meat, coffee and tobacco accounted for three-quarters of export earnings. Agribusiness in Brazil has also been expanding into vast new geographical regions that offer low land prices and access to transportation infrastructure. According to a report by the U.S. Department of Agriculture (USDA), Brazil's center-west region now rivals the country's southern region in agricultural production. Longer term, Brazilian agricultural cropland could increase by an additional 250% to 300%, according to another report by the USDA.
"A key factor has been Brazil's growing capacity to move up the value chain toward high-quality, value-added agricultural products," says Gerald McDermott, professor of management at Wharton. Agencies such as SEBRAE, Brazil's small business administration, are expanding their role by providing access to technology, financial assistance and capacity-building programs. They tap into local resources where they can take advantage of "dynamic state governors."
Another example, McDermott says, is a federal agency called EMBRAPA (Empresa Brasileira de Pesquisa Agropecuária), which takes advantage of "national standards and know-how and transmits this information back to governors. It uses networking relationships to improve best practices" on the local level. Trade associations, working with regional governments and federal agencies, have also been able "to get together and build up local institutions by providing training, R&D, and promotions." In addition, quality control procedures have been upgraded. "It's a non-trivial issue, because if you have one bad melon in the shipment, you have to scrap the whole shipment."
Nichols agrees that Brazil has built a strong infrastructure of institutions that have the knowledge and capital required to support its transformation. "Brazil has not only modernized its technology but its institutions for creating relationships," he says, adding that the country has made major progress upgrading its financial system and its legal infrastructure from an era in which relationships were based on personal ties, rather than institutional norms and regulations. "There was a time when you had to be relatively cautious when dealing with middlemen in the sugar business; you couldn't always rely on them," says Nichols.
Helping the Rural Poor
Nevertheless, Brazilian policymakers face a major challenge creating a coherent strategy for the entire vast nation. Reforms have helped reduce the poverty rate over the past 15 years or so, but more than 60% of the rural population still survives on income below the absolute poverty line -- the equivalent of half the minimum wage, according to the OECD's latest report on the country. In the Northeast, poverty and under-development remain endemic. While commercial agriculture in Brazil has grown rapidly in recent years, the report states, this has put even greater pressure on less competitive semi-subsistence farmers. "Although rural poverty has fallen significantly in Brazil, the situation for the poorest of the rural poor has actually deteriorated, and poverty has become increasingly concentrated in the North and Northeast regions."
How much might Doha Round tariff and subsidy cuts help Brazil? The OECD report argues that if the U.S., Europe, and the remaining members of the OECD were to cut tariffs on agricultural imports and their subsidies on agricultural products, farmers in Brazil would gain significantly from the resulting rise in their export prices. Larger-scale Brazilian commercial producers would enjoy the greatest benefits, however. The OECD report estimates that if the Doha Round negotiations lead to an overall 50% global cut in tariffs and export subsidies by developing nations, and a 50% reduction in domestic supports to agriculture in the 30 developed countries that comprise OECD, the Brazilian economy would derive significant benefits in the form of higher incomes for consumers and producers worth $1.7 billion. That is the equivalent of around 0.3% of Brazil's GDP.
Although freer trade would clearly benefit Brazil, the contrast between North and South within Brazil's own borders makes it hard for the country to pursue a coherent trade policy, say the Wharton professors. Given these huge disparities, "It is very hard for it to figure out what its trade strategy should be," says Guillén. Nichols agrees. "Brazil is very unbalanced, and it is between two worlds" -- the rich and poor, the North and the South.
At the same time, Brazil's enormous size and diversity provide it with a much wider range of potential options than smaller developing nations. "Suppose, for example, that the Doha Round results in an agreement that leads to an increase in manufacturing goods from the developing world to Europe or to the U.S.," says Nichols. Although that's not a key area of current discussions, deregulation of trade worldwide could have that impact. "In such a case, Brazil and India would be in a position to ramp up their manufacturing to take advantage of that provision, but many other developing countries would not be in such a position."
A further complication, notes Nichols, is that Brazil's foreign trade is largely oriented toward markets outside Latin America, despite its leadership role in MERCOSUR, the South American free-trade pact, which includes Argentina, Brazil, Paraguay, and Uruguay. "Brazil is in a weird position; it should be a huge driver in South America, but intra-South American trade is so stunted. Its trade relationships elsewhere, with North America and Europe, have more impact." An additional problem is that "those relationships are still affected by the incredibly protectionist" policies of previous Brazilian governments, when "some industries that should have grown, did not."
The Limitations of Soy
Is Brazil's agricultural export boom about to end? McDermott sees reason for concern because many of these goods are still commodities, including soybeans, sugar, beef, coffee and tobacco. "There remains a lot of work to be done moving up the value chain. Even really cool soy is still soy," he says, adding that export growth has slowed lately, because Brazilian soy exports are more vulnerable to competition from other producers now that the Brazilian real has appreciated significantly.
OECD economists argue in their report that Brazil could improve its competitiveness by reducing the volume of government subsidies to farmers. They say support for struggling farmers should be more productively channeled into areas such as research and extension, training, and the development of rural infrastructure that improves rural standards of living, especially in impoverished areas.
Overall, despite Brazil's stature as the largest economy in Latin America and one of the most influential participants in the global trade negotiations, it remains to be seen whether Lula's government will play the key global role that many Brazilians seem to expect. "At the end of the day they are not very influential" on the world scene, "even though they are one of the largest countries in the world" in population, says Guillén. "Brazilian attitudes are not helpful. They want to play a role, as if they are one of the big superpowers." Brazil will remain the most influential player in Latin America, but it will never become a global super star until it moves up the value chain in agricultural products, where it has the greatest comparative advantage, and becomes a truly developed country in every respect, Guillén adds. "As the old expression goes, Brazil is a country of the future -- and it always will be."