Latin America Advisor

A Daily Publication of The Dialogue

Are Brazil & the U.S. on a Fast Track to Closer Trade Ties?

U.S. President Donald Trump and Brazilian President Jair Bolsonaro shaking hands. Presidents Donald Trump (L) and Jair Bolsonaro met in Florida last March. // File Photo: Brazilian Government.

Brazil and the United States this month signed a limited pact that is expected to ease trade barriers, strengthen regulatory practices and fight corruption, according to officials from both countries. However, it is unclear to what extent the new deal will actually increase trade between the two nations, given its limited scope. What are the motivations behind the deal, and what does each country stand to gain from it? How will the United States’ offer to finance the deployment of 5G technology in Brazil play out, especially in terms of U.S.-China competition? Is the limited trade pact likely to be expanded in years ahead, and how might the outcome of U.S. presidential and congressional elections next month influence that?

Francisco Sánchez, partner at Holland & Knight and former U.S. Under Secretary of Commerce for Trade: “On Oct.19, the United States and Brazil signed a ‘mini’ trade deal that addresses trade facilitation, customs administration, regulatory practices and anti-corruption. The deal did not address the most important question facing U.S.-Brazil economic relations: commodity tariffs. The deal appears to be a diplomatic step to keep the door open for a broader one, even though that is unlikely. Right now, the mini deal is the most that Trump can do without Democratic support in Congress. In Brazil, Bolsonaro is bound by Mercosur, a regional common market deal, which would have to be renegotiated for Brazil to seek a free trade agreement with the United States. The limitations of the deal may prove to be a missed opportunity for the United States as it competes with China to influence the future of Brazil’s IT infrastructure. Through a memorandum of understanding, the United States is offering Brazil $1 billion to walk away from a 5G network deal with Huawei, but that is probably not enough. China is now Brazil’s largest trading partner and has committed to investing billions of dollars in factories and infrastructure. The upcoming U.S. election is poised to slow any groundbreaking U.S.-Brazil economic deal. A Biden administration would likely focus on valid concerns over Bolsonaro’s poor record on human rights and environmental destruction. If Trump retains office, he will probably still not have the congressional support he needs for a broader deal. With so much uncertainty, do not expect the mini deal to change much in the short term.”

Jim Kolbe, senior transatlantic fellow at the German Marshall Fund of the United States and former member of the U.S. House of Representatives (R-Ariz.): “The trade protocol that the United States and Brazil signed on Oct. 19 should not be confused with a trade ‘agreement’ or even a trade ‘pact.’ It is an outgrowth of the conversations between Presidents Trump and Bolsonaro last March. It covers provisions on trade facilitation, customs administration and good regulatory practices, among other areas. In the area of trade facilitation, for example, it encompasses advance rulings to settle disputes, setting levels for penalties and automation questions. But none of this is enshrined in law. The protocol neither requires nor provides for congressional approval nor contains enforcement provisions. Notably, no tariffs rates currently in effect in either country are affected or changed. The motivation for the protocol seems to be two-fold: first, to draw Brazil away from an increasingly expanding trade and investment relationship with China, and second, to demonstrate President Trump’s support for a Latin American leader with an autocratic streak. While it could be a launching pad for deeper, more far-reaching agreements in a number of areas, further advances will almost certainly depend on the outcome of the election in a few days. Both the chairman of the House Ways and Means Committee and its Trade Subcommittee have denounced the agreement, citing Brazil’s dismal record on human rights and the environment, and the administration’s circumvention of Congress in reaching it. In the event of a Democrat sweep of Congress and the White House, it is hard to imagine a Biden administration moving forward to expand the boundaries of this agreement. The bottom line is that the U.S.-Brazil protocol is unlikely to affect the economic relationship in any significant way and is not likely to provide a template for agreements with other countries or a path to deepen the U.S.-Brazil relationship.”

Renata Amaral, co-director of the certificate program on the WTO and U.S. trade law at American University’s Washington College of Law: “The protocol updates the 2011 Agreement on Trade and Economic Cooperation (ATEC) with three new provisions on customs administration and trade facilitation, good regulatory practices and anti-corruption. Although it has been called a ‘trade package,’ it’s not a trade agreement per se and has limited scope (and it does not include tariffs reduction). But ATEC allows engagement on a wide range of issues that affect business, and there is great value in terms of easing bilateral trade and investments, through commitments to historical demands from the private sectors of both countries in terms of automation of customs, greater previsibility of regulations, adoption of uniform standards and anti-corruption practices. Brazilian exports to the United States are expected to increase 7.8 percent with better regulation cooperation and coherence. The protocol does not require U.S. congressional approval, but it will need approval by the Brazilian Congress before entering into force. Brazil’s government clearly expects to expand ATEC to a broader trade agreement in upcoming years. On the U.S. side, the upcoming elections might affect the protocol’s expansion to a trade agreement, as U.S. priorities in terms of future trade deals could significantly change. Additionally, the Export-Import Bank of the United States (EXIM) announced it had signed an MOU with Brazil’s Economy Ministry to explore and identify potential opportunities for EXIM financing of more than $1 billion. This comprises facilitation of financing related to the deployment of 5G technology in Brazil, which directly affects Chinese interests in the country. The center of the dispute is Huawei. The United States is trying to get Brazil to exclude China from the upcoming 2021 bid. Both sides of the dispute suggest that Brazil could suffer sanctions depending on how the government decides to position itself.”

Peter Hakim, president emeritus of the Inter-American Dialogue: “The U.S.-Brazil trade facilitation agreement is a modest, but constructive advance for the sluggish commercial relationship between the two countries. A quick surge of trade or investment flows, however, is not in the cards. Sharp policy disputes sank, in 2005, a decade of hemisphere-wide trade talks, co-chaired by the two nations. Limited trade deals that Brazil subsequently negotiated with the Bush and Obama administrations never took hold. With an economy in dismal shape, Brazil would surely benefit from more robust trade and financial relations with the United States—its second-largest trading partner, the main market for its manufactured goods and its largest foreign investor. And President Bolsonaro is personally and politically invested in a close political bond with Donald Trump. The U.S. stake is smaller. Sure, Washington welcomes Brasília’s steadfast support on international matters, but its highest priority is a cooling of Brazil-China ties, and firm backing for the United States in its rivalry with the Asia Giant. That comes with a high price for Brazil. Its debilitated economy now depends on China, and so does the president’s political future. Brazil’s agro-business sector, a crucial ally of Bolsonaro, sends 80 percent of it exports to China. Overall, Brazil sells twice as much to China as it does to the United States, and Chinese investment continues to climb. China aside, expanding U.S.-Brazil trade will require policy changes that both nations have long rejected. Brazil will have to abandon a raft of protectionist measures and reshape its difficult business environment. And negotiations take time. Minor alterations in the 25 year-old NAFTA accord took three years. Brazil and the United States start from scratch. A Biden administration, with concerns about the environment and labor rights, will be an even more demanding negotiating partner.”

Cassia Carvalho, executive director of the Brazil-U.S. Business Council at the U.S. Chamber of Commerce: “The United States and Brazil signed a three-chapter protocol introducing new trade rules. This milestone opened a new chapter in the relationship between the two largest economies in the hemisphere. The protocol establishes common standards that create a foundation for closer economic ties. Both governments are relying on a new vision for a partnership and a desire for new trade initiatives. For the business community, this agreement supports commerce, growth and job creation in both countries, through trade facilitation reforms, good regulatory practice and steps to combat corruption. With U.S.-Brazil trade exceeding $100 billion last year and aspirations of doubling that number by 2025, Americans benefit from stronger commercial ties with Brazil. However, the omission of digital trade and express shipment provisions from the deal is a missed opportunity at a time when the pandemic has clearly demonstrated their importance. China is the elephant in the room. China’s growing geopolitical influence is a driving force behind efforts to bolster U.S. ties with Brazil. Two new projects involving the USDFC and EXIM have been established for investments of more than $1 billion to jointly develop business ventures in telecommunications, energy, infrastructure and manufacturing, among others. In telecom, the United States has been very expressive in noting that China brings risks concerning data protection and privacy. The protocol is a building block. For USTR Lighthizer, a comprehensive trade agreement is ‘not in the cards’ in the immediate future, given the time needed to negotiate a full agreement and the immediacy of U.S. elections. Trade talks will continue to be incremental. The U.S.-Brazil relationship is an alliance with global and regional geopolitical consequences that warrant a more strategic approach for rebuilding post-pandemic. This potential clearly goes beyond any one party or government in power. The business community continues to be bullish about the relationship’s economic potential and calls on both nations to leverage positive momentum to sustain this ambitious alliance.”

Adrian Cruz Vazquez, retired former president for Latin America of GlaxoSmithKline: “In order to feed the 1.3 billion people, China needs to import agricultural products, specifically soy, beef and pork, from Brazil. It has been aggressively buying farms, silos and meat-processing plants in Brazil and other countries in Latin America and Africa. At the same time, it is promoting its high-tech products in order to conduct political espionage on elections and industrial sectors. Brazilian President Bolsonaro has good relations with Trump due to the fact that they are right-leaning and are considered outsiders (Trump is a businessman, while Bolsanaro is a retired Army captain) and not from the established political class. They are both vilified by the left-leaning press in the United States and in Brazil. Both know that they need each other if they don’t want more Latin American countries going to the left, corrupt, socialist/communist labor party of Lula in Brazil and the left-leaning governments in Venezuela, Nicaragua, Peru, Ecuador, Bolivia, Peru and Mexico. Trump knows that Brazil’s right-leaning Bolsonaro is one of the few leaders he can trust, and we need to support his government in order to prevent the left (the likes of Lula) from taking over. This is important, especially with the Russians in Venezuela and the Chinese buying everything in Brazil, the rest of Latin America and Africa.”

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