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Foreign Trade: Reformulated issues

There are strong signs that 2017 may become a benchmark of great changes in global political-economical order.  In the first weeks of the year, while taking office, the new president of the United States announced a deflection from the post of the world's greatest free trade advocate, sustained for decades, on a path to economic nationalism.  Almost concurrently, the Chinese president spoke for the first time at the World Economic Forum, in Davos, defending globalization and stressing that China shall keep its borders open. That is certainly a radical switch in the stance of these economic powers.

 

In Brazil and in the world, businessmen and statesmen have shown concern with the uncertainty in regard to the progress of trade agreements and global investment, hindering the predictability to define their business and strategies.

 

The approval of Brexit, along with United States policy shifts, should trigger events leading to deglobalization.  The last contention of the sort unraveled in 1930, with the approval of the Smoot-Hawley Tariff Act by the U.S. Congress, gave rise to a true global trade war. Several decades went by before goods and capital flows resumed as a significant share of global production and finances. The 1914 trade apex only recovered in 1970, while the scale and mobility of financial flow only recouped in the 1990s.

 

This framework is alarming, for deglobalization brings the risk of growth deceleration in the long-term, a greater gap between rich and poor countries, more protectionism/less cooperation, and higher risk of international conflicts.

 

Ruptures are also likely to delay the negotiation of mega regional trade liberalization deals, such as the TransPacific Partnership (TPP), which had a final proposal signed in February 2016, only needing to be ratified to be rendered effective.   The TPP was negotiated for seven years as an agreement involving 12 countries of the Pacific coast - USA, Mexico, Australia, Canada, Japan, and seven others - who jointly comprise 25% of global exports and 40% of the world's GDP, combining a (consumer) population of over 800 million people. The initiative had U.S. adherence in 2008, who sought to extend North American influence over Asian countries to keep up with Chinese progress in the region.   Agriculture, often left out in trade liberalization discussions, was included in the TPP.  Despite its scope and focus, countries such as Brazil, Argentina, and Russia, who represent a significant share of global agro trade, were not included.

 

In his first week in office, Trump withdrew the United States from the TPP. China becomes a strong candidate to fill in that void. 

 

A lucky break for Brazil?  Perhaps. 

 

Regional deals spawn commerce between the participants and can deviate commerce between them and more competitive non-participants.  In that case, trade between Brazil and Asia in primary product markets - specifically grains, milk, meat and sugar - may decrease, favoring its competitors Canada, Australia and New Zealand.  Development, Industry and Trade Department (MDIC) data shows that many countries involved in the TPP are important players in relevant markets for Brazilian exports - a roughly estimated 47% of the total exported by the country (before the U.S. exit) -, even if not necessarily importers of our products.  There is, thus, no doubt, that trade deviations would result in negative effects for Brazil, even if indirect.

 

Due to an unexplainable lack of initiative, Brazil remains at the fringe of the regional agreement consolidation process, adopted as an alternative to leverage greater integration to global trade in face of the stagnation of multilateral negotiations.  With economic strategies guided to stimulate internal demand, the tech lag, aggravated by political turmoil-derived economic paralysis, increased the distance between Brazil and the "emerging" economies that forged "BRIC" last decade. 

 

The country is in fact becoming more and more isolated, betting exclusively on basic product exports to meet, above all, the external demand of countries like China.   While the main countries in the global trade scenario combine mega regional agreements to the more than 400 regional trade liberalization deals reported to the World Trade Organization (WTO), Brazil remains at the margin of this process, participating of only 22 preferential agreements, which are mostly of little relevance to the effective development of commercial relations. According to the National Industry Confederation (CNI), in this regard the country finds itself much behind other South-American countries. Chile, for example, has tariff preferences with 62 countries, Colombia has it with 60 trade partners, and Peru, with 52 countries.  Those three countries have free trade deals both with the United States and the European Union. Brazil in turn has not shown any effective action in this sense.

 

How can this be explained?  

 

It has been common to ascribe Brazil's low participation in free trade agreements to its relationship with Mercosur. This argument, however, has become easy to rebut. Even when not able to act on their own, as was the case of the long Mexico negotiation during Lula's Government, the country was not successful. In agreements that do not depend on Mercosur, focusing investment deals, sanitary requirements, and the service sector, Brazil has shown quite timid progress, closing deals with only a few African countries.

 

Another explanation for this seeming inability to advance in regional or bilateral agreements is the resistance shown by uncompetitive Brazilian industrial sectors.  Since Brazil's greatest exporting potential lies in farming commodities (e.g. soy, maize, sugar, beef and chicken), attractive markets would have little interest in establishing free trade agreements with Brazil, involving only agricultural products.  Agreements only evolve from a basis that sustains mutual interests.

 

If it thrives, a nationalist political-economic reorientation in the United States may affect European countries, and the formalization of new commercial agreements becomes even more remote and dislocated for Asian countries. To face the experience accrued by these countries that have their economic development model based on open borders, it will be necessary to invest in negotiating capacity.  A first step seems to be promoting the harmony between different economic sectors – more specifically agriculture and industry. Subsequently, the productive sectors - both agro-industry and industry – need to demand persistence and efficiency from our negotiators. In regard to China, as pointed out by Marcos Jank in a recent article, "it knows what it wants from Brazil", we need to require from our negotiators efficient actions and pragmatic strategies that yield balanced gains between the parties. If the United States move on to prioritize bilateral agreements as it has declared, we must quickly bring "win-win" proposals to the table in order to be recognized and respected for our competence in expanding trade, exploring and advancing in our comparative advantage. 

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