Critically evaluate Brazil's International Trade Policy in terms of key trade issues and primary benefits and limitations of current trade policy

2.1 Key data

The main trade partners of Brazil are the United States and MERCOSUR, especially Argentina, which is one of Brazil's most important markets, followed by the European Union (EU). The main suppliers to Brazil are, in decreasing importance, the EU, the United States, and Argentina (Country Commercial Guide, 2001). The table 2 in appendix shows the Brazil’s import and export trade data in 1999 and 2000.

• The USA is still the largest single overseas market today, taking 23% of Brazil's exports.
• Over 15% of Brazilian exports go to European Union (EU) countries such as Holland, Germany, and Italy.
• Argentina takes 11%, with almost half going to South America.
• The Asian market is rising. Japan currently leads the field with 5%

3.0 Brazil’s Foreign Trade Environment

Brazil’s foreign trade environment divides into internal environment and external environment. Internal environment includes tariff and non-tariff trade barrier, subsidies, export financing programmes, foreign trade zone and other trade policies. External environment mainly refer to the opportunities and threat of globalisation and the global trade influence on Brazil. It is important to analyze the internal and external trade environment, overcoming current trade obstacle and maximize trade opportunities.

3.1 Tariff

Tariff is a tax on goods that are shipped internationally. In general, Tariffs are the primary instrument in Brazil for regulating imports. Brazil and its Southern Common Market (MERCOSUR) partners, Argentina, Paraguay, and Uruguay, implemented the MERCOSUR common external tariff (CET) on January 1, 1995. The CET currently covers approximately 85 percent of 9,000 tariff items; most of the remaining 15 percent will be covered by 2001, and all will be covered by 2006. While after the adoption of the CET, virtually all imports from MERCOSUR entered Brazil duty-free with the notable exceptions of sugar and automobiles and parts (Bilateral Trade Relations, 2001). And Brazilian government has begun to reduce import tariff rates and eliminate trade barriers in an effort to encourage trade. In 2002, Brazil’s average applied tariff is 11.8% with the exceptions tariffs on certain items such as coal, petroleum, shoes, automobiles, consumer electronics and agricultural inputs. The average tariff in 1990, by contrast, was 32. However, most of consumer goods including automobiles, motorcycles toys and other certain foods and chemical products are still higher than applied rates and a number of imports are prohibited, including various used goods such as machinery, clothing, and other consumer goods(Richard.& Ramirez., 1996). So the United States continues to encourage Brazilian government tariff reductions on products of interest to U.S. firms.  In general, tariff of some products in Brazil still remain on restrictive levels and becomes a priced-based barrier.

 

3.2 Non-tariff Barriers

The economic effects of nontariff barrier (NTBs) to trade are roughly similar to those tariff. NTBs are inefficient distortions which reduce potential gains from trade. There are a wide range of NTBs such as Quotas, buy national restrictions, subsidies, antidumping legislation, technical barrier, quality and testing standards etc (Wall and Rees, 2001).  The main non-tariff trade irritants in Brazil have include government buy national policy, restrictive and intransparent import licensing, agricultural products export subsidies and incentives, Arbitrary Standards, restrictions on service imports and unnecessarily burdensome customs procedures. While some progress has been made in practically part of these issues, there is still lack of transparency regarding applicable rules and many elements of the trading regime still appear unnecessarily trade restrictive.

3.2.1 Government Procurement

Brazilian federal, state and municipal governments follow a "buy national" policy. Given the significant influence of the state-controlled sector due to its large size, discriminatory government procurement policies are a substantial barrier to exports. For example, discriminatory government procurement practices govern the telecommunications, computer and computer software sectors. The rules permit the government to provide foreign companies with production facilities in Brazil preferential treatment in government procurement decisions (Brazil Trade Policy, 2000). So Brazilian government needs to adopt non-discriminatory policies and open the state telecommunications, computer distribution monopolies for foreign participation to ease some of the barriers currently faced by foreign companies.

3.2.2 Arbitrary Standards

Arbitrary standards such as labelling and testing standards may become a barrier for export to entry Brazil because such standards allow the sale of domestic products but obstruct that of foreign-made ones. Take testing standards for example. Testing Pharmaceutical and cosmetics products are regulated by the Ministry of Health, which requires registration of laboratories and laboratory products before relevant products can be sold in Brazil. Brazil generally accepts U.S. product standards, and accepts U.S. testing laboratory certifications, such as those of Underwriters Laboratory (Brazil Trade Policy, 2000). So Pharmaceutical products made in the US are fully acceptable and may be preferred, but EU standard might keep some products out of market completely. Such standard may poses a barrier for Pharmaceutical products access to EU market.

3.2.3 Import Licensing Arrangement

Another non-tariff barrier in Brazil is the intransparency licensing system for import licences. In 1997 Foreign Trade Secretariat implemented a new trade documentation system to handle import licensing. In new system licenses for most products are issued automatically and it regulates a list of imported products that are subject to prior approval before importing into Brazil. These products included food, chemicals, petroleum, energy products and some textiles. Each import will be reviewed by the Ministry under which the product is regulated, for example agricultural products will be approved by the Ministry of Agriculture. And the Import License must be approved before the shipment leaves the country of origin. Normally it takes average five days for each license to be granted (National Import and Export Profile, 1999). The new system allows the Government of Brazil greater control over imports before they reach Brazil's shores and greater flexibility in denying the licenses of certain products. But in terms of the process time for licensing, the level of licensing fees and reduction of the validity of licences in new measure, import licensing has posed a barrier to exporting to Brazil. Brazil's licensing system required greater transparency and efficiency in implementation.  

3.2.4 Service restriction

Service like transportation, insurance, consulting, and banking account for about 20 percent of the value of the international trade which are growing faster than the trade of goods. The Brazilian imports of services has grown and developed in recent years. But Brazilian restrictive investment laws, legal restrictions on remittances and arbitrary application of regulations limit service exports to Brazil. Service trade, particularly in the telecommunications, oil field, mining and financial industries, have been affected by limitations on foreign capital participation in many sectors(Trade Policy Review Body, 2000).

Other service restriction on foreign legal, accounting, tax preparation, management consulting, architectural, construction and engineering industries are hindered by various barriers. These include forced local partnerships, limits on foreign directorships and non-transparent registration procedures (Trade Policy Review Body, 2000). Brazil is South America's largest economy and has potential market for service industries. Brazilian strict requirements for service importing prevent foreign market access for trade in some service industries.

All in all, during the past ten years Brazil has liberalised its trading regime in a substantial manner, but still maintains various barriers to trade of both a tariff and a non-tariff barrier nature. The Tariff and NTBs that hamper its products' access to the world's principal markets, such as the European Union, the United States and Japan, must be lifted to increase trade.

3.3 Subsidies

The Government of Brazil offers a variety of tax and tariff incentives to encourage production for export and the use of Brazilian inputs in exported products.As one of the world's major producers and exporters of agricultural products, Brazil direct price supports or input subsidies provided to farmers for domestic production in an effort to protect them from foreign unfair competition such as dumping goods at extremely low prices.After joining the WTO in 1995, Brazil agreed to extend market integration from a regional to a global level. The Uruguay Round had a specific Agreement on Agriculture that required unprecedented liberalization of agricultural markets. So the Brazilian government export subsidies had been reduced by 24% and domestic price supports were reduced by 13.3%, both over a period of ten years (Richard&Ramirez, 1996). Particularly evidence is the difference in percentage reduction for key export crops such as coffee, wheat and rise in which Brazil has more powerful agricultural interests were drastically reduced compared to other crops. Therefore Brazilian government subsidies in agriculture sector have sharply decreased. Table 3 in Appendix shows the downward trends of subsidies.

Now most of agricultural support programmes, mostly minimum-price supports and rural credit at preferential rates, are targeted at assisting low-income farmers in disadvantaged areas (Richard&Ramirez, 1996). Despite of the reduced government assistance, agricultural production and productivity had increased significantly for the private involvement. But it also increased the risk for Brazilian farmers’ exposure to the fluctuations of international prices and may lead to the instability of agricultural export.

3.4 Export Financing Program

All the standard methods of export financing are available and used in Brazil, both for exports and imports. Brazil encouraged exports through a number of schemes, including the Export Finance Programme (PROEX), government direct financing and internal tax concessions. The Brazilian government plays an important role in encouraging export production and the use of Brazilian inputs in exported products with a variety of tax and financial incentives. For example, Brazilian government has launched a program for the Northeast of Brazil which includes long-term financing of US$1.5 billion to the Northeast to cultivate tropical fruits such as grapes, melons and mangoes to triple the export value than previous years. In addition, the government was finally extended exempts the state VAT on exports to primary products, such as soybeans and other agricultural products on January 1, 1997. The semi-processed and processed food products already benefited from the exemption of state VAT tax (National Import and Export Profile, 1999). It largely stimulates domestic agricultural firms to increase the export production.

Besides the government direct financing, there is an export credit program, known as PROEX, which was established in 1991 gained new financial strength since 1996. Under the program, the Brazilian government provides interest rate guarantees to commercial banks which finance export sales, thus ensuring Brazilian exporters access to financing at rates equivalent to those available internationally(National Import and Export Profile, 1999). The policy of interest rate equalization in PROEX program makes great contributions to the export production and sales. In order to improve the competitiveness of Brazilian products on the international market, the major step was to broaden the scope of the Export Financing Program and make its operations accessible to a larger number of companies.

Brazilian commercial banks, and subsidiaries of international banks are active in trade finance are active in trade finance. They can provide direct loans to exporter so that export can get bank financing of receivable. Now Brazilian commercial banks are becoming more aggressive in providing export financing for Brazilian firms, especially for small, medium or large Brazilian companies investing in capital goods, raw materials, infra-structure, energy or technology which substantially accelerate the export trade (National Import and Export Profile, 1999).

3.5 Foreign Trade Zones

Foreign Trade Zones(FTZs) are areas in which domestic and imported merchandise can be stored, inspected, and manufactured free from formal customs procedures until the goods leave the zones (Daniels and Radebaugh, P.555). FTZs are important trading patterns in Brazil because increasing trade activities occurs under FTZ status. Brazilian government benefits substantially from using free zones more intensively, not only for the attraction of foreign investments but for inducing domestic firms to engage in export production. The role of free trade zones in Brazil is to provide a bureaucracy-free environment, free trade conditions such as duty free machinery, equipment and materials and stability for both local and foreign investors who want to process raw materials for export.  

Till now there are eight Free Trade Zones in Brazil. Manaus, which has been the most important free trade zone in Brazil, is extensively developed to create an industrial, commercial and agricultural center in Amazon (Trade Policy Review Body, 2000). The Free Trade Zone status implies that goods of foreign origin may enter into the Manaus free port without the payment of customs duties or other Federal, State or local import taxes. So domestic importing companies in Manaus greatly benefits form the lower cost of procurement from foreign countries. Together with other free trade zones in Brazil free ports for import and export of goods, free trade zones enable domestic importing companies to compete more readily with foreign producers or subsidiaries of multinational enterprises.

Besides the major attractions of FTZs for national economic development, another factor may influence the FTZs of Brazil is that it is a country well known for frequent changes in economic and administrative regulations. Prevalent changes in trade legislation may impede the growth of FTZs and decrease trade activities. Recently Brazil government has made administrative regulations to restrict the applicability of informatics sector to Manaus Trade Zone. And the license and the authorization requirement for health and sanitary controls, national security interests, and environmental protection take effects (Trade Policy Review Body, 2000). So the Manaus Free Trade Zone was generally influenced by the new policy for in a short period of time.  

3.6 Unfair Trade Practices

Developed countries like US spend billions subsidizing their agricultural sector. By encouraging over-production and export dumping, these subsidies for agriculture products are driving down world prices at their lowest levels. It is damaging to smallholder farmers in Brazil countries and poses the unfair trade. 

Brazil is one of the few countries that traditionally import more from the United States than it exports to it. One important reason is that the United States has particularly ferocious protection on the goods that Brazil has a comparative advantage such as citrus and sugar. This unfair trade practice cost Brazil as much as $5 billion in lost exports every year. For example, in 1995 US violate WTO rules through subsidies and export credits for cotton and Soya production (Brazil Trade Policy, 2000). It artificially increase production and dumping exporting at price far below production cost. Brazil has been one of the largest competitive agricultural exporters in the world, whose production costs in several sectors are between 10 and 45 per cent lower than in the US and Europe. But the dumping of US surplus reduces the Brazil’s export revenue. Brazil inflicts enormous damages in excess of $2bn to its cotton and Soya industries for depressed price by US (Brazil Export Statistics, 1999).

In addition, EU as the representative of one of the world’s richest and most powerful trading bloc, dumping sugar to Brazil not only reduce Brazilian export revenue.  Despite the EU being one of the highest-cost sugar, its subsidies mean that it is the second largest sugar export in the world. The EU therefore has a strong influence on world price. The World Bank study estimates that EU sugar regime has caused world market fell by 17%. So the unfair trade practices still exist and substantially damage the Brazilian agricultural export. Now the Brazilian government is launching an unprecedented offensive to challenge US and European Union agricultural subsidies and trade incentives before the World Trade Organisation.  

3.7 Globalization

One of the prominent trends in the contemporary world is claimed to be globalisation. The world is seen as increasingly connected as the result of economic, political, sociological and cultural forces (Hill, 1997). From the perspective of international business, globalisation refers to the implementation of free trade on a global scale, which is accomplished through international trade liberalization. A country liberalizes its trade with other countries by removing policies that serve as barriers to trade. The primary evidence for globalisation results in the rapid growth in the volume of cross-border of international trade and the increase in international capital flows. The most recent data from the World Trade Organization and the United Nations indicate that in recent years the growth in cross-border trade and investment has accelerated, suggesting that the world is moving ever more rapidly toward a global economy and the world economy is becoming much more interdependent (Hill, 1997). As for Brazil, the growth of foreign trade as a percentage of GDP remained stable and foreign direct investment has increased substantially since 1997. It indicates Brazil’s current import and export trade is becoming deeply intertwined with foreign countries. Increasingly, the level of trade activities in Brazil depends in large part on being able to utilize import from other countries and to export goods and services to other countries.  

On the one side, globalization creates new forms of global, regional and transnational communities which unite the trade of countries across territorial boundaries. For example, international trade union increasingly plays an important role in trade liberalization and settlement of trade disputes. On the other side, it also has the potential to divide and fragment communities. One giant regional trading blocs in Latin American is Mersour that was established in 1990 to set up a full free trade area and a common market between Brazil, Argentina, Paraguay and Uruguay. Mersour has made a positive contribution to the increase trade growth of four core member. Trade between Mersour member-states grew from $4 billion in 1990 to 14.5 billion in 1995(Bilateral Trade Relations, 2001). So Brazil’s trade will reap benefit from participating import and export most of goods with free tariff in the free trade area in the long term.

4.  International Trade Theory

4.1      Theory of Absolute advantage

The theory of absolute advantage holds that by specializing in the production of goods country can produce goods more efficiently than anyone else, nation can increase their economic well-being (Rugman and Hodgetts, 2000). For example, by virtue of their superior manufacturing processes, the English were the world’s most efficient manufacturer of textile. It indicates that the English had an absolute advantage in the production of textile.

As for the Brazil, due to its natural ample land, particularly favourable climate, the world's largest fresh water reserves which is an essential condition for modern irrigated agriculture and considerable skillful farmers, it had the most efficient coffee and sugar industries which means Brazil has an absolute advantage in the production of agricultural products such as coffee and sugar. Therefore, Brazil should specialize in the production of coffee and sugar for which it has an absolute advantage and then trade sugar and coffee for textile in a cheap price produced by the English. That’s the reason that Brazil remains the world's largest exporter of several agricultural products including coffee, orange juice and sugar. Similarly, the English can get all the coffee and sugar it needed at a lower cost by selling textile to Brazil and buying coffee and sugar in exchange. It indicates by specializing in the production of goods, Brazil can benefit by engaging in trade and global efficiency can increase through free trade.

4.2    Theory of Comparative advantage

According to Ricardo’s theory of comparative advantage, it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if it could produce them more efficiently itself(Rugman and Hodgetts, 2000). Few are the countries with as many absolute advantages in producing coffee, sugar, fruit and fiber as Brazil. But Brazil has a comparative advantage only in production of coffee and sugar. This is because its advantage in coffee production is comparatively greater than its advantage in fruit and fibers. It means by using the same amounts of resources, Brazil can produce more coffee and sugar per unit than fruit and fiber. Then Brazil can import fruit and fiber from foreign countries that has comparative advantage in producing these goods. Comparative advantage indicates that if Brazil focuses on producing in goods that have a comparative advantage it has greater potential production and through unrestricted free trade and the consumer in other countries will consumer more in sugar and coffee. So in order to maintain the national competitiveness in international trade, Brazil may have to give up less efficient agricultural output to produce more efficient output.

Brazil is a country of immense agricultural potential. With the autonomous trade liberalization and stable economic growth, both absolute advantage and comparative advantage of Brazil needs considerable resource inputs to and labour source particular skilled labour for goods production and packaging. Although Brazil has a huge population, some remote regions lack of skilled and semi-skilled workers to engage in agricultural and industry production. Therefore it is quite urgent for Brazil to improve educational system to train qualified workers to well prepare for future trade growth.

In conclusions, with the economic liberalization initiated in 1990s Brazil’s current trade policy is much more liberalized comparing with the situation decades ago. Manufactured exports become more important for Brazil than agricultural goods. With the opening up of European market and regional integration of MERCOSUR, EU and Argentina become the main trade partners besides US. The growth of import and export trade is stable but various trade barriers nature hampers its products' access to the world's principal markets.

This report critically evaluates the Brazil’s International Trade Policy with regards to some key trade issues such as trade barrier, subsidies, financial export program etc. And the main benefits and limitations of current trade policy are identified. Brazil’s tariff and non-tariff barrier such as restrictive legislation on service sectors and high applied rate of automobiles, motorcycles toys may hamper its products' access to the US, EU and other principal markets so it must be lifted to increase trade. All standard methods of export financing are used in Brazil and government direct financing, tax exemptions and the Export Finance Programme plays an important role to accelerate export production. But it is necessary to broaden the scope of the Export Financing Program to access to a larger number of companies and improve the competitiveness of Brazilian products on the international market. Although some unfair trade practices still impede Brazil’s export, the government has increasingly utilising the WTO dispute settlement mechanism to settle trade dispute. Globalisation indicates the level of trade activities in Brazil depends in large part on being able to utilize import from other countries and to export goods and services to other countries and it provides opportunities for Brazil to boost up trade transaction in principle of free trade.  

According to absolute and comparative advantage trade theories and globalization opportunities, the option for Brazil’s future trade policy would be greater trade openness on a strong adherence to WTO rules and procedures basis. Such an approach has two main advantages. First, it eliminates the possibility of inefficient trade diversion. 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 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, strong adherence to WTO rules approach in Brazilian trade policy would be more easily administered and some trade dispute such as unfair trade practices can be settled by world trade organization. 

Some recommendations are summarized in a prioritized order as follows.

1. The first and foremost approach is to stabilize and simplify the trade-related laws and regulations to enhance its transparency. Because foreign trade in Brazil is governed by a large number of laws, provisional measures and decrees which have created an intricate web of statutes and impede the growth import and export trade. Moreover trade laws are amended frequently. Some amendments have helped speed up certain reforms but they may also have lessened the predictability of the regulatory structure for traders.
2. Brazil should take positive attitudes and measures to negotiate with the U.S. and other Latin American countries to join an FTAA which could thus potentially offer major benefits to Brazil. Because an effective FTAA will substantially enhance Brazil’s export power and easily double or triple Brazilian sales to the United States since Brazilian exports restrictions is freed. And some unfair trade practices can be eliminated if stronger anti-dumping provisions and major cuts rules in U.S. farm is agreed.  
3. Further its autonomous liberalization programme, including the elimination of import prohibitions, reductions in the average tariff, removal of non-tariff barriers and committed to tax reform. Although Brazil has liberalised its trading regime from the 1990s, some applied tariff rates were still high and bound rates were considerably higher than applied tariffs which will hamper Brazil's commitment to free trade. The tax changes and reform, including related constitutional measures to facilitate further tax changes. For example the elimination of the state value added tax for primary and semi-manufactured goods should increase the competitiveness of Brazilian exports.
4. Invest in education and training sectors to nurture qualified labor to meet the requirement of growing import& export trade, Although Brazil has a population of 162 million, it lacks of sophisticated and skilled labor to engage in trade activities and industry production. Regional disparities are profound in terms of the availability of skilled and semi-skilled workers. There is growing recognition that the Brazilian educational system has failed to adequately prepare the workforce for future trade growth.

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  [Accessed 15th April 2004]
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• Hill, C.W., 1997. International Business: Competing in the Global Marketplace. 2nd ed. New York: McGraw-Hill.
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• Rugman, A.M. and Hodgetts, R.M., 2000, International Business: A Strategic Management Approach. London: Prentice-Hall.
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• Daniels, J. D. and Radebaugh, L. H., (2004). International Business: Environments and Operations. 10th ed. New Jersey: Prentice Hall International Inc.
• Hill, C.W., (1997). International Business: Competing in the Global Marketplace. 2nd ed. New York: McGraw-Hill.
• Rugman, A.M. and Hodgetts, R.M., (2000). International Business: A Strategic Management Approach. London: Prentice-Hall.
• Wall, S. and Rees, B., (2001). Introduction to International Business. 1st ed. London: Prentice-Hall

Table 1. Brazil Economic Performance

Table 2. Brazil Import/Export Data  

Table 3: Product-Specific Aggregate Measurement of Support (millions US$)