US - Brazil trade Archives - Global Trade Magazine

Olá Brasil!

President Trump and Brazilian President Jair Bolsonaro announced their desire to “build a new partnership” after meeting in August, potentially through a bilateral free trade agreement. For the time being, the United States and Brazil are starting with some pragmatic approaches, for example by streamlining customs procedures, agreeing on safety standards for Brazil to import U.S. pork and beef, increased imports of U.S. ethanol, and possible ways to expand energy trade.

But Brazil would be a good target for a full U.S. free trade agreement. It is by far the largest South American economy. With total two-way trade reaching $103.9 billion in 2018, Brazil is our ninth-largest export market. Beyond any political merits or challenges, the potential commercial benefits can be shown through textbook economics.

“Revealed” Comparative Advantage

In a 1965 paper entitled Trade Liberalisation and “Revealed” Comparative Advantage, economist Bela Balassa developed an index for identifying where the comparative advantage of industrial countries lay in regard to their trade with one another.

Comparative advantage basically means one country can produce a particular good at a lower opportunity cost than another, which doesn’t necessarily mean at a lower absolute cost. The revealed comparative advantage (RCA) index is a useful tool that cuts out the laborious work of trying to assess all the factors that might determine comparative advantage but still captures relative costs and differences in non-price factors. Here’s how it works.

The Power of One

A country’s RCA in a certain class of goods is calculated by dividing the proportion of the country’s exports in that class by the proportion of world exports in that class. If the resulting RCA is greater than one, then a comparative advantage has been discovered. If it is less than one, the country is said to have a comparative disadvantage in that class of good.

The RCA is therefore useful in identifying areas where large gains from trade are possible but currently untapped. If one country’s RCA in a product is below one and another’s is above one this may be a potentially lucrative pairing.

Furthermore, if the country whose RCA is below one has either tariff or non-tariff barriers on that good and is importing from an inefficient source or producing for its own consumption, there is even greater potential for benefit.

The U.S.-Brazil Trade Relationship Revealed

Applying the RCA method to the U.S.-Brazil trading relationship in 20 sectors, the relative strengths and weaknesses of the United States and Brazil are complementary in 11 of them. There are only three categories in which both countries have RCAs higher than one, in which they would compete head to head.

For Brazil, export gains could be made in minerals, animals, food products, hides and skins, metals and raw materials such as alloys and iron ores, all sectors where Brazil has a high revealed comparative advantage compared to the United States. The United States has a revealed comparative advantage in exporting capital goods, chemicals, miscellaneous goods, plastics, rubber and transportation.

Classic Trade: More Sales and More Savings

When it comes to importing raw materials from Brazil, the United States already has zero or low tariff rates in most categories, but there are some products where demand is high, but tariffs remain, creating opportunities for savings for U.S. consumers. For example, U.S. tariffs on building materials such as cut stone and shaped wood range from 3.2 to 4.9 percent. The United States does not have a comparative advantage in these materials and currently imports 24 percent of its building stone and 30 percent of its shaped wood needs from Brazil.

Tariff savings may also shift consumer purchases in Brazil’s favour. For example, Brazil enjoys a comparative advantage over the United States in coffee (we don’t produce it except some specialty in Hawaii). At present, 50 percent of U.S. imported coffee comes from countries we have an FTA with including Colombia and Guatemala, so Brazil would be well poised to increase its share of U.S. coffee imports under an FTA.

The products the United States has a revealed comparative advantage in compared to Brazil are more diverse, from capital goods to chemicals. Brazil’s lowest weighted average tariff among the good represented on the chart is 6.24 percent for chemicals; the highest is 21.01 percent in transportation. Reducing tariffs on U.S. industrial and agricultural goods would benefit both Brazilian importers and U.S. exporters.

A U.S.-Brazil FTA Could Be Positive

Overall, these numbers suggest a high complementarity in revealed comparative advantages between the United States and Brazil such that removing barriers to cross border trade in goods and services between the United States and Brazil has the potential yield gains for both sides, with increased trade flows both ways.

If only negotiating a trade agreement were as easy as following the numbers. The United States has a number of pension and tax reforms it would like Brazil to enact before getting serious about an FTA, and Brazil is a member of MERCOSUR, a South American trading bloc that precludes members from negotiating tariffs on an individual country basis. And so, the two countries will continue to nibble at the margins of an agreement, achieving “free-er” trade where possible, but when they are ready, the comparative advantages are now revealed.

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Alice Calder is a program manager at the Mercatus Center at George Mason University. Prior to this she worked as a graduate research assistant while pursuing her MA in Applied Economics at GMU. Originally from the UK, where she received her BA in Philosophy and Political Economy from the University of Exeter, living and working internationally sparked her interest in trade issues as well as the intersection of economics and culture.

This article originally appeared on TradeVistas.org. Republished with permission.

The U.S. and Brazil are the largest economies in the Americas, and all signs point to an even more active relationship between the two powerhouses in the future. Just this year it was confirmed that U.S. citizens would no longer need a visa to travel to Brazil and can remain in the country for at least 90 days, allowing for more frequent interactions at a very basic level. Since that announcement, Brazil has seen increased travel interest from American tourists, with searches for flights from the U.S. to Brazil up more than 30 percent in March alone, compared to the previous year.

While tourism is a great way to build strong country relationships, what’s even more significant is a recent report that shows investment interactions between the U.S. and Brazil increased – and improved – between 2008 and 2017. More specifically, the report highlighted growth and opportunity across three of the most powerful indicators of economic health between 2008 and 2017: direct investments, exportation and employment.

Consider that by the end of 2017, U.S. investments into the Brazilian economy reached a whopping $68 billion, comprising nearly 3.3 percent of Brazil’s overall gross domestic product (GDP) – according to the report. For its part, Brazil’s foreign direct investments into the U.S. surged dramatically (356.5 percent) over the last decade, reaching over $42 billion in 2017. What’s more, from an exportation standpoint, the U.S. is a key destination for Brazilian exports. In fact, in 2017 alone, Brazil exported goods worth over $27 billion to the U.S. Similarly, the U.S. was the second main source of imports to Brazil in 2017.

Naturally, prolific trade and investment between the two countries is already leading to job creation in both countries. U.S.-controlled multinational companies employed nearly 655,000 Brazilians in 2015 and generated 131,900 new jobs in Brazil between 2009 and 2015. On the other hand, Brazilian companies in the U.S. employed over 74,000 Americans in 2015. Further, for Brazil, increasing trade with the U.S. also eases the country’s access to other international markets, boosting Brazil’s clout internationally while also broadening the job market and improving the Brazilian economy. In turn, increased trade with Brazil offers the U.S. access to resources that are critical to the American economy, such as oil and gas, mining, and chemicals.

As these initial results suggest, the opportunities on the horizon for a mutually beneficial relationship between the two countries are seemingly limitless. Currently, the U.S. is investing heavily in sectors across the Brazilian economy, focusing especially on mining, finance and insurance – and the U.S. is also especially well positioned to take advantage of unprecedented access and opportunity in one particular sector: oil. In light of that fact that the global demand for oil is rising, potentially reaching 102.3 million barrels per day by 2022, the Brazilian oil and gas industry presents the next great investment opportunity for foreign investors, especially those from the U.S.

Indeed, Brazil’s oil reserves are enormous – the 15th largest in the world, with over 15 billion barrels – and are located mostly offshore in deep waters. Brazilian oil companies are already pushing the boundaries of innovation when it comes to deep water exploration. Petrobras, for example, discovered pre-salt oil reserves – which are entirely unique to Brazil – off the coast of Rio de Janeiro in the Santos Basin in 2006. This initial discovery led the company to find a series of even larger oil reserves containing potentially billions of barrels of light oil. As oil experts will know, pre-salt extraction is more painstaking and complicated than other forms of oil and gas removal. However, investing in exploration and production in the pre-salt regions is becoming absolutely critical as the world’s post-salt reserves dwindle. Since discovering these reserves, Petrobras has actually developed many of the technologies needed to overcome harsh oceanographic conditions and create production infrastructure.

Of course, breaking into a new foreign market is always daunting. To entice foreign investors who are best equipped to efficiently and responsibly drill at these pre-salt reserves, Brazil’s National Petroleum Agency is organizing seven auctions (also known as “bidding rounds”) between 2019 and 2021, during which they’ll auction off areas containing billions of barrels of oil. These bidding rounds are designed to formally and transparently assign blocks from the pre-salt reserves that Petrobras currently has ownership over. During an upcoming bidding round on November 6, for instance, the Brazilian government will auction off the rights to extract the excess of 15 barrels of oil from across four fields called Atapu, Buzios and Itapu e Sépia. The winners will be able to utilize Petrobras’ technical data for pre-salt exploration and extraction in return for reimbursing Petrobras for a portion of its investment costs.

Encouraging bilateral trade and investment between Brazil and the United States is already leading to economic growth for both countries, and – as the data from recent years shows – the opportunities for future mutual prosperity are endless. By continuing to create unique investment opportunities, such as those offered to foreign investors during the upcoming oil auctions, Brazil will be able to court U.S. investors and further solidify its standing as America’s next great international trade partner.

To consult the schedule of bids and more information, please, refer to: http://rodadas.anp.gov.br/en/

Sergio Ricardo Segovia Barbosa, 55, is a retired Rear Admiral in Brazilian Navy. With recognized professional experience in military, managerial and governmental areas, he has worked in Intelligence Analysis, Military Operations, and Logistics. He also worked in Emergency and Risk Management, Maritime Safety, Strategic Planning, Navigation and Maritime Operations. In addition, in the foreign trade area, he was responsible for logistics and international acquisition processes, when he was in charge of the group for ship receiving abroad.

Mr. Segovia has a postgraduate degree in Politics and Strategy from the War College. He is fluent in English and Spanish.

Comparative Advantage Revealed: What the U.S. Could Gain from an FTA with Brazil