Global Policy Forum

By Matthew Flynn

During his two terms in office, Brazilian President Fernando Henrique Cardoso has transformed his country's formerly inward looking, state-dominated economy into one of Latin America's leading models of free trade reform. Economic aftershocks following Brazil's 1999 devaluation of its currency were short-lived and the catastrophe now facing Argentina was avoided. With its economic house more or less in order (though blaring social inequalities persist) the world's fourth largest democracy has now begun to play a larger, more activist role in international affairs, often taking stances contrary to those of the world's industrial powers-including the United States.

Brazil's policy of distributing AIDS medications free of charge, for instance, runs contrary to the interests of large pharmaceutical companies, many of them based in the United States, and is eyed with distaste in Washington. At the latest World Trade Organization (WTO) meeting in Qatar, Brazil successfully argued that AIDS medicines should be exempted from the TRIPS accord-despite U.S. resistance.

Brazilian diplomats are now fighting for the inclusion of "traditional knowledge"-for example, the herb-lore of Amazonian peoples-in the international patent rights regime. Brazil has also vigorously condemned the use of agricultural subsidies by wealthy countries as protectionist measures intended to safeguard their own agricultural sectors.

Similarly, in a dispute with Canada over export subsidies for regional airplanes, Brazil has firmly stood its ground. And when that imbroglio boiled over into other areas, Brazil responded to Canadian allegations that its beef was contaminated by Mad Cow Disease by taking Canadian goods off supermarket shelves and shunning companies backed by Canadian investors.

Of course, Brazil does not always assume adversarial positions vis a vis the rich countries of the North. After the Sept. 11 terrorist attacks on the United States, Cardoso quickly invoked the Rio Treaty mutual-defense pact. Still, the move was more public relations than substance: Brazil continues to look askance at U.S. policy in Colombia.

Brazil's Stance in FTAA Negotiations

While the application of the International Monetary Fund's (IMF) neoliberal recipe in Brazil has so far been successful in achieving macroeconomic stability, over the last decade Brazil has experienced less-than-spectacular growth-and has racked up recurring trade deficits. For 2001, economists estimate that GDP grew a mere 2%, the result of the global slowdown, Argentina's downward spiral, and a domestic energy crisis.

The leading drag on Brazil's economy is its need to annually send close to $25 billion overseas in order to service its debt obligations and repatriate profits. In the recent past, large sums of foreign direct investment-mainly through the sale of state assets-covered Brazil's accounts. But now that the pace of privatization is slowing, Brazil is being forced to look elsewhere for sources of income. In other words, as Cardoso has put it, Brazil must "export or die!" Thus Brazil, like most other Latin America countries negotiating the Free Trade Area of the Americas (FTAA) with the United States, is interested in gaining greater access to the world's largest consumer market.

Currently, the United States imposes average tariffs of 3% on Brazilian goods, compared to Brazilian duties of 16% on U.S. imports. However, Brazilians are quick to point out that the disparity in tariffs is not as large as it seems, since the 15 most important Brazilian exports to the United States are charged, on average, a tariff of 45.6%. Brazilians add that many of their exports also confront numerous phytosanitary barriers and quotas, such as those applied to tobacco. When the quotas are surpassed, U.S. tariffs on those commodities can reach 350%.

As a result, Brazilian resentment over U.S. trade policy is growing. Even if the U.S. Senate George W. Bush Trade Promotion Authority, commonly called 'fast track' authority, U.S. negotiators may find Brazil unimpressed-especially since the version of the fast track bill passed by the House this past November included measures which Brazilians say are protectionist and targeted against their most competitive exports, soybeans, sugar and orange juice.

"The United States has recently passed fast track for FTAA negotiations, but with conditions which, if they are taken to the letter, mean that there would be no FTAA," Cardoso said following the House vote.

One of Brazil's most effective bargaining tools is its leadership role in the Mercosur trade bloc-home to an estimated 50 million middle class consumers and potential purchasers of U.S. goods. Brazil recently played this card successfully when it garnered enough support from other Latin American countries to overturn a U.S. motion to inaugurate the proposed FTAA ahead of schedule in 2003, instead of in 2005 as initially planned.

One reason behind the U.S. push to implement the FTAA earlier is the fact that Mercosur is set to clinch a free-trade deal with the European Community within the next two years. The United States would like to firm up the FTAA before that happens. Latin America's southern cone receives more investment from Europe than from the United States, but Mercosur's turn to Europe has to do with more than just trade and investment. There is also talk of the need for a "little Maastricht" for countries of the Southern Cone, and European know-how and experience is being sought in this regard.

Cardoso has praised Europe's willingness to tackle the sticky problem of wealth and development disparities within the European Union (EU) and between Europe and nearby neighbors by establishing regional development programs. "If we wish to move toward effective integration in the hemisphere, the task should be to eliminate the differences between nations, which are unjust; and the profound inequality of income and the quality of life within nations as well as between nations," he has said.

Deepening Public Doubts in Brazil Regarding the Free Trade Model

Alongside the Brazilian government's independent stance on trade relations comes deepening public dissatisfaction with the results of economic liberalization. Presidential elections in this coming October make this trend even more significant.

In a country where 23 million live in extreme poverty, the issue of improving living standards touches nationalist sentiments. Though relieved to have put the days of hyperinflation behind them, many Brazilians say they are tired of the government's neoliberal policies and doubt that free trade will improve their situation. Public servants have had their salaries frozen for seven years, while consumer prices have tripled. And some 570,000 factory jobs have been lost in the industrial suburbs of Sí£o Paulo since the start of the Real Plan in 1994.

Additionally, while gaining greater access to the U.S. market has its attractions, many Brazilian producers also fear being swallowed up by an economy 18 times bigger than Brazil's. Like other developing countries, Brazil faces many disadvantages when competing head-to-head with firms from advanced countries. These include inadequate infrastructure, heavy taxes, high cost of capital and a lack of investment in export industries.

"Almost everything that we export [today,] from steel to orange juice, from paper and pulp to iron ore, is the product of [historic] investments from the end of the 1970s to the start of the 1980s," notes Rubens Ricupero, former Finance Minister and current secretary-general of the United Nations Conference on Trade and Development (UNCTAD).

In fact, there is a growing chorus in Brazil that the FTAA should be abandoned altogether. At the end of last year, the lower house of Brazil's Congress unanimously passed a non-binding measure to withdraw from FTAA talks.

"If the United States can pull out of the Anti-Ballistic Missile Treaty because that doesn't suit its interests, why shouldn't we pull out of negotiations that are not going to be of any benefit to us?" asked Aloizio Mercadante, a legislator from the left-leaning Workers' Party who sponsored the motion.

The alternative for Brazil-and probably the most optimal program, from a Brazilian perspective-is to prioritize regional integration and expand Mercosur. Ambassador Samuel Pinheiro Guimarí£es, who was dismissed from his position as the director of Brazil's Foreign Service Research Institute for his outspoken criticism of the FTAA, would like Mercosur to become the "Free Trade Area of South America."

In Guimarí£es' and many others' view, U.S. competition will destroy Brazil's industrial base and lead to greater balance-of-payments problems in the future. The logic goes that once the Mercosur common external tariff (which reaches 35%) is removed, there will no longer be any incentive to invest in Brazil. Transnational companies, instead, will establish their factories along the U.S.-Mexico border and export to Brazil. Additionally, a continent-wide bloc would mean even more bargaining power than that provided by Mercosur.

FTAA or Bust?

If established, the FTAA would be the largest trade bloc in the world-an area encompassing 800 million inhabitants and tallying a combined GDP of $11.4 trillion. While still on the campaign trail, George W. Bush signaled that creation of the FTAA would be one of the accomplishments of his administration, the first step forward in what would be a U.S.-sparked "century of the Americas."

But progress on that front has been negligible. Talks for easing restrictions on the crossborder U.S.-Mexico labor market have foundered, and Bush barely managed to win access for Mexico trucks to U.S. highways, as called for by the 7-year-old North American Free Trade Agreement (NAFTA).

Most observers agree that resolving U.S.-Brazilian differences is a crucial key for unlocking the FTAA talks. It is not clear, though, how willing the United States will be to meet Brazilian demands.

The next pending hurdle for Washington's FTAA plans relates to U.S. allegations that Brazil is dumping steel. The International Trade Commission will be ruling in coming months whether or not to impose quota and tariff restrictions on Brazilian steel. Celso Lafter, Brazil's Foreign Minister, has already threatened that Brazil will retaliate in the case of an unfavorable ruling. If the country's actions during the recent trade feud with Canada are any indication, by pushing hard with charges of steel dumping, the United States runs the risk of scuttling the already in-doubt FTAA negotiations.

The implosion of the FTAA talks would be a welcome development for many fair-trade activist organizations in the United States and elsewhere in the Americas. Neither the Brazilian government nor the Bush administration favor including any mention of labor and environmental issues in the FTAA text, as advocated by fair trade activists.

Also, if Bush fails to win fast track and is obligated to negotiate on what members of Brazil's diplomatic corps refer to as 'slow track,' there is a chance that the U.S. Congress could include social clauses like those in NAFTA's side accords. The Brazilian government's position, frequently vocalized, is that such measures are nothing more than U.S. protectionism, and are not acceptable.

While the Bush administration and Brazil are in general agreement on the issue of excluding social clauses from the text of the FTAA, Brazil's stance on including provisions akin to NAFTA's notorious Chapter 11 investor protection language in the FTAA presents a much stickier wicket. Brazilian negotiators have bluntly stated that Brazil will never sign a trade deal that cedes similar rights to foreign investors.

Brazil, without a doubt, will be the United States' toughest negotiator during the FTAA talks. In Brazil there is already growing discontent due to perceptions of U.S. unilateralism and disillusionment with the results of neoliberal reform. With presidential elections coming and Luis Inacio Lula da Silva from the left-leaning Workers' Party leading in the polls, there could be a dramatic shift in Brazilian economic and trade policy. Washington could suddenly find Brazil, like Venezuela, and to a growing extent, Argentina, a less-than-enthusiastic partner.

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