Brazzil, the U.S.A.,
and the FTAA

President Cardoso has to waste too much of his time
just teaching his country’s opinion makers so much
about the democratic process. Why don’t Brazilian diplomats learn
that North American trade policy is a lot bigger than the labor,
or the environmental, or the steel or the dairy lobbies?

Conrad Johnson

Since the beginnings of the histories of the Americas, Brazil and the U.S.A. have been very fortunate in their mutual relations. In the Spanish-American War, that most sticky and dubious of all historical American events (at least in terms of the development of foreign relations in the Americas), Brazil to the seeming eternal consternation of American Spanish speaking countries, was the only Iberian American country that supported the U.S. in finally throwing colonial Spain out of the hemisphere. Brazil too was the only American nation, outside the U.S. and Canada, to fight and lose citizen soldiers warring against fascism in Europe.

Commentators from Brazil and the U.S. are currently however, observing growing tension between the two countries on trade issues. Tensions in one area often get expressed in others. (Brazil and Canada have much more in common than the disfigured state of their present relations would indicate) Brazil, for example and compared to the U.S., has only an infant environmental movement. Brazilian environmental activists say so every day. Brazil has recently taken to painting Americans as unconcerned about preserving the environment, when in fact everyday Americans invest more preserving the Brazilian environment than everyday Brazilians do; they invest and invent more each month in preserving environments everywhere than Brazilians have historically spent to date. Out of the enjoyable exercising of such free, uninformed (and not totally unwelcome to the growing anti-Bush movement) critical holidays can result in misunderstandings that grow into troublesome relational environments in general.

Particularly between democratic countries, issues like trade and environment need wide public attention if the institutional offspring of mutual desires are to flourish. It would be sad indeed if Americans quit giving to the WWF (World Wildlife Fund) because it spends too much in Brazil, for example; glad indeed if Brazil became the deserved destination of choice for North American ecotourists. FTAA (Free Trade Area of the Americas) could do for relations between Brazil and North America what NAFTA (North American Free Trade Agreement) did for those with Mexico. It is in that spirit—the spirit of substantive and continuing relational events between American cultures—that treaties might reflect mutual understandings between nations.

On the other hand, the Brazilian public is being properly educated to believe that FTAA negotiation will have little impact unless the U.S. swallows a good deal of its own "free trade" propaganda, especially in the agricultural sector. The story goes that unless the U.S. allows much cheaper, sometimes better and always more varied Brazilian agricultural product into its markets there will be few deals at all from the Brazilian side. Part of the conflict is put aside at the moment however because Brazil, Canada and Argentina are part of a larger group of nations that have lobbied, mostly unsuccessfully, for general freer international trade in agricultural commodities.

Need to Negotiate

The U.S. is a sometimes friend to this group; for sure at least in its battles with the granddaddy of all agriculturally regressive policies, the Common Agricultural Policy of the European Union. Logically perhaps, within the EU (in all its versions) the CAP too is its most prominent and contentious divider. But new rounds of negotiations in the World Trade Organization will occur some day, Seattle notwithstanding. The Americas therefore have to negotiate new trade deals between themselves with WTO negotiations in mind. Seeing U.S. agricultural policy as villainous, as some of Brazilians best trade minds tend to paint it, will only help the U.S. not to see the error of its ways.

In no circumstance is it a charitable interpretation. Are not those exactly the circumstances that mutual understanding and agreement always need if communication could be expected? Do Brazilians really think that good agreements are reached under other conditions? Too bad they never had to admit tragic error in the treaty that ended the First Great War; it certainly was one of Europe and the U.S.’s greatest ones and nearly every U.S. school child knows some of its faults. ‘With whom do they think they are talking?’

Must U.S. public policy learn only from the Brazilian version of its economic case what the IMF or trade invented along development lines might do for Brazilian-specific development and maybe development everywhere (not even opening the question of preserving democratic institutions)? The depression, the Second World War, the Korean tragedy, the Cold War recount errors all around. Neither you, nor I—nor even nations—will correct errors without changing and reinventing—among other things—themselves. That is the intractable problem in the Middle East.

The Brazilian press rushed to paint Bush as too greedy, too involved with hegemonic economic preoccupations, to become involved in devoting time between the Arabs and the Jews when his common sense told him that mutual understanding would be extremely difficult there. The tract of the Irish problem as part of North American history seems not to count for Brazilian interpretations of U.S. actions or decisions not to act. Maybe Brazil really is as new to democracy as Fernando Henrique keeps saying? No wonder he has to waste so much of his time just teaching his country’s opinion makers—and its dense, truly uninterested-in-the-details that can’t be given a macro economic spin Brazilian public press—so much about the process.

Why, 'por amor de Deus', don’t Brazilian diplomats know that North American trade policy is a lot bigger than the labor, or the environmental, or the steel or the dairy, etc, etc, etc, lobbies? When U.S. citizens claim that their legislative processes are corrupted by special interests they don’t use ‘corrupt’ in the way it occurs in Brazil speech. They simply mean corrupted on the way to getting good results. We should all know that no good treaty or legislation can be invented without the involvement of those most immediately concerned with the problem. If Brazilian public officials do, why do they talk otherwise for their opinion makers? There can be no changes in any effective respect in trade politics that isn’t mutually understood between nations. And if Brazilians think this is disrespectful—coming from even proven Brazilian lovers—with what beyond their personal lives and their kibitzing and wisecracking would they take into battle (to follow their metaphors) against the CAP?

While those negotiations proceed, Brazzil has decided to run a series of articles on free trade in the Americas. This first article is to give some structure to the historical and institutional circumstances of understanding the two principal parties.

Across the history of U.S. trade policy, at least since the Great Depression, agreements with other nations have been fashioned relying on a public and common sense use of the theory and results of commercial transactions based on comparative economic advantage. If one can buy from someone else something that is better or equal in quality for a lesser price than I can make for myself, I can then invest the savings I enjoy into my own production of goods or services advantaged in other exchanges. Not incidentally, I can also spend it to increase my standard of living and sharpen my consumption skills, regardless of whether I am rich or poor.

Fair and Unfair

Trade agreements recognize that these differences in productive capacity across national borders result in advantages enjoyed on both sides. Freer trades are almost never zero sum events. Thus these agreements, like the authority needed to negotiate them, are ‘unfair’ to domestic producers who can’t match the price or quality of ‘fair’ foreign production because consumers on both sides of the boundaries are advantaged: the sums saved in the transactions increase productive capacity all around; everyone is ‘better off’ because his pocket book of consumption and investments in production ‘goes farther’.

It has never been politically easy to satisfy ‘unfair’ producers under these arrangements. Seen within the political constituencies of national physical market borders, the social value of citizens’ otherwise protected production yields lower and therefore unfair returns to home producers to the extent ‘foreign goods’ have penetrated ‘home markets’. Although there are cases where cheap producers actually expand markets as an effect of their entry (Venezuelan roses into the U.S. as an exotic example), such marvels are not the everyday basis of trade negotiations.

Such cases are however everyday occurrences in dynamic, chaotic trading environments where political economies have so arranged them that such spontaneous events can occur. Political negotiators unfortunately have to assume that ‘unfair’ producers lose economically; they have constituents to answer to. ‘Unfair’ producers are and will continue to summon political reasons beyond the cruel dictates of price and quality of goods and efficient investment of savings. ‘We cannot rely on foreign sources for our food or steel because these are "strategic" commodities’. ‘Steel workers and the mostly elderly of the farm sector are not positioned to obtain other employment’ and ‘our nation’s family farms are disappearing’, or ‘U.S. companies pay less taxes’, etc.

In all events nevertheless, a good deal of a nation’s wealth depends on silencing the losers in lifting barriers to comparative advantage; a good deal of a nation’s self-respect relies on recognizing and compensating these ‘unfair’ losses. But beyond doubt, much of North American’s unequalled productive capacity has been achieved, at least in part, by fashioning these lately rare trade pacts and then biting the fiscal bullet of mitigating their ‘unfair’ losses.

What is proposed in the Free Trade in the Americas Agreement, ALCA for Brazilians, is that North, Central, Caribbean and South Americans enter into a comprehensive trade agreement that over time will increase the productive capacity of all the American nations. Increased productive capacity increases national wealth; increased capacity makes alleviating poverty less costly, both politically and economically. Other American nations with less skills and resources will be asked to placate their own ‘unfair’ producers and workers with the democratic political capital at their disposal that all fairly competitive American producers, workers and consumers will be advantaged.

Except to economists (and not all of them), the advantages for all nations with such treaties are not obvious to all citizens. Nevertheless this theory of understanding drives all trade negotiations and treaties; and, all efforts to sell their results to the voters and consumers who care to understand. Trade is by its nature a wealth spreading sequence of events. The written purposes of the WTO record this understanding as its main purpose for existence. No doubt the effects of FTAA negotiation should be the same.

Most American citizens are unaware that it was first Canada, then Mexico who approached the U.S. in order that all three could create NAFTA. Because of political advancement, the ‘unfair’ loss claims of U.S. citizens-producers are more easily heard and less often financially addressed because the less expensively an economy can absorb these causal effects of freer trade, the more it has to invest in productive capacity.

All trade is regulated. Trade agreements are complex and all good ones have painful political results. The U.S. has been slow to achieve them for many decades. (In few places has progress been slower than in Brazil. Its intuitions have always told it collecting tariffs on foreign goods is not just good tax policy but even better politics.) It was first Canadians and then Mexicans (and not the enlightened public opinion that usually precedes any reform in the U.S.) that were persuaded of the comparative advantages of freer trade between the North American neighbors. Both countries are developmentally ahead of the U.S. in that proportionally much more of their commerce is ‘globalized’.

In macro economic fact, the U.S. economy, despite its history of economic size and growth, is only slightly more developed than Brazil in terms of the share of its GNP that is globalized. Both the U.S., and especially Brazil, are among those nations with the lowest proportions of international trade/GNP. The dynamics of both of these economies look historically and presently ever to their own respective home markets. If Brazilians think Americans seem obsessed with foreign markets (and most of them think just that) they are certainly out-of-touch with the American economy. Brazilian opinion makers who contribute to that picture are intellectually lazy. Too, the American economy relies much less on traditional multinational companies than Brazilians seemingly can even imagine. Of course the deficiency is understandable given Brazilian addiction to them.

In summary: in all U.S. trade treaties to date, portions of home markets remain protected as a cost of achieving wider trade in others. Some ‘unfair’ producers are left to compete under circumstances where subsidies are being paid by higher domestic consumption costs and lower investment returns for ‘foreign’ producers. Some ‘unfair’ producers progress, or are forced by competitive conditions to live, on a decreasing share of their target markets and a corresponding loss of profit. Whether these protection arrangements are created out of tariffs or other trade barriers—like quotas as provided for in bargained agreements, or in domestic laws like anti-dumping—the results are the same: some domestic "unfair’ producers, for one reason or another and by one means or another, are left to continue tending grimy steel mills or the soil. ‘Fair’ return to domestic consumers and foreign soybean and steel producers suffer the cost.

Whether one likes it or not, what advantages the U.S. has received from trade agreements has only been purchased politically at the cost of subsidizing domestic productive capacity in areas such as textiles, metals and agriculture. Without these subsidies, new productive capacity, like in technology and financial services and intellectual property, would not have been freed to demonstrate its wealth building potential by introducing efficient products and services for foreign clients in other nation’s respective ‘home’ markets. The U.S. political economy has brought greater wealth to all of its citizens by privileging these innovative industries in trade negotiations. This has also meant paying off older, more ‘basic’ industries.

Basic Products

The U.S. labor force is more highly compensated over all, for example, because a decreasing number of workers and less national savings are committed to productive capacity where margins are low. Labor and capital costs are marginally less important in markets that reward innovation and surprise. In Latin America by contrast, and particularly in Brazil, most of its productive capacity is concentrated in agriculture and basic industries. Even more than Canada and Mexico, most of Brazil’s wealth has been accumulated selling basic products like steel and food into its own large domestic market. In other words, the industries that will supply the money component of the political capital that needs to be paid to liberalize markets and reform the economy in Brazil, are crucially related to the very domestic claims the U.S. has had to ‘pay-off’ to increase its own over-all wealth or productive capacity.

Of course neither the U.S. nor Brazil planned this basic conflict into their respective economies. But as one Brazilian observer who is familiar with both economies observed, U.S. agricultural trade policy is so designed that (outside coffee which thanks to Brazil operates with an archaic and international ‘commodity agreement’) it "surgically" damages Brazil agriculture exactly where it has developed, and could develop further, its comparative strengths.

So in discussing the future of ALCA or FTAA it is clear from the beginning that alliances or bargaining power aside, differences between the structures of the U.S. and the Brazilian economy need to be addressed if negotiations are to spread wealth around the Americas within a single basic legal structure or treaty. The fact that they are also the largest economies on their respective continents is purely coincidental, at least beyond the fact that they are also two of the world’s richest nations in natural resources and willing-to-work labor populations.

Please tune in again next month.

Conrad Johnson, the author, is an American attorney, permanently residing in Brazil. He writes for various publications on development and legal issues in Latin America. You can reach him at conrad@alternativa.com.br