When U.S. Commerce Secretary Wilbur Ross toured Latin America, President Trump hinted to reporters of his main mission: “We’re going to work on a free trade agreement with Brazil.”
Trade agreements that reduce barriers for the exchange of goods, services, and terabytes have the ability to raise incomes and boost opportunities for all countries involved, if they play by the rules.
Brazil’s President Jair Bolsonaro knows this. He played a leading role in finally getting a signed trade deal between the South American Mercosur trade bloc and the European Union after two decades of negotiation.
Bolsonaro said he hoped the agreement would lead to a “domino effect” of other trade deals, and indeed he is pursuing one with the United States with the same enthusiasm as Trump, even nominating his son to be the U.S. ambassador.
Brazil’s previous leaders were never serious about trading with a real competitive partner. Instead, they praised South-South trade with BRICS countries. Such deals offered little room for entrepreneurs and innovators to grow, and a lot of space for inefficiency and corruption to fester.
When the North and South American leaders first met in March, they cemented their positive relationship with some trust-building deals. Brazil got rid of visa requirements for U.S. tourists and business travelers while the U.S. put in a word for the country to become a “major non-NATO ally.” Both signed a technology safeguard agreement paving the way for U.S. investments in the Brazilian aerospace and defense industry.
That was easy. Early on in his presidency, Trump signaled his preference for bilateral trade deals. He got out of the Trans-Pacific Partnership and was happy to reach a bilateral deal with Mexico when Canada temporarily left the USMCA negotiating table.
As a member of Mercosur, Brazil can’t sign an agreement with the U.S. on its own. Argentina, Paraguay, and Uruguay have to tag along. Ross stopped by Argentina to talk about trade on the same trip, which is a positive sign the U.S. isn’t aiming to break up the group. Still, Bolsonaro shouldn’t be held back.
Brazil is 75% of the Mercosur’s GDP and is responsible for 67% of its imports and 71% of its exports. By far, most of that trade is with China and the U.S. Brazil’s largest intra-bloc partner is Argentina, where 6% of its imports originate and the destination for only 8% of its exports.
Even if the whole bloc gets on board and the Trump administration is favorable to a deal, negotiations promise to get sticky. The main flash point will be on agriculture, which makes up a large portion of each economy’s exports. For instance, Brazil is the world’s largest fresh beef exporter, except not to the U.S. where the USDA banned it in 2017 due to safety concerns. Similarly, a quota on sugar blocks another major Brazilian export.
That shouldn’t deter an ambitious agenda. Increased access to the U.S. market for all other industries should be enough for Brazil to reduce its monumental average tariff rate of 13% without asking for additional concessions on U.S. agriculture. Trade agreements are also about rules: protecting intellectual property, reducing barriers for foreign businesses to set up shop, restricting the role of state-owned enterprises, and allowing the free exchange of ideas as well as data are hallmarks of the recent USMCA.
No doubt these will be at the top of the U.S. agenda and where both sides should spend their political capital. Bolsonaro can act now with a second stage of confidence building measures. For example, outdated regulations are holding up investment from multinational telecom giants like WarnerMedia and preventing consumers from streaming TV shows without going through a middleman. This would be fixed in a trade agreement, but why wait? An executive action now would still be a win-win.
Secondly, passing the Provisional Measure of Economic Freedom currently in Congress would sort out other regulatory nightmares before they derail talks. Such actions would spur others in the bloc to get serious and signal to the U.S. that this time, negotiations won’t carry on for two decades.
Brazil’s accession to the Madrid Protocol, which came only days after the EU agreement, is a good sign Brazil is ready to protect intellectual property. But it may not be enough to for the U.S. to forget Brazil’s past with compulsory licensing. Above all, Brazil has to show that it and the rest of the bloc are ready to welcome disruptive competition from the world’s largest economy.
Philip Thompson is a policy analyst for IP and trade at the Property Rights Alliance.
