The Economist | February 7, 2004
WHEN Luiz Inacio Lula da Silva looks to the outside world he presents one of two faces: a welcoming one and a wary one. The first was on show last week in India, where Brazil's president signed the first trade deal between Mercosur, a South American trade block that Brazil leads, and an Asian country. He also proposed a full-fledged free-trade agreement among the G20 developing countries, a Brazilian-inspired grouping formed ahead of last year's meeting of the World Trade Organisation (WTO) in Cancun. But this week, Lula's wary face hovered over a meeting in Puebla, Mexico, of 34 deputy trade ministers negotiating the proposed Free Trade Area of the Americas (FTAA).
Put the two stances together, and Lula looks like an ardent promoter of an old idea, fashionable in the Non-Aligned Movement in the 1970s: that poor countries can stand up to rich ones and achieve development by co-operating with each other. In 20 foreign trips since taking office in January 2003, Lula has tried to rally developing countries like the union organiser he used to be. He has formed a co-operation pact with India and South Africa, two other emerging democracies. In Geneva last week he joined UN chief Kofi Annan and the presidents of Chile and France in calling for a noble-sounding fund to fight world hunger, whose details are vague. Lula's government claims that its overriding foreign-policy priority is closer links with its Latin American neighbours.
All this serves several goals. Most important, perhaps, standing up to the United States's vision of pan-American free trade does Lula no harm with Brazilians who have suffered a year of tight economic policies. (The same applies to Brazil's recent decision to single out American visitors for fingerprinting.) The partnership with South Africa and India helps to press the claims of all three for permanent seats on the UN Security Council, while the G20 aspires to take on the rich countries in the WTO's Doha round of global trade talks. There is also a harder-headed reason to promote third-world solidarity: developing-country markets are increasingly important to an export boom that underpins the prospect of economic recovery.
For the past two decades, Brazil's export performance has been pitiful. When rising debt and falling foreign finance threatened the country's financial stability, Lula's predecessor launched an export drive. Mr da Silva himself has pledged to increase exports by 10% a year. Last year, helped by a weaker currency and rising world prices for commodities, they rose by 20%. That helped to turn a current-account deficit, which peaked at $33 billion in 1998, into a surplus of $4 billion in 2003. This provides Brazil with more dollars to pay its external debt, which in turn leads to a higher credit rating, lower interest rates, faster economic growth and, Lula devoutly hopes, more jobs and higher wages.
Brazil's exports to developing countries have risen by 35% over the past five years--nearly double the rise in sales to rich countries (see chart on next page). China has become Brazil's third-biggest trading partner. Although exports to India were just $550m last year, Brazil spots opportunities for cosmetics, medical equipment and Embraer's regional jets.
Certainly, these are welcome new sales. But the United States, the European Union and Mercosur remain Brazil's main markets. And while Brazil's biggest export to China is soyabeans, to the United States it is aircraft. But this is where the wariness creeps in. Lula probably reflects a majority at home in seeing more threat than opportunity in the FTAA, which is supposed to be ready by the end of this year.
In Puebla, as The Economist went to press, Brazil was lobbying for an "FTAA-lite", as it had at a meeting of hemispheric trade ministers in Miami in November. This would impose few obligations on countries to open up such areas as government procurement and services or to impose yet-tougher rules on intellectual property. Such commitments, Brazil fears, could kill big sectors of its industry and prevent others from being born. Besides, the United States has banished from the FTAA the issues that Brazil cares most about, such as farm subsidies and anti-dumping measures. It insists that these be dealt with by the slow-moving WTO talks. The United States has gone along with an "FTAA-lite" while simultaneously offering a dozen countries deeper bilateral or "plurilateral" deals.
Brazil's timidity could be costly. An FTAA without South America's economic giant is "not worth signing," says Jeffrey Schott of the Institute for International Economics, a think-tank in Washington DC. And a Mercosur consigned to second-class status within the FTAA risks isolation and lost investment. For example, Brazil's hopes for a trade deal with the EU depend in part on the scope of the FTAA.
The World Economy Centre of the Funda o Getulio Vargas, a Brazilian business school, reckons the FTAA and an EU-Mercosur deal could allow Brazil to increase its exports by 20% a year, cutting by half the ratio of debt payments to exports, and lifting Brazil's credit-rating to investment grade. This could be the foundation for a new stage of sustainable growth, according to Carlos Langoni, the centre's director, and "much more important" than any industrial policy which the government might pursue.
South-south trade is unlikely to pay off so handsomely soon. China will be a fierce competitor for Brazil's manufacturers, as well as a promising market for its commodities. India is one of the world's most protected economies. Even Argentina, Brazil's closest diplomatic friend, is trying to reduce imports of Brazilian textiles without flouting the rules of Mercosur. Lula's wariness in dealing with the United States is understandable, especially in the absence of progress in the global trade talks. But that need not make it wise.The Economist:
