This paper looks at Brazil's unfinished trade reforms and argues that if the country really wants to fully enjoy the growth and welfare benefits of trade, it needs to further lower and rationalize its structure of protection, adopt a more aggressive, WTO-plus, policy to open markets abroad, design a regional integration strategy that makes sense to its smaller partners and bring trade facilitation, particularly, transport costs, to the core of its trade agenda.
IDB WORKING PAPER SERIES
Brazil?s Trade Policy: Old and
Mauricio Mesquita Moreira
Inter-American Development Bank
Inter-American Development Bank
Vice Presidency for Sectors and Knowledge
Integration and Trade Sector
Brazil?s Trade Policy: Old and New
Mauricio Mesquita Moreira
Inter-American Development Bank
Inter-American Development Bank
© Inter-American Development Bank, 2009
Documents published in the IDB working paper series are of the highest academic and editorial quality. All have
been peer reviewed by recognized experts in their field and professionally edited. The views and opinions presented
in this working paper are entirely those of the author(s), and do not necessarily reflect those of the Inter-American
Development Bank, its Board of Executive Directors or the countries they represent.
This paper may be freely reproduced provided credit is given to the Inter-American Development Bank.
The views and interpretations in this documents are those of the authors and should neither be attributed to the Inter-
American Development Bank (IADB), its executive directors or its member countries. Other usual disclaimers also
Brazil?s Trade Policy: Old and New Issues
Mauricio Mesquita Moreira
Inter-American Development Bank
After a half century of overtly inward-oriented policies, Brazil finally moved to
open its trade regime in the early 1990s. Being one the last countries to make this move in a
region that notoriously lagged behind East Asia, Brazil was quick to implement a
comprehensive trade liberalization program, which had strong unilateral and regional
components. In roughly five years, tariffs were slashed, nontariff barriers were removed,
and Mercosur became a reality. Later on, even the possibility of a free trade zone for the
hemisphere was entertained. Yet this initial momentum lost steam in the mid-1990s,
undermined by inhospitable macroeconomic and international environments. When, at the
turn of the century, the right macroeconomic policies were finally put in place and Brazil
began to enjoy the benefits of a commodity boom, a new government took over that clearly
had a skeptical view of trade. Despite initial concern, however, the political transition did
not bring a significant policy reversal. But trade policy reform never regained its
momentum, despite its unfinished agenda. This paper examines this agenda and argues that
if Brazil really wants to fully enjoy the growth and welfare benefits of trade, it needs to
further lower and rationalize its structure of protection; adopt a more aggressive, World
Trade Organization?plus, policy to open markets abroad; design a regional integration
strategy that makes sense to its smaller partners; and bring trade facilitation, particularly
transport costs, to the core of its trade agenda.
Paper prepared for the conference, Brazil as an Economic Superpower? Understanding Brazil?s Changing
Role in the Global Economy, Washington, D.C.: Brookings Institution, April 28, 2008.
After a half century of overtly inward-oriented policies, Brazil finally moved to open its trade
regime in the early 1990s. Being one the last countries to make this move in a region that
notoriously lagged behind East Asia, Brazil was quick to implement a comprehensive trade
liberalization program, which had strong unilateral and regional components. In roughly five
years, tariffs were slashed; nontariff barriers (NTBs) were removed, and Mercosur became a
reality. Later on, even the possibility of a free trade zone for the hemisphere was entertained.
Yet this initial momentum lost steam in the mid-1990s, undermined by inhospitable
macroeconomic and international environments. The country?s failure to adopt sound fiscal and
monetary policies led to a substantial loss the of growth and the allocational benefits of opening
up, with the economy alternating periods of runaway inflation with those of severe exchange rate
appreciation, while enduring strong external shocks ranging from Mexico in 1994 to Asia in
1999. However, not all the benefits were lost to volatility.
There is plenty evidence that the greater exposure to import competition boosted
productivity growth in manufacturing, the most protected sector of the economy, whose
stagnation was behind the country?s dismal growth performance. Likewise, the evidence is
unequivocal in pointing to a drastic reduction in the cost of investment, i.e., cheaper equipment,
one of the key drivers of growth.
When, at the turn of the century, the right mix of macroeconomic policies were finally
put in place?a combination of fiscal austerity, inflation targeting, and a floating exchange
rate?and the country began to enjoy the benefits of a more benign external environment?e.g., a
China-led commodity boom?the political support for deepening the trade reforms had waned
and a new government took over that clearly had a skeptical view of trade.
Fortunately for Brazil?s growth prospects, the political transition, despite concern, did not
bring a significant policy reversal. Yet, trade policy reform never regained its momentum,
despite its unfinished agenda. This paper looks at this agenda and argues that if Brazil really
wants to fully enjoy the growth and welfare benefits of trade, it needs to further lower and
rationalize its structure of protection; adopt a more aggressive, World Trade Organization
(WTO)?plus, policy to open markets abroad; redesign, in the light of the two previous measures,
See, for instance, Lopez-Córdova and Moreira 2004, Moreira 2004, and Muendler 2004. For a recent discussion on
Brazil?s growth constraints, see Blyde, Pinheiro, Daude, and Fernández-Arias 2007.
Mercosur to advance both the country?s interest and that of its smaller partners; and, finally,
bring trade facilitation, particularly transport costs, to the core of its trade agenda.
The paper is organized in six sections, including this introduction and a section that
summarizes the conclusions. The four core sections take each of the topics of the ?unfinished
agenda? in turn: Section I makes a case for further tariff reform; section II questions the
rationale of a de facto South-South, market access strategy; section III argues that the reforms
and strategy discussed in sections I and II would help turn Mercosur into a more sustainable and
mutually beneficial initiative; and section IV seeks to draw attention to a type of trade costs that
are usually not seen on the agenda of trade negotiators but have turned into one of the more
important, if not the most important, obstacle to the country?s trade.
II. Making Sense of Protection
There is little doubt that Brazil has come a long way towards reducing and rationalizing its
tariffs. As can be seen in Figure 1, in 1987, before the first tariff reform, the value-added-
weighted average tariff was as high as 57 percent. The first two tariff reforms brought this
average down to 32 percent but left in place an elaborate system of NTBs, which made sure that
the tariff reduction had little effect on trade. Trade liberalization in earnest had to wait until
1991, when, after removing all the relevant NTBs, the government began to implement a four-
year tariff reduction schedule and to phase in its regional integration agreement with the other
members of Mercosur. This schedule, alongside measures taken in 1994 to facilitate the
implementation of a stabilization plan (the Real Plan), brought the weighted-average tariff to its
lowest point in more than half a century.
See Kume, Piani, and Sousa 2000 for details of the tariff reforms.
Mercosur was launched by the Treaty of Asunción, signed in 1991 by Brazil, Argentina, Paraguay, and Uruguay.
The treaty asked for the implementation of a common market until 1995, which would include 90 percent of the
Figure 1- Brazil's MFN tariff:
weighted average, 1987-99 (%)
First Reform 1988
Second Reform 1999
Third Reform 1991-93
Real Plan/Mercosur (CET)
10.0 Russian crisis
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Note: Value-added used as w eights.
Source: Kume, Piani and Sousa 2000.
This promising first half of the 1990s, however, soon gave away to paralysis and even to
a small but significant reversal of the tariff reforms, as Brazil entered a period of increasing
current account deficits driven by a severe exchange rate appreciation and negative external
shocks. The change of government in 2001?which took place amid increasing ?fatigue? in
public opinion with market-oriented reforms?did not, as expected, push the reversal to greater
lengths (although it did raise the tariffs of some products such as apparel and shoes to as much as
35 percent in 2007), but it effectively ruled out any possibility of further reducing and
rationalizing tariffs, unless as a part of an (increasingly elusive) agreement in the Doha Round.
The prospects for further opening thorough comprehensive regional trade agreements such as the
Free Trade Area of the Americas and the European Union?Mercosur agreement also faded away
as negotiations were stalled by the intransigent negotiating positions of all the parties involved.
Without the perspective of change any time soon, Brazil remains stuck with a level and
structure of protection that is not as costly as that of the late 1980s but whose reform can still
bring substantial welfare and growth gains. As shown in Figure 2, the median most-favored-
nation (MFN) tariff places Brazil solidly in the top quartile among a large sample of countries
around world. The median tariff is used because it minimizes the problems that affect simple
(outliers) or weighted (bias towards low-tariff, high-volume items) averages, but the picture does
not change significantly when these measures are used. Moreover, the use of MFN tariffs tends
to underestimate the relative level of Brazil?s protection vis-à-vis other large developing
countries such as Mexico and China, which have, respectively, massive preferential (NAFTA
and European Union?Mexico agreements) and special trade regimes.
Median Nominal Tariff (MFN) for Selected Countries, 2006
Source: UNCTAD-TRAINS (Trade Analysis and Information System) database.
Having this still relative high level of protection means that Brazil?s is forgoing, apart
from the traditional welfare gains, the opportunity, for instance, to boost productivity, whose
level and growth are known to lag well behind those of East Asia. According to one estimate
(Lopez-Córdova and Moreira 2004) based on Brazilian data, a 10 percent reduction in tariffs
increases total factor productivity (TFP) by 1 percent, which would have far from a negligible
impact given that in the second half of the 1990s manufacturing TFP grew at an annual rate of
2.8 percent (Lopez-Córdova and Moreira op. cit.). Relatively high protection is also a cause for
concern in a world where production is increasingly fragmented and the high growth benefits of
joining global value chains hinge on lower trade costs, among other competitiveness factors.
Lacking large-scale North-South agreements or special trade regimes, Brazil is far less equipped
than countries such as Mexico and China to take advantage of this trend and, indeed, the
0 10 20 30
Hong Kong, China
Egypt, Arab Rep.****
Iran, Islamic Rep.***
available evidence suggest that the country?s participation in global chains is still incipient
(Calfat and Flôres 2008).
But the problem is not only the level of protection but also its variance. Figure 3 shows
nominal and effective tariffs for 2007 at the three-digit level of Brazil?s National Accounts
Classification. Nominal tariffs vary from 0 to 35 percent, an interval high enough to fuel rent
seeking and impose severe costs on resource allocation. Yet the picture is even worse from the
point of view of Corden effective tariffs, which take into account protection for both final
products and inputs. Rates vary from ?4 to 133 percent. Such figures beg the question: What is
the rationale, if any, behind such disparate rates? The answers, though, are difficult to find. A
promising explanation might be found in the power of lobbies and special interest groups in
shaping protection along the lines of the ?protection for sale? argument developed by Grossman
and Helpman (1994).
The effective rates of protection were calculated using the Corden method (Corden 1971), with free trade technical
coefficients. The coefficients were estimated using 2005 data on the use of 110 intermediate goods by 55 activities
of the National Accounts System Classification?SCN (IBGE 2007, Table 2, ?Uso de Bens e Serviços?). The data for
tariffs came from the Common External Tariff 2007 (http://www.desenvolvimento.gov.br). An IBGE
correspondence between SCN and the NCM (Nomenclatura Comun do Mercosur) was used to combine tariff and
There some evidence that this is the case. See, for instance, Calfat and Flôres (2002).
Figure 3 - Brazil Nominal and Effective Tariffs. 2007 (%)
Passenger cars and light trucks
Trucks and buses
Food and beverages
Soaps and detergents
Plastic and rubber products
Casting of non-ferrous metals
Other non-metallic products
Other transport equipment
Machinery and equipment
Pulp and paper
Agriculture & forestry
Nominal Tariff Effective Tariff
Office and computer machinery
Mining of iron ores
Other mining industries
Oil & gas
Refined oil products
-20 0 20 40 60 80 100 120 140
Source: Own calculation based on National Accounts and Ministry of Development,Trade and Industry data. See text for details.
The prevailing structure of protection is particularly damaging for growth. Most
economists would agree that high investment rates in equipment and machinery play a key role
in sustaining high rates of growth. De Long and Summers (1991), for instance, show that there
is a strong and negative correlation between growth and the relative price of capital goods, and a
strong and positive correlation between growth and investment in capital goods. Such types of
evidence suggest that there is a link between trade and growth other than productivity. Since
machinery and equipment are tradable goods, trade liberalization would lower their relative
prices, reducing the cost of investment and boosting growth.
There is suggestive evidence that the trade liberalization of the first half of the 1990s
made a substantial contribution to lower the prices of capital goods in Brazil. Their relative
prices, measured by the wholesale price index (IPA) and general price index (IGP), fell by 47
percent in 1990?2001, a drop that appears to be strongly correlated with the rise in import
penetration (Moreira 2004). As Figure 4 shows, there appears to be considerable room for further
reducing these prices. Tariffs on these goods (9.7 percent in 2006) are still well above those
practiced by the fast-growth economies of Asia, clearly punishing investment.
CAPITAL GOODS TARIFFS (%) FOR SELECTED COUNTRIES, 2006
Indonesia China Thailand Korea, Rep. Brazil
Note: Broad Economic Categories (UN) , weighted by imports.
Source : UNCTAD-Trains Database
True, when measured by actual (tariff revenue divided by imports) rather than nominal
tariffs, protection seems to be lower (7.2 percent in 2007; http:// www.
this is still considerably higher than the nominal tariffs seen in Asia, and this figure alone tends to
underestimate the costs of importing capital goods. The lower actual tariff is mostly the result of
special import regimes, which target capital goods not produced locally. The discretionary nature
of these programs is a fertile ground for red tape and corruption. In other words, they carry hidden
costs that are not captured by tariff revenue.
Overall, there seems to be no clear economic justification for Brazil to continue to pay
the costs of this chaotic and counterproductive structure of protection. One can argue that maybe
this is not the right time for a tariff reform because of the WTO negotiations or because Brazil is
yet again facing the consequences of a steep exchange rate appreciation driven by the recent
0 2 4 6 8 10
7commodity boom. Though legitimate, these arguments do not undermine the case for urgent
First, Brazil was a latecomer to trade reform, and there has already been more than a
decade since the last measures was taken to cut and rationalize tariffs. The cumulative costs of
these delays in terms of welfare and growth are hard to measure, but given the level of protection
and the gap between the country?s growth performance and those of countries that have adopted
a more open trade regime, they are likely to be substantial and to continue to escalate,
particularly as some of the initial gains are reversed.
The potential gains from waiting for the conclusion of a WTO negotiation have to be
balanced against these welfare and growth costs. In fact, these costs call for Brazil?s to temper
the ?enlightened mercantilism?(Krugman 1991) that has prevailed in its recent trade policy with
a more careful assessment of the costs and benefits of further delaying tariff reform?the more
so because the offers seen so far on the Doha negotiating table do not seem to translate into any
significant change of the status quo.
For instance, the last text produced by the chair of the Doha Round negotiations on
nonagricultural market access (February 2008) called for ?Swiss formula? coefficients of 19 or
23 percent for developing countries , which would imply tariffs cuts for Brazil of between 55
and 60 percent, with tariff ceilings equivalent to the coefficients. Given that there is a
considerable difference between Brazil?s bound and applied tariffs, a coefficient of 23, for
instance, would only affect approximately 56 percent of the applied tariff lines, and to a
considerably smaller extent than the bound tariffs. In addition, these cuts are likely to be
accompanied by ?flexibilities,? which would exempt 5 to 10 percent of the tariff lines from the
full extent of the cuts, with a phase-in period of between 8 to 9 years.
Despite its modest impact, the press reports that Brazil and its partners in Mercosur see
the proposal as a threat to their industries and are asking for a coefficient of 35 (see for e.g.
www.ictsd.org/weekly/08-04-17/story1.htm). Negotiating tactics aside, it seems reasonable to
According to Brazil?s Central Bank (http://www.bcb.gov.br/?INDECO), in the first quarter of 2008, the real
exchange rate against the dollar was roughly at the same level it was in December 1998, before the Real prompted
See Bridges Weekly Trade News Digest Volume 12 No 13 April 17 2008 ( http://www.ictsd.org/weekly/08-04-
Own calculation using published bound
(http://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htm ) and applied tariff data
assume that is very unlikely that the Doha Round would do much to address the more blatant
distortions of Brazil?s current structure of protection. In other words, the ?wait-for-Doha
argument? would make sense if the government?s negotiation position included a scenario where
both the level and structure of the country?s projection would be significantly overhauled. From
what has been revealed so far, that does not seem to be the case.
It is not also clear the Brazil?s bargaining power would be severely reduced if the country
sat at the negotiating table with lower and more homogenous applied tariffs. The negotiations are
about bound tariffs, and there are also other important trade-offs to put on the table, such as the
expiration of the peace clause for agriculture, which, by the way, has allowed Brazil?s to
challenge the U.S. subsidies for cotton. Open markets and the elimination of subsidies for
agriculture are clearly welfare- and growth-enhancing outcomes for Brazil. What is not clear is
that the country has to punish its economy with a dysfunctional tariff structure to achieve these
As to exchange rate appreciation, it is hard to dispute the fact that the recent steep
appreciation of the exchange rate poses a challenge to the survival of manufacturing in Brazil, at
a time when already-fierce competitive pressures from India and China are only bound to
increase. Yet tariffs are a very blunt instrument to deal with this issue. This is a job for classical
fiscal, monetary, and exchange rate policies. If every time the notorious volatile exchange rate
moves, the government decides to change tariffs, the damage to price incentives and to resource
allocation is likely to be severe?particularly because it is very likely that constant changes in
tariffs are going to trigger special interest pressures that would inevitably shape an unexpected
and undesired outcome. But even if we ignore these issues, the appreciation argument is a case
for keeping tariff levels where they are right now. It does not give any justification to keep the
wide variation of tariffs across sectors seen earlier.
Leaving aside those very circumstantial arguments about trade negotiations and the
exchange rate, the road ahead for Brazil?s tariff reform could not be clearer. The country should
aim for a homogenous tariff across sectors, close to the OECD average (between 4 and 6
percent) (Moreira 2004), which could only be changed by Congress. This is important not only
for the country to enjoy the full benefits of trade but also to ensure that its commercial policy is
transparent and less vulnerable to lobbies and special interests. To put it simply: to ensure that
protection in Brazil ?is not for sale.?
III. Market Access and Regional Integration
There is both theoretical and empirical evidence suggesting that the gains from trade are
maximized when a country not only opens up its own market but also has greater access to
markets abroad (see, for instance, Harrison, Rutherford, and Tarr (2003)). This was not so much
a concern for Brazil in the late 1980s since protection was so high that the gains from bringing it
down alone would dwarf any progress made in market access. At the current levels of protection,
though, a strategy that combines lower tariffs at home with greater market access abroad is more
likely to produce the best results. Unfortunately, Brazil?s results in opening markets have been
Multilateral cum South-South Strategy?The country?s market access strategy appears
to be a combination of a multilateral thrust with an emphasis on South-South agreements. On the
multilateral front, there were important advances in agriculture as Brazil, together with its
partners in the G-20, successfully managed to push an agenda of substantial tariff cuts and
greater discipline for subsidies and specific tariffs?issues that remained off limits during the last
round of international negotiations. These gains, though, have yet to materialize since the
completion of the Doha Round remains uncertain and elusive. Brazil?s reluctance in opening up
its own market for manufacturing goods might not be the main obstacle to the agreement, but it
clearly does not work in its favor.
It is the other strand of the strategy, though, that gives more cause for concern. Judging
by Brazil?s attitudes towards preferential agreements in the last decade, there appears to be an
assumption that South-South agreements bring more net gains than their North-South
equivalents. This is an assumption that may survive in the realm of politics, but it has a very
short life when it comes to economics. This is not to deny that the trade gains of free trade
agreements (FTA) such as Mercosur are important and worth fighting for, but their limitations
cannot be ignored.
The limited size of the market and the similarity of factor endowments impose severe
constraints on scale and efficiency gains (Venables 2003). By contrast, the gains of North-South
agreements are more promising for involving considerably larger markets and a longer array of
comparative advantages. True, the risks of this type of initiative are higher, especially of
dislocation of knowledge-intensive, growth-enhancing sectors. Yet Brazil?s response to trade
liberalization in the last decade plays down the likelihood of any catastrophic scenario.
Moreover, one cannot overlook the costs of nonparticipation, i.e., the prospect of seeing
Brazilian exporters paying higher tariffs than their competitors in the world?s large markets and,
therefore, being on the receiving end of trade diversion. Rather than a theoretical possibility, this
is already the reality they are facing in the U.S. and EU markets where an increasing number of
agreements are being signed (NAFTA, CAFTA-DR, Peru-U.S. FTA, U.S.-Australia, the EU
enlargement, the EU-Mexico, and EU-Chile FTAs, to name but a few) and implemented.
The cost of nonparticipation acquires particularly dramatic contours in the context of the
emergence of China and India, whose labor costs and size advantages leave Brazilian
manufacturers in no position to forgo preferences in the markets of the North, particularly in the
U.S. market (see, for instance, Moreira 2007). As shown in Figure 5, the tariff levied on
Brazilian goods entering the U.S. market are not that different from those levied on Chinese and
Indian goods and are well above those paid by Mexico and Costa Rica. With the implementation
of the new generation of agreements signed by the United States with Australia and Central and
South America, Brazil?s disadvantages are only going to increase.
Figure 5- Tariffs Paid in the US Market. Manufacturing Goods. 2006 (%)
0 2 4 6
Source: U.S. Census Bureau
To make things even more worrying, Brazil?s preference for the South has only produced
a very limited number of very limited trade agreements, which, with the exception of Mercosur,
either cover a very limited number of tariff lines or have a long period of implementation (e.g.
Brazil-Mexico, Mercosur?Andean Community, Mercosur-India, and Mercosur?Southern African
Customs Union). This not only increases the costs of not having signed any major agreement
with countries in the North but also leaves Brazil vulnerable to ?negative preferences? or to
having its preferences erode in the markets of the South, even in its own region.
Figure 6 illustrates this point, by comparing the ?real ? tariffs (tariff revenue divided by
the value of imports) paid by similar Brazilian and U.S. goods when entering selected markets in
Latin America. Whereas preferences are considerable in Mercosur and Colombia, that is not the
case in Chile and Peru. In the case of the latter, U.S. preferences are even higher. With the full
implementation of the U.S.-Chile and U.S-Peru FTAs, Brazil?s position will deteriorate further,
as it will be case with Colombia if its FTA with the United States is eventually approved by the
U.S. Congress. Data for Central America are not available, but given the depth and scope of
CAFTA-DR, it is very likely that Brazil will face a difficult situation there too.
Figure 6 - Tariffs on Similar Import Goods from Brazil and the U.S.
Selected Latin American Countries. 2005 (%)
BRA USA BRA USA BRA USA BRA USA BRA USA
ARG CHL COL PER URY
Note: products in the same 6 digit HS
Source: Own calculation on ALADI data
Ad Valorem Tariffs
0 10 20 30
Mercosur?The South-South strategy faces steep challenges even in its more successful
achievement: Mercosur. Despite repeated signs of discontent with the results of the agreement
among the smaller partners, there is no evidence that Brazil is willing to tackle the fundamental
flaws of the initiative.
The problems begin with misguided expectations. Mercosur was to great extent sold on
the idea it would help industrialize the smaller partners. Whereas it seems warranted to expect
that an enlarged common market would deliver gains of scale and efficiency to all members of
the bloc, there was nothing in the economic fundamentals of the countries involved that would
indicate that this outcome was likely. Quite the contrary. Economic theory suggests that custom
unions between partners that have similar factor endowments (and therefore similar factor prices,
such as labor and capital) are more likely to promote the concentration of manufacturing
activities in the largest partners, given the interplay of economies of scale and transport costs
(see, e.g., Venables 2003).
The expectation of the industrialization of the smaller Mercosur members looks even
more misguided when the mix of policies and incentives adopted by member countries is taken
into account. For instance, Brazil, apart from being the largest and most industrialized economy,
has by far the most generous industrial policy in the bloc.
But the coup de grâce on these expectations comes from the available empirical evidence,
which show that the distribution of manufacturing activity among the bloc?s members has not
changed significantly since 1991 (Sanguinetti 2006; Blyde 2008), with the bulk of the industry
still concentrated in Brazil. To be sure, given the similarity of factor endowments and the
asymmetries of size and policy, it is somewhat surprising that Brazil?s share has not increased
substantially. Yet Mercosur was just one of a large number of developments that have affected
these economies during this period, ranging from unilateral liberalizations to different
stabilization plans and different exchange rate policies, to name but a few.
The main problem with Mercosur, though, is not one of misguided expectations or
asymmetric policies but one of policy design. The key pillar of the agreement, the common
external tariff (CET), closely reflects Brazil?s industrial interests and promotes an unfair
For a thorough discussion of the policy and economic asymmetries within Mercosur, see Blyde, Giordano, and
distribution of costs and benefits. This is the bloc?s most serious deficiency and the one that puts
in doubt its long-term sustainability.
Since Brazil applied tariffs follow closely the CET, the latter has exactly the same
problems of level and variance as the former, but with the aggravating circumstance that it shifts
part of the burden of protection to Mercosur?s smaller partners. When the CET charges up to 16
percent on capital goods (http://www.desenvolvimento.gov.br/sitio/interna/
interna.php?area=5&menu=1848) , it is shifting demand from producers outside the bloc to
producers in Brazil (where regional production is concentrated) and is asking consumers in
Uruguay and Paraguay to help pay the extra cost without getting any of the benefits.
Fortunately, and precisely because of its shortcomings, the CET has not been fully
implemented, which has helped to attenuate the costs. Yet without a functioning common
external tariff, countries cannot enjoying the full-scale benefits of a common market as they are
forced to introduce costly regulations, such as rules of origin. Tariff reform for Brazil along the
lines advocated above would do more to consolidate the future of Mercosur than any amount of
presidential declarations of commitment and support. With a more solid economic base and with
down-to-earth expectations about what the bloc can deliver, it would be easier to advance in
other problematic areas such as the harmonization of policies and incentives.
IV. The ?Other? Trade Costs
As in most of Latin America, trade policy in Brazil during the last two decades has been mostly
about bringing down tariffs and NTBs and signing trade agreements. Whereas the focus on this
single source of trade costs was justifiable in the earlier 1990s given their sheer size, the country
now faces a different reality.
For one thing, as shown above, unilateral trade liberalizations and preferential
agreements have brought those barriers to a fraction of what they were in the past, and even
though they are still unduly high for both imports and exports in some sectors and markets, they
have clearly lost relevance vis-à-vis other less visible trade costs, as transportation and regulatory
costs. Figure 7 illustrates this point vividly. As can be seen, the average freight expenditure for
For a thorough discussion of the impact of transport costs on trade in Latin America, including Brazil, see
Moreira, Volpe, and Blyde (forthcoming).
Brazil?s exports to the United States stands well above what is paid for import tariffs and exports
to Latin America.
Figure 7 - Ad Valoren Freight and Tariffs paid by Brazil's Exports
to the U.S. and Latin America.
Freight expenditures to the U.S. 12.3
Tariffs the U.S.
Freight to LAC
Tariffs to LAC 2
0 5 10 15
Note: Tariffs and freight rates are simple averages. Data for Latian America is for 2005 exports to Argentina, Peru, Chile, Uruguay ,
Colombia and Ecuador.Data for Exports to the US is for 2007.
Source: Data from ALADI and U.S. Census Bureau
For another, Brazil now faces a much transformed world economy, which bears little
resemblance to that of the 1980s and early 1990s. The combination of worldwide trade
liberalization?which has brought vast and resourceful countries such as China and India into the
world markets?fast technological development, and falling communication and transport costs
has reshaped countries? comparative advantages and has imposed a much higher penalty for
economies that are complacent about nonpolicy trade costs.
This new reality calls for a more balanced trade agenda, where the government would
strive not only to cut tariffs and NTBs at home and abroad (a job, as shown, which is far from
over), but would also focus on what is generally referred to as trade facilitation. The pressing
need for this new agenda is clear for both intra- and extraregional trade. Without, for instance,
improving a poor transport infrastructure?whose development was biased towards extraregional
markets by centuries of colonial rule, and which has suffered badly from underinvestment in
recent decades?it is unlikely that Brazil will maximize the gains of scale and specialization that
can arise from preferential agreements such as Mercosur.
Likewise, to expand and diversify its exports and take full advantage of the increasing
fragmentation of production and the time-sensitiveness of international trade, Brazil can no
longer rely solely on trade agreements, relative proximity to large markets such as that of the
United States, low labor costs, and on an abundant supply of natural resources. Having much
higher labor costs than Asia?s (and lower productivity growth) (Moreira 2007) and having seen
its geographic advantage being eroded by rapidly falling air freight rates and by economies of
scale and oligopolies in ocean transport, Brazil?s role as a producer of manufacturing goods
hinges crucially on improvements in its dilapidated transport infrastructure. Figure 8 gives
some perspective on the urgency of this agenda. As can be seen, Brazil?s export transport costs to
the key U.S. market do not reflect its proximity advantage. Issues such as the volume of trade,
the quality of infrastructure, and the degree of competition on shipping routes seem to be behind
these figures (see Moreira, Volpe, and Blyde, forthcoming).
Brazil?s investment in infrastructure has fallen abruptly in recent decades, dropping from 5 percent of GDP in the
early 1980s to 2 percent during the 1990s. The decline in transport infrastructure has been even more drastic, falling
from 1 to 0.2 percent over the same period (Calderón and Servén 2003).
Figure 8- Ratios Between Brazil and China's Export Freight and Distance to the U.S.
Similar Goods (10 digit HS) 2007
Note: Freight ratios are based on simple average ad valorem freight rates of similar products (10 digit HS)
Distance ratios are based on the average distance between the U.S. and the countries' main ports.
Manufacturing defined as in the WTO- SITC classfication.
Source: U.S. Census Bureau
Transport costs also play a key role in Brazil?s ability to extract the full benefits of its
abundant natural resources. The deficiencies in its infrastructure have been depriving producers
of a substantial part of their profits. This seems to be the case, for instance, for soy producers in
western Brazil who reportedly spend four times more to ship their product abroad than their
counterparts in the U.S. Midwest. Along the same lines, worldwide ship shortages, driven mainly
by growing Chinese demand for raw materials, have been pushing shipping rates to ever-growing
heights. The Baltic Dry Index, which reflects freight rates for transporting raw materials, has
increased by a factor of 6 since 2001 (as of January 2008), leading to odd situations such as that
of iron ore, where ocean shipping from Brazil to Asia can be more expensive than the cargo
The Baltic Dry index is published by the Baltic Exchange ( http://www.balticexchange.com/). See, for instance,
Wall Street Journal, October 22, 2007.
0 .2 .4 .6 .8
V. Summing Up
Brazil?s trade agenda has both old and new issues, which are equally challenging. The old issues
are related to a process of trade liberalization that clearly came to a halt in the 1990s. Whereas
considerable progress was made until then, there is still an important job ahead to give Brazil the
best chances of enjoying the welfare and growth benefits of trade. Protection is still relatively
high and has a structure that is as dysfunctional and costly as it is incomprehensible. It distorts
the allocation of resources and punishes growth with its high tariffs on capital goods and can
only be understood as product of lobbies and special interests. The way ahead is clear: a low,
homogenous structure of protection that would remove once and for all these lingering trade
costs from Brazil?s trade agenda.
Unilateral liberalization alone, though, would not be enough to exploit the full benefits of
trade. Market access remains high on the agenda, and Brazil?s dual, multilateral, South-South
strategy has been producing mixed results. On the positive side is the progress made in putting
agriculture at the center of the multilateral agenda. Concrete results, though, have yet to come.
On the negative side is a South-South agenda that has left Brazil without preferential access to
the world?s major markets, while failing to sign enough and significant South-South agreements
to at least reduce the disadvantages of not making inroads in the North. Even Brazil?s most
significant achievement in the South, Mercosur, faces significant problems of misguided
expectations and dysfunctional incentives, the latter due in great part to Brazil?s unfinished job in
opening its economy.
The new issues on the trade agenda have come from the increasing strategic importance
of nonpolicy trade costs, which traditionally have been left out of the main thrust of trade policy.
Costs such as transportation have gained importance in part because tariffs and NTBs are these
days much lower than they were a decade ago. But that is not the whole story. The
transformation of the world economy?which, on the one hand, has increased the fragmentation
of production and the timeliness of trade, and, on the other, has brought large and extremely
competitive economies to the world markets?is also behind the growing importance of trade
facilitation. For a country like Brazil, which has traditionally underinvested in its infrastructure,
the need to respond to these changes is gaining even more urgency and calls for a trade policy
that can be effective in quickly reducing all costs that are relevant to trade.
Blyde, J. 2008. ?Convergence Dynamics in Mercosur.? In Blyde, J., P. Giordano and E.
Fernández-Arias, eds., Deepening Integration in Mercosur: Dealing with Disparities.
Inter-American Development Bank, Washington, D.C.
Blyde, J., P. Giordano, and E. Fernández-Arias, eds. 2008. Deepening Integration in Mercosur:
Dealing with Disparities. Inter-American Development Bank. Washington, D.C.
Blyde, J., A. C. Pinheiro, C. Daude, and E. Fernández-Arias. 2007. ?Competitiveness and
Growth in Brazil.? Processed, Inter-American Development Bank, Washington, D.C.
Calderón, C., and L. Servén. 2003. ?The Output Cost of Latin America?s Infrastructure Gap.? In
Easterly, W., and L. Servén, eds., In The Limits of Stabilization: Infrastructure, Public
Deficits and Growth in Latin America. Stanford University Press for the World Bank.
Calfat, G., and R. G. Flôres Jr. 2002. ?Endogenous Protection in Mercosur: an Econometric
Analysis? Paper presented at Regional Integration Network, Punta del Este, Uruguay.
Corden, W. M. 1971. The Theory of Protection. Clarendon Press, Oxford.
DeLong, J. B., and L. H. Summers.1991. "Equipment Investment and Economic Growth,"
Quarterly Journal of Economics 106: 2 (May), pp. 445-502.
Grossman, G., and Helpman, E. 1994. ?Protection for Sale.? American Economic Review 84:
Harrison, G. W., T. F. Rutherford, and D. G. Tar. 2003, ?Chile?s Regional Arrangements: The
Importance of Market Access and Lowering the Tariff to Six percent?. Working Paper
No 238, Banco Central de Chile.
IBGE. 2007. Sistema de Contas Nacionais Brasil 2000?2005. Contas Nacionais No. 19. IBGE,
Rio de Janeiro.
Krugman, P. R. 1991. ?The Move Toward Free Trade Zones.? Paper presented at Policy
Implications of Trade and Currency Zones, symposium sponsored by Federal Reserve
Bank of Kansas City, Jackson Hole, Wyoming, August 22?24.
Kume, H., G. Piani, and C. Bráz de Souza. 2000. ?A política brasileira de importação no período
1987- 1998: Descrição e avaliação.? Rio de Janeiro: IPEA, May 2000. Mimeo.
López-Córdova, E., and M. Moreira. 2004. ?Regional Integration and Productivity: The
Experiences of Brazil and Mexico.? In A. Estevadeordal, D. Rodrik, A. Taylor, and A.
Velasco, eds., FTAA and Beyond: Prospects for Integration in the Americas. Cambridge,
Mass.: David Rockefeller Center for Latin American Studies, Harvard University Press.
Moreira, M. M. 2004. ?Brazil?s Trade Liberalization and Growth: Has it Failed?? INTAL-ITD
Working Paper 24. IDB, Washington, D.C. Also in Portuguese: ?Abertura e
Crescimento: Passado e Futuro,? in Giambiagi, F., J. G. Reis, and A. Urani, eds.,
Reformas no Brasil: Balanço e Agenda. Editora Nova Fronteira, Rio de Janeiro.
Moreira, M. M. 2007. ?Fear of China: Is There a Future for Manufacturing in Latin America??
World Development 35, no.3: 355?76.
Moreira, M. M., C. Volpe and J. Blyde (forthcoming) ?Unclogging Arteries. A Report on the
Impact of Transport Costs on the Region?s Trade.? Cambridge, MA.Harvard Univeristy
Press for the Inter-American Development Bank.
Muendler, M. 2004. ?Trade, Technology and Productivity: A Study of Brazilian Manufacturers,
1986?1998.? CESIFO Working Paper 1148, March.
Sanguinetti, P. 2006. ?Asimetrías en el Mercosur: ¿Son compatibles con el proceso de
integración? ? Estudio 005/06, Secretaria Técnica del Mercosur. Montevideo.
Venables, A. 2003. ?Regionalism and Economic Development.? In R. Devlin and A.
Estevadeordal, eds., Bridges for Development. Policies and Institutions for Trade and
Integration. Inter-American Development Bank.