brazil and germany: a 21st-century relationship - opportunities in trade, investment and finance
DESCRIPTION
This paper by the Bertelsmann Stiftung in Germany, the Bertelsmann Foundation in the US and the Fundacao Getulio Vargas in Brazil, reviews economic relations between Germany and Brazil, and highlights the opportunities for and bottlenecks to bilateral trade and investment.TRANSCRIPT
Brazil and Germany:
A 21st-Century RelationshipOpportunities in Trade, Investment and Finance
Brazil and Germany:
A 21st-Century RelationshipOpportunities in Trade, Investment and Finance
Viviane Maria Bastos, Andreas Esche, Renato Flores, Samuel George, Antonio Carlos Porto Gonçalves, Thieß Petersen and Thomas Rausch
5
Table of Contents
Table of Contents
Introduction 7
ChapterI: Trade 11
1. AComplimentaryRelationshipwithRoomForGrowth 12
2. TheDriversofTrade 12
3. GermanandBrazilianTradePolicy 16
4. OverviewofBrazilian-GermanBilateralTrade 18
5. ComplicationsinBrazilian-German-Trade 20
6. TowardsaMercosul–EUFTA? 21
7. 21stCenturyOpportunitiesfora21stCenturyRelationship 24
ChapterII:CapitalFlows&Investment 26
1. TheMicroeconomicsofInternationalFinancialFlows 27
2. DirectInvestmentandPortfolioInvestmentfromAbroad,
inBrazilandinGermany 30
3. TheMacroeconomicsofInternationalFinancialFlows 36
ChapterIII:Recommendations 43
1. AFocusonBilateralDirectInvestment 44
2. HarmonizingMonetaryPolicy 45
3. TowardsanAgreementonMigration 47
4. Findingthecommongroundontradepolicy 48
5. Brazil&GermanyasLeadersinEU-MercosulFreeTradeRelations 49
MovingForward:FindingtheCommonGround 51
WorksCited 52
GlobalEconomicDynamics(GED) 56
6
Brazilian-German Trade and Finance: Complements and Caveats
Brazilian-German Trade and Finance: Complements and Caveats
ComplementsEndowment: Natural resources
Brazil is abundantly endowed in natural resources and land, whereas Germany is poor in the first and relatively poor in the second. Therefore, Brazilian exports of natural resources are welcome in Germany, which depends on importing raw materials from abroad.
Endowment: Labor Germany is relatively abundant in skilled labor and less so in unskilled labor. Hence, Germany holds a comparative advantage in producing goods and services that require advanced labor. Meanwhile, populous Brazil is working to improve its education system. Thus Brazil and Ger-many are not competitors with respect to products that either require significant skilled labor or rely upon unskilled labor.
Endowment: Capital and current account balances
In order to enlarge the Brazilian capital stock, large investments are necessary. Brazil’s savings are not large enough to finance domestic investment. Germany has a high income level, high saving rate and current account surplus. Germany’s savings (and current account surplus) are therefore available to finance Brazil’s investment (and current account deficit).
CaveatsContext of trade policy Brazilian and German trade policies are firmly rooted in differences between the countries’
long-standing institutional structures and mind-sets. Brazil’s trade policy places a high pre-mium on developing national industries and promoting the interests of developing countries. Germany’s economic policy is traditionally export-oriented and strongly intertwined with its European neighbors, to the degree that there is no independent German trade policy, only German interests that contribute to the formulation of the EU’s trade policy. These separate approaches can lead to differing trade strategies.
Agricultural products Brazil holds a comparative advantage in many agricultural products, which implies a disadvantage for German producers. German farmers, in turn, are being protected through restrictions and subsidies of the EU’s common agricultural policy. These measures are an object of consistent dispute.
Export-oriented job creation
Both countries have a strong interest in obtaining and maintaining high levels of employment. Increasing exports are a key instrument to satisfy this goal, especially for Germany. As a result, both countries pursue high exports and, consequently, current account surpluses. As all coun-tries cannot simultaneously have current account surpluses, Germany’s surplus might sooner or later become an object of dispute.
Desired outcomes Although Brazil and Germany share the common aim to increase employment by foreign trade activities, they differ with respect to deeper desired outcomes of trade. In Brazil, fighting poverty, increasing the material prosperity of the population and importing technological knowledge are of greater importance than in Germany. In Germany, economic growth and full employment are the primary goals of trade.
Terms of trade and wealth
If the terms of trade of one country rise, that country receives a larger quantity of imported goods for a given bundle of exported goods. Therefore, an increase in the terms of trade of an economy has a positive impact on the wealth of the country. However, given the contrasting export portfolios, an improvement in Brazilian terms of trade would imply a reduction to German terms of trade (and vice versa). This represents an irresolvable trade-off.
Exchange rate policy The real depreciation of the domestic currency has a positive impact on the volume of a country’s exports. If, for example, Brazil tries to increase its exports by devaluing its currency, the result is a relative appreciation of Germany’s currency, which has a negative impact on German exports. As a result, there is another irresolvable trade-off if both countries try to incre-ase exports by devaluing their currencies. However, as a member of the eurozone, Germany has limited influence on the exchange rate.
7
Introduction
Introduction
Onthesurface, itwouldseemthatBrazilandGermanypresentmanyopportunitiesforfruitful
bilateral trade and investment. In terms of comparative advantages, the Brazilian export
portfolio tacksheavilytowardspreciselytherawmaterialsGermanmanufacturersrequire—and
lack domestically. Conversely, German producers specializing in high-end technological and
knowledge-basedgoodscouldfindanexpandingconsumerbasebothintheburgeoningBrazilian
middleclassandinbusiness-to-businesstradewithBrazilianpartners.Intermsof investment,
BrazilwouldappeartobeaprimedestinationforsurplusGermansavings.Forexample,Brazil
facesaninfrastructuredeficitwhileGermanfirmshaveachievedparticularsophisticationinthis
field.ForGermanfirms,investmentinthissectorinBrazilcanofferreturnscurrentlyunavailable
incontinentalEurope.
To an extent, the statistics reflect the growing opportunities between the two. As this study
demonstrates,bothbilateraltradeandinvestmenthaveincreasedinrecentyears.Nevertheless,
the relationship has yet to reach its full potential. Politics and policies have curtailed trade
expansion.Brazil’smembership in theMercosul tradeblocandGermany’smembership in the
EuropeanUnionhavehamperedthepair’sabilitytoforwardabilateraltradeagreement,aseach
blocmaintainscertaindefensivepositions that limit theother fromexercising its comparative
advantages. Capital flows between the two countries—especially long-term foreign direct
investments—remainunderwhelming.
Thispaper,jointlyauthoredbyeconomistsandpoliticalscientistsfromtheBertelsmannStiftung
ofGermanyandtheFundaçãoGetúlioVargasofBrazil,reviewseconomicrelationsbetweenthe
two countries with a particular focus on highlighting the opportunities while addressing the
bottlenecksthatslowbilateraltradeandinvestment.Thetextisorganizedasfollows:
• ChapterI,authoredprimarilybyspecialistsfromtheBertelsmannStiftung,reviewsthestate
ofBrazilian-Germantrade.Thechapterreviewseachcountry’sdriversoftradeaswellaseach
country’stradepolicies.Itcontinuestoanalyzethenatureofthebilateraltradeitself,aswellas
policyissuesthatpreventfurthertrade.ThechapterthenreviewsprogressonaMercosul-EU
freetradeagreement,andconcludesbyconsidering21stcenturytradeopportunities.
• ChapterII,authoredprimarilybyspecialistsfromtheGetúlioVargasFoundation,considers
investment, comparing German and Brazilian capital flows against what traditional theory
predicts.Thechapterdistinguishesbetweenmoretransientportfolioinvestmentandlonger-
termforeigndirectinvestment.Italsoreviewshowalackofharmonizationinmacroeconomic
policycanleadtodistortionsinfinancialflows.
8
Introduction
• ChapterIIIattemptstodrawtangibleandactionablerecommendationsbasedonthefirsttwo
chapters.This chapter accepts thatGermanyandBrazilmaypursuedifferingpolicies, and
areconstrainedbytheirrespectiveregionalblocs,butitarguesthatcommongroundexists.
Forthcomingpolicycanbegearedtowardsthiscommonground.
Inthe21stcentury,neitheremergingmarketsnordevelopedcountriesalonecansustainglobal
growth.Rather,itwillbetheinteractionbetweentheknowledgeofadvancedeconomiesandthe
dynamismsofemergingeconomiesthatwillmostlikelymotorglobalgrowth.WebelieveBrazil
andGermanycanbeattheforefrontofthisinteraction.
This text represents the outcome of a year-long collaboration between Bertelsmann Stiftung
and the Fundação Getúlio Vargas. Moving forward, both sides are dedicated to continuing the
explorationofbilateraltiesbetweenBrazilandGermanyandtohelpingbuildatruly21stcentury
relationship.
Priortoaddressingthefutureoftherelationship,thisintroductionfirstoffersaperspectiveonthe
pastandthepresent.
Brazil and Germany: Two countries with strong historical ties
BilateralrelationsbetweenBrazilandGermanyarelong-standingandcomprehensive.Thehistory
ofGermanimmigrationtoBraziltracesbacktothe16thcentury.Thisimmigrationincreasedat
thebeginningofthe19thcentury;from1872through1939,nearly200,000Germansimmigrated
toBrazil.Thistidereachedanapexbetween1920and1929,when76,000Germanscrossedthe
Atlantic to Brazil. In the 1940s and 1950s, people of German origin accounted for roughly 20
percentofthepopulationinsomeBrazilianstates,suchasSantaCatarinaandRioGrandedoSul
(seeGregory,2013,pp.114–121).
Thesestrongtiesresultedinanintensivebilateraleconomicpartnershipstartinginthesecond
halfofthe1950s.In1954,forexample,theGermansteelcompanyMannesmannbeganoperations
inBrazil.In1955,Sofunge,whichlaterbecameapartofMercedes-Benz,didthesame.German
automakerVolkswagenopenedaplantin1959.Inthe1970s,Germancommitmentreacheditspeak
whenGermancompaniesfromheavyindustry,chemicalindustry,machinery,plantengineering
andtheautomobileindustryinvestedlargesumsofmoneyinBrazilandestablishednumerous
plants.Duringthe1980s,Germancompaniesandinvestorsreducedtheirinvolvementsbecause
oftheeconomicdownturninBrazil.Nevertheless,atpresentthereareabout1,600companiesin
BrazilwithGermancapital,andGermanchambersofcommerceinSaoPaulo,RiodeJaneiroand
PortoAlegre(seeLohbauer,2013,pp.133–135and144–145).
9
Introduction
Thereisalsoastrongtraderelationshipbetweenbothcountries.Brazilisbyfarthemostimportant
LatinAmericantradingpartnerforGermany,whileGermanyisatpresentthefifthorsixthmost
importanttradingpartnerforBrazil,behindChina,theUS,Argentina,theNetherlandsandJapan
(seeLohbauer,2013,p.144).
RelationsbetweenBrazil andGermanyarenot restricted to economic ties. Formore than140
years,thetwohavebeenlinkedbyactivebilateraldiplomaticrelations.Peopleinbothcountries
share important values, most notably for democracy and corresponding institutions. Bilateral
cooperation has occurred on issues including education, culture (there are, for example, five
Goethe-Instituts inBrazil),scienceandtechnology,climatechangeandenvironment, laborand
socialaffairs,energyandinternationalcrisismanagement.
Theseextensiveconnectionsformasoundbaseofmutualtrust,respectandsupportthatserves
asthefoundationforanexpansionofbilateraleconomicrelationstothebenefitofbothcountries.
Brazil and Germany: The largest economies of their respective regions
BrazilisthecoreeconomyofLatinAmerica,andGermanyplaysthatrolefortheEU.Measuredin
termsofgrossdomesticproduct(GDP),Germanyhasa20percentshareoftotalEUGDP,while
Brazil’s share of Latin American and Caribbean GDP is even larger, accounting for almost 38
percent(seeTable1).
TheimportanceofBrazilandGermanytotheirrespectivegeographicalregionsisalsoreflected
inpopulationsize.Germanyaccountsforroughly16percentoftheentireEUpopulation,while
BraziliansaccountforathirdoftheLatinAmericanandCaribbeanpopulation(seeTable2).
Table 1: Estimated Gross Domestic Product (GDP) in 2013, expressed in current prices
Region/Country GDP absolute in US$ (Billions) Share of the relevant region in percentEuropean Union (EU) 17.267 100.0 Germany 3.593 20.8
Latin America and the Caribbean 5.774 100.0 Brazil 2.190 37.9 Source: International Monetary Fund, World Economic Outlook Database, October 2013.
10
Introduction
Henceduetotheireconomicstrength,BrazilandGermanycanbeconsideredanchoreconomies
forLatinAmericaandtheEuropeanUnion.
Table 2: Population, expressed in millionsRegion/Country Population mid-2013 Share of the relevant region in percentEuropean Union (EU) 506.0 100.0 Germany 80.6 15.9
Latin America and the Caribbean 606.0 100.0 Brazil 195.5 32.3 Source: World Population Reference Bureau: World Population Data Sheet 2013, p. 8–11.
11
Chapter I: Trade
Chapter I:
Trade
1. A Complementary Relationship with Room for Growth 2. The Drivers of Trade 3. German and Brazilian Trade Policy 4. Brazilian-German Trade 5. Complications in Brazilian-German Trade 6. Towards a Mercosul – EU Free Trade Agreement? 7. 21st-Century Opportunities for a 21st-Century Relationship
12
Chapter I: Trade
Chapter I: Trade
This chapter reviews thedrivers of trade forBrazil andGermany, aswell as theopportunities
inherentinthepair’sbilateraltraderelationship.Section 1offersabriefoverviewofBraziland
Germany’s complementary relationship with room for growth, while Section 2 considers the
driversoftradeforbothcountries.Section 3reviewsGermanandBraziliantradepolicy,which,
inturn,influencesSection 4,whichanalyzesactualGerman-Braziliantrade.Section 5considers
thecomplicationsofthattrade,whiletheSection 6reviewsprogresstowardsaMercosul-EUFree
TradeAgreement(FTA).
1. A Complementary Relationship With Room for Growth
TheBrazilian-Germantraderelationshipismutuallybeneficialandgrowing.Burgeoningcommerce
stemsfromcompatibleexportportfoliosandnationalendowments.GermandemandforBrazilian
rawmaterialsismatchedbyBraziliandemandforhigh-qualitygoodsmanufacturedinGermany.
Germany offers Brazil diversification away from predominant partners such as China and the
US,aswellasaccesstocapitalandcutting-edgetechnology.Meanwhile,BraziloffersGermanya
modicumofresourcesecurity,aswellasaccesstoamassiveandrapidlyexpandingmiddleclass
whosemembersarepotentialcustomersforGermanindustrialgoods.
Unfortunately,thetraderelationshipisnotdictatedbyeconomicsalone.Inbothcountries,trade
policyispartiallyshapedbypoliticalandinstitutionalfactorsthatmaymakethepathtoimproving
therelationshipmorecomplicatedthansimplyincreasingbilateralinvestment.
2. The Drivers of Trade
Drivers of Brazilian Foreign Trade
DeterminingBrazil’s factorendowmentsismoredifficult thaninitsregion’s lesseconomically
dynamiccountries,suchasArgentinaandChile,becauseofBrazil’s large,complexportfolioof
imports and exports (Muriel and Terra, 2009). Moreover, the country’s true abundances and
deficiencieshavemost likelybeenobscuredorat leastdistortedbyyearsofprotectionist trade
policy.
Despitethiscaveat,certainfactortrendsareclear.Inparticular,Brazilenjoysstrongendowments
inlaborandespeciallylandandnaturalresources.Withapopulationofmorethan200million
andastill-developingschoolsystem,Brazilmaintainsfactorabundanceinunskilledlabor.This
abundanceisoftenexploitedthroughagriculturallaborsuchascoffeecultivation.Brazil,which
isthefifthlargestcountryintheworldbyareabuthasarelativelylowpopulationdensity,clearly
13
Chapter I: Trade
hasanabundanceofland.Itisrichinnaturalresources,includingfertileland,minerals,waterand
forests.Braziliantradepatternsalsoindicateadegreeofcapital.MurielandTerrapositthatthis
capitalcouldreflectinteractionswithevenless-developedcountries,oraresidualdistortionfrom
theimportsubstitutionindustrialization(ISI)period.
In Brazil, the volume and structure of exports is heavily influenced by an abundance of raw
resources, high commodity prices and strong global growth levels. Brazil is rich in mineral
resources such as iron ore and agricultural products such as soybeans that are vital for large
emergingmarkets,specificallythosepursuinganurbanizationstrategysuchasChina.Emerging-
marketgrowthand,subsequently,strongcommoditypriceshavebeendriversofBrazilianexports
in the21stcentury.Beyondcertainniche industriessuchasEmbraeraircraft,Brazilianexport
expansioninrecentyearshasbeenpushedbyglobaldemandforrawmaterials.
Brazilianimportsaretypicallydrivenbytheneedtosupplydomesticmanufacturerswithparts,
aswellastheneedtosatisfyBraziliandemandformanufacturedgoodsbeyondthecapacitiesof
domesticfirms.Stronggrowthinformalemploymentandrealwages,combinedwithinitiatives
such as the conditional cash transfer program Bolsa Familia, have lifted tens of millions of
Braziliansfrompovertyandhavecreatedagrowinglower-middleandmiddleclassofconsumers
whocannowaffordimportedmanufacturedgoods.Therecenteconomicgrowthhasalsofostered
anupperclasskeenonhigh-endEuropeanimports.
Brazil’sendowmentweaknessappearstolieinitsrelativelackofskilledlabor,suchasengineers.
Hereit isimportanttodrawregionaldistinctions,asBrazil’slaborendowmentisdifferentiated
acrossthecountry.UrbancenterssuchasSãoPauloandRiodeJaneiromayhavemoreaccessto
skilledlabor.Otherareas,suchasthenorthandthenortheast,arelackinginit.Overall,Brazil
is experiencing a shortage of skilled labor in important industries such as infrastructure and
resourceextraction.
Regardingoverallcompetitiveness,Brazilhasdemonstratedtremendouspotentialbut lingering
inefficiencies.Thecountryishometoasophisticatedbusinesscommunityandhastheadvantages
of a massive internal market. But its competitiveness is hindered by, among other things,
infrastructuredeficienciesthatcostBrazilianbusinessesbillionsofdollarsannually.1
1 Accordingtoa2010MorganStanleyBluePaper,Brazilianfieldsproducegraintwiceasfastastherestoftheworld,butgettingthatgraintoportacrossunpavedroadscancostalmosthalfitsvalue.Meanwhile,vastmineraldepositsremainburieddeepwithin the earth for want of railroads to transport the goods. Statistics support these anecdotes. The paper found the thatBrazilianinfrastructureinvestmenthasbeenonaconsistentdecline,from5.4percentofGDPinthe1970sdownto2.1percentinthe2000s—onlyslightlyabovetheestimated2.0percentrequiredtosimplymaintaintheexistinginfrastructurestock(SeePaiva2010).Asa result, theWorldEconomicForum’sGlobalCompetitivenessReport2013–2014 ranksBrazil114thof148countriesinqualityofoveralltransportinfrastructure(WorldEconomicForum2013).
14
Chapter I: Trade
Drivers of German Foreign Trade
In Germany the volume and structure of exports and imports are mainly determined by an
abundance of capital, a well-trained work force, favorable unit labor costs, a high standard of
scientificandtechnicalknowledge,supply-chainintegrationwithinEuropeandthelackofnatural
resources. Hence the German economy depends on importing raw materials from abroad and
exportingmanufacturedproductsthatcontainahighdegreeofhumanandphysicalcapital.
Germanyhasahighlyskilledandspecializedlaborforce,whichcaninparticularbeattributedtothe
country’ssystemofvocationaleducation.This“dualeducationsystem”combinesapprenticeships
inacompanywithtraininginvocationalschools.Asaresult,Germanycanbedescribedasan
economythatiswellendowedinskilledlaborbutrelativelypoorlyendowedinunskilledlabor.
Thusthecountryexportsgoodsandservicesproducedwiththehelpofskilledlaborandimports
productsfromabroadthatrequireunskilledlabor.Intermsofcapital,Germanycanbeclassified
asacapital-richcountry,andthereforetheoreticallymeanttoexportcapital-intensivegoodsand
services.
Another driver of the volume and structure of German exports is the country’s high level of
technology, which allows Germany to export high-tech products, knowledge and technology-
intensivegoodsandservices.One indicatorofGermantechnologicalprowess is thenumberof
annualpatentapplications.In2009,Germanyrankedfifthinthenumberofpatentapplicationsper
onemillionemployedpersons,aheadofallotherlargeindustrialcountries(Expertenkommission
ForschungundInnovation,2012).
Despite being labor-poor in a global context, Germany benefits from favorable labor costs per
unit.Thoughit isahigh-wagecountry,growthofwagesoverthepast15yearshasbeenlower
thaninotherdevelopedeconomies.Therestraintonwagesisrootedprimarilyinaperiodofhigh
unemploymentandstructuralreformofthelabormarketinthe2000s,aswellasaweakeningof
thebargainingpowerofGermanunions.
Followingreunificationin1990,unemploymentinGermanyreacheddoubledigitsby1994and
remained elevated for more than a decade. Persistent high unemployment and the increasing
possibility of outsourcing jobs to Central and Eastern Europe exhorted significant downward
pressureonGermanrealwages.Inresponsetothecontinuingemploymentcrisis,thegovernment,
underChancellorGerhardSchröder,enactedasetof labormarketreformsaimedat increasing
participationinthelaborforcebyallowingformoreflexibleformsofemploymentandreducing
benefitstothelong-termjobless.Thesereformsalsoactedtoslowwagegrowth.Finally,andrelated
tothesestructuralchangesoftheGermaneconomy,theunionizationofthelaborforcedecreased
significantly.In1990,morethan11millionpeopleweremembersofaunion.By2011,membership
haddroppedto6.15million.
15
Chapter I: Trade
Another driver of German exports is its membership in the EU and the eurozone. Germany’s
central location in Europe and high degree of integration with neighboring countries through
thecommonEuropeanmarkethasledtostronggrowthinintra-industrytradebetweenGermany
and other European countries. German producers draw on asupply chain that includes firms
in many European countries and makes use of advantageous product specialization and cost
competitiveness(i.e.,lowerlaborcostsinCentralandEasternEurope).Themonetaryunionofthe
eurozonealsobenefitsGermancompetitivenessbypreventinganappreciationofthecurrency.
Inaseparatestudy,theBertelmannStiftungestimatesthatiftheseparateGermancurrencystill
existed,itwouldhaveappreciatedbyroughly23percent,whereasthecurrenciesoftheremaining
countries of the eurozone would have been devalued by an average of nearly seven percent
(Bertelsmann Stiftung, 2013a). Such an increase in relative prices would have had a negative
impact onGermanexports.At the same time,German importswouldhave increased.Beinga
memberof thesingleEuropeancurrency,Germanydoesnotsuffer fromanappreciationof its
currencybecausetheexportsofall17countriesusingtheeuroaremoreorlessbalancedtothe
imports–atleastuntil2011.
Evaluatingtheoverallcompetitiveness,Germanyisspecificallystronginmacroeconomicstability,
capacityforinnovation,quantityandqualityoflocalsuppliers,judicialindependence,intellectual
propertyprotectionandqualityofoverallinfrastructure.Germanymaintainsalargetradesurplus
andacurrentaccountsurplus.
Figure 1: Labor costs per unit across countries and times (index: labor costs per unit in the base year 2000 = 100)
Source: OECD, calculations of the Institute for the Study of Labor (IZA), Bonn.
UK Italy Canada
USA Germany OECD
France
60
70
80
90
100
110
120
130
140
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
16
Chapter I: Trade
3. German and Brazilian Trade Policy
Brazilian Trade Policy
Braziliantradepolicyhashistoricallybeenprotectionist,datingbacktothe importsubstitution
industrialization (ISI) model of development employed during the middle of the 20th century.
Sincethemarket liberalizationof the1980s,Brazilhasembarkedonacourseofrelativetrade
openness, lowering tariffsunilaterally andpursuing regional trade integrationwithArgentina,
UruguayandParaguayviaMercosul.
ImplementationofBrazilian tradepolicy isoverseenby theMinistryofDevelopment, Industry
andTrade,theministerofwhichalsoservesasthechairmanoftheChamberofForeignTrade
(CAMEX).ThisbodywascreatedbythegovernmentofPresidentFernandoHenriqueCardosoin
1995toensuremulti-agencypolicycoordinationaswellastoadvisethepresident(Cantarinoda
CostaRamos,2010).AsamemberofMercosul,Brazilisrequiredtonegotiatenewtradeagreements
withtheregionalblocasawholeratherthanbilaterally.Afterbeingstalledforanumberofyears,
EU-Mercosulnegotiationsrestartedin2010.
Brazil’scurrenttradepolicystillhasattributesinheritedfromitsISIperiod,withanemphasison
protectionofimport-competingsectors,notablyautomobiles,electricalandelectronicequipment,
textiles,clothing,rubberandplastics(DaMottaVega,2009).Protectiongenerallytakestheform
not only of tariffs but also of non-tariff barriers, including complex import licensing schemes,
importfeesandanti-dumpingduties,whichincreasedfrom63measuresin2008to83measures
inmid-2012(WTO,2009;WTO,2013).2
InMay2010,asa resultofadeteriorating tradebalance inmanufacturedgoods, theBrazilian
governmentintroduceda25percentpreferencemarginingovernmentprocurementfordomestic
biddersaswellasanincreaseinimporttariffsoncarparts(Cornetetal.,2010).In2011,Brazil
implementeda30percenttaxonimportedvehicleswhileexemptingdomesticallyproducedcars
andtrucks,inameasureoriginallyintendedtolastoneyearbutextendedforfiveadditionalyears
in2012.ThesemeasureshaveresultedinaformalrequestforconsultationsattheWTOfiledby
theEuropeanUniononDecember19,2013.
Brazil’stradepolicyalsofeaturesexportpromotion.ToolsforthisincludetheExportFinancing
Program(PROEX),primarilytargetingsmallandmedium-sizedenterprisesthatotherwisestruggle
toobtaincredit,aswellastheExportGuaranteeFund(FGE).In2012,PROEXprovidedUS$4.88
billion to Brazilian exporters. Between 2009 and 2012, FGE supported 253 export operations
totalingUS$32.6billion.3Finally,theBrazilianDevelopmentBank(BNDES)hasseveralprograms
inplacetoeasetheinterestrateburdenonexporters(WTO,2013).
2 Morethanhalfoftheanti-dumpingmeasuresinplacein2011weredirectedagainstChina(Lima/Ragir2011).
3 FGEsupportedtheseexportoperationsbyguaranteeingupto100percentofthecommercial,political,andextraordinaryrisk.
17
Chapter I: Trade
German Trade Policy
Germany’spreferenceforglobalintegrationisalsoawell-acceptedguidelineforitspolicymakers.
GermantradepolicyisformedandimplementedbytheFederalGermanMinistryonEconomics
andTechnology (BMWi).Theministryhas fosteredanumberof initiatives to improveGerman
competitiveness.4TheGermanOfficeofEconomicsandExportControl(BAFA)supportssmalland
medium-sized enterprises and oversees export and import regulations (BAFA, 2012). Germany
TradeandInvest(GTAI)isanagencythatpromotesGermanyasalocationfordoingbusinessand
assistscompaniesoperatinginforeignmarkets.
However,Germanycannotcontrolitsowntradepolicy.AspartoftheEuropeanUnion,itisonly
throughtheintergovernmentalinstitutionoftheCounciloftheEuropeanUnion(CEU),aswellas
thesupranationalEuropeanCommission (EC)andEuropeanParliament (EP), that tradepolicy
involving Germany (setting of tariffs or negotiation in the WTO and other pacts, for example)
canbecreated.WhiletheEUconsiderstradeliberalizationessentialtofurthereconomicgrowth,
there are also countries and industries that represent important protectionist interests within
theunion.Thestanceofasinglemembercountry,evenanimportantonesuchasGermany,can
oftenremainunclearasitishiddenbehindtheveilofthecommonEUpolicythatrepresentsa
consensusamong28nationalpolicypreferences.TheEUhasprioritizedtheliberalizationinareas
suchastradeinservices,publicprocurementandprotectionofintellectualpropertyrights.Itis
alsoconcernedwithsecuringsuppliesofrawmaterialsandenergyfortheindustrialcountries(EC,
2011).However,theEUalsopursuesapolicyofprotectingcertainindustries,notablyagriculture,
viahighmost-favorednation(MFN)tariffsaswellasprovisionofsubsidiestoEuropeanfarmers,
whichhasconsistentlyfrustrateddevelopingcountries(WTO,2013a).
The EU Generalized System of Preferences (GSP) grants preferential access to the EU market
fordevelopingcountries.TheEUrevisedtheGSPin2013to focusonassisting least-developed
countries rather than middle-income countries. As of January 1, 2014, a number of countries
thathavebeenclassifiedashighorupper-middle-incomecountriesnolongerbenefitfromthese
preferences.Brazil,alongwithallMercosulmembersexceptParaguay, isamongthecountries
thathavelostthispreferentialaccess.
4 Theinitiativefeaturesfourelements:1)Supportingsmallandmedium-sizedGermancompaniesabroad,particularlyinemergingmarkets; 2) Exhausting all the mechanisms available to trade policymakers, including a marketing campaign for investingin Germany, company match-making, and the realignment of export development schemes and export credit guarantees;3)Reducingbureaucracybyabolishingunnecessaryexportregulationsandacceleratingtheprocessforgrantingexportandinvestmentcreditguarantees;4)StrengtheningtheinternationaltradeframeworkbyworkingtowardsthesuccessfulconclusionoftheDohaRoundandthenegotiationsabouttheAnti-CounterfeitTradeAgreement(ACTA)aswellasconcludingbilateraltradeagreementswithemergingeconomiesinAsiaandLatinAmerica.
18
Chapter I: Trade
4. Overview of Brazilian-German Bilateral Trade
Brazilian-Germantradehasconsistently increasedoverthepastdecade, thoughgrowthslowed
following the economic crisis of 2008–2009. Of major EU member states, Germany is by far
Brazil’slargesttradingpartner,bothintermsofimportsandexports.GermanyiscurrentlyBrazil’s
fourthlargesttradingpartnerbehindChina,theUSandArgentina(GED,2013).
TheGerman-BrazilianconnectionfuelstradebetweentheEUandSouthAmerica.In2010,Germany
accountedforonethirdofallBraziliantradewiththeEU,andthisfigurelikelyunderestimatesthe
totalvalueowingtotheso-calledRotterdameffect.5
Brazil’smajorexportstoGermanyincludeironore,soyandsoyproducts,coffeeproducts,meat,
copper and crude oil (German Foreign Office, 2012). While raw materials predominate, some
machinery and aircraft parts also figure into Brazil’s German export portfolio. The majority of
BrazilianexportstotheEUoverallarelikewiseinrawcommodities.Twenty-onepercentofeurozone
oreandmineralimportsoriginateinBrazil,asdo11percentofagriculturalimports(EC,2012).
KeyGermanexportstoBrazilincludemachinery,carsandcarparts,aswellasbasicchemicals
andpharmaceuticalproducts(GermanForeignOffice,2012).IncontrastwiththeBrazilianexport
portfolio, German exports to Brazil are overwhelmingly manufactured goods, either for final
consumptionorintermediategoodsandcapitalgoodsforBrazilianbusinesses.Onceagainhere,
German-BraziliantradeisindicativeofthegreaterEU-SouthAmericanrelationship.In2011,for
example,88.5percentofMercosulimportsfromtheEUweremanufacturedgoods,withtradefor
machineryandintransportequipmentaccountingfor49.2percentofthetotal(EC2012).
Intermsofoverallvalue,Brazilian-Germantradeisrelativelybalanced.Brazilhadatradesurplus
withGermanysevenof theeightyearsbetween2003and2010,peakingatUS$2.78billion in
2007.ThissurplushasaveragedonlyUS$1.1billion.Brazil’stradesurpluswithGermanyappears
toreflectatidechangeasBraziltradedatadeficitwithGermanyfrom2000to2003.
ThetransitiondoesnotreflectadecreaseinBrazilianappetiteforGermangoods.Onthecontrary,
GermanexportstoBrazilnearlytripledbetween2000and2010,fromUS$4.43billiontoUS$11.75
billion. Increases in Brazilian exports simply outpaced increases in Brazilian imports from
Germany.
5 The Rotterdam effect refers to goods destined for a given country that enter the eurozone in third countries such as theNetherlands. Incaseswhere thesegoodsare then traded toGermany, these transactionsare recordedasDutch tradewithBrazil,andsubsequentlyaseurozonetradebetweentheNetherlandsandGermany.
19
Chapter I: Trade
Bilateraltradeflowsarecomplementaryandmutuallybeneficial.FromtheGermanperspective,
exportingtoBraziloffersdomesticmanufacturerstheopportunitytoreachthecountry’sgrowing
middle class—a massive new group of consumers. There is also a growing class of extremely
wealthyBrazilianconsumerswhorepresentaprimemarketforhigh-endGermangoods.Finally,
increasedbusinessactivityinBrazilgeneratesopportunitiesforGermanintermediategoodsand
capitalgoodssuchaschemicalsandmachinepartsandequipmentthatmakeupthebackboneof
theGermanexportingsector.
Source: Bertelsmann Stiftung, Global Economic Dynamics
Figure 2: Overview of Brazilian-German trade
Germany Brazil
426.89 bn
Import
497.44 bnExport
46.47
bn
Impo
rt
51.94
bn
Expo
rt
2001
Germany Brazil 0 500 1000 1500 2000 2500
Import Export
178,8
8 bn
Impo
rt
210,8
2 bn
Expo
rt
0 500 1000 1500 2000 2500
2011
Germany Brazil
846.21 bn
Import
957.51 bnExport
69.35
bn
Impo
rt
177.8
8 bn
Expo
rt
2006
0 500 1000 1500 2000 2500
1,091 bnImport
1,242 bnExport
20
Chapter I: Trade
FromtheBrazilianperspective,exporting toGermanyhelpsBrazildiversify its tradeportfolio.
Without trade to Europe, Brazilian commodity exporters could be particularly vulnerable to a
downturninChina.WhileBrazilexecutesagreatervolumeoftradewithbothArgentinaandthe
US,Brazilalsocompeteswiththesenationsonexportssuchassoy,beefandhydrocarbons.Not
onlycanthiscreatetradepolicyfriction,butitalsomeansBrazilmustfindadditionalconsumers
forsuchgoods.Germanyfitsthisdescriptionneatly,asitdoesnotcompetewithBrazilinmost
commoditysectors.
Germanmanufacturesrelyoncommodityimportstogeneratetheirfinishedproducts.Amassive,
politically stable commodity producer such as Brazil can offer resource security for Germany.
Meanwhile,GermandemandforBraziliancommoditiesnotonlyexpandsthequantityofannual
sales,butalsohelpsbiduptheglobalprice—bothtotheadvantageofBrazil.
5. Complications in Brazilian-German-Trade
Despite—orperhapsbecauseof—thecomplementarynatureofthetwocountries’factorendowments,
theEUandBrazilareinvolvedinaseriesoflong-standingtradedisputes.BrazilandtheEUhave
beeninvolvedin12casesbeforetheWTO;sevenofthemwerebroughtbyBrazil,whiletheEUhas
actedasacomplainantfivetimes(foranoverview,seeTable1).
WhileBraziliancomplaintshavefocusedontheEU’simportrestrictionsonagriculturalproducts
andrawmaterials,theEUhasobjectedtowhatitseesasBrazilianprotectionismonintermediate
inputs and final goods. Non-tariff and behind-the-border trade barriers feature prominently in
mostofthedisputes.WiththeEUstillstrugglingtorecoverfromthefalloutofthefinancialand
economiccrisis thatbegan in2008, theriskofprotectionismandnewtradedisputesremains
high.ExpertsfearthatastheDohaDevelopmentAgendanegotiationsremaininastalemate,the
riskof tradedisputesettlement initiationsrisesaswell.Asonediplomatput it, “The lessyou
negotiate,themoreyoulitigate”(Miles2012).
InthecurrentDoharound,BrazilandtheEUholdopposingviewsonmanycrucialissues.Most
importantly, theydisagreeon furtherconcessions foragriculturaland industrialproducts.Due
to the high competitiveness of its farmers, Brazil sees huge potential to increase the global
Figure 3: Overview of trade driversFor Germany For BrazilLarge growing market for German goods , Key trade diversification from USA & ChinaBrazilian development means increased trade opportu-nities for German firms
, German expertise key for Brazilian infrastructure development
Maintain national resource security for manufacturing sector
, German commodity demand increases quantity/prices of Brazilian exports
Global leader in green energy exports , Dedicated to green developmentSource: Bertelsmann Stiftung
21
Chapter I: Trade
marketshareofitsagriculturalproducts.Therefore,ithasbeenparticularlyconcernedwiththe
liberalizationofagriculturalmarkets.Brazilhastakenafairlyaggressivestanceonmarketaccess,
domesticsupportaswellasexportsubsidies(Nogueira,2009).Developedeconomies,inparticular
the EU and the US have offered cuts but they have been rather unrelenting about employing
thespecialsafeguardmeasures(SSM)thatallowforthetemporaryuseofimportrestrictionson
certainproducts(forexample,sugar)incaseofasuddensurgeinimports.
6. Towards a Mercosul-EU Free Trade Agreement?
Given their complementary and growing trade ties, Germany and Brazil would both stand to
benefitfromcloser,directbilateraltraderegulations.However,giventheformer’smembershipin
theEUandthelatter’sassociationwithMercosul,anFTAwouldrequirealargeraccordbetween
thetwoblocs.Asearlyas1995,theEUandMercosulsignedaframeworkagreementandinitiated
adialogueaimingtoestablishfreetradebetweenthetwoblocs.Sincethen,however,negotiations
regardingapossibleEU-MercosulFTAhaveoscillatedbetweennewpushesforanagreementand
lacklusterattemptstohammeroutthedetails.
OnMay29,1992,aJointInstitutionalCooperationAgreementwassignedbytheEUandthe(then)
fourMercosulcountries.InJuly1998,theEUdecidedtonegotiateanFTAwithMercosulandChile;
meetingsanddiscussionsstartedthatsameyear.Negotiationshavesinceoscillatedbetweennew
thruststofixtheagreementandlacklusterattemptstohammeroutthedetails(Flôres,2013a).
Duringthisperiodofmorethan15years,notmanyformalstudieshavebeenmadeonthelikely
impactoftheFTA.
Table 1: Brazilian–EU Trade Disputes before the WTONo. Complainant Respondent IssueDS69 Brazil EU EU tariff quota on frozen poultryDS81 EU Brazil Brazilian measures regulating the import of cars and car parts DS116 EU Brazil New payment terms introduced by the Brazilian Central BankDS154 Brazil EU EU special preferential treatment for soluble coffeeDS183 EU Brazil Brazil’s import measurers for textilesDS209 Brazil EU EU special preferential treatment for soluble coffeeDS219 Brazil EU EU anti-dumping duties on iron imports from BrazilDS266 Brazil* EU EU subsidies for the sugar industryDS269 Brazil** EU EU tariff reclassification of frozen poultryDS332 EU Brazil Brazilian measures regulating the import of tiresDS409 Brazil EU EU seizure of generic drugs destined for BrazilDS472 EU Brazil Brazilian taxation and charges on certain manufactured goods* Together with Thailand and Australia.** Together with Thailand.Source: Bertelsmann Stiftung based on WTO data (as of March 11, 2014).
22
Chapter I: Trade
Inapervasivepartial-equilibriumanalysis,CalfatandFlôres(2006)showthatpotentialEUgains
from such an agreement are much more widespread, in particular for several manufactured
goods,whileMercosulwillreapadvantagesfromanumberofcommodityexports.Inspiteofthe
significanttradedeviationtoChinabymostMercosulmemberssincethetimeofthestudy,the
evaluationsarestillvaluableasupperboundsforgainsattheindividualproductlevel.
Flôres andMarconini (2003) argued thatmany synergies couldbe foundoutside the classical
realmofagriculture.Migrationofhumancapital—aticklishissuefortheEU—couldbearinteresting
andrewardingoutcomes forbothsides; telecommunicationservicesareanotherpotentialwin-
winarea.
NegotiationsofficiallyreopenedinMay2010,withBrazilemergingasakeyleaderinthedialogues.
BothBrazil andGermanycould realizesignificantgains fromanagreement:Brazilian-German
tradeflowsaccountedformorethanone-fifthofEU-Mercosultradein2010.
BrazilwouldverymuchliketocompleteanFTAwithamoredevelopedeconomy.Butdifficulties
andhesitationsstillplaguetheadvancementoftheprocess.OntheMercosulside,Argentina,and
toalesserextentVenezuela,haveposedquiteafewdemandsandobjections.FromtheEuropean
side, despite the extremely positive rhetoric, not much enthusiasm has been demonstrated in
termsofconcessions,whichactuallymimicthepatternofthoseofferedlongago.
Moreover,twonewvariablesareatstake.
ThefirstisChina,anewandmassivemarketthathasconsiderablyeasedtheanxietyofMercosul
commodityexporters—especiallymeatproducers—makingtheEUastillattractivebutlesscrucial
marketthanitwastenyearsago.OntheEUside,beyondtheseveralcrisesstilloccupyingthe
largerfractionoftheBrusselsstaff,inthetradearena,theprospectsofaTrans-AtlanticTradeand
InvestmentPartnership(TTIP)isdrawingconsiderableattention.Thisisacomplicated,ambitious
attempt, with no clear outcome but giving way to an extremely time and human resource-
consumingprocess.
A study by the Bertelsmann Stiftung and the IFO-Institute concluded that in global economic
terms,boththeUSandtheEUwouldprofitfromacomprehensiveTTIP(Felbermayr,2013),with
southernEUmemberstatesandtheUKbeingthemainbeneficiaries.CountriesoutsidetheTTIP,
especiallythosewithveryclosetraderelationswithoneofthetwoblocs,suchasMexico,would
facetradecontractionthatwouldresultindecreasestorealincomeandemployment.
ThestudyforecastsBrazilianexportstotheEUtocontractby9.4percentiftheTTIPisconcluded,
andBrazilianexportstoGermanytocontractby7.9percent.ThestudyalsofindsthatBrazilian
exportstotheUScoulddeclinebyasmuchas29.7percent.Overall,thesecontractionscouldcost
Brazilmorethantwopercentofper-capitaGDP.
23
Chapter I: Trade
The impactonBrazil issomewhatdebatableandpreliminary,ageneralevaluationwithwhich
Flôres(2013b)agrees.Thekeyissue,morethantradedeviation,istheenvisagedunifiedplatform
oftechnicalnorms,rulesandstandardsformanufactures,servicesandcommodities.Thisimplies
thatBrazil,andMercosulaswell,shouldsetataskforcetodeeplyanalyze,outofthepotentially
commonnorms thatcouldresult6, thosewithwhich italreadycomplies, those itwould like to
adopt,andthosethecountryseesnopointinfollowing.Inconductingthiseffort,Germany,withits
closetieswithBrazilianindustryanditssuperiortechnicalexpertise,couldbeafriendlypartner
toBrazil.
InFebruary2012,GermanForeignMinisterGuidoWesterwellevisitedBrazilianForeignMinister
AntonioPatriota,andthetwojointlycalledforprogressintheEU-MercosulFTAdialogues.While
theyconcededthatEurope’ssubsidiestofarmersrepresentacrucialdividingpoint,bothmade
clear that their governments supported an agreement. At a summit meeting in January 2013,
GermanChancellorAngelaMerkelwonthecommitmentofBrazilianPresidentDilmaRousseff
and Argentine President Cristina Fernández de Kirchner to exchange concrete proposals for
loweringtradebarriersbytheendof2013(Emmott,2013),somethingBrusselshasfailedtodo.
On February 24, 2014, Rousseff met with EU leaders to discuss negotiations (GMF, 2014).
Mercosulmembershadmetearlier thatmonthtodiscussa jointproposalontariff reductions.
Additionally,discussionsofthepotentialfornegotiationstomoveforwardwithoutArgentina;aso-
called“two-speed”negotiationprocesshaveemerged.Whilethisapproachwouldrequirerevising
Mercosulrules,BrazilandUruguayhavehintedatpreparationstodosoifArgentinacontinuesto
pursueamoreprotectionisttradepolicy(Mercopress,2014b).Brazil’spowerfulConfederationof
Industries(CNI)hasrecentlycomeoutinsupportofthisidea,notingthatFTAswiththeEUand
USarenecessarytomaintainBrazil’scompetitiveness(Ridout,2014).Paraguayalsoindicatedan
inclinationtofollowtheothertwomembers.
Yetobstaclesremain.Europeanfarmlobbiesplacea€25billionpricetagonapotentialEU-Mercosul
FTA, claiming thatEuropean farmerswill suffer extensive losses in the event of liberalization
of theagricultural sector (Mercopress,2011).TheEC’sownassessment found the losses tobe
considerablylower,rangingbetween€1billionand€3billion(Burrelletal.,2011).Theagricultural
lobby,however,isunlikelytobeconvincedbythecalculationsoftheEC—aknownsupporterof
freetrade.
ThesedevelopmentssuggestBrazilandGermanyshouldexploitdeeperbilateralrelations,without
violatingtherulesoftheexistingcustomsunions,andthatthiswouldcreatemoreopportunities
andtargetedbusinessventuresinatraditionalrelationshipthatisfortunatelybloomingagain.
6 Wesay“potentiallycommonnormsthatcouldresult”becauseinmanyareas,suchasGMOs,theInternetrealmandchemicalgoods,itishardtoconceiveaEU-USharmonization(seealsoFlôres,2013b).
24
Chapter I: Trade
7. 21st-Century Opportunities for a 21st-Century Relationship
ThetraderelationshipbetweenBrazilandGermanyisnotjustcharacterizedbycomplementary
endowmentsandcompetitionbetweennationalindustries.Italsofeaturessignificantopportunities
inso-called“new”or“21st-century”trade—manyofwhichremaintobeseized.
Newtradetheorywasdevelopedasearlyasthe1970s,basedontheobservationthatanincreasing
shareofinternationaltradewastakingplacewithinindustriesandcouldnotbeexplainedbythe
classicaltheoriesofcomparativeadvantageanddifferencesinfactorendowments(Krugman,1979).
Intra-industrytrade,countriestradingfinalgoodsbutalsopartsandcomponentswithinthesame
industry,isseentobedrivenbyfactorssuchasmonopolisticcompetition,consumerpreferencefor
diversity,increasingreturnstoscaleandagglomerationeffects.Intra-industrytradeaccountsfora
largepartoftheexponentialgrowthofinternationaltradeintheageofglobalization(beginningin
the1990s),asopenbordersaswellasfallingcostsoftransportationandcommunicationallowed
forsupplychainintegrationacrosscountries.
BrazilandGermanyhavetakenremarkablydifferentapproachesto thesedevelopments.While
Germanyhasembracedintegrationintoregionalglobalsupplychains,Brazilhasgenerallyfavored
verticalintegration—thelinkingofvariousstagesofproductionwithinacountry.
ForGermany,supplychainintegrationcamenaturallygiventhecountry’scentralpositioninthe
commonEuropeanmarket,scarcityofresourcesandhighdegreeofindustrialspecialization.The
openingofCentralandEasternEurope’seconomiesinthe1990sprovidedaspecialopportunity
forGermanbusinessestotapnotonlynewmarketsbutalsonewsourcesofrelativelycheaplabor.
OutsourcingorrelocatingpartsofproductiontoGermany’seasternneighborsallowedcompanies
tofocusonthestagesofproductionmostefficientlydoneathome,increasingoverallproductivity.
InBrazil,verticalintegrationislargelyarelicoftheISImodelofdevelopmentofdecadespast.
Thecountry’sprotectionofindustriesthroughtariffandnon-tariffmeasuresandpreferencefor
domesticindustryisoneimportantfactorpreventingsupplychainintegration.Anotherkeyfactor
isitsgeographicdistancefromtheworldeconomy’smostdynamicandintegratedregions(Europe,
NorthAmerica,EastAsia),combinedwithpoor logistics infrastructure.Withtheestablishment
of Mercosul in 1991, Brazil bet on its own model of regional integration. Mercosul has led to
some supply-chain integration in the region—a notable example is the automotive industry in
BrazilandArgentina—butMercosul’sclosedapproachtotheoutsideandlongstagnationinterms
ofdeepeninginternal integrationhasseverely limitedthesupplychainintegrationofBrazilian
industries.Interestingly,theonlyindustrialsegmentinBrazilwithstronginternationalintegration,
aerospace (heavilyconcentratedaroundaircraftmanufacturerEmbraer), isalsooneof the few
Brazilianmanufacturingsegmentsexperiencingstronggrowthinrecentyears.
25
Chapter I: Trade
Consideringtherangeofindustriespresentinbothcountries,increasedsupplychainintegration
betweenBrazilandGermanyshouldpresentsignificantopportunitiesforbothcountries,especially
inthemanufacturingsector.ForBrazil,transferofGermanknowledgeandtechnologycouldhelp
firmsbecomemoreefficient.ForGermany,Brazilpresentsnotjustanattractivemarketbutalsoa
potentialsourceofinputs(thoseincorporatinglaborandnaturalresources)andeventechnology
inareaswhereBrazilianfirmshavefoundniches(e.g.biofuels,aerospace).
Supplychainintegrationisalsolinkedtoanotherimportantnewthemeininternationaltrade:trade
inservices.Theproductionoffinalgoodsinamodern,globallyintegratedindustryincorporates
notjustalargenumberofcomponentsorintermediategoodsbutalsoarangeofservices,manyof
whichcanbegloballysourced.Thesetradableservicesincludediverseactivitiessuchastransport,
logistics,IT,finance,insuranceanddesign.Inadditiontosuchbusiness-orientedservices,tourism
isalsoagrowingtradableservice.
Astradeinserviceshasgrown,Brazilhasnotfullytakenadvantageoftheresultingopportunities.
This isnosurprise, asbusinessservices tend tobeclosely linked to supplychain integration.
Germanyhowever,isalsorelativelypoorlyintegratedinglobalservicestrade,asmanyimportant
sectors remain closed. Hence, services present an opportunity for both countries to deepen
integrationwitheachotheraswellaswiththerestoftheworld.Tourismalsopresentsabilateral
opportunity.Brazil,withitsplentifulsunshineandlushbeaches,shouldbeabletotapintothe
marketforsun-hungryGermans,rivalingtheCaribbeanandSoutheastAsiaasawarm-weather
touristdestination.Bythesametoken,Germanyhassofarmissedoutonthedramaticincreasein
Brazilianstravelingabroad.GiventhatmanyBraziliansareofGermandescentandthecountryhas
muchtoofferintermsofhistoryandculture,thereisagreatopportunitytoattractmoretourists.
AnotherinterestingareaofopportunityforintegrationbetweenGermanyandBrazilisinthearea
ofgreenenergyandbiofuels.Bothcountriesareleadersinsubsectorsinthisareabutcooperation
hasbeenlimited.Brazilhasbeenleading inthedevelopmentofethanolmadefromsugarcane
(a more efficient source than corn or other plants) and related technologies such as flex-fuel
engines(thatrunongasoline,ethanoloranymixtureofthetwo)andelectricityfromthebiomass
byproducts of sugarcane (rather thanbeingnet consumers of electricity,Brazilian sugarmills
actuallysupplysignificantamountstothegrid).Germany,meanwhile,hasbeenaleaderinthe
development of solar panels and wind turbines, which are clearly an attractive energy option
for Brazil. However, instead of benefiting from each other’s strengths, each country has taken
aprotectionistapproachtowardstheother’sproducts,withcostsforbotheconomiesaswellas
theenvironment.GiventhatBrazilandGermanybothaspiretobeleadersontheglobalclimate
agenda,greatercooperation in thisareashouldbeapoliticalpriority. In the20thcentury, the
twocountriescooperatedinthedevelopmentofnuclearenergy,withtheGermanfirmSiemens
supplying thereactors forBrazil’snuclearplant inAgradosReis.Whynotembarkonsimilar
cooperationonenergysourcesforthe21stcentury?
26
Chapter II: Capital Flows and Investment
Chapter II:
Capital Flows and Investment
1. Financial Flows 2. Foreign Direct Investment and Portfolio Investment 3. Macroeconomic Stability and International Financial Flows
27
Chapter II: Capital Flows and Investment
Chapter II: Capital Flows and Investment
ThischapteroutlinesthekeyissuesinfluencingfinancialflowsandinvestmentbetweenGermany
andBrazil.Section1reviewsthemainfactorsinfluencinginternationalfinancialflows,asrevealed
bytherelevantliterature,whileSection2describesandanalyzesdataondirectforeigninvestment
andinternationalportfolioinvestment,withaparticularfocusonBrazilandGermany.Section3
analyzesthelinkbetweenmacroeconomicstabilityandinternationalfinancialflows,particularly
in light of recent Brazilian exchange rate volatility, and concludes by briefly considering the
potentialbenefitsofmacroeconomicpolicyharmonization.
1. The Microeconomics of International Financial Flows
Thefinancialdecisionsofforeigninvestorsareinfluencedbyexpectedrisksandreturns,asisthe
caseofanyfinancialflow.Theeconomicroleofinternationalfinancialflowsistotransfersavings
betweencountries.AccordingtoLucas(1990),oneshouldthusexpectlargecapitalflowsfromrich
topoorcountries,giventhatthelowerratioofcapitalperworkerinpoorcountrieswouldimply
largermarginalreturnstocapital.However,asReinhartandRogoff(2004)noted,externaldebtper
capitadoesnotseemtofollowthislogic.Rather,thelargertheincomepercapitaofacountry,the
largertendstobeitsexternaldebtpercapita.GertlerandRogoff(1989,1990)showthatthereis
evidenceofexpandingcapitalflowsfrompoortorichcountries,whileAlfaroetal.(2003)present
evidenceofincreasingdirectforeigninvestmentincountrieswithhighpercapitaincome.
Finally,ReinhardandRogoff (2004) found thatagroupof20orsoemerging-marketcountries
receivethebulkoffinancialflowsfromrichercountries,withtheremainingdevelopingcountries
generallyreceivingfundsthroughaidanddirectforeigninvestment.Theseempiricaldisagreements
withLucas’sexpectationsregardingcapitalflowshavecometobeknownasthe“LucasParadox.”
Whilethiscouldbepartiallyrelatedtothephenomenonofthe“homebiaspuzzle”(reviewedin
Lewis,1999,thisreferstothepreferenceofinvestorstoinvestintheircountryoforigin),thereare
severaladditionalfactorsinvolved,someofwhicharediscussedbelow.
Scarcity of Human Capital and Natural Resources
ContrarytoLucas’spostulation,thereturnstocapitalarenotnecessarilyhigherinpoorcountries.
Onekeyreasonisthatequipmentandphysicalcapitalingeneralarecomplementaryfactorsof
productiontohumancapitalandnaturalresources.Consequently,therelativescarcityofhuman
capitalinmanypoorcountriesandofnaturalresourcesinwealthierones,decreasesthemarginal
productofphysicalcapital.
28
Chapter II: Capital Flows and Investment
ThiscontentionissupportedbyCaselliandFeyrer(2007),whodevelopedamethodologytocorrect
themarginalproductofcapital(MPC)thataccountsforitscomplementaritieswithhumancapital
andnatural resources. They find that although there are significant differentials in calculated
MPCbetweenrichandpoorcountriesaccordingto“naïve”methodologies(11.4inrichcountries
against 27.2 in poor ones), corrections for the complementarities between capital and human
capitalaswellasnaturalresourceslargelyequalizesthem(8.4forrichcountriesagainst6.9for
poorcountries),suggestinginfactthatrichcountriesmayhaveasomewhathigherMPC.
If capital, despite being the relatively mobile factor of production, must have complementary
humancapital(and/ornaturalresources),onemayaskwhethermigrationofworkerscouldnotbe
animportantforceequalizingmarginalproducts.Therecentintensificationofinternationallabor
migrationsuggeststhatitis,tosomeextent,butthattherearestillrestrictionsandconstraints.
These includeconflicts (religious, ethnic)andpecuniaryandnon-pecuniarycostsofmigration
(legal restrictions, differences of cultural values, habits, loss of relations and network, lack of
informationetc.).
Brazil has ample natural resources, but its dearth of human capital may discourage potential
investors,atleastintheshortandmediumterms.Thecountry’seducationsystemdoesnotprovide
thenecessarynumberofqualifiedworkers,norhasmigrationrecentlybeenabletofillthisgap.
Institutional Quality
Another factorbehind the relativescarcityofcapital inpoorcountries is the increasedriskof
investment. Papaionnau (2004, 2009) examined the financial flow data from banks of 140
(industrial, emerging and underdeveloped) countries. His main finding was that institutional
qualityisakeycorrelatetoforeignbanklending.Acountrywithpoorlyperforminginstitutions,
includingweakpropertyrightsandhighrisksofexpropriation, legal inefficiency,bureaucratic
corruption, etc., inhibits foreignbank lending. In effect, these factors act as (uncertain) taxes,
restrictingcapitalinflows.Ontheotherhand,politicalliberalization,privatization,anindependent
bankingsystemandsimilarstructuralcharacteristicsenableaneconomytoattractsubstantially
moreforeignbankcapital.
Papaionnau(2009)alsotestedforinformationalasymmetriesandethno-linguistictiesascontrol
variables(seealsoGlickandRose,2002),buttheinstitutionalfactorsremainedprominent.Lane
(2003)arrivedatasimilarconclusionregardingequityanddirectforeigninvestment;hisresearch
suggestedthatthepoorqualityofinstitutionsandtheprevalenceofcorruptioninhibitedforeign
investment. Somewhat to the contrary, Lucas (1990) dismisses the importance of the political
riskfactor,citingtheexampleofIndiapriorto1945.Duringthatperiod,Indiawasstillsubjectto
Britishruleand,consequently,tothesamepoliticalrisk,yetitscapitallaborratioremainedbelow
thatofBritain.
29
Chapter II: Capital Flows and Investment
Inlinewiththeresultsonbroadlydefinedinstitutionalquality,ReinhartandRogoff(2004)focus
onserialsovereigndefaultanditseffectsonreputation(whichmaybeconsideredanoutcomeof
poorinstitutionalquality)asaninhibitorofcapitalinflows.Table1belowshowsthenumberof
defaults(ordebtrestructurings)duringthe20thcenturyforseveralcountries.
TheimportanceofserialdefaultledCaselliandFeyrer(2007)tosuggestthatinordertokeepits
creditworthinessandattractforeignsavings,acountrywithapastdefaulthistoryshouldmaintain
foreigndebtatamaximumratioof30percentofGDP,andthatthisratioshouldbeprudently
loweredifthepublicdebtistoohigh.Table2showsvaluesoftheseratiosforBrazilandGermany
in2012.
Asalientconclusionisthatrisk(chieflystemmingfromweakinstitutionsandinadequatepolicies)
isamajorfactorinfluencingnetcapitalinflows.Riskevaluationagenciesratesovereignriskfor
manycountries.InJuly2013,Standard&Poor’sratedBrazilasBBB/negative/A-2andGermany
asAAA/stable/A-1+.Standard&Poor’sMarch2014downgradeofBrazil toBBB-confirms this
negativetendency.The“negative”and“stable”classificationsreflecttheratingagency’soutlook
regardingfurtherratingaction.AnothermeasureoftheoverallBrazilianriskistheinterestrate
spreadbetweenBraziliandebt andUSTreasury securities,knownasEMBI+.Figure1 shows
therecentevolutionofthisdifference.Itfluctuatesconsiderably,andtherehasbeenashort-run
upwardstrendsinceFebruary2013(anincreaseof100basispointsmeansthattheinterestrate
differenceincreasedonepercentagepointperyear).
Table 1: Number of defaults* during the 20th century, selected countriesCountry Number of Defaults Episodes*Ecuador, Uruguay and Liberia 6Brazil and Peru 5Venezuela, Austria and Yugoslavia 4Mexico,Colombia, Argentina, Bulgaria, Russia and Poland 3Germany, Chile and China 2* Or debt restructuringSource: Reinhart and Rogoff (2004).
Table 2: Gross External Debt, Public Debt and GDP (2012)Data Brazil GermanyGross External Debt (as percent GDP) 19.6 168.2Public Debt (as percent GDP) 58.8 81.9GDP (US$ billion) 2252.7 3399.6Source: World Bank, IMF and CIA.
30
Source: JP Morgan.
Figure 1: Brazilian risk as measured by EMBI + Risco Brasil
100
150
200
250
300
Jul
Jun
MayAp
rM
arFeb
Jan
Dec
NovOct
Sep
AugJul
Jun
MayAp
rM
arFeb
Jan
Dec
NovOct
Sep
AugJul
Jun
MayAp
rM
arFeb
Jan
Dec
NovOct
Sep
AugJul
Jun
MayAp
rM
arFeb
Jan
100
150
200
250
300 EMBI + Risco-Brasil - - - JP Morgan - JPM366_EMBI366
2010 2011 20132012
Chapter II: Capital Flows and Investment
The literature and evidence on international capital flows suggest that the typical Keynesian
investmenttheoryassertion,thatdecreasingrealinterestrateswouldboostinvestment,isperhaps
toosimple.Risk(stemmingmanytimesfromweakorweakeninginstitutionsorinadequatepolicies)
andshortageofhumancapitalandnaturalresourcesareveryimportantfactorsaswell.Regarding
Brazil,besidesthecurrentshortageofqualifiedworkersinthecountry(afactorcomplementaryto
capital),thepolicyframeworkcoincidedwithageneralizedperceptionofweakeninginstitutions
andinadequatemacroeconomicpolicies,asreflectedintherecentmovementshowninFigure1.
2. Direct Investment and Portfolio Investment from Abroad, in Brazil and in Germany
Foreign Direct Investment
DataonBrazil’sandGermany’sstockofforeigndirectinvestment(FDI)arepresentedinTables
3,4and5.
31
Chapter II: Capital Flows and Investment
Table 3: Direct Foreign Investment Position in Brazil, by country of origin, end of 2011Rank Country US$ Billion
Total 688.61 Netherlands 171.22 United States 119.33 Spain 92.44 France 34.25 Japan 34.26 Luxembourg 32.77 United Kingdom 20.48 Mexico 17.19 Germany 16.7
10 Cayman Islands 16.5Source: Coordinated Direct Investment Survey (CDIS) – IMF.
Table 4: Direct Foreign Investment Position of Germany in other countries, end of 2011
Rank Country US$ BillionTotal 1,206.3
1 United States 221.52 United Kingdom 126.53 Netherlands 113.54 Luxembourg 101.65 Belgium 55.36 France 52.57 China, P.R.: Mainland 44.28 Austria 43.09 Italy 42.0
10 Spain 33.917 Brazil 16.3
Source: Coordinated Direct Investment Survey (CDIS) – IMF.
Table 5: Direct Foreign Investment Position in Germany, end of 2011Rank Country US$ Billion
Total 915.31 Netherlands 229.32 Luxembourg 130.93 United States 91.44 France 83.45 Switzerland 79.16 United Kingdom 75.57 Italy 46.58 Austria 30.99 Japan 20.6
10 Sweden 19.7161 Brazil 0.3
Source: Coordinated Direct Investment Survey (CDIS) – IMF.
32
Chapter II: Capital Flows and Investment
Table6showsthestockofFDIrelativetoGDPoftheworld’s20largesteconomies.Thestockof
FDIinthesecountriescorrespondsto28.3percentoftheircombinedGDP,whiletheirstockofFDI
abroadcorrespondsto32.1percent.Asawhole,thisgroupofcountriesreceivedandsentabroad
aboutthesameamountofdirectinvestment.Brazil(andotheremergingmarketssuchasMexico)
receivedFDIinlinewiththeoverallaverage,buttheysentabroadafigurequitebelowtheaverage.
Germanyreceivedslightlybelowtheaverageandsentabroadasumaboveit. Japan,Indiaand
SouthKoreamaybeconsideredrelativelyclosedeconomiesintermsofreceivingFDI.
TheexaminationofTables3,4,5and6allowsseveralconclusions:
1) ThetotalstockofFDIinBrazil,relativetoGDP,is31percent.ForGermany,thefigureis27
percent.Thefiguresareclosetoeachother,suggesting,asarguedbytheauthorsmentionedin
theprevioussection,thatemergingeconomiesarenotnecessarilypreferredrecipientsofFDI.
Rather,richcountriesreceiveasizableportionofit.
Thefigures inthefinalcolumnofTable6areameasureoftheopennessofeacheconomy
withrespecttoFDI. It isanimportantmeasure,sincethestockofFDIisaccumulatedover
Table 6: Stock of Foreign Direct Investment (FDI) as percent of GDP (for the 20 largest GDP countries)
RANK (based on GDP)
Country 1. Stock of FDI in the country as percent of GDP
2. Stock of FDI of the country abroad as percent of GDP
1 + 2
1 United States 16.2 26.5 42.72 China 23.2 0.0 23.23 Japan 3.8 16.2 19.94 Germany 26.9 35.5 62.45 France 37.2 61.1 98.46 United Kingdom 43.7 70.8 114.57 Brazil 30.6 6.8 37.48 Russian Federation 22.6 18.0 40.69 Italy 16.9 25.8 42.7
10 India 9.7 3.3 13.011 Canada 32.2 36.3 68.512 Australia 33.9 22.6 56.513 Spain 43.8 44.9 88.714 Mexico 29.8 8.4 38.215 Korea, Rep. 11.8 15.2 27.016 Indonesia 21.2 0.0 21.217 Turkey 14.4 3.3 17.718 Netherlands 443.1 550.8 993.919 Switzerland 102.0 162.9 264.920 Sweden 64.7 67.2 131.9
OVERALL 28.3 32.1 Source: Coordinated Direct Investment Survey (CDIS) – IMF.
33
Chapter II: Capital Flows and Investment
manyyears.Consequently,itreflectsinformationregardingthelong-runhistoricalbehavior
ofthecountrywithrespecttoFDI—i.e.,informationaboutitseconomicrelationshipwithother
countriesand,particularly,itsabsorptionofforeigncapitalandtechnology.
The coefficient of correlation between the measure of openness described in Table 6 (last
column)—and a more traditional measure of openness, such as (import + exports)/GDP—is
0.368.Anda“Studentt”statisticaltestshowsthatthecorrelationissignificantlydifferentfrom
zeroatthe95percentconfidencelevel.Theconclusionisthatcountriesthatareopentotrade
tendtobeopentoFDI(andviceversa).
AccordingtotheFDIopennesscriteria,asarecipientcountryBrazilranksninthamongthe20
largesteconomies.Germanyranks11th.
2) Assuminganincome/capitalratioof20percent,thetotalcapitalstockinBrazilwouldhavea
valueofUS$11.3trillion.Consequently,consideringTable3,thevalueofthestockofforeign
directinvestmentinBrazilwouldbeaboutsixpercentofthevalueofthetotalcapitalstockin
thecountry.Iftheincome/capitalratiowere25percent,thepercentageofthestockofforeign
directinvestmentinBrazilwouldbearound7.5percentofthetotalstockofcapital.
ForGermany, theratios foreachhypothesiswouldbeslightlysmaller:5.5percentand6.9
percent,respectively.Consequently,thereisnotmuchdifferencebetweenahigh-income-per-
capitacountrysuchasGermanyandamedium-income-per-capitacountrysuchasBrazil.The
overall figures (see the last lineofTable6) also suggest that,makingsimilarassumptions
abouttheincome/capitalratioforallthe20countries,thepercentageofthestockofforeign
direct investment to the total capital stock, for an average country of the group, would be
aroundsixorsevenpercent.
3) The stock of German direct investment in Brazil is 1.4 percent of the total German direct
investmentabroad.Throughtheyears,ithasbeentheUS—adevelopedcountry—thathasbeen
theprincipalrecipientofGermandirect investment(18.4percentof thetotal, representing
US$119billion);datafromthesamesourceshowthattheUSowns10percent(worthUS$91.4
billion)ofthestockofFDIinGermany.Brazil,withUS$260millionoftotaldirectinvestment
inGermany,istheglobe’s161stforeigndirectinvestorinGermany.Giventhatthetotalstock
ofBraziliandirectinvestmentabroadisworthUS$154billion,Braziliandirectinvestmentin
thecapitalstockinGermanyisquitesmall.
4) Table7(derivedfromtheprevioustables)showsthepercentagedistributionofFDIinBrazil,
bycountryoforigin.
34
Chapter II: Capital Flows and Investment
ThestockofdirectinvestmentofGermanyinBrazilamountsto2.4percentofthetotal,andranks
ninth,behindtheNetherlands,theUSandSpain(seethefootnoteonp.4foranexplanationof
theDutchfigure).
Foreign Portfolio Investment
FiguresonthetotalstockofforeignportfolioinvestmentsinBrazil—anditsdistributionbycountry—
appearinTable8.TotalportfolioinvestmentremainslessthanthetotalvalueofFDIinthecountry.
Germanyisresponsibleforonepercentofthisportfolioinvestment,farbehindtheUS,thelargest
investorwith39percentofthetotal.(Theover-representationofcountriessuchasLuxembourg
andtheCaymanIslandslikelyreflectsthosecountries’statusastaxhavens.)
Table 7: Distribution of the stock of foreign direct investment in Brazil, by country of origin, end of 2011
Rank Country Percent1 Netherlands 24.82 USA 17.33 Spain 13.44 France 5.05 Japan 5.06 Luxembourg 4.87 UK 3.08 Mexico 2.59 Germany 2.4
Source: Author’s Calculations based on CDIS/IMF Data
Table 8: Portfolio Investment Liabilities of Brazil to other countries, end of 2011Rank Country US$ Billion
Total 497.11 United States 196.22 United Kingdom 106.03 Luxembourg 53.04 Japan 28.95 Cayman Islands 17.46 Netherlands 11.87 Canada 11.78 Ireland 11.79 Norway 7.9
10 France 7.811 Germany 5.0
Source: Coordinated Direct Investment Survey (CDIS) – IMF.
35
Chapter II: Capital Flows and Investment
Table9showsGermanportfolioinvestmentsinothercountries(whichtotalabouttwicetheamount
ofGermandirectinvestmentsabroad).LuxembourgistheNo.1recipient,whileBrazilaccounts
foronly0.2percentofthetotal.
Table10makesacomparisonoftheBrazilianandtheGermanstockpositionsofforeigndirect
investmentsandportfolioinvestments,asrecipientandinvestorcountries.Again,Germanportfolio
investmentinLuxembourgissignificantlyoverstatedasthefundsdonotstayinLuxembourg,but
areonlyroutedthroughthecountry.
Table10showsthat,overall,Brazilreceivesfarmoreportfolioinflowthanitinvestsabroad.While
Germanydoesinvestheavilyabroad,itisstillanetrecipientofportfolioinvestment.
Table 9: Portfolio Investment Assets of Germany in other countries, end of 2011Rank Country US$ Billion
Total 2,380.41 Luxembourg 301.52 France 237.33 Netherlands 202.54 United States 202.25 United Kingdom 173.76 Italy 163.77 Spain 125.38 Ireland 92.09 Austria 53.8
28 Brazil 5.0Source: Coordinated Direct Investment Survey (CDIS) – IMF.
Table 10: Stock of Foreign Direct and Portfolio Investment; Brazil and Germany as recipient and investor countries, end of 2011
Brazil Percent of GDP Germany Percent of GDPRecipient Investor Recipient Investor
Foreign Direct Investment 30.6 6.8 26.9 35.5Portfolio Investment 22.1 1.3 82.9 70.0Source: CPIS/IMF and CDIS/IMF
36
Chapter II: Capital Flows and Investment
3. The Macroeconomics of International Financial Flows
Bysharplydecreasingcostsofcommunicationandtransportation,andthegeneralglobalization
processhasledtoanextraordinaryexpansionoftradeandofcapitalflowsofallkinds.Figures2
and3showtheevolutionofFDIintheworldandtheevolutionofforeigntradefortheBrazilian
andGermaneconomies,respectively.
Thefiguresrevealtheclearexpansionintradeandcapitalflows(FDI):
Figure 3: (Imports + Exports) as percent of GDP, Brazil and Germany
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
100 %20
12
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
49.7
97.6
15.2
26.9
Source: World Bank.
Germany Brazil
Source: World Bank.
Figure 2: World Foreign Direct Investment flow per year as percent of World GDP
0.0 %
0.5 %
1.0 %
1.5 %
2.0 %
2.5 %
3.0 %
3.5 %
4.0 %
20112000199019801970
37
Chapter II: Capital Flows and Investment
Net recipientsof financial flowsmay runcurrentaccountdeficits (i.e., theymay receiveanet
positiveexcessvalueofgoodsandservicesfromabroad,allowingthemtosustainahigherlevel
ofinvestmentand,consequently,obtainahigherpotentialGDPgrowthrate).Countriesthatare
suppliersofsavingsruncurrentaccountsurpluses,transferringabroadgoodsandservicesnow
andexpectingtoreceivefuturerepaymentsofgoodsandservices(seeObstfeldandRogoff,1996).
Figure4shows that,during thepast20years,Brazilhasabsorbedmore foreignsavings than
Germany:Germanyhasbeenanexporterofsavingssince2000,andparticularlyinthelastfive
years,theGermancurrentaccountwasinconsiderablesurpluswhileBrazil’swasindeficit.
Foritspart,Brazilneedsforeignsavingstoincreaseitsrelativelylowfixedinvestment/GDPratio,
whichoscillatedaround17to18percent,wellabovethelowlevelofdomesticsavings(14to15
percentofGDP).Table11,below,showsthetotalfixedinvestmentinBrazilasapercentofGDP.
Theratiohasbeensomewhatbelow20percentduring the firstdecadeof thecurrentcentury.
Bycomparison,inChinaithasbeenaround50percent.TheBrazilianinvestmenttoGDPratiois
twotofivepercentagepointslowerthanthesamerateinseveralotherLatinAmericancountries,
includingChile,Argentina,Peru,ColombiaandMexico.
Figure 4: Current Account Balance as percent of GDP; Germany and Brazil.
–5 %
–4 %
–3 %
–2 %
–1 %
0 %
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
Source: World Bank.
Germany Brazil
38
Chapter II: Capital Flows and Investment
Internationalfinancialflowsarethecrucialtransmissionmechanismofsavingsamongcountries.
These flows finance current account deficits. Yet the recent and substantial expansion of
internationalcapitalflowsbetweencountriesandcurrencieshasraisedthequestionofwhether
theseflowsareathreattomacroeconomicstability.Thefearisthatasharp,possiblyunwarranted,
redirectionoftheseflowscouldoverstateboththeupsideanddownsideofacountry’seconomic
conditions.
Thus,thekeyquestioniswhetherthefreeflowofcapitalisonthewholemoreofabenefitforthe
countriesinvolvedthanitisadetraction.Toanswerthatquestion,weturntoProfessorJagdish
Bhagwati and his well-known article entitled “The Capital Myth” (1998). Bhagwati favors free
tradeingoodsandservices,buthearguesthattotallyliberalizedcapitalmovements—thatisto
say,capitalofanysortandofanyamount—havedisadvantagesthatarenotpresentinthecaseof
freetrade.
The problem inherent to portfolio capital flows is that they are subject to contagion and herd
behavior,whichisattimesdrivenbypanics,maniasandcrashes.Destabilizingspeculators,defined
asthosewhobetagainstagivencountry’seconomicfundamentals,mayrealizehugeprofitsasthe
speculativebehavioritselfchangesthefundamentals.Economicmodelswithspeculativebehavior
havedifferentequilibriumpositions.Consequently,thewell-knownargumentofMiltonFriedman
(1953),thatdestabilizingspeculationwouldeventuallypunishthespeculatorswithlossesonce
theunderlyingfundamentalsreassertthemselves, istheoreticallyincorrect.Speculationsimply
changesthefundamentalsinmodelswithspeculation.ResearcherssuchasTriffin(1957),Aliber
(1962),Obstfeld(1986)andothershaveshownthiswhilealsoraisingthepossibilityofmultiple
economicequilibria.Moreover,freecapitalflowsinthepresenceoftradedistortions(tariffs,quotas,
etc.)maynotbeasecond-bestsolution,accordingtoargumentsdevelopedbyCooper(1998,1999).
Notallformsofinvestmentcausethesekindsofrisks.Infact,themajorgainsfromcapitalflows
todevelopingcountries(includingtheacquisitionofskillsandtechnology)maybeobtainedby
Table 11: Fixed Investment as percent of GDP in BrazilYear Fixed Investment2000 16.82001 17.02002 16.42003 15.32004 16.12005 15.92006 16.42007 17.42008 18.72009 16.72010 18.4Source: IpeaData
39
Chapter II: Capital Flows and Investment
encouraging direct foreign investment. This would imply that a successful policy grants free
exchangeconvertibilityonly to firms’earningsandcapital.Banks, firmsandcommoncitizens
shouldnothave theability to freelywithdrawshort-termcapital fromthecountry inwhatever
magnitudetheylike.Neithershouldtheybeabletomakeshort-termloans,whichcanincrease
sharply in the presence of unsustainable asset price movements and can reinforce economic
instability.
The case of Brazil presents an illuminating example of instabilities related to capital inflows.
In particular, in Brazil we find interesting results when these flows interact with the political
system,makingforanexcellentpoliticaleconomycasestudy.Capitalflowvolatilityhasbeenan
importantfactorbehindtheincreasedvolatilityofthedomesticexchangerateforthepastdecade.
Forexample,theshockstemmingfromtheSeptember2008globalcrisis(seeninFigure5),acting
through the flight of portfolio investments to other countries, was followed by an increase of
roughly50percentinthemarketexchangerateoftheBrazilianrealtotheUSdollarinlessthan
amonth.Beyondinflationarypressure,thiscurrencymovementcausedproblemsforcompanies
andbankswithdollarliabilities,withseveralsuchfirmsendingupgoingbankrupt.Laterinthe
sameyear,whentheextentofthecrisisbecameclearer(andtherelativelysolidfinancialposition
ofBrazilbecamewell-known),theexchangerateoftherealtothedollarreturnedtoitsprevious
level.
CapitalinflowswereattractedbythehighinterestratesinBrazil(thesehighrateswereaholdover
from the1990s,whenBrazil facedextremelyhighdomestic ratesof inflation).Figure7below
showstheevolutionofthemoneymarketinterestrateinBrazil,whileFigure6showstheend-of-
the-yearexchangerates.
Figure 5: Portfolio Investment Liabilities of Brazil to other countries. Stock of Equity Securities from 2001–2011, reported by Brazil
0
50
100
150
200
250
300
350
400
20112010200920082007200620052004200320022001
Source: CPIS/IMF.
Equity Securities
US$
, mill
ions
40
Chapter II: Capital Flows and Investment
The substantial appreciation of the real in this period caused problems for the export sector.
Moreover, the averageBrazilian rate of inflation in the sameperiodwasgreater than the rate
of inflationofBrazil’smore important tradingpartners.Brazilian ratesof inflation reachedan
averageof justunder sixpercent in2003–2013, consistently reaching theceilingofmonetary
policytargetsandfarsurpassingratesintradepartnercountriessuchasGermany(1.82percent
inthatperiod)andtheUS(2.40percent).Brazilianindustrialexportstookaserioushitfromthe
combinationofnominalexchangeappreciationandhigher inflation,as it impliedasignificant
appreciationofthereal.
TheBraziliangovernmentreactedtotheappreciationoftherealbybuyingforeigncurrencyin
theexchangemarketsinordertoavoiddevaluation.Asaresulttheinternationalreservesofthe
Source: IPEAdata.
Figure 6: Exchange Rates R$/US$
0.0 %
0.5 %
1.0 %
1.5 %
2.0 %
2.5 %
3.0 %
3.5 %
20122011201020092008200720062005200420032002
2.892.65
2.342.14
1.77
2.34
1.74 1.67 1.88 1.97
0 %
5 %
10 %
15 %
20 %
2012201120102009200820072006200520042003
% p
er y
ear
Figure 7: Brazil Money Market Interest Rate (SELIC), 2003–2012
16.5017.75 18.0
13.25
11.25
13.75
8.7510.75
11.0
7.25
Source: IPEAdata.
% per year Average of the period
41
Chapter II: Capital Flows and Investment
countryincreasedsubstantially,fromUS$49billiontoUS$373billion,overtheperiod2003–2013.
Yettheacquisitionofinternationalreservescouldnotpreventanappreciationandwasalsocostly
tothegovernmentintermsofitsdomesticpublicdebtandinterest.Theforeigncurrencyreserves,
wheninvestedininternationalbanks,didnotreceivecomparableinterestpayments.Additionally,
since the foreign currency continued to devalue relative to the real, the Brazilian government
sufferedhugeexchangelossesonitsholdingsofforeigncurrencyreserves(itisdifficulttoassess
preciselyhowmuch,butsuchlossesarelikelytohaveexceeded100billionreais).
Astherealcontinuedtoappreciateinrealterms,Brazilianindustrialexportsbecameincreasingly
uncompetitive.Commodityexporterswere compensatedbyabnormallyhighcommodityprices
(seeFigure8),butthesamedidnothappentoindustrialexporters(seeFigure9).
Source: IPEAdata.
Figure 8: Soybean prices per ton
0
100
200
300
400
500
600
2012201120102009200820072006200520042003
233.25276.83
223.17
217.42
317.25
453.33
378.50 385.00
484.25
538.00
US$
per
ton
Source: IPEAdata.
Figure 9: Industrial Exports ÷ Total Industrial Production
0 %
5 %
10 %
15 %
20 %
25 %
2012201120102009200820072006200520042003
20.50
21.60
20.80 19.90
19.00
16.80
14.80 13.90
15.10
14.00
42
Chapter II: Capital Flows and Investment
Thefiscalcostsoftheinternationalreservesandthecontinuousappreciationoftherealfinallyled
toa2012governmentpolicyofsharplycuttingdomesticinterestratestoavoidattractingforeign
financialcapital,devaluingthereal,andboostingindustrialexportsandinvestments.Theconcern
with thisapproach,however, is that lowerdomestic interestratesmayfuel increased inflation,
preventingthedesireddepreciationoftheexchangerate.
Toavoidtheresurgenceofinflation,theBraziliangovernmentintervenedtocurbenergyprices
(oilandelectricity)andpostponedotherpriceincreases(inpublictransportation,forinstance).
Besidestheseactions,thegovernmentbeganengaginginwhatwastermed“creativeaccounting”
(manipulatingthepublic-sectorbudgetresultsandusingnonstandardpracticessuchasdeferring
spending)inordertostaywithintheoriginalbudgetsurplustargetzone.Thisdemonstratesthat
hugeinternationalreservesdohaveaprice,intermsoflowerbudgetsurplusordeficits.
Theseinterventionistpoliciesandthediminishedcommitmentofthecentralbanktostrictinflation
targetshavecausedincreaseduncertaintyforinvestorsintheBrazilianeconomy:Investmentin
2012declinedfourpercentrelativeto2011.
In conclusion, allowing free international capital flows set a chain of events in motion which,
paradoxically, led to a decrease of investment and of the productive capacity growth of the
Brazilian economy. Speculative capital flows have been particularly problematic for Brazilian
policymakers. Such flows are also caused, however, by the substantial difference of economic
policiesamonginteractingcountries.Theirinteractionleadstoamutualinfluencethatshouldbe
takenintoaccountbypolicymakersineachofthecountries.Infact,thelackofpolicycoordination
maycauseanoverallsub-optimumdecision-makingprocess,typicalofnon-cooperativegames.
Ifthereiszeropolicycoordination,thencontrolsonshort-runfinancialflowsmaybenecessary
for a country to defend itself against the eventual negative externalities coming from abroad.
Conversely,ifthereisenoughpolicycoordination,thenalackofcapitalcontrolsmaybecompatible
withstabilityandgrowth.Ifthemajoreconomiesoftheworldadoptmacropoliciesthattreattheir
emergingpartnersaspassiveadapters,thepoliticaleconomyandthepolicymakingprocessmay
makecapitalcontrolsdesirableforpoorandemergingeconomies.
43
Chapter III: Recommendations
Chapter III:
Recommendations
1. A Focus on Bilateral Direct Investment 2. Harmonizing Monetary Policy 3. Towards an Understanding on Migration 4. Finding the Common Ground on Trade Policy 5. Brazil and Germany as Leaders in a EU-Mercosul Free Trade
Agreement
44
Chapter III: Recommendations
Chapter III: Recommendations
German-Brazilian economic relations may be growing, but they remain far from their overall
potential.Insomecases,differingpolicyapproachespreventbothcountriesfromfullyexercising
their comparative advantages or engaging in mutually beneficial exchanges. In other cases,
membershipinpoliticalandeconomicblocsconstrainsbothcountries’abilitiestoexpandtheir
economicrelationswhereitisinthenationalinterest.
Given the deep-seated and often political nature of these obstacles, concrete and actionable
recommendations can be elusive. Nevertheless, this paper indicates that there is significant
commongroundsharedbetweenBrazilandGermany,andthereareconcreterecommendations
thatcanhelpbothcountriesbuilduponthiscommonground.
These recommendations aim to deepen those economic relations which are less exposed to
sovereignpolicyrisksandthathingemoreontheknowledgeandtheagencyofmajoreconomic
actors.Atthesametime,therecommendationsdonotshyawayfromthedifficultyetimportant
policydebatesthatremain.Insteadofattemptingtodefinecorrectorincorrectpolicies,weseek
strategiestomakedifferingpoliciesmutuallycompatible.
Inparticular, thissectionoffersrecommendationsfor1)fosteringbilateraldirect investment;2)
harmonizing monetary policy, 3)facilitating migration as a mechanism for spurring economic
links,4)findingcommongroundontradepolicy,and5)encouragingBrazilandGermanytoassume
leadershiprolesinadvancinganEU-MercosulFTA.
1. Prioritizing Bilateral Direct Investment
Whileafirmconsensuscanbehardtofindonwhetheropencapitalflowsbenefitagiveneconomy,
there is greater room for agreement on FDI. Moreover, in contrast to liberalizing trade, which
requires a time-consuming and cumbersomenegotiation process, a deepening of bilateral FDI
canbeachievedonaproject-by-projectbasis.Thus,FDIisafertiletopicforfurtheranalysisand
debatebecauseitisrelativelyresilienttopoliticalprocesses.Additionally,giventhelinkbetween
FDIandinternationaltrade,especiallyasitpertainsto“newtradeissues”(intra-industrytrade,
supplychainintegration,intellectualpropertyrights),opennesstoFDIshouldsupportincreased
tradeopenness(shareofexportsandimportsintheeconomy).
Onekeyopportunity is forGermancompanies tobuild industrial plants inBrazil, thus taking
advantageofthestill-growingBrazilianconsumermarketthatisreadyforproductsthatmakeuse
of“Germanengineering”butthatcouldbeproducedlocallyinmassquantities.
45
Chapter III: Recommendations
Likewise,BrazilianR&Dteams—whoseprojectsmaynevercometofruitiongivenconstraintsin
Brazil’sskilled-labormarket—mightbenefitfrombasingtheiroperationsinGermany.Mediumand
long-termopportunitiesforlocal(German,Brazilian)industriesmightalsobecreatedbygenerating
complementaryindustriesabroad(Brazil,Germany),eitherfromthefragmentationofindustrial
processesorfrommorecomplexscenariossuchasbrandeffectsandnetworkexternalities.
Yettheselinkagesdonotalwaysemergeorganically.BothBrazilandGermanycantakestepsto
encouragebilateralFDI,bydrawingattentiontotheopportunitiesinbothcountries.Inorderto
expanddirectinvestmentbetweenBrazilandGermany,wesuggestthatbothcountriespromote
partialorfullexemptiononcorporatetaxesandimportdutiesbetweenthem.Wealsocallforthe
bilateralinvestmenttreatysignedbyBrazilandGermanyin1995toberatified,asitwouldprovide
investorswithconfidencethattheirrightswillbeprotected.
Thereisalsothepotentialoffruitfulcollaborationsemergingbetweensimilarinstitutions,such
as the Brazilian development bank (Banco Nacional do Desenvolvimento Econômico e Social,
or BNDES) and the German development bank (KfW Entwicklungsbank). In particular, these
organizationsmightworktogethertofacilitateGermaninvestmentinBrazilianinfrastructure—an
areawhereweseeurgentdemandontheBraziliansideandparticularexpertiseontheGerman
side.
Finally,anannualconferencefeaturing investorsandpolicymakerscould facilitateconnections
whilealsoofferingaforumtoharmonizeregulatoryandlegalstandards.Initially,suchaconference
couldaddressfundamentalquestionssuchaswhyGermaninvestmentinBrazil(measuredasa
percentage ofGDP) significantly lags that of other countries including theUSandSpain. The
German-BrazilianBusinessDay,organizedannuallybytheFederationofGermanIndustries(BDI)
and itsBraziliancounterpart, theNationalConfederationof Industry (CNI),couldbeexpanded
into a broader conference bringing together the business community with policymakers and
academics.
2. Harmonizing Monetary Policy
InordertofullyleveragethepotentialofbilateralGerman-Brazilianinvestment,thetwocountries
mustreconciletheirdifferingperspectivesoncapitalcontrols.
Ingeneral,Germanysupportsfreecapitalmarketsandrejectscapitalcontrols.Germanywelcomes
inwardFDIbecausesuchinvestmentsprovidenewjobs.AninterestinoutwardFDIstemsfrom
a desire for improved access to foreign markets. Given its export surpluses, Germany seeks
investmentopportunitiesabroad—bothintermsofFDIandportfolioinvestment.Incontrastwith
emergingmarkets,Germanydoesnotneedhighforeigncurrencyreservestopreventdepreciations
ofitsowncurrency.Alsodifferingfromdevelopingeconomies,theGermancapitalstockisalready
46
Chapter III: Recommendations
relatively large. Hence the demand for domestic investment is comparatively small. Surplus
revenuefromforeigntrade isspenton investmentabroadrather thanoncurrencyreservesor
domesticinvestments.Therefore,GermanysupportsveryopenFDIandportfolioinvestmentpolicy.
Brazil, on the other hand, has suffered exchange rate volatility in recent years that has gone
beyondwhatwouldbeexpectedbasedon theunderlyinguncertaintyabout the real economy.
SomeBrazilianpolicymakershavearguedthatsharpvariationsofshort-runcapitalmovements
maybecausedbythelackofharmonizationininternationalmacroeconomicpolicies,asevidenced
recentlybyemergingmarketturbulencecausedbytighteningmonetarypolicyintheUS.While
US monetary policy is made exclusively with US economic interests in mind, it has global
implicationsbecause thedollar iseffectivelyaglobalcurrency.Forsimilar reasons,Braziland
Germanyshould strive tomaintainglobalmacroeconomic stability,whichmay implyagreater
degreeofmacroeconomicpolicyharmonizationandcoordination.
TheChileanmodelofcapitalcontrolisapossiblemodelforamediumgroundcompatiblewiththe
interestsofbothcountries.Between1991and1998,theCentralBankofChileenactedtheencaje,
whichrequiredafractionofthecapital inflowtobedepositedatthecentralbankforacertain
periodoftime(typicallyayear),andwithoutremuneration(unremuneratedreserverequirement,
orURR). The encajewasmodified anumber of times aspolicymakers sought to establish the
correctbalance.Alternatively,foreigninvestorscouldpayanupfrontfeetothecentralbankand
avoid theURR.Studieshave suggested that the encaje succeeded in changing thematurity of
capital inflows, allowing the government more room for independent monetary policy. Such a
middlegroundcanbepredictableenoughforforeigninvestors.Atthesametime,phenomenasuch
asadverseselectioninfavorofspeculativecapitalcanbeavoidedbyeschewinginterestratesas
primarymeansofstabilizingcapitalflows.Ultimately,stabilitybenefitsall.
Whilesomerestrictionson the flowof“hotmoney” (short-termportfolio investment)mightbe
warrantedinBrazil,directinvestmentshouldbewelcomed.Brazilhasbeenquitesuccessfulat
attracting FDI, mostly because of the attractiveness of its domestic market and abundance of
naturalresources.However,thismarketandresourceseekinginvestment,whilewelcome,does
notpresentthemanyopportunities intermsoftechnologytransferandincreasedproductivity.
Thereforeinvestmentinotherareassuchasmanufacturingandprofessionalservicesshouldbe
encouraged.Toattractthiskindofinvestmenthowever,Brazilmightneedtobecomemoreopenin
areassuchastradeandimmigrationwhicharenecessaryforproductioninthesesectors.
47
Chapter III: Recommendations
3. Towards an Understanding on Migration
Demography,migrationandlaborcanplayakeyroleinthedeepeningofbilateraldirectinvestment
betweenBrazilandGermany.Forexample,Brazilfacesdeficitsinthequalificationofindustrial
workers.Incontrast,Germanyislikelytosufferfromlaborshortagesduetodemographicchanges,
despitebeingthehometothethird-highestnumberofinternationalmigrants,accordingtothe
UN,ofwhichonlyaboutathirdcomefromtheEuropeanUnion.
Inthiscontext,BrazilandGermanyshouldconsiderworkingonamutuallybeneficialunderstanding
onmigration.ThedestinationofFDIisoftenlinkedtothemovementofpeople.Thekeyconditionfor
feasibilityofaninvestmentprojectistheinternalized,oftentacitknowledgeofthechiefinvestors
andkeyspecialists,whichcannotbeexportedwhenbuildingabusinesselsewhere.Thefeasibility
ofindustrialprocessesmayalsohingeonspecificqualificationsthatcannotbetransferredeasily,
andmaynecessitatebringingalongamoresignificant labor force. Inaddition,migrationrules
playanimportantrulefortradableservices,especiallytermsoftemporarymovementofpersons.
Seizing theopportunityofextendingbilateral trade inservices thereforewouldbenefit froma
moreopenmigrationregime.
Suchrealitiesarenotalwaysobvioustopolicymakerswhodealwith thepolitical landmineof
migration.AsEuropeismiredinaneconomicslump,someofitscitizensareincreasinglywary
ofexpandingnon-EuropeanimmigrationintocontinentalEurope.FromtheBrazilianperspective,
thecountryisconcernedaboutlosingtoomanyofitshighlyeducatedspecialists(thesocalled
“braindrain”effect).AlsolaborunionsandassociationsofprofessionalsinBrazil(e.g.,medical
associations)tendtoopposeopeningtheirprofessionstoimmigrants,andtheycanconstitutea
significantandorganizedspecialinterest.
Thus, an agreement on migration that suits the deepening of bilateral investment should not
belefttotheextantpoliticalprocess,butunderstoodassomethingthatarisesfromthegoalsof
investorsandothereconomicagentsinvolvedinFDIprojectsineithercountry.
Onarelated(andperhapslesscontentious)note,werecommendthepromotionofcross-cultural
exchangeprograms.Brazil remainsanexoticandpoorlyunderstooddestination in theeyesof
many Germans, and the same is true for Germany as seen by Brazilians. As a result, foreign
investmentprojectsbetweenthetwocanseemdaunting.However,stemmingfromtheGerman
ethnic origins of a sizable portion of Brazil’s population, the southern Brazilian states (where
peopleofGermandescentareconcentrated)haveinterestingrelationswithseveralsegmentsof
Germansociety, including twinand sister cities agreements, cross-collaborationsamongsmall
andmediumenterprises,technologyexchangesbetweenscientificandindustrialresearchcenters,
andartandculturalfestivals.Webelievethatanexpansionofsuchcross-culturalprograms,such
as study abroad opportunities at the high school and university levels, could pay significant
dividendsdowntheroad.Similarly,tourismisanareathatcouldbeexpandedinbothdirections.
48
Chapter III: Recommendations
4. Finding Common Ground on Trade Policy
Our first recommendations focus on FDI because we believe these will be easier to achieve.
However, given the complementary export portfolios and potential for mutually beneficial
integration between the two countries, neither should shy away from the difficult dialogues
requiredtodeepentradeingoodsandservices.
Westress that foreign tradehasapositive impacton theeconomicdevelopmentofBraziland
Germany.Broadlyspeaking,thekeypolicyhereisthatbothcountriesshouldexpandliberalization
andreduceexistingtariffandnon-tarifftraderestrictions,especiallythosemostrelevantforthe
Brazilian-Germantraderelationship.Assaid,outsidetheframeworkofanEU-MercosulFTA,there
isstillmuchthatcanbedone.
The European Union consistently maintains high taxes and non-tariff barriers on agricultural
products,whichplayanimportantroleforBrazilianexports.Germanyshouldpleadforareduction
ofsuchbarriersattheEuropeanlevel.Furthermore,GermanycouldpushforchangesintheEU’s
Common Agricultural Policy to reduce—or even abolish—subsidies for agriculture; a distortion of
competitionattheexpenseofdevelopingandemergingcountriessuchasBrazil.Inexchange,Brazil
shouldreduceitstaxesonfinalindustrialgoods.Suchmeasureswouldbebeneficialforbothsides.
A liberalization of trade flows should also facilitate the establishment of international supply
chainslinkingindustriesinGermanyandBrazil.Giventhatbothcountriesarethemostprominent
manufacturing hubs in their respective regions, there should be significant gains made from
supplychainintegration.
Anotheraspect is thatcontemporarywaysofproductionandconsumptionarenotsustainable,
especially due to the implied huge demand for natural resources and the volume of harmful
emissions. In order to move to more sustainable patterns, an increase in the price of natural
resourcesandcarbonseemsunavoidable.However,ifasingleeconomytakesasteptoreducethe
domesticdemandfornaturalresources,atleastintheshortrunthisdecisionwillhaveanegative
impactonitsinternationalcompetitiveness,asproductioncostswouldlikelyincrease.
HowcouldBrazilandGermanyreducetheirdemandandconsumptionofnaturalresourceswithout
losinginternationalcompetitivenessandincreasingunemployment?HowcanBrazilandGermany
maintaintheirexportcapabilityandsimultaneouslypromoteenvironmentalsustainability?Can
anincreaseinservicesoutputandexportscombineecologicalsustainabilitywithinternational
competitiveness?
OneanswercouldbeforBrazilandGermanytocooperateinthedevelopmentanddisseminationof
greentechnologies.Bothcountrieshaveexpertiseindifferentformsofrenewableenergy.Instead
ofprotectingtheirdomesticindustries,thecountriesshouldaimatlearningfromeachotherand
49
Chapter III: Recommendations
welcoming imports of products related to renewable energy. This includes allowing exports of
sugarcane-basedethanolfromBraziltoEurope.
Thesearecrucialquestionsforthetwocountries.Anabilitytofindamiddlegroundmayhelp
addressthemandaidinreducingtheimbalancesintheexistingtradeflows.Furtherresearchon
thisisundoubtedlyrequired.
Lastbutnotleast,positivepoliticalsignalsshouldnotbeunderestimated.Themutualimportance
of two countries to each other is emphasized, among other things, by visits of high-ranking
politicians. Since taking office in November 2005, German Chancellor Angela Merkel visited
Chinasixtimes.Duringthatsameperiod,shevisitedBraziljustonce,inMay2008.
5. Brazil and Germany as Leaders in EU-Mercosul Free Trade Relations
Asevidencedbyhigh-levelmeetingsonbothsidesoftheAtlantic,theEUandBrazilarekeenon
fast-trackingthefreetradedialogue.However,progresshasremainedelusive.Certainmembers
ofMercosulremainreluctanttoliberalizetradeatamomentwhentheircountriesfacesignificant
macroeconomic turbulence. Meanwhile, the EU maintains agricultural subsidies that could
preventMercosulcountriesfromleveragingtheircomparativeadvantages,thusdisincentivizing
cooperation.
Yet a window of opportunity exists. Uruguay and Paraguay have joined Brazil in expressing
interest in rapidly advancing thedialogue.Meanwhile, officials from theEuropeanParliament
haveinsinuatedthattheremaybe“moreroomformaneuver”regardingEUagriculturalsubsidies
thistimearound(Leahy,2013).Theentireprocesscouldbenefitfromstrongleadership,bothin
privatenegotiationsandinthesphereofpublicdebate.Asthelargestcountriesfromeitherside
(both in termsofpopulationandGDP),Brazil andGermanyareparticularlywellpositioned to
assumethisleadershiprole.
While trade with Brazil is currently less important for Germany, it presents an important
opportunity, as South America is a region still poorly integrated with Germany. The German
governmentshouldthereforebeastrongproponentofsuchanagreementasworktocounteract
moreprotectionistEUgovernments.
Internally,BraziliantradenegotiatorscanworkcloselywiththeMercosulpartnerswhoaremore
amicabletoanEU-Mercosulagreement.IfBrazil,UruguayandParaguaycanagreeonreasonable
termstopresenttotheEU,thiswillputincreasedpressureonotherMercosulmemberstojoin.
IfVenezuelaandArgentinacontinue toholdout, they riskpushingBrazil towardsa two-track
negotiationprocessthatcouldredefineMercosul.
50
Chapter III: Recommendations
Externally,Brazilianpublicandprivateleaderscouldmountapubliccampaigndrawingattention
towhytheybelieveanEU-MercosulFTAcantangiblybenefittheBrazilianeconomy.Whilesome
leadershavespokenontheissue,acampaignwithaconsistentandlongtermstrategywouldbe
moreeffectiveinbuildingmomentumfortheproject.
Germany,foritspart,mustpushtheEUtoadoptalessdefensivepositiononagriculturalimports
in order to entice the South American bloc to join in the agreement. Germany should use its
bargainingpowerwithintheEUinordertopushforthedismantlingofoutstandingtradebarriers.
At the same time, these important multilateral initiatives should not constrain the expansion
ofbilateralrelations. Inservicessectorsaswellas inmanufacturing, thereisawidescopefor
partnershipsandpreferentialtradefacilitationmeasures,withinWTOrules,thatcansignificantly
boostbilateral flows.Coupledwithawiseandmutuallybeneficial transfer of technology, they
representapragmatic,results-orientedapproachthatcanbestartedimmediately.
51
Moving Forward: Finding the Common Ground
Moving Forward: Finding the Common Ground
AlloftheserecommendationsimplythatthereiscommongroundbetweenBrazilandGermany
in terms of economic strategies, strengths and policies. By finding this common ground, the
burgeoningrelationshipbetweenthetwocancontinuetogrow.
Asthis“commongroundprocess”advances,coordinatedonmultiplelevels(amonggovernments,
institutions and investors), the conversation on trade, technology and other significant policy
topicsmightbecome increasinglymore feasible,and furthermutuallybeneficialarrangements
maybediscovered.
As such, the relationship between the highly advanced German economy and the rapidly
developinganddynamicBrazilianeconomycantrulybecomearelationshipforthe21stcentury.
52
Works Cited
Works Cited
Chapter I
BundesamtFürWirtschaftUndAusfuhrkontrolle(2012).Report2011/2012.ForeignTrade,
EconomicDevelopment,EnergyandClimateProtection,March2012.
Böhmer,M.,Limbers,J.andWeiss,J.(2013).VorteileDeutschlandsdurchdieWährungsunion.
SzenarienberechnungenbiszumJahr2025.Gütersloh:BertelsmannStiftung.
Burrell,A.,Ferrari,E.,GonzálesMellado,A.,Himics,M.,Michalek,J.,Shreshta,S.andVan
Doorslaer,B.(2011).PotentialEU-MercosurFreeTradeAgreement:ImpactAssessment,
Volume1.Luxembourg:PublicationOfficeoftheEuropeanUnion.
Calfat,G.andFlôres,R.G.,Jr.(2006).TheEU-MercosulFreeTradeAgreement:Quantifying
mutualgains.JournalofCommonMarketStudies,44(5);921–45.
CantarinoDaCostaRamos,G.CamexandUSTR.AnInstitutionalAnalysisoftheConductof
TradePolicyinBrazilandtheU.S.Washington:TheGeorgeWashingtonUniversity,Minerva
Program,Spring2010.
CornetNaidin,L.,DaMottaVeiga,P.,PereiraDaCosta,K.,andPolóniaRios,S.(2010).
BrazilianTradePolicy:NewMotivationandTrends.CentrodeEstudosdeIntegraçãoe
Desenvolvimento(CINDES),September2010.
DaMottaVeiga,Pedro(2009).Brazil’sTradePolicy:MovingAwayFromOldParadigms.In
Brainard,L.AndMartinez-Diaz,L.(eds.),BrazilasanEconomicSuperpower?Understanding
Brazil’sChangingRoleintheGlobalEconomy.Washington:BrookingsInstitutionPress,pp.
113–136.
Emmott,R.(2013).EU,MercosurtoUnblockTradeTalks,HurdlesRemain.Reuters,January26,
2013.
EuropeanCommission(EC).Trade,Growth,andWorldAffairs.TradePolicyasaCoreComponent
oftheEU’s2020Strategy.FactSheet,June14,2011.
EuropeanCommission(EC).EUBilateralTradeandTradewiththeWorld.Brazil.DGTrade,
March21,2012.
Felbermayr,G.(2013).TransatlanticTradeandInvestmentPartnership:Whobenefitsfromafree
tradedeal?BertelsmannStiftung.
Flôres,R.G.,Jr.(2013a).InSearchofaFeasibleEU-MercosulFreeTradeAgreement.CEPS
WorkingDocumentNo.378,February.Brussels:CEPS.
Flôres,R.G.,Jr.(2013b).AÁreadeLivre-ComércioEstadosUnidos—UniãoEuropeiaeseus
DiversosImpactos.FinalReport,Project/ProjetoDAS79445.Brasília:UnitedNations
DevelopmentProgramme.
Flôres,R.G.,Jr.andM.Marconini,orgs(2003).AcordoMercosul-UniãoEuropeia–Alémda
Agricultura.RiodeJaneiro:KonradAdenauerStiftung.
GermanForeignOffice.CountryProfileBrazil.October2012.
Krugman,P.,(1979).Increasingreturns,monopolisticcompetition,andinternationaltrade.
JournalofInternationalEconomics9,pp.469–79.
53
Works Cited
Leahy,J.(2013).BraziltorestartEUtradetalks.FinancialTimes,April8,2013.
Mercopress(2011).EUFarmLobbiesIncreaseCampaignagainstTradeAgreementwith
Mercosur,May3,2011.
Mercopress(2014).UruguayandBrazilpreparedfora“two-speed”Mercosur/EUtrade
negotiation,February10,2014.
Miles,T.(2012).WTOSeesMoreTradeDisputesAheadAfterVintageYear.ThomsonReuters,
December14,2012.
Muriel,B.andTerra,C.(2009).SourcesofComparativeAdvantagesinBrazil.Reviewof
DevelopmentEconomics1,pp.15–27.
Noguera,S.(2009).TheInternationalFinancialCrisisandBrazilintheDohaDevelopment
Round.WorkingPaperpreparedforpresentationatthe2009WTOForum,September28,
2009.
Paiva,G.(2010).BrazilInfrastructure:PavingtheWay.MorganStanleyBluePaper,May5,2010.
Ridout,T.(2014).BrazilLooksOutward,Cautiously.GermanMarshallFundExpertCommentary.
February18,2014.
WorldEconomicForum(2013).TheGlobalCompetitivenessReport2013–2014.
WorldTradeOrganization(2009).Brazil:TradePolicyReview.ReportbytheSecretariat.
WorldTradeOrganization(2013).EuropeanUnion.TradePolicyReview.Reportbythe
Secretariat.
WorldTradeOrganization(2013a).Brazil:TradePolicyReview.ReportbytheSecretariat.
Chapter II
Alfaro,L.,Kalemli-Ozcan,S.,andVolosovych,V.(2003).WhyDoesn’tCapitalFlowfromRichto
PoorCountries?AnEmpiricalInvestigation.Mimeo,HarvardUniversity.
Aliber,Z.(1962).SpeculationintheForeignExchanges:theEuropeanExperience,1919–1926.
YaleEconomicEssays.
Bhagwati,J.(1998).TheCapitalMyth:TheDifferencebetweenTradeinWidgetsandDollars.
ForeignAffairs77,May/June1998.
Brecher,R.andDiaz-Alejandro,C.(1977).Tariffs,ForeignCapitalandImmiserizingGrowth.
JournalofInternationalEconomics7,pp.317–322.
Cooper,R.(1998).ShouldCapitalAccountConvertibilitybeaWorldObjective?Essaysin
InternationalFinance,No.207,PrincetonUniversity.
Cooper,R.(1998).ShouldIMFPursueCapital-AccountConvertibility?EssaysinInternational
Finance,No.207,PrincetonUniversity.
Cooper,R.(1999).ShouldCapitalControlsBeBanished?BrookingsPapersonEconomicActivity
1,pp.89–141.
Frieden,J.andLawrence,J.(2011).ThePoliticalEconomyofInternationalMonetaryPolicy
Coordination.InTheEncyclopediaofFinancialGlobalization.
Friedman,M.(1953).TheCaseforFlexibleExchangeRates.EssaysinPositiveEconomics.
Chicago:UniversityofChicagoPress.
54
Works Cited
Gandolfo,G.(2001).InternationalFinanceandOpen-EconomyMacroeconomics.NewYork.
Gertler,M.andRogoff,K.(1989).DevelopingCountryBorrowingandDomesticWealth.
Cambridge,Mass.:NationalBureauofEconomicResearch,WorkingPaperNo.2887,March
1989.
Gertler,M.andRogoff,K.(1990).North-SouthLendingandEndogenousDomesticCapitalMarket
Inefficiencies.JournalofMonetaryEconomics,October1990,26,pp.245–266.
Glick,R.andRose,A.(2002).DoesaCurrencyUnionAffectTrade?TheTime-sSriesEvidence.
EuropeanEconomicReview,June,46(6),pp.1125–1151.
InternationalMonetaryFund(1993).BalanceofPaymentsManual,5thEdition.
Lane,P.AndMilesi-Ferreti,G.(2007).TheexternalwealthofnationsmarkII:Revisedand
extendedestimatesofforeignassetsandliabilities,1970–2004.JournalofInternational
Economics73,pp.223–250.
Lewis,K.(1999).TryingtoExplaintheHomeBiasinEquitiesandConsumption.Journalof
EconomicLiterature,June,37(2),pp.571–608.
Lucas,R.(1990).WhyDoesn’tCapitalFlowfromRichtoPoorCountries?.AmericanEconomic
Review80(2),pp.92–96,1990.
Obstfeld,M.(1986).RationalandSelf-FulfillingBalance-of-PaymentsCrises.AmericanEconomic
Review76,pp.72–81.
Obstfeld,M.AndKennethR.(1996).FoundationsofInternationalFinance.TheMITPress,.
Papaioannou,E.(2004).Whatdrivesinternationalbankflows?Politics,institutionsandother
determinants.EuropeanCentralBank,WorkingPaperSeries437,February2004.
Papaioannou,E.(2009).Whatdrivesinternationalfinancialflows?Politics,institutionsandother
determinants.JournalofDevelopmentEconomics88,pp.269–281.
Rajan,R.(2005).HasFinancialDevelopmentMadetheWorldRiskier?NBERWorkingPapers
11728,NationalBureauofEconomicResearch,2005.
Reinhart,C.andRogoff,K.(2004).SerialDefaultandthe“Paradox”ofRich-to-PoorCapitalFlows.
AmericanEconomicReview94(2),pp.53–58,2004.
Triffin,R.(1957).EuropeandtheMoneyMuddle.NewHaven:YaleUniversityPress.
Triffin,R.(1966).ExchangeControlandEquilibrium.InSeymourE.Harris,ed.,Foreign
EconomicPolicyfortheUnitedStates.Cambridge,Mass.:HarvardUniversityPress.
55
56
Global Economic Dynamics (GED)
About the Authors
Dr. Viviane Maria Bastos –ProfessorofQuantitativeMethodsatUniversidadeFederaldoRiode
Janeiro;ResearchAssistantatFundaçãoGetulioVargas,RiodeJaneiro.
Dr. Renato G. Flores–Professor,GetulioVargasFoundationGraduateSchoolofEconomicsand
SpecialAidetothePresidentFondaçãoGetulioVargasRiodeJaneiro
Dr. Antonio Carlos Porto Gonçalves–ProfessorofEconomicsofFundaçãoGetulioVargasand
attheFederalUniversityofRiodeJaneiro.DirectorofBusinessDevelopmentofFundaçãoGetulio
VargasinRiodeJaneiro.
Andreas Esche–ProgramDirector,ShapingSustainableEconomies,BertelsmannStiftung,
Gütersloh.
Samuel George–ProjectManager,GlobalEconomicDynamics(GED),BertelsmannFoundation,
WashingtonDC.
Dr. Thieß Petersen–SeniorExpert,GlobalEconomicDynamics(GED),BertelsmannStiftung,
Gütersloh.
Thomas Rausch–ProjectManager,FutureEconomicDialogue,BertelsmannStiftung,Gütersloh.
About the Project “Global Economic Dynamics” (GED)
The Bertelsmann Stiftung established the project “Global Economic Dynamics” (GED) to shed
morelightonthegrowingcomplexityofinternationaleconomicrelationships.Byusingstate-of-
the-art toolsandmethodsformeasuring, forecastinganddisplayingthedynamicsof theworld
economy, theproject aimsatmakingglobalization, its economiceffects aswell as itspolitical
consequencesmoretransparentandtangible.
Contact
BertelsmannStiftung
GEDTeam
ProgramShapingSustainableEconomies
Carl-Bertelsmann-Straße256
33311Gütersloh|Germany
Phone +49524181-81353
Fax +49524181-681353
57
Global Economic Dynamics (GED)
GED-Team
Program Director
AndreasEsche
DirectorShapingSustainableEconomies
Phone +49524181-81333
Fax +49524181-681333
Project Managers
Dr.JanArpe
ProjectManager
Telefon +49524181-81157
Fax +49524181-681157
SamuelGeorge
ProjectManager
Phone +49524181-81661
Fax +1202384-1984
Dr.ThießPetersen
SeniorExpert
Phone +49524181-81218
Fax +49524181-681218
Dr.UlrichSchoof
ProjectManager
Telefon +49524181-81384
Fax +49524181-681384
58
Imprint
Imprint
©2014BertelsmannStiftung
BertelsmannStiftung
Carl-Bertelsmann-Straße256
33311Gütersloh
Germany
www.bertelsmann-stiftung.de
Responsible
SamuelGeorge,Dr.ThießPetersen
Autors
FundaçãoGetúlioVargasContributors
Dr.VivianeMariaBastos
Dr.RenatoG.Flores
Dr.AntonioCarlosPortoGonçalves
BertelsmannStiftungContributors
AndreasEsche
SamuelGeorge
Dr.ThießPetersen
ThomasRausch
Design
NicoleMeyerholz,Bielefeld
Picture
©FlorianKopp/ImagebrokerRF/Strandperle
www.bertelsmann-stiftung.de
Address | Contact
Bertelsmann Stiftung
Carl-Bertelsmann-Straße 256
33311 Gütersloh
Germany
GED-Team
Program Shaping Sustainable Economies
Phone +49 5241 81-81353
www.ged-project.de