The U.S. turns to ‘big stick diplomacy’ on 5G

. Jul 30, 2020
5g china us brazil Photo: Thai Succulents/Shutterstock

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We’re covering Brazil’s competitiveness challenges. The U.S. pressuring Brazil to turn against China on 5G. And how extreme poverty is lowering in Brazil.

Brazil ranks low in competitiveness study

Brazil’s high tax burden and the lofty costs

for financing capital have left the country near the bottom of the Competitividade Brasil 2019-2020 report, measuring 61 competitiveness-related variables in 18 countries comparable to Brazil. Only Argentina placed lower in the general ranking, as was the case in the 2018-2019 report. Leading the list were, in order: South Korea, Canada, Australia, China, Spain, and Thailand. Brasília correspondent Renato Alves breaks down the results:</p> <ul><li>The report, carried out by Brazil&#8217;s National Industry Confederation (<a href="http://www.portaldaindustria.com.br/cni/en/">CNI</a>), measures nine areas of competitiveness: Financing, Taxation, Labor, Infrastructure and Logistics, Macroeconomic Environment, Business Environment, Productive Structure, Education, and Technology and Innovation. Brazil does not feature in the top six for any of these areas. </li></ul> <div class="flourish-embed flourish-scatter" data-src="visualisation/3329171" data-url="https://flo.uri.sh/visualisation/3329171/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Expensive credit.</strong> Brazil ranked dead last in the area of financing, with costs to borrow money significantly higher in the country than any other nation in the study. Brazil had the highest short-term interest rates (8.8 percent) and interest rate spread (32.2 percent), with the latter being almost three times larger than second-lowest ranked Peru.</p> <p><strong>Tax burden.</strong> In 2017, Brazil&#8217;s tax incidence added up to almost one-third of its GDP, only smaller than Spain and Poland, where the average income per capita is twice that of Brazil&#8217;s, according to 2018 data. As well as this high burden, the Brazilian tax system is classified as being &#8220;low quality,&#8221; with its labyrinthine rules spanning municipal, state, and federal levies. The tax framework in Brazil is so complex that companies spend excessive time and resources simply to pay the correct amount of tax.</p> <p><strong>A large, unproductive workforce.</strong> Brazil has a competitive advantage when it comes to its readily available workforce, but desperately low productivity rates make labor in Brazil exceedingly costly. During the Covid-19 crisis, productivity levels in the Brazilian economy have dropped even further, as we explained in our <a href="https://brazilian.report/newsletters/brazil-weekly/2020/06/22/brazilian-productivity-bombs-amid-coronavirus-crisis-bolsonaro/">June 22 Weekly Report</a>.</p> <p><strong>The &#8220;Brazil Cost.&#8221;</strong> Understood as a combination of increased operating expenses of doing business in the country, the &#8220;Brazil Cost&#8221; is a well-known phenomenon among global businesspeople and deemed a major hurdle in the country&#8217;s competitiveness. CNI President Robson Braga de Andrade stated that it was paramount to reduce these hidden difficulties. &#8220;To reach the status of a developed nation, we need a strong, dynamic, and competitive industry, which looks to the future, being increasingly innovative, global, and sustainable,&#8221; he said.</p> <hr class="wp-block-separator"/> <h2>The U.S. turns to &#8216;big stick diplomacy&#8217; on 5G</h2> <p>The U.S. Ambassador to Brazil Todd Chapman said in an interview that failing to ban Chinese tech giant Huawei from operating 5G technology in the country could lead to &#8220;consequences&#8221; for Brazil. The ambassador echoed U.S. President Donald Trump&#8217;s claims that Huawei hands over private data circulating on its 5G networks to the Chinese government.</p> <p><strong>Where Brazil stands on Huawei. </strong>The Brazilian government has avoided voicing an official position on the issue. Behind the scenes, it is torn between its more ideological wing — which preaches <a href="https://brazilian.report/podcast/2020/07/22/biden-trump-what-changes-brazil-latin-america/">total alignment to the U.S.</a>, including a ban on Huawei&#8217;s 5G — and pragmatist officials such as Vice President Hamilton Mourão, Economy Minister Paulo Guedes, and Agriculture Minister Tereza Cristina, who are <a href="https://brazilian.report/podcast/2020/02/26/brazil-us-china-5g-more-fast-internet/">less enthusiastic about that option</a>, given how dependent Brazil has become on trade with China.</p> <ul><li>In 2015, 18 percent of Brazilian exports headed to China. Now, that share amounts to 34 percent.</li></ul> <div class="flourish-embed flourish-chart" data-src="visualisation/3335177" data-url="https://flo.uri.sh/visualisation/3335177/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Stick … </strong>&#8220;I wouldn&#8217;t say reprimands, but <a href="https://oglobo.globo.com/economia/embaixador-dos-eua-alerta-que-se-brasil-permitir-chinesa-huawei-no-5g-enfrentara-consequencias-24555785">consequences</a>,&#8221; Mr. Chapman told newspaper O Globo, about the repercussions of Brazil allowing Huawei to operate 5G networks. &#8220;Each country is responsible for its decisions. We are seeing in the world a fear of companies which depend on proprietary technology to invest in countries where that intellectual property is not protected.&#8221;</p> <p><strong>… and carrot. </strong>Mr. Chapman also suggested that the U.S. International Development Finance Corporation —&nbsp;an agency that provides financing for private development projects —&nbsp;has USD 60 billion to spend on allies which buy telecommunication products from &#8220;reliable sources.&#8221;</p> <p><strong>5G ban: easier said than done.</strong> As reporter Beatriz Farrugia informed last year on <strong>The Brazilian Report</strong>, a Huawei ban in Brazil would not be easy to carry out. The Chinese giant has built roughly 70,000 of the country’s 86,000 operational radio antennas and has an <a href="https://brazilian.report/business/2019/06/27/huawei-controls-telecom-infrastructure-brazil/">enormous presence in the country&#8217;s telecom infrastructure</a>.</p> <div class="flourish-embed flourish-map" data-src="visualisation/3335585" data-url="https://flo.uri.sh/visualisation/3335585/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <ul><li><strong>Go deeper:</strong> <a href="https://open.spotify.com/episode/3YsBHpzE0oGHDZnfiIBEYG?si=gl3DfPCWToiXqwAadtCelg">For Brazil, 5G means more than faster internet</a></li></ul> <hr class="wp-block-separator"/> <h2>Emergency aid slashes Brazil&#8217;s extreme poverty rates</h2> <p>Despite Brazil facing one of its most daunting economic crises on record, the country&#8217;s extreme poverty rate dropped to its lowest level in at least 16 years, with 3.3 percent of the population living with less than USD 1.90 per day. That amounts to roughly 7 million people — about half the population in that situation last year.&nbsp;</p> <p><strong>What is happening. </strong>The reason for that, economist Daniel Duque says, is the BRL 600 (USD 112) coronavirus emergency salary.</p> <ul><li>Mr. Duque says the comparison beyond the past 16 years is difficult, as survey methodologies were very different before that period, meaning the results are not automatically comparable.</li></ul> <p><strong>By the numbers.</strong> Reporter Laís Martins talked to Mr. Duque to break down his findings:</p> <ul><li>Last month, 43 percent of households and 50 percent of the national population benefited from the aid;</li><li>Poverty rates fell from 25 percent in June 2019 to 21.7 percent in June of this year;</li><li>The emergency salary costs the government BRL 50 billion per month. In comparison, the Bolsa Família cash-transfer program had a BRL 30-billion budget for the <em>entire</em> year of 2020;</li><li>Up to the beginning of this week, spending on the program amounted to nearly BRL 167 billion, according to a congressional consultancy body.</li></ul> <div class="flourish-embed flourish-chart" data-src="visualisation/3329363" data-url="https://flo.uri.sh/visualisation/3329363/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Electoral impact.</strong> Lifting millions out of extreme poverty has given President Jair Bolsonaro extended political life. Everyone predicted that the pandemic would plummet his approval rates. It did — for a moment. Now, as the emergency aid program expands, the president sees his re-election prospects grow more realistic.</p> <p><strong>Yes, but … </strong>We are talking about very vulnerable people here. &#8220;If — or when — these handouts are halted, many will likely fall back below the extreme poverty line,&#8221; says Mr. Duque. Which would push the president&#8217;s approval rates down, too. With that in mind, the government is drafting a new, revamped version of the Bolsa Família program, but it has yet to present it to Congress.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Taxes 1.</strong> The Economy Ministry wants to propose a 25-percent cut on payroll taxes for all wage brackets. Minister Paulo Guedes believes the move will make hiring and firing less expensive — thus making the job market more dynamic. But Mr. Guedes also hopes that the tax cut will make congressmen more sympathetic to his project of <a href="https://brazilian.report/business/2019/09/11/cpmf-economy-ministry-central-bank-new-tax/">recreating a tax on financial transactions</a> — a levy that is much-loathed in Brazil.</li><li><strong>Taxes 2.</strong> The government is also mulling over new income tax rules, which could create exemptions for those with monthly earnings of up to BRL 3,000 (USD 580), lowering rates for the middle class, and creating a new tax bracket for the super-rich — which would be taxed more. A secretary at the Economy Ministry said these changes could come as soon as August, without giving further details.</li><li><strong>Mining. </strong>With rising iron ore prices and a bump in Chinese demand for the commodity, Brazil&#8217;s mining giant Vale secured profits of BRL 5.3 billion (USD 1 billion) in Q2 2020. Over the past quarter, iron ore was sold for USD 93.30 per ton — a 5-percent bump from Q1. In a securities filing, Vale said &#8220;the most critical moment [of the pandemic] has passed.&#8221;</li><li><strong>Gas.</strong> The House has agreed to turn the so-called &#8220;New Gas Bill&#8221; into a priority project. It hopes to modernize the sector by fostering competition. In debate since 2013, the bill only passed the House&#8217;s Mines and Energy Committee in October 2019.</li><li><strong>Targeting Moro.</strong> House Speaker Rodrigo Maia has teamed up with Supreme Court Chief Justice Dias Toffoli to push forward a bill that would only allow judges to run for office eight years after leaving the bench. This move has a clear target: former Justice Minister Sergio Moro — who is polling second for president at the moment, two and a half years before the next election. But whether Mr. Moro may be affected is uncertain, since as new laws cannot work retroactively. Moreover, many former judges are <em>already</em> in public office — such as Rio de Janeiro Governor Wilson Witzel.</li><li><strong>Environment.</strong> Areas with native vegetation have expanded by 4.9 percent in the state of São Paulo over the past decade. Now, 22.9 percent of the state&#8217;s territory is covered by forest, mostly found in the Serra do Mar region — an inhospitable chain of mountains near the coast. Meanwhile, forest areas are practically nonexistent in the interior of the state. Even so, &#8220;forest regeneration is greater than deforestation,&#8221; says physicist Marco Aurélio Nalon, responsible for São Paulo&#8217;s Forest Inventory project.

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