Letter IEDI n. 923–Exports down, especially in Medium-High Technology
Although the external sector could contribute more to the recovery of the Brazilian economy, various reasons this is not happening, especially in the case of the industry. After last year's slowdown, exports of manufactures fell in the first three months of 2019, causing the manufacturing trade deficit to increase almost 60% over the same period last year.
There are internal and external factors that have led to this recent behavior. On the external side, global GDP has been showing signs of slowdown, as highlighted by the main international organizations. After a +3.6% increase in 2018, the IMF expects the world economy to grow +3.3% in 2019, the same level estimated by the OECD. The World Bank, for its part, believes that the result will be even weaker: +2.9%. Parallel to this movement, international trade in goods is weakening: +4.6% in 2017, +3% in 2018 and +2.6% in 2019, according to the WTO.
As if the loss of overall dynamism of the global economy and trade —due to the escalating tensions involving the US, China and other countries— were not enough, the Brazilian industry should also face the adverse effects of the economic crisis in Argentina, an important partner for our trade in manufactured goods. The IMF predicts another year of recession for the Argentine economy in 2019.
On the domestic side, the numerous obstacles to the competitiveness of national production remain unresolved and weigh even more in the current context of lower international growth. Transitional instruments that softened some of these obstacles were virtually extinguished in recent years, such as Reintegra, which allowed exporters to recover taxes paid and not reimbursed at the time of export. If we had not neglected our competitiveness so much, today we would face a different reality.
In Q1/2019, the manufacturing industry registered a trade deficit of US$ 6.8 billion. As a result, despite the improvement in primary (agricultural and mineral) goods' trade balance compared to the same period in 2018, the country's total trade surplus was only US$ 10.5 billion, the lowest level since Jan-Mar/2016.
For manufactured goods, exports declined -9.1% versus Q1/18, to US$ 31.1 billion, while imports fell -1.6%, reaching US$ 37.8 billion. That is, there was a deterioration in the balance with a reduction in the flow of goods typically produced by the manufacturing industry.
This IEDI Letter analyzes the performance of our manufacturing trade balance using the OECD's classification of the manufacturing industry. The following is a summary of the results found.
• The high technology industry was the only one to show higher exports (+2.3%) in Q1/19 when compared to the same period of the previous year. This was mainly due to the foreign sales of the aeronautical and aerospace branches, which grew +5% in relation to Q1/18. Meanwhile, high technology imports followed the general trend and declined -3.1%, due to electronics. Thus, there was a small decrease (-6% against Q1/18) in the trade deficit of this range to US$ 4.6 billion in Q1/19.
• The medium-high technology industry, in turn, presented the biggest deterioration: its deficit jumped +33% compared to Q1/18, reaching US$ 9.6 billion. In this case, there was not only an increase in imports (+2.3%), but also an intense decline in exports (-21.4%). Two movements are behind this result: a 36.1% reduction in sales of vehicles, as a result of the Argentine crisis, and a +12.1% increase in our purchases of chemical products, except pharmaceuticals.
• In the opposite direction, the group of medium-low technology was the one that presented the largest deficit drop: -55% compared to Q1/18. Imports explain this behavior, with a decrease of -5.2% compared to the same period of last year. Exports were practically stable (-0.2%). Although this group is undergoing large oscillations, due to the change in the rules of the Repetro program, it was not the shipbuilding sector that mattered the most for the Q1/19 result, but rather coal, refined oil and nuclear fuel, whose deficit was 41% lower.
• Lastly, low technology, the only group in which Brazil is consistently in surplus, saw its balance shrink -10% in Q1/19. Behind this was the sharper drop in exports (-8.9% vs. Q1/18) than in imports (-5.9%). External sales declined in sectors like food, beverages and tobacco (-13.1%) and textiles, leather and footwear (-13.4%), and there was a sharp deceleration in wood, pulp and paper (+2.3 %). On the import side, all of its components fell in relation to the beginning of 2018.