The Transatlantic trade and investment partnership TTIP

Created: 01 July 2016

The EC chose not to honour its commitment under GATT 1994 to phase out all its customs preference agreements within five years. Instead it has made new agreements, mostly with many of the world's poorer countries, which have enabled export of EC goods at low or even zero import charges to countries which have had little to sell to us and would have been obstructed by non-tariff barriers anyway. An obvious result is that many of the world's trading nations have tried to protect themselves by forming trading blocs with tariff barriers against non-members. The Export Guide lists nearly forty such recently-formed blocs but the list is not complete. To protect itself the USA has started to play the game, and in particular has formed the North American Free Trade Area NAFTA of the USA, Canada and Mexico. The Brussels Commission has for some time sought to negotiate a free-trade pact with NAFTA which would have been the biggest free-trade association in the world. They have made the derisory claim that it would eventually increase the EC's GDP by 0.5%!   Whether or not the pact was ever likely to happen, recent events have dealt the project a serious blow.

The electors of Holland have collected 100,000 signatures so far calling for a referendum on the proposed pact. Greenpeace has acquired and leaked 248 pages of negotiation papers at the beginning of June. Careful study of the papers, on the Greenpeace website, is worrying. Greenpeace claims that they show "a race to the bottom in environmental, consumer protection and public health standards" and although not everybody would go so far the papers do raise serious questions about the Commission's conduct. The French President Hollande's Socialist Party has reacted strongly and forced him to deny further support for the pact. He has said: "We don't want unbridled free trade. We will never accept that basic principles are threatened". In Germany only 17% of those asked in a recent poll support the negotiations and barely half even accepted that free trade is itself a good thing, a strange finding in a country where exports are so important.

Disorder in Brazil

Created: 27 April 2016

Brazil is or was said to be the eighth largest national economy in the world. For years it was a prominent member of the G20 group of nations and took a leading role in establishing their political effectiveness against the traditional dominance of the “western” industrialised economies. It was developing sophisticated manufacturing with exports and all seemed well while President Luiz Inacio da Silva remained in office until 2011. The year 2016 should have been triumphant with the Olympic Games in Rio beginning on 5th August two years after the football World Cup event was held in Brazil. But Brazil rode the commodity boom, feeding China with iron ore and other raw materials, relying on an obsolete growth model which China was to abandon: its demand for raw materials was suddenly reduced, oil prices slumped around the world and consumer confidence sank with them. Brazil allowed its own currency to inflate to levels which smothered manufacturing. Da Silva is now subject to criminal investigation, the latest victim of the growing “carwash scandal” which began with enquiry into the abuse of inflated contracts from the state oil giant Petrobras to finance the Workers Party but now involves a succession of hundreds of other political figures. The current President Mrs. Dilma Rousseff tried to control the situation by imposing price controls when the real fell by 70% but the finance minister Joaquim Levy resigned after only a year because he could not overcome the cabinet’s unwillingness to take vital decisions. His departure cost the government any real hope of regaining confidence without help from an international body. The government is frozen, the finance ministry having lost the confidence of global markets as well as investors in Brazil. Few still hope that the ruling Workers Party will or even be brave enough to take the drastic measures to remedy matters; their coalition partners the PMDB party left the government at the end of March.

Sr. Arminio Fraga, the former governor of the Central Bank, in an interview with a newspaper said recently that: “I have the feeling that nobody wants to take any bold steps or make any sacrifices. Brazil ended up in this situation by doubling down on credit and fiscal expansion. It woke up with the nightmare of a paralysed country and a ruined model.” Three quarters of the budget is set, committed to welfare payments and regional transfers while basic infrastructure has been neglected. President Lula is still revered by many for welfare reforms which enabled about 35 million people to escape deep poverty in the boom days but are now an unsustainable burden on the economy. In Mrs. Rousseff’s first term the government imposed “administered prices”, which made electricity and other products unrealistically cheap: now these prices have been freed and contribute to inflation. Currently Mrs. Rousseff faces impeachment for shuffling public funds to hide a budget deficit before elections in 2014 but the lengthy proceedings against her may well lead to paralysis and prevent control of the budget deficit which is now passing 10% of GDP. She has said that she will never voluntarily resign but she will need at least a third of the votes in the Congress to block impeachment. Of the 65 members of the Impeachment Commission, 37 are accused of corruption or other crimes. Brazil has fallen to 75th place in the World Economic Forum’s rankings for competitiveness, 123rd in quality of infrastructure and 135th for days needed to start a business. Commentators are comparing Brazil with Greece and even Venezuela. The Vice President Michel Temer, who would presumably take over if Mrs. Rousseff is impeached, is talking to opposition parties about drastic cuts in public expenditure. He apparently hopes that it will be possible to restore confidence among investors and stimulate domestic private investment. Mr. Temer is also being investigated for corruption, as are the opposition leader Aécio Neves and 352 of the 594 members of the National Congress.

In the summer of 2014 Mrs. Rousseff claimed that “The IMF will never again command Brazilian politics” but now there seems little choice. Brazil’s position is serious enough to generate contagion among other developing markets and even to set off a financial crisis involving many countries. But a pre-emptive IMF deal to cover Brazil’s borrowing needs for two years, if one could be negotiated, might be enough to avoid international trouble and Brazil’s default. Brazil cannot muddle through without help. Inflation has risen to nearly 11%, its highest for thirteen years, and the Central Bank cannot counter this by adjusting interest rates because the economy is in free fall. Last December the Bank forecast that GDP would fall this year by 1.9%, but in the last week of March it changed this to 3.5% with inflation at 6.6%. This was the greatest annual fall in GDP since 1990, when hyperinflation and debt default seriously harmed Brazil’s return to democracy. Output fell by 3.8% last year and is expected to fall by at least another 4% this year. In 2015 businesses abandoned investment plans and laid off more than 1½ million workers so that the country faces perhaps its deepest-ever recession. Brazil’s “country risk” has already pushed real rates on ten-year debt in international markets to the dangerous 7%: it will inevitably rise further - assuming that anybody will risk lending at higher rates - so that Brazil will be unable to repay its debts. Major credit rating agencies have already cut Brazil’s credit rating to junk with contingent effects on parastatal companies such as Petrobras, Banco do Portugal and Caixa. With all the excitement there has been about the Brazilian economy over the past forty years, the income gap between this country and the west has not closed at all: Brazil’s GDP per capita is now 23% of that in the United States, about where it was in 1956.

The Workers Party’s President Rui Falcão has drafted the party’s National Emergency Plan for dealing with the crisis. He is said to be supported by the former national President da Silva. The plan involves drawing on the country’s foreign-exchange reserves to fight recession and prevent a further increase in unemployment. It requires a draw-down on Brazil’s foreign reserves of US$371,000m (£262,000m) both to finance development and employment and a major cut in interest rates, a change which would compromise the independence of the Central Bank. Altogether the sixteen proposals in the plan constitute a return to the Workers Party’s Marxist roots and rejection of its recent free-market concordat. Doing this would heighten the emerging market crisis and lead to intense scrutiny of the affairs of other countries around the world which face similar problems following the collapse of the commodity boom and the end of cheap dollar liquidity from the US Federal Reserve. Developing countries which committed too much of their economies to sales of raw materials to China are now at risk.

Snr Falcão’s plan is contrary to the policies of the current President and this implies a direct clash between the government and its own political base in the Workers Party, so its adoption might prejudice the stability of the currency and Brazil’s debt markets. Investors might be prepared to accept use of the reserves to support stabilisation and reform but they would hardly support what looks like a desperate populist agenda. Tapping the reserves could easily lead to a run on the currency: while the reserves are large it is difficult to value them precisely because the Central Bank has taken out $115,000m in currency swaps, partly to support companies with dollar debts which have suddenly doubled as the real has fallen in value. Total external debt is $470,000m and there are also $200,000m of inter-company loans which are like debts so that Brazil’s external debts are substantially less than its external assets. Snr Falcão admits that the government faces “an intense political-ideological battle”. The progressive wing of the Workers’ Party needs to regain control over events and double down on stimulus policies which rescued Brazil from crisis in 2009. This must mean a state-financed industrial policy, heavy investment in infrastructure, health and housing, and employment programmes with a general rise in salaries. Overall the policy would involve a partial retreat into economic dependence, heightening the isolation of the economy which even now has the very low trade gearing of 10% of GDP. The state oil company Petrobras, which accounts for about 10% of all investment in Brazil, has cut its investment by 40% since the ‘Lava Jato’ contracts scandal and the fall in oil prices. The steel group Usiminas is suspending production in Cubatao near São Paolo. The Workers’ Party is worried by the increase in unemployment as the recession has deepened in the past quarter. Employers are shedding more than 150,000 workers a month and this destroys the Party’s support in the workforce. The Brazilian Economic Institute estimates that unemployment will rise from 6.8% in late 2014 to 11.7% this year, but even this does not express the extent of the harm. It has started a leftward shift in political allegiance and vitiates the efforts of the President and her closest supporters to make alliances with opposition parties in the national congress.

Where does this leave British exporters who developed relations with Brazil with the encouragement of the Department of Trade a few years ago? It is an old maxim of exporting that a successful exporter will in any year have some profitable markets and some loss-making ones but that the balance should justify going on. A major problem arises when an exporter remains loyal to a market in severe decline and has to decide whether to stay with it or withdraw. Nobody might want to abandon committed business partners but this is sometimes unavoidable. And Brazil is not alone: Argentina’s late return to prosperity has turned to an agreement to pay billions of dollars to four aggressive Wall Street hedge funds. Obvious trouble began in 2001 when Argentina suspended payment of over US$80,000m of debt, the biggest government default ever. Most bondholders agreed to accept 30 cents in the dollar, but the hedge funds refused and battle has raged in and out of court since then. Argentina’s economy is in ruins again and the long-ruling populist government fell in December. Argentina now has to pay about 75% of its debts, several times what it had offered, and nobody can see where the money is to be found. The case has important implications for other such disputes around the world. Venezuela is expected to default this year and President Maduro’s cup really will be full when that happens. Several African countries which benefitted in the short term by selling large quantities of minerals to China may suffer because they have not stabilised their economies since the sales ended.

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