Brazil: Why Is Opening Up So Hard to Do?

When you think about trade policy in Brazil, the first question that comes to mind is “Why is the country taking so long to open up its economy? Why it such a laggard?”

After all, Brazil still has one of the highest import tariffs in the world, very few trade agreements to speak off, and its trade liberalization—one of the last to take off in the region (if not in the world)—has recently shifted into reverse gear, even though the job was far from done. Since 2004, protection has increased, but through the back door, in the form of taxes, local content rules, import licenses, you name it.

Brazil’s reluctance is clearly not due to a lack of theoretical and empirical evidence. Economic theory has been very clear about the benefits of trade since Adam Smith wrote his treatise in the 18^th century, at least. Advances in modern trade theory have also explained how trade can be the so-called handmaiden of growth. And it isn’t just theory. The post-war world has plenty of empirical evidence to support the theory, most obviously the performance of East Asia, of which China is the most recent and visible example. Of course, nobody can argue that trade explains all these successes or that those countries have been models of free trade. But it would still be impossible to explain China’s growth—or Korea’s or Japan’s, for that matter—without referring to trade.

Yet Brazilians have resisted. They have even resisted learning from their own telling experience.

Yes, the import substitution regime (which has become almost legendary, in the eyes of Brazilians, at least), delivered decades of high growth while eventually giving Brazil a degree of openness akin to the former Soviet Union. But it all ended in decades of stagnation, and an industry which has struggled to this day to catch up with the technological frontier. The latest trade policy reversal has also ended in tears: since 2010 Brazil has been experiencing its worst recession since the Great Depression.

To be fair, we have to acknowledge that Brazil’s colonial history was traumatic. After all, the whole economy depended on exports of just a handful of commodities (often a single one), which the country could sell to only one buyer, who had price-fixing prerogatives. Even after independence, Brazil faced a very volatile world economy, marked by two world wars and the Great Depression.

This context may help to make Brazil’s trade record less puzzling, but it took place in the early 20^th century and was an experience shared by many other countries in Latin America and even in Asia, yet their policies and attitude to trade evolved to their own benefit.

Whatever the deep sociological and political roots of Brazil’s resistance, the good news is that there are signs that this attitude is finally changing, with both the private sector and the government speaking of the need to open up; sign new agreements with Latin America, the EU, and the US; reform the MERCOSUR’s protectionist bias; join global value chains; and so on.

Given the current political climate in the US and Europe, this might not be the best of times to become a free trader, but Brazil being Brazil, better now than never. It is time for the country to check trade liberalization off its list and focus on how to improve its growth fundamentals in education, S&T, and infrastructure. It’s no longer about Friedrich List or Alexander Hamilton’s infant industry argument—before long, Brazil will be celebrating two hundred years of independence!