BRAZIL: Trade surplus masks limited export growth

Analysis

On September 20, the accumulated trade surplus for 2002 reached just over 7.2 billion dollars, above the 7 billion predicted for the year as a whole. Although the trade surplus and reduced current account deficit present an encouraging picture for Brazilian trade flows, a more cautious reading of the trade data reveals that much of the surplus was due to a sharp contraction in imports rather than a rise in exports. This 'mixed' news raises the question as to whether the improvement in trade flows is structural or conjunctural, as well as the impact of currency depreciation on export performance. These issues have important policy and investment implications for both the presidential candidates and the private sector.

Export performance . Brazil's share of world trade was 0.97% in 2001 and is expected to increase this year. A favourable exchange rate, the recovery of commodity prices, excellent harvests, efforts to diversify both markets and products, and private sector investments to improve the quality and competitiveness of products are beginning to pay off (see BRAZIL: Soya harvests continue to set new records - LADB, August 30, 2002, I. ; and BRAZIL: Soya harvests continue to set new records - LADB, October 10, 2001, II. ). Moreover, the national development bank, BNDES, has given increasing priority to financing the export sector, allocating over 2.5 billion dollars from January to August 2002, a 40% year-on-year increase.

Exports to a number of regions increased in the first half of 2002, year-on-year, including rises of 52% to Caribbean, 26% to Central America, 15% to Africa and 8% to the Middle East. Exports to China have doubled to 3 billion dollars in the past two years. The range of products exported has also expanded -- for example, in the past two months, Brazilian firms have signed contracts to export wine to France, buses to Saudi Arabia and fuel transport tanks to Angola; further export contracts are pending to sell children's clothing presented at a Spanish trade fair, cosmetics to South Africa and regional jets and alternate fuel technology to India. Agriculture and agribusiness have made an important contribution, with the sector expected to export 21 billion dollars' worth of merchandise in 2002 (see BRAZIL: Key sectors to grow but broader worries remain - LADB, September 16, 2002, II. ).

Foreign investment . Foreign direct investment (FDI) is also increasingly directed to tradeable products -- as opposed to services -- which should have a positive impact on the trade balance in the future. For example, in the first half of 2002, the automotive sector received 10.5% of FDI and was responsible for 13.7% of total exports; the food-processing sector received 12% of FDI and its exports -- only 2% of the total -- are expected to increase.

Despite the strong trade surplus, exports to August 2002 fell by 6%, year-on-year. This decline can be explained on the basis of a number of conjunctural factors, including:

the Argentine crisis;

global economic slowdown; and

a prolonged strike of customs inspectors in June and July.

However, the main cause for the fall in exports was reduced demand from Brazil's main trading partners. Exports fell by 5.4% to the United States and EU, by 58.6% to Mercosur as a whole, and by 66.3% to Argentina alone. According to the Applied Economics Research Institute (IPEA), the fall in Brazilian exports to Argentina accounts for about 55% of the total drop in exports.

Import contraction . Some analysts argue that there has been no structural change in the trade balance, a view reinforced by the fact that much of the trade surplus can be attributed to the sharp drop in imports. Imports contracted almost 20% in the first half -- largely due to slow economic growth in the past 15 months, triggered by the energy crisis in 2001 (see BRAZIL: Power crisis saps economy’s energy - LADB, June 15, 2001, I. ) and import substitution owing to the fall in the real in the past twelve months. Other factors contributing to the fall in imports are lower oil prices (saving 1.1 billion dollars in crude oil and derivatives imports), the tapering-off of imports by fixed line telephone companies, and falling imports of machinery and equipment due to the uncertain investment climate.

Others argue that there is a more permanent structural element to the slump in imports, ie import substitution as a result of the 70% depreciation of the real in the past four years. An IPEA study, noting the decreasing import coefficient (down from 15.6% of GDP in 2001 to 11.9% this year), calculated that between 2003 and 2005, Brazil should expect to save 14 billion dollars of foreign currency due to import substitution. Business association IEDI forecasts that imports will drop to under 50 billion dollars annually in the short and medium term, compared to levels of around 60 billion annually in 1997-98.

Private sector interests . Rising business interest in trade policy was evident when the Brazilian Exporters Association (AEB) brought forward its annual conference to October -- before a second round of elections would be scheduled -- for the explicit reason of hearing the candidates' proposals for export promotion and trade policy. Although the private sector has not altogether changed its attitude to exports -- traditionally regarded as an alternative market when domestic demand is low, rather than a priority in itself -- there is a growing awareness of the advantages of exporting. Thus, exports did not collapse even at the height of the credit crunch in July and August: firms adjusted to the new circumstances by reducing stocks, delaying purchases of inputs and payment of suppliers, as well using their own resources or arranging financing from other sources. A growing number of firms are showing interest in trade negotiations and have signed up to participate in government organised trade missions. There is also the expectation that a weak real is likely to stimulate export related investment plans.

Policy issues . Brazil is currently engaged in an unprecedented range of trade negotiations, including multilateral fora, regional trade blocs, single countries and specific products. The complexity of talks and the danger of over-extending negotiators' capacity has led the government to increase coordination with the private sector.

The incoming president is likely to consider a re-organisation of the decision-making process in trade policy so as to minimise overlapping responsibilities among different departments. He will also have to consider issues arising from reviving and revising Mercosur agreements, making progress on the Free Trade Agreement of the Americas, and export financing. Despite campaign rhetoric calling for extended trade relations with the so-called 'emerging powers' -- China, India and Russia -- such trade must be in addition to, rather than a substitute for, trade with developed country markets. Finally, he will also have to address the ongoing questions arising from the urgent need for tax reform, port reform and infrastructure investments to increase export competitiveness.