Article Tag Archives: Rio Grande do Sul exports

The challenges of Rio Grande do Sul in the emerging nations era

Luciano D’Andrea

Luciano D’Andrea is International Relations and Foreign Trade manager of the Federation of Industries of the State of Rio Grande do Sul (FIERGS). He holds a Bachelor’s Degree in Business Management from Virginia Commonwealth University (VA) and a Master’s Degree in International Strategic Studies from the Federal University of Rio Grande do Sul (UFRGS).

In an interview to Panorama, Luciano D’Andrea comments on the current trends of the international environment, Brazil’s insertion into the global market and the activities of the BRICS — a group gathering Brazil, Russia, India, China and South Africa. Our interviewee also makes observations on the exporting sector of Rio Grande do Sul and on the activities of the Brazilian Development Bank (BNDES).

Panorama:The last two decades have been characterized by an intense geopolitical and economic dynamism in the globe. In this sense, there are several government and private research centers dedicated to a systemic analysis of the international scene. At the local level, what can be learned from these analyses for the decision-making process of private companies and government institutions?

Research into and analyses of political and economic data on the international scene are of key importance for any actor aiming at developing a global strategy and/or a particular form of relationship with other economic blocs or countries. Likewise, the study and the systemic framing of information are regarded as essential for a country that aspires to qualify and prepare its industry and trade for an increasingly competitive and globalized scenario. Knowledge is one of the central aspects of the decision-making process, both for government institutions and for private companies, but the organization framework of the government and private actors does not always allow for the collection and the analysis of strategic data. Therefore, diversifying agencies that produce knowledge and, especially, share intelligence through an accessible and transparent fashion is indispensable for the national or the local development, either collectively or individually. By understanding the international conjuncture, it becomes possible to set objectives, goals and fields of operation and also guide the strategic planning proccess and implement it in a safer and more assertive way.

Panorama:Besides the international protagonism of traditional actors, such as the United States, Europe and Japan, countries such as Brazil, China, Russia and India have been achieving international preeminence in various issues on the international agenda. How do you evaluate Brazil’s recent international presence? To what extent can this integration provide opportunities for Rio Grande do Sul?

Since the mid-1990s, the bilateral and multilateral relations of Brazil have been expanding, following a global process of international openness and consolidation of foreign relations driven by the end of the Cold War. In the last fifteen years, there has been a clear shift in the Brazilian foreign policy, and the country has been making political efforts to consolidate partnerships in Latin America, Asia and Africa. This new approach invests in multilateralism and in non-traditional markets with high potential. Altogether, this current foreign policy has been positive for the trade of goods and services with these nations and for new investment projects. Undoubtedly, China is the most prominent case, becoming the main trading partner of Brazil and of Rio Grande do Sul thanks to its extraordinary economic growth over the past decades and to its astonishing demand for commodity goods, such as iron ore, soybeans, meat, and other products that our country has to offer. On the other hand, imports from China have been of great concern for the Brazilian industry due to the flood of Chinese goods into the country, facilitated by the excessive overvaluation of the Brazilian Real in the last decade.  Thus, based on this scenario, we can conclude that China has strongly contributed to the overall positive trade balance of Brazil in recent years, but, on the other hand, has caused a huge deficit of more than a hundred billion in the balance of the manufactured goods in this period, given its exports of machinery, equipment and intermediate and consumer goods. In this paradoxical context of threats and opportunities, Rio Grande do Sul has been one of the most successful Brazilian states for offering products strongly demanded by the Chinese, especially soybeans, meat and tobacco. The exports of these commodities have also benefited from their high prices in the international market. Africa was the first origin of the state’s imports due to the Petrobrás (Refap[1]) purchase of fuel and derivatives, especially from Nigeria, Algeria and Angola. In 2014, the imports from Africa accounted for 23% of the state’s purchases, totaling US$3.52 billion. Therefore, the establishment of stronger ties with the other BRICS members has been positive due to their booming economic performance, which took place particularly between 2000 and 2008. However, while progress has been observed within the BRICS, a relative setback can be noticed between Brazil and the advanced markets, such as the U.S. and the European Union, whose markets remain as the backbone of the world economy, accounting for almost half of the global GDP. Right now, an effort to recover the interaction with these players through bilateral agreements and free trade as well as other initiatives have been outlined within the National Plan for Export issued by the Brazilian Ministry of Development, Industry and Foreign Trade on June 24, 2015.

[1] Refinaria Alberto Pasqualini, an oil refinery located in the State of Rio Grande do Sul.

Panorama: Notwithstanding the contradictions among the BRICS members, the group has been consolidating itself as a counterpoint to the current international system established in the post-World War II era (UN, WTO, World Bank and IMF). How do you evaluate the dynamism of this ongoing process?

A more cohesive action of the BRICS depends on central issues in political, economic and security terms. The position of the participating countries on these issues is considerably divergent due to their national interests, which follow opposite paths, thus hindering the political consolidation of the group. However, the increasing trade between these countries has been gaining more and more representation in the international scene and can be a facilitating vector of cooperation. Furthermore, the establishment of the BRICS Development Bank is somehow consistent with these countries’ strategy to reduce their dependence on funds and international banks controlled by the developed countries. Although the bloc still lacks a common established agenda — albeit bilateral agendas have been strengthening — the fact that countries with such representation in the world economy are gathering and willing to discuss joint guidelines is an important step towards their consolidation and strengthening through effective economic development actions.

Panorama: In 2014, the remaining BRICS countries accounted for around 27% of the state’s total exports. In your opinion, how can the state exporters and the local government defend their interests in the context of the BRICS negotiations?

Back to the question concerning the relevance of analyzing the international scene, it is necessary for both the government and the entrepreneurs to understand the potentialities that the BRICS market has to offer to Rio Grande do Sul. Studies on commercial and strategic intelligence can guide the companies’ perspective on the BRICS. Moreover, the government, by understanding both the local reality and the bloc itself, can develop an approach to defend the interests that are in line with the potentialities of the private sector, that is, agriculture, industry and services.

Panorama: Soybeans are the leading export products of Rio Grande do Sul, and China, South Korea, Vietnam, India and Thailand are the main purchasers of this commodity. Besides soybeans, tobacco, poultry, rice, leather and agricultural machinery are shipped to emerging countries in Africa, Asia and Latin America. How do you view the economic dynamics of these regions on the state’s exporting sector? What measures can the private sector and the local government take to increase the volume of the state’s exports to these countries?

It is true to say that Rio Grande do Sul meets the demands of the emerging markets in the south-south trade with its traditional range of products of the soybean complex, meat and tobacco. However, there is no doubt that there are innumerous opportunities for exporting other products to these countries. In order to intensify the dynamism of the exporting sector, it is mandatory to diversify the supply of products through the expansion of knowledge about the quick transformations that have been going on in terms of consumers’ habits and export needs in these markets. China, for instance, after years extensively importing basic products, such as food, iron ore and oil, is now not only demanding larger amounts of consumer goods, but is also being urged to provide wealthier and more demanding consumers with higher value-added goods. In this sense, in order to take advantage of this expanding consumer market not only in China, but also in other booming nations in the region, such as Vietnam, Malaysia and Thailand, the exporting sector of Rio Grande do Sul must be competitive and knowledgeable about the market and the specific characteristics of its respective industries. The introduction of free trade zones in China, for example, reflects the implementation of recent economic and financial reforms intended to boost the domestic consumption of imported products. The Chinese case opens new possibilities for higher value-added Brazilian items, such as premium food, for example. In relation to Latin America, a strategic market for manufactured products made in Brazil and in Rio Grande do Sul, the region must be urgently revitalized, improve its payment mechanisms and create effective means for the integration of high-value productive chains, focusing on productive specialization. Nevertheless, this region requires investments in infrastructure and logistics to reduce its foreign trade operating costs, so that it can catch up with other markets in terms of competitiveness, especially the Asian ones. Economic and political instabilities and recurring crises are also obstacles that governments and private companies must overcome.

Panorama: In the 21st century, Africa has stood out due to its high economic growth rates, in contrast to its poor performance in the previous decades. As many countries across the continent have been developing largely owing to agriculture, what can be done for Rio Grande do Sul to seize this opportunity and expand the sales of agricultural machinery to Africa?

Exports of agricultural machinery to Africa represent a very important niche to the state’s companies. According to 2015 data from the Brazilian Ministry for Development, Industry and Trade, 42% of the overall Brazilian exports to Africa consist of manufactured goods, and the level of technological intensity used in these products has risen in the last three years. Thus, Rio Grande do Sul may also take advantage of the idiosyncrasies in the process of agricultural development in Africa by adapting and designing equipment that can better suit its market needs. According to 2014 data from the International Labour Organization, agriculture in Africa can and must be boosted through integrated solutions involving industries, rural areas, and services. Another very important measure aiming at expanding this sector’s exports involves lines of credit provided by the government through the Banco do Brasil, directed primarily to the African countries that are granted funds for acquiring agricultural machinery and equipment made in Brazil. Therefore, the long experience of the government and the business community of Rio Grande do Sul along with the extension of lines of credit can serve as a competitive asset in the African market.

Panorama: In all the countries that have been successful in boosting their exports — such as the United States, Japan, Germany and China —, we notice the presence of a specialized bank to internationalize their national companies, in order to promote their investments and foreign sales. In what ways can the Brazilian Development Bank contribute to the integration of the national companies into the global market?

A bank dedicated to promoting international trade is a fundamental mechanism for increasing the Brazilian investments and exports abroad. The role of the Brazilian Development Bank in international trade involves both granting credit for the export-driven production of goods and services and for the overseas commercialization of Brazilian goods and services, providing special maturity dates, interest rates and payment conditions consonant with the size of the company. The Brazilian Development Bank also supports projects abroad, financing not only the acquisition of capital goods, but also the working capital of the companies. These policies expedite the opening of new markets, the insertion of Brazilian companies into global value chains and the growth of the Brazilian trade flow. Additionally, it is paramount to be up-to-date on the financial policies offered by the export credit agencies of other countries, such as the U.S. and Germany, to adjust the resources management of national funding to the level of the competition, allied with the real needs of the companies and their respective exporting profiles.

The developing countries on Rio Grande do Sul’s trade radar: the case of agricultural machinery

It is common to analyze the insertion of the State of Rio Grande do Sul in the global economy by taking into account topics such as its exporting partners — Argentina, China and the United States, not necessarily in this order — and the traded goods — soybeans and its products, meat (beef, pork and chicken), tobacco and chemicals. Although an increase (or maintenance) in the economic flows to these destinations and in these sectors is desirable, it is convenient to explore the opportunities in countries with high potential of economic growth in the next decades: the developing or emerging markets, especially those in southern Asia and in Sub-Saharan Africa.

Graph 1 - Share of countries and blocs in the exports of Rio Grande do Sul — 2003-14

Currently, most exports of Rio Grande do Sul are already directed to developing and emerging countries, thus following the trend of Brazilian exports, as shown in Graph 1. According to data from the Economics and Statistics Foundation (FEE), exports to the other four BRICS members (China, India, Russia and South Africa) and to the remaining Latin American countries comprised, in 2014, more than half of the state’s total exports (the proportions were 27.2% and 23.8% respectively). If other developing countries in Africa, Asia and the Middle East are considered, this proportion will certainly increase. The developed world — North America (9.2%), Europe (16.8%) and Japan (1.22%) — remains relevant, but its share has reduced over the last two decades.

Characterizing the current trade with emerging countries in general lines is a complicated task, as we can observe differing patterns for each geographical area. While soybeans and its products predominate in the commerce with East Asian partners (China, India, South Korea and Vietnam), in Africa and in bordering countries of Brazil, the export basket is more diversified. In the case of Rio Grande do Sul’s exports to Argentina, for instance, in spite of recent fluctuations and restrictions, products of medium and high added value, such as agricultural machinery, transport vehicles, industrial inputs and chemicals, are still relevant. When it comes to African and Middle East nations, other sectors are more salient, as the case of meat products to Angola (roughly US$108 million in 2014, or almost 54% of exports to that country), tobacco to Indonesia (47% of the basket to the country), and rice to Cuba (45% of the basket), according to statistics from the Brazilian Ministry of Development, Industry and Foreign Trade (MDIC).

An observation of this recent trade dynamics should not undermine the considerable potential of intensifying the trade with most emerging countries. The expectations about the broadening of agricultural frontiers in Latin America and in Africa offer, at the same time, opportunities and challenges to the insertion of the state in the global economy. African and other Latin American markets are competitors of Rio Grande do Sul as producers and exporters of soybeans and corn and also partners as importers of agricultural machinery. This may be not only a very profitable niche for the local companies and entrepreneurs, but also a convenient solution for the risk of excessive commoditization of state exports in recent times.

Graph 2 Composition of Rio Grande do Sul’s exports of agricultural machinery by destination — 2003-14

Currently, African and Latin American countries purchase 92% of Rio Grande do Sul’s exports of agricultural machinery, as can be seen in Graph 2. This figure is even more significant when we bear in mind that it was only 72% in 2005. Such process is in line with a wider movement within the Brazilian commercial policy over recent years, focused on the expansion of economic activities in emerging markets. With respect to the agricultural machinery industry, such strategy provides an additional demand for the industrial sectors of Rio Grande do Sul which have been struggling to compete in foreign markets. As the primary sector is still predominant in most of Latin America and Africa, the state’s industry may restore its share within the state’s exports.

In Africa, Ethiopia, Chad, Mozambique and Rwanda are among the top ten countries in economic growth rates in the 21st century. Unlike Angola and Nigeria, they are not rich in mineral resources and have prospered thanks to agriculture. Placed in the earliest stages of development, these nations still need machinery to expand their rural production, which represents a significant room for the economy of Rio Grande do Sul.  In fact, the Brazilian government signed an agreement in 2013 aimed at financing exports of agricultural machinery to Africa, through the Financing Program for Exports (Proex). Such measure is part of the international More Food Program, whose purpose is to promote the development of agriculture in Africa. Finally, the line of credit offered by the Brazilian National Bank for Economic and Social Development (BNDES) for exports-driven and non-agricultural products can be used by the state industry interested in exporting to Africa.

Furthermore, among Latin American countries, we highlight Bolivia and Paraguay, whose economic growth rates have been sound due to the expansion of family farming and to the advance of soybeans cultivation respectively. These processes have been influencing the state industry, which increased its sales to Bolivian and Paraguayan farmers. Concerning Paraguay, the strong presence of Brazilian-origin farmers (many of which, born in Rio Grande do Sul) strengthens the ties between the rural production in that country and the state’s industry of agricultural machinery. In addition, the increase in exports to Venezuela, despite its acute economic crisis, is probably a consequence of the accession of that country to the Southern Common Market (Mercosur), an initiative supported by many Brazilian industrial groups. Argentina has been an exception to the norm: its protectionist stance on trade, more visible after 2009, has induced a stark reduction of 56% on local sales from 2007 to 2013.

Economic and Trade promotion overseas, in contrast to the political and diplomatic relations, is not an exclusive competence of federal authorities. States and city authorities may — and are expected to — encourage local business beyond the borders of the nation. Actually, the activity of subnational governments in global economy has become more and more common, which operates, in most cases, as a complement to the national diplomatic bodies, or as a link between the latter and the business community. The forging of economic ties of Rio Grande do Sul with nations and regions traditionally underrated within the state trade outlook meets the interest of society and reinforces the current Brazilian foreign policy.

The Relevance of the BRICS for the State of Rio Grande do Sul

Understanding and systematically monitoring the dynamics of the relations between Brazil, Russia, India, China and South Africa (BRICS), as well as the international insertion of these countries, is something that should be important not just for the Presidency and the Ministry of Foreign Affairs of Brazil (MRE). Given the links between these markets and the export basket of Rio Grande do Sul, understanding the BRICS should also be a task for the government of the State of Rio Grande do Sul.

The BRIC acronym was originally coined by the Goldman Sachs’s English economist Jim O’Neill in his study Building Better Global Economics, which pointed out the influence of the emerging economies of Brazil, Russia, India and China on the future of the global economy as a whole. As the projections on the BRICS were being confirmed, another study from the same financial institution (BRIC’s and Beyond) went on to make economic predictions for a group of eleven countries that became known as the Next Eleven (Bangladesh, South Korea, Egypt, Philippines, Indonesia, Iran, Mexico, Nigeria, Pakistan, Turkey and Vietnam).

Although this economic focus on the BRICS keeps reverberating among international financial market analysts, it is worth mentioning that this is a market approach to this group of countries.

Thus, it is believed that to better understand the role and the influence of the joint action of these countries in the international arena more broadly, it is advisable to analyze this variable geometry group from its members’ own point of view.

In the political and diplomatic field, in spite of their differences and contradictions, the BRICS countries have taken advantage of the international attention to launch projects of political and economic coordination in the international arena, as well as international cooperation programs in areas which are sensitive to these countries: education, economic development, energy, food security, environment, defense, etc.

From an International Political Economy perspective, one can understand the reasons that explain, for example, the role played by South Africa in this bloc of emerging economies. Although lacking the economic weight of the other partners, South Africa’s leadership and influence on the African continent and its regional weight in the various international forums would give the then BRIC legitimacy to its demands and proposals in various issues on the international agenda.

In this sense, the reasons that led the other partners to include the African country in the group during its 3rd Summit, in 2011, become more evident. The addition of the “S” to the acronym (BRIC “S”) then shows that there is a clear distinction between the connotation given by Jim O’Neil in the early 2000s and the sense that the members themselves give to the BRICS.

Since its first meeting of foreign ministers, in Russia, 2008, six annual Summits of Heads of State have already occurred. In 2014, the BRICS gathered in Fortaleza, Brazil. This year the seventh meeting took place on July 9 in Ufa, Russia.

The important fact about the BRICS concerns the scope of its economic and political insertion in a variety of issues of the international agenda. The geopolitical weight of each country in their respective regional areas of influence around the globe and their joint actions make them a counterpoint to the current international system established after the Second World War — World Bank, International Monetary Fund (IMF) and the United Nations (UN).

Last year, the six countries announced the creation of their own Development Bank with a starting capital of $50 billion, which could reach $100 billion. The BRICS Bank plans to set up credit financing lines for infrastructure projects as well as a fund to help member countries in case of international financial turmoil. Thus, as the BRICS consolidate themselves as a reality in which Brazil is one of the protagonists, it is up to society as a whole, especially the people from Rio Grande do Sul, to understand this whole dynamics.

The striking feature of the BRICS regarding the state of Rio Grande do Sul is the fact that they have relevant domestic markets for the products of the state’s export basket. In this sense, Rio Grande do Sul needs to plan ahead of time the best way to improve the relationship between local companies and these markets. Although a considerable part of the export basket is composed of primary products, cooperative efforts among the BRICS may generate export opportunities for products with higher added value such as footwear, agricultural machinery and tools.

Rio Grande do Sul’s exports accounted for 18.2% (approx. $18.7 billion) of the state’s GDP in 2014. Out of this total, the BRICS partners accounted for 27.23% of the market for the local companies (approx. $5.1 billion). The export average growth rate to these countries in the last 14 years was 20.2%, as shown in the table.

The BRICS as a market for Rio Grande do Sul’s exports — 2001-14

 

When the share of each country as a market for the state’s exports is analyzed individually, the results are: China (87.52%), Russia (6.94%), India (3.04%) and South Africa (2.5%). According to data from the Brazilian Ministry of Development, Industry and Foreign Trade, in 2014, about 300 companies based in RS exported to China, 200 to South Africa, 130 to India and 100 to Russia, as shown in the chart.

Destination and export value of Rio Grande do Sul’s main exporters to the BRICS — 2014

COUNTRY

 VALUE COMPANIES MAIN ACTIVITY

Russia

 Over $50 million Philip Morris Brasil

Tobacco

Russia

 Between $10 and $50 million Universal Leaf Tabacos Ltda. Tobacco
Alibem Comercial de Alimentos Ltda. Pork
India Over $50 million Petrobras Oil
Bunge Alimentos S/A

Food

India

 Between $10 and $50 million Bianchini S/A Soybeans
China Over $50 million Bunge Alimentos S/A Food
Noble Brasil Grains, oilseeds
Vale S.A.

Ores

China

 Between $10 and $50 million Souza Cruz S/A Tobacco
Brf S/A Food
Epcos do Brasil Ltda Electrical and electronic material
South Africa Over $50 million Scania Latin America Ltda. Trucks
South Africa Between $10 and $50 million Souza Cruz S/A Tobacco
Dana Indústrias Ltda.

Automotive suspension and axles

RAW DATA SOURCE: BRAZIL. Ministry of Development, Industry and Foreign Trade (MDIC). Foreign Trade Secretariat (Secex). Exporting companies by countries and subnational units: Rio Grande do Sul 2014. 2015. Available at RAW DATA SOURCE: <http://www.mdic.gov.br//sitio/interna/interna.php?area=5&menu=1444&refr=603>. Retrieved July 15 2015.

Thus, this scenario reinforces the need for the state government to defend the interests of the state entrepreneurs institutionally (from the industry to agribusiness) in Brazil’s commercial relations policy-making. In the case of the BRICS, defending the interests of Rio Grande do Sul demands a strategic and systemic view of the political and economic relations within the bloc and partnerships that these countries have with the rest of the world.

The role of exports in the determination of income in the State of Rio Grande do Sul

Economists usually take the propensity to import as a universal parameter, regardless of the category of the final demand. However, this simplifying hypothesis does not hold empirically. In the case of Rio Grande do Sul’s economy, as well as the Brazilian one, the fixed capital investment propensity to import is greater than the export propensity to import. That happens in the exact extent to which investment tends to associate with innovation, and many times the inverting firm does not find, in the local market, an equipment supplier effectively equivalent to the model that is aimed at being incorporated into the plant. In this case, import is an imposition. On the other hand, it is extremely rare for imports to be simply re-exported, without any added value along the internal production process.

Since the exported goods are based on comparative and/or absolute advantages that present some stability in terms of the international division of labor, productive chains are structured around these goods, which unfold into large internal integration systems with low external leakage. In the terms of our discussion, it means that, given the productive structure of the state’s economy, little is imported when it comes to export, both in immediate (the exported good itself) and in mediate (the necessary inputs for the production of the good to be exported) terms.

These facts are evidenced even in a relatively superficial analysis of the 2008 Input-Output Matrix of Rio Grande do Sul (IOM-RS), which shows the sources of funds and the destinations of the state’s production.[1] According to the Economics and Statistics Foundation (FEE), the monetary value of exports (X) to other countries and that of the Gross Fixed Capital Formation (GFCF) were very similar in 2008: just over R$36 and R$34 billion respectively. Nevertheless, the imports directly associated with the GFCF totaled nearly R$12 billion (more than one third of the total), while the imports for exports did not exceed R$17 million.

Consider a final demand increase of about R$1 billion in the state’s economy even if such increase takes place either in the GFCF or in the foreign exports, and if it is distributed proportionally to the structures of these two categories of demand in 2008. As we can see in the table, the multipliers of the IOM-RS for the Gross Production Value (GPV), the Gross Value Added (GVA), the salary and the employment of these two demand categories are very different and always higher for exports than for the GFCF.

Comparison of the impact of the autonomous variation of R$1 billion on demand

Leaks in the GFCF, i.e., the part of the initial demand thrust that ends up being directed towards imports are so high that we cannot strictly speak of a “multiplier” of the amount invested, for even if we take into account the indirect impacts of the investment demand, the GPV will grow below the initial demand variation. In contrast, the demand for exports is multiplied by 1.644, that is, after the initial demand thrust, the production of various segments of agribusiness, industry and services integrated to the production for export increases.

As the export chains demand more workers and are relatively more democratic in the distributive plan, being present in nearly all regions of the state, they foster an increase in income and employment significantly bigger, even though the so-called “income effect” has not even been computed yet. This effect is the one that comes from an increased demand for consumer goods derived from the expansion in income —wages, mixed income (such as those of family farmers, micro-entrepreneurs, etc.) and corporate earnings — appropriated by economic agents due to the expansion of the initial autonomous demand. As shown in the table, the impact of X is also bigger than the impact of the GFCF on these components, which brings us again to the same conclusion: in Rio Grande do Sul, exports are the autonomous demand component with the greatest potential for boosting income and employment. In the short and medium terms, it seems clear that the most effective strategy for mobilizing the state’s economy is supporting the growth and the modernization of its exports.

[1] SÁ, R. de (Org.). Matriz de Insumo-Produto do Rio Grande do Sul: 2008. Porto Alegre: FEE, 2014. Available at <http://www.fee.rs.gov.br/indicadores/matriz-insumo-produto-rs-miprs/mip-rs-2008/>.