Amid slowdown, Brazil turns inward
By Howard Schneider,
SAO PAULO — When the Brazilian economy began to stall last year, officials in Latin America’s largest country started pulling pages from the playbook of another major developing nation: China.
They hiked tariffs on dozens of industrial products, limited imports of auto parts, and capped how many automobiles could come into the country from Mexico — an indirect slap at the U.S. companies that assemble many vehicles there.
A large state-funded bank grew larger, steering cheap money to projects that rely on locally made goods and equipment rather than imports. Other rules and tax breaks for local products proliferated under President Dilma Rousseff’s “Bigger Brazil Program.” The latest statistics show continued sluggishness, with Brazil growing at an annual rate of about 2.4 percent, less than the United States.
The country’s slowdown and the government’s response to it is a growing concern among U.S. officials worried that Brazil may be charting an aggressive new course — away from the globalized, open path that the United States has advocated successfully in Mexico, Colombia and some other Latin American nations, and toward the state-guided capitalism that the United States has been battling to change in China. As the world economy struggles for common policies that could bolster a still tentative recovery, the push toward protectionism by an influential developing country is seen in Washington as a step backward.
“These are unhelpful and concerning developments which are contrary to our mutual attempts” to strengthen the world economy, outgoing U.S. Trade Representative Ron Kirk wrote in a strongly worded letter to Brazilian officials that criticized recent tariff hikes as “clearly protectionist.”
Brazilian officials insist the measures are a temporary buffer to help their developing country stay on course in a world where they feel under double-barreled assault from cheap labor in China and cheap money from the U.S. Federal Reserve’s policy of quantitative easing.
“We are only defending ourselves to prevent the disorganization, the deterioration of our industry, and prevent our market, which is strong, from being taken by imported products,” Brazil’s outspoken finance minister, Guido Mantega, said in an interview. Mantega popularized use of the term “currency war” to describe the Federal Reserve’s successive rounds of easing, which he likened to a form of protectionism that forced up the relative value of Brazil’s currency and made its products more expensive relative to imports from the United States and also China.
Brazil’s voice on global economic and trade issues has become an important one, alongside those of China and India, as a nation that is successfully pulling a large population into the middle class. Big and resource-rich, it is now the world’s sixth-largest economy — between Britain and France — with a major presence in world agricultural and energy markets, and home to a few globally competitive companies such as aircraft maker Embraer. The financial center of Sao Paulo has become a staggering megacity of endless sprawl and helicopters hopping over gridlocked streets to skyscraper landing pads.
Yet the country’s economic dip clouded the accepted wisdom that emerging economies could on their own keep the global system stable and growing in an era when the industrialized world seems consigned to tepid performance. U.S. officials and companies have championed deeper U.S. economic ties with nations such as China and Brazil on the expectation that, even if manufacturing capacity and jobs relocated to those places, their growth and success would benefit the United States — a strategy that presumes those markets steadily open.
By some measures, Brazil’s performance over the past decade has been miraculous. After successive crises involving inflation and a crashing currency in the 1990s, the country averaged growth in excess of 4 percent, maintained solid government accounts, and crafted welfare and income policies that moved perhaps 35 million people into the middle class. The country’s per capita income is now about $13,000 annually, about the same as Russia and well above Mexico.
But in important ways the country also has failed to keep up, its industries pinched by high-tech goods from the United States and cheaper ones from Asia. Investment has been below levels expected for a developing country — a fact officials have used to justify the large role played by a state-funded development bank. Major energy finds and an agricultural boom notwithstanding, the country’s manufacturing sector has slipped as a percentage of the total economy — leaving the nation dependent on natural resources and local consumer spending rather than moving up the “value chain,” as developing nations strive to do.
Having created a middle class, Brazil is now faced with the challenge of maintaining and expanding it. Many of the recent policies — particularly those that steer state investment toward projects that use more local goods and equipment, or apply import taxes to machinery and industrial parts without an adequate local component — have aimed to preserve and expand the factory jobs most at risk from global imports.
“There’s a notion in the country that there is only value added if you import very little,” as opposed to integrating local companies into global supply chains, in the way China, Mexico and other nations have done, said Gustavo Franco, former governor of Brazil’s central bank. “We are still struggling with the same old concepts. . . . People see a retreat from market economics.”
The situation makes for a complicated economic environment. In the World Bank’s most recent survey on the ease of doing business, Brazil ranked 130th out of 185 countries — an ignominious ranking for a nation trying to present itself as a world model.
“It is a hard place to do business, and they are making it harder and harder,” said Flavio Siqueira, a trade lawyer. He said that both the strategic direction of officials and a hidebound bureaucracy seem pointed in the same direction: to shield local businesses.
Local content and taxation rules are bewilderingly complex, he said, to the point that multinational companies that set up new product lines have to negotiate detailed agreements over what parts they are importing and what tasks they will perform in the country. A tax of as much as 18 percent hinges on whether enough parts or labor are involved for the final product to qualify as “local.”
Business people talk of simply upping the price paid for locally made parts to increase the perceived local share of a piece of equipment; importers say goods get stuck at seaports because a customs form was signed in the wrong color of ink or the product involved a new technology not vetted under Brazil’s rules.
Felipe Soares, director of Redex Telecom, said the end result is higher prices but little impact on jobs. The company, founded in 1981 by Soares’s father to fabricate metal straps to hold phone and other utility cables to poles, now sells a variety of sophisticated fiber-optic equipment — for example, fusion splicers that connect cables with intense heat.
“These have never been made in Brazil and will never be made in Brazil,” said Soares, who said that the main effect high import taxes have had on his business is to shift his sourcing. While much of the equipment he sells is available from China, he now buys U.S. versions whenever possible: They break down less often, which avoids the hassle of trying to re-import a replacement.