`No Miracle' for Brazil as Closed Economy Saps Export Potential

(Bloomberg) -- Brazil is largely missing out on improving global growth prospects as Latin America’s largest economy remains one of the most insular in the world.

Brazil’s exports have risen 20 percent year to date versus the same period in 2016, and the government last month increased its forecast trade surplus to between $65 billion and $70 billion in 2017, up from previously $60 billion. Still, exports account for about 12.5 percent of gross domestic product, a ratio that has barely budged in recent years and that is about half that of countries such as Russia and Chile, and one-third of Mexico’s, according to the World Bank.

Years of government policies betting on Brazil’s huge domestic market coupled with protectionist measures, red tape and infrastructure bottlenecks have turned the country into the most closed emerging market economy, according to Credit Suisse. While that relative isolation has worked in favor of the country during the global crisis of 2008, it is slowing its economic recovery now.

"There are no miracles, and there’s no magic," Otaviano Canuto, executive director at the World Bank, said in a phone interview. Brazil will "take less advantage of global economic growth than it should because of how closed the economy is."

As an example, Brazil imposes an average tariff of 8.8 percent on all of its imports, compared to 0.6 percent in Chile and 1.6 percent in the U.S., World Bank data show. Brazil also ranks 139th out of 190 countries on the ease of trading across borders, according to the World Bank’s latest Ease of Doing Business rankings, which also showed that export costs from main hubs of Sao Paulo and Rio de Janeiro are roughly double the Latin American average.

Missing Out

The International Monetary Fund boosted its global growth forecasts for this year and next, driven in part by a brighter outlook in the U.S. and China, Brazil’s top two trade partners. On the other hand, the IMF expects Brazil to grow at less than half the global pace this year and next.

Brazil’s trade ministry says that, aside from seeking new trade deals, it is providing assistance to small and medium-sized firms looking to expand sales abroad and centralizing export authorizations through an electronic portal. Data showing the number of companies exporting from Brazil reached a record in September is proof that the strategy is working, Foreign Trade Secretary Abrao Neto said in an interview.

"This increase has contributed in a fundamental way to the recovery of the country’s economic growth, and should continue next year," he said. "The effects of the government initiatives will certainly allow Brazil to better take advantage of any increase in global trade and economic growth."

Meanwhile, trade talks between Mercosur and the EU, which started in 1999, are running into new roadblocks such as food safety standards raised by the French, a Brazilian government official with knowledge of the discussions told Bloomberg.

Brazil’s traditional focus on its gigantic domestic market will continue to be a barrier to exports, said Welber Barral, a former secretary of foreign trade. Economists expect GDP growth to more than triple next year, and rising demand at home may discourage local companies from seeking new sales opportunities abroad.

"Exporting is only a choice when local consumption is in crisis," Barral said in an interview. "When that consumption bounces back, exporters prefer local markets."

--With assistance from Rafael Mendes

To contact the reporters on this story: Rachel Gamarski in Brasilia at rgamarski@bloomberg.net, Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Raymond Colitt, Walter Brandimarte

©2017 Bloomberg L.P.