Almost 200 years ago the UK first established diplomatic relations with Brazil. Since then, we have seen a considerable rise in Brazil’s economic power and its GDP (PPP) is now greater than that of the UK. It is likely that Brazil’s economic and global influence will continue to grow and in order to fully benefit from this, the UK needs to establish much stronger bilateral diplomatic and economic relations.
The Foreign Affairs Committee in its 2011 report on UK-Brazil relations clearly recognises the need for stronger economic ties and since then it appears considerable effort has been made towards achieving this. Indeed, both the PM and Foreign Secretary visited Brazil in 2012 and 2014 respectively and the UK-Brazil Joint Economic and Trade Committee (JETCO) set up in 2006 continues to meet. Nevertheless, no formal agreements have been signed between the UK and Brazil. However, the U.S. and Brazil have signed an agreement on trade and economic cooperation (2011) aimed at furthering their already good relations, and Brazil has signed cooperation agreements with China (2014). So even though Brazil is certainly willing to sign such agreements the UK has not capitalised on this yet and is missing an opportunity to counter the dominance of Chinese and American businesses in the region. Importantly, as has been noted by the Foreign and Commonwealth Office, Brazil has reached a stage in its economic development where its growing middle class could benefit from UK goods and services.
Currently, Brazil’s two biggest importers are China (34.2% of imports in 2012) and the U.S. (32.4% of imports in 2012) – in comparison the UK does not even make it into the top 10. However, the failure of the Free Trade Area of the Americas is an opportunity for the EU/UK since it means that there does not exist a free trade area between Brazil and any large developed economy. The EU-Mercosur Free-Trade Agreement represents the EU’s attempt for a free trade area. Yet, even though talks started in 1999 there remain problems; certain Mercosur members like Argentina don’t want an agreement with the EU as they would be less able to compete with EU goods in the Brazilian economy. Negotiation is slow but it is hoped that a finalised agreement could be reached in 2016. Yet even if this happens, UK businesses will still need to establish a position in the Brazilian market; competing not only with the U.S. and China, but also other European counties such as Germany and Italy whom already have a much greater market share than the UK.
The majority (97.5%) of imports from China to Brazil are manufactured products and the top imports from the U.S. to Brazil are machinery, mineral fuel, aircraft and pharmaceuticals (these represent 60% of total imports from the U.S. to Brazil). If we compare the biggest UK exports worldwide; financial services, aerospace engineering, pharmaceutical products and automobiles. These are all things Brazil needs and is already importing from other sources as well as from UK companies: there is indeed a market in Brazil for UK goods. Since no large developed economy currently benefits from a free trade agreement, there is no reason why the UK cannot compete in Brazil. In fact, some UK companies; notably, British Gas group and Rolls Royce have enjoyed big successes in Brazil – although this will not be helped by the current bribery accusations against Rolls-Royce.
Unfortunately for UK businesses, the Brazilian market is challenging to enter; it has a complex tax system often with high tax rates, a cultural demand for personal contact in a country which is very large, insistence on Portuguese speaking staff and UK businesses working in Brazil sometimes become vulnerable to corruption. Solving these problems is not impossible but costs time and money; potentially enough to discourage smaller companies from choosing Brazil as their next market. UK Trade and Investment (UKTI) do offer support to businesses wanting to enter the Brazilian market but while this is useful it is not enough by itself. The UK needs to demonstrate a greater commitment to Brazil. Although high-level visitations by senior politicians and policy-makers are beneficial, actually signing some agreements to bring the countries closer together offers a much greater pay off. The Foreign Affairs Committee recommended a Double taxation Agreement; removal of double taxes will improve investment but more importantly also can be used to emphasise good relations. The failure of the U.S. to reach such an agreement means that potentially this is an opportunity for UK to have a trade advantage.
Other options include increasing exports in the creative and green technology sectors as the Brazilian government is likely to continue to invest in these areas. Importantly however, minor economic cooperation leads to improved bilateral relations, after which fully-fledged trade agreements can be signed. The importance of improved bilateral relations with Brazil extends beyond more than just economic cooperation: it is start to entering the other Latin-American economies with potential for even more benefits.