Brazil’s Economic Relationships Foreign and Domestic

Categories: EconomicsEconomy

Brazil Economic Uncertainty

South America is one-eighth of the Earth’s land surface. Brazil is the fifth largest country in world. (Central Intelligence Agency, 2018) Occupying half of South America’s landmass, it is geographically the largest country on the continent. Brazil has a population of 211 million 418 thousand and 244 people, which is equivalent to 2.76% of the total world population. (Central Intelligence Agency, 2018) Brazil was at the forefront of the emerging-country movement to transform the global order, and the international trading system. Many argued that Brazil was on track to be a major participant in global governance.

Yet, economic decay and political turmoil at home have produced retrenchment abroad. Economic Isolation Brazil’s economic isolation comes at an enormous cost to a clear majority of Brazilians who work in services, agriculture, or in the informal economy. That cost comes in the form of low efficiency, a lack of technological innovation, shrinking income, and absence from the global markets (Focus Economics S. L., 2018).

Companies and workers in the country aren’t prepared to compete internationally.

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Economic imbalance is without a doubt the most serious factor that beset the Inter-American regional system. Brazil’s solution to economic downturn and political retrenchment came in the form of economic isolation. In a realist approach Brazil has focused on production and economic growth on a domestic front. By removing themselves from heavily relying on global markets and trade Brazil is in the position to strengthen its economy and country so that it will gain a more favorable image internationally.

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Plus, having a successful domestic economy allows for greater investments and leadership in the international market, which has always been a goal for Brazil. Since its previous Secretariat Trade Policy Review in 2017, Brazil has focused largely on its domestic demand-driven economy which began to plummet and entered a severe recession in 2015-16. This recession was triggered by worsening terms of trade and aggravated by political uncertainty. The World Trade organization reported, “annual GDP growth dropped from 3% in 2013 to 0.9% in 2014 and then turned negative in 2015 and 2016 with consumption and gross fixed capital formation following a similar trend. The recession, one of the most severe in Brazil’s history, has been accompanied by a steep rise in inflation (8.7% in 2016) and unemployment (11.3% in 2016) as well as fiscal discipline challenges. While the Brazilian financial system was not significantly impacted by the economic downturn, domestic lending became more cautious and borrower demand decreased.” (Organization, 2017)

The change in Brazil’s economy and political support are due to its instability making the risk high for other countries to trade, and invest in them. Monetary policy interventions were adjusted to cover inflation, which remained incredibly high by the Central Bank of Brazil (BCB) tolerance range standards during most of the review period. The inflationary pressures slowly rose since October 2016 and enabled the BCB to progressively cut its policy rate from a peak of 14.15%, which should help rekindle growth. Reports show, “The BCB has not sought to influence the exchange rate, limiting its currency market interventions to containing excessive short-term volatility. During 2013-15, the real depreciated by around 20% in real effective terms, moving towards levels more consistent with fundamentals, but then appreciated by around 6% in 2016.” (Organization, 2017) WTO also reported that the, “fiscal policy has experienced difficulties responding to the severe economic downturn and public expenditure pressures arising from Brazil’s demographic dynamics. As a result, the federal budget’s primary balance registered widening deficits during 2014-16, interrupting a decade-long succession of surpluses. The downward trajectories of gross and net public sector debt were also reversed, with respective increases from 51.5% to 69.9% of GDP and from 30.5% to 46.2% of GDP between 2013 and 2016. The loss of investment grade in the last quarter of 2015 did not trigger much volatility in public debt management, due to low levels of exposure to foreign currencies and overseas investors. (Organization, 2017)

The authorities have taken steps towards fiscal consolidation, including measures to improve the management of public finances and state-controlled enterprises, and the adoption of a New Fiscal Regime in December 2016. Nevertheless, structural deficiencies, such as the complex and burdensome tax system, and federal and sub-federal budget rigidities, are yet to be addressed.” (Organization, 2017) Data produced proclaims that “The Brazilian economy remains inward oriented, with aggregate two-way trade in goods and services representing about 25% of GDP throughout the review period. International trade and foreign direct investment (FDI) trends reflect the continued importance of the European Union as Brazil’s main supplier and a key destination market, although in 2015 China became the single most important destination for Brazilian merchandise exports. Brazil continued to attract sizable FDI inflows, ranging between 2% and 3.3% of GDP, which fully financed the current account deficit in both 2015 and 2016.” (Organization, 2017)

Brazil welcomes inward FDI, but there are several sector-specific foreign ownership prohibitions and limitations. “Certain healthcare services were further opened to FDI. In addition, a new model of investment agreements, built upon UNCTAD and OECD guidelines, was used to negotiate and sign a series of bilateral investment, promotion and protection treaties whose ratification is under way.” The overall thrust of Brazil’s “trade and trade-related policies” has not changed. Brazil’s stated “trade and trade-related policy objectives have been those of integration into global value chains and raising the competitiveness of domestic products”. Yet, because of recent economic slowdown, its long-lasting programs aimed at fostering high-tech development, to shield domestic producers from external competition. Brazil’s has used its unique position to use the lack of global intervention as a catalyst for domestic economic growth.

In 2017, The Brazilian economy was projected to slowly recover, but growth has been and is projected to continue to be weak for a lengthy period. Despite Brazil’s mainly solid economic fundamentals, downside risks to the economic outlook remain. “The economy remains vulnerable to a re-intensification of political uncertainty, as well as to delays in addressing fiscal imbalances. Future prosperity and sustainable growth depend on the implementation of productivity-enhancing structural reforms in several areas including revamping the overly complex tax and incentives regime and reducing the regulatory burden on businesses, as well as closing infrastructure gaps and addressing pension and labor market issues. These reforms would increase the resilience of the Brazilian economy, thus enabling it to continue to meet its broad-based economic and welfare objectives, including inclusive growth and a narrower wealth divide.” (Organization, 2017)

Difficulties with Economic Isolation

Economic isolationism is a countries deliberate isolation from global markets, and policies. Isolationist leaders maintain that the best thing for the nation is to put other nations at a distance. In situations such as Brazil it has been applied well and for the right reasons. Brazil asserts that it applied “inward oriented” policies due to political instability and economic crisis. This allowed them to step away from other nations and reevaluate its policies all while effectively growing its economy and import and export fields. Unfortunately, this isolation has not been put into effect by a nation of Brazil’s size and due to the state that the country it is in this isolationism does not present itself to be sustainable. The Secretariat report states, “Despite their comparatively modest contributions to GDP, agriculture and mining remain important drivers of Brazilian exports. The Brazilian economy is inward oriented, with aggregate two-way commercial flows in goods and services representing about 25% of GDP throughout 2012-16. Moreover, the share of exporters among Brazilian companies is remarkably small, pointing to limited integration into international value chains.” (Organization, 2017)

This makes it difficult for Brazil to cross into international markets that could potentially benefit the country exponentially. Many policies approve economic isolation or an inward oriented economy. The gross outcomes reflect Brazil’s small network of special trade agreements and structural insufficiencies, it also represents the gaps in the physical infrastructure and limited access to long-term capital. The high level of rural debt remains a major challenge which is being addressed. During the span from 2012 to 2016, the renegotiation of rural financing was overseen by about 20 principles, including Central Bank Resolutions. This agreed with ordinary laws and National Monetary Council verdicts. “To address the far-reaching economic and social effects of the worst drought of the last 100 years in the Northeast region, in 2016 a law dealing with the renegotiation of farmers’ debt was passed.” (Organization, 2017)

The National Treasury expenditures on interest equalization related to the renegotiation of rural debt were 300.3 million dollars in 2013 and after renegotiating rural debt many times over it was lowered to 33.0 million in 2016. (Organization, 2017) According to the OECD, “the agricultural credit system is intended to address failures in financial markets, it also creates risks for government and producers, particularly since the macroeconomic condition has depreciated. The higher availability of funds for loans is potentially creating excess supply. Most of this credit is concentrated on subsidizing short-term borrowing such as working capital and commercialization loans that further distort markets.” (Organization, 2017)

Foreign Direct Investment

FDI net inflows are the value of inward direct investment made by non-resident investors in the reporting economy. FDI net outflows are the value of outward direct investment made by the residents of the reporting economy to external economies. (Central Intelligence Agency, 2018) Foreign direct investment (equity) inflows by trading partner, were recorded from 2012-16. The total inflows recorded in US dollar by the millions went from 60,542.7 in 2012 to 53,672.8 2016. The percent of GDP total FDI inflows for the Netherlands went from 20.2 to 15.7 in 2014 to 19.6 in 2016. (Organization, 2017) The Netherlands is currently Brazil’s Top FDI inflow investor. Luxembourg is the second highest FDI investor with investment equity moving from 9.9 in 2012 to 11.9 in 2014 then to 13.8 in 2016. United States is Brazil’s third highest investor with 20.3 in 2012 then decreasing to 15.3 and then falling to 12.2. (Organization, 2017)

Foreign direct investment (equity) outflows by trading partner during 2012-16 report United Kingdom as the top outflow consumer with 4.4 percent in 2016 and increasing dramatically to 57.1 percent in 2016. Luxembourg is not only the second highest inflow investor but also the second highest outflow investor as well with 9.9 percent in 2012 and progressing 13.6 percent in 2016. United States has also remained third highest investor with 16.0 percent in 2012 and later decreasing to 12.8 percent in 2016. (Organization, 2017) From trends it becomes clear that consistently the US has been a constant trade partner with Brazil and during times where Brazil was experiencing above average internal conflict the US has reduced trading with the country by significant margins. Yet, overall the US falls within the top three when ranking Brazil’s Trading partners. Brazil and the United States Relations Some of the reasons for this is history and the confidence that the countries have in the effectiveness of the partnership and if it is beneficial. The United States and Brazil have vital political and economic relations. The United States was the first to recognize Brazil’s in 1822 as an independent nation. (Kiprop, 2018)

As the two largest democracies and economies in the Western Hemisphere, the United States and Brazil’s partnership is rooted in a shared commitment to expand inclusive economic growth and prosperity. (Simon & Winter, 2018) Brazil is the world’s ninth-largest economy and the United States is Brazil’s third-largest trading partner. Two-way trade was $88.2 billion in 2016. (Focus Economics S. L., 2018) The United States had a $22.3 billion trade surplus with Brazil in 2016. Brazil’s main imports from the United States are aircraft, machinery, petroleum products, electronics, and optical and medical instruments. Brazil’s Foreign Trade Minister, Abrão Neto, defended their relationship, saying it was “very positive.” He asserts over the last 10 years, “the United States has enjoyed a trade surplus with Brazil of $90 billion in goods, and of $250 billion in goods and services” (Simon & Winter, 2018).

The political climates of both nations play a big role in their partnership with President Trump expressing disgruntled opinions about trade partners including Brazil. In interviews where he was asked about the relationship between brazil and the US he asserts that Brazil and many other countries have taken advantage of the United States. He maintains that by taking advantage of trade deals made nations like brazil have profited from bad policy agreements made with the country. This was his reasoning for leaving the NAFTA agreement. This showed that with the current temperament shown by both nations, each country viewed the partnership in different ways until very recently. With “Plenty of kind words have been exchanged. Newly elected President Bolsonaro styled himself in the mold of the U.S. leader, frequently professing public admiration for Trump.

The U.S. president, for his part, weighed in with a swift congratulatory call when Bolsonaro won the election, tweeting the next day that the two would work closely on trade and security “and everything else!” the relationship between the two countries are projected to steadily improve if their political policies match. The economy has recovered from the recession, structural reforms will be crucial to sustain the recovery, and growth is projected to accelerate assuming favorable prospects for the continuation of reforms, confidence and easier credit conditions will continue to support investment. Unemployment is projected to decline further, including through the creation of more formal sector jobs. Policy recommendations When it comes to its partnership with the US it goes without saying that the relationship between the two is paramount for growth in both nations and for the hemisphere in general if they have better relations.

From what the data shows Brazil’s economy is on the mend and are focusing inward to fix its problems before making any crucial deals with major powers. This seems to be although it has benefited them Brazil being the 10th leading economy in the worlds it foreign relations are key to achieving their goal of economic and technological leadership. This potential growth can benefit the US if they were to seriously deal with Brazil in a way that will enhance relations between the two, grow trade initiatives in the hemisphere and if they can come to free trade agreement that allows them to see achieve the greatest possible benefit for both economies. If the US were to lead the effort in establishing healthy economic relations, Brazil may even back up the US in political initiatives and it will spur both countries into greater positions combating China’s hold in both countries.

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Brazil’s Economic Relationships Foreign and Domestic. (2021, Sep 22). Retrieved from https://studymoose.com/brazil-s-economic-relationships-foreign-and-domestic-essay

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