Author Archives: Tomás Amaral Torezani

About Tomás Amaral Torezani

Pesquisador em Economia da FEE. Economics Researcher at the FEE.

World trade and the commoditization of Brazilian exports

Jorge Arbache, a Professor of Economics at the University of Brasília, is the former chief economist of the Brazilian Ministry of Planning, Budget and Management. His previous positions also include senior economic advisor to the President of the National Bank for Economic and Social Development (BNDES) and senior economist at the World Bank in Washington, D.C. Arbache holds a Ph.D. in Economics and a B.A. in Economics and Law. His main current research interests are sectorial competitiveness, investment, productivity, technology and trade.

In an interview to Panorama, Jorge Arbache evaluates the challenges for foreign trade and points out that the costs are no longer what determines the competitiveness of nations and enterprises. He comments on the obstacles faced by developing countries for their integration into the international trade and argues that Brazil’s focus on the production and export of commodities traps the country in a backward situation. Arbache explains the weakening of multilateral agreements, positions himself on the challenges that mega deals represent for Brazil and evaluates the productivity of the Brazilian service sector.

By: Tomás Torezani

Panorama: In recent decades, several processes have decisively changed the configuration of the international economic order, especially the fragmentation of production in global value chains, the role of multinational companies and the growing importance of China. Do these movements bring new challenges to foreign trade in the 21st century?

Yes, many new major challenges, particularly for developing and emerging countries that are still looking for a “place in the sun” in the twenty-first century. Costs are losing relevance in determining the competitiveness of nations and enterprises. Robots, the “Internet of things”, artificial intelligence, 3D printers, manufacturing 4.0, new energy, nanotechnology, etc. reduce part of the conventional production costs of the final value of products. Yes, they still are and will be very important for a long time, but what increasingly determines competitiveness is the ability to produce value added to things. “Commoditized” goods and services will be less and less able to promote the full and inclusive economic development.

 Panorama: With the weakening of the multilateral agenda of the World Trade Organization (WTO), preferential trade agreements have been signed. Can recent mega deals that begin to take shape be considered a new stage of globalization?

The weakening of multilateral agreements is due to the change in orientation of the United States and other countries in favor of the plurilateral agenda, letting the multilateral agenda die of inaction. Plurilateral agreements, such as the TPP[1] and the TISA[2], are already tacitly replacing multilateral agreements and, later, will expressly replace them. The problem is that the plurilateral agreements are neither concerned with the development agenda nor consider the huge inequality between countries in terms of their technological status quo, innovation, per capita capital inventory, access to credit capacity, intellectual property, whether or not they host global corporations, etc. Virtually the whole digital economy is in the hands of a few giant firms, and almost all of them are in the U.S. and a few are in Europe. It is an agenda that basically aims to extend the benefits of those who already have an advantage. Maybe it’s the globalization in its most questionable step from the point of view of access to productivity, growth and prosperity convergence opportunities for all.

 Panorama: What are the major obstacles that emerging countries are facing in order to assertively integrate themselves into the international trade? And, in the case of Brazil, how does the country position itself in the trade negotiations?

The major obstacles are associated with the inability, in the foreseeable future, to reduce the knowledge and technology gaps, which keep expanding. Yes, in part, the gap increases due to the ultra-mercantilist posture of the advanced countries. But in large part it is due to ourselves, because we insist on confronting the relevance of knowledge agendas in their various dimensions: basic education, science and technology, innovation, professional education, production management, cooperation between universities and companies. As for the position of Brazil in the negotiations, we have focused on agendas that favor the production and export of commodities, which can be good in the very short term, but which worsens even further our situation of backwardness and increases our detachment from the countries that develop and produce high value added goods and services.

Panorama: The attention given to the role played by services produced and marketed globally has been increasing lately. What is your opinion about the real importance of the sector for international trade and the growth prospects in the current world economic order?

One of the characteristics of globalization is the consolidation of markets, namely, the reducing number of players in the segments that matter the most. This is already happening before our eyes in the food, automobiles, processors, glass, aircraft, supermarkets and insurance markets, and so on. In some markets, it is now more difficult for a company that operates only nationally to compete with companies that operate globally, let alone companies at state and municipal levels.

Panorama: The services’ share of value added of global exports is increasing. However, the weight of the sector in Brazilian exports and its productivity in the economy as a whole are still low. How much can services represent for the country’s trade, investment and technology flows?

Services now account for 54% of global trade, when counted in Value Added. It is estimated to be 75% by 2025. Therefore, exported final services, such as insurance policies and, more importantly, services “embedded” in the production of industrial, agricultural and mineral goods are simply crucial to the competitiveness of enterprises and the prosperity of nations. In Brazil, services are the main component of the gross value of industrial production. Their share is high among exported products. The more elaborate the product, the larger that share can be, which is not our case, because we export many commodities and commoditized industrial goods, such as cellulose and sugar. Finally, as the productivity of our service sector is very low and has stagnated, services “intoxicate” the other sectors, undermining their competitiveness. This helps to explain inflation, in general, and our low international competitiveness.

 

 

[1] Trans-Pacific Partnership.

[2] Trade in Services Agreement.

 

The possible outcomes of the mega-trade deals in Brazil’s exports

Whatever the extension or the depth of a debate on trade deals, even in the 21st century, the duality between free trade and protectionism gains ground. While the advocates of the first one identify potential gains and opportunities for those involved in an agreement of this scope, from the perspective of comparative advantages based on traditional models of international trade, others argue that trade liberalization changes the composition of employment and its level, as well as other variables, such as wages, income and the trade flows themselves. The advances of the last global trade and investment deals have invigorated this debate. However, what is at stake in these deals surpasses this false dichotomy when we start to understand what is really being defined in these negotiations.

The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) are mega regional trade agreements formulated under the leadership of the United States, to the detriment of the multilateral negotiations under the World Trade Organization (WTO). The TPP consists of a partnership between 12 countries of the Pacific coast[1], which together account for 25% of world exports, about 40% of the global Gross Domestic Product (GDP) and over 800 million people. It is an American prerogative to increase its influence in Asia at the expense of China’s advance on the continent. This is reinforced by the fact that the United States already has trade agreements (low tariff barriers) with some of the countries involved, although these barriers are still high between the other members of the TPP. The TTIP, on the other hand, is a more thorough proposition of a trade and investments agreement between the United States and the European Union, bringing together 60% of the world’s GDP, one third of the world’s trade in goods and more than 40% of that of services.

In common, these two mega deals go beyond the barrier of trade in goods and services, emphasizing issues such as the reduction of nontariff barriers, dispute resolution mechanisms[2], intellectual property rights, labor standards, currency manipulation, government procurement, the environment, etc., that is, these mega deals inaugurate a new regulatory framework for international trade within the deepening of the current logic of production fragmentation and the global value chains.

From the establishment of these partnerships arises a natural discussion about their potential effects (direct and indirect, positive and negative) on the countries (independently of their being or not being members of the partnerships). However, a more accurate and thorough investigation has been made impossible due to the lack of access to the terms of the agreements, a behavior that has been widely criticized. In spite of the legitimate concerns caused by the lack of knowledge of the full texts of the agreements, it is clear that there will be winners and losers and benefits and drawbacks unevenly granted to the world economies. At the same time, challenges will be presented and opportunities will be created for every country.

Undoubtedly the mega deals will profoundly affect the trade relations and the flows of goods and services across national economies. At first, we can anticipate the potential outcomes for both the participating and the nonparticipating countries. Among such outcomes are: (a) trade creation and/or diversion; (b) deepening or isolation of global value chains; (c) erosion of special and differential provisions of previous bilateral negotiations; and (d) the effects on income and employment throughout the world.

For Brazil, it is understood that the intra-regional trade liberalization of the TPP and the TTIP countries, as well as the alignment of their regulatory frameworks, will affect their trade flows in all product categories (basic and industrial). As we can see in the table, most of the products that Brazil exports (47% of the total) are not highly significant in these markets. Nonetheless, the nations that participate in these partnerships are major exporters or importers of many of these products, which can generate negative indirect effects on Brazilian exports. Moreover, regarding the other 53%, the foreign sales of some products are largely dependent on the markets covered by the partnerships. At the same time, there are, in these regions, potential competitors to Brazil and expectations of a growing intra-regional trade, which could result in negative direct effects to the country’s exports.

In the case of the primary sector, the TPP may cause trade diversions between Brazil and Asia in favor of competitors such as the United States, Canada, Australia and New Zealand, specifically in the sectors of grains, milk, meat and sugar. Manufactured products sales may also undergo some adaptions, once some European markets and the United States are important destinations of these Brazilian products. On the other hand, the participation of countries such as Mexico and, most of all, Peru and Chile can create an open door for industrial products in South America, at Brazil’s expense. In addition, the granting of preferential tariff quotas by the European Union to the U.S. could also reduce Brazil’s access to European markets.

Participation of the 10 main products exported by Brazil and major source and destination markets — 2012-15 (%)

PRODUCT

 PRODUCT/

TOTAL BR

 PRODUCT TPP/TOTAL BR PRODUCT TTIP/

TOTAL BR

 MAJOR WORLD EXPORTERS

MAJOR WORLD IMPORTERS
Iron ore

11.5

 1.4 2.1 Australia (52%), Brazil (25%), South Africa (6%)

China (65%), Japan (12%), South Korea (6%)
Soybeans

9.4

 0.4 1.3 U.S. (42%), Brazil (38%), Argentina (7%)

China (64%), Germany (3%), Spain (3%)

Crude oil

 6.8 2.4 2.3 Saudi Arabia (20%), Russia (17%), United Arab Emirates (9%)

U.S. (19%), China (15%), Japan (9%)
Sugar

4.6

 0.5 0.3 Brazil (40%), Thailand (11%), France (5%)

China (8%), U.S. (8%), Indonesia (7%)
Broilers

3.0

 0.6 0.1 Brazil (26%), U.S. (18%), Netherlands (10%)

Germany (8%), Hong Kong (7%), UK (7%)
Soybean meal

2.9

 0.1 1.9

Argentina (37%), Brazil (23%), U.S. (13%)

 Netherlands (8%), Indonesia (7%), France (6%)
Coffee 2.4 0.8 1.8

Brazil (19%), Vietnam (11%), Germany (9%)

 U.S. (20%), Germany (14%), France (8%)
Corn

2.3

 0.6 0.2

U.S. (29%), Brazil (17%), Argentina (15%)

 Japan (15%), South Korea (8%), Mexico (8%)
Cellulose

2.2

 0.5 1.3

Brazil (17%), Canada (17%), U.S. (16%)

 China (30%), U.S. (10%), Germany (9%)
Meat

1.9

 0.0 0.1

Brazil (21%), Australia (18%), India (15%)

 Russia (16%), U.S. (15%), Hong Kong (9%)
Subtotal

47.0

 7.3 11.4

Australia (29%), Brazil (25%), U.S. (8%)

 China (42%), Japan (10%), South Korea (6%)
TOTAL

100.0

 22.9 30.6

China (16%), U.S. (15%), Germany (9%)

 U.S. (14%), China (11%), Germany (7%)

RAW DATA SOURCE: BRASIL. Ministério do Desenvolvimento, Indústria e Comércio Exterior. Aliceweb 2. 2016. Retrieved from on Mar. 8, 2016.

UNITED NATIONS. United Nations Comtrade Database. [2016]. Retrieved from on Mar. 8, 2016.

 

Some previous studies have estimated the effects of the TPP and the TTIP on the Brazilian economy. Simulations made by Thorstensen and Ferraz (2014)[3] indicate a reduction of the Brazilian trade with the TPP and the TTIP countries and Brazil’s participation in international trade as a whole, with more significant retractions when they simulate reductions in nontariff barriers — in addition to tariff barriers —, which is precisely the case of these mega deals. As the tariff barriers between member countries are already relatively low, the reduction of nontariff barriers would bring major negative effects to Brazil. With the adoption of the TPP, the most affected sectors in Brazil would be meat products, animal products, fruits, vegetables and coffee. On the other hand, the most benefited sector would be silviculture. With the TTIP, there would be even more deleterious effects on Brazilian trade: in the agricultural sector, most of the losses would be in the same sectors of the TPP. In the industrial sector, however, the most benefited segment would be wood products, while the most damaged would be the ones related to transports equipment, vehicles and parts, leather and nonmetallic minerals.

Another study, conducted by Fleischhaker et al. (2016)[4], simulates that the mega deals would have a limited effect on Brazil’s growth rate — for the country has a relatively closed economy —, but its trade structure would be severely compromised. Overall, the country would be even more isolated from the global trade and increasingly characterized as an exporter of commodities. Regarding the TPP, a trade growth with China is expected, strengthening the ties between two great outsiders. However, gains in exports to China would be counterbalanced by even greater losses in exports to the TPP members, especially the U.S. and Mexico. When it comes to the TTIP, even with the relative increase in exports of mineral raw materials for the European automotive industry, this would come as a cost for exports in other key markets for Brazilian products, with overall negative results in terms of trade and growth. The only sector that would not lose is mining, but not even other commodity-based industries would benefit due to the presence of other agricultural powers, such as Canada and Australia, which would have preferential access to important markets for these products, among which are Japan and the E.U. Moreover, the authors argue that the progress of these mega deals could aggravate the deindustrialization process of the Brazilian economy, making the manufacturing industry shrink in almost all its segments, starting with the automotive industry.

In times of increased interdependence of national economies, lower growth in world trade and fiercer foreign competition, the consummation of the mega deals may pose further challenges to a good integration of the Brazilian economy in the international arena and to a greater integration in the global value chain, especially in a downward period in the cycle of commodities, with unfavorable terms of trade and a rebalancing of the Chinese economy. In this sensitive scenario for Brazil, even with a large domestic market, advantages in some agricultural and mineral sectors and demand for its manufactured products from its strategic neighbors, it would be desirable that the country should adopt a strategy to at least reduce its relative isolation in terms of international trade and global value chains. While the TPP and the TTIP seem to represent serious threats to Brazil’s interests, with potential effects on the composition and the direction of its trade flows, these effects may worsen the Brazilian situation even more, by increasing its dependence on the exports of only a few commodities.

[1] Besides the U.S., the other TPP members are Canada, Mexico, Peru, Chile, Japan, Malaysia, Vietnam, Singapore,   Brunei,

Australia and New Zealand.

[2] In this respect, in The secret corporate takeover, published in Project Syndicate, on May 13th, 2015, Stiglitz draws attention to the fact that mega deals consist of managed trade agreements, tailored to the corporate interests of the U.S. and the European Union, requiring fundamental changes to the legal, judiciary and regulatory frameworks of the nations involved. By allowing foreign investors to sue countries, it opens up the possibility of the latter indemnifying the former for losses on expected profits even in cases in which profits are made from public damage.

[3] THORSTENSEN, V.; FERRAZ, L. Brasil: entre acordos e mega-acordos comerciais. Revista Brasileira de Comércio Exterior,

Rio de Janeiro, n. 120, Jul./Sep., 2014.

[4] FLEISCHHAKER, C.; GEORGE, S.; FELBERMAYR, G.; AICHELE, R. A chain reaction? Effects of mega-trade agreements on Latin

America. Gütersloh: Bertelsmann Stiftung, 2016.

Economic links between Mercosur and the State of Rio Grande do Sul

The location of Rio Grande do Sul in Southern Brazil, regarded as “eccentric” by many, due to its distance from the country’s main consuming centers, becomes central when it comes to Mercosur. After all, the shared borders with Uruguay and Argentina give the state a privileged position for strengthening production and trade ties between the bloc’s countries and Brazil. Initially perceived as a threat to the state’s economy, given the productive similarities with the neighboring countries (mainly because of the relevance of agribusiness), Mercosur has become a factor for attracting investments to Rio Grande do Sul. In that crop of investment, achievements can be seen in the automotive industry, which has witnessed the creation of a regional division of labor involving complementarities and interdependences between the products manufactured in Brazil and those made in Argentina. The same can be said of the agricultural machinery sector, whose location in the state has proven strategic for meeting the needs of both the neighboring countries and the growing demand of the Brazilian midwest. From the start, Mercosur posed a strategic opportunity for a structural transformation in the state’s production structure.

[…] the integration with the countries in the southern part of the continent has proven to be able to change the major features of the state’s economy. Indeed, the state is starting to leave behind its historical peripheral condition in Brazil to play a central role within the integrated economy. Investment decisions which reflect and materialize such ongoing change are starting to be made and tailored to meet the needs of Mercosur.[1]

After more than 25 years since its creation, Mercosur still plays a strategic role in the state’s economy, although the opportunities and expectations about the bloc’s future are less promising.

The state’s economy is more open to Mercosur than the national average due to the built production complementarities and the higher share of imports, whose front door is the state and whose destination is often the center region of Brazil (Figure 1). On average, between 1991 and 2014, sales to Mercosur accounted for 14% of Rio Grande do Sul’s exports and 11.2% of the ones from Brazil. As regards imports, in the same period, Mercosur was responsible for 32.5% of the state’s foreign purchases and 9.8% of Brazil’s .

grafico-1-cecilia-tomas-eng

When comparing the state’s exports towards Mercosur with those towards other regions, the relevance of the bloc becomes even more evident (Figure 2). Throughout almost the entire period between 1991 and 2014, Mercosur was the third main destination of the state’s exports. The average share of the export value was only surpassed by the European Union (22.8%) and the U.S. (19.9%). However, their relevance in the exports of Rio Grande do Sul has been reducing significantly in recent years.

Considering each bloc member, for the period 1991-2014, on average 62% of the exports were directed to Argentina, 19% to Paraguay and 18% to Uruguay. From 1991 to 2009, the exports of Rio Grande do Sul to Mercosur increased in value at an average annual rate of 15%, while the overall state’s exports expanded in 9%. More recently, however, a sensible change can be noticed: the state’s sales to the bloc member countries shrank 2% between 2010 and 2014, while the state’s total exports grew 4%. This change reflects primarily a decrease of 9% in the sales to Argentina in the period.

The relevance of Mercosur for the state’s economy, at least when it comes to international trade, becomes even clearer when the composition of the exports to the bloc is disaggregated. By analyzing the state’s exports in a more recent period (2007-14) and by aggregate factor, we can notice that the composition of the export basket of Rio Grande do Sul to the world (Figure 3) is predominantly commodity-driven (average of 52%), while the sales to Mercosur (Figure 4) largely comprise  manufactured products (92%), which shows a very contrasting pattern.

grafico-3-cecilia-tomas-eng

grafico-4-cecilia-tomas-eng

A similar pattern can be seen when we classify the state’s exports by technological intensity. Medium-high and medium-low technology goods comprise a larger share of the exports to Mercosur, while the exports to other destinations have a greater share of nonindustrial and low-technology items. In 2014, medium-high and medium-low technology goods made up approximately 80% of the sales to Argentina and Uruguay. On the other hand, over 70% of the exports to European countries consisted of low-tech or non-industrial products, a percentage that exceeded 90% in the case of the exports to China. To the United States, the share of medium-high and medium-low technology products was 42% in the same year. However, the U.S. participation in the state’s exports has been consistently decreasing, as can be seen in Figure 2.

Therefore, Rio Grande do Sul’s exports to the Mercosur nations comprise mainly industrial products with some degree of technological intensity. The importance of such products is also revealed in the greater income-elasticity of the demand and in the high potential of long-term growth. These products also tend to be less subject to the deterioration of the terms of trade, less susceptible to substitutes in the world market and more demanded by more dynamic markets. In this case, Mercosur can be seen as an exception to the structure of the export basket of Rio Grande do Sul, which is highly concentrated in low value-added products. Thus, the proximity of the state’s economy to that of the Mercosur member countries — and the very existence of the bloc — contributes to the diversification and the quality of the state’s exports, offsetting the competitive difficulties associated with the export of manufactured goods to other regions.

As for the sectorial activity in the state’s exports to Mercosur (Table 1), a strong participation of chemicals, machinery and equipment and motor vehicles can be underlined. Mercosur is also a major destination for the products of other industries with lower participation in the state’s exports, such as petroleum products, textiles, metal products, rubber and plastic products, computer equipment and electronics. The exceptions — some of the important state’s exports of which Mercosur does not represent a relevant share — are food products, tobacco products, leather and footwear. Regarding the share of exports in the total production, the chemical and textile sectors direct much of their production to Mercosur. In the other sectors, Brazilian market and exports to other countries and blocs are more relevant.

tabela-1-cecilia-tomas-eng

As can be perceived from the discussion above, the last few years have been characterized by difficulties in the trade and production relations within the bloc, to which the economic problems faced by Argentina have greatly contributed. These difficulties do not stem only from the slowdown in the growth rates and from the high inflation in that country, which inevitably impact on its imports. They especially reflect the scarcity of foreign exchange in the face of the still poor access to external financing flows, a legacy from the crisis of the end of the convertibility plan in the early 2000s. More recently, the shortage of foreign exchange in Argentina has worsened, owing to the cooling of soybean prices in the world market. In that scenario, the crisis in the neighboring country has affected the performance of Rio Grande do Sul’s exports not only because of the drop in imports, but also because it has induced, even temporarily, the adoption of control policies over the granting of import licenses and the establishment of quotas.

Furthermore, the Government of Argentina has also been adopting structural measures aimed at overcoming the shortage of foreign exchange in the long run. They involve reissuing an import substitution policy — already evident in the agricultural machinery sector, given the “[…] change of the neighboring country from the main foreign customer into a competitor in South American and African markets”[2] — and broadening partnerships with China, in order to finance infrastructure projects in exchange for a greater opening for the manufacturing market of that Asian country. As a result, there is an increasing market share of Chinese manufactured goods imported by Argentina and a greater propensity for Brazil to adhere to bilateral trade agreements, which questions many economic advances achieved thanks to the bloc. Considering that an important part of the industry established in Rio Grande do Sul aims to occupy a strategic and central position simultaneously for Brazil and the Mercosur markets, the difficulties of the bloc also result in the loss of crucial competitive advantages for attracting investments to the state.

[1]  CASTRO, A. B. Notas para uma estratégia. In: RIO GRANDE DO SUL. Secretaria de Coordenação e Planejamento (SEPLAG). Projeto RS 2010: realizando o futuro. Porto Alegre, 1998. p. 10.  Translation mine.

[2]  FEIX, R.; DE GASPERI, E. Argentina substitui importações de máquinas agrícolas. Carta de Conjuntura FEE, Porto Alegre, v. 23, n.  12, p. 1, dez. 2014. Translation mine.