Brazil and the FTAA: Strategic Trade Options

Article excerpt

The first half of 2001 brought renewed interest for the creation of the Free Trade Agreement of the Americas (FTAA). The Quebec Summit confirmed the creation of the FTAA by 2005. NAFTA and Mercosur, the region's two largest trading blocks, play a vital role in any attempt to integrate markets across the Americas. Brazil is Mercosur's largest economy and a key player in the FTAA negotiation process. Brazilian exports are currently destined to several global markets. This paper evaluates these markets from a portfolio, risk-return perspective, adding another dimension to the FTAA discussion

I - INTRODUCTION

The Quebec Summit of April 2001 created a new momentum in the hemispheric Free Trade Agreement of the Americas (FTAA) trade negotiations. It is now expected that by 2005, the hemispheric FTAA will be implemented. The FTAA would create an 800 million people market, with an estimated combined GDP of more than US$ 11 billion for the year 2000 (The Economist, 2001).

Latin American countries see the FTAA as creating new markets and expanding current ones for their exports of primary, semimanufactured and manufactured products. For the U.S, the FTAA means opening up a very promising market in the Americas for its services and knowledge-intensive made products (Fauriol and Weintraub, 2001).

The creation of such a regional trade agreement is not trouble free. An agreement that meets the needs of 34 countries throughout the Americas will not take place without frictions. The ostrich mentality is well entrenched in a number of countries that see the FTAA with apprehension and suspicion. Brazil is one of the countries that are reluctant to foster the FTAA process. Brazil lobbied forcefully to postpone the implementation of the FTAA, fearing the potential threats posed by the U.S. more competitive business environment. Its efforts were successful and the implementation of FTAA was postponed until 2005. Although Brazilian politicians and businesses are far from consensus about the benefits of the FTAA, Brazil and Mercosur have been developing a more pragmatic approach towards the agreement since Quebec, accepting the inevitability of establishing a free trade area in the Americas (Barbosa, 2001).

This paper proposes an alternative approach to evaluating the benefits of increasing the trade with the FTAA countries. Namely, we assess the relative performance of the U.S. and ALADI markets for Brazilian exports vis-A-vis the European, Africa, and Asian markets. The U.S. market is Brazil's main attraction in the FTAA arena. The Single Index Model is used to evaluate the risk-return tradeoffs associated with these exporting markets for Brazilian exports of primary, semi manufactured, and manufactured products. In addition, we analyze the contribution of each export market in each export product category to the sensitivity of Brazilian exports earnings to global fluctuations. The period under analysis is 1980-2000, fully reflecting recent trends in Brazil's most significant exporting markets.

The paper is organized as follows. Sections 11 and III discuss recent progress in the negotiations for FTAA and the evolution of Brazilian exports during the years 1980-2000. Section IV presents the methodology and results of the SIM portfolio evaluation.

II - INTEGRATING THE AMERICAS

The election of George W. Bush in January 2001 has once again dramatically changed the dynamics of FTAA negotiations. The Bush administration has made the FTAA a major priority. The Bush administration believes that the U.S. leadership in global trade would be strengthened by successful implementation of the FTAA and it would provide a momentum for other trade policies. In order for the U.S. to reestablish leadership in FTAA negotiations, the Bush administration must be granted the Trade Promotion Authority or TPA (The Economist, 2001). The U.S. Congress, however, might not vote on the FTAA-related TPA negotiating authority until later in 2001. …

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