Brazilian Trade Policy and the United States
CRS Report for Congress
Brazilian Trade Policy and the United States
February 3, 2006
J. F. Hornbeck
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
Brazilian Trade Policy and the United States
Summary
As the largest and one of the most influential countries in Latin America, Brazil
has emerged as a leading voice for developing countries in setting regional and
multilateral trade agendas. The United States and Brazil have cultivated a
constructive relationship in pursuit of their respective efforts to promote trade
liberalization, including attempting to broker a compromise with the European Union
in the World Trade Organization (WTO) Doha Round and forming bilateral working
groups on trade (and other) issues. Still, they approach trade policy quite differently,
are at odds over how to proceed regionally with the Free Trade Area of the Americas
(FTAA), and share concerns over specific trade policies and practices.
Brazil’s trade strategy can be explained only in part by economic incentives. Its
“trade preferences” also reflect deeply embedded macroeconomic, industrial, and
foreign policies. Whereas U.S. trade strategy emphasizes the negotiation of
comprehensive trade agreements on multiple fronts, Brazil is focused primarily on
market access issues as they pertain to its economic dominance in South America.
Brazil exercises this priority in all trade arenas, such as pursuing changes to
agricultural policies in the WTO, expanding the Southern Common Market
(Mercosul) in South America, and resisting the FTAA for lack of a balance
conducive to Brazilian interests.
Brazil has a modern, diversified economy in which services account for 53% of
GDP, followed by industry and manufacturing at 37%, and agriculture at 9%.
Agribusiness (commodity and processed goods) account for some 30% of GDP,
explaining Brazil’s emphasis on agricultural policies in trade negotiations. Brazil is
the world’s largest producer of sugar cane, oranges, and coffee, and the second
largest of soybean, beef, poultry, and corn. It is also a major producer of steel,
aircraft, automobiles, and auto parts, yet surprisingly, a relatively small trader by
world standards. The United States is Brazil’s largest single-country trading partner.
Brazil is critical of U.S. trade policies such as the Byrd Amendment (repealed,
but program in effect until October 1, 2007), which directs duties from trade remedy
cases to affected industries, the administration of trade remedy rules, and what it
considers to be discriminatory treatment in the U.S. expansion of free trade
agreements in Latin America. It also objects to product-specific barriers such as
tariff rate quotas on sugar, orange juice, ethanol, and tobacco; subsidies for cotton,
ethanol, and soybeans; and prolonged antidumping orders on steel and orange juice.
U.S. concerns focus on Brazil’s comparatively high tariff structure, especially on
industrial goods, Mercosul’s common external tariff program, and Brazil’s refusal
to address issues of critical importance to the United States such as services trade,
intellectual property rights, government procurement, and investment.
Despite these differences, both countries recognize the potential for important
gains to be had from mutually acceptable trade liberalization at all levels. As a
developing country with an opportunity for considerable growth in both exports and
imports, however, Brazil may have the most to gain from addressing both foreign
barriers to its trade, and unilaterally opening its economy further.
Contents
Brazilian Foreign Trade Strategy......................................3
Trade and Industrial Policy......................................4
Trade and Foreign Policy........................................5
Trade and Macroeconomic Issues.................................6
Brazilian Trade with the World.......................................8
Southern Common Market (Mercosul)............................10
Free Trade Area of the Americas (FTAA)..........................12
World Trade Organization (WTO)...............................14
U.S.-Brazil Trade Relations.........................................15
U.S.-Brazil Trade Trends.......................................16
U.S.-Brazil Foreign Investment..................................18
U.S.-Brazil Bilateral Trade Issues and Disputes.....................18
Tariffs Structures.........................................19
Brazilian Complaints Against the United States.................19
U.S. Complaints Against Brazil..............................21
Outlook ........................................................22
List of Figures
Figure 1. Map of Brazil.............................................2
Figure 2. Brazil’s Balance of Merchandise Trade, 1988-2004...............8
Figure 3. Brazil’s Direction of Trade, 2004.............................9
Figure 4. U.S.-Brazil Merchandise Trade, 1988-2004....................16
List of Tables
Table 1. U.S. Trade with Brazil, Mexico, and Latin America..............17
Table 2. U.S. and Brazil Average Tariff Rates..........................19
Appendix 1. Brazil: Top 15 Exports and Imports........................24
Appendix 2. U.S.-Brazil Merchandise Trade...........................25
Appendix 3. U.S.-Brazil Services Trade...............................26
Appendix 4. U.S.-Brazil Foreign Direct Investment......................27
Brazilian Trade Policy and the United States
As the largest and one of the most influential countries in Latin America (see
Figure 1), Brazil has emerged in recent years as a leading voice for developing
countries, particularly in setting regional and multilateral trade agendas. Brazil led
in the creation of the Southern Common Market (Mercado Común do Sul —
Mercosul), is a co-chair with the United States of the Free Trade Area of the
Americas (FTAA) negotiations, was a founding member of the Group of 20 (G-20)
coalition that represents developing country interests in the Doha Development
Round of the World Trade Organization (WTO) negotiations, and meets bilaterally
in working sessions with the United States on trade (and other) issues, in part because1
of its influence in all these groups.
Brazil is the 15th largest U.S. export market, but a distant second to Mexico as
the United States’ top trading partner in Latin America. For economies of their size,
Brazil and the United States actually trade rather little with each other. Trade and
investment between the two is growing, however, and the potential for deeper
economic relations was a prominent theme in the two meetings that Presidents
George W. Bush and Luiz Inácio Lula da Silva have held. During President Bush’s
visit to Brasilia in November 2005, the two presidents issued a joint communique
reinforcing the importance of: 1) building on the many bilateral working groups
already established; 2) increasing cooperation on trade matters at the WTO; and 3)
taking advantage of the potential to double bilateral trade by 2010.2
The United States and Brazil have purposely cultivated a constructive
relationship in pursuit of their respective efforts to promote trade liberalization. This
is important because as a developing country, Brazil’s trade priorities can vary from
those of the United States, and the two are often at odds over specific trade practices.
This has ranged from disagreements that have halted progress on the FTAA, to
ongoing trade disputes before the WTO. For the United States, this means that
maintaining a strong working relationship with Brazil is important for making
progress with its own trade agenda. To assist Congress in understanding Brazil’s
stance on regional and global trade matters, this report analyzes Brazil’s foreign trade
policy and how it affects its trade relations with the world and the United States. It
will be updated periodically.
1 Mercosul is the Portuguese variation of the more widely seen Spanish acronym Mercosur.
It includes Brazil, Argentina, Uruguay, and Paraguay, with six other South American
countries affiliated as associate members. The FTAA is a proposed free trade area that
would encompass 34 countries of the Western Hemisphere (all except Cuba).
2 Joint Statement on the Occasion of the Visit by President George W. Bush to Brazil.
November 5-6, 2005.
Figure 1. Map of Brazil
Brazilian Foreign Trade Strategy
David Ricardo postulated the rationale for free trade some 200 years ago when
he argued that countries could improve their national welfare if they exploited their
comparative advantage by exporting those goods at which they were relatively more
efficient at producing and importing the rest. Later arguments for trade pointed to
the benefits arising from intra-industry trade (and investment) in which specialized
production along with scale economies could lead to even more efficient exchange
and innovation-driven productivity increases. These foundational ideas, which
recognize the value of both imports and exports, remain valid today for explaining
why countries generally wish to pursue freer trade and why trade liberalization has
been at the center of the economic reform debate in much of Latin America.
In practice, however, few countries have opted unilaterally to throw open their
borders to unfettered free trade, and the call to maintain trade barriers is common
even if it is understood that they come with a cost to society as a whole. There are
many reasons for this. Perhaps most transparent is resistence by firms and workers
who stand to bear most of the adjustment costs of freer trade, even if national welfare
is ultimately enhanced through lower priced goods and services, a greater selection
of choices from imports, and overall efficiency gains that can lead to higher national
income. Less obvious is that countries adopt diverse trade policies based on
historically, socially, and politically determined “trade preferences” that cannot be
explained solely by a calculus of economic costs and benefits.
The “trade preference” framework helps explain Brazil’s trade strategy. It pegs
Brazil as a “regional leader” based on its leadership in pressing for South American
economic integration, its conditional support of multilateral negotiations, and its3
reticence to consummate separate trade deals with developed countries. Brazil’s
trade preferences in order of priority are: 1) expand and strengthen Mercosul, where
Brazil is the undisputed industrial hub and political leader; 2) advocate developing
country interests in the Doha Round, especially on agricultural issues, and; 3) resist
what it views as a welfare reducing, U.S.-designed FTAA, and to a lesser extent, also
a preferential trade arrangement with the European Union unless it serves as a4
counter influence to the FTAA.
Brazil and the United States approach trade liberalization from different
perspectives. U.S. trade strategy has been characterized as “competitive
3 The “trade preference” framework is developed in Aggarwal, Vinod K. and Ralph Espach.
Diverging Trade Strategies in Latin America: A Framework for Analysis. In: Aggarwal,
Vinod K., Ralph Espach, and Joseph S. Tulchin, eds. The Strategic Dynamics of Latin
American Trade. Woodrow Wilson Center Press. Washington, D.C. 2004. p. 4-5. By
comparison, Chile with its unilateral reduction in trade barriers and multiple trade
agreements would be a “multilateral trader,” and Argentina would be a “regional partner”
based on its supportive role for regional integration. See pp. 11-12.
4 Da Motta Veiga, Pedro. Regional and Transregional Dimensions of Brazilian Trade
Policy. In: Aggarwal, Vinod K., Ralph Espach, and Joseph S. Tulchin, eds. The Strategic
Dynamics of Latin American Trade. Woodrow Wilson Center Press. Washington, D.C.
liberalization,”5 where simultaneously negotiating comprehensive multilateral,
regional, and bilateral pacts allows gains to be achieved where parties can agree. It
is competitive in that gains at one level of negotiation (e.g. bilateral or regional) can
create new incentives or pressures to make breakthroughs at other levels (e.g.
regional or multilateral). It is comprehensive by its inclusion of issues that go
beyond market access such as services trade, intellectual property rights, government
procurement, and investment.
Brazil has a narrower and more cautious tack, restricted largely to market access
and dominance in regional trade, where it feels most ready to compete. The
perceived benefits of Brazil’s strategy include attaining greater bargaining power
through the Mercosul coalition, slowing the multilateral trade liberalization process
to allow more time for economic adjustment, and enhancing its national influence in
the world by protecting domestic economic (industrial) capacity. These “trade
preferences” are not randomly determined, but are deeply embedded in the country’s
industrial, foreign, and macroeconomic policies, discussed below.
Trade and Industrial Policy
The “regional leader” category captures well the influence Brazil’s economic
development strategy has had on its trade preferences and policy. Brazil adopted its
own version of the import substitution industrialization (ISI) model employed
throughout much of Latin America in the 20th century. To promote industrial
development, Brazil created, and protected from foreign competition, important
government sponsored enterprises that still operate today, although some are now
privatized. These include the National Steel Company (CSN) founded in 1942;
Petrobras, the national petroleum company, established in the 1950s; the National
Economic and Social Development Bank (BNDES), created in 1952; and Embraer,
a leading manufacturer of regional jets, incorporated in 1969.6 BNDES was at the
heart of this policy, providing financing for public infrastructure and strategic
industries. It continues today as a necessary major source of long-term business
financing given the unique structure of Brazil’s financial system.
Brazil’s industrial policy achieved notable results for decades, but with
predictable tradeoffs. The inward orientation of the ISI model shielded domestic
industry from global competition, diminishing market incentives to innovate and
become more efficient. Trade policy was essentially administered protectionism.7
5 Although this concept is widely associated with Robert Zoellick, first USTR in the George
W. Bush administration, it has an intellectual antecedent in: Bergsten, C. Fred. Globalizing
Free Trade. Foreign Affairs. May/June 1996. pp. 105-106.
6 Gordon, Lincoln. Brazil’s Second Chance: En Route toward the First World. Brookings
Institution Press, Washington, D.C. 2001. pp. 35 and 44.
7 This policy was overseen by the Carteira de Comércio Exterior do Banco do Brasil
(CACEX), created during the military dictatorship (1964-1985). Trade policy today is set
by the President with the Foreign Ministry as the lead agency. The Foreign Trade Board
(Câmara de Comércio Exterior — CAMEX), created in 1995, acts as an advisory agency for
all government departments. Cross-sectoral business interests are voiced by the Brazilian
(continued...)
The large state bureaucracy also contributed to inefficiency and the high cost of doing
business in Brazil. Although privatization efforts in the 1990s have improved the
competitive landscape in Brazil, the so-called Brazil cost or “Custo Brasil” endures,
which is one way of saying there are numerous microeconomic distortions introduced
by excessive taxation, high interest rates, cumbersome regulations, and corruption.8
The large untaxed informal economy combined with Brazil’s big government, for
example, mean that formal businesses pay up to 85% of the tax burden, more than
twice that of the United States.9 These issues directly diminish Brazilian productivity
and indirectly deter trade liberalization. Yet, continuing to protect this regulatory
regime and Brazil’s “national production structure” remains an important aspect of
the national trade strategy, a priority Brazil pursues unilaterally and through
Mercosul. 10
Trade and Foreign Policy
As with all countries, Brazil’s foreign policy shapes its trade preferences, but
compared to the United States it plays a more prominent role. Unlike the United
States where trade policy is constitutionally defined as the responsibility of Congress
and carried out in a separate cabinet-level agency (the United States Trade
Representative — USTR), in Brazil it is undertaken by the executive branch under
the purview of the Ministry of Foreign Relations. The most important aspects of
trade policy, therefore, are driven less by commercial interests and often are
subordinated to a larger foreign policy imperative, primarily, enhancing Brazil’s
influence in Latin America and the world. In the Western Hemisphere, this implies
taking on the United States. In the words of one Brazilian expert, “Brazil’s foreign
policy over the past four decades is characterized by competition with the United
States, and the objective of developing the nation’s industrial capacity as a key
condition for independent activities within the international system.”11
Economically, there are two sides to this policy: offensively, it seeks to integrate
South America; defensively, it seeks to deter encroaching U.S. economic influence
in the region. Brazil’s government has taken steps recently to realize this agenda, by
7 (...continued)
Business Coalition (Coalizao Empresarial Brasiliera — CEB), established in 1996. NGOs,
trade unions, and other independent groups are represented in coalition groups, such as the
Brazilian Network for the Integration of People (Rede Brasileira pela Integracao dos Povos
— REBRIP). Marconini, Mario. Trade Policy-Making Process in Brazil. Mimeo. March
8 Globally, Brazil ranks at the bottom for the number of regulations and time it takes to start
a new business, and is also known for its cumbersome labor force regulations. See The
World Bank. Doing Business in 2005: Removing Obstacles to Growth. Washington, D.C.
9 Lewis, William W. The Power of Productivity: Wealth, Poverty, and the Threat to Global
Stability. University of Chicago Press, Chicago, 2004. pp. 140-41.
10 Pedro Da Motta Veiga, Regional and Transregional Dimensions of Brazilian Trade
Policy, p. 183.
11 Ibid., p. 177.
establishing in 2004 the South America Community of Nations as a loosely
interwoven example of political and economic integration and by limiting progress
on the U.S. version of the FTAA. Although intentions may not be overtly
adversarial, these two policies do present a challenge to the U.S. trade agenda. By
extension, Brazil’s leadership in the region is played out at the WTO where it is an
unyielding force in pushing for reductions in agricultural barriers in the Doha Round.
The foreign policy aspect of trade policy may also be seen in the emphasis on
deepening developing country trade relations. In addition to negotiating for
developing country interests in multilateral and regional trade talks, Brazil has also
consummated an agreement with the Andean countries, India, and South Africa, and
deepened relations with Portuguese-speaking African countries, by concluding
various commitments on trade. Progress in the Doha Round, FTAA, and EU
negotiations has proven harder to achieve.12
Trade and Macroeconomic Issues
Macroeconomic challenges have and continue to constrain Brazil’s trade policy
options. Brazil, for example, is known for its historical accommodation to inflation,
having employed for decades a comprehensive system of wage, price, and interest
rate indexation as part of its macroeconomic management. Inflation ran at
“manageably” high rates for years and was fought, albeit unsuccessfully, with a
number of stabilization plans. By the 1970s, however, it eventually spiraled out of
control following the oil price shocks. This led Brazil to the 1980s debt crisis along
with much of Latin America.13 By the 1990s, the economy was defined by its
growing deficits and debt, failed efforts at stabilization, slow growth (averaging only
2.3% from 1980 to 2004), and reluctance to embrace reforms. An important factor
in Brazil’s sluggish economic performance was poor productivity growth due to
microeconomic policy distortions discussed above, macroeconomic problems, and
to some degree, also its closed trade policy.14
Brazilian trade policy also had to adjust to encroaching globalization in the
1990s, including multilateral efforts (the conclusion of the Uruguay Round), new
regional talks (the FTAA), and U.S. subregional initiatives (the North American Free
Trade Agreement — NAFTA). Brazil responded with some unilateral liberalization,
12 Mario Marconini, Trade Policy-Making in Brazil, p. 5
13 In the 1970s, Brazil was a major importer of oil, but the government delayed passing on
the full price increase to the public, financing the difference with debt. By 1982, this
subsidy proved unsustainable and when eliminated, the higher price doubled the annual
inflation rate to nearly 100%. Because of indexation, the oil price increase was passed on
to wages, which then showed up as more price inflation. Suddenly, it seemed, Brazil was
swamped by debt and spiraling hyperinflation, and so began the lost decade of the 1980s.
For a good discussion of the economic points, see Dornbusch, Rudiger. Brazil’s Incomplete
Stabilization and Reform. Brookings Papers on Economic Activity. William C. Brainard
and George L. Perry, editors. Washington, D.C. 1997. pp. 371-374.
14 Blyde, Juan S and Eduardo Fernnadez-Arias. Economic Growth in the Southern Cone.
Economic and Social Study Series. RE1-04-004. Inter-American Development Bank.
Washington, D.C. April 2004. pp. 1-3, 10, and Lewis, The Power of Productivity, p. 138.
the formation of Mercosul in 1991 with Argentina, Uruguay, and Paraguay to
consolidate its trade positions in South America, and the adoption of a government-
assisted export promotion policy to help address its large and growing external debt.
The average tariff in Brazil fell from 51% in 1988 to 14% in 1994, but the selective
preferences given under Mercosul belied the liberalization message as Brazil
continued to limit trade outside the regional pact, allowing it to manage carefully the
degree to which foreign competition would be accepted.15
Brazil’s trade policy shifted again in 1994 to accommodate the Real Plan, a
price stabilization policy imposed by then-Finance Minister (and later-President)
Fernando Henrique Cardoso. It was named for a new currency that was pegged to the
U.S. dollar to serve as an anchor to bring down hyperinflation. The plan actually
worked where others had not, but in pegging the real to the dollar, the differences in
inflation between the two countries caused a large real appreciation of the Brazilian
currency, as price levels between the two countries diverged. This resulted in a
sudden turn to trade deficits in 1995 (see Figure 2), an economic consequence that
ran counter to the political priority given to running trade surpluses. To offset the
exchange rate effect on the balance of payments, Brazil raised interest rates and16
redoubled its protectionist policies.
The macroeconomic story was further complicated by a major financial crisis
in 1998 that resulted in a currency devaluation and return to a floating exchange rate
in 1999, Argentina’s financial collapse in 2001, and a financial panic in 2002
exaggerated by the impending presidential election of longtime Worker’s Party leader
Luiz Inácio Lula da Silva. Today Brazil’s macroeconomic priorities still constrain
trade and other policy choices. The economy is stable, but growing at inadequate
levels to bring about desired development goals. To control inflation, the Lula
Administration has had to maintain very high real interest rates, while Brazil’s large
debt service obligation has required a large primary budget surplus, approaching 5%
of GDP in 2005, and a trade surplus.17
The cost of this development strategy has been accepting the microeconomic
distortions discussed above and inadequate social spending, which raises the prospect
for future social and political unrest given the already very high levels of income
inequality and poverty. Subordinating trade liberalization to debt reduction and other
goals also diminishes Brazil’s growth prospects, a key variable in reducing poverty.
Therefore, as may be seen, Brazil’s “trade preferences,” which point to a cautious
(some would say protective) and carefully managed approach to trade liberalization,
15 Costa Vaz, Alcides. Trade Strategies in the Context of Economic Regionalism: The Case
of MERCOSUR. In: Aggarwal, Vinod K., Ralph Espach, and Joseph S. Tulchin, eds. The
Strategic Dynamics of Latin American Trade. Woodrow Wilson Center Press. Washington,
D.C. 2004. pp. 235 and 255-57.
16 Pedro Da Motta Veiga, Regional and Transregional Dimensions of Brazilian Trade
Policy, p. 178.
17 The primary surplus is the fiscal surplus not including interest payments, and
theoretically represents the amount available for debt service. Real interest rates (adjusted
for inflation) in Brazil have hovered around 10% for years, making them among the highest
in the world.
reflect a combination of industrial, foreign, and macroeconomic policy priorities that
often outweigh purely trade-related economic arguments, and deters progress in
Brazil’s long-term development. These points bear remembering when considering
specific trade negotiation stances and disputes, discussed later.
Figure 2. Brazil’s Balance of Merchandise Trade, 1988-2004
$ millions
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
-10,000
-20,000
1988 19 90 1992 19 94 19 96 1998 20 00 2002 2004
ExportsImportsTrade Balance
Data Source: Boletim do Banco do Brasil, September 2005.
Brazilian Trade with the World
Brazil has a modern, diversified economy, with services accounting for 53% of
GDP, followed by industry and manufacturing at 37%, and agriculture at 9%.
Depending on how agribusiness is measured, it contributes to some 30% of GDP.
Brazil is the number one producer of raw sugar, oranges, and coffee in the world, and
the second largest producer of soybean, beef, poultry, and corn.18 It is also a major
producer of steel, aircraft, automobiles, and auto parts. By comparative standards,
however, Brazil is actually a small trader, with total trade accounting for only 26%
of GDP in 2004, up from 14% a decade earlier, but still a relatively small amount
compared to the rest of Latin America. Brazil represents only 0.9% of world trade,
18 Data from Brazilian Institute of Geography and Statistics and Brazilian Embassy,
Highlights of Brazilian Agriculture, September 2004.
a number that has not grown, suggesting that Brazil’s trade liberalization efforts have
not resulted in any change in its trade openness relative to the rest of the world.
Brazil’s global trade is diversified (see Figure 3), with 25% of exports going to
the European Union, 21% to the United States, 20% to Latin America, and 15% to
Asia. Brazil’s imports mostly from the European Union (25%), Asia (20%), the
United States (18%), and Latin America (16%). Brazil’s top three trading partners
are the United States, Argentina, and Germany. Together they account for over one-
third of Brazil’s world trade and each, interestingly, is the dominant trading partner
of a different region or trade group (NAFTA, Mercosul, and the European Union).
Figure 3. Brazil’s Direction of Trade, 2004
Brazil Exports, Total = $96.5 billionBrazil Imports, Total = $62.8 billion
United StatesUnited StatesOther
21 .1%O the r 18 .3%11 .2%
14 .2%
Latin America
Latin America20.4%16.0%
European Union
25 .2%
European Union
24 .8%
As i a15 .1%Af r i c a As i a19 .5%Af ri c a
4. 4% 9. 9%
Some 30% of Brazil’s merchandise exports are primary products, 14% semi-
manufactured goods, and 56% manufactured goods (see Appendix 1). Importantly,
natural resource-based goods dominate in all categories. For example, together all
steel and aluminum based products, fabricated to varying levels of completion,
represent 10% of total exports. Agricultural products, including raw sugar and other
products, as well as, manufactured goods like orange juice and refined sugar, and
semi-manufactured sugar and soybean products, account for at least 30-40% of
exports. Soybean and soybean products alone amount to 10% of exports, more than
automobile and related parts (8%) and aircraft (3%).19 These numbers provide some
insight into why Brazil places such a strong emphasis on further opening developed
country markets to its agricultural products.
19 Data from Boletim do Banco Central do Brasil. September 2005 and Jales, Mario.
Brazilian Agribusiness in International Trade and WTO Negotiations. Presentation made
June 12, 2006. Available at [http://www.Iconebrasil.org.br].
Brazilian imports fall into five categories: capital goods (17.6%); consumer
goods (10.8%); durable consumer goods (4.9%), fuels (16.4%); and intermediate
goods (50.3%). Brazil imports capital and intermediate goods in support of its own
industrial and agricultural growth, development, and export. These goods range from
aircraft engines to chemicals and pharmaceuticals that are used in processing other
goods. Raw materials for farming, foodstuffs, and nondurable consumer goods round
out the major imports.
Brazil’s trade priorities cannot be derived entirely from a calculation of the
trade-weighted importance of trade partners. The United States is Brazil’s largest
single-country trading partner, yet Brazil has resisted increasing trade liberalization
with the large U.S. market via the FTAA because the U.S. model of liberalization is
viewed as insufficiently balanced to meet Brazilian needs. To appreciate Brazil’s
approach to the United States and the world with respect to trade negotiations, it is
critical to see how its “trade preferences,” discussed above, take form in actual
negotiations. Mercosul is most important to the economic and political life of Brazil
and has taken on perhaps even greater priority under the Lula administration. It is
discussed first followed by Brazil’s approach to the FTAA and WTO, which will
allow for a better understanding of U.S.-Brazil trade relations, as a whole.
Southern Common Market (Mercosul)
Mercosul was created in 1991, the outgrowth of Brazil-Argentine bilateral
efforts in the late 1980s to address longstanding political and security concerns. By
including Uruguay and Paraguay, and defining the partnership along economic lines,
Mercosul was expected to help the region improve its chances for mutual economic
growth and development, and thereby stabilize regional political relations as well.
Mercosul has succeeded on the political side and also developed as a credible
collective voice in the WTO and the FTAA. Its success at economic integration is
more questionable.
Mercosul began as a free trade area, but was designed to evolve into a customs
union, defined by a common external tariff (CET), and eventually, a common market
with the free movement of goods, investment, and labor. To date, Mercosul remains
an incomplete customs union with many exceptions to the CET. Early successes
were measured by the doubling of intra-Mercosul trade by 1995, as tariffs came down
according to schedule, and cooperation remained largely positive. This trend
reversed course in the late 1990s because of financial crises in Argentina and Brazil,
and the absence of macroeconomic coordination and other policy problems.
Brazilian trade within Mercosul expanded by only 13% from 1999 to 2004, with
Brazil’s trade balance shifting from a nearly balanced position to an uncomfortably
large surplus of $2.5 billion by 2004, as imports from all three Mercosul partners
stagnated or declined. Argentina responded with quotas and higher tariffs on certain
Brazilian exports and calling for more equitable bilateral trade flows.
In reality, the trade rationale for Mercosul was always limited and fraught with
challenges. After 15 years, Mercosul accounts for only 9% of Brazil’s exports. The
United States and Europe remain the dominant markets for Brazilian manufactures
and agricultural goods, respectively, as well as, the major suppliers of capital goods.
Argentina and Brazil have both resorted to raising trade barriers against each other
in response to sectoral and macroeconomic problems, and Brazil stands alone as the
industrial center, so Mercosul offers little competition in technological and
innovative-based industries that can bring deeper gains from trade.
The increased intra-dependence fostered by a successful Mercosul also carries
certain risks, as seen in the compression of trade and economic growth in Paraguay
and Uruguay following financial crises and currency devaluations in Brazil (1999 and
2001) and Argentina (2002). These setbacks merely confirmed what has been widely
understood, that Mercosul was really launched as a “political project carried out in
the economic and commercial realms.”20 Deeper economic integration, under these
circumstances, has proved elusive.
In response, Mercosul turned to broadening its membership rather than
deepening the arrangement. Chile and Bolivia acceded to Mercosul in 1996 as
associate members (not subject to the CET and other provisions), and after years of
negotiation, the Andean Community of Nations (Ecuador, Bolivia, Venezuela, Peru,
Colombia) was added in October 2004. Brazil took a further step in organizing the
South American Community of Nations in December 2004, which is a very loose
arrangement of the twelve major South American countries.21 In December 2005,
Venezuela agreed to become a full member of Mercosul, and has been promised full
membership status, except for voting, despite its inability to adopt the CET and other
policies. A similar proposal has been suggested for Bolivia following the
presidential election of leftist Evo Morales in December 2005. These decisions
suggest that Mercosul continues to operate based primarily on political incentives.
Mercosul has been negotiating with the European Union for an FTA for many
years. These talks, once considered promising, have bogged down on market access
and other issues that have similarly hindered progress on the FTAA. Brazil wants
better access for agricultural goods, while the EU wants Brazil to lower tariffs on
industrial goods. Brazil is unwilling to make such a commitment until the EU also
addresses its agricultural subsidy program. Currently, the talks are stalled, with little
expectation of significant movement in the near future, a prospect, as with the FTAA,
that may hinge on developments in the Doha negotiations.
Despite the undisputed expansion in Mercosul affiliation, growth in trade has
stagnated and after 15 years, by most accounts, the pact still lacks institutional
strength and coordination, providing little evidence of enhanced trade-related
productivity gains.22 Still, support for the pact is strong despite its troubles. The
20 Costa Vaz, Trade Strategies in the Context of Economic Regionalism, pp. 234-235 and
Weintraub, Sidney. Development and Democracy in the Southern Cone: Imperatives for
U.S. Policy in South America. Center for Strategic and International Studies. Washington,
D.C. February 2000. pp. 12-13.
21 Details on the various Latin American integration efforts may be found in: CRS Report
RL33162, Trade Integration in the Americas, by M. Angeles Villarreal.
22 The limits of Brazil’s trade-related productivity gains from Mercosul are analyzed in:
Lopez-Cordova, Ernesto and Mauricio Mesquita Moreira. Regional Integration and
Productivity: The Experiences of Brazil and Mexico. In: Estevadeordal, Antoni, Dani
(continued...)
smaller economies benefit from preferential access to the large Brazilian market, and
Brazil sees a unified Mercosul as being the definitive counterbalance to the United
States in FTAA negotiations, where the FTAA is viewed as a complement to, not a
substitute for, Mercosul. The technical distinction between a free trade agreement
and a customs unions becomes important here. A customs union with a CET implies
that its members will negotiate trade agreements collectively with the outside world,
or the union becomes largely meaningless.23
For these many reasons, Mercosul remains at the heart of Brazil’s trade strategy.
Brazil relies on the customs union to strengthen its regional economic leadership, and
by extension, its trade negotiating position outside of Mercosul. Conversely, Brazil’s
strength would be undermined if any members of Mercosul opted for FTA status or
chose to go their own way with extra-regional negotiations, a position Uruguay flirted
with in January 2006, although apparently with no real conviction. Mercosul also
serves Brazil’s trade strategy precisely because Brazil can set the levels of deepening
to ensure a balance between maintaining its industrial policy and co-opting regional
voices in approaching the EU, WTO, or FTAA. Finally, Brazil uses Mercosul as a
way to ease its transition to trade liberalization in the global economy because it has
a ready-made regional comparative advantage in manufacturing.
Free Trade Area of the Americas (FTAA)
The FTAA is a proposed free trade area that would include 34 nations (all
except Cuba) of the Western Hemisphere. It has been under consideration for a
decade, but talks effectively stalled in late 2003. Problems arose over differences
between Brazil and the United States, which as the co-chairs of the Trade
Negotiations Committee (TNC), hold the key to consummating the agreement. At
the heart of the disagreement are their diametrically opposing positions that reflect
not only differences in sectoral and industry issues, but in broader trade preferences
as well. The United States remains committed to an agreement that includes
negotiating investment, services, intellectual property rights, and government
procurement, among other issues. Brazil has not deviated from its more limited
support of dealing mostly with market access, and its refusal to engage on these other
issues unless the United States concedes to address agricultural subsidies and trade
remedy issues.24
This impasse resulted in a compromise unveiled at the 2003 FTAA Ministerial
meeting in Miami calling for a two-tier agreement under which countries could
assume different levels of commitment. The proposed framework, viewed by the
United States as an accommodation to Brazil, would include a common set of rights
and obligations for all countries along with optional obligations that could be entered
22 (...continued)
Rodrik, Alan M. Taylor, and Andrés Velasco, eds. Integrating the Americas: FTAA and
Beyond. Harvard University Press, Cambridge, 2004. pp. 573-609.
23 Weintraub, Development and Democracy in the Southern Cone, pp. 6-7.
24 See CRS Report RS20864, A Free Trade Area of the Americas: Major Policy Issues and
Status of Negotiations, by J. F. Hornbeck. pp. 5-6.
into on a plurilateral basis. Defining these various commitments so far has proven
unworkable, and the breadth of an emerging resistence to the FTAA became clearer
at the fourth Summit of the Americas held on November 4-5, 2005, in Mar del Plata,
Argentina. Amid dramatic and sometimes violent public demonstrations against
President George W. Bush and the FTAA, it was evident that Latin America was
divided over how to proceed. A total of 29 countries supported renewing
negotiations, and the United States pushed to set a specific date in 2006.
Brazil, Argentina, Uruguay, and Paraguay (the Mercosul countries) rejected this
idea, arguing that the conditions for achieving a balanced and equitable agreement
did not yet exist. Taking a more extreme position, Venezuela lobbied to end any
further effort on the FTAA and for unified resistence against U.S. policies and
presence in Latin America. The Summit declaration called for a time to explore
problems in the FTAA process, while awaiting the outcome of the upcoming World
Trade Organization (WTO) ministerial, indicating that at this juncture, there is no
unified vision on how to proceed with the proposed FTAA. Brazil continues to offer
to negotiate market access talks between the Mercosul countries and the United
States (the so-called “4+1” option), an overture the USTR has repeatedly declined.
Brazil sees little advantage to an FTAA at this point in time, particularly one
that does not address its interests, and so appears content with the status quo for the
indefinite future. The United States, by contrast, has been frustrated by an inability
to advance a NAFTA-like region-wide agreement. Therefore, it appears that Brazil
will continue to reinforce support for Mercosul, while biding its time on the FTAA
and attempting to make headway with agricultural issues in the WTO.
Mercosul negotiates the FTAA as a bloc, which may gather strength if
Venezuela joins as a full member.25 Interestingly, most analyses of the economic
effects of joining the FTAA point to differences in costs and benefits between Brazil
and the other three smaller members. The gains for Mercosul as a whole would come
from its comparative advantage in agriculture vis-a-vis the United States, provided
barriers to trade in this sector are meaningfully lowered. For Brazil, opening up the
U.S. market to agricultural products is critical, but the United States is also its major
market for many value-added manufactured exports (frozen orange juice concentrate,
steel, aircraft, petroleum). There is, it seems, the potential for considerable
commercial gains for Brazil should a far-reaching FTAA be completed.26
25 It has been noted that the addition of Venezuela as a full member of Mercosul
consolidates in one bloc all the countries resisting the FTAA, setting up the potential for a
major political standoff with the United States on this issue. Latin American Brazil and
Southern Cone Report, December 2005, p. 7.
26 Weintraub, Development and Democracy in the Southern Cone, p. 12, Laens Silvia and
Inés Terra. Integration in the Americas: Welfare Effects and options for the MERCOSUR.
In Lorenzo, Fernando and Marcel Vaillant, eds. MERCOSUR and the Creation of the Free
Trade Area of the Americas. Woodrow Wilson International Center for Scholars,
Washington, D.C. 2005. p. 107, and Masi, Fernando and Carol Wise. Negotiating the
FTAA between the Main Players: USA and MERCOSUR. In: Lorenzo and Vaillant,
MERCOSUR and the Creation of the Free Trade Area of the Americas, p. 323.
The cost and benefit calculus, however, is more complicated. For the smaller
Mercosul countries, an FTAA means giving up preferential access to the large
Brazilian market, which could mean a net loss in welfare for some sectors. The
FTAA would also mean greater access to the U.S. and other Latin American markets,
and reduced costs for capital goods and other imports that no longer face a high
Mercosul CET (e.g. 35% in the case of automobiles). The smaller economies might
also consider the effects of any future economic setbacks from potential
macroeconomic problems in Brazil or Argentina. Brazil also is reticent to push for
an FTAA precisely because with Mercosul (and more so with a functioning South
America Community of Nations), it is the hub and industrial center of a major
preferential trade arrangement, which would certainly change in importance if the
FTAA comes to be.
With an FTAA, Brazilian manufacturing industries that compete directly with
more efficient U.S. firms (e.g. machinery and chemicals) could lose in the short run.
Combined with possible trade restructuring that other Mercosul countries might face,
Brazil’s comparative advantage might shift, to some degree, from industrial products
in a regional economic union to more agricultural goods in a hemispheric one. Given
the economic and political strength of the United States, the FTAA might alter the
balance of power in the region, to the possible detriment of Brazil’s regional
leadership. The potential for these relative changes, compounded by Brazil’s
concerns over its ability to conform to provisions covering enforceable intellectual
property rights, services trade, and investor protection, point to why Brazil remains
reluctant to advance an FTAA, particularly if U.S. agricultural protection remains
relatively untouched. Stated more succinctly, although an FTAA could provide
commercial (and certainly consumer) gains to Brazil, it may come at a cost to
industrial and foreign policy priorities.27
For the United States, even a two-tier FTAA may make sense, particularly if the
alternative is an FTAA without Brazil. With a two-tier FTAA, most of the
hemisphere would be integrated, including Brazil, at least nominally. It may be
viewed as a way to co-opt Brazilian reticence, or at least diminish the stalemate
approach that can also extend to other Mercosul countries. Given Brazil’s deeply
held concerns that reflect its “trade preferences,” however, the status quo (impasse)
seems to be Brazil’s preferred position between moving ahead with the FTAA
negotiations or killing them outright.28
World Trade Organization (WTO)
Brazil has also been a vocal leader of the G-20 that represents developing
country interests in the WTO. Even prior to forming the G-20 group, Brazil stood
27 Lorenzo and Vaillant, eds., Mercosur and the Creation of the Free Trade Area of the
Americas, various chapters, pp. 4, 38, 152, and 324.
28 The future of the FTAA remains unclear from the Brazilian perspective. At the
conclusion of the WTO Hong Kong Ministerial in December 2005, Ambassador Adhemar
Bahadian, Brazil’s FTAA co-chair representative, suggested that the FTAA may be put off
for at least another year. He was, however, replaced soon thereafter as the co-chair, and
Brazil has signaled that it is still interested in negotiating with the United States in 2006.
up for including matters critical to developing countries in the WTO including the
most pressing issue, barriers to agricultural trade, as well as, the treatment of rules
covering antidumping and pharmaceutical data protection, among others.29 In
particular, Brazil has insisted on addressing the reduction of barriers to agricultural
trade, particularly export and production subsidies. The United States is working in
the WTO negotiations with Brazil to find a way to reduce agricultural subsidies,
resists addressing antidumping rules, but is generally sympathetic to finding a
solution to developing country concerns over providing drugs for HIV/AIDS and
other emergencies.30
The implication for Brazil-U.S. trade relations is that the WTO is an arena
where the two countries can find areas of both commonality and disagreement. For
many issues, the United States has indicated that the multilateral forum is the
preferred or only venue for issue resolution (domestic agricultural subsidies) and so
progress in addressing Brazilian concerns in the FTAA are contingent, at a minimum,
upon success at the WTO. Brazil has taken similar stands with respect to services
trade, intellectual property rights, and other issues. Hence, it is important to integrate
the various factors that drive Brazilian trade priorities at the different levels of
negotiation to be able to interpret Brazil’s underlying intent and perhaps offer some
understanding of why U.S. negotiators have been frustrated in their attempts to move
forward on some critical U.S. trade policy initiatives, especially the FTAA.
At the latest WTO ministerial in Hong Kong, Brazil played a leading role in
continuing to represent developing country interests in the Doha Round. It’s voice
was prominent in becoming a member of the latest group of would-be brokers of a
Doha Round agreement known as the Group of Six (EU, U.S., Japan, Australia,
Brazil, and India). The WTO remains an important forum for Brazil, which could
be a major winner if barriers to agricultural trade are significantly reduced. In the
post-Hong Kong period, Brazil has expressed a readiness to offer reductions in
barriers to trade in industrial goods and services, if the United States can convince
the European Union to move forward on agricultural barriers. The current level of
cooperation between Brazil and the United States bodes well for making headway in
multilateral talks that could “trickle down” to regional and bilateral accommodations.
This outcome, however, is far from assured.
U.S.-Brazil Trade Relations
Brazil and the United States are two independent political and economic leaders
in the Western Hemisphere, and is reflected in their trade relationship. First, unlike
much of Latin America, Brazil does not have a preferential trade arrangement with
the United States such as NAFTA, the CBI, or the Andean Trade Preference Act,
although it is protective of its U.S. preferences provided under the Generalized
29 Fishlow, Albert. Brazil: FTA or FTAA or WTO? In: Schott, Jeffrey J., ed. Free Trade
Agreements: US Strategies and Priorities. Institute for International Economics.
Washington, D.C. 2004. pp. 285-287.
30 For a comprehensive discussion of WTO issues, see CRS Report RL33176, The World
Trade Organization: The Hong Kong Ministerial, coordinated by Ian F. Fergusson.
System of Preferences (GSP). Second, although there is consistent effort to maintain
constructive engagement between the two countries at all levels of negotiation, much
attention turns to areas of disagreement. Indeed, progress on the FTAA has crept to
a halt, bilateral disputes have left some interests dissatisfied, including those
represented in the U.S. Congress, and key issues in the multilateral realm remain
largely unresolved. A look at U.S.-Brazil trade and the issues that confront the two
countries help explain this situation.
U.S.-Brazil Trade Trends
Brazil is the 15th largest U.S. export market, but a distant second to Mexico as
the United States’ largest trading partner in Latin America. For economies of their
size, Brazil and the United States actually trade rather little with each other. Total
merchandise trade (trade turnover) in 2004 between the United States and Brazil was
$35 billion, or 8.2% of U.S. trade with Latin America. The United States purchased
bilateral trade with Brazil reflects a number of factors including their respective
macroeconomic growth trends, Brazil’s 1999 and 2001 devaluations (note rise in
U.S. imports and fall in U.S. exports in Figure 4 — data presented in Appendix 2),
and after 2002, Brazil’s enhanced export promotion policy.
Figure 4. U.S.-Brazil Merchandise Trade, 1988-2004
$ millions
20,000
15,000
10,000
5,000
0
-5,000
-10,000
19 8 8 199 0 199 2 199 4 199 6 199 8 200 0 200 2 200 4
U.S. ExportsU.S. ImportsTrade Balance
Data Source: Boletim do Banco do Brasil, September 2005.
Brazil and the United States are far from achieving their full bilateral trade
potential. It is clear that over nearly two decades, beginning before either NAFTA
or Mercosul came into being, that the growth in U.S.-Brazil trade has lagged
compared to U.S. trade with Latin America and especially Mexico, a close trader
with the United States. As seen in Table 1, in 1987 Brazil accounted for 1.8% of
total U.S. trade, compared to 5.3% for Mexico and 12.4% for Latin America as a
whole. U.S.-Brazilian trade grew by 195% from 1987 to 2004, a meager amount
compared to the 422% growth in U.S.-Latin American trade and the 665% growth
in U.S.-Mexican trade. By 2004, Brazil had lost ground, making up only 1.5% of
total U.S. trade compared to Mexico’s 11.7% and Latin America’s 18.7%.
Table 1. U.S. Trade with Brazil, Mexico, and Latin America
% of Total% of TotalTotal U.S.Trade 2004% Growth in
U.S. Trade 1987U.S. Trade 2004($ millions)Trade 1987-2004
Brazil 1.8 1.5 35,057195
Mexico 5.311.7266,737665
Latin America12.418.7426,849422
Source: CRS computations from U.S. Department of Commerce data.
Nonetheless, the United States is still Brazil’s largest single-country trading
partner, rivaling total trade with the European Union (EU) and exceeding Brazil’s
trade with Latin America. A simple analysis of Brazil’s trade with the world
suggests that the United States could play a more important role. This point is
supported by more sophisticated estimates as well. One study using a gravity model
simulation suggested that Brazil’s trade with the United States in 1999 was only 44%31
of what the model estimated it should have been.
The United States exports mostly capital goods to Brazil; the top three
categories composing over half of U.S. exports are:
!machinery (gas turbines used in the manufacture of Brazilian
aircraft, computers, office machinery and engine parts);
!electrical machinery (integrated circuits, radio, television, and
telephone parts); and,
!organic materials (such as industrial chemicals).
The United States is also the largest market for Brazilian manufactured goods, which
are included in the top three U.S. import categories and compose nearly one-third of
U.S. imports from Brazil. These include:
!aircraft (regional jet airplanes);
!electrical machinery (cell phones, radio, and other transmission
apparatus); and,
!machinery (automobile engine parts).
Other important U.S. import categories include mineral fuel, iron and steel,
automobiles, and footwear (see Appendix 3 for bilateral services trade data, not
discussed in this report). Treatment of Brazilian agricultural products, conspicuously
absent from top categories of U.S. imports, are among Brazil’s major bilateral issues.
31 This point is developed in Schott, Jeffrey. J. U.S.-Brazil Trade Relations in a New Era.
Institute for International Economics. November 2003. pp. 4-5. [http://www.iie.com]
U.S.-Brazil Foreign Investment
Trade liberalization is also important because it tends to encourage increased
foreign direct investment (FDI). Permanent and predictable trade rules induce FDI
because the flow of trade will be less likely to be interrupted by government actions.
If a trade agreement also includes an investment chapter, which typically assures
foreign investors that they will receive national treatment and have recourse to an
impartial dispute settlement process, there is further inducement for FDI. This an
important issue because the United States does not have a Bilateral Investment Treaty
(BIT) with Brazil, another way to secure U.S. investor rights with developing
countries.
The stock of U.S. FDI in Brazil was $33.3 billion in 2004 (see Appendix 4).
This figure actually declined from a peak of $37.8 billion in 1998. U.S. investment
in Brazil, the largest economy in Latin America next to Mexico, is relatively small,
representing only 1.6% of U.S. FDI in the world and only 10.2% of U.S. FDI in Latin
America (Mexico has twice this amount). In addition, Brazil invests little in the
United States, with the stock of FDI amounting to $1.3 billion in 2004. Although
this is double the previous year’s level, it accounts for less then one-tenth of one
percent of FDI in the United States. Brazilian investment is growing, however,
concentrated in industries of strategic interest to its economy that face formidable
U.S. barriers to entry, such as citrus and steel.
U.S.-Brazil Bilateral Trade Issues and Disputes
Brazil and the United States have a number of specific trade issues that are taken
up at all levels of trade negotiations. As with all countries, the United States and
Brazil practice some form of protection, although they are very different. The United
States is most concerned over Brazil’s high average tariffs, particularly on industrial
goods, and multiple non-market access issues including intellectual property rights
(IPR) enforcement, services trade, government procurement, and investment rules.
The United States Trade Representative (USTR) considers the common external
tariff (CET) a major barrier to U.S. agricultural exports, distilled spirits, and
computer equipment.32
Brazil has raised its major concerns over broad U.S. policies such as the Byrd
Amendment, which directs duties from trade remedy (antidumping) cases to affected
industries, the calculation of antidumping margins, and what it considers to be
discriminatory treatment inherent in U.S. expansion of preferential trade agreements
in Latin America (NAFTA, Chile, CAFTA-DR). The Byrd Amendment was found
to be in violation of WTO rules. Although repealed by Congress on February 1,
2006, the program remains in effect until October 1, 2007. The other two complaints
face no challenge in the WTO. Brazil also objects to product-specific barriers that
include restrictive tariff rate quotas (TRQs — sugar, orange juice, ethanol, and
tobacco), subsidies (cotton, ethanol, and soybeans), and trade remedy cases (steel and
orange juice). The U.S. 2002 Farm Bill that effectively increased agricultural
32 United States Trade Representative. 2005 National Trade Estimate Report on Foreign
Trade Barriers. Washington, D.C. March 2005, p. 30.
subsidies further aggravated the situation. As of January 1, 2006, there were 17 U.S.
antidumping and countervailing duty orders in place against Brazil.
Tariffs Structures. One significant difference between Brazil and the United
States is their tariff structure. As shown in Table 2, Brazil has comparatively high
average tariffs. Although the difference in average agricultural tariff is small,
Brazil’s average tariff on industrial products is three times that of the United States,
the major product category of U.S. exports to Brazil. It follows that market access
discussions between the two countries usually find the United States focusing on
reduction of industrial tariffs, whereas Brazil emphasizes U.S. peak tariffs on
agricultural imports subject to TRQs. The high out-of-quota tariffs are meant to deter
imports to protect U.S. producers, which are, for example, 350% for tobacco and
agricultural tariffs. Brazil notes that the U.S. average agricultural tariff can mask the
high cost Brazil faces from out-of-quota peak U.S. tariffs.33
Table 2. U.S. and Brazil Average Tariff Rates
Count ry Al lP r oduct s AgriculturalP r oduct s Indust r i a lP r oduct s
A vg. Standard A vg. Standard A vg. Standard
Tariff*Deviation# Tariff*Deviation#Tariff*Deviation
United States 4.3%11.3 8.5%30.2 3.7%5.1
Brazil10.9% 6.810.2% 6.011.0%6.8
Data source: Inter-American Development Bank via personal correspondence.
* Simple average tariff for calender year 2004.
# Standard deviation as measure of how much tariffs can vary from average.
Brazilian Complaints Against the United States. Brazil’s major
product-specific complaints are summarized briefly below.
Sugar. As part of U.S. support for the domestic sugar growing and processing
industry, quotas are set under U.S. commitments made under WTO rules to restrict
the amount of sugar imports that may enter the country. The purpose is to maintain
the domestic price of sugar above a set minimal level. The United States Department
of Agriculture (USDA) allocates quotas among eligible countries, with Brazil
receiving approximately 13% of the world total. In-quota imports are subject to a
very low duty. Amounts entering above the quota are subject to a tariff computed by
the USITC to be 78% ad valorem in 2003.34 Brazil has expressed concern over the
small increases in quotas given to the Central American countries under the CAFTA-
DR, suggesting it bodes poorly for future negotiations with the United States, given
that Brazil is the world’s largest producer of raw and refined sugar.
33 Brazil’s positions in this section are summarized from: Embassy of Brazil. U.S. Barriers
to Brazilian Goods, Services, and Investment. October 2002 and the summary update of the
same publication printed in March 2005.
34 For details of the sugar program, see CRS Issue Brief IB95117, Sugar Policy Issues, by
Remy Jurenas. Brazil calculates a much higher ad valorem equivalent of 221% for 2004.
Cotton. Cotton is a protected crop in the United States, benefitting from direct
payments, counter-cyclical payments, subsidized loans and other federal programs.35
Subsidies averaged $1.7 billion per year for fiscal years 1991 to 2004. Brazil
successfully challenged portions of the U.S. cotton program under WTO dispute
settlement rules, requiring the United States to change or withdraw these prohibited
support programs. Although the United States missed the deadlines to correct these
programs, Brazil, unlike some other countries, did not take retaliatory measures.
Congress repealed two of the offending programs as part of the FY2006 budget
reconciliation conference bill on February 1, 2006, but Brazil remains critical of
remaining cotton support programs.36
Steel. The steel industry files more antidumping and countervailing duty cases37
than any other U.S. industry, the subject of repeated complaints by Brazil. As of
January 1, 2006, there were 16 such orders in place against Brazil, some dating back
to 1986. The steel issue was further exacerbated in 2002 when the United States
imposed special safeguard duties of up to 30% on various steel imports, until
successfully challenged in the WTO and withdrawn. Brazil estimates that the total
cost of these measures exceeds $2 billion in lost sales, and with the United States as
one of its most important export markets, is eager to see restrictions reduced, if not
eliminated.
Ethanol (corn). For years, both Brazil and the United States subsidized
heavily the development of ethanol production from sugar and corn, respectively.
Currently, Brazil’s subsidy program has ended and it maintains a highly efficient
ethanol production process. Brazil’s exports of ethanol face two barriers to the U.S.
market. First, U.S. corn production is subsidized by various U.S. programs, and
some 13% of total corn production is used for ethanol. Second, there is a U.S. import
duty on ethanol plus an additional 54 cents per gallon designed to offset a tax
reduction all ethanol receives to offset the federal gasoline excise tax levied at the
pump on all fuels.38 Brazil continues to press for changes in both programs.
Orange Juice. Brazil argues that the U.S. tariff on orange juice concentrate
is equivalent to 65% on an ad valorem basis and 18.4% on non-concentrated juice.
In addition, the most recent U.S. antidumping order against Brazil was placed on
orange juice on January 1, 2005. In January 2006, the U.S. Department of Commerce
made a preliminary finding of dumping against Brazilian frozen concentrated orange
juice, which Brazil has vowed to fight in the WTO.
35 See CRS Report RL32571, Background on the U.S.-Brazil WTO Cotton Subsidy Dispute,
by Randy Schnepf. p. 1.
36 International Trade Reporter. House Approves Budget Measure Containing Byrd
Amendment Repeal. February 1, 2006.
37 CRS Report RL32333, Steel: Price and Availability Issues, by Stephen Cooney. pp. 8
and 29.
38 CRS Report RL30369, Fuel Ethanol: Background and Public Policy Issues, by Brent D.
Yacobucci and Jasper Womach. pp. 2-3 and 17.
Tobacco. Also subject to tariff rate quotas and very high over-quota tariffs,
Brazil would like to see the U.S. market open more to greater imports of the product
from Brazil. Tobacco represents only 1% of total U.S. imports from Brazil on a
dollar value basis.
Soybeans. Brazil, the second largest producer of soybeans in the world, must
compete against U.S. subsidies on soybeans ranging from $1.5 to $3.2 billion
annually between 2004 and 2006. Brazil is evaluating whether to challenge these
subsidies in the WTO, as it did with cotton.
Shrimp. On January 27, 2005, the United States imposed an antidumping duty
order on frozen or canned shrimp, and prawns from Brazil, decreasing imports from
shrimp farmed in the poorer northeast portion of the country.
Beef and Chicken. U.S. sanitary certification for Brazilian chicken has not
been approved, and for beef was only approved in 2005, subject to a TRQ.
U.S. Complaints Against Brazil.39 The USTR lists a number of complaints
against Brazil, ranging from cumbersome import administrative procedures to
outright restrictions on certain imports. Of equal importance is the inability to make
more progress in areas where the United States is most competitive such as
protection of intellectual property rights and services trade.
High Tariffs. Between Brazil’s higher average tariffs (especially on industrial
goods) and Mercosul’s CET (exacerbated by a surcharge from 1997 to 2004),
Brazil’s tariff regime hurts U.S. exports of agricultural products, distilled spirits,
computer and telecommunications equipment.
Prohibited Imports. Restrictions apply to various consumer goods, with a
safeguard measure currently issued against certain toys.
Intellectual Property Rights. Although Brazil has numerous IPR laws on
the books, the USTR is critical of many and notes that enforcement issues are a
serious problem.40 There is a 5-6 year backlog in processing patent applications, and
data confidentiality protection for pharmaceuticals is not covered by law. Brazil
lacks copyright enforcement leading to significant piracy losses for U.S. businesses
(particularly video and audio cassettes). Despite Brazilian attempts to rectify the
problem with a new task force and other initiatives, it lacks the resources to tackle
the problem fully at this point in time. Brazil, therefore, is reluctant to sign on to an
FTA that contains enforceable IPR provisions. The United States held up review of
Brazil’s eligibility for benefits under the Generalized System of Preferences (GSP)
because of concerns over piracy issues, but the United States decided against taking
action in recognition of Brazil’s attempts to address piracy. Still, Brazil
acknowledges its piracy problem, realizing the implications for its own producers and
tax revenues as well. The Brazilian Congress conducted a study on the issue in 2004,
39 For Brazil’s trade barriers, see United States Trade Representative. 2005 National Trade
Estimate Report on Foreign Trade Barriers. Washington, D.C. March 2005. pp. 30-37.
40 USTR, 2005 National Trade Estimate Report on Foreign Trade Barriers, pp. 33-37.
which noted that piracy constituted nearly 60% of music sales and that Brazil had
failed to close legal loopholes and counteract the problem more effectively, including
its lack of organizational capacity and resources.41
Onerous Licensing and Regulatory Requirements. Importers complain
of the high costs associated with meeting business registration and other
requirements in Brazil.
Sanitary and Phytosanitary (SPS) Barriers. The USTR argues that SPS
restrictions, including those that apply to beef, the prohibition of poultry imports
(also a reciprocity issue), and certain types of wheats from various U.S. states are
unfounded.
Government Procurement. Brazil is not a signatory to the WTO
Agreement on Government Procurement and there are multiple preferences given to
local businesses.
Export and Financing Subsidies. Through various programs at the
National Social and Economic Development Bank (BNDES), Brazil promotes the
purchase of domestic equipment and machinery and helps finance export activities.
Services Trade and Investment. There are restrictions on industries such
as audio visual, telecommunications, financial (insurance), and express delivery
services. Brazil has expressed concern over investor-state provisions, standard
language in U.S. free trade agreements, and possible U.S. reaction to some of its
subsidized financing programs conducted under BNDES. Brazil has not signed a
bilateral investment treaty with the United States.
Outlook
Brazil trades relatively little for an economy of its size and diversity and would
benefit from trading more. It has embraced export promotion, which generates
foreign exchange and can contribute to growth in economic output, but has shied
away from deeper commitments to lowering barriers to imports, which are key to
gains in productivity, per capita income, and development. This strategy is consistent
with Brazil’s short-term financing needs and its trade preferences, which are driven
by a combination of macroeconomic, industrial, and foreign policy priorities.
For the United States, this presents a delicate policy conundrum because
economic reciprocity may not be the only key to successful trade negotiations with
Brazil. For example, even if significant progress could be made on agricultural
issues in the Doha round, and Brazilian trade complaints could be ameliorated in
bilateral working groups with the United States, Brazil may still choose not to
liberalize areas where either it cannot easily fulfill the provisions of an FTA
(enforcing protection of IPR), or where the United States has a distinct comparative
41 Federative Republic of Brazil. Chamber of Deputies. Legislative Investigation
Committee on Piracy (CPI) Report. Brasilia, 2004. pp.127 and 267-269.
advantage or particular interest (industrial goods, services, investment). This has
been made clear in statements by Brazilian officials and by formal trade negotiation
positions.
To illustrate, in speaking on the FTAA, a former Brazilian Ambassador to the
United States and noted trade expert wrote:
The Brazilian position is not merely a tactical reaction to the U.S. negotiating
strategy regarding the so-called systemic issues. In fact, Brazil has a clear
interest in preventing hemispheric disciplines on topics such as investment,
intellectual property, government procurement, and services from curtailing its
ability to formulate and implement public policies that are in its highest national42
interest.
This attitude is reinforced by evidence questioning the economic logic of Brazil’s
anti-FTAA position based on the U.S. preference for addressing subsidies in the
WTO. For example, studies point out that ending agricultural subsidies would
increase FTAA agricultural trade little compared to a far bigger gain for Brazil from
eliminating tariffs.43 Brazil seems to realize this on some level or it would not
continue to offer the “4+1” market access talks as an alternative to the FTAA.
As such, U.S. trade negotiators may be frustrated because there is perhaps little
they can do to nudge Brazil off its course of continuing to advance Mercosul, where
the marginal gains from expansion are likely small, and pursuing selective priorities
in the WTO, while leaving the FTAA to flounder indefinitely. Brazil may actually
have more to lose, however, because as much as both countries could improve their
economic well-being from greater trade liberalization, as a developing country, Brazil
seems to have the most to gain from not only reducing foreign barriers to its exports,
but unilaterally opening its economy further, particularly as part of completing its
ongoing economic reform agenda.
42 Barbosa, Rubens Antonio. The Free Trade Area of the Americas. Fordham International
Law Journal. February 2004. p. 1021.
43 Salazar-Xirinachs, José M. Development Issues Posed by the FTAA. In Weintraub,
Sidney, Alan M. Rugman, and Gavin Boyd, eds. Free Trade in the Americas: Economic and
Political Issues for Governments and Firms. Cheltenham, Edward Elgar Publishing, Inc.
2004. p. 238. A similar conclusion is drawn for global agricultural trade as well, where
some 80-90% of trade-distorting cost is attributed to tariffs rather than subsidies.
Congressional Budget Office. The Effects of Liberalizing World Agricultural Trade: A
Survey. Washington, D.C. December 2005.
Appendix 1. Brazil: Top 15 Exports and Imports
(calendar year 2004, $ millions)
Export Product$ ValueImport Product$ Value
1. Soybeans5,3951. Fuels and lubricants10,317
2. Iron ore4,7592. Chem./Phar. Intermed. goods9,638
3. Motor vehicles3,3523. Intermediate parts5,589
4. Soybean oil cake3,2714. Mineral products5,068
5. Airplanes3,2695. Accessories for trans. equip.4,905
6. Meat, chicken2,4946. Non-durable consumer goods3,673
7. Iron/Steel semi finish 2,1157. Farming, raw materials3,473
8. Flat-rolled iron/steel2,0078. Industrial machinery3,278
9. Motor vehicle engines1,9729. Office/Science equipment2,679
10. Meat, bovine1,96310. Fixed equipment2,528
11. Motor vehicle parts1,96111. Inedible farm products2,213
12. Footwear1,89912. Parts, industrial capital goods1,518
13. Coffee1,75013. Foodstuffs, intermediate1,517
14. Cane sugar, raw1,51114. Pharmaceutical products1,454
15. Tobacco1,38015. Accessories for indust. mach.1,065
Subtotal 39,098 Subtotal 58,915
% of Total Exports40.5%% of Total Imports93.8%
Data Source: Boletim do Banco do Brasil, September, 2005.
Appendix 2. U.S.-Brazil Merchandise Trade
($ millions)
U.S.Trade% Growth% Growth
YearU.S.ExportsU.S.ImportsTradeTurnoverin U.S.in U.S.
Balance Expor t s Imports
19925,7517,609 -1,858 13,360
Data source: U.S. Department of Commerce.
Appendix 3. U.S.-Brazil Services Trade
($ millions)
% %
YearU.S.ExportsU.S.ImportsTradeBalance*TradeTurnoverGrowthin U.S.Growthin U.S.% of TotalU.S. Trade
Expo r t s Impo r t s
Data Source: U.S. Department of Commerce. Bureau of Economic Analysis (BEA).
* Trade turnover = total trade or exports plus imports.
Appendix 4. U.S.-Brazil Foreign Direct Investment
(in millions of U.S. dollars, historical cost basis)
YearU.S. FDI in Brazil% ChangeBrazil FDI in U.S.% Change
Source: U.S. Department of Commerce. Bureau of Economic Analysis (BEA).
Note: historical cost data measures the stock of FDI reflecting prices at the time of the investment.