By Ricardo Taño Feijoó

Recently I had a very interesting conversation with a friend, Prof. Lucas P. do C. Ferraz (Prof. Ferraz), at São Paulo School of Economics – Fundação Getulio Vargas (EESP – FGV, in Portuguese). He is the Head of Economic Modeling at the Center for Global Trade and Investment at the Fundação Getulio Vargas and Coordinator of the WTO Chair Program in Brazil. He was getting ready to deliver an important presentation in Switzerland on the subject of “The Brazilian Industry” and wanted to go over the presentation with me.

Honestly, I was not prepared to receive an outstanding lesson about Brazil’s Industry history and difficulties. I was sure that the conference’s participants were going to be as impressed as I was. Prof. Ferraz has a total command knowledge of the subject matter. He has delivered similar presentations all over the world. It was a distinct privilege and an honor to have this unique opportunity.

Having been back to São Paulo, Brazil –- where I grew up during my teenage years (1973 – 1979) — for nine months, it has been a very interesting and challenging experience. After living in the USA for more than three decades, the quick adjustment is not only crucial but also mandatory. Our international consulting firm, headquarter in Miami, Florida, has had an office in São Paulo since its inception in early 2011. Brazil has been for many years, even when working for other international companies, our primary target market in Latin America. We had been focusing on bringing international companies to Brazil, both in the product and service sectors, and had a good traction during our first two years in business.

Things started to turn around in mid 2013 when riots, in protest to the raising of the bus fare, erupted in many of the most populous Brazilian cities. We have since changed our strategy and, instead of bringing companies to Brazil, we decided that we would assist Brazilian companies to expand and to export their products and services towards North America, Latin America and the Caribbean markets where we have over two decades of successful business experience. Therefore, we needed to learn, and we are continuing learning, everything about the Brazilian industry market.

Prof. Ferraz presentation and careful explanations gave us a clearer view of the difficulties, challenges and hurdles the Brazilian industry needs to confront and are currently confronting. It also explained to us why it has been so difficult, almost impossible, for Brazil to become a dominant player in world exports. Other countries around the world, that do not have as much natural resources or the unskilled labor force volume that Brazil has, are doing much better in worldwide exports than Brazil.

Prof. Ferraz started his presentation discussing “Global Value Chains” and how they will affect the market in the “New Commerce Theory” environment. The “New Commerce Theory” was consolidated in the 80s, principally following Paul Krugman’s work; it was trying to explain the trade patterns between developed countries. During this time, this type of “intra-industry trade”, which refers to the exchange of similar products belonging to the same industry, practiced by developed economies, represented 30% - 40% of all world exports. The term usually applies to international trade, where the same types of goods or services are both imported and exported.

In addition, in the 70s and 80s we had the rising of Asia’s economies and the rapid industrialization of many of its countries (China, Taiwan, South Korea, and Singapore, just to name a few). This period combined with the strong reduction of international transportation cost and the advance of information technology, reducing cost and allowing remote control management, allowed companies to start thinking of the implementation of labor force where its cost was less expensive. Instead of using an “import substitution” model, the Asia countries opted for specializing in “stage production” integrating their productive structures and creating their own regional value chains.

The intra-industry trade corresponds to approximately 66% of all world exports. The production fragmentation makes the competitive concept of a particular country ceases to be only domestic, turning it dependent on the competitive advantages of each global chain participating country. It becomes necessary to let go of the view as a “gross value international trade” and start viewing it as a “value added international trade”. “What you sell it is not necessarily what you earn”, indicated Prof. Ferraz “in Brazil, for each dollar it is exported, 0.87 cents are ‘domestic value added’”, he continued.

How integrated is the Brazilian economy in the Global Value Chain?

In general, Brazil adds little foreign content to its exports. Brazil added about 11% of import value to its manufactured exports; and, 6% to its agricultural exports in 2014. The total imported participation has increased in recent years in the transformation industry but it still lags behind other countries around the world (China, India, Mexico, USA, etc.). Due to its low openness to imports, it is natural that the Brazilian industry also exports little. We can say the same about Brazilian industry exports of intermediary goods, suggested by the low integration in the global value chain. Consequently, the share of domestic intermediary goods compared to the total intermediary goods used by the Brazilian industry is still very high when compared to other developing and developed countries around the world.

Isolated from the “Global Value Chain” and from “trade agreements” with other countries, the Brazilian industry losses international competitiveness and opens space for the economy to focus and specialize in the service sector. These services, however, have a very low value added influence in the country’s GDP. Countries that are more productive in the service sector tend to have lower import barriers towards international trade.

The heads of the Brazilian industry complain, and they have strong reasons, about their low competitive conditions: high taxes, bad infrastructure, complex and unstable public regulations, and poorly qualified labor force. “The high taxes, the macroeconomic instability and the chaotic state interventions are reflections that the government spends like there will be no tomorrow and thinks that knows everything and has all the answers” said Armando Castelar Pinheiro on a recent article. He was referring to the Brazil’s government public policies based on an authoritarian narrative.

Having a modern and competitive industry is obviously very important for any serious country. Between 1950 and 2014, Brazil’s work productivity grew a mere 197%. On the other hand, South Korea and China’s productivity grew respectively 1,605% and 2,176% during the same exact period.

Conversely, according to the WTO Brazil has grown its participation in the Global Value Chain (GVC) and the service sector contributing even more towards competitiveness of manufactured exports. In a recent study the WTO quantified various aspects of today’s international trade dynamics and showed how imports and exports from 61 economies are globally connected. In the study, it was identified that there is even more foreign content in the products and services that countries export. There is a 9.9%, on average, yearly growth in imported supplies for all global exports.

According to the WTO’s data Brazil’s participation in the GVC is rising. Nearly 11% of everything the country exports, including products and services, includes imported supplies. Approximately 25% of Brazilian exports are utilized as supplies by other foreign companies and then exported to third markets.

Adding up both indicators, the total value in the GVC for Brazil’s total export stayed at 35% in 2011, representing a 14% yearly growth, on average, higher than the 13% in the developing and the 8% in the developed countries.

Our conclusions

Excluding East Asia, the loss of industry’s participation on GDP and service specialization is a global phenomenon and it is directly associated to the growth of Global Value Chains (GVC). The same process has been occurring in Brazil, not for its greater GVC’s integration, but because of the loss in its industry’s competitiveness. The specialization in low productivity services explains the significant reduction in Brazil’s economic growth in the last 40 years. Brazil’s productivity service growth requires a bigger commercial openness in this sector, which is one of the most regulated sectors in the world. It also needs a larger GVC industry integration, to the point where the most productive industry will require services that are more qualified.

Brazil needs to formalize relevant trade accords, like the one in negotiation between the EU-Mercosur. In addition, an eventual approval of the Brazilian government to the TISA (Trade in Service Agreement) will greatly contribute to the service sector’s competitiveness increase and, consequently, to the transformation industry. Initiatives to facilitate trade, like the implementation of the foreign trade’s “Unique Portal Program” (Programa Portal Único in Portuguese), could give a new boost to Brazil’s GVC integration since the program aims at reducing significantly the current port delays.

The path is long, difficult and arduous but not impossible. We see a light at the end of the tunnel and we are extremely optimistic about Brazil’s future in the GVC. We value that there are companies in Brazil that are striving to succeed and many are achieving this important goal. We also understand that there might be companies in the market that are exploring the possibility of expanding their reach into foreign markets. Either by exporting their products and services or expanding their operations internationally to take advantage of any emerging opportunity.

In a global economy, businesses are pursuing international business strategies outside traditional markets. Entering or expanding international markets is expensive, time consuming and risky without the necessary expertise and networks. Most companies new to international business development or to a new geography engage the help of third-party consulting firms, like RTF International, who specialize in assisting companies venturing into new markets, either regional or international. Our firm offers a complete range of global business solutions to assist clients get where they want to go in a smooth, cost and time effective manner.

Source:linkedin/Ricardo Taño Feijoó