It rocks, but doesn't it fall?


Author: Eliana Cardoso

Source: Valor Econômico, 05/03/2009

In the first, from 1971 to 1980, foreign credit allowed the government to escape the necessary adjustment to two oil shocks. The consequence? Debt crisis and strong recession between 1981 and 1983. In the second, from 1995 to 1998, external liquidity allowed the use of the exchange rate anchor to end inflation. Without fiscal adjustment, the result was the collapse of the real in 1999.


Since 2001, the trade balance has risen and, in terms of its share in GDP, peaked between 2004 and 2005. Although it started to fall after 2006, it still remained positive until 2008. At the beginning of the rise, the devaluation of the real (from 1998 to 2003) had a positive impact on the export of manufactured goods, as shown in the figure above. And since 2004, total exports have benefited from favorable terms of trade and strong external demand.


That picture has changed. The trade balance plummeted in 2008, as prices for our exports fell, global demand declined and Latin American economies, which absorb around 40% of manufactured exports, are also entering a recession. Even the diversification of Brazilian exports was not enough to protect us. And see that Brazilian exports are very diversified. The value of the Export Concentration Index, calculated by the World Trade Organization (WTO), is 9,1 - typical of the rich countries of the Organization for Economic Cooperation and Development (OECD). But if demand drops worldwide, there is nowhere to run.


There is not much the government can do (directly) to change this outcome. Brazil is already more protectionist than the average for Latin American countries. According to the Commercial Tariff Restriction Index (TTRI), calculated by the WTO (“World Tariff Profiles 2008”), on a 125-step ladder, Brazil occupies step 92. Although its maximum rate of 35% is relatively low, the average tariff of 12% is higher than the average both regionally and in other countries with the same income level.


Brazil applies non-tariff measures (quotas, licenses, safeguards) to 46% of the tariff lines. Our Trade Restriction Index Including Non-Tariff Measures (Otri) is 20%, in contrast to the average of 12% in Latin America and in upper middle income countries, which suggests a much more protectionist regime in Brazil than in Brazil. rest of the region. The comparison was made before the protectionist measures adopted by Argentina in 2008 and 2009, but they are not expected to change the regional average significantly.


On the other hand, the arguments that support interventions in favor of exports are as problematic as those in favor of protectionism. Grants give rise to retaliation and result in lobbying and corruption. It is better to eliminate import tariffs than to try to compensate them with export subsidies.


The government has two important areas of activity. The first is to improve the business environment. Our ranking (at position 122 out of 178 positions) according to the World Bank's “Doing Business” index is bad, because it is difficult to open and close a company in Brazil, just as it is difficult to enforce a contract.


The other front depends on international negotiations. Brazil still faces important external barriers. Our agricultural exports are faced with average tariffs of 12,8% in contrast to the average for the countries of Latin America and the Caribbean (6,2%) and for the countries of upper middle income (8,1%). To make matters worse, the first annual report of the US Trade Representative (USTR) from the Obama administration came out. It subordinates the conclusion of the Doha Round to social and environmental objectives. Therefore, it carries a risk of disguised protectionism, which would make the Brazilian commercial position even more difficult.


Finally, it is worth remembering that trade deficits in the 1971-80 and 1995-98 periods were only possible because they could be financed externally. As external liquidity is scarce, the current account deficit in 2009 will require the use of international reserves. Will we have new risks later? The early years of the Dutra government (1946-47) show that reserves can be quickly depleted. The Lula government will have to ask itself what combination of fiscal and monetary policy would allow a pace of growth consistent with small deficits, so as not to jeopardize future stability.


Eliana Cardoso is a full professor at EESP-FGV and writes, every two weeks, on Thursdays