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International business management

Brazil’s blueprint for recovery

Taneli Ruda  SVP and Managing Director, Thomson Reuters ONESOURCE Global Trade

Taneli Ruda  SVP and Managing Director, Thomson Reuters ONESOURCE Global Trade

An economic cliché is that Brazil is the future and always will be, and its most recent boom-bust cycle would seem to support this narrative. But maybe this time, recovery will be different.

The background: As recently as 2011, Brazil seemed to be on the brink of an economic transformation. Boasting natural resources, an engaged population ready and willing to work, the 2014 FIFA World Cup and Rio 2016 Olympics to look forward to. It was the Latin America region’s most obvious economic success story. Brazil was growing faster than it had in half a century while at the same time controlling inflation and making positive social progress.

Now, in just five years, it has regressed substantially. Brazil’s economy has produced negative growth for three years in a row, and this year’s decline will most likely reach 10 percent. What happened, and how can Brazil get back on the right track economically?

It is impossible to talk honestly about Brazil’s economic woes without mentioning its current political dilemma. President Dilma Rousseff was suspended in May pending the results of an impeachment trial, with her vice president, Michel Temer, serving as interim leader.

This does not tell the whole story. While President Luiz Inacio Lula da Silva (who left office in January 2011 amid great popularity) instituted economic policies that rapidly expanded growth, his administration did not do enough to hedge against the possibility of contracting commodities prices. Sure enough, this caught up with Brazil shortly after da Silva’s second term ended. (Da Silva earned the presidency in 2002 and was re-elected in 2006; Brazil’s constitution limits presidents to two terms.)

The fact is that China both fueled and extinguished Brazil’s explosive growth.

What Brazil had—natural resources like iron ore and oil, and perishables like soybeans and beef—happened to be exactly what China needed as its infrastructure boomed, middle class expanded, and economy began to move from export-driven to consumption-oriented. Brazil’s trade with China grew from $2 billion in 2000 to $83 billion in 2013.

This created a massive influx of foreign money and, among some, a unique kind of irrational exuberance. BNDES, Brazil’s national bank, amassed a larger loan portfolio than that of the World Bank. Massive stadiums of questionable long-term value were built to host the 2014 World Cup and 2016 Olympics. Brazilian officials began to showcase marketing documents that suggested the country’s economy would grow at an average of 4.5 percent a year in perpetuity, according to a 2015 article in the Wall Street Journal.

Anyone who watched the U.S. real estate meltdown in 2007 knows what can happen when one underlying assumption of a model is that prices will rise indefinitely.

China’s waning appetite for commodities pushed prices lower, and Brazil ended up producing less oil than expected. Moreover, the optimism led to questionable foreign policy. It blocked a U.S.-led initiative to further liberalize trade throughout the Americas and teamed with Venezuela to dampen the United States’ influence in the region. This caused Chile, Colombia and Peru to negotiate individual trade deals with the United States, which cut Brazil out of the action.

But Brazil has been in difficult situations before. The spectacular Brazilian growth of the late 1960s and early 1970s was followed by the 1980s debt crisis. The question is, what can be done now to turn the corner, and how can the country close off this familiar path?

Despite ranking fifth in the world and second in the hemisphere in population, Brazil has the 32nd most complex economy, as ranked by the MIT Observatory of Economic Complexity. Considering its population, area, and GDP, Brazil’s share of global trade is minute: exports account for less than 12 percent of GDP, and its share of world exports is barely 1 percent.

High commodities trade with China, and the resulting fact that investing in Brazil became a proxy to investing in China, masked the fact that Brazil was never taking full advantage of its trade potential.

Consequently, Brazil’s National Export Plan aims to make it easier on importers and exporters to do business in or through Brazil, and it has had a major impact on foreign companies wanting to tap into production capacity and consumer markets in Brazil. This should help its recovery.

Brazil still does not have a comprehensive accord with the United States in any area of joint strategic importance, including trade. Despite having many preferential trade agreements with emerging markets, the United States has yet to strike one with Brazil. According to the Atlantic Council, this is due to a deep-seated belief that Brazil’s national interests are not served by an improved relationship with the United States.

U.S.-Brazil relations need to get better for Brazil to boost trade in the manner that it wants.

Technology can also play a crucial role in Brazil’s way forward. To tap into the country’s capabilities, it is virtually a pre-requisite to navigate its highly complex tax and regulatory environment and take advantage of its multiple special regimes, such as RECOF-SPED, which in support of the Brazilian National Export Plan offer very compelling incentives. Automation can essentially neutralize this complexity and enable companies to take full advantage of Brazil as a sourcing, manufacturing, re-export and logistics value-add hub.

By following its National Export Plan, improving cooperation with the United States, and automating trade compliance around its borders, Brazil can fend off lingering effects from its latest recession and advance its economy in a more sustainable, methodical way.

This article was originally published in American Shipper magazine.

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