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Brazil's Trade Patterns and Regional Economic Integration
Underlying much of the debate over trade policy in Brazil in the
1990s is an implicit choice between regional trade arrangements
or a more nonpreferential policy that would not discriminate by
national origin or destination. Brazil's most important current
regional trade initiative is the Common Market of the South (Mercado
Comum do Sul--Mercosul; see Glossary). With the ratification of
the North American Free Trade Agreement (NAFTA; see Glossary) among
Canada, Mexico, and the United States in 1993, it was inevitable
that Brazilian participation in even larger regional trade arrangements
than Mercosul would be discussed increasingly.
Despite the rhetorical prominence of Latin American trade in debate
over Brazilian trade policies, Brazilian trade flows do not reflect
a particularly strong orientation to other Latin American countries.
However, with Mercosul, other Latin American countries may gain
in relative importance. By the mid-1990s, trade with the other Mercosul
partners, particularly Argentina, was one of the most rapidly growing
sectors of Brazilian foreign trade.
In the 1980s, Brazilian exports to the rest of South America had
averaged less than 10 percent of all exports; exports to Mexico,
Central America, and the Caribbean added another 2 percent. Brazilian
exports were directed overwhelmingly to the United States and Canada
(about 30 percent) and to Western Europe (about 30 percent).
Brazilian export patterns in the 1980s and early 1990s were little
different from earlier decades, when they were also dominated by
trade with the United States and with Europe. This trade orientation
reflected several historical influences, including the structure
of Brazilian international transportation channels and the composition
of Brazilian exports. Only in the 1970s did Brazilian exports shift
from being dominated by primary and semiprocessed products to manufactures.
Major markets for all these products were primarily in high-income
countries; for example, Brazil long depended on the United States
as its major market for coffee. Other important primary products,
such as sugar, soybeans, and iron ore, were also sold mainly in
high-income countries (see table 17, Appendix).
Finally, and possibly most important, Brazilian export patterns
reflected the relatively strong inward orientation of most of Brazil's
Latin American trade partners during most of the early post-World
War II decades. The strong influence of the import-substitution
industrialization doctrines of the Economic Commission for Latin
America and the Caribbean (ECLAC; see Glossary) in most of the Latin
American economies in the 1950s had by the early 1960s led to extensive
import-substitution industrialization, particularly in Brazil and
its larger trading partners, notably Argentina and Mexico. The inevitable
result was that the more open economies of Europe and North America
continued to provide the most important markets for Brazilian exports.
Only with the concurrent liberalization of trade in a number of
other Latin American economies, especially Argentina, did Brazil's
exports begin to reflect the importance of its Latin American trade
partners.
Brazil's export orientation toward North America and Europe is
also noticeable in its import pattern. In addition, the Middle East
is a significant trade partner because of the high value of petroleum
imports. The large trade deficit with this region was financed primarily
by surpluses with other regions, notably the United States and Europe.
Brazil's imports from the rest of Latin America accounted for only
about 12 percent of the total value of its imports in the 1980s.
Despite the approximately equal shares of Latin American trade
in both Brazil's exports and its imports, during most of the 1980s
Brazil had a large trade surplus with the region, exceeding US$800
million in most years. This surplus, which was generated primarily
in trade with Argentina, Bolivia, and Paraguay, helped finance Brazil's
oil imports from two of the region's oil exporters, Mexico and Venezuela.
The value of Brazilian imports of petroleum from these countries
was greatest in the early 1980s and declined with the fall in petroleum
prices.
Brazilian attempts to expand formal regional trade agreements beyond
bilateral preferential trading arrangements date from 1958, when
the government joined Argentina, Chile, and Uruguay in discussions
that led to the Treaty of Montevideo, signed in February 1960. Under
the treaty, which was expanded subsequently to most of the economies
of South America and to Mexico, the members agreed to negotiate
mutual tariff reductions on a permanent basis.
Despite its professed intentions, the organization created by the
treaty, the Latin American Free Trade Association (LAFTA--also known
as Asociación Latinoamericana de Libre Comercio--ALALC; see
Glossary) was only a limited success. Part of the reason lay in
the departures of many of the agreements from the nondiscriminatory
provisions of Article 24 of the General Agreement on Tariffs and
Trade (GATT--see Glossary), which regulates regional trade agreements.
Although the intent of LAFTA was to create new trade rather than
to divert trade flows from efficient sources outside the region,
its success in this respect was minimal. Another provision of the
agreement, which required the formation of a free-trade area within
a specified time period, was ignored. The deadline for LAFTA to
create such an area was first extended from 1972 to 1980; when the
1980 deadline was not met, LAFTA was replaced by the Latin American
Integration Association (LAIA--also known as Associação
Latino-Americana de Integração--ALADI), which had
more modest goals. The real blow to LAFTA/ALADI trade came after
1982, when international capital markets were closed to most Latin
American borrowers following the onset of Mexico's external debt
crisis. Like most Latin American governments, Brazil reacted by
sharply restricting its imports, including those from other ALADI
members. As a result, intraregional trade fell significantly in
the first half of the 1980s.
Argentina historically has been Brazil's most important Latin American
trade partner by a wide margin, both in imports from Brazil and
exports to it. For this reason, virtually all Brazilian regional
trade initiatives have been based on this bilateral trade relationship.
Well behind, and of comparable importance, are Chile, Mexico, and
Venezuela. One feature of Brazil's regional trade is the substantial
surpluses that it has run with several of its neighbors, among them
Bolivia, Colombia, and Paraguay. In the case of Paraguay, this surplus
may reflect an underreporting of imports as a result of the high
value of contraband and unreported consumer good imports from Paraguay
to Brazil. Another prominent feature of Brazil's trade with the
rest of Latin America is the importance of imports from the temperate-zone
Southern Cone countries. With the exception of the oil exporters,
Brazilian imports from other tropical Latin American economies are
relatively unimportant, despite the importance of several of them
as markets for Brazilian exports.
During the 1970s, Brazil's trade with the United States, historically
its most important trade partner, declined in relative importance
as trade with Western Europe and Japan grew. On the export side,
this trend ended in the early 1980s, as the United States economy
grew more rapidly than Europe's and the real appreciation of the
dollar made the United States a relatively more attractive market
in which to sell. The tendency toward a greater trade surplus was
reinforced by Brazil's efforts after 1982 to restrict imports, especially
from traditional suppliers like the United States.
Brazil's export-led growth (see Glossary) since the 1980s has been
oriented decidedly toward the industrialized countries. As a result
of their already large share of Brazil's export market and their
rates of growth, the United States and Canada were responsible for
nearly half of Brazil's export growth during the late 1980s and
early 1990s. Brazil's most rapidly growing market in the period
was the rest of South America, with annual growth exceeding 10 percent.
However, its relatively modest initial share of the Brazilian export
market placed South America behind Asia and the Pacific and Western
Europe, as well as the United States and Canada, in its contribution
to total Brazilian export growth.
Brazilian import growth in the 1980s and early 1990s presents a
similar picture. The total value of Brazilian imports in this period
grew very slowly, as the decline in the value of oil imports nearly
offset the rise in the value of imports from Western Europe and
North America. As was the case with exports, the industrialized
countries were far more important trade partners for Brazil than
were the less developed regions. Brazilian imports from other Latin
American trade partners fell in value after 1983, as modest increases
in imports from the rest of South America and the Caribbean were
more than offset by the fall in imports from Mexico and Central
America.
Until the early 1990s, both Brazil and Argentina had a tradition
of inward-oriented industrial policy, and it is therefore not surprising
that trade between the two economies fell far short of its probable
potential. The 1986 trade agreement between Brazil and Argentina
was a partial attempt to address this problem and formed the nucleus
of the regional trade agreement for Mercosul.
President Sarney and Argentina's Raúl Alfonsín (president,
1985-89) signed twelve protocols in July 1986 and additional protocols
in December 1986. Most of the protocols aimed at strengthening Argentine-Brazilian
economic cooperation, although cooperation in other areas also was
included. In November 1988, following extensive consultations between
the two governments, Alfonsín and Sarney signed the final
Argentine-Brazilian Agreement, which was ratified subsequently without
modification by the congresses of the two countries in August 1989.
Both governments hailed the agreements as major steps toward economic
integration, as well as a Latin American response to what was perceived
as the formation of economic blocs, such as the plans of the United
States-Canada Free Trade Agreement (FTA) and the European Community
(EC; see Glossary). In reality, the protocols were more statements
of intention than the detailed results of negotiations in the areas
covered. The Argentine-Brazilian Agreement was a short, five-page
general statement summarizing the objectives of the July 1986 protocols.
Unlike the massive United States-Canada FTA, it in effect deferred
much of the specific negotiation involved in the agreement's implementation
to the future. It was nevertheless an ambitious document, appearing
to promise a level of cooperation and coordination analogous to
that of the EC.
The Argentine-Brazilian protocols signed between 1986 and 1988
paved the way for an even more ambitious regional trade agreement.
Following negotiations with Uruguay and Paraguay, the foreign ministers
of the respective governments agreed in March 1991 in Asunción,
Paraguay, to establish a common market among the four countries
by the end of 1994; the Treaty of Asunción, which established
Mercosul, explicitly recognized the potential participation of additional
members. Like the earlier bilateral Argentine-Brazilian agreements,
the 1991 Mercosul agreements were long on promises and left much
for future negotiations. The agreements envisioned a full common
market. Article 1 of the treaty provides for free circulation of
goods, services, and factors of production (see Glossary) among
the member countries; elimination of tariff and nontariff barriers;
establishment of a common external tariff; coordination of policies
in regional and international forums; and coordination of macroeconomic
and sectoral policies.
During the transition period from 1991 through 1994, the accord
called for a progressive "linear and automatic" reduction
in tariffs, which was to be accompanied by the elimination of nontariff
barriers to trade among the contracting parties. The December 31,
1994, target was to be a zero tariff among the members. As more
recent entrants, Paraguay and Uruguay were given an additional year
to comply with the terms of the treaty.
Compared with some earlier declarations of intent, the Treaty of
Asunción was considerably more specific about how the common
market was to be created. A schedule for tariff reductions was established;
cuts were to be made at six-month intervals between June 30, 1991,
and December 31, 1994. These reductions were to be calculated as
a percentage of the lowest tariffs applied to members outside the
Mercosul group and were based on the ALADI tariff classification.
Several other provisions of the treaty give it a positive bias
toward greater economic openness. Tariff reductions are based on
the rates prevailing before the signing of the treaty. Any external
tariff reductions that lower the base from which intra-Mercosul
tariffs are calculated was to apply to all signatories. The treaty
also contains a type of "most-favored-nation" clause,
which guarantees that any trade concession extended to nonmembers
of Mercosul by any member will be extended automatically by all
other contracting members.
The Treaty of Asunción allowed each nation to submit a list
of exceptions to the tariff reduction list. Brazil and Argentina
submitted 324 and 394 tariff exceptions, respectively; Paraguay,
allowed 439; and Uruguay, 960. Although it is impossible to quantify
the degree to which these exemptions undercut the main thrust of
the treaty, their most important feature was that they were temporary.
Argentina and Brazil agreed to reduce their exception list by 20
percent annually, while Paraguay and Uruguay were allowed an extra
year (to the end of 1995) to eliminate their lists.
Brazil and many of its neighbors have tended to view Brazilian
trade preference options as geographically defined and relatively
local. Whatever the outcome of the Mercosul regional initiative,
the existing pattern of Brazilian trade flows suggests that Brazil's
long-term trade interests extend well beyond such regional boundaries.
Indeed, Mercosul and the European Union (EU, the former EC; see
Glossary) have been discussing the creation of a free-trade area
between the two groups. Two alternatives to Brazil's South American-focused
regional trade policy are participation in a hemispheric FTA or
more open, nonpreferential trade with the entire world. The former
would follow the Mexican example by negotiating Brazil's entrance
into the NAFTA, which is composed of the United States, Canada,
Mexico, and potentially, Chile. The second strategy is to follow
a Chilean approach, avoiding preferential trade liberalization and
making Brazil more open to all trade flows, whatever their geographical
source.
Compared with membership in an expanded NAFTA, Brazilian participation
in Mercosul represents a much more modest regional trade arrangement.
Canada alone has a larger GDP than do all of the Mercosul economies
combined; the four Southern Cone members have a combined GDP totaling
less than 10 percent of the total GDP of the NAFTA countries. Given
recent rates of economic growth, this gap has actually widened in
recent years.
The great disparity in the sizes of the two regional trade groups
has a number of implications for alternative Brazilian trade strategies.
Membership in the current group, in which Brazil is by far the dominant
economy, offers political influence and the possibility of shaping
many of Mercosul's external commercial policies to match Brazilian
trade objectives. In many manufacturing areas, Brazil faces little
competition from the other Mercosul countries. If Brazil were to
become a member of the larger hemispheric trade group (NAFTA), the
country would account for only about 5 percent of the association's
joint product.
In addition to the size difference between Mercosul and a hemispheric
FTA, other features of the two regional trade arrangements have
important cost and benefit implications for Brazil. The Treaty of
Asunción is in many ways more ambitious than is NAFTA. Its
stated objective is the creation of a true common market similar
to the EU. In such a regional trade arrangement, trade barriers
among the member countries are eliminated and external tariffs against
third countries, fiscal policies, and exchange-rate policies are
integrated.
Brazilian participation in a hemispheric FTA would in principle
require less coordination of fiscal, monetary, exchange-rate, and
foreign capital policy than is required by the Treaty of Asunción.
One may question how seriously the Brazilian government or other
Mercosul members are prepared to implement the integration implied
by a common market. The replacement of LAFTA by ALADI in 1980 suggests
that in the choice between national sovereignty and the benefits
of greater economic integration, the former may prevail. But, if
the explicit commitments of the four governments in the Treaty of
Asunción are to be taken at face value, it would appear that
a relatively high degree of policy independence would be sacrificed
for economic integration benefits, which are likely to be considerably
more modest than those attainable by membership in a hemispheric
FTA.
Another option for Brazil would be to follow a Chilean approach
of greater trade openness on a nonpreferential basis. Such an approach
has three main advantages, which in principle make it superior to
other trade strategies. First, the possibility that inefficient
trade diversion will occur is eliminated. The lowest cost or most
efficient producers would be able to supply Brazil without facing
trade barriers, because no such producer would be eliminated from
among Brazil's potential suppliers under a nonpreferential open-trade
policy. Brazilian demand would thus be supplied by the most efficient
suppliers in the world market, rather than those in a more restricted
area.
Second, a nonpreferential approach in Brazilian trade policy would
be more easily administered because it is in effect a unilateral
policy, not dependent on negotiations with potential trade partners.
However, this approach may not be perceived as an advantage from
a political standpoint, as it appears to sacrifice Brazil's "bargaining
chips."
Third, a nonpreferential strategy may better position Brazil to
respond to changes in world markets. Until the mid-1990s, Brazilian
trade had not grown faster in the Mercosul region than in other
areas. In fact, the United States, Canada, Western Europe, and Asia
all contributed more to the growth of Brazilian trade until the
mid-1990s than did other Latin American economies. Although Brazilian
membership in a hemispheric FTA might ensure greater access to the
United States, Canada, and Mexico, it would offer little prospect
of trade expansion with Europe or Asia.
Data as of April 1997
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