Brazil’s Foreign Economic Policy: South – South, North – South or both? ISABELLE MAAG Brazil’s Foreign Economic Policy FES Briefing Paper March 2005 Page 2 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 China, of the argument, the question of exclusion is India, Brazil and South Africa, 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 United States 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