Is Brazil Relevant for South Africa in Trade?

Brazil has been on the South African radar of late for two reasons. Firstly the results of the Brazilian Trade Policy Review were released in the WTO this month; and secondly South Africa and its local neighbours are now working to ratify the free trade agreement concluded with Brazil and its Mercosur partners at the end of last year. The trade policy review holds some interesting insights with relation to the future of the free trade agreement.

Firstly, in the WTO a trade policy review is a type of periodic trade audit conducted to see whether a country is on track with its WTO commitments. For each review there is a submission by the government of the member under review accompanied by a detailed report written independently by the WTO Secretariat. The reports are then scrutinized and questioned by the full WTO membership in the Trade Policy Review Body. These audits are thus a useful source of information in spotting trouble ahead in bilateral relations. In taking up the bilateral linkage recall that Mercosur and South Africa signed a framework agreement in 2000. The framework’s main objective was the conclusion of a free-trade agreement, but there was a so-called ‘partial scope agreement’ to be concluded as a first step to that objective. These steps were needed as a bit of fancy footwork around the WTO rules on regional trade agreements. In 2003, the other four member countries of the Southern African Customs Union (SACU) joined the negotiations, which were concluded in December 2008. Locally it is expected that SACU Ministers will jointly sign the Free Trade Agreement on 3 April 2009 at which time they are scheduled to meet in Lesotho. This signing has to be followed by ratification within each country before the arrangement will enter into force. This has been difficult in the past for SACU, and it is most unlikely that any duty benefits will be seen in practice before the beginning of 2010.

Brazil has long regarded the multilateral trading system as the main priority of its foreign trade policy. This is not surprising as between 2004 and 2007 Brazilian foreign trade expanded steadily with exports growing from US$96.5 billion in 2004 to US$160.6 billion in 2007, while imports rose from US$62.8 billion to US$120.6 billion. Brazil considers that this expansion was done in a ‘geographically well distributed pattern’. None the less Brazil holds the view that they did promote South-South trade, in particular citing growth of 114% in trade with African nations. Africa accounts for just under 8% of Brazil’s imports but more that half of this is from one source – Nigeria. On the export side it is notable that Brazil imports around 40% more from Africa than it exports to it – an encouraging statistic. However if one unpacks the export position, South Africa is the biggest African export destination for Brazil, accounting for 20% of Brazil’s African export programme.

Brazil is renowned as probably the leading developing nation in global agricultural trade and has not been shy to defend this interest in WTO dispute settlement, notably against the European Union in sugar and the United States in cotton. This holds some lessons for Africans with large agrarian based trade profiles. This being said Brazil is also not shy to support its own agricultural sector with subsidies. Admittedly Brazil’s agricultural production has a relatively low level of tariff protection but it is supported through several domestic support spends. There are guaranteed prices for a number of agricultural products. It is true that the value of assistance to agriculture in Brazil is low compared with the average in OECD countries. None the less its interventions in both the credit and agricultural domestic markets are distorting forms of support substantially above those applied by South Africa. It has been speculated that the type of assistance provided by Brazil could in itself affect global markets of agricultural products for which Brazil is a large exporter. Southern African’s would do well to note this in the SACU-Mercosur relationship on the defensive side. On the pro-active side Brazil may have some useful lessons for South Africa in that much of its subsidization is aimed at providing low cost credit to small scale farmers, a definitive priority with SACU.

The other area where South Africa may face frustrations is with import prohibitions and the fact that Brazil uses both automatic and non-automatic licences that affect just over one third of all its tariff lines. The administration surrounding these licenses has been known to be a source of aggravation to South African exporters. One item of particular interest to Western Cape based agriculture, raised in the trade policy review, is the fact that Brazil has import prohibitions on certain grapes and grape juices to be used in the production of wine and with respect to wine transported in containers larger than five litres.

The large growth in African imports by Brazil is certainly an attractive reason to move to prompt ratification of the free trade agreement, as South Africa’s share in this growth has been modest at best, and should improve under the FTA. This also facilitates both South Africa and Brazil’s wider commitment to South-South trade and cooperation, both in the WTO via the G-20 configuration and more notable the three-way linkage that is being explored under the India-Brazil-South Africa (IBSA) forum which is intended to lead to a trade pact. In this regard South Africa is somewhat of a second mover as Mercosur and India have already concluded a trade agreement in 2004 covering around 450 tariff lines with tariff reductions of between 10% and 100% on the MFN tariff. The required ‘catch up’ will happen rapidly if SACU countries are diligent in ratifying the SACU-Mercosur text; as the Mercosur-India agreement is itself not yet fully ratified. South Africa is definitely still on the pace here.

Is Brazil important to South Africa? ‘Silly question,’ you may retort.