brazil's economy isolated trade tariffs

How isolated Brazil’s economy is?

During an event this week, the CEO of Goldman Sachs Brazil rated the country’s productivity indicators as “disastrous.” According to Maria Silva Bastos Marques, improving the efficiency levels of Brazilian workers is actually more important to the country’s development than reforming the economy’s legal framework.

As a matter of fact, a Brazilian worker produces 25 percent as much as an American one, according to research organization Conference Board. Part of the blame is on Brazil’s lackluster educational system, responsible for a labor force that is less educated and less qualified than those in developed nations. Economic isolation, however, might be an even greater factor.

Bureaucracy and regulatory barriers scare away foreign investors and limit the exchange of knowledge between Brazilians and the rest of the world. Compared to developed countries, Brazil doesn’t have many foreigners in the workplace. And that limits the flow of know-how and technology.

A closed-off economy also creates a system with limited competition. Big business in Brazil is often privileged by monopolies or oligopolies, which don’t create incentives for companies to invest in innovation and increase productivity. According to the World Bank, enhancing Brazil’s participation in global trade would generate enough wealth to lift over 6 million people from poverty.


where global tariffs are higher


High tariffs

While the U.S. and the European Union have average import taxes of 2.5 and 1.9 percent, respectively, Brazil’s import tariffs are, on average, 13.5 percent, according to World Bank data. That places Brazil just above a group of much smaller economies, such as Venezuela (which has been ravaged by a full-scale crisis), and African republics such as Niger and Chad.

Brazil has the second-highest level of taxes in Latin America, below only the communist regime of Cuba, according to national tax authorities. As The Brazilian Report recently explained, such tariffs are part of the reason for Brazil being such an expensive country to live in.

Even the Ministry of Finance’s Secretary of International Affairs, Marcello Estevão, admits how insular Brazilian economy is. “[It is] one of the more closed off economies, after some African nations,” he recently declared.


imports exports gdp %


Brazil’s self-imposed embargo

It is important to stress that taxes are by no means the only metric that allows us to verify how open an economy is, or isn’t. After all, the U.S. and China – the world’s two biggest trading juggernauts – are similar to Brazil in that respect and have begun a trade war between themselves.

Nevertheless, it is intriguing to notice that Brazil imports and exports less (compared to the country’s GDP) than Cuba, a country whose dictators have consistently complained about the U.S. embargo.

Brazil suffers, then, from a curious case of a self-imposed embargo. Politicians from our own country are responsible for the strict trade regulations between Brazilians and the rest of the world. But they are not the only ones. Several Brazilian businessmen were outraged by a 2017 shoe purchase made by President Michel Temer in China. Shoe producers wanted the president to buy only products “Made in Brazil.”


brazil vs cuba exports imports


To export, one needs to import

Something that tends to be forgotten is that the world’s biggest exporters are also the biggest importers. To export quality goods and services, we must have quality raw materials. That is the case in countries which are part of valuable global chains, rather than those aiming to be “self-sufficient,” producing everything it consumes.

Many believe that exporting is positive while importing is negative. That would justify “incentives” to exports, such as currency devaluation and protectionist measures that lower imports. The following graphic shows the correlation between imports and exports. It suggests that, if politicians and businesspeople want Brazil to export more, we should open up our country to international trading.


exports imports g20 countries world bank


Will protectionism help Brazil amid the U.S.-China trade war?

The U.S. and China have escalated hostilities, with both countries raising import tariffs against each other – and then filing complaints at the World Trade Organization about it. Mr. Estevão believes that Brazil is unlikely to suffer too much with the trade war, thanks to the isolation of our economy. The small participation in world trade would finally work to the country’s advantage, as tariffs rise worldwide.

The government is understandably trying to create a mood of confidence around Brazil. This logic, however, has its flaws. Brazil is an economy that relies heavily on trading commodities – and the uncertainty around the global economy has pushed down prices of these basic products.

Future contracts on soybeans (which represent 45 percent of Brazil’s agricultural exports), for instance, have crashed by 15% – which represents losses of BRL 4 billion in exports for 2019. That’s particularly bad when we consider that China’s demand should rise by up to 13 percent by 2030. 

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MoneyJul 18, 2018

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BY The Brazilian Report

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