Text of the presentation made upon the invitation of the Los Angeles Chamber of Commerce, in Los Angeles, California, United States of America, on May 21, 2001.
I am delighted at the opportunity to be here today to discuss with you the current business climate in Brazil and the prevailing feelings in the country with respect to the initiative for a Free Trade Area of the Americas (FTAA). We, at Noronha-Advogados, believe so much in the potential for growth in trade between the United States of America (USA) and Brazil that, after having had a commercial presence in Florida for 20 years, we decided to have a second US office in Los Angeles, California. In order to do so, we looked at New York and California and came to the very decisive conclusion that we ought to be here. We thus started our local operations, with two partners and two associates, one year and a half ago. I must say that we have no reasons for complaints!
If it is true that dictatorships are midgets casting a long and onerous shadow onto the future of nations, it is also true that benefits from democracy, even those on the economic side, are to be reaped from the beginning. Accordingly, Brazil has greatly benefited from the re-democratization of the country since 1986. As the Brazilian people have a clear and inherent democratic nature, institutional political and economic changes from the somber heritage of the ghastly years of fascist dictatorship started to take place immediately and gradually those changes came to present a new reality for us Brazilians, and a more attractive picture for the international community at large. Even if we recognize that there is still much to be done, we are justifiably proud of our achievements.
Accordingly, a new democratic Constitution was enacted in 1988, which had some very serious faults in dealing with the economic order. Such faults, such as most restrictions on foreign capital, were eliminated. New modern laws were passed dealing with securities; corporations; the environment; intellectual property; competition and anti-trust; government purchases; consumer protection; money laundering; white collar crime; and arbitration. Whole sectors of the economy were liberalized, including telecommunications; transportation; oil and energy; banking; financial services and insurance. Exchange controls were lifted. The Judiciary has been constantly improving its standards and modernizing its provision of services to the public. There are approximately 6 million suits in Brazil. In some states, there are dedicated small claims courts in shopping centers. The federal circuit of the judiciary has ISSO-9002 certification. The average suit will take approximately 3 years to the resolved.
Inflation has been brought at long last under control and has now been stabilized at approximately 5% per year. A very important federal law on fiscal discipline has been enacted, bringing under monetary and fiscal order not only the federal, but state and municipal governments as well. A well conceived and efficient privatization has been put in place within the law and corruption free, which attracted substantial investments from many countries. The privatization program, which is still under way, has up to the moment brought investments of US$ 90 billion and transferred to the private initiative approximately US$ 18 billion in debt.
The economy has been consistently growing and Brazil has been, in the past four years, the developing world’s second largest foreign investment recipient after China, and the first on a per capita basis. In 1999 and 2000, Brazil received US$ 31 and 34 billion in foreign direct investments, respectively. Until 2003, in the telecommunications sector alone, US$ 33 billion are expected to be invested. The electric sector is expected to grow at the minimum rate of 5% per years, which will require investments of US$ 23 billion until 2004. In the oil sector, which has recently been liberalized, the Brazilian national oil company, Petrobrás, alone announced investments of US$ 16.8 billion until 2005, in order to bring domestic production from about 1.5 million to 1.85 million barrels day, to meet a forecasted need of 2.2 million. The 39 concession companies of federal and state roads will invest US$ 5.3 billion in the next few years. In the automotive industry alone, Brazil received investments of US$ 21 billion from 1995, the year of the Automotive Regime, to 1999. The total expenditure recently announced for the near future is of US$ 22 bilion, with US$ 15 billion coming from car manufacturers and US$ 7 billion coming from auto components’ industries. The list is vast and exemplary only.
Brazilian tariffs were reduced from the consolidated level of 55% at the end of the Uruguay Round of the General Agreement of Tariffs and Trade (GATT) to the average effective level of approximately 14% in force today. In 1991, MERCOSUL, a common market was created comprising Brazil, Argentina, Paraguay and Uruguay. This extraordinary initiative had not only the merits of defusing regional tensions and upholding democracy and the rule of law, but also increased regional trade in 336%, from approximately US$4.1 billion in 1991 to about US$ 19 billion in 2000. Such a spectacular achievement was not accomplished at the expense of the diversion of the out-of-bloc trade. Imports from the rest of the world increased 180% whilst exports increased 40%.
This year, Brazil’s economy will be the 5th largest in the world in purchase parity power (ppp), with a GDP of slightly over US$ 1 trillion, after the US, Japanese, German and Chinese economies. Brazil’s economy is almost as large as the Chinese and twice as large as the Russian and the Indian. Brazil has more than half the population and of the GND of South America. Brazil has the largest unsubsidized agricultural sector in the world; second largest market of executive jets and helicopters in the world; the third in tires and soft drinks; the second in cell phones and facsimiles; the fourth in refrigerators and video products; and the fifth in CDs. Brazil has the largest market for videos in the hemisphere and accounts for half of the sales market for sound recordings in Latin America. By the end of April of this year, Brazil had twice as many users than the rest of Latin America together, Mexico included. The country’s automotive sector will produce approximately 2.3 million vehicles by the end of this year. The agricultural sector will produce in 2001 more than 90 million tons of grains. The São Paulo Stock Exchange and the Mercantile and Commodities Bourse are bigger than all other Latin American exchanges together. The country’s top exports are…. regional jets!
However, Brazil is also a country with many problems. Institutionally, the lack of political maturity due to the terrible heritage from the many years of fascist rule, coupled with the natural differences stemming from an enormous ethnic and territorial diversity, have left still many legislative reforms undone, such as the fundamental one on taxation. Socially, Brazil offers a bleak picture of exclusion, having approximately 40 million people living below the poverty line. Slums plague the large cities and their squalor are a national shame. The health situation of the population at large is still poor, if improving. The educational system still leaves a lot to be desired. Economically, Brazil is the world’s main victim of unilateral trade action, partly another bad heritage from the poor international relations during the military years, and partly because of the subsidies practiced in agriculture by the main trade partners. This situation dramatically affects, in a adverse manner, the almost 40 million people who depend of the agricultural sector in the country.
This brings us to the bilateral relationship between Brazil and the USA and the prevailing sentiments in the country with respect to the FTAA. Many Americans, even business people, tend to generalize what they know about Mexico and apply this to other Latin American countries. This does not work for Brazil. Brazilians speak Portuguese, rather than Spanish. Brazil has the most numerous African population outside of Africa living alongside with more than 37 million Italians, and millions of native Brazilians, ethnic Portuguese, ethnic Germans, ethnic Poles and ethnic Japanese. The city of São Paulo alone has more Italians than the combined populations of Rome and Milan. The geography is also quite different. Vast areas of Brazil are adequate for intensive agriculture. Lastly, for better or for worse, Brazil does not have a common frontier with the USA.
Such differences are responsible for important economic differences. Whereas commerce with the USA is responsible for 90% of Mexico’s external trade, Brazil’s bi-lateral trade with the USA1 is only 23,93% of its total external commerce. Brazil’s main trading partner is the European Union with 26,84% of the balance of trade, followed by the Latin American Integration Association (LAIA) countries with 23,42%. Asian countries have 11.48% and the Middle East and Africa answer for 4.87% of Brazil’s external trade. Trade with Canada represents less than 1%. With respect to foreign investment, EU countries are by far the greatest investors in Brazil, answering for not less than 62% of the total. Many European companies, like Fiat and Pirelli, are larger in Brazil than in their domestic markets. The USA is responsible for 18.1% and Canada for 0.6% of the total investments in Brazil. European banks have the larger stake, amongst foreign banks, in the Brazilian financial markets and, more importantly, are responsible for approximately 70% of the commercial and trade loans to Brazil. Of all the tourists who visit Brazil, about half are Europeans, 30% Argentines and 10% Americans. Because of such differences, the profile of Brazil’s imports and exports is very much different than Mexico’s.
At the end of the military regime and beginning of the democratization process in Brazil, there was a very serious trade litigation between the two countries that has left a devastating effect on bi-lateral relations. As Brazil opposed the US initiative to include the so-called new areas in the Uruguay Round of the GATT, a major destabilization campaign was put in practice by the US against the Brazilian government, which involved action in the multilateral international financial organizations and unilateral measures against certain Brazilian products which were competitive in the US markets. As it always happens, once protectionist measures are put in place, they are very difficult to be removed, as the artificially benefited parties get dependent on them. Therefore, even if the serious differences of opinion between the two countries have long ceased and the US prevailed in its view point, the protectionist measures against Brazil are still in force.
Accordingly, the average Brazilian tariff for the US’s top 15 export products to Brazil is 14.3%, the average US tariff for Brazil’s top 15 export products to the USA is 45.6%. More than 130 Brazilian export items face US tariffs above 35%. The average US import tariff, for comparison sake, is under 2%. Brazilian sugar, commodity of which Brazil is the largest world producer without subsidies, pays 236% duties in the USA; Brazilian tobacco faces a duty of 350%; orange juice has a tariff of 44.7%. Brazil had to face no less than 71 anti-dumping or countervailing duties cases in the USA since 1986. Not less than 60% of Brazil’s export products face restrictive practices in the USA, including quotas. Those US practices have adversely affected many naturally competitive Brazilian businesses, such as the steel industry, the shoes industry, the rubber industry and the auto parts industry. Conversely, the highest tariff applicable to US exports charged by Brazil are 35% on automobiles; digital processing units at 30% and computer parts at 24%. In addition, the US is, after the EU, the country which mostly subsidizes its agricultural sector in the world. Such subsidies have a devastating effect of the Brazilian sales to third markets, in addition to preventing access of Brazilian exports to the domestic US market. In the services’ sector, the US uses horizontal barriers for access to the domestic markets, even within the North American Free Trade Agreement (NAFTA).
The Brazilian government is negotiating the FTAA having those points in mind. For the governments, as well as for the vast majority of the Brazilian public opinion, a FTAA modeled after the NAFTA does not come in the national interest, as it will alienate our major trade partners, investors and bankers, without benefits of note for Brazil. Even if the government had a different view, opposition to the present framework is so great that it would probably not be ratified by Congress and certainly be challenged in court. Brazilians know that the country is at the threshold of becoming a major economic power and expect trade deals to bring about generalized economic prosperity and social development.
Whilst the governments are negotiating, and even if so many sanctions against Brazil are in place, opportunities for bi-lateral trade abound. Such sanctions benefit only a small group of non-competitive and obsolete industries and do a great disservice not only to bi-lateral relations, but also to the American tax-payer, the American consumer, and to the concept of free trade. However, even under such circumstances, a growing Brazilian economy under a stable political and economic environment offers multiple areas of business activities, in services, infra-structure, industry and agriculture. For California, in particular, there are also opportunities for triangular operations involving Brazil and the Far-East. In the first quarter of this year alone, Brazil’s trade with China grew 93.7% and will probably reach 4% of Brazil’s external trade by the end of the year, twice the amount with Korea and four times that with Canada.
We, at Noronha-Advogados, believe in such bi-lateral opportunities. That’s why we have opened an office in California.