For a long time, the IEDI has been emphasizing the importance of Brazil improving its insertion into world trade, further diversifying exports, expanding foreign sales of manufacturing goods, participating in higher value-added links of global value chains, and accessing a larger set of inputs and modern capital goods at lower costs. To this end, the prerequisite is for the country to advance on the world integration agenda, reducing the barriers imposed on its foreign trade.

We need a firm and unconditional plan for the competitive insertion of the Brazilian economy in the world, as we face the risk of even greater isolation from geopolitical transformations, technological advances and the search for resilience that are reshaping global value chains (GVCs) and international trade flows.

As this document shows, based on studies carried out at the request of the IEDI by the FGV/SP professor Vera Thorstensen, who for 15 years advised the Brazilian Mission in the WTO, and by her team at the FGV/SP Center for Global Trade and Investment, and by economist João Emílio Gonçalves, former superintendent of Industrial Development of the National Confederation of the Industry (CNI), there is numerous evidence that we have accumulated a very long delay in this area. 

To stress only the most synthetic indications: we are the 12th economy in the world, but we occupy only the 26th position among the largest exporters and the 29th among the most importing countries. Our manufacturing exports are marginal in the world and do not stop shrinking: they represented 0.85% of the world total in 2005 and 0.45% in 2020.

Integrating more and better into the global economy is not only urgent, given the accumulated backlog, but also desirable. In general, the national debate emphasizes expansion of competition and easier and cheaper access to raw materials, capital goods and imported technology as the effects of reducing our barriers to international trade, promoting the productivity gains that Brazil needs so much.

The more active participation of our companies in world trade also brings great benefits: by establishing relations with a larger and more diverse universe of customers, suppliers and competitors, companies are exposed to new forms of competition and have contact with new technologies, different business models and management practices. As a result, many studies suggest that exporting companies grow more, innovate more, and pay higher wages. 

Considering these factors, the development of a country moves pari passu with the advancement of its integration with the rest of the world. From this comes IEDI's unconditional defense of greater integration of the country into the international economy. It is true that this process will be much more constructive if we simultaneously make progress on the necessary reforms to reduce the so-called "Brazil Cost," boosting the competitiveness of the national product, without this acting as an impediment to the necessary integration.

Note that the current obstacles to foreign trade that Brazil insists on conserving also end up as part of "Brazil Cost" and deteriorate the competitiveness of domestic production. Opening our economy and reducing "Brazil Cost" are two faces of the same coin and need to be addressed over time with the same vigor, without one of them becoming a pretext to delay the other. The objective must always be to improve the long-term growth conditions of the country and, consequently, the standard of living of our population.

The experience of Asian countries, which in recent decades have performed much better than Brazil, shows that there is no room for one-dimensional strategies when the goal is to promote development. Integration into international trade is fundamental and its limitation was a relevant factor for Brazilian deindustrialization. As a matter of fact, the Asians went much further to achieve success, as they articulated openness to imports of capital goods and inputs with a firm impulse to exports and significant investments in science and technology, R&D and education, with a view to the necessary technological catching up.

If we want to go in this direction, we should embrace a much greater export orientation than our industrial sector has been following in recent decades. This implies reviewing and recalibrating in a coherent manner various policy instruments, such as: an effective exports tax relief, through an urgent tax reform; rationalization of customs tariffs, respecting the principle of tariff escalation according to the aggregation of value; elimination of privileged treatments without justification; carefulness to avoid excessive and prolonged exchange rate appreciation, as we had in the past; recovery of the export financing system; proactive foreign and commercial policy; planned investments in logistics; support for technological learning, reverse engineering, R&D, development of trademarks and commercial assets, etc.

How to move forward in our economic opening continues to be subject to much discussion, which does not always take into account all the important aspects involved. For example, the debate in Brazil is still very much focused on the issue of tariff barriers. As this document illustrates, internally we have room to rationalize and reduce our import tariffs and, externally, we also have work to do, since our products face, in foreign markets, higher tariffs than the average of countries similar to Brazil. 

Nevertheless, issues such as technical, sanitary and phytosanitary barriers and standards or norms on topics such as climate change, energy efficiency, human rights, labor rights, animal rights, carbon emissions and regulation of the digital economy are increasingly central to the integration of a country into the world economy. These are unavoidable dimensions of trade openness that have received less attention than they should.

Much has been said about the appropriateness of unilateral trade opening. It is true that this could be a quick path to bring the import rates practiced in Brazil closer to international levels, but it is not a risk-free path. The first risk is that if rates are cut too fast it may not allow healthy and profitable companies to adjust to a new competitive reality. If the “rules of the game” change, there needs to be time for adjustments.

Another risk is that the political conditions underpinning the unilateral strategy may change during the process of openness. It is important to recognize that unilateral opening is not exempt from pressure from specific lobbies and interest groups that can delay or even suspend the tariff reduction schedule and create exceptions and distortions, due to the non-horizontality of unilateral measures—such as a reduction in the import rate of the capital goods sector without reducing the rates of its raw materials, causing unwanted asymmetries between sectors and/or participants in a given chain.

Depending only on the “political will” of the government in office to advance in openness is an advantage for the agility it can confer, but it is also a disadvantage because nothing guarantees that it will follow an adequate procedure and that it will last the necessary time.

In addition, this route does not ensure or leverage access to foreign markets by domestic companies and may not be accompanied by the reduction of non-tariff barriers and the necessary search for convergence of national standards to international standards, as mentioned.

Openness through trade agreements—which are a solution negotiated not only with other countries, but also between the different sectors of Brazilian society—would enable the creation of consensus and convergence, giving greater firmness to the process. The existence of commitments with foreign partners, subject to sanctions in case of non-compliance, tends to provide greater stability. 

Moreover, international agreements increasingly deal with a set of rules and standards that can consist of non-tariff barriers and guarantee access to foreign markets, making our current delay in reducing tariffs an advantage in the negotiation process.

On the other hand, this route usually takes a long time to be negotiated, approved and implemented by the signatory countries, due to the complexity of the interests involved, which contrasts with the urgency of this agenda for Brazil. Mercosur is also sometimes seen as an obstacle but, as Thorstensen recalls, we are the largest economy in the bloc and co-responsible for its improvement. Therefore, Mercosur should be considered an attribute and not a justification for not advancing Brazil's international integration.

Another aspect to be considered is that signing agreements is subject to the willingness of other countries to negotiate, which may not be evident in the current context of intensified technological competition, reorganization of global value chains and revival of protectionist ideas, especially after the effects of the pandemic—and, more recently, the war in Ukraine—on world trade and on access to goods and inputs considered strategic. Therefore, consensus among the different domestic interest groups around the opening agenda is an even more important condition today.

The negotiations between Mercosur and the European Union, concluded in 2019, as well as the difficulties that have been observed for the signing of the resulting deal and internalization by the signatory countries, bring lessons, some of which are highlighted below, that may be useful for the conclusion of other trade agreements. 

The following points should be observed:

•  it has been demonstrated that it is possible to close broad and complex agreements without profound transformations or weakening of Mercosur;

•  different motivations of successive governments delay the negotiating agenda considerably, hence the 20 years taken for the Mercosur-EU agreement do be achieved. Therefore, it is necessary to take advantage of the windows of opportunity created by the alignment of governments' interests;

•  with the increasing complexity of negotiations, frequent dialogue and the constant exchange of information between the public and private sectors are essential, both to build consensus and to subsidize negotiators with accurate technical data on the reality of the sectors. This ensures transparency for the negotiation and integration process;

•  the use of suprasectoral discussion instances enables the construction of convergences between the different economic sectors, facilitating the elaboration of the Brazilian offer lists, giving legitimacy to the positions of the Brazilian government and solidifying formal support from the private sector to the conclusion of the agreement. This dialogue allows opening to be wide and horizontal, such as in the case of the Mercosur-EU agreement, which provides for the reduction of tariffs on goods, which exceeds 90% of the tariff lines in Mercosur and 95% in the European Union;

•  establishing gradual and differentiated schedules of tariff reduction (from zero to 15 years in the Mercosur-EU Agreement) allows to accommodate different realities derived from sectoral specificities and distortions existing in so many areas of the Brazilian business environment, enabling the formation of consensus in the private sector;

•  gradualism in tariff reduction may be accompanied by flexibility that allows its acceleration. Article 3 of the Agreement with the EU provides that each party may accelerate its tariff elimination schedule or otherwise improve market access conditions if its overall economic scenario and the economic situation of the referred sector so permit;

•  a trade agreement with other blocs and countries contributes to strengthening the institutional framework of Mercosur countries, improving their business environment. The Agreement with the EU, for example, covers issues such as rules of origin, non-tariff measures (sanitary, phytosanitary, technical barriers), government procurement, intellectual property, small and medium-sized enterprises, trade and sustainable development, trade facilitation, among others, in addition to a commitment to tariff reduction. 

The ideal is that we seek to negotiate with as many countries as possible, diversifying our commercial relations, always having as a guideline the commitment to transparency, gradualism and horizontality of our opening process.

In conclusion, both strategies—unilateral or via agreements—are not necessarily exclusive and can be combined, notably, if we consider that a unilateral opening is not limited to the tariff theme, and should contemplate a set of actions, among which trade facilitation, regulatory convergence and improvement of export financing.

The full text is available in Portuguese.