MercoPress. South Atlantic News Agency

Opening the economy “would be a disaster for Brazilian industry” states Rousseff minister

Trade minister Mauro Borges warned about the 'mexicanization' with 'maquiladoras' of the Brazilian economy

Anticipating what could be policy under a second government of President Dilma Rousseff, her Trade Minister Mauro Borges told Brazilian daily Folha do Sao Paulo that opening the country to more foreign trade would be a “disaster for Brazilian industry” and lead to the “mexicanization” of the economy, in reference to the light assembly factories known as “maquiladoras” that dominate Mexico’s non-oil exports.

 Mexico’s light assembly factories, or “maquiladoras,” are often used by US firms to take advantage of cheap labor, with goods usually exported back to the US market.

Currently, Brazilian industry is mostly oriented toward the domestic market, with local manufacturers protected by high import tariffs, local content rules for government procurement contracts, subsidized credit and a wave of stimulus measures to boost output and protect jobs.

Next Sunday Brazil is holding presidential and legislative elections and President Rousseff is bidding for re-election in a neck-to-neck dispute with challenger Marina Silva, whom apparently has the support of the business community.

Borges was specifically responding to the position defended by Pedro Passos, president of the association that brings together the largest business groups in Brazil, that liberalizing the country’s trade policy would make the country more competitive.

He said to Folha, “that vision, voiced by the opposition candidates, would be a disaster for Brazilian industry. Business leaders have asked for more protection. The trade policy is favorable to competition as it is accompanied by an active industrial policy. No country opens up its trade unilaterally.”

The largest industrial manufacturers are keen on easing import guidelines to reduce input costs but Brazil’s small and medium-sized companies are unlikely to be able to compete globally in the short-term. These smaller companies also sell a significant proportion of their goods to Argentina and other Mercosur members and have an interest in maintaining a positive relationship with Buenos Aires.

Some of the arguments used by those favoring lower trade barriers in Brazil are based on their belief that it would help cut the cost of inputs and make local industry more competitive in the global marketplace. The manufacturing sector is expected to contract 1.94% in 2014, according to a Brazilian Central Bank survey released last week. Furthermore, Brazil’s 2014 trade numbers moved into a slight surplus in August after hovering in negative territory through most of the year. The country’s trade surplus fell to its lowest level in over a decade in 2013, causing the country’s current account deficit to widen sharply.

Borges attributed those numbers to Brazil’s “relatively open economy,” in which some imports replaced locally manufactured products.

According to International Monetary Fund (IMF) data, Brazil is the most closed major economy in the Americas, with trade accounting for only about a quarter of gross domestic product. An International Chamber of Commerce study released last year ranks Brazil near the bottom of G20 economies for openness to trade.

The debate is significant because as a member as member of Mercosur, Brazil negotiate any trade deals along with its bloc partners, a position that the Rousseff administration and Borges seemed to be comfortable with.

However challenger Silva has backed further integration with the Pacific Alliance and the idea of a two-speed solution for the Mercosur, whereby Brazil, Uruguay and Paraguay would sign a free-trade agreement with the European Union, even if Argentina doesn’t.

Asked by Folha why a trade deal with the European Union had not yet been signed, Borges said that “Brazil did its homework. We made our offer more than a year ago. We initiated negotiations with our Mercosur partners for a unified offer, which was submitted... we aren’t going to make a unilateral proposal.”

In addition, the minister downplayed the possibility of a free-trade agreement with the United States, saying that neither country was ready and that it was not a priority for the Brazilian government.