Federative Republic of Brazil Business Guide
Introduction
Brazil, officially the Federative Republic of Brazil (Portuguese: Brasil or República Federativa do Brasil), is the largest and most populous country in Latin America, and the fifth largest in the world in both area and population. Its territory covers 8,514,876.599 km² between central South America and the Atlantic Ocean and it is the easternmost country of the Americas. It borders Venezuela, Suriname, Guyana and the département of French Guiana to the north, Uruguay to the south, Argentina and Paraguay to the southwest, Bolivia and Peru to the west, and Colombia to the northwest. The only South American countries not bordered by Brazil are Ecuador and Chile. The Brazilian coastline covers 7,367 km to the east. Numerous archipelagos are part of the Brazilian territory, such as Penedos de São Pedro e São Paulo, Fernando de Noronha, Trindade e Martim Vaz and Atol das Rocas. Tropical climate is predominant. In the south of the country, subtropical climate prevails. Brazil is traversed by the Equator and Tropic of Capricorn lines. It is home to varied fauna and flora and extensive natural resources.
Economy
Characterized by large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries and is expanding its presence in world markets. From 2001-03 real wages fell and Brazil's economy grew, on average only 2.2% per year, as the country absorbed a series of domestic and international economic shocks. That Brazil absorbed these shocks without financial collapse is a tribute to the resiliency of the Brazilian economy and the economic program put in place by former President CARDOSO and strengthened by President LULA DA SILVA. Since 2004, Brazil has enjoyed continued growth that yielded increases in employment and real wages. The three pillars of the economic program are a floating exchange rate, an inflation-targeting regime, and tight fiscal policy, initially reinforced by a series of IMF programs. The currency depreciated sharply in 2001 and 2002, which contributed to a dramatic current account adjustment; from 2003 to 2006, Brazil ran record trade surpluses and recorded its first current account surpluses since 1992. Productivity gains - particularly in agriculture - also contributed to the surge in exports. While economic management has been good, there remain important economic vulnerabilities. The most significant are debt-related: the government's largely domestic debt increased steadily from 1994 to 2003 - straining government finances - before falling as a percentage of GDP beginning in 2003. Brazil improved its debt profile in 2006 by shifting its debt burden toward real denominated and domestically held instruments. LULA DA SILVA restated his commitment to fiscal responsibility by maintaining the country's primary surplus during the 2006 election. Following his second inauguration, LULA DA SILVA announced a package of further economic reforms to reduce taxes and increase public investment. A major challenge will be to maintain sufficient growth to generate employment and reduce the government debt burden.
Market Overview
With a gross domestic product (GDP) of approximately US$700 billion, Brazil represents roughly half of the South American territory and economy. The country is rich in agricultural, mineral, and industrial resources and offers substantial market opportunities for US exporters in a diverse array of sectors that support Brazil’s drive to industrialize further, court energy and transportation investment, and cultivate export-led growth. The US continues to be Brazil’s single largest trading partner. From January – December 2006, US exports to Brazil were US$19.23 billion, US$3.856 billion more than 2005, and Brazilian exports to the US were US$26.39 billion, US$1.953 billion more than in the same period in 2005. Brazil’s GDP grew at just under 3.0% in 2006 – a growth rate that continues to concern Brazil’s economic authorities.
Market Opportunities
Most industrial economic activity, which includes automobiles, steel, petrochemicals, computers and steel, is focused around the southeastern states of Rio de Janeiro, Minas Gerais, and São Paulo. Brazil’s agricultural sector is well diversified and the country is a world leader in producing sugarcane, coffee, soybeans, and orange juice. Brazil has a diversified industrial sector as well, with many opportunities for both large and small U.S. businesses. Though the government is a large part of the Brazilian economy, it is often difficult for U.S. businesses to take advantage of public sector opportunities. It is extremely difficult for U.S. companies to get involved in government procurement without a local Brazilian partner. There are a number of promising areas for U.S. exports and investment that U.S. Commercial Service Brazil has identified, including: Agricultural Equipment; Agriculture; Aircraft and Parts; Airports; Computer Software; E-Commerce; Highways; Insurance; Iron and Steel; IT Hardware; Medical Equipment; Mining; Oil and Gas; Pharmaceuticals; Pollution Equipment; Ports; Railroads; Safety & Equipment; Telecommunications & Tourism.
Market Challenges
Brazil’s population – at 188 million making it the world’s 5th most populous country – continues to face a number of challenges. The country continues to experience high unemployment in major urban centers. Crime, drug abuse, epidemics, poor public education, and environmental degradation are major problems that are exacerbated by one of the most unequal distributions of wealth in the world. Beyond the need for greater economic development, Brazil faces the challenges of prevalent black and gray markets. These markets form the basis of Brazil’s large informal economy, hindering tax collection and promoting piracy in technology, consumer goods and other products.
Despite partial liberalization in recent years, the complexities of Brazil’s business environment still create substantial obstacles for US exporters. Doing business in Brazil requires intimate knowledge of the local environment, including the explicit as well as hidden costs of doing business (referred to as “Custo Brasil”). U.S. companies face tariff barriers, a difficult customs system, a heavy and unpredictable tax burden, and a legal system that is overloaded and often incapable of enforcing business law or intellectual property rights effectively. Nevertheless, many companies find that the opportunities outweigh the risks.
Still, there is reason for optimism about Brazil and its future. Even as the Brazilian Real heavily appreciated against the U.S. Dollar, the country’s exports continued to grow. Additionally, the government has been able to hold inflation at bay through high federal discount rates. The discount rate has been lowered to 13% from near 20%, and while it has been blamed by some for dampening consumer demand, memories of hyper-inflation have blunted policy makers from lowering it too quickly. Some also worry that the country’s export-led growth strategy could overexpose the country to the ups and downs of the global market. The country’s current account was positive in 2006, as in 2004-2005, and is expected to be so in 2007.
Common Commercial Goals
Overall relations between Brazil and the US are good. President Luiz Inacio Lula da Silva, of the left-leaning Workers’ Party (PT), has pursued orthodox macroeconomic policies since taking office in January 2003. His administration has focused on tax and social security reforms and the fight against hunger and poverty. In 2005, however, legislative progress on Lula’s micro-reform agenda stalled. In the long run, sustained GDP growth is the best antidote to Brazil’s poverty and inequality. Many US companies have invested heavily in Brazil and continue to view it as an attractive export market. In June 2006, the U.S. Commerce Department and Brazil’s Ministry for Industry, Development and Commerce launched the “U.S. – Brazil Commercial Dialogue” to facilitate trading relations between the two countries. Key activities under the umbrella of this dialogue include customs facilitation, IPR protection and export promotion.
