US-Brazil Trade Relations in a New Era Jeffrey J. Schott Senior Fellow, Institute for International Economics © Institute for International Economics, 2003. All rights reserved.

To be published in O Brasil e os Estados Unidos num Mundo em Mutação, edited by Paulo Roberto de Almeida and Rubens Antonio Barbosa, 2003

The United States and Brazil are the largest economies in North and South America,

respectively. A generation ago, both were relatively closed economies in terms of the

proportion of their trade to gross domestic product (GDP), but for sharply different

reasons.1 The US market was highly competitive except for some light manufactures

(e.g., textiles, clothing, and footwear) and a few agricultural sectors with high border

barriers. By contrast, Brazilian industry was largely uncompetitive and highly subsidized;

important commodities like coffee provided the bulk of exports while a large share of the

value of most industrial exports was attributable to export subsidies.

Over the following decades, the US economy adapted to the growing

globalization of trade and financial markets. The US ratio of trade to GDP almost tripled,

with dramatic and beneficial impacts on US income and employment. In Brazil, there

have been important economic and political transformations as well, with significant

growth in the manufacturing sector abetted by the economic reforms of the 1990s.

However, the Brazilian economy is still relatively closed despite a spurt in intra-Mercosul

trade in the mid-1990s. Given the imperative to boost income and productivity in its

1 In the 1960s, the trade/GDP ratio averaged 13.1 percent for Brazil and 9.7 percent for the United States (Penn World Tables 2002).

2

economy, Brazil must continue to augment its trade and investment reforms so its

industries and workers can keep pace with global competitors. Import substitution

policies failed in past decades and are even less viable in a world of increasingly

globalized markets.

At the start of the 21st century, both the United States and Brazil have important

interests in expanding their exports and imports to promote economic growth and

employment in their societies. In the past, bilateral trade has been more of an irritant than

an opportunity for each country. Two-way trade flows have been small, especially when

one considers the size of US investment in the Brazilian economy (which in other

countries has generated substantial trade between parent and subsidiary). Bilateral trade

relations have tended to focus on complaints, some of which have survived the lengthy

careers of notable diplomats. Efforts to refocus attention on a “positive agenda” have

quickly deteriorated into traditional bickering on antidumping or subsidies or

discriminatory government regulations.

Yet the history of bilateral economic relations also demonstrates numerous

instances of cooperation on the economic front. US officials supported the

macroeconomic reforms of Mario Simonsen in the late 1970s, which began to wean

Brazilian industry off costly export subsidies. In the 1990s, the previous Bush

Administration supported regional integration and reform in the Mercosul and launched

new “4+1” talks in parallel with the Enterprise for the Americas Initiative (EAI). The

EAI presaged the broader initiatives undertaken a few years later at the Summit of the

Americas in Miami, including negotiations on a Free Trade Area of the Americas (FTAA

or ALCA). Interestingly, Robert Zoellick, the current US Trade Representative, helped

3

launch the “4+1” process in the early 1990s. Now that the United States and Brazil share

responsibility for leading the FTAA negotiations to a successful conclusion, it is

noteworthy that he has revived that process to try to advance the goals of both the United

States and its South American partners. Both have strong economic and political interests

in doing so.

For the United States and Brazil, closer ties serve both economic and political

objectives; indeed, the two are interrelated.2 The United States benefits when its trading

partners are prosperous and democratic governance is deepening in the hemisphere. The

same applies to Brazil, which borders eleven countries in South America: it benefits from

the economic health and political stability of partner countries and is adversely affected

when neighbors endure economic hardship and suffer political instability. That’s why

Argentina and Brazil care so much about each other’s problems and that’s why it is

important for the United States to work with Brazil--both in the hemisphere and in the

WTO--to expand two-way trade as a way to contribute to economic development in the

region. Increased trade can help spur economic growth and generate additional resources

that can be invested in the economic and social infrastructure of each country.

This paper will examine the state of US-Brazilian trade relations and ways the

two hemispheric economic powers can work together to advance their economic interests

and deepen bilateral cooperation. The first section summarizes key trends in bilateral

trade and investment. The second section turns to the areas of trade friction that so often

2 The same argument holds for the broader FTAA initiative which is the economic engine that drives hemispheric cooperation on a number of political, socio-economic, and cultural issues (e.g., promo ting education, strengthening the rule of law, protecting the rights of indigenous peoples). Progress on the FTAA is critical to sustain efforts in these other areas.

4

dominate bilateral talks. The final section suggests ways to bridge the gap between US

and Brazilian interests through bilateral, regional, and multilateral trade initiatives.

Trade and Investment

US exports to and imports from Brazil grew sharply during the 1990s (from a low base);

however, compared to their peak in 1997, US exports in 2002 were 25 percent lower due

to the economic crises in Brazil (and subsequently Argentina). By contrast, US imports

from Brazil have continued to grow markedly and were 64 percent higher in 2002 than in

1997. Bilateral trade in services also has grown rapidly; US services exports have more

than doubled since 1992 and imports have almost tripled (see table 1). The United States

had run a sizeable trade surplus with Brazil since the mid-1990s; in 2002, however, the

United States recorded a $4.4 billion merchandise trade deficit with Brazil.

As shown in table 2, US firms generally export high value-added manufactured

goods (e.g., computers, electric machinery, aircraft) and import small aircraft, electric

machinery, petroleum and mineral fuels, footwear, and iron and steel. Manufactured

goods (SITC 6-9) account for around 70 percent of US exports to Brazil and almost 75

percent of Brazilian exports to the United States. In this respect, Brazilian export interests

differ significantly from those of its Mercosul partners—for example, manufactures

represented only 35 percent of Argentine shipments to the United States in 2001. This

simple statistic suggests that Brazil could be flexible in negotiating the terms of

agricultural reforms in the FTAA, while Argentina probably must achieve a good result

in that area for the trade pact to be deemed a success.

5

Unlike trade, US FDI in Brazil has grown markedly over the past decade. In 1990,

US firms held $14 billion in direct investments in Brazil. By 2001, US holdings had

grown to $36.3 billion on a historical cost basis—though down from its peak of $39

billion in 2000 (table 3). Part of this growth can be attributed to the participation of US

firms in the privatization of Brazilian energy and telecommunications companies, but a

significant share has been placed in manufacturing plants that serve both the large

Brazilian market and other export markets. Simply put, US firms have a $36 billion bet

on the future of the Brazilian economy.

US FDI in Brazil represents only 13.5 percent of total US FDI in the Latin

American and Caribbean or LAC region (including Mexico). However, if one factors out

the massive placements in financial services, particularly in the Caribbean Basin, the

Brazilian share climbs to 22 percent. Importantly, more than one third of US FDI in

manufacturing in the LAC region is in Brazil, with substantial holdings in chemicals and

transportation equipment (table 4).

Gravity models consistently report that the United States and Brazil trade less

than is expected given the magnitude of the two economies and the distance between

them. To investigate whether this is still the case, we generated predicted values of trade

using Professor Andrew Rose's data set and his default gravity model, which in addition

to the standard variables includes many other control variables (Rose 2003). In 1999, the

actual amount of two-way trade between the United States and Brazil was only 44

percent of what Rose's model predicted should be the level of trade between the two

countries. This suggests that there is plenty of room for more trade between the United

States and Brazil should the two countries take steps to facilitate it.

6

To put these modeling estimates into perspective, consider that US trade with

Brazil is only about one-eighth the value of US trade with Mexico (about $232 billion in

2002). If the United States and Brazil had access to each other’s market comparable to

that existing in the NAFTA region (adjusted for market size, per capita income, and

geography), bilateral trade could quickly double (or more). To achieve such results, the

main barriers to US-Brazil trade would need to be liberalized. Such reforms would likely

encompass the elimination of the relatively high Mercosul tariffs on manufactured goods

(which average about 4 to 6 times higher than US tariffs) and the high US tariffs on

textiles, clothing, and footwear, plus reduced protection for sensitive farm products. The

reforms do not have to be all- inclusive, however. Note that the growth in the NAFTA

region has come despite the maintenance of some agricultural restrictions and continued

use of antidumping measures; the prospective gains indicated for the United States and

Brazil could be achieved with similar limitations.

Some people believe that US-Brazil trade is less than it should be due to myriad

trade frictions between the two countries. Although trade disputes constrain trade growth,

they are not the primary cause of the "missing trade" between the two countries estimated

by the gravity models. The next section analyzes the trade frictions between the United

States and Brazil and tries to put them in perspective relative to the magnitude of the US-

Brazil economic relationship.

Bilateral Trade Frictions

7

Complaints about trade arise through a variety of channels—some more benign

than others! The following surveys national reports, trade remedy cases, and WTO

disputes to try to parse out some of the key problems on the bilateral trade agenda.

National Trade Reports. Both the United States and Brazil annually compile a

"complaint list" of other countries' barriers to its trade. In 2003, the section devoted to

Brazil in USTR’s National Trade Estimate Report on Foreign Trade Barriers was only

seven pages, as compared to thirty pages written about China's trade barriers (USTR

2003). The United States registered complaints against Brazil's external tariffs (and their

consistency), import licensing and customs valuation practices, sanitary and

phytosanitary (SPS) measures, government procurement, export subsidies, intellectual

property right (IPR) protection, various barriers to service industries, and barriers to

investment. The following highlights some of the key problems covered in the USTR

report.

Brazilian tariffs against US exports are high compared to average US tariffs

against Brazilian exports (see table 5). The simple average Brazilian tariff against US

exports is 13.8 percent, with especially high tariffs on beverages and tobacco as well as

manufactured products. The trade-weighted average Brazilian tariffs are lower than the

simple average tariffs, indicating that Brazil tends to import US products that face tariffs

at the low end of the range. Brazil's maximum tariffs are not all that high by developing

country standards, but a significant number of Brazil's tariff lines set a tariff in excess of

15 percent. By contrast, US tariffs against Brazilian exports are low, except for beverages

and tobacco and a few manufactured products. While the United States has maximum

8

tariffs that are prohibitive in every product category, the share of tariff lines requiring a

tariff in excess of 15 percent is usually small.

US companies must obtain a license to export some products, such as certain

beverages and pharmaceuticals, to Brazil. Registering with the Brazilian government and

inquiring whether an import license is needed imposes significant costs on US exporters.

Although Brazil has made some progress in this area in recent years, the US report still

lists licensing and customs valuation as major nontariff barriers (NTBs).

The USTR report also charges that Brazil blocks US exports of poultry and seed

potatoes due to alleged SPS issues. The Brazilian government is wary of genetically

modified (GM) products, of which the United States is the world's largest producer. In

particular, Roundup Ready soybeans are not legally permitted to comprise more than 4

percent of the Brazilian soybean stock, though the actual share is probably much greater

since Brazilian soybean producers reportedly evade this requirement and purchase GM-

seed in Argentina. The United States is keen to promote open trade in GM products and

is pursuing a WTO case against the European Union to signal its resolve to the rest of the

world.

Brazil, like most developing countries, has not signed the WTO Plurilateral

Agreement on Government Procurement and discriminates against foreign bidders for

government contracts. Brazil openly discriminates on informatics and

telecommunications procurement and de facto discriminates on other types of

procurement contracts by imposing minimum domestic content requirements.

Brazil subsidizes its exports through programs like PROEX, which has been

found to be countervailable under US law and inconsistent with Brazil's WTO obligations

9

in a case involving aircraft. In 2002, $788 million was budgeted for PROEX in order to

offset the spread between domestic and international interest rates and to directly finance

Brazilian exports.

The USTR report also lists concerns with Brazil's protection of intellectual

property rights (IPRs). The United States contends that several of Brazil's practices are

likely inconsistent with its WTO obligations. In particular, obtaining a patent in Brazil is

a very slow process, and the enforcement of Brazil's copyright law is inconsistent. The

report estimates that US firms lost $771 million due to Brazilian copyright piracy in 2002

and that over half of the CDs bought in Brazil in 2002 were pirated.

Barriers to service imports are common in almost all countries. In particular, the

USTR report objects to Brazilian barriers to imports of telecommunications services,

maritime services, audiovisual (cable, TV, films, etc.) services, express delivery services,

insurance, and financial services. Despite these barriers, the United States exported $5.8

billion in private commercial services to Brazil in 2001.

Finally, Brazil does not have a Bilateral Investment Treaty (BIT) with the United

States and limits foreign investment in "strategic" sectors and in certain locations. These

restrictions impair the ability of US firms to establish themselves in Brazil to provide

goods and services.

The 2002 Brazilian "complaint list" against US trade barriers is 92 pages long.

Brazil's primary complaints are against US quotas and subsidies in the agricultural sector,

antidumping, countervailing, and safeguard measures in the manufacturing sector, and

barriers to services imports and investment.

10

The United States has a variety of agricultural trade barriers, but the most

notorious are the quotas on sugar imports. As a major producer of sugar, Brazil believes

that its quota allocation is too small—and, indeed, it would be able to sell much more if

the US quotas were lifted. However, Brazilian exporters reap large rents from their

constrained sales, since sugar prices in the United States are three times international

prices.

Other US agricultural policies are perhaps more costly to Brazil. In 2002, the US

Congress passed the Farm Security and Rural Investment Act, which increased trade

distorting subsidies above levels provided under the previous farm bill—though still

below the maximum amounts allowed under US commitments in the WTO. These

subsidies adversely affect Brazil primarily by lowering the price of corn, cotton, and

soybeans. Reducing these subsidies is a Brazilian priority in both regional and WTO

negotiations. As a practical matter, however, the potential for progress on this front is

much greater in the WTO negotiations (which would cover both US and European

subsidies) than in bilateral or regiona l agreements.

While US tariffs against Brazilian products are generally low, some of the

exceptions—or tariff peaks—adversely affect Brazilian exports. In particular, Brazilian

exporters of tobacco, footwear, textiles, and ethanol face significant US import barriers.

In addition, Brazilian companies are charged or threatened with antidumping and

countervailing duties on a number of products (discussed below).

Although the United States is one of the most open countries in terms of service

imports and foreign investment, there are some measures (such as the Jones Act) that

adversely affect foreign firms. However, Brazil is neither a major provider of services nor

11

a major investor abroad, so it is questionable whether US barriers to service imports and

foreign investment significantly discourage Brazilian access to the US market.

Trade Remedy Cases. Tariff and nontariff barriers account for the bulk of the

trade distortion in US-Brazil trade, but antidumping (AD) orders, countervailing duties

(CVDs), and safeguard measures generate a large portion of the political controversy in

the bilateral trade relationship. Trade remedies invariably spark loud complaints from

foreign producers targeted by the contingent protection measures.

Table 6 shows the AD and CVD orders that were in effect between the United

States and Brazil as of April 2003. The United States maintains 19 AD and CVD orders

against Brazilian exports, of which 13 pertain to iron and steel. In addition, the United

States has imposed antidumping duties on frozen concentrated orange juice since 1987.

Overall, the United States has 343 AD and CVD orders in place, of which 193 pertain to

iron and steel. Thus, Brazil accounts for 5.5 percent of total US AD and CVD orders but

only 1.4 percent of US imports for consumption (in 2002). Moreover, Brazil accounts for

6.7 percent of US steel-related AD and CVD orders and 6.4 percent of US steel imports

(in 2002).

Brazil has 6 AD orders (and 1 price undertaking) against US exports, although

none of the products affected are particularly important politically. Overall, Brazil has 51

AD orders (and no CVD orders) in place. Thus, the United States accounts for 12 percent

of Brazilian AD orders but 23 percent of Brazilian imports (in 2002). For both these

reasons, little concern is raised in the United States over Brazilian trade remedies.

The most contentious trade remedy case involves the safeguard measures that the

United States imposed in March 2002 on imported steel. The United States immediately

12

increased tariffs on imports of finished flat steel products by 30 percent and instituted a

tariff- rate quota on unfinished flat steel products (slabs).3 Under the terms of the tariff-

rate quota on slab, Brazil was permitted to export slab duty-free up to its volume in 2000

(2.6 million short tons) and then pay a 30 percent tariff on all slab that exceeded that

total. However, US officials granted special exceptions to Brazil for 275,573 short tons of

additional slab to supply a Brazilian subsidiary in the United States.4

Table 7 shows US imports of Brazilian steel from 1996 to 2002. The value of US

steel imports from Brazil peaked in 2000 before the market downturn in 2001, but in

volume terms, US steel imports from Brazil reached a new high in 2002--despite the steel

safeguard. Overall, US steel imports from Brazil were valued at almost $800 million in

2002 and total tonnage was up 31 percent from 2001 levels.

However, the composition of US steel imports from Brazil changed. Due to US

AD duties on hot-rolled flat products in 1999 and the US safeguard in 2002, Brazil has

been much less able to export high-value, finished steel products to the United States.

Most of the shipments in 2002 were steel slab (76 percent of the value and 88 percent of

total volume). In part, this reflects the fact that the US appetite for Brazilian slab has

grown tremendously as more and more US producers have recognized the advantages of

outsourcing the initial stages of steel production. As a consequence, the average nominal

price of Brazilian steel exports to the United States (inclusive of tariffs) fell from $299 in

1998 to $212 in 2002, reflecting the fact that relatively cheap slab now dominates the

product mix. Simply put, Brazil is exporting more but profiting less.

3 The United States also imposed tariffs on long, welded/tubular, and stainless steel products, but Brazil was excluded from these tariffs under the de minimis threshold for imports of these products from developing countries. 4 However, this exception was only one-third of the slab volume that Brazil requested in its petition.

13

Although Brazil is one of eight complainants in the WTO case against the US

safeguard, it is probably the least injured of the group. Although the safeguard adversely

affected Brazil's flat finished steel products, they were already limited by an AD order,

and Brazil does not export that much finished steel anyway. However, the safeguard

measure has prevented a major Brazilian steelmaker from supplying its US subsidiary as

much as it would like and has forced it to postpone investing in other joint ventures.

WTO Disputes. As of year-end 2002, Brazil has filed 22 complaints under the

WTO’s dispute settlement mechanism, of which 8 were against the United States (see

table 8). The United States has lodged 74 total complaints, of which 4 were against

Brazil. Of the 8 disputes initiated by Brazil against the United States, 3 rulings against the

United States have been adopted, and in the case of the US steel safeguard, the United

States is appealing the adverse ruling it received from the panel. A WTO panel is also

investigating a Brazilian complaint against US cotton subsidies.

Both countries reached a mutually acceptable solution in 3 out of the 4 US

complaints against Brazilian practices. The fourth case resulted in consultations but no

request for a panel. Thus, no panel has ruled against Brazil in any of the cases brought by

the United States.

Bridging the Gap

The preceding section detailed the wide array of complaints about US and

Brazilian barriers to trade in goods and services. The most enduring of these problems for

Brazilian exporters involve steel, sugar and citrus, and agricultural subsidies; for the

14

United States, the lengthy list of complaints can be more narrowly focused on key

problems with trade and regulatory barriers in services sectors (especially financial

services and telecommunications), plus the relatively high common external tariff of the

Mercosul.

Given these difficult problems, the main challenge for US-Brazilian trade

relations is to figure out how to harvest the potential trade gains that would result from

freer trade. Ivory tower economists would counsel unilateral liberalization, but such

enlightened self- interest is constrained by domestic political factors. More pragmatically,

both countries should take advantage of the unusual opportunity to negotiate

simultaneously in bilateral, regional and multilateral trade forums to maximize

liberalization of foreign and home-grown barriers to trade and investment.

To be sure, some problems are more amenable to resolution in bilateral talks;

others likely will fare better in regional negotiations like the FTAA or in the WTO. It

would be a mistake to focus exclusively in one forum at the expense of the others, since

the various negotiations are mutually reinforcing.

The United States and Brazil have worked well together in recent years to launch

the Doha Round, minimize the impact of US steel safeguards on Brazilian exports, and

secure $30 billion in IMF financing for Brazil to help manage its debt problems. They

now need to build on these precedents to forge an agreement that opens markets in both

North and South America, and that encourages a broader consensus for trade reform in

the WTO. Indeed, bridging the gap between the US and Brazilian positions—and

achieving market access reforms of value to both—is likely to be crucial for the

successful completion of both the FTAA and the WTO negotiations.

15

Both countries already have begun to work more closely together in the WTO,

even though their positions diverge on some key issues. Since the start of the Lula

government, bilateral trade contacts have increased dramatically as well. Now, as co-

chairs of the FTAA negotiations for the duration of the talks, both need to lead by

example and cooperate closely together to ensure the successful achievement of the

Summit of the Americas mandates. The following subsections summarize key points in

each area.

WTO Negotiations. The successful conclusion of the Doha Round is a high

priority for the United States and Brazil. Both have global trading interests and need to

improve access to European and other major markets, as well as to substantially reduce

distortions to world farm prices caused by foreign subsidies. As such, they share key

interests in achieving a big package of agreements in the Doha Round, thereby

strengthening the rules-based multilateral trading system.

The two countries already have worked closely together on the TRIPS/access to

medicines issue to pave the way for the launch of the Doha Round. Now they need to

replicate that effort in pushing for deep cuts in agricultural subsidies, border and

regulatory protectionism on farm products (including processed foodstuffs, the source of

significant growth in the Brazilian economy in the recent past). US negotiators already

have established a good marker for that effort in their initial proposals on agriculture and

industrial tariffs. Working together, the United States and Brazil can help promote the

negotiation of a big package of market access reforms in the Doha Round.

16

Bilateral. Questions have been raised as to whether the United States should

negotiate bilaterally with Brazil or with the Mercosul via the “4+1” process. The answer

is “both”. The United States and Brazil should adopt a pragmatic approach so as to

promote the most comprehensive result. To some extent, however, the talks perforce will

be bilateral. Brazil is the predominant market in the Mercosul, and some market access

problems involve specific US or Brazilian policies. For example, bilateral talks could

help resolve longstanding problems regarding Brazilian commitments to reforms in

telecommunications and financial services as well as US restrictions on steel and orange

juice.

At the same time, however, “4&1” talks also are desirable, since they would

encourage policy coordination within the Mercosul and thus help catalyze deeper

regional integration. Here, it would be useful to pursue inter alia negotiations on

investment policies and government procurement rules; indeed, the North-South talks

could provoke the Mercosul partners to forge common policies in these areas. Such

actions also would help revive intra-Mercosul trade and investment, and contribute

importantly to economic development and political stability in the region. From the US

perspective, it would make the Mercosul an even more attractive trading partner.

FTAA. The FTAA is a self-contained negotiation among the 34 democratic

countries in the hemisphere. However, these countries—reflecting widely diverse levels

of size and economic development—are deploying a diverse array of trade initiatives to

prepare themselves for the task of implementing a hemispheric free trade pact. Some

involve commitments to deeper integration with regional neighbors than is likely to be

17

achieved in the FTAA; such agreements (like the Mercosul) will not be superceded by the

FTAA. Others establish free trade agreements that will blend into the broader

hemispheric pact. And some others offer unilateral trade preferences to hemispheric

neighbors; in these cases, the arrangements provide way stations to the gradual

fulfillment of reciprocal trade obligations in the FTAA (particularly for the smallest or

lesser developed countries).

The United States is engaged in a number of these initiatives, including FTAs

with Chile and the Central American countries (plus the Dominican Republic) on top of

the nearly 10-year old NAFTA and tariff preferences for the Caribbean Basin and

Andean countries (except Venezuela). In addition, other South American countries have

requested FTA negotiations with the United States, including Colombia, Peru and

Uruguay. Indeed, these initiatives are establishing building blocks for the FTAA.

The combination of the FTAs and the Caribbean Basin and Andean trade

preferences should help those countries prepare for adherence to the FTAA by promoting

reform of trade and domestic policies in the region (see Schott 2001). These countries

have clamored for these arrangements to enhance their access to the world’s largest

single market, to “lock in” their own domestic reforms, and—as a consequence—to

encourage increased investment in their economies. While the FTAA will provide these

benefits as well—while diluting the value of the bilateral trade preferences—these

arrangements give them a head-start, in competition with their neighbors in the Southern

Cone and other developing countries, in expanding trade with the United States and

attracting foreign direct investment.

18

For this reason, Brazil and its Mercosul partners have been understandably

concerned that, under the FTAA, their access to the US market could be phased in slowly

to maintain the value of the trade preferences for the smaller countries until hemispheric

free trade is fully or nearly completely implemented. That, of course, would be many

years after the FTAA enters into force. Though officials are too polite to say so, the US

policy confronts Brazilian negotiators with a stark choice: accelerate talks on the FTAA

or risk growing discrimination against Brazilian exporters to the US market as FTAs are

concluded with other hemispheric partners. The clear US preference—as evidenced by

Ambassador Zoellick’s visit to Brasilia in May 2003 and expressed in the Joint

Declaration of the Bush-Lula summit on June 20, 2003—is to mitigate the prospective

discrimination by moving faster toward hemispheric free trade.

The United States has two overarching goals in pursuing an FTAA. First, free

trade in the Americas is an integral component of a global US trade strategy designed to

reduce barriers to trade and investment and thereby increase US trade, production and the

productivity and income of US workers. Second, the FTAA is the linchpin of the broad

array of summit initiatives that seek to promote closer cooperation in the hemisphere to

deal with pressing economic, social, and political problems.

The trade objective is straightforward. Breaking down Latin American trade

barriers will yield important new opportunities for US firms to export and invest. US

firms benefit and US workers benefit as well, since exporting firms generally pay higher

wages and offer steadier employment than firms that do not export (Lewis and

Richardson 2001). The same applies to US firms that invest abroad, since they also are

significant exporters. In addition, the FTAA would help level the playing field for US-

19

based exporters by reducing discrimination resulting from other FTAs in the region to

which the United States is not a party. The US Congress is particularly concerned about

discrimination against US-based producers as a result of free trade pacts that Latin

American countries have or may sign with each other and with the European Union. 5 In

some cases, such pacts have forced US firms to source their exports from their foreign

instead of domestic production plants to the detriment of US workers.

Second, the United States benefits when its neighbors prosper and democratic

processes deepen. The FTAA would help strengthen the economic foundation on which

Latin American and Caribbean countries have built their democratic societies.

Furthermore, the prospect of improved trade relations can act as a magnet for attracting

support among Latin American countries for other important US political and foreign

policy goals, including cooperation on drug interdiction, improving environmental and

labor conditions, supporting educational reforms, and reinforcing democracy. Thus, an

FTAA could have important spillover effects on overall US relations with the region.

For Brazil and its Mercosul partners, the US market is the economic reason for

participating in an FTAA. Brazil, in particular, needs to expand its exports, especially to

the major industrial markets of North America and Western Europe (which is why it is

also negotiating a free trade pact with the European Union). To a certain extent, the

FTAA negotiations give Brazil leverage in its parallel talks with Europe, and vice versa.

But neither negotiation is likely to yield the agricultural reforms sought by Brazilian

exporters; indeed, it is unclear how a regional pact could effectively dismantle subsidies

if other major subsidizers outside the pact don’t follow suit. For that reason, the FTAA

and EU-Mercosul FTA need to be coupled with progress in the Doha Round of WTO

5 For an analysis of European free trade initiatives in the Americas, see Schott and Oegg (2001).

20

negotiations, where Brazil and its Mercosul partners can work with other agricultural

exporting nations to push for multilateral disciplines on farm subsidies. In fact, the

United States and Brazil share key objectives in the WTO regarding the importance of

achieving deep cuts in farm subsidies and market access barriers.

As noted above, enhanced access to the world’s largest economy would generate

a large increase in Brazilian exports and contribute importantly to GDP growth. But if US

barriers were left intact, the promise of the FTAA would fall flat. That’s why President

Luiz Inácio Lula da Silva has voiced the same arguments of his predecessor, Fernando

Henrique Cardoso, who repeatedly challenged US officials to commit to removing the

key US barriers to Brazilian exports of steel, citrus, and other products, and warned that

Brazil would not sign a pact that did not include greater access to the US market.

While increased trade is important, an even more critical benefit from an FTAA

would be its impact on FDI in the region. To be sure, attracting FDI requires a

combination of good domestic policies and a conducive business environment. In that

regard, Brazil and its neighbors still have a lot of “homework” to do. Three broad efforts

that deserve particular attention are: restructuring the banking system; attenuating fiscal

deficits; and reducing burdensome tax and regulatory policies that dampen productivity

and increase transactions costs (commonly called the “Brazil cost”). Such reforms are

never easy to achieve in democratic governments, given the diversity of views and

economic interests in the various policy alternatives. But the promise of better access to

the US market should provide substantial incentives to advance the domestic reform

agenda and encourage FDI inflows.

21

The key to success in the FTAA for both the United States and Brazil—especially

if they are to meet the pressing negotiating deadline of January 2005—is to focus more

sharply on the key market access issues. That means both liberalization of existing tariffs

and quotas plus reform of regulatory and administrative practices that effectively impede

the ability to sell in foreign markets (including discriminatory standards and customs

procedures, and contingent protection policies). The FTAA deal can’t be closed, much

less sold to national legislatures, without opening new opportunities for trade and

investment in the hemisphere.

What could be achieved? Eliminating all tariffs is likely to be the basis of the

deal, with some balance struck between US farm trade reforms and enhanced access to

Latin American procurement and services markets. Regarding procurement, FTAA

negotiators should be able to agree on principles that provide transparency for public

tenders and guidelines for open tendering. In addition, such rules should be

complemented by a commitment to negotiate within 5 years or so a list of entities whose

purchases would be covered by these new obligations. Regarding services, the preferred

outcome would be agreement on a “negative list” that covers all services subject to

FTAA obligations except those explicitly listed—with exceptions hopefully kept to a

minimum.

In contrast, new rulemaking initiatives will need to be more narrowly focused. In

the area of IPRs, for example, negotiators are most likely to achieve results on obligations

related to e-commerce—since such provisions would benefit countries in both North and

South America. Antidumping—which in the US-Brazil context is primarily a steel

problem—probably will be deferred to WTO talks, though I am not optimistic that

22

substantial changes in existing rules will result from those negotiations—beyond what is

already being considered as a result of decisions of the WTO dispute settlement process.6

On the other hand, special treatment for FTAA partners in safeguards cases might be

possible following to some extent the precedent set in the NAFTA. I also would not

dismiss the possibility that some progress could be made on the steel issue in the context

of the FTAA, depending on the restructuring of the US steel industry during the period of

safeguards protection and pursuant to the rulings of US bankruptcy courts.

I am less sanguine, however, that some sacred cows of US protectionism can be

sacrificed, especially sugar. Not only is it a sensitive issue for US politicians, but the

sugar quota rents that the US program doles out to less competitive suppliers to the US

market—including other Latin American and Caribbean producers--would likely

disappear if the FTAA opened the market freely for Brazil (and for Australia under a

separate FTA currently under negotiation). Moreover, given the fact that the maximum

achievable result would be a modest expansion of US sugar quotas, the limited gain for

Brazil seems hardly worth the expenditure of negotiating capital.

Conclusion

In sum, the United States and Brazil have an important stake in deepening their

bilateral trade relations. Both have common objectives in advancing trade reforms at

home and abroad. Both will benefit from an opening of their markets that spurs

competition and innovation in their economies, boosts productivity, and augments

6 Note that both subsidies and antidumping issues were not disciplined in either the Canada-US FTA or the NAFTA (see Hufbauer and Schott 1993).

23

growth. Both have a leadership role and responsibility for ensuring that trade negotiations

succeed in the hemisphere and in the WTO.

For Brazil, it is a propitious time to move forward on the trade front. Brazil needs

a stronger contribution from net exports to offset sluggish domestic demand and propel

economic growth. The new government has a narrow window to push the needed reforms

to both domestic economic and trade policies; it needs to take advantage of its

competitive exchange rate, which has dampened protectionist pressures, to reduce the

notorious “Brazil cost” at home and barriers to Brazilian exports abroad.

For the United States, closer ties with Brazil would reinforce efforts made over

several decades to promote economic development and to strengthen democratic

processes in the region. Increased trade and investment can help boost income and

employment in both countries, open new channels for political cooperation and cultural

exchange, and strengthen prospects for hemispheric integration.

At the end of their summit meeting in Washington in June 2003, both presidents

pledged “to chart a newly purposeful direction in our relationship, guided by a shared

vision of freedom, democracy, peace, prosperity, and well-being for our peoples, in order

to promote hemispheric and global cooperation.” Both countries are committed to deepen

their bilateral relationship; both share the challenge and responsibility to ensure that trade

negotiations achieve the best results for their citizens and those of their trading partners in

the hemisphere and around the globe.

24

References

Hufbauer, Gary C., and Jeffrey J. Schott. 1993. NAFTA: An Assessment (rev. ed). Washington: Institute for International Economics. Inter-American Development Bank (IDB). 2003. Hemispheric Trade and Tariff Data Base for Market Access. http://alca-ftaa.iadb.org/eng/NGMADB_E.HTM (accessed November 10). Lewis, Howard, and J. David Richardson. 2001. Why Global Commitment Really Matters! Washington: Institute for International Economics. Rose, Andrew K. 2003. “Which International Institutions Promote International Trade?” Discussion Paper 3764. London: Centre for Economic Policy Research. January. Schott, Jeffrey J. 2001. Prospects for Free Trade in the Americas. Washington: Institute for International Economics. Schott, Jeffrey J., and Barbara Oegg. 2001. “Europe and the Americas: Toward a TAFTA-South?” The World Economy, vol. 24, no. 6 (June), 745-759. United States Department of Commerce, Bureau of Economic Analysis (BEA). 2003. International Economic Accounts. http://www.bea.doc.gov/bea/di1.htm (accessed November 10). United Nations Conference on Trade and Development (UNCTAD). 2003. World Investment Report. Geneva. US International Trade Commission (ITC). 2003. Interactive Tariff and Trade DataWeb. http://dataweb.usitc.gov (accessed November 10). United States Trade Representative (USTR). 2003. National Trade Estimate Report on Foreign Trade Barriers, (www.ustr.gov). World Trade Organization (WTO). 2003. Dispute Settlement Gateway. http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm (accessed November 10).

Year Goods Services Total Goods Services Total1990 4,876 7,7621991 5,945 6,7611992 5,442 2,499 7,941 7,588 679 8,2671993 5,712 2,949 8,660 7,763 734 8,4961994 7,638 3,737 11,376 8,847 904 9,7511995 10,757 4,997 15,753 8,989 1,165 10,1531996 11,920 5,205 17,125 8,871 1,421 10,2921997 15,001 6,405 21,406 9,510 1,764 11,2741998 14,293 6,616 20,909 9,953 1,959 11,9121999 12,331 5,548 17,879 11,273 1,701 12,9742000 14,025 6,027 20,053 13,732 1,933 15,6642001 14,663 5,777 20,439 14,415 1,770 16,1852002 11,208 15,609

Source: US International Trade Commission (2003) and Bureau of Economic Analysis (2003).

US exports to Brazil US imports from Brazil

Table 1. US-Brazil trade, 1990-2002

Note: Data on goods trade pertains to domestic exports and imports for consumption .

HTS US imports for consumption from BrazilMillions

of dollarsMFN tariff

All categories 15,609 1008802 aircraft, powered (for example, helicopters, airplanes); spacecraft (including satellites) and spacecraft launch vehicles 1,830 11.7

8525 transmission apparatus for radiotelephony, radiotelegraphy, radiobroadcasting or tv; tv cameras; still image video cameras and recorders 1,015 6.5

6403 footwear, with outer soles of rubber, plastics, leather or composition leather and uppers of leather 1,015 6.5

2710 petroleum oils and oils from bituminous minerals (other than crude) and products therefrom 651 4.2

8703 motor cars and other motor vehicles designed to transport people (other than public-transport type) 622 4.0

9801 exports of articles imported for repairs etc.; imports of articles exported and returned 563 3.6

7207 semifinished products of iron or nonalloy steel 409 2.6

8708 parts and accessories for motor vehicles 400 2.6

7201 pig iron and spiegeleisen in pigs, blocks or other primary forms 387 2.5

4703 chemical woodpulp, soda or sulfate, other than dissolving grades 348 2.28414 air or vacuum pumps, air or other gas compressors and fans; parts thereof 299 1.98409 parts for spark-ignition reciprocating or rotary internal combustion piston engines and compression-ignition internal combustion piston engines 286 1.8

HTS US domestic exports to Brazil Millions PercentAll categories 11,208 100

8411 turbojets, turbopropellers and other gas turbines, and parts thereof 1,019 9.18802 aircraft, powered (for example, helicopters, airplanes); spacecraft (including satellites) and spacecraft launch vehicles 600 5.48803 parts of balloons, dirigibles, gliders, airplanes, other aircraft, spacecraft and spacecraft launch vehicles 542 4.88431 parts of machinery of headings 8425 to 8430 covering derricks, fork-lift trucks, etc. 389 3.58473 parts and accessories nesoi for typewriters and other office machines of headings 8469 to 8472 376 3.48471 automatic data processing machines and units thereof 316 2.88708 parts and accessories for motor vehicles 241 2.18542 electronic integrated circuits and microassemblies; parts thereof 236 2.13808 insecticides, rodenticides, fungicides, herbicides, antisprouting products etc., packaged for retail sale or as preparations or articles 191 1.73004 medicaments (except vaccines etc., bandages or pharmaceuticals) 189 1.79880 estimate of non-canadian low value export shipments 188 1.79018 instruments and appliances used in medical, surgical, dental or veterinary sciences (including electro-medical and sight-testing) 179 1.63100 fertilizers (exports only; includes crude fertilizers from other areas) 174 1.52701 coal; briquettes, ovoids and similar solid fuels manufactured from coal 166 1.58409 parts for spark-ignition reciprocating or rotary internal combustion piston engines and compression-ignition internal combustion piston engines 147 1.38529 parts for television, radio and radar apparatus (of headings 8525 to 8528) 144 1.38428 lifting, handling, loading or unloading machinery (including elevators, escalators and conveyors) 131 1.28524 records, tapes and other recorded media for sound or other similarly recorded phenomena 127 1.18517 electrical apparatus for line telephony or line telegraphy, including such apparatus for carrier-current or digital line systems; parts thereof 125 1.18526 radar apparatus, radio navigational aid apparatus and radio remote control apparatus 106 1.0

Table 2. US trade with Brazil by product, 2002

Source: United States International Trade Commission (2003) and IDB (2003).

Total BrazilianYear World Latin America Brazil FDI inward stock1990 430,521 71,413 14,384 37,1431991 467,844 77,677 14,997 38,5801992 502,063 91,307 16,313 39,9751993 564,283 100,482 16,772 35,9751994 612,893 116,478 17,885 38,1251995 699,015 131,377 25,002 42,5301996 795,195 155,925 29,105 50,1951997 871,316 180,818 35,778 65,5061998 1,000,703 196,755 37,195 132,7341999 1,173,122 237,748 37,383 164,1052000 1,293,431 251,863 39,033 196,8842001 1,381,674 269,556 36,317 219,342

Table 3. US and world foreign direct investment, 1990-2001

US FDI position on a historical cost basis

Sources: Bureau of Economic Analysis (2003) and UNCTAD (2003).

LAC region

(including Mexico) Brazil

Brazil share in

LAC region

Total 269,556 36,317 13.5

Petroleum 10,566 1,022 9.7

Total manufacturing 45,633 15,506 34.0Food and products 8,654 1,376 15.9Chemicals 11,884 3,690 31.1Primary and Fabricated Metals 2,981 1,460 49.0Industrial Machinery and equipment 2,327 1,627 69.9Electronic and other electric equipment 1,677 1,674 99.8Transportation equipment 8,468 2,262 26.7Other manufacturing 9,642 3,416 35.4

Total services 184,341 15,279 8.3Wholesale trade 9,773 356 3.6Depository institutions 9,988 2,280 22.8Finance, insurance, real estate 153,796 10,542 6.9Other services 10,784 2,101 19.5

Other industries 29,017 4,511 15.5

Source: Bureau of Economic Analysis (http://www.bea.gov/bea/di/extract.exe)

Table 4. US FDI in Brazil (year-end 2001; $ million)

Simple Weighted Minimum Maximum Share ofSITC Product Avg. Tariff Avg. Tariff Tariff Tariff lines > 15%Total TOTAL TRADE 13.8 8.9 0 36.0 39.3

0 Food & live animals 13.1 9.8 0 27.0 42.31 Beverages and tobacco 20.9 18.0 13.5 27.0 96.72 Crude materials excl. food/fuel 6.9 6.2 0 29.0 7.03 Mineral fuel/lubricants 0.7 0.8 0 5.5 0.04 Animal/veg oil/fat/wax 10.2 7.6 3.5 13.5 0.05 Chemicals/products n.e.s 10.5 10.0 0 36.0 25.96 Manufactured goods 15.2 14.6 1.5 21.5 59.87 Machinery/transport equipment 14.6 8.0 0 35.0 37.58 Misc. manufactured articles 17.4 13.4 0 25.0 71.99 Commodities n.e.s. 1.5 1.5 1.5 1.5 0.0

Simple Weighted Minimum Maximum Share ofSITC Product Avg. Tariff Avg. Tariff Tariff Tariff lines > 15%Total TOTAL TRADE 2.1 1.6 0 350.0 4.0

0 Food & live animals 2.0 0.5 0 131.8 5.41 Beverages and tobacco 12.0 65.7 0 350.0 7.82 Crude materials excl. food/fuel 1.3 0.1 0 131.8 0.53 Mineral fuel/lubricants 0.0 0.0 0 0.0 0.04 Animal/veg oil/fat/wax 2.0 1.1 0 19.1 4.55 Chemicals/products n.e.s 0.7 0.7 0 9.2 0.06 Manufactured goods 2.7 1.4 0 38.0 3.07 Machinery/transport equipment 0.3 0.4 0 25.0 0.28 Misc. manufactured articles 4.5 6.2 0 48.0 12.59 Commodities n.e.s. 0.0 0.0 0 0.0 0.0

Source: World Bank, World Integrated Trade Solution Database

Note: Applied tariff rates are used for simple average and (trade) weighted average tariff calculations. Some Brazilian exports receive preferantial treatment in the United States under the Generalized System of Preferences.

Table 5. United States and Brazil's bilateral tariffs by SITC classification, 2002

Brazilian tariffs against US exports

US tariffs against Brazil's exports

Order Type of Product date duty Product Group Maximum Duty

05/09/1986 AD Iron construction castings Iron/Steel05/15/1986 CVD Heavy iron construction castings Iron/Steel12/17/1986 AD Carbon steel butt-weld pipe fittings Iron/Steel01/08/1987 CVD Brass sheet & strip Metals01/12/1987 AD Brass sheet & strip Metals 40.6205/05/1987 AD Frozen concentrated orange juice Agriculture 15.9807/10/1990 AD Industrial nitrocellulose Chemicals 61.2507/31/1991 AD Silicon metal Metals 93.2011/02/1992 AD Circular welded nonalloy steel pipe Iron/Steel 103.3808/17/1993 CVD Carbon steel plate Iron/Steel 48.6408/19/1993 AD Carbon steel plate Iron/Steel 75.0401/28/1994 AD Stainless steel wire rod Iron/Steel 25.8812/22/1994 AD Silicomanganese Metals 64.9302/21/1995 AD Stainless steel bar Iron/Steel 19.4308/03/1995 AD Seamless pipe Iron/Steel 124.9407/06/1999 AD Hot-rolled carbon steel flat products Iron/Steel 42.1207/06/1999 CVD Hot-rolled carbon steel flat products (Suspended) Iron/Steel Suspension agreement10/22/2002 CVD Carbon steel wire rod Iron/Steel 6.1110/29/2002 AD Carbon steel wire rod Iron/Steel 94.73

Order Type of Product date duty Product Group Maximum Duty4/7/1992 AD Polyvinyl chloride 16.00

11/23/1992 AD Vacuum blood containers 54.139/15/1997 AD Laboratory reagents 91.802/12/1998 AD Polycarbonate resins 61.00

10/19/1998 AD Hydroxyethylcellulose 19.802/12/2001 AD Insulin products Price undertaking4/19/2001 AD Phenol 68.20

Table 6. US antidumping and countervailing duty orders against Brazil in place as of April 7, 2003.

ANTIDUMPING AND COUNTERVAILING DUTY ORDERS AGAINST THE UNITED STATES IN PLACE AS OF DECEMBER 31, 2002

Source: US International Trade Commission (http://www.usitc.gov), Brazilian Embassy (http://www.brasilemb.org/Barr2002_english.pdf), International Trade Administration (http://www.ia.ita.doc.gov/trcs/foreignadcvd/brazil.html), and WTO (http://docsonline.wto.org/DDFDocuments/t/G/ADP/N98BRA.doc).

Product 1996 1997 1998 1999 2000 2001 2002Unfinished Slab 437,565 463,586 371,747 475,483 590,088 393,305 600,092Finished Carbon and Alloy Flat Products 253,342 239,732 278,649 157,274 120,943 116,309 65,818Carbon and Alloy Long Products 88,726 90,617 101,084 98,317 125,372 68,373 75,534Carbon and Alloy Pipe and Tube 32,614 33,440 23,227 18,684 25,788 56,279 33,924Stainless Steel and Alloy Tool Steel 5,777 10,946 9,285 17,824 27,076 16,286 17,907Total 818,025 838,321 783,992 767,581 889,267 650,552 793,276

Product 1996 1997 1998 1999 2000 2001 2002Unfinished Slab 1,879 1,887 1,649 2,815 2,645 2,224 3,298Finished Carbon and Alloy Flat Products 622 641 775 471 311 326 140Carbon and Alloy Long Products 205 223 244 319 387 201 235Carbon and Alloy Pipe and Tube 48 51 32 31 40 93 57Stainless Steel and Alloy Tool Steel 3 5 5 15 21 11 12Total 2,757 2,807 2,705 3,652 3,405 2,854 3,743

Product 1996 1997 1998 1999 2000 2001 2002Unfinished Slab 233 246 225 169 223 177 182Finished Carbon and Alloy Flat Products 407 374 359 334 388 357 471Carbon and Alloy Long Products 433 406 414 308 324 340 321Carbon and Alloy Pipe and Tube 685 660 729 606 642 607 595Stainless Steel and Alloy Tool Steel 1,969 1,995 2,025 1,150 1,300 1,531 1,517Total 297 299 290 210 261 228 212

Average price (in current dollars, including cost, insurance, freight, and duties)

Table 7. US steel imports from Brazil, 1996-2002

Value (in 1,000s of current dollars, including cost, insurance, freight, and duties)

Volume (in 1,000s of short tons)

Source: United States International Trade Commission (2003).

Subsidies on Upland Cotton 267 9/27/2002 Panel review underway.Definitive Safeguard Measures on Imports of Certain Steel Products 259 5/21/2002 Panel has ruled against the United States. The United States is appealing.Equalizing Excise Tax Imposed by Florida on Processed Orange and Grapefruit Products 250 3/20/2002 Panel requested but not yet composed.Anti-Dumping Duties on Silicon Metal from Brazil 239 11/1/2001 Consultations but no panel request.US Patents Code 224 1/31/2001 Consultations but no panel request.

Countervailing Duties on Certain Carbon Steel Products from Brazil 218 12/21/2000

Panel and Appellate Body ruled the US practice was inconsistent with WTO obligations. The United States has modified its practices due to a similar dispute with the E.U.

Continued Dumping and Subsidy Offset Act of 2000 217 12/21/2000

Panel and Appellate Body ruled the US practice was inconsistent with WTO obligations. The US Congress is unlikely to modify the "Byrd Amendment" anytime soon.

Standards for Reformulated and Conventional Gasoline 4 4/10/1995Panel and Appellate Body ruled the US practice was inconsistent with WTO obligations and the United States modified its practice in 1997.

Measures Affecting Patent Protection 199 5/30/2000 Parties reached a mutually acceptable solution.Measures on Minimum Import Prices 197 5/30/2000 Consultations but no panel request.Certain Measures Affecting Trade and Investment in the Automotive Sector 65 1/10/1997 Parties reached a mutually acceptable solution.Certain Measures Affecting Trade and Investment in the Automotive Sector 52 8/9/1996 Parties reached a mutually acceptable solution.

Source: WTO (2003).

US complaints against Brazilian practices

Dispute NameDS

NumberRequest

Date Status

DS Number

Table 8. US-Brazil WTO disputes, 1994-2003

Brazilian complaints against US practices

StatusDispute NameRequest

Date