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The weakening of globalization intensified by the war in Ukraine opens a good chance for Brazil to reduce its economic isolation and connect to global production chains for goods and services. But the opportunity will be lost without opening the economy and comprehensive economic reforms that make Brazil more attractive to international companies.
The thesis that the conflict in Eastern Europe opens a “once-in-a-century opportunity” for Brazil was recently raised by Central Bank President Roberto Campos Neto in an event at public spending watchdog TCU. “Brazil has not inserted itself into global chains,” he said. “Now it has an opportunity with the redivision of global chains.”
For geopolitical reasons, the United States and Western Europe would be interested in reducing their dependence on inputs and products not only from Russia, but also from China. Brazil, at least in theory, could benefit, both because of its geographical proximity and because of shared values, such as democracy. Mr. Campos Neto says that, for this to materialize, the country must be “in the right place, with the right policies.”
Experts told Valor that, in reality, the war is a new chapter in the process of “corrosion of globalization,” as defined by economist Adam Posen, from the Peterson Institute, a Washington-based research organization.
“The deglobalization process is not new,” said Lia Valls, an associate researcher at Fundação Getulio Vargas (Ibre/FGV) and a senior fellow at Cebri, a center for studies on international relations. This trend emerged after the 2008 global financial crisis, which hit the working class in the United States, leading it to question the income inequality caused by globalization.
Since then, there have been several attacks on world economic integration, from Brexit to China’s five-year plan focused on the industry to dominate the high value production chains, from U.S. President Donald Trump’s retaliations against the Asian country to the foreign policy of his successor, Joe Biden, aimed at reindustrializing the U.S.
The pandemic intensified this trend, with the restrictions that several countries imposed on exports of health products and equipment. It also led to disruption in global value chains, such as chips and electronic goods, encouraging companies to rethink supply chains and prioritize secure access to inputs over costs and productivity.
In the war, the problem impacts mostly energy, food and minerals supplied to the world by Russia and Ukraine. But the case raises more general concerns about the risk of disruption in the supply of inputs and final products due to geopolitical risks.
“The U.S. and the European Union will not be the ones to guide the revision of global value chains. These are decisions made by the companies themselves,” said Carlos Pio, a professor of international political economy at the University of Brasília and a former executive-secretary of Brazil’s Foreign Trade Chamber, known as Camex.
In the companies’ decisions about where to produce each input used in the value chain, it matters a lot if the country has an open economy, which reduces costs to move products and capital, and if the business environment in general is competitive. “What the Brazilian government can do to better position the economy as a whole is having a pro-market reform agenda,” Mr. Pio said. He is in favor of a unilateral opening of the economy, since the negotiation of trade agreements with other countries generates slow results and our level of protection is high, according to him.
A criterion widely used to measure the level of integration of an economy into global value chains is the share of imported components in exports of industrial goods. In the case of Brazil, this indicator is at 14%, well below Mexico, with 38.4%, according to data compiled by the World Bank.
In a 2020 report on global value chains, the World Bank highlights some government decisions that have hindered integration into global chains. One is the Inovar-Auto program, put in place during the Rousseff administration, which protected the industry and required a high percentage of local content, causing the industry to stop focusing local production on exports.
But integration into global chains has not made any tangible progress during the Bolsonaro administration despite the pro-market economic view. Economy Minister Paulo Guedes has been criticized for his strategy for trade. He has been publicly arguing for a plan to first give equal competitiveness to companies, with the approval of a tax overhaul, and only then substantially lower import tariffs.
Mr. Pio, who was part of Mr. Guedes’s team until July, believes that the Bolsonaro administration has moved in the direction of trade opening by cutting tariffs, although he considers that this process must be accelerated.
Ms. Valls ponders that Brazil’s disconnection from global value chains, although true, has some nuances. First, Brazil is not outside all chains, but rather of some of the most valuable ones. In the case of food, for example, Brazil has a large footprint. And there are some cases where the country is a major player in a high value chain, she said, citing planemaker Embraer.
Brazil has a greater integration, according to data compiled by the World Bank, as a supplier of inputs for industrial exports from other countries. In this case, the percentage is 17.7%, reflecting the export of basic products used in industrial processes in other economies.
Comparisons of international indicators of participation in production chains can show some distortions. Small countries, such as Chile, have few alternatives other than integrating into trade.
“Our internal market is large, and multinational companies historically come to Brazil to take advantage of it,” Ms. Valls said. The question mark is how to get companies to look beyond the domestic market. The geopolitical environment favorable to the relocation of global value chains is not enough. “If you don’t have the conditions of attractiveness, companies will not come.” This includes commercial issues, such as tariffs trade agreements with other economies, but also factors such as macroeconomic stability, clear and stable rules, infrastructure and quality of human capital.
The Ibre/FGV researcher ponders, on the other hand, that Brazil’s greater connection with global chains is not a panacea, which would bring only gains or solve all development problems. “The discussion over the search for productivity has no end,” she said. “If I want to avoid the so-called middle-income trap, I have to invest in development, human capital.”
It is also necessary to ensure that the gains from globalization are not captured only by companies and, therefore, are also shared with consumers. Another concern is to avoid that, in this process of integration into global chains, standards like the preservation of the environment are loosened.
Source: Valor International