Reuters | By Pedro Nicolaci da Costa | Aug. 10, 2003
NEW YORK (Reuters) - Even if Brazil's Workers Party government manages to implement long-sought pension and tax reforms, Latin America's largest economy faces another nagging impediment to growth: U.S. barriers to trade.
A wave of optimism on Wall Street toward the country's union-leader-turned-president has boosted returns on Brazilian debt to a staggering 35 percent so far this year.
President Luiz Inacio Lula da Silva, known simply as Lula, scored another big political victory on Thursday when his proposed reforms passed a crucial hurdle in Congress.
But even with a solid reform agenda in place by the end of the year, analysts argue that for the Brazilian economy to fully blossom, export industries must operate to their fullest potential. That, in turn, will likely require a change of heart -- and a shift in policy -- from the United States on trade.
Despite boisterous rhetoric from the U.S. government about the need to expand free trade in the Americas, the reality of regional commerce has been fraught with restrictions in politically sensitive industries like agriculture and steel.
"Latin America delivered on their end of the bargain," said John Welch, head of Latin American research at bank West LB. "The U.S. not only did not deliver, but it also increased subsidies."
For Brazil, that has meant money not earned -- a lot of it. The nation loses around $2.4 billion a year from the U.S. government's most recent injection of financial aid to its farming sector, according to officials at the Brazilian Embassy in Washington, D.C.
Analysts argue that a serious overhaul of such restrictions would help unleash the economic potential of a nation of 170 million. Lula and his party have long made this argument, and now they are finding some unlikely allies in the cause of free trade: Wall Street bankers.
DON'T WAIT FOR UNCLE SAM
Less than a year ago, New York investors cringed at the prospect of seeing Brazil ruled by a leftist. One Wall Street analyst even referred to him publicly as "the devil incarnate."
But such demonic whispers were silenced by Lula's policies following his victory last October. Wall Street was pleasantly surprised when he vowed in taking office in January not only to honor Brazil's foreign debt obligations but also to extend his predecessor's budget-trimming reforms.
Analysts say Lula will have to apply to the arena of trade the same practical approach that earned him Wall Street's trust.
Brazil, they say, cannot afford to hold out for a complete eradication of agricultural trade barriers before embarking on regional agreements like the proposed Free Trade Area of the Americas. Farm, steel and textile lobbies have a strong hand in U.S. politics, and that is not likely to change any time soon.
So Lula may have to compromise on trade, even as his diplomatic corps lobbies for a reduction in farm subsidies on exports like soybeans and concentrated orange juice.
"Brazil will have to be more pragmatic than ideological," said Suhas Ketkar, senior economist and head of emerging markets analysis at the Royal Bank of Scotland.
"They will have to go for second best and expect some concessions in trade and manufacturing. This is a country that produces airplanes and computers, after all, not just a one-dimensional commodity exporter."
Still, trade is a two-way street and Brazil's success in selling its goods abroad will depend in part on the willingness of rich countries, the United States in particular, to open up politically touchy industries.
"You can't clap with one hand -- you need support from your trading partners," said Ketkar.
SLOWLY BUT SURELY: A VIRTUOUS CIRCLE?
Now that a financial crisis fueled by pre-election anxiety is long over, conditions in Brazil may be ripe for just the sort of virtuous policy cycle that would sow the seeds of sustainable growth.
"Brazil has enough of a domestic capital base that it can start generating a recovery on its own," said Jose Barrionuevo, director of emerging markets research at Barclays Capital.
When export-led growth reaches a level conducive to job creation and higher wages, say analysts, Brazil's huge untapped internal demand for consumer goods should spring to life, carrying the recovery forward.
Already the central bank has begun lowering sky-high interest rates, which have curtailed business investment. The downward trend in borrowing costs is set to continue as inflation gauges reveal softening price pressures, giving officials further room to ease monetary policy.
But still, trade will be key for Brazil's future and an eventual free trade agreement with the United States will need to involve some degree of give and take if it is to yield lasting economic benefits.
"For Brazil, the Free Trade Area of the Americas is a priority, but a priority that they are willing to negotiate, not give away," Barrionuevo said. "They want to make it worthwhile for them, and that's understandable."Reuters:
