Brazil Goes Global: The links Between Foreign Policy And Investment Abroad

6 September 2016

King’s Brazil Institute Column

In the last twenty years there has been a 180-degree shift in the way Brazil is seen by the international community. Not only has the country established an active role in international affairs but it has also come to figure much more prominently in global flows of trade and investment.

Years of economic boom, driven by high international commodity prices, led to a significant expansion of the middle class. Income redistribution boosted domestic consumption, and social programmes such as Bolsa Família became a worldwide reference point. All these changes contributed to a transformation of Brazil’s international image. Meanwhile, developments in Brazilian foreign policy have been significant in shaping the way the country connects to the world economy.

Analysts agree that the stabilisation of the Brazilian currency, achieved through the implementation of the Real Plan (Plano Real) in the 1990s, was an important step towards increasing Brazil’s participation in global trade. The efforts made by President Fernando Henrique Cardoso at the helm of the Brazilian government were crucial in allowing Brazilian firms to reorganise internally and become more competitive internationally. Parallel to this, in foreign policy, acceptance of international rules on economic, social and political matters laid the foundations of a more globally integrated approach.

Brazil’s diplomatic role with regard to the World Trade Organisation (WTO) during the Uruguay Round of trade negotiations, along with its pragmatic strategy towards international agreements, secured substantial gains for the private sector (for example in the Embraer/Bombardier dispute settlement, involving Brazil and Canada, in the WTO in 1996). Motivated by improving domestic conditions, Brazilian companies in the fields of engineering, and oil and gas exploration, have grown in size and shown themselves capable of seizing opportunities for expansion abroad. During the Cardoso years, the main markets for those Brazilian companies were in Latin America and in major developed countries that had been longstanding trade partners.

During President Lula’s eight years in office there was a shift in the focus of Brazilian foreign policy. Based on the idea of constructing a multipolar world, Brazil sought the support of developing countries, aiming to strengthen partnerships with Africa, Latin America, and the major emerging countries of China, Russia and India.

Lula’s personal involvement in looking after Brazil’s interests abroad opened up opportunities for business. From 2003 onwards, some of the most important Brazilian companies started to diversify investments and explore new markets. During his time as president, Lula himself spent an average of one day in six travelling abroad, clocking up a total of 180 foreign trips.

Government programmes played a fundamental role in encouraging outward investment. The Brazilian Development Bank (BNDES) was a stimulus for Brazilian multinationals: it provided cheap credit with good financing conditions, boosting trade and overseas investment. From 2003 to 2010, Brazilian companies’ direct investments abroad grew sixfold (from US$51 bn in 2001 to US$312 bn in 2014), placing the country among the world’s leading sources of FDI.

Under Lula, the orientation of foreign policy towards developing countries proved to be a crucial factor for the internationalisation of Brazilian companies. However, his successor, President Dilma Rousseff, paid less attention to international issues. Brazilian policy lost its clear direction and no longer played such a strategic role in support of economic interests.

RECENT CHANGES IN FOREIGN POLICY AND POSSIBLE IMPACTS

It is hard to predict the impact on foreign policy of the change in political trajectory brought about by the recent game of musical chairs in Brasilia. Nevertheless, some changes that have already taken place do provide some indication of what the future might look like. The new foreign minister, José Serra, has promised to significantly alter certain aspects of foreign policy and to adopt a more pragmatic approach, which is a euphemism for rapprochement with developed countries and a quest to make Mercosur more flexible (for example by changing Clause 32/00, which prohibits bilateral trade negotiations unless there is consensus among the members of the bloc).

Many consider that the flexibilisation of Mercosur would represent a regrettable step away from regional integration. On the other hand, supporters of the new approach point out that it will potentially offer opportunities to strengthen bilateral economic relations with the United States, Canada, and members of the “Pacific Alliance” bloc of Latin American countries.

Governance problems inside the bloc, along with the political turbulence in venezuela and in Brazil itself, have hampered the creation of the consensus that would be necessary in order to pursue negotiations with strategic trade partners such as Colombia and Peru (two dynamic members of the Pacific Alliance). The recent change of government in Buenos Aires, however, points to a potential convergence of interests between the two biggest economies in the region, Brazil and Argentina. An agreement between Brazil, Argentina and Uruguay – which is also open to negotiations – would provide a window of opportunity for the redesign of the customs union.

Meanwhile, events on the other side of the Atlantic might also present an opportunity for Mercosur. With the negotiations for a free trade agreement between Mercosur and the European Union currently on hold, the new relationship between the United Kingdom and the EU in the wake of the “Brexit” might offer promising alternative ways of connecting the Southern Cone with Europe.

When the Brazilian government reaches calmer waters after the recent turbulence in Brasilia, it will probably need to advance in the search for new trade partners. There will certainly be a move away from the South-South policy orientation in which relationships with developing countries were prioritised. Meanwhile, the pace of Brazilian companies’ expansion abroad has slowed, along with the country’s economy.

There are currently fewer financing incentives for internationalisation. Brazil, therefore, needs to bet on the diversification of its trade partners in order to balance its current account. Major changes, however, will only occur when the domestic political puzzle has been solved. 

PIETRO  RODRIGUES: Pietro Carlos de Souza Rodrigues is a joint PhD student at King’s College London (Brazil Institute) and the University of São Paulo (USP). He is particularly interested in assessing the economic impacts of Brazilian foreign policy. See also: www.pietrorodrigues.com