Letter IEDI n. 922–Brazil in global value chains
Brazil remains poorly integrated into global value chains, but there has been some progress, according to the latest data released by the OECD. It is important to recognize, however, that the improvement in most indicators was not very significant and was most probably influenced by the crisis in the domestic market, which forced some redirection of our companies to the foreign market.
At the end of 2018, the OECD updated TiVA (Trade in Value Added), its database on international commerce in value added, after five years of no new data. Thus, this important source of information on global value chains (GVCs) now covers a time span that goes up to 2015 or 2016, depending on the indicator. This IEDI Letter will analyze these new data, emphasizing Brazil's position vis-à-vis the rest of the world.
Three indicators are commonly used to assess the integration of a country's production system into international chains: (1) re-exported intermediates as percentage of total intermediate imports; (2) backward linkages, which refer to the foreign value added content of a country's gross exports; and (3) forward linkages, related to the domestic value added contained in the rest of the world's exports and its own gross exports.
In 2015, Brazil ranked lower than the OECD average in most of these indicators, illustrating our low integration in the chains, a result of competitiveness problems. In the first indicator, Brazil registered 19.3% and the OECD average was 38.2%; in the second, the percentages were 12.5% and 20.1%, respectively. Only in the third one did Brazil marginally exceed the OECD average: 19.6% against 18%.
The IEDI document "The Industry and the Future of Brazil" (in Portuguese) pointed out the main challenges to be overcome so that this situation can be reversed; for instance: untangling the tax knot, keeping the level of domestic interests in line with the rest of the world, diversifying sources of financing for investment, expanding and updating our infrastructure, and establishing an industrial strategy that modernizes the sector and prepares us for the industry 4.0.
Although the lack of competitiveness weighs heavily, other factors also contribute to our low levels of integration, such as the country's continental dimension, the abundance of natural resources, Brazil’s position as a major producer of raw materials and its large domestic market. So much so that the our indicators are in line with the United States'. The OECD average is pulled up by smaller countries, by those heavily dependent on imports of food and fuel, or by those with a clear export strategy, which have received the "factory floor" of many developed countries' companies in recent decades.
Let us see, with the help of the new OECD data, how Brazil did between 2011 and 2015. But first, it should be borne in mind that 2011 was a year of strong national market growth (+4% GDP growth) while 2015 saw an open crisis (-3.5%), which pressured many companies to export and others to substitute foreign suppliers for domestic ones that went bankrupt. Therefore, the favorable evolution of many of the following indicators may eventually be reversed. Let's go to the numbers:
• An increase in the share of imported intermediate goods re-exported, in relation to total intermediates imported: from 16.4% to 19.3%;
• An increase in the share of foreign value added in total gross exports (although 2016 shows a drop to 10.2%): from 9.7% to 12.5%.
• An increase in the share of imported value added in the gross exports of the manufacturing industry, from 13.8% to 16.2%, due to developments in several sectors — especially, vehicles, other transport equipment, food and beverages, pulp and paper, and textiles, clothes and shoes.
• A drop in the domestic value added in other countries' exports as a percentage of Brazil's total gross exports: from 26.1% to 19.6%.
• A drop in the domestic value added in other countries' exports as a percentage of Brazil's gross exports of manufactures, from 21.1% to 15.2% —mainly due to vehicles, machinery and equipment, basic metals, and coke and petroleum products.
There are two other comments on the evolution of the global value chains, which, due to the emergence of new technologies applied to production, are in a process of transformation, as discussed in IEDI's eBook "The Industry of the Future in Brazil and in the World" (in Portuguese). According to the OECD data:
1. Approximately 70% of international trade comes from global production chains, but since 2011 some indicators show a reduction in the overall fragmentation of production, with considerable regional and sectoral differences. The GVCs backward linkages index, for example, showed a drop in the OECD total due to developments in major world economies such as the US, Japan and China, as well as other countries.
2. The participation of services in the exports of different countries and sectors is increasing. For the OECD average, the value added of services incorporated in total gross exports rose from 52.4% to 54.8% between 2011 and 2015. Brazil is not far behind, having recorded an even greater high: from 41.4% to 48.3%. Exports of manufactured goods are an important lever of this process; in the case of Brazil they had, in 2015, a services content of 37.1%, above the OECD's average of 32%.
In a world context of protectionism revival and reaffirmation of industrial, technology and innovation policies, with a new technology paradigm based on industry 4.0, it is important to reflect on the different possibilities of insertion in GVCs.