THE BRAZILIAN FOREIGN TRADE POLICY: THE OLD AND THE NEW ORTHODOXY - CONFRONTATION OF DOCTRINES AND COMMERCIAL PRACTICES

 

 

A B S T R A C T

 

LEITE, Érico Lins. The Brazilian Foreign Trade Policy: the old and the new orthodoxy - confrontation of doctrines and commercial practices.

Rio de Janeiro: UFRJ/IE, 1998. D.Sc. thesis, xxxi, 611 pg., 2 volumes.

  

The main goal of this thesis is to prove that the decision of implementing a liberal model of trade made by the Brazilian government in the early nineties ¾ time at which the country broke with a long regulatory tradition, and abdicated of its prerogative to promote a foreign trade policy in favor of the market ¾ was a grave mistake.

 

Until recently, the nation has counted on a strong structure of policy-making and foreign trade management. This allowed the government to play a decisive regulatory role in the search of solution for several exchange crises, from that carried out by the Great Depression in the thirties to the recent ones, in the seventies and the eighties.

In fact, the Brazilian foreign trade policy arose from the formidable crisis unleashed by the Great Depression, and has improved as a consequence of international events that have been affecting the country since that time. At each new crisis, defense mechanisms have been adopted, and adjustments have been made to prior instruments. As a result, the degree of interventionism on the economy, and especially on foreign accounts, has increased continuously. In this context, Brazilian trade policy began to take shape and has been improved.

              The long and vigorous period of state interventionism which aimed at balancing foreign accounts and fostering national production through import selectiveness and export promotion, has been followed by a new orthodoxy based on trade liberalism. This orthodoxy denies the policy and all the mechanisms adopted so far.

The strategy of development based on domestic industry protection and on the import-substitution model adopted by the country within a period of at least fifty years together with export promotion carried out from the 1960's to the 1980's has been completely abolished to make way to a new model. The reasoning behind this is that its continuity would hamper both the economic development retaking and the country's greater insertion into the international economy.

The new paradigm consists in liberalizing imports so that Brazilian industry is exposed to outside competition. What is expected is that quality will be improved and prices will diminish, and consequently domestic product will reach competitive gains. This would be beneficial to both domestic-market-oriented production, which would improve its competitive edge, and export output, which could even dispense with any kind of incentive.

 

Taking into account that the forms of governmental action and economic rules included in the present model are diametrically opposed to those adopted in the past, which allowed the country to face different balance of payment crises, this thesis questions whether the new orthodoxy is effective enough to avoid, or even to deal with new exchange crises, or ¾ even worse ¾ whether it increases the country's exposure to sudden changes in international economic order.

 

The fundamental point, therefore, is to know whether the new orthodoxy favors or, contrarily, limits Brazilian economic development, considering that import liberalization ¾ and consequently trade imbalance ¾ requires the continuous inflow of international financial resources for the current account balance to be maintained.

 

Aiming at discussing this question, it was confronted the foreign trade policy adopted by the country since the beginning of the century until the late eighties ¾ period which we call Old Orthodoxy ¾ with the New Orthodoxy that begun and has been developing in this decade.

 

Eight-year data on trade policy have been retrieved through inventory and the analysis of pertinent legislation (laws, executive laws, provisional remedies, decrees, administrative rules, instructions, resolutions, circulars, notices, and advices), as well as through testimonies from people who worked in this field, in different periods of time and the author's personal experience as a executive at the Banco do Brasil's Foreign Trade Department, in the seventies and eighties and at the Foreign Trade Secretariat of the Ministry of Industry, Commerce and Tourism until the beginning of 1995, and as an International Economy professor at the Federal University of Rio de Janeiro - UFRJ, since 1978.

 

The thesis emphasizes the importance of governmental organizations created with the aim of making, coordinating, and implementing the old industrial and foreign trade policies. Besides, it examines and places great emphasis on fiscal and credit incentives used with the objective of fostering exports, as well as on subsidy given to freight, shipowners, and shipbuilding. In addition, it examines exchange and administrative instruments for curbing imports, that go from the adoption of the concept of national similar product and exchange auctions to the list of goods that have had their import licenses suspended and import programs.

 

Furthermore, the thesis compares the effects on domestic production development of the old import tax system ¾ in which prevailed high nominal custom tariffs, in spite of being lower the effective ones, due to import special systems ¾ with the current system, which sets low tax rates to be applied to all imported goods indistinctly. Also, it is broadly discussed the current inability of governmental organisms to enforce commercial defense measures against unfair actions widely practiced by other countries with the aim of promoting their exports.

 

The thesis also studies the country's opening up to the international capital market, and shows that, in the 1990's, due to commercial outcome, to higher or lower exchange overvaluation, and to variation in the amount of its international reserves, periodic changes have been made in newly created deposit-taking mechanisms, in an incredible succession of comings and goings, sometimes boosting, sometimes limiting the inflow of resources from the international market, object of successive and unexpected transformation.

 

Moreover, the thesis looks carefully to economic stabilization plans applied to Brazilian economy in the eighties and nineties, due to the fact that they are closely related to exchange and foreign trade. Besides, it shows that since a long time ago the country has widely been utilizing exchange overvaluation as an instrument of anti-inflationary policy.

 

Finally, it analyses post-liberalization outcomes of foreign trade and capital flows.

 

 With respect to this, it deserves mention the fact that whenever economic activity level expanded, imports enlarged dramatically and exports cooled off, except in periods in which the prices of some commodities increased in the international market. As a consequence, trade balances declined uninterruptedly as from 1990 until turning into negative figures from 1995 onwards. Payments of interests relating to prior and ¾ mainly ¾ to new indebtedness under service account grew geometrically, the same happening with profit and dividend remittance, mostly due to progress in privatization program applied to public companies and services, and to increased acquisition of domestic enterprises and banks by overseas conglomerates. Additionally, it was registered a huge increase in expenses under transportation and international traveling.

 

Because of this, the present decade has been registering successive deficits on current account, which reached only in 1997 the significant amount of US$ 33 billion, equivalent to more than 4% of Brazilian gross domestic product.

 

Since Brazil has adopted the liberal model, in detriment of any other industrial and foreign trade policies, it became too dependent on the inflow of foreign capital to match current account's imbalance. For this model to be sustained, international capital flows had to be liberalized, too. As trade balances increasingly diminished, and ¾ principally ¾ a succession of deficits took place, a huge number of procedures for attracting foreign capital were created and carried on with the aim of assuring balance of payment's equilibrium. Meanwhile, and in accordance with liberal prescriptions, the country has patiently been waiting that national production could spontaneously achieve the competitiveness necessary for boosting exports, and that all economic agents restrained their demand for imported goods.

 

Throughout this decade, a substantial volume of international reserves has been accumulated with the aim of preventing occasional interruptions in capital inflow, as well as avoiding greater exchange overvaluation. This overvaluation had paradoxically been originated in the massive inflow of foreign capital itself.

 

The lack of foreign trade policy and the consequent dependence on the international capital market forced the country to maintain interest rates at high levels. Monetary policy, therefore, had to be periodically adjusted at least in accordance with the differential between domestic interest rates ¾ deducted from the exchange variations ¾ and the international rates. Domestic public indebtedness ¾ besides having increased mostly due to reserves' accumulation ¾ began to grow continuously in function of the extraordinary feedback from the high interest rates.

Economic activity expansion was limited and the level of employment decreased by more than 30%.     

 

Insofar as economic stabilization is concerned, the results of the Real Plan, adopted in 1994, were evident. In effect, free imports together with domestic currency overvaluation policy constitute the basis over which the present anti-inflationary policy has been constructed. Abundant supply at low prices disciplines, and even limits, prices of tradables.

 

             Nevertheless, general prices stability, as objective of short- and long-term economic policies, albeit desirable ¾ and to a certain extent fundamental for economic development ¾ should not serve its own purpose only. So, the means by which monetary stability could be reached and sustained should be object of rigorous analysis, in view of negative effects on economic development, in the medium and the long run.

 

It was not regarded that is traditional in the economic science field the conflict between internal and external balance. In other words, there is an inevitable chock between domestic and foreign accounts' stability. Most of the time, internal balance occurs in detriment of external equilibrium, and vice-versa. This can be acceptable in the short term, but dangerous in the long run, due exactly to its consequences on economic development.

 

What seems to be new in the present Brazilian case, regarding this traditional conflict, is not the submission of the country's current accounts to its anti-inflationary policy, but its insistence on adopting free-market procedures with the expectation that ¾ due to competitive gains ¾ exports could spontaneously increase. This situation could allow the achievement of current account balance and continuity of inflation-control achievements.

 

Based on this reasoning, the successive trade deficits registered from 1995 onwards have become increasingly important. They are no more conjunctural or structural deficits resulting from outside shortages or from programmed import-substitution actions. At present, trade balance deficits derive from market liberalization, that is, from the model adopted by the country with the aim of restructuring production and serving as an instrument for economic stabilization.

 

The thesis points that in the face of successive trade deficits, it is not even possible to continue maintaining the current economic stabilization program because the deficits cause not only growth in dependence on capital inflows for the balance of payments equilibrium, and submission of monetary policy to external outcomes, within an international framework that is changing constantly.

 

The thesis' conclusion is that the country has made a grave mistake adopting the liberal model of trade, braking with the regulatory tradition, and abdicating of its prerogative to promote a foreign trade policy in favor of the market.

 

The current orthodoxy is unable to solve exchange crises or to avoid the occurrence of new ones. Even worse, the new model has increased even more the country's exposure to international crises because external balance and economic development began to depend continuously and increasingly on short-term capital inflows.

 Therefore, the cause of the present exchange crisis is the model adopted by the country, that is, the lack of trade policy which imposes subordination of Brazilian current account balance to permanent capital inflows, thus considerably increasing country's exposure to international economic crises.

 

The speed at which the country has dealt with both the loss and the recovery of international reserves in the late 1994 Mexican crisis and in the early 1998 Asia's financial crash associated with the significant amount of reserves that has been pouring out of the country in a short period of time under the current exchange crisis ¾ which started with the Russian debacle ¾ not only makes evident the volatility of capital flows and the risk the country takes by continuing to depend exclusively on these capitals for balancing its current accounts, but also gives reasons that help demonstrate the mistake the country has made when it adopted the liberal orthodoxy.

 

Solution relies on positive trade balance achievements. However, due to large commercial freedom ¾ which causes imports to increase continuously ¾ and to lack of a consistent industrial policy that could effectively help increase domestic production's competitiveness and exports, it is impossible to stem the trade deficit and, as a consequence, to balance the current account.

 

What is proposed for overcoming the present exchange crisis definitely, avoiding others, and allowing the country to adopt an independent monetary policy is that the country set up a minimum project of development and formulate a Foreign Trade Policy, besides creating a policy coordinator organism and restructuring the current ones responsible for foreign trade management.

 

Érico Lins Leite

Rio de Janeiro, RJ

September 1998