This case analysis provides a brief insight into the long journey covered by Brazil since the end of the World War I. With a population of around 166 million and an area of 3.27 million square miles, Brazil is one of the most naturally resourceful countries in the world. Despite being among the largest producer and exporter of tobacco, raw cane sugar, coffee, orange juice, soy, beef, chicken, iron, tin, aluminum, and gold, it has faced many ups and downs in its journey. Periods like the great depression of 1930s, the first oil shock of 1973, the second oil shock of 1979 played a major role in derailing the Brazilian economy. In addition, its internal political turmoil, high inflation rates, increasing poverty and rising inequality among the social classes played a major role in halting its progress.
Though, here and there, Brazil had some good times, as well when its economy grew reasonably well, and both agriculture and manufacturing sectors tried to realize their true potential, but time and time again its economy has become unstable, its institutions have collapsed and it is left at the mercy of some external and internal support. Now, the country is facing a serious question of how to go about in forming a trade strategy. It has major interest in the United States and the European Union, and if proper agreements are made with them, it can see off the end to most of its issues, including the trade deficit. Brazil has also benefitted from the formation of Mercosur union, but the question is can it pursue all regional, global and bilateral trade strategies at the same time?
After the disastrous effects of the great depression on the Brazilian economy, the government implemented an import substitution strategy, protecting many of its key industries and sectors by making heavy investments and creating trade barriers. This strategy not only allowed the economy to grow by 7% for nearly three decades, but it also decreased the country’s dependence on the coffee alone. As the world markets got hit by the boom in oil prices and frequent recessions, countries around the world started accepting merits of globalization. The government of mid 90s took some bold decisions of deregulating the economy and lowering the trade barriers. Though, many local industries especially the manufacturing sector, was at a loss as they were not able to match the economies of scale of the developed countries. But this step made the economy more competitive and provided the agriculture producers a chance to tap the foreign market in an efficient manner. During this time, Brazil became part of Mercosur union, which provided greater export opportunities than ever before at a reduced tariff rate. The government continued to explore the North American and the European region, but very little was achieved in this regards. Brazil at this moment is in desperate need of a new trade policy to overcome the effects of Asian financial crisis. The following SWOT analysis will assist in formulating a new strategy as per the situation of the country.
Brazil is the largest exporter in the world of raw cane sugar, tobacco, orange juice, and coffee. It is the second largest exporter of soy and the third largest of chicken and beef. It is also among the top ten producers of tin, aluminum, and gold. It has iron reserves in excess of one-third of the entire world’s reserve. It is also the fifth largest agricultural country. In addition to all this, in recent decades, Brazil has taken huge strides in the manufacturing sector and now it is a major exporter of transportation equipment like autos and planes.
During the last 80 years, Brazil’s economy has taken many downturns despite its much strength. Brazil exports more than two hundred items around the world, yet its imports are higher than its export. More than four-fifth of the oil used is imported, which is one of the major reasons of its high import bills. During the two oil shocks of 1973 and 1979, the government faced a serious crisis and was forced to devalue the currency in order to control the balance of payment issue. In addition to this, a huge percentage of the Brazilian population is illiterate, which is also the main reason of the rising inequality among the social classes. Moreover, high tax burden and poor infrastructure has been the main reason of low foreign investments. Furthermore, violent crimes have significantly impacted the tourism industry.
Because of its huge area, Brazil shares its border with ten out of twelve South American countries. This provides an opportunity to promote its products in the neighboring countries by making a strong hold in the region. In addition, every time Brazil has found itself in a financial crisis, it has managed to come out of it by some external and internal support. Following the recession era, the new period has always been of high growth for the country. Since, the government has managed to stabilize its economy after the recent crisis, it is expected that the country will witness reasonable growth. If the government manages to formulate a new trade strategy that is in the best interest of the country then it can certainly end many of the country’s economic issues. Lastly, if the government can manage to improve its infrastructure and make its economic policy more investor friendly, then it certainly has the chance of attracting high foreign investments.
If Brazilian Government fails to sign an agreement with the United States and the European Union, these markets will be grabbed by other countries that are in good terms with them. Secondly, high level of bureaucracy and constitution backed employee rights has slowed down the process of making changes in the legislation, which has continued to cost a high amount to the government. Third, only the servicing rate of the national debt has surpassed five percent mark of the GDP, and if the government plans to reduce the tax burden then it will face a hard time in repaying the debt.
The first option of Brazil is of going forward and carrying out bilateral trade agreements with the United States and the European Union. For decades, both of these regions have tried their best to protect their domestic industries by putting up trade barriers and quotas for Brazil. They also have carried out series of investigations against Brazilian products claiming them to be subsidized indirectly by the Brazilian government thus allowing manufacturers to produce at a cheaper rate than the global market. Brazilian manufacturers have also been accused of selling their products at a dumping rate i.e. selling at a price level considerably lower than in the home country. Both the regions, despite their trade barriers account for more than half of the Brazil’s total export. If the Brazilian government can promote their views via World Trade Organization (WTO) and manage to reduce trade barriers and increase exports to these regions, it can certainly benefit a lot from them.
Second option it has is of promoting the regional trade among the countries of Mercosur union. It is basically a regional integration area, which includes countries like Argentina, Brazil, Paraguay and Uruguay. It also includes Chile and Bolivia as its associate members. It has become the fastest growing trade region in the world with its exports crossing the $20 billion mark by the year 1997. Though, Mercosur union has posed many challenges to the member countries because of its unstable macroeconomic conditions and non-uniform exchange rates, yet the union had been fruitful for Brazil up till now. If Brazil and other neighboring countries can continue their cooperation as Mercosur union and manage to represent themselves as a united voice at the international level then not only will they have a higher negotiation power with the North American and the European region, but also they will have an alternative route to promote their exports, in case industrialized countries continue their partial treatment towards developing countries.
Another option that the Brazilian Government possess is of forming a comprehensive trade strategy where they not only focus on countries participating in Mercosur union and the Western region, but on covering all those regions, which are potential importers of the Brazilian products. Though, in this case the Brazilian government will have to design a strategy where it would improve bilateral trade relations with the United States and the European Union, without setting off its cooperation at the Mercosur union. Since, Brazil decided to de-regulate its economy and make it more competitive by reducing trade barriers and providing more opportunities for foreign companies to invest, it should pursue the same by expecting all partner trading countries to reduce their trade barriers and provide opportunities to Brazilian manufacturers to thrive in the international market.
In this paper’s perspective, option three would be the most feasible for the Brazilian government, considering the current situation around them. First of all, series of individual trade agreements already signed by the Mercosur union members with third parties like Argentina Mexico trade accord and Brazil Andean Community agreement showed that the member countries were not ready to go forward as a single regional community rather they were safeguarding their individual interests. In addition to this, Chile decided to begin bilateral talks with the United States on an individual level, which tempted both the Argentina and Brazil to pursue same tactics. Moreover, after the formation of Mercosur Union, Argentina and Brazil would often put up trade barriers or increase tariff rates whenever their currency used to depreciate. This act from both sides took place a couple of times during the five years period, and it significantly impacted the export level. So, despite many past benefits of the Mercosur Union, member countries were not ready whole heartedly to move forward as a single voice.
Furthermore, the plan of the Brazilian government to carry out a trade agreement with the United States and the European Union was not so simple. Both the United States and many countries of European Union were among the largest producers of the beet sugar plant. Because of the World Trade Organization treaty, many European countries had to cut down their production rate of sugar beet plant in order to provide opportunities to third world countries. As a result of this, the European Union became the net importer of sugar, whereas it was the second largest exporter of the beet sugar. So, to protect other sectors of its economy especially from Brazil, the European Union had set up trade quotas and high tariff rates. Similarly, the United States had already placed free trade agreements with over dozens of countries with whom it had strong diplomatic relations. These free trade agreements resulted as a disadvantage of Brazil as the majority of the demand of agricultural products was fulfilled by these countries.