Dispatch: Dynamics of a U.S.-Brazil Trade Conversation
Analyst Karen Hooper examines the possibility of expanded trade between the United States and Brazil and the negotiation strategies each country could pursue.
Amidst a global economic slowdown and uncertainty in Europe, Brazil is in the midst of a strategic economic shift to combat an expected deceleration of growth. In addition to adjustments over the past months to key interest rates and spending policies, there has also been talk from key international players of expanding trade relationships with Brazil. Most importantly, U.S. trade officials have indicated a U.S. desire to re-engage South America — and Brazil in particular — in a new effort to open up trade barriers in the region.
The U.S. has secured several free trade agreements (FTAs) over the past decade with South American countries — namely Peru, Chile and Colombia. But efforts in the late 1990s and early 2000s to push the "Free Trade Area of the Americas" that would have integrated all of the Western Hemisphere except Cuba, fell through in 2003 when the parties failed to agree on key aspects of the regulatory framework. Chief among those are the subsidies that the U.S. grants to its agriculture sector.
But agriculture isn't the only impediment. Brazil, which — at over 2 trillion dollars in gross domestic product (GDP) — has the largest economy in Latin America, also carefully manages the business climate within the country and has a vested interest in protecting Brazilian industries. Through the Common Market of the South, or Mercosur, Brazil and its Southern Cone partners have created a system that, through regular business-to-business negotiations, is specifically designed to flexibly service business needs. This contrasts starkly to free trade agreements pursued by the United States, which are characterized by across-the-board tariff reductions.
This protectionist strategy has so far benefited Brazil's independent development. Brazil is a global leader in aeronautics, petroleum extraction, ethanol and it's a critical player in international commodities markets. Furthermore, the majority of Brazil's growth is dependent on its substantial internal market. Total trade for Brazil equals only about 20 percent of GDP and exports are half of that. This means that despite the development challenges Brazil faces, it is not as vulnerable as many other developing countries to external trade shocks.
In the current uncertain economic environment, it is not outside the realm of possibility that Brazil could consider the possibility of greater trade relations with the United States. As one of Brazil's top export markets, the United States is an important partner. Unlike China, which imports mostly raw commodities from Brazil, the United States is an important destination market for higher value-added products. This translates directly into more jobs for Brazil.
While there is no guarantee of meaningful bilateral negotiations, the most likely strategy for Brazil, should it choose to negotiate with the United States, would be to seek lowered tariffs on a limited list of goods. Something short of a full FTA would be possible without having to negotiate an exception to the Mercosur common external tariff and it would potentially satisfy Brazil's domestic economic imperatives. However, it is unclear at this point if the United States would see that as an acceptable alternative to a full FTA. In any case, as we saw in the recently passed U.S.-Colombia FTA — which took 4 years to pass — serious movement towards an FTA with Brazil would be limited by U.S. domestic factors as well.