Global Policy Forum

Matthew Flynn *

Two different perspectives on solving the world's problems faced off when U.S. President George W. Bush met with Brazil's President Luiz Inacio Lula da Silva on June 25, in Washington, DC.

The Bush agenda emphasizes fighting terrorism and ensuring stability by combining the big stick of preemptive military intervention threats and the big carrot of free trade agreements. In contrast, Lula's vision calls for the world's most powerful countries to work together to reduce global poverty, in the belief that the failure to do so is the root of instability. This profound difference has important implications for the prospects of the proposed Free Trade Area of the Americas (FTAA). The negotiations are co-chaired by the United States and Brazil.

At the latest G-8 meeting in France, Lula proposed a small tax on the arms trade to finance hunger relief programs in Third World countries. The representatives of the world's eight most-powerful nations seated at the G-8 table did not even refer to the proposal in the summit's closing statement. Still, Bush will be hard pressed to simply ignore the policy agenda of South America's largest country.

Negotiating the creation of the world's largest free trade area--which would stretch from Canada to Argentina, encompass some 800 million people, and represent a combined GDP of $11.4 trillion--is one of the Bush administration's top priorities on the trade front. As South America's largest economy, Brazil is a key player in that plan. Despite differences, Lula joined with Bush in the June meeting to reaffirm intentions to implement the FTAA by 2005. But many of Lula's own constituents, along with those of other Latin American countries, have serious political and economic concerns that run counter to the free-trade scheme. Several obstacles have threatened to derail the talks.

First, the war in Iraq and Bush's withdrawal from key arms control agreements have reduced U.S. credibility in the eyes of its Latin American neighbors. Brazil was against any intervention in Iraq that lacked full UN backing, and hard feelings were created between the Brazilian and U.S. administrations over the latter's insistence on intervention without consensus. While Bush and Lula might be able to overcome those feelings, Philippe Bruno, a Washington, DC-based trade lawyer, points out another obstacle. Bruno notes that during the height of the Iraq conflict, trade negotiations ground to a halt and doubts arose over the U.S. commitment to stick to commercial agreements. The Bush administration made an effort to push the agenda forward in May, dispatching U.S. Trade Representative Robert Zoellick to Brazil to make headway. But the top U.S. trade negotiator encountered increased skepticism from Brazilian officials.

Another obstacle to the FTAA--and a prime source of concern among Latin American countries--is the shallowness of U.S. offers at the bargaining table. "We see that the deal proposed by the United States does not respond to our interests. It implies the abdication by Brazil of a development project," says Paulo Nogueira Batista, an economist at the Instituto de Estudos Avaní§ados da Universidade de Sí£o Paulo. Brazil's development project, which centers on technological advancement and job creation, would be compromised if its markets were opened wide to foreign competition. The United States, with an economy 18 times the size of Brazil's, would dominate not only the technology sector but almost all other markets if protections are not assured. Many in the Southern hemisphere warn that their markets will be swallowed up by more competitive, better-capitalized U.S. firms.

Many Brazilians also believe that even an FTAA will not necessarily lead to the promised land of full access to the U.S. markets. 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 an average tariff of 45.6%.

The Latin American perception is that the United States throws up barriers to free trade whenever another country becomes competitive in an industry. Trade in steel trade is a case in point for this mistrust. The U.S. steel industry, saddled with high pension liabilities and antiquated facilities, has successfully pressured the U.S. government to impose safeguards against more competitive steel imports. As a result, Brazilian steelmakers, some of the lowest-cost producers in the world, feel that their investments, aimed at increasing exports to the United States, have been wasted.

Two trade topics that Brazilian diplomats would like to include in the discussions are agricultural subsidies and U.S. anti-dumping laws. But the United States remains adamant those issues will only be negotiated in the ambit of the World Trade Organization (WTO). To counter the U.S. position, Brazil has proposed that government procurement, industrial policies, and intellectual property also be left out of the FTAA and be negotiated at the WTO. The United States and other countries, including Mexico, Chile, and Colombia, disagreed with the Brazilian proposal, made at a secretive meeting at the Wye River Plantation near Washington, DC, in which 15 trade ministers tried to reach a consensus.

The United States has threatened that Brazil will lose out if it does not join the party, and has tried to isolate it by negotiating separate trade deals with its neighbors, such as Chile. Yet Brazil continues to fortify its position in South America and hopes to have even more bargaining power when the trade ministers are slated to meet in Cancun, Mexico, this November.

An Alternative Bloc?

Brazil is not alone in its desire to deepen local integration. On May 25, President Nestor Kirchner assumed office in Argentina, where the economy has suffered its worst economic crisis ever, after following the advice of Washington for the past 10 years. The Kirchner administration is banking on recovery through the close ties between Argentina and Brazil institutionalized in the Mercosur trade bloc, which also includes Uruguay and Paraguay.

Celso Amorin, Brazil's foreign minister, says his country wants to revitalize relations between members of the Mercosur due to "the need for more integration between us in benefit of our industrial, agricultural producers, etc., and also the external dimension of fortifying our capacity to bargain with other countries and trade blocs."

Too, Brazil is working to establish closer ties with other South American countries outside the Mercosur. Henrique Rattner, a political economist at the University of Sí£o Paulo, said that all of Brazil's policy is aimed at fortifying both Brazil's bargaining position vis-í -vis the United States and that of the rest of South America. "If each one of these countries bargains by themselves they won't be able to obtain anything," he said. Through the federally owned development bank, BNDES (Banco Nacional de Desenvolvimento Economico e Social), Brazil is providing much-needed financing to neighboring countries. Its first cooperation deal under the Lula administration was signed with Venezuela. The BNDES will provide up to $1 billion in credits for the country to buy Brazilian goods and services. And the guarantee is Venezuela oil.

Similar deals are being negotiated with Argentina and Bolivia, expected to total $1 billion and $600 million, respectively. Brazil also is looking to become the largest shareholder in the Andean Development Corporation by increasing its stake to 20% with a $400 million investment. The cooperation deals and many intergovernmental visits involve cross-boundary infrastructure projects designed to erase one of the reasons for historical divisions between South American countries: the lack of an adequate transport network. "Infrastructure is the base. We want infrastructure that allows for a great circulation of goods and services, but also goods and services produced in the region," said Brazil's Amorin.

Brazil's actions in the United States' extended backyard evidently are ruffling feathers in Washington. In October 2002, House International Relations Committee Chairman Henry Hyde sent a letter to Bush that cast Lula as part of a South American "Axis of Evil" along with President Fidel Castro in Cuba and President Hugo Chávez in Venezuela. Most U.S. policymakers view Brazil as a stable, democratic force in the region. Yet a consolidated South American market led by the continent's largest country could create a new political terrain. "If Mercosur re-establishes itself, the U.S. would have to re-think its relations with the bloc," Rattner notes.

With these considerations in mind, economists remain doubtful that the complicated FTAA pact can be hammered out in the set timeframe. Meanwhile, Lula continues to drum up support for a unified front in South America. "For South American nations to obtain real benefits in long-term trade negotiations, it is important to ... successfully coordinate our positions," he said in a meeting with presidents from the Andean pact on June 29.

Real FTAA benefits for Lula and other South American leaders mean improving the lives of the region's poor. Brazil's president was elected to office to raise living standards for some 50 million Brazilians who live below the poverty line. Should not Bush see it in the U.S. national interest to seek the same ends throughout the region it wants to secure with the hemispheric trade agreement?

Matthew Flynn is a frequent contributor to the Americas Program. He is a correspondent for Business News Americas, based in Rio de Janeiro, Brazil, and can be reached at < This e-mail address is being protected from spambots. You need JavaScript enabled to view it >.

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