Letter IEDI n. 905–Towards the Past: Industrial Trade Balance in 2018
In 2018, the Brazilian industry's foreign trade deficit moved toward pre-economic crisis levels. There was not a complete deterioration, but the worsening was significant: the balance went from US$ -3.2 billion in 2017 to US$ -25.2 billion in 2018. In other words, given the performance of manufacturing goods, had it not been for the record result of primary products, Brazil's trade balance would not have registered the second largest surplus in the country's recent history (US$ 58.6 billion).
If we are in a comfortable external accounts situation with respect to trade, this has little to do with the behavior of manufactures, whose exports grew more slowly while imports advanced at a rate twice as great. Two major drivers of export growth ceased to function in 2018: motor vehicles and food, which together account for just over 1/3 of total manufactured goods.
Thus, from 2017 to 2018, the total dynamism of manufacturing goods’ foreign sales decreased from +9.2% to +4.1%. At the same time, imports growth increased from +9.7% to +20.1%. Although close, further deterioration is still needed before we reach our worst marks in the trade balance of manufacturing goods. The 2018 deficit was less than half that of 2014, for example.
In addition, it is worth noting that the changes in the rules of Repetro program had repercussions on the accounting of oil platforms' trade flow last year. Excluding exports and imports of the shipbuilding and repair industry, which are directly affected by the new rules, the manufacturing deficit narrows from US$ 25.2 billion to US$ 21 billion, but does not change in magnitude.
Thus, the regression of the balance of manufactures in 2018 is a symptom of the lack of competitiveness that has accompanied the Brazilian industry for a long time. It is a result of, for example, low productivity and a tax system that significantly penalizes the sector, to take only two factors of great influence. Actions to change this setting are still crawling in Brazil and are perpetuating the competitiveness deficit pointed out in recent IEDI works, such as Letters n. 900, "Chinese threat and Brazilian position in the foreign sales of dynamic products", and n. 892, "Brazil's new fall in the rankings of largest global exporters and importers".
In turn, the present Letter IEDI analyzes the trade balance based on the technological intensity of each industrial sector, aggregated into four distinct ranges: low, medium-low, medium-high and high-intensity, according to the methodology developed by the OECD.
The high technology industry traditionally registers a trade deficit and 2018 was no different, with a negative balance 8.7% higher than that of 2017. This was due to the pharmaceutical sector, whose deficit jumped 17% from one year to the next, as well as to precision optical medical instruments, with a 13% worsening. These negative figures were slightly mitigated by a higher surplus in the aeronautical industry (+9.6%), due more to lower imports (-17.2%) than to an increase in exports (+2.3%).
Meanwhile, the medium-high technology industry, whose balance has been negative since 2006, was one of the ranges with greater deterioration. In 2018, its deficit was 45% higher than in 2017. The main reason for this was that the auto industry was in the red (US$ 752 million deficit) after a US$ 3.4 billion surplus in 2017, its best result since 2007. Exports of automobiles fell in 2018, making it one of the most significant setbacks across all industrial sectors. The +15.4% jump in imports of machinery and mechanical equipment, bringing the balance of this branch from US$ -4.3 billion to US$ -6.4 billion, also contributed to the worsening of the medium-high intensity range.
It was the middle-low technology group that switched from water to wine last year. A surplus of US$ 858 million became a deficit of US$ 5.4 billion, reflecting the heavy import of oil rigs that led the shipbuilding and repair industry to a deficit of US$ 4.1 billion in 2018. Without this sector, however, the medium-low deficit would remain negative at US$ 1.3 billion. The deficit in rubber and plastic (+21.3%) also advanced in the period.
Finally, the low technological intensity group, the only one with a positive balance, saw its surplus decline 5.4% as a result of lower exports (-3.4%) and higher imports (+2.0%). On the exports side, the branches that pulled the numbers down were food (-9.6%) and textiles, leather and footwear (-16.3%). Both surpassed (negatively) the export performance of wood, pulp and paper, which rose 23% and led to a surplus of US$ 12.2 billion (+25.6% compared to 2017), the highest in the historical series started in 1989. On the imports side, the 7.5% increase in textiles, leather and footwear contributed to the deficit to double between 2017 (US$ 901 million) and 2018 (US$ -1.9 billion).