Brazil’s Foreign Economic Policy: South – South, North – South or both?

ISABELLE MAAG

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1 Introduction tions, some special aspects of Brazilian domestic policy have to be examined in this paper as well Since he came into office on 01 January 2003, in order to see if Brazil’s foreign trade policy is the new Brazilian president Luiz Inácio “Lula” da integrated into a sound domestic policy frame- Silva has promised continuity in his foreign policy work and follows a coherent national strategy. objectives and priorities while setting some different emphasis than his predecessor As the title of this paper already indicates, this Fernando Henrique Cardoso. Seeing foreign study will have two parts: Brazil’s relations with trade as an essential instrument for economic the South, i.e. to the developing world, and development and the reduction of external Brazil’s relations with the industrialized countries vulnerabilities, Lula’s main concern is to achieve of the North.2 The next chapter will include an a more equitable international order through an overview of some possible strategies a country active engagement in regional and global can pursue concerning its foreign economic partnerships. He wants trade liberalisation to go policy. hand in hand with social justice. Trade should not only be free, but also fair. 2 The options: bilateral, regional and multilateral trade negotiations This paper examines Brazil’s foreign economic policy under president Lula da Silva and pays After the collapse of the 5th WTO-Ministerial in special attention to Brazil’s role within a Cancún, bilateral free trade agreements (FTAs) changing international context of new have expanded exponentially. The number of constellations in North-South and South-South FTAs will continue to rise simply because the economic relations. 1 These new elements economies concerned want to move quicker became obvious through active players in the than in the WTO-framework. On the other side World Trade Organization (WTO) like , of the argument, the question of exclusion is , Brazil and , who established raised because the faster bilateral trade deals the G-20, a group of developing countries that render irrelevant the most-favoured-nation- insists on becoming more involved in setting the clause (MFN), the basic principle of the World rules of world trade. Especially since the collapse Trade Organization, under which the conditions of the 5th WTO Ministerial in Cancún in granted to one country apply equally to all September 2003, there is a new capacity and member states. Therefore, FTAs are by definition willingness amongst countries of the Southern discriminatory. Furthermore, there are asym- Cone to form a united front based on coalitions metries if a developed and a developing country or joint actions. Brazil is actively involved in those negotiate a FTA because of the often substantial efforts. “The emergence of the G-20 […] has differences in bargaining power. In particular, demonstrated that the time of deals negotiated the are pushing forward bilateral between the major powers and then passed on trade agreements. There is a serious desire by to the rest of the membership for minor the US to have access to the services markets of adjustments is past”, said Luiz Felipe de Seixas developing countries, and also to get those Corrêa in his candidate statement during the countries to agree to rules favouring the protec- WTO Director-General selection process. But can tion of intellectual property and rules covering intensified South-South cooperation enhance foreign direct investment. Developing countries trade and even the negotiating weight of the for their part want to secure market access to states involved? And how do Brazil’s traditional the large industrialized countries’ markets. They trading partners, the European Union (EU) and the United States, react to those ambitions? 2 Following UNCTAD’s definition, “developed or Brazil faces a very difficult challenge in negotia- industrialized countries” are: the countries mem- bers of the OECD, “transition economies” are: the ting simultaneously on several international countries of Central and Eastern Europe, the fronts: at the WTO, the Free Trade Area of the Commonwealth of Independent States (CIS) and Americas (FTAA), an Association Agreement the Baltic States and “developing countries” are: between Mercosur and the EU and within Mer- all countries, territories or areas not specified above. cosur itself. The overlap of various agendas for See definition of UNCTAD in Trade and Develop- parallel negotiations means an uncertainty of ment Report 2004, p. xi. Although not all OECD countries are in the northern hemisphere (i.e. results. Apart from the analysis of those negotia- Australia) and not all developing countries are on the southern part of the globe, the OECD-countries are in this paper referred to as “the North” and 1 South-South trade is increasing at an annual rate developing countries as “the South”. This simplifi- of 10 %, more than twice the rate of expansion of cation is undertaken to underline the Brazilian pre- world trade in 2003. Especially in Asia South-South sident’s ideological element in his foreign econo- trade is moving at full speed. mic policy. Brazil’s Foreign Economic Policy FES Briefing Paper March 2005 Page 3

also see an opportunity for increasing foreign This does not mean, however, that there are no direct investment in their respective countries. potential win-win situations in FTAs and RTAs being negotiated amongst developing countries. Apart from the more recent phenomenon of bilateral trade agreements, the last decade has To sum up, RTAs are proliferating and now cover also witnessed a spectacular increase in the one third of world trade, but their liberalizing number of Regional Trading Agreements (RTAs). effect has often been modest. RTAs accounted However, it is still unclear whether those repre- for only about 10% of the fall in developing sent “building blocs” or “stumbling blocs” in countries’ average tariffs in the past 20 years. the development of a more globally integrated RTAs and FTAs have not benefited all their market economy. The proliferation of regional signatories. Although preferential trade trade agreements is fundamentally altering the agreements could in theory help developing world trade landscape. The number of agree- countries to expand their export markets, to ments in force nowadays surpasses 200 and 40 raise economic efficiency and to deepen regional percent of global trade takes place among policy co-operation, poorly conceived deals have countries that have some form of reciprocal re- often prevented those gains from being realised. gional trade agreement. RTAs imply new trading Positive results are not automatic and depend opportunities for developing member countries critically on the design of each treaty. and they can complement unilateral and multila- Parallel to FTAs and RTAs, 148 member teral policies. But one should not overlook the countries of the World Trade Organization are effects RTAs can have on excluded countries involved in the Multilateral Trading System. The because preferences for some countries mean WTO, an intergovernmental institution, is the discrimination against others who are not mem- only negotiating forum in which the needs of bers of those “exclusive commercial clubs”. This developing countries can be given full weight. can even result in a disadvantage for a member Every country, no matter how small or poor, has country of a RTA: Many regional agreements a veto. The Doha Development Round was cost the economy more in lost trade revenues launched in November 2001 specifically to help than they earn, because they discriminate a- poor countries. They will be the biggest victims if gainst efficient, low-cost suppliers in non- the negotiations do not lead to results. However, member countries. The World Bank’s report on the Multilateral Trading System can only provide “Global Economic Prospects 2005” states that frameworks and opportunities for development. not all regional agreements create new trade 3 Other important conditions have to be met and investment. Especially those with high ex- domestically. This means that even if the system ternal border protection are particularly suscep- worked perfectly, it would still require the right tible to the adverse effects of trade diversion. domestic policies to take advantage of the opportunities offered. The average Latin American country belongs to The World Bank report states that RTAs are no eight agreements. This creates a “spaghetti alternative to multilateral liberalization because bowl” of overlapping arrangements with little gains for developing countries are usually only a transparency and coherence. Each agreement fraction of those from full multilateral has different rules of origin, different tariff liberalization. Therefore, developing countries schedules, and different periods of have a powerful collective interest in an effective implementation, which complicates customs and successful Doha Development Round. A administration. successful Round would lower the risk of trade The report states further that in general, North- diversion for members and eliminated the South agreements score better on implementa- negative effects on excluded countries from tion than South-South agreements. This is be- bilateral or regional deals. Therefore, the report cause North-South agreements can integrate suggests that developing countries should see economies with distinct technological capabili- regional integration as one element in a three- ties and other different factor proportions and pronged strategy that includes unilateral, therefore the potential gains are usually greater. multilateral, and regional liberalization. The important question in this context is in fa- 3 See “Global Economic Prospects – Overview and vour of which options Brazil decides concerning Global Outlook 2005”, edited by The International its foreign economic policy: How much impor- Bank for Reconstruction and Development / The World Bank. tance does Brazil give to multilateral negotiati-

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ons and which aims does it pursue within its hunger and social exclusion, wants to tackle institution, the WTO? Brazil is involved in the fundamental social rights such as access to food, preferential regional agreement Mercosur and is education, social welfare, and employment pro- currently negotiating an inter-regional agree- tection.6 ment between Mercosur and the European Uni- The Brazilian government sees the active use of on. Therefore the question about Brazil’s role trade policy as a means of fostering sustainable within those negotiations arises. Is Mercosur economic growth, fighting hunger and poverty adequate to push Brazil’s trade forward and to and reducing the country’s vulnerability with strengthen its negotiating power with respect to respect to global financial markets. Regional e- the North? conomic integration and export diversification are therefore considered important policy targets. 3 Brazil’s foreign economic relations Brazil’s essential goal is to obtain enhanced mar- While Brazil’s export performance was ket access for its agricultural products through disappointing during the 1990s this trend was multilateral and regional negotiations while at reversed after the major devaluation in January the same time developing its manufacturing sec- 1999, which marked the start of a period of tor. The country has the potential to become a sustained currency weakness. The trade balance giant in industry and agribusiness, in the tech- swung back into surplus in 2001 for the first nology of uranium enrichment, and in biotech- time since 1993 and record export earnings nology since it has immense biological reserves were achieved in 2002-2003.4 In 2003 primary and an extremely mineral-rich soil.7 According to products performed strongly, boosted by robust the WTO’s Trade Policy Review “Brazil”, further Chinese demand for soya and iron ore, but liberalization would promote greater competi- exports of manufactures also recovered, led by tion and efficiency and help ensure sustainable cars. Between 2002 and 2004 the main growth. 8 Brazil would gain by addressing re- industrial items exported by Brazil were civil maining economic distortions and barriers to aircraft, vehicles and parts, steel, chemicals, market access. The tariff continues to be Brazil’s machinery, electric equipment, paper, pulp, and main trade policy instrument. The average ap- footwear. As for commodities, soybeans, ores, plied MFN tariff decreased from 13.7 percent in oil, meat, coffee, sugar and tobacco maintained 2000 to 10.4 percent in 2004. a leading share. Fruits, maize and cotton have raised their share in the total exported. In parallel to the growth in export volumes, Bra- Lula’s fiscal restraint has not only produced a zil has diversified its trading partners. While Bra- healthy current account surplus, but also en- zilian exports between 2000 and 2003 to its couraged investment to flow back into the coun- traditional trading partners the USA and Europe try. In the second quarter of 2004, Brazil’s econ- rose by 26.4 percent and 24.9 percent respecti- omy grew by 5.7 percent compared with the vely, regions with a hitherto small share in Bra- same period last year – the third successive quar- zil’s trade were significantly higher: exports to ter of strong growth.5 This provides Brazil with Africa increased by 112.3 percent, the Middle more possibilities to pay its external debt, which East, 109.7 percent, Eastern Europe 108.6 per- in turn would lead to a higher credit rating, cent and Asia 84.6 percent.9 While in 2003 Brazil lower interest rates, faster economic growth and exported to Mercosur and the US mostly manu- eventually more jobs and higher wages. factured goods, the European Union and Asia

An essential part of Brazil’s economic policy stra- 6 In the long run 46 Million Brazilians are to be re- tegy is to fight hunger and poverty in the lieved from hunger. Social programmes with a view country itself and worldwide. Lula’s programme to attain reduction of poverty and social inequali- “Fome Zero” (Zero Hunger) aimed at eradicating ties and a reallocation of public expenditures have been put into practice. 7 See Tachinardi, Maria Helena: Brazilian Food Needs 4 That helped to turn a current account deficit, Only a Chance, Globalization Insights 2005, FES which had peaked at $ 33 billion in 1998, into a Berlin. surplus of $ 4 billion in 2003. 8 See Trade Policy Review “Brazil”, 5 See “To Lula’s credit”, in: The Economist, Septem- http://www.wto.org/english/tratop_e/tpr_e/- ber 2nd 2004. For 2005, an economic growth bet- tp239_e.htm from December 2004. ween 3.5 percent and 4 percent is being projected 9 See WTO-Trade Policy Review, Government Report by Bloomsberg. by Brazil, November 2004.

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absorbed mainly primary products. The expansi- efforts are undertaken to achieve a deeper re- on of Brazil’s foreign trade has helped the gional integration – especially in the fields of country to better integrate into the global eco- infrastructure, transport, energy and telecom- nomy, although Brazil still accounts for only 1 munication. More integration – so the Brazilian percent of world trade. Therefore better market strategy - should then result in enhanced power access, especially for agricultural products, is in the negotiations with the European Union and Brazil’s priority. the United States. But Mercosur is accompanied by setbacks and many difficulties. It is still an Brazil looking South “imperfect customs union”, no real free trade zone and it has no common market. The Deeper integration in South America? “Common” External Tariff has 800 exceptions In South America, the Brazilian president Lula da and exporters to Mercosur often pay double- Silva explicitly wants to assume and exercise poli- tariffs: once on entry into Mercosur and again at tical leadership and strengthen Mercosur. This the border with the destination country. regional integration initiative, launched in the In 2004, relations between Brazil and Argentina early nineties by Brazil, Argentina, Uruguay and worsened because Argentina protected its Paraguay, is perceived as the platform from domestic production from some Brazilian which regional leadership must be further built 10 imports through special safeguard mechanisms. and exercised. Mercosur has preferential trade 11 Brazil itself provides cheap finance to its own agreements with its associate members Chile, exporters and has a system of trade and Bolivia, Peru, Ecuador, Columbia and 12 investment incentives, a practise that adversely Venezuela. In October 2004, Mercosur has affects Argentine industry.14 Most probably the signed an agreement with the Andean 13 solution to this conflict will be the introduction Community of Nations (CAN) , which has the of quotas and limits for imports of “sensitive” potential to become the world’s fifth largest products. The problems with Argentina have trade bloc. Furthermore, in July 2002, a partial aroused a lot of criticism in Brazil’s business scope agreement providing for free trade in the community calling Mercosur a “suitcase without automotive sector was signed between a handle” – because a suitcase that has no Mercosur and , which also announced its handle is obviously very difficult to carry intention to apply for becoming a Mercosur around.15 associate member. It seems that Brazil’s relations with Chile are developing particularly well. At Apart from Mercosur, Lula tries to strengthen its the end of August 2004, Lula signed a number own sub-continent in an initiative which aims at of agreements in Santiago de Chile increasing building a new political union, the “South Ame- Chile’s access to the Brazilian agricultural and rican Community of Nations”. On 08 December agro-industrial market. 2004 twelve Latin American countries establis- hed this union in Cuzco, Peru. This Community Apart from those new trade deals, Brazil’s inten- has ambitious aims: it wants to follow the Euro- tions to push forward and strengthen Mercosur pean Union and its process of establishing a sin- became obvious through financing projects of gle market and currency along with a common the Banco Nacional de Desenvolvimento Eco- parliament. A first concrete signal towards more nômico e Social (BNDES). Furthermore, Brazil integration is the project for the 1200 km long tries to achieve more convergence regarding highway “Transoceánica” linking Brazil to the Mercosur’s Common External Tariff (CET). These pacific through Peru. But not all Latin American governments seem to give the same importance 10 See Costa Vaz, Alcides: Brazilian Foreign Policy to the Community as Brazil does: three of the under Lula: Change or Continuity?, Friedrich Ebert four Mercosur presidents did not come to Cuzco Foundation Briefing Paper, April 2004. 11 Since June 2001 Mercosur member countries are no longer allowed to sign individually trade prefer- ence agreements with third parties, according to a 14 Brazil protects its beverages, transport equipment, Common Market Council Decision. clothing and footwear against import competition 12 On 17 December 2004 at the “Summit of Ouro and specific financing support programmes have Preto”, Ecuador, Columbia and Venezuela became benefited the automobile, shipbuilding and aircraft new associate members with a similar status as the industries. three already existing. 15 See Jank, Marcos: “‘Suitcase Without A Handle’: 13 The CAN is made up of Bolivia, Colombia, Ecuador, Brazil’s Expression, Mercosur’s Fate?”, in: InfoBrazil, Peru and Venezuela. 14 October 2004.

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and not everyone is in favour of Brazil’s self- tember 2003. A Trilateral Business Council will imposed leading role. create the framework under which business people from the three countries can get to-

gether and use synergies with the existing Prefe- rential Trade Agreements that Brazil has initiated with India. Economic relations to Asia and Africa: a new geography of world trade? In December 2000, Mercosur and South Africa had already signed a framework agreement to China – As there is hard competition between negotiate a free-trade agreement. In 2003, the the newly industrializing countries of the South, 16 other South African Customs Union members China is a strong competitor for Brazil’s joined the negotiations. manufacturers. On the other hand it is a promising market for its commodities. Trade The two previous chapters have shown Brazil’s between Brazil and China has been growing recent initiatives with countries of the South - in significantly, making China Brazil’s third biggest Latin America, Asia and Africa. South-South trading partner after the EU and the US, trade has been increasing well above world especially for exports as soya beans, iron ore and trade average growth and is becoming a steel. In May 2004 Lula paid his first presidential significant source of dynamism for the global visit to China. The meeting of the two giants economy. There are some initial results in South- aimed at searching for a “new geography of South trade with global trade flows reorienting world trade”. During President Hu Jintao’s themselves as economies November 2004 visit to South America, China substitute imports from rich industrialised signed a number of deals with Brazil increasing nations with cheaper products from other their already rapidly growing bilateral trade. The developing countries. But the increasing number Brazilian-Chinese relationship could mark an of South-South agreements does not always important shift in world trade, as emerging necessarily mean an increase in trade flows. market economies substitute imports from rich Therefore it is very important to examine the industrialized nations with cheaper products trade creating capacity of each new agreement. from other developing countries. In the case of Brazil’s president Lula da Silva emphasized that Brazil and China this procedure is being North-South trade should not be diminished by simplified by their complementary economies. these initiatives - trade with Europe and the USA China’s appetite for natural resources and farm absorbs almost half of Brazil’s exports - but that products seems insatiable and Brazil can offer new alternatives are necessary to reduce both. But there are fears in Brazil that a closer dependencies and to forge an alliance of relationship will simply help the Chinese to developing countries which would help them to compete in the world market in manufactures, increase their bargaining power in international especially in textiles and the car sector, without and regional organisations. bearing the same advantages for the South Critics of South-South cooperation, amongst American country. them many Brazilian business men, accuse the India and South Africa - Because of Brazil’s Brazilian government of pursuing deals with o- leading role within Mercosur, it could play a key ther developing countries at the expense of tra- role as a link between fast growing India and de with the European Union and the United Sta- Latin America. India and Mercosur have already tes. Celso Lafer, professor and ex-Minister for signed a framework trade agreement in January Brazil’s foreign relations, made some critical re- 2004, the first trade deal between Mercosur and marks on the present government and its “po- an Asian country, which later could lead to a lítica-espetáculo”. 17 He criticizes especially the free trade agreement. This is especially impor- creation of an image of radical new beginning in tant for Brazil as India is one of the world’s most foreign policy. In his book A Identidade Interna- protected economies. For Brazil there is the cional do Brasil e a Política Externa Brasileira he chance to export its huge abundance of primary attacks the government’s rhetoric and the use of products that India needs. the external politics for the internal ideological Apparently India, Brazil (through Mercosur) and 16 South Africa are confident in leading South- SACU members are Botswana, Lesotho, Namibia, South Africa and Swaziland. South cooperation. The three have formed the 17 See Kuntz, Rolf: “O ex-chanceler e a diplomacia”, India-Brazil-South Africa Forum (IBSA) since Sep- in: O Estado de São Paulo of 05 December 2004.

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satisfaction. 18 Lafer argues that many positive to imports of sugar from the ACP countries and achievements credited to Lula’s government had India (1.6 million tons). Brazil is the largest sugar already been priorities under ex-president Fer- producer in the world accounting for 16.6 per- nando Henrique Cardoso as, for example, the cent of world production in 2002. The subsidi- main concern for the South American integra- sed production of sugar by the EU depresses the tion, for multilateralism and even the emphasis world market price, which has severe conse- on China, India, Russia, South Africa and on Por- quences for Brazil. Foreign exchange losses for tuguese speaking countries as Angola and Mo- Brazil as a result of EU sugar subsidies are esti- zambique. Lafer further criticizes the current mated to be around 500 million US$ per year. In government’s ignorance of the costs for Brazil both cases – cotton and sugar – there is still no from missed export opportunities and markets.19 final ruling. Should the final decision be in fa- vour of Brazil, which is a very probable outcome,

Brazil might soon continue using the dispute Brazil’s engagement in the WTO settlement mechanism - this time against US’ Brazil is one of the WTO’s most active subsidies for soybeans. participants and its actions are geared towards A very important forum for Brazil is the G-20, a building consensus and preserving the integrity group which was established in August 2003 in of the mandate agreed to in Doha, while at the th the final phase of the preparations of the 5 same time emphasizing and promoting the 21 WTO Cancún Ministerial. Led by Brazil, China, shared interests of developing countries. As the India and South Africa, the G-20 became a po- third largest exporter of agricultural products 20 werful voice and a distinctive and new element worldwide, Brazil has played a leading role in in the scenario of trade negotiations. Its objecti- the agriculture negotiations, since the sector ve was, and still is, to reach an outcome in the remains subject to wide trade distortions and agricultural negotiations which would reflect the protectionism that hinder Brazilian trade. level of ambition of the Doha mandate and the The country supports the strengthening of Spe- interests of developing countries. The G-20 cial and Differential Treatment (S&DT) for deve- addresses export subsidies, trade-distorting do- loping countries and considers it to be an essen- mestic support and market access for developing tial part of an agreement on agriculture in parti- countries’ products. It takes its legitimacy out of cular to cover food security and vital concerns of the importance in the agricultural production rural populations. Brazil is also an active user of and trade, as it represents almost 60 percent of the WTO dispute settlement mechanism. This the world population, 70 percent of world’s ru- mechanism has become an essential instrument ral population and 26 percent of world’s agricul- for Brazil to address worldwide market distorti- tural exports. Furthermore, the G-20 has the ons, which affect Brazil’s exports and is one im- capacity to translate a vast range of developing portant reason for Brazil to further strengthen countries’ interests into concrete and consistent the WTO. The country has recently reached a proposals. It has developed skills in coordinating victory in a dispute over American cotton subsi- its members and interacting with other grou- dies, which were higher than the agreement pings in the WTO.22 However, due to the great allowed and thus harmed Brazilian exporters. In differences of the leading states Brazil, China, 2003, Brazil together with Australia and Thai- India and South Africa, common positions are land, filed a complaint at the WTO against the not easily reached. India, for example, is more European Union’s subsidised sugar production. defensive than Brazil concerning “Agriculture” The WTO Panel ruled recently in favour of the and “Market Access” because it wants to pro- complainants, concluding that the EU contrave- tect is own internal market and is not ready to ned its WTO commitments by subsidising its ex- cessive sugar re-exports of an amount equivalent 21 Today the G-20 is integrated by 19 members: 5 from Africa (Egypt, Nigeria, South Africa, Tanzania and Zimbabwe), 6 from Asia (China, India, Indone- 18 See Lafer, Celso: A Identidade Internacional do sia, Pakistan, Philippines and Thailand) and 8 from Brasil e a Política Externa Brasileira, São Paulo: Latin America (Argentina, Bolivia, Brazil, Chile, Cu- Editora Perspectiva 2004. ba, Mexico, Paraguay and Venezuela). Colombia, 19 The FTAA and an EU-Mercosur trade deal could Costa Rica Ecuador, El Salvador, Guatemala and allow Brazil to increase its exports by 20 percent a Peru had left the group because of incompatible year. negotiations with the USA in the frame of the 20 Brazil is the leading exporter of soybeans, coffee, FTAA-negotiations. orange juice, sugar, beef and chicken. 22 See http://www.g-20.mre.gov.br/

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make major concessions in these regards. While tions, especially in “Agriculture”, as said by Am- South Africa has similar offensive positions like bassador Luiz Felipe de Seixas Corrêa.24 Brazil, China differs from those two. China is not as in favour of liberalization as Brazil and South Africa and as a recently acceded member The Global System of Trade Preferences country of the WTO it wants to avoid further Another element in South-South cooperation is obligations and is thus less involved in the G-20 the Global System of Trade Preferences among discussions. Developing Countries (GSTP), whose third round Brazil has a large, modern and competitive agri- has been launched at the UNCTAD XI meeting in cultural sector, but at the same time there are São Paulo in June 2004.25 The GSTP is a multila- widespread areas of poverty and millions of teral trading system which was established in small farmers living at a subsistence level. There- 1988 as a framework for the exchange of trade fore, Brazil has proposed a free-trade agreement preferences among developing countries in or- among the G-20 developing countries and will der to promote intra-developing-country trade. continue to press for concessions by rich count- The basic idea was that member countries make ries at global trade negotiations.23 However, the- concessions - such as the reduction of trade bar- re are limitations: Brazil cannot continue fighting riers - that they do not have to extend to deve- against Europe if it becomes its partner through loped countries. Negotiations are dealing only an Association Agreement between Mercosur with non-agricultural goods. It is important to and the European Union. note that UNCTAD, and not the WTO, services the Committee of Participants and provides technical and administrative assistance in setting The July Package and the Framework Agreement up the GSTP. There are currently 44 participants of 01 August 2004 would not have been pos- and approximately 900 products are covered by sible without the active participation of Brazil in the tariff schedules of the participants. All mem- the G-20, which contributed greatly to the suc- bers of the Group-77 are invited to join inclu- cess in harmonizing conflicting interests in agri- ding China, which is not yet a member of the culture. On farm trade, the giants USA, EU, Bra- GSTP. Trade amongst GSTP members between zil, Australia and India are inching towards 1960 and 2003 increased from 24 percent to compromise. New guidelines were established spectacular 43 percent of the world’s total tra- which might lead to good solutions although the 26 de. original Doha mandate was more ambitious than the July package. Negotiators agreed to elimina- te export subsidies, but they failed to set a date Brazil has taken a leading role within the GSTP certain. They also committed themselves to sub- as an answer to developed countries’ demands stantial reductions in trade-distorting domestic that the more advanced developing countries subsidies, but there are no time frames either are to take their responsibilities for a fairer inter- and no definition of “substantial”. Tariffs and national trading system as well helping less and other impediments to imports are to be reduced least developed countries to improve their trade as well, but with the right to declare products as performances. Industrialized countries demand “sensitive” and thereby protect them. The that trade between southern countries should be Agreement is important in the sense that it gives the Doha Round-negotiations new drive. It has 24 At the conference “Multilateralism and its Options shown the member countries’ willingness to – A Multi-Stakeholder Approach”, 26 November commit and engage in the forthcoming negotia- 2004 in Lausanne (co-organized by the Friedrich Ebert Stiftung Geneva Office and the IMD Lausanne, Evian Group). 25 The second round of the GSTP was concluded in 1998, but the first and second round did not fulfil their expectations. In 2004, two negotiating 23 The Group – despite its prophesized early end of groups, “market access” and “trade rules”, were some industrialized countries – still exists: it held established to develop negotiating plans in their two Ministerial Meetings and meets frequently at respective areas. The completion of the third round the level of Heads of Delegation in Geneva. Within is foreseen for November 2006. the G-20 a group of five countries, Argentina, Bra- 26 Cp.: Khor, Martin: “South Leaders launch GSTP zil, China, India and South Africa, meets at techni- new round in optimistic mood”, TWN Report São cal level to discuss the WTO-agriculture negotiati- Paulo, 17 June 2004, in: South North Development ons. Monitor, 18 June 2004.

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more evenly distributed: today only ten develo- the current joint presidency of the final negotia- ping countries account for 70 percent of south- tions to conclude the FTAA-negotiations taken south trade between themselves. by Brazil and the United States has very asym- metrical and polarized positions. Therefore, the For Brazil, the GSTP is an opportunity to promo- United States have offered various countries, te new markets. Yet there are still many amongst them many Latin American countries, constraints on a boost in trade among develo- bilateral trade deals. With this strategy the USA ping countries: apart from high tariffs, practical want to put pressure on Brazil. However, for constraints such as institutional problems, pro- Brazil there are very practical reasons to prefer cedural issues (no transparency of rules and pro- multilateral negotiations to those in the frame of cedures), long customs clearance and a often the FTAA: in the multilateral context the same poor financial and physical infrastructure are results can be achieved without bearing costs considerable. that regional agreements like the FTAA would imply because of higher negotiation power on Brazil looking North the side of the United States. The other reason FTAA – negotiations: a lighter version? why Brazil has an interest in “light” FTAA nego- tiations is because standing up to the United In 1994 at the Summit of the Americas in Miami States’ vision of pan-American free trade “com- an effort began to unite the economies of the pensates” for Lula’s own tight economic policies Americas into a single free trade area. The Heads and therefore can be seen as a populist reaction of State and Government of the 34 to domestic developments in Brazil. For now, the in the region agreed to construct a Free Trade “FTAA light” is a convenient solution for both, Area of the Americas (FTAA) reaching from A- 27 Brazil and the United States, because none of laska to Cape Horn . Initially Brazil took a favou- them is obliged to make major concessions in rable position towards the FTAA-negotiations their respective sensitive fields (Brazil: “Intellec- because it expected substantial gains through tual Property” and “Services” and USA: “Agri- access to the US-market. But now negotiations culture”). Although the negotiations are stalling, are practically stalling. Apart from the fact that the parties have left open the option to take up the FTAA-negotiations are not on the US’ top talks again at a later point. The deadline for the priority list at the moment, the US government creation of the FTAA was January 2005, a ti- has made some demanding claims on Brazil. The meframe which could not be met. Now the par- USA wants to secure strict intellectual property ties are trying to reach an accord before the next rights (Trips+) and full liberalization in the service Summit of the Americas in November 2005 in sector. Brazil does not want to accept these de- Argentina. This will still be a difficult task kee- mands and promotes a “FTAA-light”, a flexible ping in mind that Lula will fight for his re- 34-country agreement of two speeds allowing election in 2006 and therefore might not be the members to assume different levels of com- ready for bigger compromises. mitment in the agreement. The members will agree on a minimum consensus of commercial opening and those who want to go beyond this Brazil and the European Union: towards an EU- can sit voluntarily at a parallel table. There are Mercosur Association Agreement now few obligations to open up areas such as government procurement, services, investment Brazil’s relations to the European Union, its main or tougher rules on intellectual property rights, trading partner, are carried out through Merco- the issues the US wants to see included in the sur.29 Mercosur has been trying to reach the so- negotiations and not waiting to be dealt in the called Bi-regional Association Agreement EU- WTO. Brazil, on the other hand, cares most a- Mercosur for five years since the negotiations bout farm subsidies, market access and anti- were launched officially in June 2000. This dumping measures, issues the US wants to be agreement is a comprehensive agreement en- excluded from the FTAA negotiations and be compassing political dialogue and cooperation dealt with by the WTO talks.28 This means that aspects apart from commercial issues. For Mer- cosur, a trade deal with the EU would be very

27 See http://www.ftaa-alca.org. Spanish: ALCA – el ALCA No. 20, Friedrich Ebert Foundation Chile, Área de Libre Comercio de las Américas. July 2004. 28 See Vigevani, Tulio / Passini Mariano, Marcelo: El 29 For the EU, Brazil only represents its 11th trading ALCA Light y el Gobierno Brasilero, Estudios sobre partner worldwide.

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valuable because of access to its highly protec- It is difficult to foresee how the negotiations will ted agricultural market. develop and when they will be concluded. There are still very high technical difficulties. Next steps In October 2004, the European Union and the might become clearer at the upcoming ministe- four-nation South American customs bloc failed rial conference between the EU and Mercosur in to reach a deal to create the world’s biggest April 2005. free-trade area embracing nearly 680m European and Latin American consumers, and 30 4 Conclusions 11.6 trillion US$ of GDP. A deal would have given a huge boost to trade between the EU and Amongst North-South, South-South or both, the Mercosur from the present 43 billion US$ a answer has to be: both. Having concentrated on year.31 EU and Mercosur are planning to set up South-South relations in 2003 and 2004, the ministerial talks in March 2005 to proceed with Brazilian president Luiz Inácio Lula da Silva might the negotiations. At the last negotiations have to look further North in 2005 as there are meeting, Mercosur had presented a more unfinished negotiations waiting for results, both restricted and sophisticated offer to the EU than within the USA as with the European Union. in other negotiation rounds hoping the EU The Brazilian administration following Fernando would accept those conditions. In the case the Henrique Cardoso has maintained a position in EU did not (as indeed occurred), Mercosur would further opening international commerce and a obtain a delay during which it could realize its generally positive attitude towards the other priorities, for example deepening industrialized world, but at the same time Lula integration in South America. Mercosur’s has been critical towards the developed North demands for greater access to Europe’s beef, and is self-confident in defending Brazil’s poultry and services markets have continued to interests and those of the developing world. This be stumbling blocks for the negotiations. At the has contributed to the difficulties in the same time the Europeans had offered less negotiation processes with the EU and the US. liberalisation of agricultural trade than Mercosur While relations both with the United States and had hoped for. Furthermore, the EU’s requests the European Union are not very dynamic at the for expanded access for industrial goods, moment, Brazil is not merely “waiting” for the services and investment, as well as greater North to move, but on the contrary has been opportunities for European firms to compete for very actively engaged with countries of the public procurement contacts in Mercosur South. In South America, Brazil is seeking a countries have been an obstacle for the leading role. The country has a strong interest in negotiations. The EU pressed for its goods to deepening South American integration through circulate freely within Mercosur. This would have two platforms: firstly Mercosur and secondly the given the bloc an impulse to finally free trade newly created South American Community of completely among its own members and by this Nations. Brazil’s priorities have shifted from push Mercosur forward making its own inter-regional interests (Mercosur – EU, Mercosur members fulfil their commitments to integration. – USA) to intra-regional priorities within South Reaching an agreement with the EU could America. Those options do not exclude each bolster Mercosur’s bargaining position with the other and Brazil’s ideal seems to be to negotiate US in the negotiations for a Free Trade Area of with the EU and the USA with an expanded and the Americas. There are important political rea- deepened Mercosur bloc. sons for Brazil to conclude the negotiations Mercosur is - despite its problems - a trade crea- showing hereby that Brazil is “closer” to the EU ting bloc and only to a small extent trade diver- than to the US and the FTAA. Mercosur’s trade 32 ting. It facilitates dealing with region-specific with the US is 20 percent smaller than with the issues – such as transit, water, energy, migration, EU, but it is growing faster. When the US takes movement of labour, customs and standards – up the FTAA talks again, pressure on the EU and that are difficult to broach at the global level. fears to lose commerce to the US will rise again. Mercosur is therefore seen by Brazil as a useful complement to the multilateral system. But in 30 See “Still prickly – Mercosur and the EU”, in: The order to be successful, Brazil should not only Economist, 29 April 2004. 31 See “EU-Mercosur: EU presents its completed offer 32 Richard Newfarmer at the Global Economic Pros- to Mercosur in on-going trade talks”, Brussels, pects 2005 Press Briefing in Washington D.C. on Press release from 29 September 2004. 16 November 2004.

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include new members as recently has happened of the non-financial consolidated public sector with Columbia, Ecuador and Venezuela, the new has not been sufficient to cover the increasing associate members of Mercosur, but build up debt interest payments. The public debt to GDP further pressure on establishing a new paradigm ratio increased to 56 percent in mid 2004, from of regional development based on coherent po- some 49 percent in 2000, which has constrained licies agreed by the involved countries. A regio- policy choices.34 Lula’s foreign economic policy is nal approach could help build policies that pro- therefore a reaction to the country’s growing mote growth and regional development on a external vulnerability by trying to diversify trade more sustainable basis. and secure high export revenues. Besides this regional initiative since the early 90s, There is secondly the aim of strengthening multi- there can be seen a new and very recent phe- lateralism by forging new international alliances nomenon: Lula has been carving out a role for and coalitions to support development and Brazil as spokesman for poor countries. Brazil is developing countries. Lula wants to move trying to unite countries of the South to give forward the Doha Development Agenda while South-South trade and cooperation new impul- trying not to make too many concessions to the ses. This grouping together of like-minded North. Tireless he has tried to show the countries aims at enhancing negotiating power industrialized countries the original aim of the of the South towards the North and at pushing Doha Round, which was initiated to respond to forward trade amongst developing countries. the needs of developing countries. The Brazilian government has tried to strengthen A third important objective of Brazilian Foreign relations with Asian and a few African count- 33 Economic Policy is to achieve greater negotiation ries , whose concerns and perspectives regar- weight and more balanced relations with the ding the present international scenario are seen great powers EU and USA. as convergent. For Lula there are three different playing fields for pushing forward South-South South-South cooperation cannot be a substitute cooperation: for freer trade with rich countries and is unlikely to pay off very soon. There are still many obstac- 1. multilaterally within the G-20 principally to les to overcome as the lack of interest within the gain market access for Brazilian and other southern countries to trade amongst themselves, developing countries’ agricultural products; preferring instead to build economic bridges 2. regionally through Mercosur to deepen in- with lucrative markets like the United States or tegration in South America and to enhance the European Community. Weak implementati- the region’s negotiating power and on often afflicts South-South agreements as well as infrastructural problems and hard competition 3. within the GSTP trying to deepen an existing amongst the developing countries. However, for network and hereby enhance trade in non- more advanced developing countries like Brazil, agricultural goods amongst its members South-South trade can be a supplement because without having to extend those concessions those countries find more complementarities in to developed countries. trade with other developing countries. If South- South-South cooperation from the Brazilian per- South cooperation is to include a gesture of soli- spective has various aims: firstly, there are trade darity and to help least developed countries, interests to achieve a diversification of Brazil’s bigger developing countries like Brazil have to export markets. Lula is promoting third world solidarity because developing country markets 34 A danger is banks and foreign creditors siphoning are increasingly important to an export boom off funds as happened in the months before the that helps recover the Brazilian economy. Lula Brazilian election in 2002 as foreign investors needs to fight large income inequalities in his feared a social president Lula. The real crashed own country by increasing Brazil’s GDP. Therefo- down and Brazil got at the fringe of a crisis. A re, he needs more gains from foreign trade. At mount in US-interests, falling prices for raw mate- the same time, he needs to pay Brazil’s substan- rials and signs that Brazil could leave its careful tial debts. Although fiscal targets are set and the spending policies and 2002 could be repeated. O- ther problems are high costs of credits, inefficien- economy grows, in 2003 and 2004 the surplus cies on the bureaucratic level, corruption, u- nemployment and a poor infrastructure, which hinder the country to fulfil its potentials. See Hen- 33 Trade negotiations with Morocco and Egypt are to kel, Christiane: “Träum weiter, Brasilien”, in: Die start early this year. Zeit No. 31, June 2004.

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take their responsibilities and make their contri- Foundation Briefing Paper, April 2004, bution by opening their markets to poorer http://www.fes.org.gt/documentos/Foreignpol- countries. It will be interesting to observe if Brazil.PDF concrete preferential measures in favour of LDCs, FTAA – ALCA: http://www.ftaa-alca.org/ and as foreseen in the GSTP, will be taken. www.fes-alca.cl Lula has raised very high expectations especially “Global Economic Prospects – Overview and in the poor part of the Brazilian population and Global Outlook 2005”, edited by The Internatio- is in a difficult position in a very heterogeneous nal Bank for Reconstruction and Development / country with large income inequalities. He has The World Bank, http://www.worldbank.org/ made many promises he now needs to fulfil if he prospects/GEP2005 wants to be re-elected in 2006. In his ardent intent to promote the old idea, fashionable in Group “G-20”: http://www.g-20.mre.gov.br the Non-Aligned Movement in the 1970s, that Lafer, Celso: A Identidade Internacional do Brasil poor countries can stand up to rich ones and e a Política Externa Brasileira, São Paulo: Editora achieve development by co-operating with each Perspectiva 2004. other, Lula hopefully does not achieve the contrary of what he intended: less possibilities to Relations EU-Mercosur: http://europa.eu.int/ move international trade forward because of comm/external_relations/mercosur/intro/index.ht hardened fronts, deeper conflicts and hereby m blocked negotiations. It will be extremely impor- “To Lula’s credit”, in: The Economist, 2 Septem- tant to maintain a balance at the different nego- ber 2004, tiation levels. http://www.economist.com/displayStory.cfm?sto About the author: ry_id=3151283. Isabelle Maag is an expert on Latin American Trade Policy Review (TPR) Brazil: issues and worked for the Friedrich-Ebert- http://www.wto.org/english/tratop_e/tpr_e/tp23 Stiftungs office in Geneva. 9_e.htm Vigevani, Tulio / Passini Mariano, Marcelo: El ALCA Light y el Gobierno Brasilero, Estudios sobre el ALCA No. 20, Friedrich Ebert Foundati- 5 References (Selection): on Chile, July 2004, http://www.fes- Bridges Weekly Trade News Digest, Vol. 8, 2004 alca.cl/archivos/estudioalca20.pdf and Vol. 9, 2005, several numbers.

Costa Vaz, Alcides: Brazilian Foreign Policy under Lula: Change or Continuity?, Friedrich Ebert

Brazil’s Foreign Economic Policy FES Briefing Paper March 2005 Page 13

6 Appendix

Exports Imports Jan – Nov 2003 Jan – Nov 2004 Jan – Nov 2003 Jan – Nov 2004 in million US$ in million US$ in million US$ in million US$ EFTA states 542 636 1120 1237 Africa 2587 3816 3083 5526 ALADI* 11583 17753 7500 9096 Mercosur 5075 8072 5183 5800 Asia 10772 13375 8251 11239 China 4253 5075 1950 3378 Canada 893 1107 654 789 USA 15399 18453 8827 10506 European Union 16464 21414 11635 14380 Other 8096 10726 3221 4307 Total 66336 87280 44291 57080

* Argentina, Bolivia, Brasil, Chile, Colombia, Cuba, Ecuador, México, Paraguay, Perú, Uruguay and Venezuela Source: Boletim do Banco Central do Brasil, http://www.bcb.gov.br/?BOLETIMEST

Brazilian exports Jan-Nov 2004 Brazilian imports Jan-Nov 2004

Others, 14.4% Africa, 4.4% Others, 11.1% Africa, 9.7% ALADI, 20.3% European ALADI, 15.9% Union, 25.2% European Union, 24.5% Asia, 15.3% Asia, 19.7% USA, 21.1% USA, 18.4%

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