The Brazil-U.S. Trade Agenda

March 19 marked the one year anniversary of President Barack Obama’s first visit to Brazil.  Today, President Dilma Rousseff is in Washington.   The 12 months between these meetings witnessed much progress in the Brazil-U.S. trade agenda, despite a pervasive perception that this agenda lacks substance.   The next 12 months, however, offer even better opportunities.

During the past year, the United States removed two key barriers to Brazilian exports.  On the one hand, the U.S. renewed its Generalized System of Preferences (GSP) until July 2013.  On the other, it eliminated both the tariff on foreign ethanol and the blender’s subsidy.  In addition, the United States completed the regulatory process required to open its market to pork from the Brazilian State of Santa Catarina and removed the economic basis for the imposition of an antidumping duty against Brazilian orange juice.

In the vast majority of cases, these trade liberalizing measures were motivated primarily by self-interest.  GSP, for instance, is a tool to access cheap inputs.  In the case of the ethanol tariff and subsidy, elimination of both resulted in greater energy security while at the same time reduced government spending.  Regardless of motivating factors, the U.S. responded to Brazil’s requests on these issues, and in so doing, created new opportunities for Brazilian exporters and investors.

Brazil could reciprocally move toward greater liberalization and modernization of some of its economic sectors.  This movement would result both in positive impacts for the Brazilian economy and in the creation of opportunities for American exporters and investors.

There are two sectors in particular that deserve attention.  The first one is reinsurance.  Between the end of 2010 and the beginning of 2011, the Brazilian National Council for Private Insurance established two new barriers for foreign companies operating in the Brazilian market: a 40% market reserve and a 20% cap on intra-company risk-ceding operations.  If the Government of Brazil decides to remove these barriers, it will benefit insurance consumers and avoid risk concentration in the country.  In a complementary way, it would create new opportunities for U.S. companies.

The second sector is express delivery.  The Brazilian Federal Revenue (Receita Federal do Brasil – RFB) has maintained a continuous dialogue with the private sector about potential measures to modernize Brazil’s current express delivery system.  There are a number of legal and regulatory obstacles in place that impede more use of this system.  One obstacle, in particular, is discriminatory in nature: on imports up to $50.00, the Brazilian consumer doesn’t have to pay the prohibitive 60% import tariff but only if his or her imports are transported using the Brazilian Postal Service (Correios).  This benefit could be extended to all private sector providers of a similar service.  If the Government of Brazil does so, it will benefit express delivery users.  In a complementary way, it would create new opportunities for U.S. companies.

Beyond these two specific proposals, there is one area in which Brazil can at the same time both improve public policy quality and also reduce costs to Brazilian and foreign companies, including U.S. companies.  Today, there is no harmonized regulatory process in Brazil.  Any Brazilian ministry or federal regulatory agency is free to adopt new measures the way it considers best.

In view of this regulatory uncertainty that only contributes to generation of inefficient public policy without common criteria and adequate accountability, and increases costs to the private sector, the Brazilian Office of the Presidential Chief of Staff (Casa Civil) established the pioneer Program for Strengthening the Institutional Capacity for Rule-Making (PRO-REG).  This program has contributed to foster “good regulation” culture in Brazil but more is needed.  The Brazilian National Congress should enact broad legislation to secure regulatory transparency and harmonization thus requiring all ministries and federal regulatory agencies to follow minimum procedures that contribute to policy efficiency and reduced economic impact.  The United States has vast experience in this field, experience that could be shared with Brazil.

In the long term, Brazil and the U.S. should advance toward the major and more ambitious themes of the bilateral agenda, including reciprocal opening of government procurement markets and the negotiation of agreements to avoid double taxation and to liberalize trade.

In the short term, however, there is room for incremental and reciprocal gains.  On the U.S. side, barriers to Cachaça, fruits, and beef from Brazil can be removed.  On the Brazilian side, action in sectors such as reinsurance and express delivery as well as in terms of regulatory transparency and harmonization would result in positive impacts for U.S. companies. President Rousseff’s visit to Washington is an excellent opportunity to accelerate this agenda