Brazilian international trade is going through a unique period. Exports have soared from $58bn in 2001 to an expected figure of $90bn for this year. What are the reasons for this success?

The first reason is the extremely competitive real exchange rate policy. This became possible as a result of a sound monetary policy which formed the backbone for the costly transition from a managed exchange-rate system to a floating one during the 1990s.

Advertisement

The second reason for success has been the marked investment in physical and human capital. In particular, the agricultural sector benefited from patient and well developed research by the public sector, such as in the case of Embrapa (the state owned research and development centre for the agricultural sector), and by the private sector, through investments in the development of new crops and the mechanisation of production and harvesting. Most people tend to think of Brazil as a vast county with unexploited land resources. In fact, every piece of arable land represents a conquest that has been hard-won through much research and investment.

Export-tax changes

To a lesser extent, but nevertheless an important factor for Brazil’s growth in trade, has been the reduction in taxes on exports. Some of the taxes are now charged on a value-added basis rather than on total-revenue. Nevertheless, the complexity of the Brazilian taxation system still prevents greater investment in the country. These initiatives have been very important for the growth of manufactured exports.

On the negative side is the question of investment in infrastructure. It is widely known that Brazilian seaports are not up to scratch, that the roads are not well maintained and that the railroads are practically non-existent. The new government has not been aggressive enough in dealing with this problem. The investments that are necessary in these areas will only be achieved through concessions or privatisations because the public sector has barely enough resources to keep the current facilities running. Brazil badly needs these investments. Investment by the private sector has already resumed, but without the necessary expansion in logistic capacity, growth will be slow.

New import markets

Although the EU and the US remain Brazil’s main export destinations, accounting for a 44% share of the country’s total exports, most of the growth has come from elsewhere, mainly Asia, South America, Africa and the Middle East – the last three blocs actually showed growth of more than 50% last year.

One remarkable case of growth is the development of trade with China. In 1998, exports to that country came to $0.9bn, just 1.8% of the total. Only five years later the figure had grown to $4.5bn, or 6% of the total. China has become a major partner to Brazil, rising from 15th to third largest importer of Brazilian goods. It mainly takes basic goods such as soya beans, steel, iron ore, and pulp and paper, but also vehicles, vehicle parts and electric equipment.

Exports to the US are growing at one of the lowest rates, 8%, because depreciation of the dollar has made Brazilian exports less competitive in that market. On the other hand, the other main trading partner, the EU, has increased its imports from Brazil by 34% in the first half of the year.

A basic strength

What is Brazil exporting? People tend to think of the country as mainly an exporter of basic goods, sometimes with a certain disdain. But this is actually one of Brazil’s strengths.

Basic goods provide a guaranteed income, to a great extent independent of economic cycles and technological risk. They also account for almost 30% of the country’s total exports. This gives Brazil a minimum level of permanent income in hard currencies and helps it meet its financial obligations with the international markets, a point which is sometimes overlooked.

Recently, though, manufacturers in a wide range of areas have been showing the highest rates of growth. Sectors that posted more than 20% growth in the first half of 2004 include those producing beverages, toys, automobiles, wood products and furniture, airplanes, cellular phones, steel products, leather products, shoes, and food stuffs. This variety shows how Brazilian manufacturing is diversifying.

Trade agreements

Most of the world’s trade authorities have taken note of this process and have raised a number of protectionist barriers. Brazil has been trying to increase its trade with the main economic blocs. Most of the industrialised countries prefer newcomers to international trade to follow a multilateral strategy, so Brazil is making an effort to make a greater commitment to the World Trade Organization. Nevertheless, there have been several bilateral trade initiatives with the EU and some progress with both the Free Trade Area of the Americas and the Association of SouthEast Asian Nations. The agenda of economic integration should be a priority for developing Brazilian international trade.

Recently Banco Itaú’s Economic Consulting Area completed an assessment of the conditions that are necessary for Brazil to achieve investment- grade rating. One of the key indicators is the ratio of foreign debt to revenue from exports of goods and services. This figure used to be as high as four years’ worth of exports to pay back the debt but has recently come down to about just 2.3 years. One way to accelerate the reduction in Brazil’s foreign exposure is to increase the level of the country’s international trade relations. Thus, the country is anxiously waiting for the government to be more aggressive in its strategies for international integration.