We cannot deny the risk of an advance in protectionism around the world. On the other hand, entrepreneurs indicate expectation of low impact from international movements on the local economy and businesses in 2017 - a sign that the focus will remain internal.October-December | 2016
Most experts indicate that in 2017 Brazil should deal with the risk of new protectionist measures and ideas intensifying worldwide, in counterpoint to an economy which had been heavily integrating. The temptation to protect the economies from international competition is back. In several countries, protectionism and economic nationalism are on the rise, along with the growth of political forces that reject globalization and preach the fight against immigration, the incentive to local manufacture and the rejection of international trade agreements.
The vote by Great Britain to leave the European Union and the election of the Republican candidate Donald Trump to the White House are demonstrations of this movement, in the midst of the signs of shrinkage of world trade and economic slowdown in China. “An American movement to leave global agreements and of rejection to immigration would be disastrous”, says the economist Edmar Bacha, director of the Institute for the Study of Economic Policy (IEPE), in Rio de Janeiro. “The United States led the movement of open markets that made the world thrive since 1945. These were the ones that gave shape to the World Bank, the IMF [International Monetary Fund] and the GATT [General Agreement on Tariffs and Trade], which financed the Marshall Plan and assured markets for emerging economies, such as China. To backpedal from this just a bit would be a disaster.”
In fact, there are risks, but there is also the prospect of normalization. The new Chinese economic plan to promote the consumption of households should increase imports of agricultural products from 14% to 41%, until 2030, according to the World Bank. The export of services from the United States and Japan to China is expected to grow by 10% per year in the same period.
What draws more attention, however, is the perception expressed by decision-makers in the business environment of Brazil, who were consulted by Deloitte about the potential of external impacts on our economy and the local businesses twice: in the application of the “Agenda 2017” survey in September and October (therefore before the election of Trump), and in a poll conducted less than two days after the confirmation of the new president of the United States.
In the first survey, factors such as the interest rates of the United States, the Chinese slowdown, Brexit and others were indicated as low or very low impact. In the second, even under the effect of the result of the elections, respondents indicated, in their great majority, the prospect of a neutral or slightly negative effect of the elections outcome on the global economy in 2017.
About the impacts of the external movements on the Brazilian business environment, the responses show an even less pessimistic scenario for the short term.
The following are some experts’ and market agents’ analyses, in addition to the results of the two Deloitte’s surveys.
Idea versus reality: protectionism is advancing, but the accommodation of this trend is already on the agenda
“The vision that globalization is a source of risks and uncertainties is maturing for years”, says Pedro da Motta Veiga, director of the Center for the Study of Integration and Development (Cindes). “In the 21st century, there was no significant advance in global trade negotiations. The European Constitution was rejected by France and the Netherlands. The North American Republican Party is moving from liberalism to protectionism for decades.”
Various phenomena, such as the impacts of the 2008 financial crisis, the wave of refugees in Europe and the terrorist attacks, are perceived as expressions of globalization. The world economy dynamic, however, has not been affected by these events. For the Cindes’ director, “in microeconomic terms, the globalization has continued smoothly with the entry of China and with the explosion of e-commerce. Not much has changed in the national policies toward a break with the global market. This is a worrying scenario more due to what it forecasts than for what has already happened.”
The trends, however, are changing. Between 2011 and 2016, the number of protectionist measures in the G20 countries, the group of the 19 largest economies in the world plus the European Union, increased four times, according to the World Trade Organization (WTO). In 2016, the world trade is expected to grow by only 1.7%, in contrast with the average of 6% before the global financial crisis of 2008. The capital flow to emerging countries suffered a reduction of 4.9% of the global Gross Domestic Product (GDP) between 2010 and 2015, according to the IMF – a loss of $1.123 trillion. The prices of international freight are falling since 2009.
It is possible, however, that the anti-liberal tide will seek accommodation. The British prime-minister Theresa May confirmed that Brexit will happen until March 2017, but the Secretary of Commerce, Liam Fox, has announced that Great Britain wants to maintain the “liberal” profile. The new government intends to restrict the free flow of people, but also wants an agreement with the European Economic Area (EEA). London may have to renegotiate individual trade agreements with 58 nations.
Currently, the United Kingdom is the fourth largest foreign investor in Brazil. The Brazilians import vehicles, manufactured goods, pesticides and chemicals and export gold, iron ore, soybeans, airplanes, meat and coffee to the British. British Gas, British Petroleum, Rolls-Royce and Shell have strong investments in Brazil. The President of the British Chamber of Commerce and Industry in Brazil, Jorge Santos Carneiro, believes that Brexit can improve bilateral trade. “In fact, the Brazilians gained a great opportunity to update the terms of its relationship with Great Britain”, says Ram.
China: lower growth, but still relevant
There is also turmoil in China. In the past three decades, the Chinese economy has grown amazingly – on average 10% per year, tripling in size from 5.5% share in total GDP in 1995 to 16.8% in 2015. The year in which the Chinese joined the WTO, 2011, marked the peak of the global trade expansion since 1945, at a rate twice as much the GDP growth. In 2012, the expansion slowed, dropping to 7% in 2015, and it should move back to 5% in 2020. In 2015, a bubble in the country’s newly created capital market has led to a 32% drop in the shares in 17 days – $3.5 billion loss.
To balance the economy, stimulate consumption of families and build a basic social security network, the prime-minister Xi Jinping has released the 13th Five-Year Plan, which should increase the service and food imports – directly benefiting Brazil. “The Chinese growth will certainly be slowed down”, says Ira Kalish, Deloitte’s chief economist. “However, the expansion will continue at a pace favorable to the majority of countries.”
“There are important Chinese groups that have already invested and will continue to invest in Brazil, mainly in the sectors of infrastructure, agribusiness and construction.” Paulo de Tarso
“There are important Chinese groups that have already invested and will continue to invest in Brazil, mainly in the sectors of infrastructure, agribusiness and construction.”
Paulo de Tarso
China plans to invest abroad in infrastructure projects and business chains and has already increased investments in Brazil. “I was part of the group of entrepreneurs and executives who accompanied the president Michel Temer to China in September”, says Paulo de Tarso, Deloitte’s partner who leads the Chinese Services Group of the organization in Brazil and also the market approach to the interior of São Paulo. “There are important and large Chinese business groups that have already invested and will continue to invest in Brazil, mainly in the sectors of infrastructure, agribusiness and construction. There is so much to be expected for Chinese investments in Brazil” he says.
United States: between changes and continuity
There is no doubt that the United States behavior in foreign trade can always put the world economy off balance. In 2015, $50.5 billion were handled by the Brazil-United States bilateral trade. “Brazil can benefit by increasing the share of international trade in their GDP through manufacturing”, says Ira Kalish, Deloitte’s chief economist.
In the United States, during his presidential campaign, Donald Trump proposed restrictions on immigration, incentives to local manufacture and rejection of agreements like Nafta, Trans-pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), which were already facing resistance in Congress. He defended 35% of taxation on the Mexican and Chinese products. In addition to opening a conflict between the two largest economies in the world, his proposals could lead to recession for many.
“The great depression of the 1930s was exacerbated by the imposition of stringent tariffs by the United States”, says Kalish. “I am concerned about the lack of political support to free trade because its expansion is crucial to boost growth. The protectionism can greatly impair the poorest. Its proponents claim to represent the interests of ordinary workers, but these are the ones who will suffer more.”
Everyone knows that the globalization generates winners and losers. Millions of peasants in China and India came out of poverty by migrating to work in the metropolises and a financial-corporate elite has accumulated great wealth spreading business around the globe. The economist and former minister Delfim Netto observes that “a global middle class in Asia was born, with a per capita income below the European income, and a scandalous global plutocracy of super rich. The losers are the middle classes and the industrial workers deprived of income, employment and influence with the migration of plants. But now they are saying “enough’”.
“There is unemployment, but there are also efficient sectors gaining market share”, says the economist Roberto Giannetti da Fonseca, former director of International Relations and Foreign Trade of the Federation of Industries of the State of São Paulo (FIESP). “It so happens that the winners are silent and the losers are screaming. But, if the protectionism closes markets, all consumers will be adversely affected because they will lose access to better quality products and best price.”
The Brexit is a reaction against the bureaucracy of the European Union in Brussels, just as the protectionism reacts against the complex regulatory architecture of global trade. “It is not only the rates of products that are defined”, says Giannetti. “The negotiations involve intellectual property, labor standards, health agreements, environmental legislation and government procurement. A global agreement implies a relative loss of sovereignty in favor of global integration, against which the politicians react.”
More value for export
In the face of the “deglobalization”, Brazil enjoys the dubious comfort of being one of the most closed economies on the planet. Despite the evidence of the benefits of competition and free world trade, the Country, which today is between the 8th and the 9th largest economy in the world, is the 25th largest exporter. “Brazil’s GDP represents 3% of global GDP, but only 1.1% of world exports. We are a small giant in terms of GDP and a midget in terms of export”, says Edmar Bacha, from IEPE.
Asia consumes 45% of exports of Brazilian agribusiness and China, a quarter of that amount. To grow, Brazil needs to convince itself that “it is not enough to produce well; it is necessary to sell better”, says Roberto Giannetti, former FIESP. The Country has land, climate, water, sun, technology and genetic engineering to “increase agricultural production by 40%, easily, without deforestation.”
The biggest challenge is to process the products, create eligible brands and control distribution. Instead of selling raw orange juice, sell packaged juice. Sell meat with special cuts, stamp of origin and certification. Instead of gross soybean, soybean meal and oil. Instead of raw leather, processed leather. “The qualified product yields three times more”, says Giannetti. “Instead of exporting grain and ore with free on board value, we should sell processed products with delivered duty paid value. This would change everything.”
In the current Brazil’s recession, the quantity prevails over quality in foreign trade. In 2015, exports of iron ore, soybeans and crude petroleum oils have hit record in terms of quantity, however, the price of iron dropped 48% compared to 2014, soybeans fell 24% and oil fell 49%. Despite the record volume exported, the sales value decreased.
China bought US$ 35.6 billion from Brazil, followed by the United States, with $24.2 billion, Argentina, with $12.8 billion, and the Netherlands, with $10 billion. With the high dollar, imports plummeted 24.3%, which helped to generate a surplus of R$ 19.6 billion. The North American currency rose nearly 50% in 2015, the largest increase in 13 years, benefiting the exports. “This is the result not of virtue, but of weakness”, notes the former minister Delfim Netto: “If we resume growth, imports will increase and we will have a deficit in the balance.”
According to the Central Bank, the surplus expected in 2016 is $47 billion, more than double the amount recorded in 2015, US$ 20 billion. The drop in oil prices helps the trade balance. As Brazil imports more oil than it exports, the depreciation favors the accounts. If the production of the pre-salt layer oil continues to grow, the year will close with better numbers.
To access the contents of “Agenda 2017” survey in its entirety, click here