An Examination of Brazilian Trade Policy, 1970-20101

Paul DiGilio

August 9, 2012

Abstract:Brazil is the sixth largest economy in the world and a major player in the world economy. Over the last four decade Brazil has gone from an economic backwater practicing import substitution industrialization under a military government to center of commerce. This paper intends to chronicle that evolution through examining Bazil’s trade flows and trade policies over time to provide insight into what worked, what didn’t, and what actions should Brazil take to continue its march upwards to join the high income countries of the developed world.

I. Introduction

1 This Paper has been written for American University’s course: ECON-363 – Macroeconomics of Development.

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Brazil’s development strategy over the past forty years can be characterized by one word: evolution. Brazil has progressed from a military dictatorship that implemented a disastrous import substitution industrialization (ISI) strategy, to a democratically led advocate of free trade.

This transition was a difficult one fraught with economic crises that resulted in hyperinflation like conditions, reduced growth potential, and a lack of competitiveness in international trade. This culminated in the failure of several currencies and presidential administrations.

Ultimately, it would take several failed attempts at fixing Brazil’s woes before a plan could be implemented to stabilize the economy. Brazil still has a tendency to stray towards its old ways of protectionism, and reforms have had the unintended consequence of weakening its balance of payment at times.

This paper intends to illustrate the evolution of Brazilian trade policy and trade distribution, while simultaneously attributing the effect of exchange rate, tariffs, and trade agreements on manufacturing distribution and competitiveness.

II. Brief Literature Review

Several different sources were invaluable in researching Brazil’s trade policy and composition of trade over the past several decades. These include peer reviewed articles, NGO reports and conference proceedings.

Eliana Cardoso’s “A Brief History of Trade Policies in Brazil” provides us with a glimpse of Brazilian Trade policy over time as it moved from ISI to export promotion and trade liberalization. By the end of the working paper, we are provided with look at Brazil’s experiments with free trade and key industries that continue to receive trade protection.(Cardoso 2009)

Marcos Troyjo of The Financial Times provides similar insights as Cardoso; however his analysis of Brazilian trade policy is vastly divergent. While Cardoso is more willing to accept Brazilian countervailing duties, Troyjo believes they belie a neo-protectionist trend.(Troyjo 2012)

John O. Browder’s “Brazil's Export Promotion Policy (1980-1984): Impacts on the Amazon's Industrial Wood Sector” takes a more microeconomic-oriented approach to Brazil’s export promotion strategy. In the article Browder, illustrates how trade policy resulted for a capital inflow for the Merchant class more so than any other. This resulted in large amounts of lumber being sold below its true cost resulting in tremendous damage to the Amazon rainforest.(Browder 1987)

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III. Socioeconomic Background

Brazil, one of the so called “BRICS,” is currently the sixth largest economy in the world by GDP. It is growing relatively quickly, with annual GDP growth averaging 3.3 % from 2000-2009 and reaching 7.5 percent in 2010.(World Bank 2012) By comparison, in the 1990s average annual GDP growth was only 1.7 %. Brazil has an average per capita income of roughly $11,000 USD placing it in 101st place in the category. Per capita GDP is trending upwards at an increasing rate and has been for the majority of the past forty years, as can be seen in figure 1.

Figure 1.

Source: Created by author based on World Bank (2012).

Inequality remains high in Brazil, with a Gini index of 51.9 giving it the 16th highest income inequality in the world.(Central Intelligence Agency 2012) Despite this, Brazil has a fairly robust Human Development Index score of 0.718. With a HDI of .549 in 1980 Brazil was below both the world and regional averages, but conditions have improved steadily since then. Brazil first exceeded the world average in 1990, though it continues to lag the region,as seen below in figure 2. Brazil does particularly well in the HDI’s health category with a score of 0.85 due to government intervention in healthcare, but scores on education and poverty remain low despite a literacy rate of 90%. This is due in part to adults having a mean of 7.2 years schooling and a childhood school enrollment rate of 85 %.(United Nations Development Programme 2012)

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Figure 2.

Source: Created by author based on United Nations Development Programme (2012).

Prior to the 1970s, Brazil endured almost a century of military rule. This ended abruptly under the presidency of General Ernesto Geisel, who enacted numerous democratic reforms culminating in the election of Brazil’s first non-military president in 1985.(Anon. 2012)

Figure 3.

Source: Created by author based on World Bank (2012).

However, the transition to civilian rule did not halt the trend of poor economic policies. Despite moderate growth throughout the last forty years of Brazilian history, the Brazilian government has embarked on a series of poor fiscal and monetary policies. These include the use

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of import substitution strategies, the drastic expansion of government spending and the amassment of a large public debt to finance it, and other policy failures that ultimately resulted in recession and hyperinflation.(Weisman and Blanco 2007) This is clearly illustrated in the Brazilian debt crisis in the 1980s and the exchange rate crisis in the 1990s. We can see these crises as the two recessions in figure 3 above.

IV. Examination

Brazil’s economic development, like many of the other BRICs has been to a significant degree a result of its managing its trade policy. With this comes the various successes and failures that come with industrializing a large nation. Over the course of forty years, Brazil has seen significant improvements in the size of its economy and the quality of the goods produced. We will first examine the structure of Brazil’s trade flows before taking a critical look at the trade strategies behind the results and where they went right and wrong, as well as where Brazilian trade policy stands today.

1. Re-examination of the evolution of Brazil’s trade shares

Brazil’s economic development has been a long, difficult one with many structural changes. Ultimately, much of its recent development was spent in fiscal and monetary turmoil as the nation attempted to modernize. Many of its problems were a direct result of Brazil’s trade policies. Here we take an empirical approach to our analysis and ascertain the structure of the Brazilian economy over time.

i. Exports

Throughout Brazil’s history, the export sector has remained a significant portion of the national economy. Brazilian exports make up only a small portion of its total GDP, especially compared to other middle income countries which average between 25 and 30 percent. This is not necessarily a bad thing, however as it insulated Brazil from shocks to demand from abroad. While relatively small as a percentage of GDP at between 5 and 10 percent, because of the size of Brazil, its exports currently represent close to 1.6% of total world trade.(World Bank 2012; World Trade Organization Statistics Database 2012)

It is also important to note that Brazilian exports as a share of GDP have been rising steadily since the mid-1980s. Despite a drop in exports as a result of the lowered demand following the 2008 financial crisis, they seem to be rising once again. This can be seen clearly in figure 4 below.(World Bank 2012)

Turning our attention to the composition of Brazilian exports we can see very dramatic shifts in the types of goods produced by Brazil for export. This is likely the result of shifts in Brazilian trade policy and the general progression of Brazilian industry. If we turn our attention

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to figure 5 below, we see that over time, manufactured goods have supplanted food as Brazil’s primary export.

Figure 4.

Source: Created by author based on World Bank (2012).

This trend holds true for many developing countries. As industrial development occurs, manufacturing takes over an increasingly large portion of the national economy – exports included. However, if we look again at figure 5 we can see that manufactured goods have been falling as a share of exports. We can explain this by taking a closer look at each of Brazils other export sectors.

Figure 5.

Source: Created by author based on World Bank (2012).

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While initially it would appear that the agricultural industry is rising while manufacturing is falling, a closer examination shows this is not likely the case. Figure 6 shows us that Brazilian agricultural exports have only made very modest gains since the mid-1970s and only represent less than a half of a percent of Brazilian GDP.

Figure 6.

Source: Created by author based on World Bank (2012).

However, if we look at other sectors of Brazilian exports, such as mineral exports, we see them tripling their share of the Brazilian economy from 0.5 to 1.5 percent of GDP in figure 7. We can see a similar uptick in output when looking at fuel output if we turn our attention back to figure 5. We can see that exports of fuel rose from close to 0 percent of exports to close to 10 percent. This dramatic rise is likely the result of an end to many fuel subsidies in the country during this time period, as well as new oil finds.(Weisman and Blanco 2007)

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Figure 7.

Source: Created by author based on World Bank (2012).

These changes in export composition likely combined with Brazils new strong real to reduce manufactured goods share of exports. Many manufactured goods that benefited from Brazil’s previously undervalued sliding peg currency were less competitive in the international market. Agricultural goods that depended on Brazil’s comparative advantage in both land and climate likely faced more inelastic demand curves than those face by its manufactured goods, due to competition from countries like China.(World Trade Organziation 2009)

ii. Imports

Brazil’s merchandise imports, much like its merchandise exports, paint an interesting picture of the Brazilian economy. Looking at figure 8 below, it is clear to see that the vast majority of imports consist of manufactured goods, with the exception being fuel during the late-1970s early-1980s.

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Figure 8.

Source: Created by author based on World Bank (2012).

This was likely a combination of several factors, including Brazil’s bout with hyperinflation, lack of productive capacity, and increasing demand for oil. We likely do not see a similar peak in fuel prices in the early 1990s currency crisis due to the large number of measures put in place to prevent another such occurrence. Specifically, the government eliminated heavy ethanol subsidies, increased domestic production, oil subsidies, and price caps.(Weisman and Blanco 2007)

iii. Terms of Trade

With regard to Brazil’s terms of trade, it is quite apparent that from 1980 to the mid-1990s, Brazil had a fairly heavy trade imbalance. During this time period, Brazil was working quite hard to move away from its previous ISI attempt and instead promote exports. As a part of this strategy Brazil used its fixed exchange rate regime to undervalue its currency to make its goods more competitive.

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Figure 9.

Source: Created by author based on World Bank (2012).

Examining the graph above, it is clear that Brazil was eventually able to get its terms of trade under control around the time it decided to float the real. As we know one of the main advantages of floating currencies is that they automatically correct for any trade imbalances and bring them back towards equilibrium.

2. Review of Brazil’s Trade Policies

Brazilian Trade policy is an evolution from ISI to free trade. Each stage has a set of goals and tools used to meet them to both industrialize Brazil as well as improve its fiscal and monetary standing.

i. Import Substitution Industrialization

Prior to 1975 Brazil, was a under military rule dating back almost a century. Similar to the military rule in Egypt, Brazil’s government embarked on a path towards industrial independence through an import substitution industrialization strategy.(Cardoso 2009) The basic premise of the plan is to eventually be self sustaining through the fostering of domestic industry through deficit spending on infrastructure and subsidies for the desired industries as well as a tariff shield from imports. However, these subsidies which were intended to protect Brazil’s infant industries ultimately resulted in industries that were not competitive enough to trade abroad.

ISI is in direct opposition to classical theories of the benefits of trade, such as comparative advantage. However, this is not to say that ISI can be successful. In the short run it is possible for nations with minimal infrastructure to benefit greatly from ISI with extremely high GDP growth figures, something we can see in figure 3 above for Brazil in the early-1970s.

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(World Bank 2012) However it is unlikely for a nation to be able to match the growth of its debt with further deficit spending. This ended in a debt crisis for Brazil in the 1980s following a rise in interest rates and the fuel crisis that is visible in figure 8. This is despite Brazil already moving towards Export promotion at the point in time.

ii. Export Promotion

Following ISI, Brazil undertook a long period of export promotion as its primary strategy for growth. Under Export promotion, Brazil would keep its currency undervalued, lower tariffs on inputs for its primary outputs as well as subsidies for exporting industries.(Cardoso 2009) However while this would be successful in improving Brazil’s balance of payments and industrializing the economy, it would result in unintended consequences.

One is that it resulted in environmental costs being increased beyond what they would have been had there even been free trade as subsidies fueled the destruction of the rainforest to provide new farmland as well as for timber. Second it would ultimately contribute to the Brazilian Currency crisis in the late-1980s early-1990s.(Cardoso 2009)

iii. Liberalization

Following Brazil’s currency crisis a new set of reforms came into play in the Brazilian economy. These were the influence of Real Plan a series of reforms to counteract the effect of inflation, lower government debt, and improve the Brazilian current account. These reforms were largely successful in most fronts especially with regard to inflation. In fact, as a result of the strength of the real Brazil lost much of its advantage of having an undervalued currency and soon after floated the real.(Cardoso 2009; Arida and Resende 1985)

Also included in the provisions of the Real plan were measures to dramatically decrease government subsidies, as well as promote freer trade. While Brazil had been a founding member of Mercosur in 198, it did not join the World Trade Organization until 1995. Since then, Brazil has entered other smaller free trade agreements and lowered tariffs on many goods. Brazil took a leadership role with the United States to form a Free Trade Area of the Americas, which would have united the Western Hemisphere under a free trade zone however in 2003 it proved to be impossible to reach a consensus in a manner similar to the Doha round of the WTO.(Cardoso 2009)

iv. New Protectionism

Despite advances towards free trade made during the late-1990s and early-2000s Brazil may be at risk for populist pushback to free trade by its growing middle class. Under the presidents Lula and Dilma of the Workers Party countervailing duties were raised for key Brazilian industries such as the auto industry under the guise of protecting against the Chinese

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and other nations dumping as a result of reduced demand after the 2008 financial crisis. Only time will tell if Brazil’s intentions were genuine if and when the duties are lifted.(Troyjo 2012)

V. Conclusion

Brazil has come a long way from the heavily indebted, inflation riddled economic pariah it once was. However like the other BRICs, it has a long way to go before it can take its place with the high income countries. Brazil still has significant hurdles related to ecology, education and inequality that must be overcome as well as a deficiency of infrastructure.

While there remains a significant amount of improvement to be made, one can be confident that so long as Brazil does not return to its economic ills, it will continue to grow into an economic super power.

In order to do so Brazil must not forget the social welfare of its people. To do so would result in a populist reversion to many of its previous problems. Not an easy task, but more than doable for the sixth largest world economy and the largest on the continent.

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Works Cited

Anon. 2012. “Brazil.” Encyclopedia Britannica Online. http://www.britannica.com/EBchecked/topic/78101/Brazil.

Arida, Persio, and André Lara Resende. 1985. Inertial Inflation and Monetary Reform in Brazil. Department of Economics PUC-Rio (Brazil). http://ideas.repec.org/p/rio/texdis/85.html.

Browder, JO. 1987. “Brazil’s Export Promotion Policy (1980-1984): Impacts on the Amazon's Industrial Wood Sector.” The Journal of Developing Areas 21 (3): 285–304. http://www.jstor.org/stable/10.2307/4191563.

Cardoso, Eliana. 2009. “A Brief History of Trade Policies in Brazil : From ISI, Export Promotion and Import Liberalization to Multilateral and Regional Agreements”. New Orleans.

Central Intelligence Agency. 2012. “Brazil.” World Factbook. https://www.cia.gov/library/publications/the-world-factbook/geos/br.html.

Troyjo, Marcos. 2012. “12 for 2012: Brazil’s Import Substitution Industrialization 2.0.” Financial Times, January 2. http://blogs.ft.com/beyond-brics/2012/01/02/12-for-2012-brazils-import-substitution-2-0/#.

United Nations Development Programme. 2012. “International Human Development Indicators.” http://hdrstats.undp.org/en/countries/profiles/BRA.html.

Weisman, Ethan, and Fernando Blanco. 2007. Brazil - Improving Fiscal Circumstances for Growth. Washington, DC. http://documents.worldbank.org/curated/en/2007/03/8209927/brazil-improving-fiscal-circumstances-growth.

World Bank. 2012. “World Development Indicators/ Global Development Finance Database”. Washington, DC: The World Bank. http://data.worldbank.org/data-catalog/.

World Trade Organization Statistics Database. 2012. “Brazil Trade Profile”. Washington, DC: World Trade Organization. http://stat.wto.org/CountryProfiles/BR_E.htm.

World Trade Organziation. 2009. “Trade Policy Review: Brazil.” In Promoting Market Competition Would Help Sustain Economic Growth. Washington, DC: World Trade Organization. http://www.wto.org/english/tratop_e/tpr_e/tp312_e.htm.

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