How two new free trade agreements could transform Brazil

Globalization - Trade

This article is part of the World Economic Forum on Latin America 2017  and was previously published in the World Economic Forum Blog, on March 27, 2017.

Mercosur (Southern Common Market) country members (Argentina, Brazil, Uruguay and Paraguay) and the European Free Trade Association (EFTA), a bloc formed by Switzerland, Norway, Iceland and Liechtenstein, have successfully completed an exploratory dialogue and preliminary negotiations for a Free Trade Agreement (FTA).

From the Brazilian government’s perspective, this new FTA is good news in that it should help the country recover its competitive advantage in the global economy. For a country that is still in the throes of its worst recession on record – its political scandals might be behind it, but it is still experiencing unprecedented economic hardship, due to a decline in investments and negative drop in domestic consumption of over 3% last year – this is to be celebrated.

It was largely to reverse this negative trend that policy-makers have acted to promote exports and focus on FTAs with countries and blocs outside of the Latin America region. By opening trade with new markets and negotiating new agreements, Brazil is poised for a broader global reach with new global partners, ultimately improving trade relations and contributing to the growth and stability of the Brazilian economy.

EFTA is a priority for Brazil

The prompt adoption of a discussion with EFTA by the Mercosur Common Market Group is indicative of the high priority that all Mercosur members have given to these negotiations.

This is best demonstrated by the enthusiasm Brazilian exporters have demonstrated in this FTA, excited by the prospect of new exports into these high purchasing power markets. Likewise, EFTA, which is heavily influenced by Switzerland, has expressed special interest in having more access to new markets in the Mercosur countries.

Trade exchange: Brazil and EFTA countries

In 2016, exports from Brazil to EFTA countries totaled $2.4 billion, representing 1.3% of Brazil’s export operations; manufactured goods accounted for 64.9%, semi-manufactured goods 25.9% and basic goods 9%. The main products exported by Brazil were drilling or exploration platforms (32.6%), aluminum oxides and hydroxides (24.3%), soybeans (4.0%), gold in semi-manufactured forms (3.7%) and coffee beans (1.9%).

In the same year, Brazilian imports from EFTA countries totaled $2.4 billion, representing 1.8% of Brazil’s import operations; 5.8% was for basic products, 1.8% for semi-manufactured goods and 92.4% for manufactured products. The main products imported from EFTA countries were medicines for human and veterinary medicine (21.5%), nitrogen compounds (13.0%), heterocyclic compounds (6.5%), fuel oils (6.4%), fertilizers and fertilizers with nitrogen and phosphorus and potassium (4.4%).

EFTA country exports in 2016 totaled $400 billion, and only 0.8% of them were destined for Brazil. In turn, the total EFTA imports were $333.4 billion in the same year, where only 0.9% of these imports originated from Brazil.

Under the agreement and the cheaper access to the market this will create, it is estimated that Brazilian exports of various products from the most diverse sectors of the economy will increase at constant rates. Additionally, non-tariff barriers will be removed in order to facilitate trade between both regions.

Mercosur is also working towards an EU agreement

In addition to the EFTA negotiations, Mercosur is negotiating an FTA with the European Union (EU).

For Brazil, the biggest gains are concentrated not only in exports and access to imports from EU countries, but also in major sectors. Brazil will be able to obtain cheaper inputs for the production of industrial goods with the total elimination of its import tariffs for several products, thereby eliminating some of the costs of production when buying these products from other markets. Consequently, these benefits will increase the competitiveness of Brazilian products.

Another opportunity is tightly tied to government purchasing. Studies by the Confederation of Brazilian Industry show that the government purchasing market in EFTA countries is over $80 billion, and that none of the countries insist on preference for national products and suppliers. The EU maintains a relatively flexible stance in the negotiations, which will help accommodate Brazilian interests.

Brazil’s future

The objective of these new international negotiations, whether with EFTA or the EU, is to give a much-needed boost the national economy, not only by facilitating international trade but also by increasing Brazilian exports.

The Mercosur and EFTA FTA will most likely help Brazilian exports grow significantly; as a result, companies should be able to recover their production and employment capacity. These steps are crucial for the recovery of Brazil’s economy.

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