Over the last 60 years, the Brazilian trade balance represented, on average, 1.4% of the GDP (year on year) and was not enough to cover international services (both financial and others). For the same period, the average yearly current account presented a deficit (-1.75% of the GDP per year). However, despite the Brazilian economy’s characteristic instability, the trade balance only presented a negative figure for two periods lasting longer than 4 years (as seen in Figure 1).
Figure 1 Share of the Trade Balance and of the Current Account in GDP Brazil, 1947-2008, (Percent)
During the first period (1971 to 1980), external credit allowed the government to avoid making the necessary adjustment for two oil shocks. The consequence? A debt crisis and deep recession between 1981 and 1983.
In the second period (1995 and 1998), external liquidity allowed for the use of the exchange rate anchor in order to stop inflation. Without a tax adjustment, the result was the collapse of the real, in 1999.
Since 2001, the trade balance has increased and, as a percentage of GDP, peaked between 2004 and 2005. Although it began to fall as a percentage of GDP from 2006 onwards, it remained positive until 2008. At the beginning of its climb, the devaluation of the real (from 1998 to 2003) had a positive impact on the exporting of manufactured goods (Figure 2). From 2004 onwards, total exports benefited from favorable terms of trade and the strong external demand.
Figure 2 Index of the Quantum of Exports of manufactures Divided by the Index of Real GDP, 2006 =100, And Index of the Effective Real Exchange Rate, 2000 = 100 (Depreciation up) Brazil, 1982 – 2007
This scenario has changed. The trade balance fell sharply in 2008, due to falling export prices, a reduced global demand and the fact that the Latin American economies, which account for approximately 40% of Brazil’s manufactured goods exports, are also entering into recession.
There is little that the government can do, at least directly, to change this result. Brazil is already more protectionist than the average Latin American country. According to the TTRI – Trade Tariff Restriction Index calculated by the WTO (“World Tariff Profiles 2008”), on a scale of 125, Brazil’s score is 92. Although it enjoys a relatively low maximum tariff of 35%, its average tariff of 12% is higher than the average for both countries in its region, as for those with the same income level. Furthermore, Brazil applies non-tariff measures (quotas, licenses and safeguards) to 46% of its tariff lines. Its OTRI – Overall Trade Restrictiveness Index stands at 20%, contrasting with an average of 12% for Latin America (before measures taken in Argentina in 2008 and 2009), suggesting a regime that is significantly more protectionist than its comparators (except Argentina).
On the other hand, the arguments in favor of interventions that prop up exports are as problematic as those in favor of protectionism. Subsidies give rise to retaliation and result in lobby action and corruption. It is better to eliminate import tariffs than to try to compensate for them with export subsidies.
The government is left with two fronts on which it can act. The first is to improve the business atmosphere. Brazil’s classification (ranked 122 out of 178) according to the World Bank “Doing Business” index is poor because of the difficulties involved in starting and closing a company, as well as problems in ensuring that contracts are followed. The other front depends on international negotiations. Brazil still faces important external barriers. Its agricultural exports suffer from an average tariff of 12.8%, compared to 6.2% for countries in Latin America and the Caribbean and 8.1% for upper middle income countries.
Finally, it is worth remembering that the trade deficits for the periods between 1971-80 and 1995-98 were only made possible because of the available external financing. As external liquidity is still scarce, the current account deficit for 2009 will require the use of international reserves. Will we face new risks in the near future? The first years of the Dutra Government (1946-47) demonstrate that reserves can run out quickly. The Lula Government will have to ask itself what combination of tax and monetary policies will allow for a consistent rhythm of growth, whilst incurring only relatively small deficits, in order to avoid compromising future stability.