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Brazil and Germany Brazil and Germany: A 21st-Century Relationship Opportunities in Trade, Investment and Finance Brazil and Germany: A 21st-Century Relationship Opportunities in Trade, Investment and Finance Viviane Maria Bastos, Andreas Esche, Renato Flores, Samuel George, Antonio Carlos Porto Gonçalves, Thieß Petersen and Thomas Rausch Table of Contents Table of Contents Introduction 7 Chapter I: Trade 11 1. A Complimentary Relationship with Room For Growth 12 2. The Drivers of Trade 12 3. German and Brazilian Trade Policy 16 4. Overview of Brazilian-German Bilateral Trade 18 5. Complications in Brazilian-German-Trade 20 6. Towards a Mercosul – EU FTA? 21 7. 21st Century Opportunities for a 21st Century Relationship 24 Chapter II: Capital Flows & Investment 26 1. The Microeconomics of International Financial Flows 27 2. Direct Investment and Portfolio Investment from Abroad, in Brazil and in Germany 30 3. The Macroeconomics of International Financial Flows 36 Chapter III: Recommendations 43 1. A Focus on Bilateral Direct Investment 44 2. Harmonizing Monetary Policy 45 3. Towards an Agreement on Migration 47 4. Finding the common ground on trade policy 48 5. Brazil & Germany as Leaders in EU-Mercosul Free Trade Relations 49 Moving Forward: Finding the Common Ground 51 Works Cited 52 Global Economic Dynamics (GED) 56 5 Brazilian-German Trade and Finance: Complements and Caveats Brazilian-German Trade and Finance: Complements and Caveats Complements Endowment: Natural Brazil is abundantly endowed in natural resources and land, whereas Germany is poor in the resources first and relatively poor in the second. Therefore, Brazilian exports of natural resources are welcome in Germany, which depends on importing raw materials from abroad. Endowment: Labor Germany is relatively abundant in skilled labor and less so in unskilled labor. Hence, Germany holds a comparative advantage in producing goods and services that require advanced labor. Meanwhile, populous Brazil is working to improve its education system. Thus Brazil and Ger- many are not competitors with respect to products that either require significant skilled labor or rely upon unskilled labor. Endowment: Capital and In order to enlarge the Brazilian capital stock, large investments are necessary. Brazil’s savings current account balances are not large enough to finance domestic investment. Germany has a high income level, high saving rate and current account surplus. Germany’s savings (and current account surplus) are therefore available to finance Brazil’s investment (and current account deficit). Caveats Context of trade policy Brazilian and German trade policies are firmly rooted in differences between the countries’ long-standing institutional structures and mind-sets. Brazil’s trade policy places a high pre- mium on developing national industries and promoting the interests of developing countries. Germany’s economic policy is traditionally export-oriented and strongly intertwined with its European neighbors, to the degree that there is no independent German trade policy, only German interests that contribute to the formulation of the EU’s trade policy. These separate approaches can lead to differing trade strategies. Agricultural products Brazil holds a comparative advantage in many agricultural products, which implies a disadvantage for German producers. German farmers, in turn, are being protected through restrictions and subsidies of the EU’s common agricultural policy. These measures are an object of consistent dispute. Export-oriented Both countries have a strong interest in obtaining and maintaining high levels of employment. job creation Increasing exports are a key instrument to satisfy this goal, especially for Germany. As a result, both countries pursue high exports and, consequently, current account surpluses. As all coun- tries cannot simultaneously have current account surpluses, Germany’s surplus might sooner or later become an object of dispute. Desired outcomes Although Brazil and Germany share the common aim to increase employment by foreign trade activities, they differ with respect to deeper desired outcomes of trade. In Brazil, fighting poverty, increasing the material prosperity of the population and importing technological knowledge are of greater importance than in Germany. In Germany, economic growth and full employment are the primary goals of trade. Terms of trade and If the terms of trade of one country rise, that country receives a larger quantity of imported wealth goods for a given bundle of exported goods. Therefore, an increase in the terms of trade of an economy has a positive impact on the wealth of the country. However, given the contrasting export portfolios, an improvement in Brazilian terms of trade would imply a reduction to German terms of trade (and vice versa). This represents an irresolvable trade-off. Exchange rate policy The real depreciation of the domestic currency has a positive impact on the volume of a country’s exports. If, for example, Brazil tries to increase its exports by devaluing its currency, the result is a relative appreciation of Germany’s currency, which has a negative impact on German exports. As a result, there is another irresolvable trade-off if both countries try to incre- ase exports by devaluing their currencies. However, as a member of the eurozone, Germany has limited influence on the exchange rate. 6 Introduction Introduction On the surface, it would seem that Brazil and Germany present many opportunities for fruitful bilateral trade and investment. In terms of comparative advantages, the Brazilian export portfolio tacks heavily towards precisely the raw materials German manufacturers require—and lack domestically. Conversely, German producers specializing in high-end technological and knowledge-based goods could find an expanding consumer base both in the burgeoning Brazilian middle class and in business-to-business trade with Brazilian partners. In terms of investment, Brazil would appear to be a prime destination for surplus German savings. For example, Brazil faces an infrastructure deficit while German firms have achieved particular sophistication in this field. For German firms, investment in this sector in Brazil can offer returns currently unavailable in continental Europe. To an extent, the statistics reflect the growing opportunities between the two. As this study demonstrates, both bilateral trade and investment have increased in recent years. Nevertheless, the relationship has yet to reach its full potential. Politics and policies have curtailed trade expansion. Brazil’s membership in the Mercosul trade bloc and Germany’s membership in the European Union have hampered the pair’s ability to forward a bilateral trade agreement, as each bloc maintains certain defensive positions that limit the other from exercising its comparative advantages. Capital flows between the two countries—especially long-term foreign direct investments—remain underwhelming. This paper, jointly authored by economists and political scientists from the Bertelsmann Stiftung of Germany and the Fundação Getúlio Vargas of Brazil, reviews economic relations between the two countries with a particular focus on highlighting the opportunities while addressing the bottlenecks that slow bilateral trade and investment. The text is organized as follows: • Chapter I, authored primarily by specialists from the Bertelsmann Stiftung, reviews the state of Brazilian-German trade. The chapter reviews each country’s drivers of trade as well as each country’s trade policies. It continues to analyze the nature of the bilateral trade itself, as well as policy issues that prevent further trade. The chapter then reviews progress on a Mercosul-EU free trade agreement, and concludes by considering 21st century trade opportunities. • Chapter II, authored primarily by specialists from the Getúlio Vargas Foundation, considers investment, comparing German and Brazilian capital flows against what traditional theory predicts. The chapter distinguishes between more transient portfolio investment and longer- term foreign direct investment. It also reviews how a lack of harmonization in macroeconomic policy can lead to distortions in financial flows. 7 Introduction • Chapter III attempts to draw tangible and actionable recommendations based on the first two chapters. This chapter accepts that Germany and Brazil may pursue differing policies, and are constrained by their respective regional blocs, but it argues that common ground exists. Forthcoming policy can be geared towards this common ground. In the 21st century, neither emerging markets nor developed countries alone can sustain global growth. Rather, it will be the interaction between the knowledge of advanced economies and the dynamisms of emerging economies that will most likely motor global growth. We believe Brazil and Germany can be at the forefront of this interaction. This text represents the outcome of a year-long collaboration between Bertelsmann Stiftung and the Fundação Getúlio Vargas. Moving forward, both sides are dedicated to continuing the exploration of bilateral ties between Brazil and Germany and to helping build a truly 21st century relationship. Prior to addressing the future of the relationship, this introduction first offers a perspective on the past and the present. Brazil and Germany: Two countries with strong historical ties Bilateral relations between Brazil and Germany are long-standing and comprehensive. The history of German immigration to Brazil traces back to the 16th century.
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