Open trade with ecological devastation? The failure of the trade policy of the Jair Bolsonaro administration

Marco Antônio Rocha
Assistant Professor
Institute of Economics, University of Campinas
Brazil

Victor Young
Researcher
Institute of Economics, University of Campinas
Brazil

Arthur Welle
Researcher
Institute of Economics, University of Campinas
Brazil

Pedro Paulo Zahluth Bastos
Associate Professor
Institute of Economics, University of Campinas
Brazil

The Jair Bolsonaro administration gambled on an economic policy that gave the private sector a leading role. It would be encouraged to fill the space left by the expected retraction in public spending and the privatization of state-owned companies. Encouraging private investment would come from reducing costs, whether in taxes, wages (through labor reform), or by eliminating costly regulations such as environmental protection.

An essential part of the tax reduction would come through free trade agreements by reducing or eliminating customs tariffs. The idea was that cheaper imports would allow the transfer of technologies embedded in production goods and machines, which the expansion of international competition would force local companies to incorporate. In addition, the expected efficiency gain with the increase in imports would lead to the growth of exports facilitated by trade agreements.

To complement national savings, the government also gave centrality to the ability to attract foreign direct investment (FDI) through a friendly business environment. Such an environment should be consolidated by international treaties, considering that the convergence of standards would increase the credibility of Brazilian institutions.

Two international agreements would be vital to ensuring such institutional convergence. First is Brazil’s accession to the OECD. Particularly regarding the financial sphere and capital flows, the OECD has a series of Codes of Liberalization to which member countries must comply, including, for example, the Code of Liberalization of Capital Movements. The intended signal to foreign investors is that the normative convergence would be locked-in with the accession to the OECD, being protected from an eventual alteration of the ruling coalition.

The Mercosur-European Union trade agreement would play a similar role. In addition to eliminating tariffs on industrial products within 15 years, there is a commitment to liberalize government procurement, except for defense, health, education, mining, and oil extraction. Historically, government orders have been a mechanism used by developing countries to stimulate the development of private companies. However, the Bolsonaro administration considers that Brazilian engineering companies would have more to gain and can already compete in the big European market for government procurement.

This expectation, together with the expected gain in efficiency with the liberalization of industrial imports from Europe, at least in the administration´s calculation, would compensate for the much less than proportional opening of the agricultural market in the European Union. This market will be partially opened with the use of quotas for sensitive products such as meat, poultry, sugar, and ethanol. To give an idea of the reduction in Brazilian ambition, the demand was for a quota of 300 thousand tons of tariff-free beef per year in 2004. Still, the Bolsonaro administration agreed to only 67 thousand (net of bones).

The problem is that attempting to reduce customs tariffs and attract FDI through international treaties is at odds with reducing costs by eliminating environmental regulations. Due to the dismantling of the inspection system and the incentive given by President Bolsonaro himself to logging, deforestation in the Brazilian Amazon rose from 7,536 km2 in 2018 to 13,038 km2 in 2021, an increase of 73%. The latest monthly data detected, in June 2022, 1,429 km2 of deforestation in the Amazon, a 54% increase compared to June 2021.

Because of this, in 2020, the year in which the Covid-19 pandemic stopped the world economy and caused an unprecedented reduction of almost 7% in global emissions of greenhouse gases, emissions in Brazil increased by 9.5%, practically the same rate as the previous year. They certainly increased even more in 2021 and 2022.

This is a disaster for global ecology and is perceived by Brazilian trading partners. The Mercosur-European Union Agreement and Brazil’s entry into the OECD tend to be barred on the grounds that one should not reward a government that does not comply with environmental agreements that are fundamental to controlling global climate change. It is hoped that, in a post-Bolsonaro future, international cooperation will be guided by a positive agenda that keeps the forest standing, ensuring the reproduction of populations with a diversified circular economy.

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