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AGRICULTURE IN BRAZIL: FROM THE 1980’s TO THE G-20

MAURO MASON DE CAMPOS ADORNO

Thesis Submitted in Partial Fulfilment of the Requirements of the Degree of Master by Coursework in International Policy Studies

School of Politics Faculty of Humanities and Social Sciences

La Trobe University Bundoora, Victoria 3083

Australia

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July 2005 Abstract

The Brazilian economy transformed from a state of financial crisis in the 1980’s to become a

leading agriculture exporter in the late 1990’s. Economic reforms implemented by the Real Plan

were a response to a bankrupt decade of failed economic plans and high inflation rates. In this

period agriculture played a key role in the control of the inflation and in the stabilization of the

economy. The domestic environment of the Brazilian economy and the role of agriculture helped

Brazil to develop a more active role and led it to seek for a leadership position in the

international agricultural negotiations. On the eve on the WTO’s Cancun Round of negotiation a

new coalition of developing countries formed the G-20. The Group was born from a Brazilian

initiative and for the first time a group of developing countries stood up against the developed

countries in the agriculture negotiations.

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Acknowledgments

I would like to dedicate this thesis to my mother Ana and my brother Matheus. Who believed in

me even when I did not. I love you guys.

I would like to thank my Father for the support, during the whole process, even at 4 am, William

Wyle my good friend and housemate, Celina Italiano and her beautiful family, my adviser

Anthony Jarvis, who was always a sea of calm and never lost hope in me and also to thank all my

friends and family who through phone calls or emails were there for me.

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Contents

Abstract……………………………………………………………………………..……I.

Acknowledgments……………………………………………………………………….II.

Statement of Authorship………………………………….…………………………...III.

Introduction………………………………………………………….………..……page1.

Chapter 1: The 1980’s the Brazilian Lost Decade………………….………...….page 4.

1.1 Economic Development on the Early 1980’s ………………….….…...……….page 5.

1.2 The Stabilization Plans……………………………………….....…….……..….page 9.

1.2.1 The Cruzado…………...…………………………………………….………page 10.

1.2.2 The Collor Plan……………………………..…………………….....……....page 12.

1.2.3 Two years of Itamar……………………………………………………….…page 15.

1.3 Agricultural Balance of the 1980’s………………………………...…………..page 17.

Chapter 2: The 1990’s and the Real…………………………………………….page 20.

2.1 The Last Stabilization Plan…………………………………………………….page 21.

2.2 The Real Plan……………………………………………………………..…...page 24.

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2.3 The Agriculture of the Real……………………………………………………page 28.

Chapter 3: The Size of Brazil’s Agriculture…………………………………...page 37.

3.1 The Agriculture Sector in Brazil………………………………………………page 39.

3.2 Trade Barriers or Export Measures…………………………………….……...page 45.

3.3.1 The Cotton Case…………………………………………………..…………page 50.

3.3.2 The Sugar Case……………………………………………………..…….…page 56.

Chapter 4: The WTO and The G-20…………………………………….……...page 60.

4.1 The Uruguay Round……………………………………………………...……page 61.

4.1.2 The Doha Round……………………………………………………….....…page 65.

4.1.3 The Cancun Ministerial Conference…………………………...…………….page 71.

4.2 The G-20…………………………………………………………………....….page 77.

Conclusion………………………………………………………………….……..page 81.

Bibliography……………………………………………………………………....page 86.

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Introduction

On the eve of the WTO’s Cancun Round of negotiation a new coalition of developing countries

are formed the G-20 is born from the Brazilian initiative and for the first time a group of

developing countries stand up against the developed countries in the agriculture negotiations. A

new balance of power was set in the WTO forum of agricultural negotiations.

With the collapse of the Cancun Round of negotiation little was achieved in the agricultural

negotiation but the new coalition brought new hope for developing countries starving for fairness

in the agricultural trade. Brazil played a leading role, not only, in the creation of the group but

also in the negotiations the group undergoes. Through the G-20 Brazil became a more active

negotiator in the multilateral organizations especially in the WTO. The group’s main goal, and

thus Brazil’s key goal, is the liberalization of the agriculture through regulation of the

international trade system. Brazilian complaints in the WTO Dispute Settlement Body (DSB)

became a constant and the targets always seem to be developed countries. Brazil had cases

against Canada, USA and EU, all agriculture related, solved through the WTO panels. It can be

said that Brazil has been increasingly interested and active member in the WTO negotiations in

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particular when the disputes involve agriculture. The question posed here is what domestic and

international factors made Brazil so keen to take the leadership role in the international

agricultural negotiations, in particular after the 1990’s?

This thesis tries to answer this question tracing a chronological line starting in the 1980’s when

the country struggled through a decade fighting incredible inflation rates and economic instability

until the 1990’s when economic and political reforms changed the Brazilian economy. The

liberalization of the market was a masterpiece in the process and the agricultural sector an

instrument in an overall macroeconomic strategy to stop the inflation. The Real Plan and its

reforms brought to Brazil a new currency, stabilization of the economy and control of the

inflation. During the 1990’s not only the stabilization took place but also the inflation was

controlled.

The liberalization process along side with the opening of Brazilian economy to the international

market fuelled export sectors of the economy in particular the agricultural sector. With an open

market the agricultural sector could acquire imported inputs at a cheaper price, which helped to

boost its productivity. The surpluses in the agricultural trade balance helped to normalize the

national accounts and the economic stabilization of the country. The Agricultural sector became

increasingly important to the country’s economy, to the extent that it employs more than a third

of the Brazilian work force and represents 33% of the national GDP.

This thesis is divided in four chapters. In the first chapter the focus is on the 1980’s decade in

Brazil and the attempts to fight inflation and financial crises through heterodox economic plans.

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The chapter sets a background to the forthcoming decade and the Real Plan, which comes as a

solution for the economic problems from the 1980’s.

The second chapter outlines the Real Plan and the political and economic reforms that the country

underwent during the plan. The chapter also analyses the effects of the reforms on the agricultural

sector, which was an important part on the macroeconomic conjuncture of the period and played

an important role in controlling inflation. Chapter three will analyse the growth of the agricultural

sector in Brazil, in particular, agribusiness. This chapter examines Brazilian participation in

international trade and the incidence of trade barriers to Brazilian products. Also two WTO cases,

in which Brazil participated, will be investigated to better understand the country’s participation

in the organization. The fourth and final chapter is an overview of the Uruguay Round, the

outcomes that lead to Doha, the failure of the Doha round and the Cancun Round with the

creation of the G-20 and Brazilian participation.

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Chapter 1: The 1980’s: Brazil’s Lost Decade

This chapter focuses on the 1980’s Brazilian economic policies. Due to its low growth levels,

high inflation rates and growing external debt, this period is known as the ‘Lost Decade of

Brazilian Economy’. Although it is called the Lost Decade, this period in the Brazilian economy

lasted more than a decade and it went from 1982 to 1994. It started precisely in 1982 with

Mexican Crisis and ended with the Real Plan in 1994. One characteristic of this period was the

use of heterodox economic plans in order to stabilize the economy and the control of the

inflation. Heterodox economic plans were attempts to bring inflation under control at a fast rate

in order to stop the inflationary process.

High inflation rates and foreign debt were common factors in the countries of Latin America in

the 1980’s. For example the inflation rates in 1989 in selected Latin America countries were:

Argentina 4923.3%; Peru 7649.6%; and Brazil 1946%1. In Brazil a series of economic plans

during the 1980’s and the early 1990’s failed in the process of economic stabilization and the

control of the inflation. The first stabilization plan was the Cruzado in 1986 followed by the

Bresser Plan in 1987; Summer Plan in the late of 1987 and Collor Plan in 1990. Although it was

1 Gláucio Ary Dillon Soares. Programas de Estabilização e Preseidencialismo Imperial: Argentina, Brasil e Peru. Estudos Históricos, Rio de Janeiro, n. 20, 1997. p.7.

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only in 1995 that the Real Plan stabilizes the Brazilian economy taking control of the inflation.

The stabilization and the control of the inflation were two important conditions for the

development of the Brazilian agriculture in the 1990’s.

To better understand the development of the late 1990’s, it is necessary to have an overview of

the early 1980’s of the Real Plan and the influence of macroeconomic polices in the agricultural

sector.

This chapter is divided in to three sections. The first part is an overview of the economic

development of the early 1980’s until the first stabilization plans Cruzado in 1986. The second

makes a brief balance of the economic plans from Cruzado to Collor plan. The last part outlines

the development of the agricultural sector during the same period.

1.1 Economic Development on the Early 1980’s.

In 1979 the second oil crisis exposed the Brazilian economy to external influences of the

international market. Two of these influences were the increase of international interest rates and

the growth of the foreign debt. One year later, in 1980, the Brazilian government adopted

expansion policies, followed by predetermined interest and exchange rates, an increase in the

level of wage indexation, and the maintenance of high levels of investment in segments of the

productive sector controlled by SOEs (state-owned enterprises).

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The result of expansion policies was the increase in foreign debt and acceleration of the

inflationary process. In 1981 the Brazilian economy entered into a recession. The international

crisis started in 1982 when Mexico declared moratorium to its international debt. The result of

the Mexican moratorium was a drying up of international capital loans. Developing countries

could not rely on external loans to pay public debts or to finance the current accounts of their

payment balance.

After September of 1982, with the attempting of keeping the payments of the external debt,

Brazilian economy was reoriented to the generation of positive trade balance. There is an

alignment with IMF, which became mostly responsible for supervising the economic policies in

order to ensure the payment of the debt.

“In fact, in 1983 an adjustment program was undertaken to reduce internal demand through the

implementation of changes in relative prices (exchange rate devaluation and control of nominal

wage adjustments) and public expenditures”2.

With the adjustment programs and agreement with the IMF, a recession policy starts in order to

increase even more the positive trade balance. As a consequence of the recession policy millions

of Brazilians became unemployed. The external debt interest was transformed into public debt,

through the release of public bonds by the government. The immediate consequence is an

increase of the already high inflation rates. Besides the inflation rates, the policy was a success as

2 Roberto Macedo & Fabio Barbosa. Before Cardoso. In: The Brazilian Economy: Structure and Performance in Recent Decades. Edited by Maria J. F. Willumsen and Eduardo Giannetti da Fonseca, North-South Center Press, University of Miami. 1997. http://www.brazzil.com/content/view/8233/75/. 22/03/05.

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far as it is concerned with international trade. The trade balance presented an increase from

US$ -2.821 in 1980 to US$ 6.470 billion in 1983 and US$ 13.090 billion in 19843.

The success of the external adjustments happened in part as a result of a recession. Due to the

recession there was a decrease in the imports and at the same time an increase in the exports. The

problem with the adjustment policy was the equation of the internal accounts. The surplus in the

external accounts was not transferred equally among all the sectors of the economy. Therefore,

the interest of the external debt was heavier over some sectors that had to run over other savings

in order to pay the commitments with the external debt. This was a direct consequence of the

domestic adjustment policies.

As a matter of fact in the Brazilian case, 80% of the external debt was related to the State Owned

Enterprises (SOEs), and the surplus in the trade balance was coming from the private sector. Due

to adjustments in the domestic environment, socialization of the external debt, the government

needed to find alternatives to honor its own external debt. At the time the government had three

possible alternatives to generate this currency, the first was to generate a surplus in the fiscal

revenue, the second was printing more currency and the third was the increase of public domestic

debt.

The first alternative seemed too problematic to the public fiscal sector. Corruption and tax

evasion were part of the system for a long time. The taxation system was highly complicated and

3 Banco Central do Brasil, Ministério do Desenvolvimento e Fundação Getúlio Vargas. Base de dados do Portal Brasil. Economia. Balanca Comercial Brasileira. http://www.portalbrasil.net/economia_balancacomercial.htm. 22/03/05.

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very difficult to manage with transparency. As Macedo and Barbosa observed, “there was

increasing evidence of tax evasion, not only as a result of an increasingly complex taxation

structure, but also because of deterioration of enforcement mechanisms and ‘informalization’ of

several segments of the productive structure, processes largely associated with the stagnation of

the Brazilian economy”4. The Brazilian economy was facing a structural crisis associated with the

economic crisis and it was getting worse and worse, making it very difficult or even impossible,

until the Real Plan, could stabilize the country’s economy.

The second alternative was the printing of more currency. This alternative presented a monetary

expansionistic rhetoric and was completed with the opposition of the controlling inflation

policies. The printing of more currency would increase the money circulation on the economy

stimulating the domestic demand causing prices to rise and increase of the inflation rates.

In the third alternative, the government ended up opting for the increase of public domestic debt.

One option was through the release of treasury bonds, although they were emitted under higher

interest rates and shorter payment obligations. This process resulted in a deterioration of public

accounts and increased the economy indexation. Indexation is the process by which estimates are

updated to reflect the economic forecast of a period they relate to. That is, indexation is required

to convert constant price estimates to 'outturn' prices5.

4 The Brazilian Economy: Structure and Performance in Recent Decades 5 Australian Government. Department of Finance and Administration. Indexation. http://www.finance.gov.au/budgetgroup/Other_Guidance_Notes/indexation.html. 15/07/05.

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By the middle of 1980’s, the Brazilian economy was in crisis. This affected the government’s

managerial capacity of its damaging adjustment, and any attempt to control the high inflation

rates and any economic stabilization process. The huge internal public deficit, high inflation

levels and the external debt continued in the economy orientating the policy making process in

each government mandate until its stabilization in 1995.

1.2 The Stabilization Plans

Since 1964, Brazil had an accumulated inflation of 997.251.9%6. In 1985, Brazil’s annual

inflation rate reached 228.65%. The problem concerning inflation during this time was the

inertial character of inflation. The inertial inflation or inflationary memory was the tendency of

the inflation of a period of time to persevere entirely in subsequent periods. This inertial inflation

could only be stopped with shocks on the economic process, or heterodox economic stabilization

plans. The main idea of the heterodox plans was to diminish aggregate demand. Some polices

such as the Cruzado opted to the stability of the prices, exchanging rate control, the indexation of

the minimum wage and the creation of a new currency. The Bresser plan was an attempt to rescue

the imminent failure of the Cruzado. It froze all incomes and prices as well as residential and

commercial rents. The last one the Collor plan arrested public financial assets, froze prices and

reintroduced the Cruzeiro.

In the beginning, all the plans of the 1980’s were able to reduce inflation significantly, but all

failed in stabilizing the economy. The hidden reason was that the plans did not attend to

6 Indice Anual de Inflacao. http://www.ai.com.br/pessoal/indices/INFLA2.HTM. 22/03/05.

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important reforms in the fiscal public sector, what generated the fiscal instability in the public

sector.

This section of the chapter will analyze the plans showing similarities, differences and how they

failed and affected the macroeconomic environment in Brazil causing the biggest inflation rates

in Brazil’s history just before the Real Plan in 1993.

1.2.1 The Cruzado

Under the rules of José Itamar Sarney, Brazil underwent the first stabilization plan in 1986. The

main problems faced by Sarney’s government were left by the previous administration. An

example of such problems was the inertial inflation reaching the figure of 225.16% in Sarney’s

first year of government. On March 1, 1986, the Plano Cruzado was implemented.

The monetary reform of the plan cut three zeros from Brazil’s current currency, the Cruzeiro, and

a new currency called Cruzado was introduced. ∗. The plan started with the freezing of prices for

the first year and the control of income regulating them by the average of the last six months. The

idea of the plan was to reduce the aggregated demand by reducing the purchasing power of the

population. At the same time a mechanism to adjust the incomes was created according to the

inflation increase. The mechanism was called “Gatilho Salarial” or income trigger. Every time

the inflation rates rose to 20%, the trigger would snap and the incomes would be instantly

adjusted by the same inflation index.

∗ The Cruzeiro (Cr$) was replaced by the new currency the Cruzado (Cz$). All the prices were converted (Cz$ 1 = Cr$ 1000).

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The plan was an immediate success and inflation was contained. However the purchasing power

of the population increased. The population at this time had a bigger income and started to go

shopping. This was the recipe for disaster, the prices were frozen and, with the increased demand,

it affected the freezing policy. One repercussion of this could be seen at the shops. Products were

disappearing from the shelves. The prices of the products were inferior to the inflation raising

rate and the income adjustments. Market suppliers started to surcharge on all transactions and the

inflation started to rise again. The government did not expect such a substantial increase in the

demand and the Cruzado plan failed.

In 1986, after using the initial success of the Cruzado as a leverage in state elections, the

government party PMDB∗ won the elections in the main states of the country. This gave the

government enough support to launch a new plan the “Plano Cruzado II” on November 21st. The

Cruzado II faced the same economic scenario as its predecessor 8 months earlier. An economy

out of control with high levels of inflation, but at this time the government did not count on

popular support.

Different from its predecessor the Cruzado II eliminated the freezing of the prices of the products

and services. The plan also created new measurements to the inflation. From this time on

inflation would be measured by the average expenditures of families that lived on an income

equivalent to 5 minimum wages. The idea was to measure the inflation by the average middle

class family expenditures.

∗ PMDB (Partido da Mobilização Democrática Brasileira). Brazilian Democratic Mobilization Party.

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The results of the plan were nothing less than catastrophic. The inflation rates climbed over

300%, the exports decreased and the imports increased affecting the trade balance account. A

moratorium was declared on January 20th of 1987. Bresser Pereira replaced the Finance Minister

Dilson Funaro.

Pereira took the possession of the ministry on April 29th and put the “Plano Bresser” in action.

The plan was actually a success and one month later the inflation rates dropped to 23.26%. The

plan focused on public expenditure as the main reason for the public deficit. The problem was the

government spent more than collected. Several cuts in government’s expenditures were made

affecting different sectors of economy that had relied on public investments such as agriculture.

Bresser put an end to the income trigger policy and started over the negotiations with the IMF

suspending the moratorium. Although all the measures had been taken, the inflation reached

366% in December of 1987. After that Mailson da Nobrega replaced Bresser in the Ministry.

Without taking any drastic measure the new economy policy did few and not significant

adjustments in the economy trying to avoid a hyperinflation but the inflation reached the 933%

figure by 1988. The new minister came up with the “Plano Verão” or Summer Plan.

The Summer Plan was launched on January 15th of 1988. The economic plan instantly cut three

zeros out of the currency and renamed it as “Cruzado Novo” or new Cruzado. Once more the

plan froze the prices, but at this time the plan proposed privatization of some SOEs. The plan

never took off. Brazil’s economy once again was out of control and the inflation rates reaching

1972.91% from February 1989 to the same period the following year.

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1.2.2 The Collor Plan

Different from the previous presidents in 1990, Fernando Collor de Mello was elected president

in the first direct election since the 1960’s. Collor represented the return of democracy and a new

hope for economic stabilization and the structural crisis in Brazil. However, like its predecessors

the Collor plan failed in both stabilization and resolving the structural crisis of the state as is

going to be shown.

Despite the Plan’s failure important facts had to be mentioned about Collor’s administration, it

was in this administration that the Brazilian economy started to be opened to the international

system. In the same administration the process of privatisation of SOEs started along side with

the liberalization of the market. These initiatives would pave the way for deeper changes in the

Brazilian economy and politics with the Real Plan later on. Another important aspect of the

Collor administration was the agricultural policy. Although on the one hand agricultural policy

had diminished the small farmers’ productivity capacity, on the other hand, boosted the national

agribusiness and agricultural exportation.

Like earlier plans, Collor I was an attempt to stop the inertial inflation that was punishing the

country’s economy. The plan was bold and ambitious; its goals were putting an end to the

Brazilian crisis, stabilizing the economy and elevating the country from a third world country to

the status of first world country.

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Once again, the currency was changed and the Cruzado was replaced by the Cruzeiro. In order to

reduce inflation and stabilize the economy, the Ministry of Economy Zelia Cardoso de Mello

launched the Plano Brazil Novo, later named Collor. The plan immediately arrested financial

assets, and froze prices. The purpose of the plan was to reduce aggregate demand by confiscating

financial assets. At the same time these assets would reduce and would help to create a budget to

reduce economy’s liquidity and put resources together to the budget. There was an increase on

the taxes and tariffs and new taxes were created.

In order to reduce the public expenditure, the privatisation process started and many people

became unemployed. The plan opened up the market with the conviction that international

competition would stimulate the development of domestic sectors of the economy. With the

opening of the market importation tariffs were reduced and international inputs start to be

introduced into the economy, in the agricultural sector tractors, fertilizers among many other

products were by then more accessible.

The arrest of the financial assets by the government worked as a reduction of the aggregate

demand. There was little money circulation in the country and the inflation was stepping back.

From this time on it started the biggest recession of Brazilian history. Many companies went

bankrupt and consequently the unemployed rates increased. Brazil’s Gross Domestic Product

(GDP) went from US$ 453 billion in 1989 to US$ 433 billion in 1990.

At the same time the privatisation program was approved in the senate and shares of the big state

companies started to be sold to private owners. Until 1993 under Itamar Franco’s presidency 25

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SOE were privatised. The process transferred capital from the private sector to the public one.

The money was used to finance the payment of the external debt. The privatisation progress

would continue under FHC government.

In less than 6 months inflation returned. By December 1990 it reached 19.39%. The alternative

was a new plan called Collor II in January 1991. The plan focused on fiscal policy, increasing

taxation and creating new taxes on bank financial transactions. Also an increase on the interest

rates took place along with a new freezing in people’s incomes and prices. In the industrial sector

the plan reduced import tariffs with the intent of increasing competition in the industrial sector.

By the beginning of 1992 the economy showed signs of recovery but the Collor administration

had a series of corruption accusations reaching the highest levels of government structure - even

the president himself. By the end of 1992 under a democratic process of impeachment the

president resigns. Itamar Franco the vice president assumes the presidency and implements the

Real Plan and the pursuit of economic stabilization.

1.2.3 Two years of Itamar

Although the Itamar Franco’s presidency period lasted only two years, the economic stabilization

process began in his administration. Franco nominated Fernando Henrique Cardoso (FHC) as

Finance minister. The reforms in the Brazilian economy started with the FHC ministry which

brought, consequently economic stabilization, growth and control of the inflation.

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In Franco’s two years there are several significant developments. A new approach was taken to

Brazilian’s economic situation, in particular, no more shocks to fight the inflation. The reforms

had a new scope on the origins of the economic problems in Brazil. The new economic plan

would treat the roots of the disease not it effects. The reforms undertaken in that period dealt

with the financial crises, external debt and changed reorientation of the economic development

model that was part of Brazilian governments since 19307. The Import Substitution

Industrialization (ISI) model started in the early 1930’s and lasted until the oil crises in the

1970’s. It used inflation as an economic instrument to accumulate capital8.

The new reforms plan started with the control of governmental expenditures. Particularly the

reforms of the taxation system followed by cutting public spending. The idea was to find how

much the government was spending and how much it was collecting.

This time the reforms undertaken did not used price freeze, to fight the inflation as happened in

the 1980’s.9 Inflation would be controlled by structural reforms rather than by heterodox

economic plans. That actually was the biggest difference from the 1980’s reforms. The reforms in

the 1990’s undertook structural changes in the public sector. The stagnation of the public sector

7 FERNANDES, André Eduardo da Silva. Distribuicao de Renda e Crescimento Economico:Uma Analise do Caso Brasileiro. Consultoria Legislativa. Senado Federal. http://www.senado.gov.br/web/conleg/artigos/economicas/DistribuicaodeRenda.pdf 23/03/05. 8 Indice Anual de Inflacao. http://www.ai.com.br/pessoal/indices/INFLA2.HTM. 9 BRESSER PEREIRA, Luis Carlos. A Economia e a Política do Real. Revista de Economia Política, vol 14, no. 4 (56), outubro-dezembro, 1994.

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throughout the 1980’s was considered by many Brazilian economists10 the main reason of

Brazilian crises.

Regarding monetary policies ‘URV’ (Real Value Unit) was created, a monetary index that was

pegged to the US Dollar. The URV was stable and followed the US Dollar exchange rate

variations at the same time the Cruzeiro was unstable and subjected to the inflation. The

population started to do business in URV that had a stable value of 2.750 Cruzeiros then called

Cruzeiros Reais. Within time the URV became the Real avoiding the indexation process, a strong

factor in causing inflation.∗

Although fundamental changes that made possible the stabilization and growth in Brazil started

during Franco’s administration the results would only happen under the FHC mandate. The

Franco administration did not fight inflation directly, but the reforms proven to be in the right

direction and the inflation rates decreased in those two years. In 1994 Fernando Henrique

Cardoso former Finance Minister for Franco runs for president and win with the support of

Franco. FHC gave continuity to the liberalization and deregulation of the market initiated by

Franco and leads Brazil to both economic stabilization and growth. It is under the FHC that

Brazilian agricultural sector takes off on an export-oriented direction even though faced some

bumps along the way as is shown in the next chapter.

10 BRESSER PEREIRA, Luis Carlos. Plano Verao e a Crise Estrutural da Economia Brasileira. Revista de Economia Politica. vol. 9, no. 4, outubro-dezemro, 1989.; MACEDO & BARBOSA; FERNANDES. ∗ Indexation meant that every buyer or seller knew what the recent inflation rates had been, and would factor that index into their prices, contributing to increase the future inflation.

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1.3 Agricultural Balance of the 1980’s

Although the 1980’s is called the Lost Decade of Brazilian economy not all sectors of the

economy shared the same fate. The agricultural sector is one of those. The agricultural sector

actually grew in the 1980’s.

Pessoa11 argues that the growth of productivity was caused by investments and development in

the sector during the 1970’s. The investments in fact happened in the infrastructure, research and

development of the agribusiness in the country. Pessoa also mentions, the lesser interventionist

role of the state towards agriculture, the opening of the market as being an incentive to the sector

through international competition.

But not everything was good news for agriculture - the 1980’s represented a drift of finance from

agriculture to other sectors of economy. The agricultural policies of the 1980’s were in great part

in a bigger macroeconomic environment in which the policies were designed to fight inflation12.

At the same time public investments in agriculture were reduced and farmers had to seek

investors in the private sector and abroad.

11 PESSOA, Andre. A Crise Fiscal dos Anos 80. Ministerio das Relacoes Exteriores. http://www.mre.gov.br/cdbrasil/itamaraty/web/port/economia/agric/crisefis/apresent.htm. 23/03/05. 12HOMEN DE MELLO, Fernando. A Abertura Comercial e o Papel do Aumento de Produtividade na Agricultura Brasileira. Instituto Futuro Brasil. Estudos IFB. p.4. http://www.ifb.com.br/documentos/hdemelo.pdf.23/03/05; HELFAND, Steven M. The Impact of Agricultural Policy Reforms on the Agricultural Sector in Brazil in the 1990s: Implications for Pro Poor Agricultural Policies. University of California, Riverside. Paper prepared for discussion at the OECD Global Forum on Agriculture: Desingning and Implementing Pro-Poor Agriculture Policie. Paris. 2003. p.3.; HELFAND, Steven M. & REZENDE, Gervasio Castro de. Brazilian Agriculture in the 1990s: Impact of the Policy Reforms, edited by Gasques, J.G., and J.C.P.R. Conceição, Brasília: IPEA, 2001, p.4.

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The stabilization plans throughout the 1980’s hit hard on the agricultural sector leading to an

agricultural crisis in the 1990’s due to instability of the market that was expressed through price

cycles13. As it is going to be shown in the next chapter, the effect of a new plan on agricultural

sector also happened with the Real Plan. Although the macroeconomics environment of the

1990’s in Brazil also helped the sector to overcome the crises.

Pessoa observes another fact that helped the agricultural sector in the 1980’s crisis. In the early

1980’s commodities had markets opened internationally. This measure helped to promote price

adjustments in line with international prices. The price adjustments increased Brazilian

participation in the international market. The complete opening of the economy that started later

with the Collor administration and continued under FHC allowing the sector to increase its

exports.

In an overview in the 1980’s some considerations on the agricultural sector can be made to better

understand the evolution of the agriculture during the Real era in the next chapter.

a) Although the agricultural sector was the only sector in the economy that grew (as result of

the investments and technical developments in the 1970’s), the growth did not represent

enough strength to avoid a further crisis later in the 1990’s;

b) The reduction of public investments made the agricultural sector more liberalized and the

liberalization of other sectors will happen late in the 1990’s;

13 HELFAND, Steven M. & REZENDE, Gervasio Castro de. Brazilian Agriculture in the 1990s: Impact of the Policy Reforms, edited by Gasques, J.G., and J.C.P.R. Conceição, Brasília: IPEA, 2001, p.4.

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c) The opening of the market reduced the importation and exportation tariffs, benefiting the

sector in two ways. First increasing exports and second making imported inputs more

accessible to Brazilian farmers;

d) Although the agribusiness survived the 1980’s crisis the small farmers situation got

worse, manly because of the reduction on public investments.

Chapter 2: The 1990’s and the Real

In this chapter we will focus on the economic reforms that happened in Brazil in the middle of

1990’s. The reforms were initiated under Itamar Franco’s administration and continued

throughout Fernando Henrique Cardoso’s. They involved a series of policy changes in order to

control the inflation and provide economic growth. Monetary policy, liberalization of the market,

privatization, foreign exchange rate policy, maintenance of high interest rates inside the country,

fiscal policies were some of the measures undertaken in the economic reforms.

The overall results of the reforms were as expected; inflation was controlled, the market was

liberalized, the privatization of the main sectors of the economy helped the technical

development of the sectors. The high interest rate policy helped to attract foreign investment to

the economy, which were more open to the international financial market. The foreign exchange

rate policy along side with the monetary policy helped to mantain the new currency, the Real, and

the economy stable.

Despite the positive outcome of the reforms, the agricultural sector had some bumps along the

way. The sector suffered at the beginning of the reforms but ended up playing a central part in the

26

stabilization of the economy. Despite the fact that the policies dealing agriculture were part of a

bigger stabilization plan, the sector played an important role in the economy of the country in the

1990’s and still does today.

In the first part of this chapter, we will analyse some of the results of the economic reforms of the

1990’s. In particular how they brought a solution to inflation and changed the economic structure

of Brazilian economy. Secondly, will be examined the effects of the economic reforms on the

agricultural sector of Brazilian economy.

2.1 The Last Stabilization Plan

In 1993 the Finance Minister of Itamar Franco’s administration Fernando Henrique Cardoso

(FHC) launched a stabilization plan (later the Real Plan) that would put an end to more than 15

years of inflation in Brazil. The Plan also undertook structural reforms in the public sector, from

fiscal reform to privatization to agricultural policy. Almost every sector of economy was some

how directly or indirectly affected by the reforms of the Plan. A key aspect of the Plan was the

continuity of the liberalization process and the opening and deregulation of the market started

years earlier with Collor’s administration.

The liberalization along with the reforms in the public sector was a cornerstone of the success of

the stabilization plan in Brazil. An economic environment with a lesser interventionist

27

government, and opened to the international market not only helped in the stabilization process

but also helped the development of domestic economic sectors.

The open market would help to attract international investments into the economy. These

investments helped some sectors of the economy such as agriculture, infrastructure and industry

to grow therefore the stabilization process accelerated. The development of domestic sectors of

economy was part of the stabilization process. The surplus generated on the revenue of economic

sectors would help to generate a surplus in the trade balance accounts, helping this way, to

overcome the financial crises in Brazil.14

When the Real was implemented under Franco, the economy of the country was far from stable;

inflation was high (929.32 % a year); and the pace of the structural reform was still slow. The

reforms needed the approval of the congress and political support in order to implement the full

reform plan proposed by Cardoso as the Finance minister. The reforms involved deep changes in

the state political apparatus. The main problem was how high the state accounts were and the

amount of expenditure. The state was spending more than it was collecting.

The reforms had to start with changes in Brazilian constitution, reorientation of the state’s role in

the economy, a more open market, strong monetary policy and currency, foreign exchange rates

policy, fiscal policies and liberalization of the market. The main goal of the reforms was to

stabilize the economy and generate sustainable economic growth. Eliminating or, at least,

reducing and controlling inflation, was the first step towards the accomplishment of this goal.

14 CARDOSO, Fernando Henrique. Plano Fernando Henrique Cardoso. Revista de Economia Politica. Vol.14, no. 2 (54), abril-junho. 1994. p 125.

28

The second was the liberalization of the market. Although the accomplishment of these goals

happened at the same time helping each other.

It is important to notice that the reforms started at Franco’s administration and continued during

the 8 years that Fernando Henrique Cardoso was president until 2002. Since the beginning of the

plan in 1993 when it was still called PAI (Immediate Action Plan) the economic team∗,

introduced by Cardoso, knew that in order to reduce hyperinflation and stabilize the economy, it

begins the reforms in the different areas at the same time.

The PAI was a series of fiscal measures to prepare the ground to the forthcoming Real Plan. The

PAI’s main goals were the reduction and more efficiency on public expenditures, improvement in

the tax collection, the end of the states public debts and a stronger control over the federal and

state banks. The plan also determined a reduction of US$ 6 billion of public expenditures in the

first year15.

One lesson learned from the 1980’s was that the freezing price policies and heterodox shock

plans to stop inertial inflation did not work. The hyperinflation had to be controlled by foreign

exchange rate policy; monetary policies and most of all a stable growth in the domestic economic

environment.

.∗ Pérsio Arida, André Lara Resende, Edmar Bacha, Gustavo Franco, Pedro Malan, Winston Fritsch and Francisco Pinto, were the economists that helped to create the Real Plan. The Real Plan was based in the academic works of Arida and Lara Resende the “Larida” a monetary Plan from 1984, in the Sarney administration. The plan was never implemented in the 80’s. 15Plano Real. Programa de Acao Imediata. Ministerio da Fazenda. http://www.fazenda.gov.br/portugues/real/pai.asp. 23/03/05.

29

2.2 The Real Plan

According to Gustavo H. B. Franco the Real Plan was founded on three key elements:

"i) a fiscal strategy centered on the approval of the Constitutional Amendment creating the Social

Emergency Fund, while other reforms were enacted through a prolonged period of time; ii) a

monetary reform process to take place during a few months of voluntary adoption of a new unit

of account later to become the national currency; iii) a big bang approach towards opening the

economy with aggressive trade liberalization and a new foreign exchange policy".16

The monetary reform of Real Plan was born under the Franco administration with the purpose of

controlling inflation. As Bresser17 argued that the plan was the most successful stabilization plan

in Brazilian history. Not only because it dealt with the financial crisis and controlled inertial

inflation, but also because of the innovative way in which the hyperinflation had been controlled.

16 FRANCO, Gustavo H. B. “THE REAL PLAN”. Remarks delivered at the seminar "Economics and Society in Brazil: new trends and Perspectives", a conference sponsored by the Department of Economics, the Department of Anthropology and the Center for Latin American Studies at the University of Chicago and Ministério das Relações Exteriores do Brasil, November 2 and 3, 1995 - Chicago. 17 BRESSER PEREIRA, Luis Carlos. A Economia e a Política do Real. Revista de Economia Política, vol 14, no. 4 (56), outubro-dezembro, 1994.

30

The monetary policy of the real started with the URV (Real Unit of Value) as an instrument to

control the hyperinflation. The URV was an index pegged to the American dollar on a one to one

basis while 1 URV = 2.75 Cruzeiros Reais. All the prices were converted in URV, without

inflation. The inflation remained in Cruzeiro Reais and the new currency did not have inflation.

The Cruzeiros Reais value would float according to the inflation but the variation was not

transferred to the URV prices. The Central Bank adopted high interest rates policies, in order to

maintain the new currency units stable with the American Dollar. These high interest rates would

attract international investments to the economy supporting the URV stability with the dollar.

According to Clovis Carvalho the transitional period of the currency;

“…was like if the new indexed currency (URV) absorbed the daily inflation, and after

transformed itself in a new currency (Real), clean, free from the hyperinflationary

contamination…”18

The new currency along side with a fixed foreign exchange rate and high interest rates policies

helped to stabilize the economy and stop the inflation.

The liberalization and deregulation of the Brazilian market were essential to the success of the

Real Plan as well as to the increment on the agricultural productivity. The liberalization of the

market started in the early 1990’s under Collor’s administration; but only took off on the FHC

one. The process of liberalization of the economy started with the reorientation of the Brazilian

18 Carvalho, Clovis. In: Passo a passo, como foi criado o Plano Real. Jornal O Estado de São Paulo. By Fernando Dantas. http://www.estadao.com.br/ext/especial/real/real009.htm. 06/07/05.

31

economy. From the 1940’s until the 1990’s the economic model in Brazil was the ISI

(Industrialization Substitution Importation) with a closed economy to the international

environment thus a very protected domestic market. And from the 1990’s on, the Brazilian

economy had to adapt to the international market with the Real.

The open market exposed Brazilian economic sectors to a more competitive environment.

Domestic companies had to invest in technology and development in order to be at the same level

as their international counterparts. At the same time investment started to flow into the Brazilian

economy. The high interest rate policy helped to attract investments to the economy and FDI’s

(Foreign Direct Investments) started to increase in the country. The open market stimulated

increase in productivity and allowed the specialization in key sectors of the economy.

The industrial sector of Brazilian economy was the more suitable choice of these investments,

although other sectors such as agricultural and infrastructure also benefited with the international

investments. There was thus a spill over effect derived from the development of the industrial

sector to other sectors.

The privatisation process largely undertaken in the FHC period not only helped the development

of key sectors of the economy such as energy, telecommunication, and infrastructure; but also

through the sales of the SOEs shares; which attracted a considerable amount of foreign capital

into the economy.

32

Besides the privatisation increasing productivity in key sectors of the economy previously

controlled by the state; the privatisation process helped with external debt payment. The capital

introduced into the Brazilian economy through the privatisation process helped to increase the

amount in the Social Emergency Fund∗, and also helped to finance external debt. The

deregulation of the financial market also made it easier for international investors to use Brazil as

a destination.

The deregulation and liberalization of the financial market was also one of the goals pursued on

the Real Plan as an overall strategy of the stabilization and fight against inflation. According to

Corazza19 financial liberalization of the market by the Real Plan, was too fast to open to

speculative international financial market. He also affirms that the liberalisation of Brazilian

market had a “blind trust on the virtues of the international financial market”. As a matter of fact

the liberalization made Brazilian economy more vulnerable but it paid off at the end, controlling

the inflation and stabilizing the economy.

The first 4 years of the Real Plan, there was a considerable reduction in inflation, the economy

started to grow again, although the growth of the economy was significantly small if compared

with the growth rates on the early 1980’s. The economic growth in the 1990’s was significantly

slowed in the export-oriented sectors of the economy.

∗ The SEF was a fund created in the first year of the Real that allowed expenditures in areas such education, health, social security. The Fund was separated from the government expenditures. 19 CORAZZA, Gentil. A Inserção do Brasil na Globalização Financeira- uma análise introdutória da década de 1990 –. http://netx.u-paris10.fr/actuelmarx/m4corra.htm. 06/08/05.

33

A series of export incentives and policies were created in the Real Plan in order to boost

economic growth. Exports were sought as a way towards development and growth, once the

economy was stable and there were no more risks of hyperinflation. The increase in Brazilian

exports was the main goal of the government. “Exportar ou morrer” (Export or die) one allusion

to Brazilian independence motto (independence or death) was the sentence used by FHC to

represent the importance of the Brazilian exportation to the Brazilian economy.

The idea behind exporting was to generate surplus in the Brazilian trade balance. That surplus

would not only help the domestic financial crises, but also help the development of sectors of the

economy and drive economic growth. The export-oriented market was thus sought as the

alternative to drive economic growth. The export-oriented industrial sectors of the Asian tigers

during the 1980’s and Japan before that in the late 1970’s are examples of this growth strategy.

There was in Brazil a development of the industrial sector that came along with the development

of a very productive and competitive agricultural sector. It rapidly increased its participation on

the international market.

A great part of the gains in productivity and increasing of the international market shared by

Brazilian agricultural products took place after the Real Plan. The second part of the 1990’s with

the Real Plan could be considered as the starting point of the new era for agricultural exporting

development in Brazil.

2.3 The Agriculture of the Real Plan

34

The Real Plan and its reforms introduced a series of changes in Brazilian macroeconomic

environment. It also changed the economic model in which Brazilian economy was oriented since

the 40’s putting an end to the Import Substitution Industrialization model. At this time the

Brazilian economy was being driven by the rules of international market. The economic policies

designed to fight against the inflation and to keep the stable economy in relation to the agriculture

polices were part of the strategy to tackle the inflation.

Although economic policies of the Real Plan harmed the agricultural sector in a first moment, the

same plan through liberalization of the market began to benefit it. The outcomes of the reforms

on the agricultural sector can be considered more positive than negative in terms of productivity,

participation in the national GDP, exportation and employment.

Homen de Mello explaining about the effects of the Real Plan on agriculture compared the

expected effects of the opening of the market and what had in fact happened. According to

Homen de Mello20 two fundamental changes were expected to happen in the domestic price

regulation as the direct consequence of the opening of the market. 1) The general reductions of

the importation tariffs would cause an increase on the demand of imports and as the consequence

devaluation of the foreign exchange rate. This devaluation would cause an increase in agricultural

product prices mainly on the exportable ones. 2) The reduction of the importation tariffs of

agricultural inputs (such as fertilizers, machinery, and defensives among others) would cause an

increase in the productivity. These two factors by themselves would generate economic growth to

the sector, but the opposite happened.

20 HOMEN DE MELLO, Fernando. A Abertura Comercial e o Papel do Aumento de Produtividade na Agricultura Brasileira. Instituto Futuro Brasil. Estudos IFB. p.3. http://www.ifb.com.br/documentos/hdemelo.pdf.23/03/05

35

After the opening of the agricultural market, the prices of agricultural products decreased.

According to Homen de Mello the low prices were the consequence of the macroeconomic

policies of the Real. The Plan maintained a high foreign exchange rate and support price policy in

order to control the inflation.

Helfand and Rezende21 address the same issue. They observe a price cycle initiated in the 1980’s

as results of the failed stabilization plans, which would cause instability in the agricultural sector

especially prices. The authors argued that euphoria accompanied the launches of the various

plans and then collapse with each financial crises. This would generate the price cycles in the

agricultural asset and commodities market throughout the 1980’s and early 1990’s

The argument is that before the plans, the agricultural sector would contract debt to finance the

rise of the prices of the agricultural assets. And after the failing of the plans, the prices would fall

causing financial problems to the sector.

Goldin and Rezende22 explained that the reduced attractiveness of financial assets that

accompanied the launching of these plans caused an increase of the prices of land and agricultural

commodities. This, otherwise, led to an increased borrowing and investment in agriculture. As

these plans failed, however, financial assets became more attractive again. The consequence was

21 HELFAND, Steven M. & REZENDE, Gervásio Castro de. Brazilian Agriculture in the 1990s: Impact of the Policy Reforms. Prepared for delivery at the XXIV International Conference of Agricultural Economists. Berlin, August 13-18, 2000. 22 GOLDIN, Ian & REZENDE, Gervasio Castro de., A Agricultura Brasileira na Década de 80: Crescimento numa Economia em Crise, Rio de Janeiro: IPEA, 1993.

36

an abrupt fall in the prices of agricultural assets and commodities and deep financial problems for

the sector.

Although the Real Plan did not fail, the same problems with agricultural prices happened. The

difference was that the support price polices and the high interest rate policies caused a fall in the

price of land and agricultural products. This support price policy was called Ancora Verde or

Green Anchor.

The Ancora Verde together with the foreign exchange policy and the high interest rate policy was

part of the macroeconomic strategy used to maintain the prices stable during the Real. The term

expresses the contribution of the agricultural food prices in the controlling of the inflation. It was

essential to the maintenance of general prices during the Real Plan23 that they were pegged to the

agricultural prices.

The liberalization of the agricultural market in the sector also suffered a significant reduction of

public credit. With the stabilization plan and the liberalization of the market the government

reformed the rural credit policies in Brazil. These reforms on one hand reduced significantly the

public expenditures with agriculture but on the other hand created space for private investors.

According to analyses of the public expenditures with agriculture compared with the total public

expenditures Gasques & Villa Verde24 showed that from the period of 1980-1988 the agricultural

expenditures had an average of 6.64% of the total amount of the state expenditures. From 1990 to

2001 this percentage was 2.7%.

23 CONSIDERA, Cláudio Monteiro; SOUSA, Eduardo Luis Leão de & BRACALE, Gustavo. Âncora Verde: o papel da agricultura no ajuste econômico. SEAE/MF Documento de Trabalho nº 28. December 2002.pp.4-6. 24 GASQUES, J.G. & VILLA VERDE, C.M. Gastos Publicos na Agricultura, Evolucao e Mudancas. Texto para Discussao No 948. IPEA. Brasilia. 2003.

37

Despite the reduction of the public investments, the sector managed to overcome the financial

problems. With the liberalization of the market and the reduction of export and import tariffs.

The sector could use more quantities of imported inputs. The entrance of new technology and the

low price of imported inputs enhanced the productivity in the sector.

On a market research report25 from the US Department of Commerce about productivity in

Brazilian agribusiness sector it was stated that the sector had been for the past several years

registering records of technological development, employment and investments.

The report showed that the productivity in the grain segment increased 62% from 1990 to 2002.

The outstanding performance of the sector could be pointed by the grain production, more

precisely by export-oriented ones such as soybeans.

Fabiosa, Matthew and Fuller26 observed the great participation of Brazilian exportation of grains

in the international market. An analysis from 1992 to 2002 pointed out the increase of the net

export of soybeans, soybean meal, and soybean oil, which was 444%, 65% and 288%

respectively. Compared with the USA, Brazil is the second biggest producer of the commodities.

25 SERAFIM, Igly. The agricultural sector boosts the Brazilian economy. U.S. & Foreign Commercial Service and US Department of State, 2004. http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/fr/gr114354f.html. 23/04/05. 26 MATTHEY, Holger; FABIOSA, Jacinto F. FULLER, Frank H. Brazil: The Future of Modern Agriculture? MATRIC Briefing Paper 04-MBP 6. Midwest Agribusiness Trade Research and Information Center Iowa State University. May 2004. pp.2-4.

38

The Brazilian share of the soybean international market is around 40%. They also pointed out

that in the same period, Brazil changed from a net importer of corn and cotton to a net exporter.

The Brazilian exporting of cotton and corn represented 5.8% and 7.7% of the international trade

in 2003.

The policy reforms of the Real Plan, the liberalization of the market, the increase of productivity

in Brazilian farmland and reduction in the prices of Brazilian agricultural products in the

international market; explains the high performance of Brazilian agriculture especially regarding

exports.

The Real Plan reforms and the liberalization of the market are certainly the main important factor

influencing the Brazilian agricultural sector. The agricultural policies of the Real were without

any doubt responsible for the success of the reorientation of the agricultural sector towards

exportation. Also the liberalization of the market and its spillover effects became possible with

the increase in the productivity of the agricultural sector as well as its increasing importance in

the international market.

Among the polices towards agriculture in the Real Plan, some of them could be pointed in order

to illustrate their influence over the sector. The “lei Kandir”, the creation of the “Pronaf” and the

expansion of the agrarian reform are some examples of that influence. The first refers to a

change in the taxation of interstate product movement; the second tells about a development

program for household farm families; and the third concerns the agrarian reform of the

redistribution of land.

39

In Brazil there is taxation on products crossing states called ICMS (Imposto Sobre Circulacão de

Mercadorias). The ICMS taxes products moved across state borders. The taxation is charged on

raw materials and semi manufactured ones that are going to be sold or processed domestically.

The Lei Kandir was created in 1996 exempting the ICMS taxation for exportation of raw

materials and semi manufactured ones. The law also ensured compensation from the federal

government to the states that had any kind of loss by not collecting the tax.

One example on how the ICMS functioned was given by Fabiosa, Matthew and Fuller’s analysis

of the soybean meal and oil production in the Center-West state of Mato Grosso in Brazil.

“For example, soybean meal and oil from a crushing plant in Mato Grosso that is exported

through a port in the South is exempt from the ICMS, as long as the crushed soybeans were

procured in Mato Grosso. In contrast, soybeans grown in Mato Grosso and transported to another

province for processing are subject to the ICMS, even if the meal and oil are eventually exported.

Thus, it is not cost effective to process soybeans produced in the Center-West region in the

southern states, because the cost of the tax paid on the movement of soybeans cannot be

recovered from the exported meal and oil”27.

The exemption from the ICMS for exporters not only increased the exportation of agricultural

products but also stimulated the growth of the agribusiness in the Center-West of Brazil. The

development of the agribusiness in that region happened through the initiative and substantial

investments from the private sector. Fabiosa, Matthew and Fuller observed how these farms were

27 GASQUES, J.G. & VILLA VERDE, C.M. Gastos Publicos na Agricultura, Evolucao e Mudancas. Texto para Discussao No 948. IPEA. Brasilia. 2003.

40

market-oriented, and worked on a self-financed operations basis without depending on the

government funds.

The Pronaf is a development program for family household farms and their organizations. The

main goal of the program is to strength the family agriculture as a generator of employment and

income. The Pronaf involves initiatives in a vast array of areas in order to support the family

farmers. These initiatives go from the rural credit to infrastructure programs, technical assistance,

R&D, professionalizing programs, market insertion, and harvest insurance among others.

The importance of the Pronaf is better explained if the size of the agricultural family in Brazil is

considered. Besides the fact that family household’s farms absorb significant labor, the sector

represents 67% of the national production of beans, 97% of tobacco, 31% of rice, 49% of corn,

32% of soybean and the list of agricultural products keep on going. The family household farms

occupy 30.5% of the total rural area in the country and employs 77% of the people in the whole

agricultural sector in Brazil28.

The support to the family agriculture can be also seen as a social alternative to migration that

flows from rural areas to the city. The Pronaf also helped to facilitate the agrarian reform during

the FHC administration.

28 Programa Nacional de Fortalecimento da Agricultura Familiar. Pronaf. http://www.pronaf.gov.br/quem_somos/perguntas.htm. 16/06/05.

41

Cardoso’s administration for the agrarian reform program was the most successful agrarian

reform in Brazilian history. According to INCRA29 (Brazilian Agrarian Reform Institute),

1.219.690 families received some land from 1995 to 2002. The program increased the credit for

small farmers30. Helfand and Rezende analyzed the increase of the credits for small farmers as a

government attempt to balance market failures that had prevented small farmers from accessing

the land and credit.

Besides the “Lei Kandir” and the Pronaf as important for agriculture during the 1990’s, Homen

de Mello31 points out: a) the increase until 1997 of the international prices of agricultural

products; b) reduction of the prices of agricultural inputs in consequence of the reduction of

tariffs for importation; c) continuity R&D process initiated in the 1970’s by public and private

sectors. As the role of EMBRAPA (Brazilian Institute for Agricultural Research and

Development) is particularly important.

It is also important to emphasize reforms in imports tariffs and the technical developments. One

happened because of the liberalization of the market and the other because of the initiative of

Brazilian producers and scientists. Both of them were directly responsible for the increase of

productivity in the agricultural sector.

29 Instituto Nacional de Colonizacao e Reforma Agraria. Publicacoes. http://www.incra.gov.br/_htm/serveinf/_htm/pubs/pubs.htm . 16/06/05. 30 HELFAND, Steven M. & REZENDE, Gervasio Castro de. Brazilian Agriculture in the 1990s: Impact of the Policy Reforms, edited by Gasques, J.G., and J.C.P.R. Conceição, Brasília: IPEA, 2001, p.4. 31 HOMEN DE MELLO, Fernando. Plano Real e a Agricultura Brasileira: Perspectivas. Revista de Economia Política, vol. 19, no 4 (76), outubro-dezembro/1999. p. 6.

42

The development of Brazilian agricultural sector and most of all the exportation character of it

made Brazil an avid fighter in multilateral agreements and organizations.

A more liberalized trade is sought by Brazilian agricultural producers and politicians as the only

way to ensure fairness in the international trade. The tenacious behaviour of Brazil in the WTO is

just a way to ensure that the rules in the international trade will be the same for all the countries.

Chapter 3: The Size of Brazil’s Agriculture

The first and second chapters showed how macroeconomic policies in Brazil during the 1980’s

and the 1990’s had both direct and indirect effects on the Brazilian agricultural sector. The

liberalization of the market was the most significant, mainly because the liberalization process

allowed the sector to achieve a higher level of development and increase its share of the

international market for agricultural goods. The agricultural reforms, on public credit and

agrarian reforms also helped the agricultural business and the overall goal for stabilizing the

economy.

The agricultural sector started to play a more active role in the Brazilian economy both

domestically and externally. Agricultural products, especially grains and the agribusiness

increased the total amount of Brazilian exports. In other words, agricultural sector surpluses had a

positive effect on the trade balance and increased significantly after liberalization of the

economy. Two facts can explain this increase in the agricultural surplus. First, there was the

reduction of imports and good results of the sector, which was the increasing participation of

43

agriculture in the national GDP. Secondly there were high employment rates, which allowed the

expansion of cultivated agricultural land and increased productivity.

Brazil has a vast territory with a diverse climate, which enables considerable diversity in

agricultural production and a huge agrarian population that could be translated as an advantage to

the agricultural sector in comparison to other sectors of the economy. Referring to the external

market, this diversity in agricultural production characteristics can be seen in different export

destinations for Brazilian agricultural products. Although the main Brazilian product importers

are the USA and the EU, the exports in the 1990’s reached the Middle East, Asia, Africa and

among the Mercosur countries (Argentina, Paraguay and Uruguay).

Despite the good domestic environment for the Brazilian agricultural sector and its increasing

role in the international market (due to the liberalization of the Brazilian economy) there have

still been some impediments for Brazilian exports in the international market. These impediments

or trade barriers are, in most of the cases, protectionist measures imposed by the developed

countries towards developing countries. The protectionism from developed countries generates

distortions in the international trade that can harm domestic sectors in developing countries. At

the same time trade barriers hinder the progress of trade liberalization.

Once the liberalization of the Brazilian market had progressed in the 1990’s, the agricultural

sector became much more exposed to external effects generating the necessity to regularize the

international trade as a priority. The Uruguay Round of the GATT in 1994 and the creation of the

WTO represented a common forum for the regulation of the international trade.

44

In this chapter several aspects of this issue will be investigated. First, the importance of

agriculture in Brazilian economic environment and the reasons for agricultural exports seeking an

assurance to economic growth and economic stability in Brazil. Second the size of Brazilian

agricultural production and its share of international trade. Third, a brief history of the trade

barriers, the ones that most affected the Brazilian agricultural sector and two the WTO

agricultural cases in which Brazil participated.

3.1 The Agriculture Sector in Brazil

Brazilian agriculture was one of the key sectors in the process of Brazilian economic stabilization

in the 1990’s. It was through the contribution of agriculture to the GDP and the surplus in the

balance of trade it provided, which helped stabilize the economy. The Ancora Verde policy

helped to control the inflation rates during the first years of the Real Plan. The agrarian reforms

helped to decrease the unemployment rates and to create new credit support policies for small

farms. The liberalization of the agricultural markets resulted in important increases in

productivity for the sector.

The Brazilian agricultural market, due to its diversity in size and growth, became more

competitive and active in the international arena. Brazil achieved a leading role in exporting a

series of agricultural products and changing from importer to exporter of key products, such as

corn. In the global ranking of agriculture exporters, Brazil ranks third behind the USA and the

45

European Union32. In the WTO, since the Uruguay Round negotiations, Brazil has been a

proactive participant in all of negotiations related to agriculture. Brazil was part of the Cairns

Group and later in Cancun Round of negotiation along side with India, created the G-20 Group.

Brazilian performance in the international trade of agricultural products can be analyzed in part

by the size and importance of the domestic sector. Technological innovations, increases in

farmable land and its high productivity, weather conditions, water supplies and the performance

of the agribusiness in Brazil are essential for such international performance.

Considering the Heckscher-Ohlin (H-O) model33, in which the commercial advantage of a

country in production arises solely from its most abundant input in the economy, Brazil has a

huge farmable area and abundant labor. Therefore, Brazil should have an advantage when trading

labor-intensive goods such as agricultural products. Complementary to the H-O model, the

comparative advantages principles of David Ricardo34 would explain the performance of

Brazilian agriculture in the international trade since Brazil has a low cost of production and can

export agricultural goods at relatively low prices.

32 JANK, Marcos S.; NASSAR, Andre M. & TACHINARDI, Maria Helena. Agronegocio e Comercio Externo Brasileiro. Revista USP, São Paulo., n.64, p. 14-27, dezembro/fevereiro 2004-2005. p.21. 33 KRUGMAN, Paul R & OBSTENFELD, Maurice. International Economic: Theory and Policy. Glenview, 5th Ed. Addison-Wesley. Reading Massachusets. 2000. pp. 67-77. 34 HOMEN DE MELLO, Fernando. Plano Real e a Agricultura Brasileira: Perspectivas. Revista de Economia Política, vol. 19, no 4 (76), outubro-dezembro/1999. pp. 12-24.

46

According to Brazilian Institute for Agricultural Research and Development, EMBRAPA35, the

agricultural sector employs 37% of the working population and represents 33% of the national

GDP. Brazilian agricultural and pasture areas are 41.8 and 177.0 million hectares respectively.

Considering land utilization and work force as two strong determinants in the economy we can

say that Brazil has a natural strength in agriculture. Brazil is a continental size country with a

considerable rural work force.

The fact is that agriculture has always been important in the Brazilian economy and influenced

political decisions and macroeconomic environment. Due to natural conditions and constant

growth rates in agricultural sector Brazil has the potential to be the most significant supplier of

agricultural goods worldwide.

An USDA/FAS report36 compares the utilization of land in the USA and Brazil showing that

farmable areas in Brazil could increase up to 170 million of hectares, proving that Brazil could

have a bigger cropland than the US. The report also points out that this growth would not

interfere in the area occupied by the rain forest, which could easily be adapted into agriculture or

pasture land as well.

35Ministerio da Agricultura e do Abastecimento. Embrapa 32 Anos Estimulando o Crescimento do Brasil. http://www21.sede.embrapa.br/a_embrapa/unidades_centrais/acs/eventos/embrapa32anos/index_html/mostra_documento. 26/6/05. 36 USDA. Production Estimates and Crop Assessment Division. Brazil: Future Agricultural Expansion Potential Underrated. Foreign Agricultural Service. January 2003. http://www.fas.usda.gov/pecad2/highlights/2003/01/Ag_expansion/. 27/6/05.

47

The agricultural production expansions, the diversification of the products as well as the

increasing of the cultivated land areas are important factors for the development of the sector in

Brazil. Another fact that must be pointed out is also about Brazilian performance in the

international trade and the domestic growth of agribusiness during the 1990’s and early 2000’s.

The minister of Agriculture, Livestock and Food Supply, Roberto Rodrigues that reported.

“agricultural production in Brazil expanded by approximately 110% between 1990 and 2003,

whereas the cultivated land area increased by only 12% during the same period37.”

Compared to the expansion of production with the expansion of cultivated land area, we conclude

that the increase of agricultural productivity was significantly higher than the expansion, in area,

for agriculture. The increase of productivity can be considered as one of the driving forces for

Brazilian agricultural market. Another important driving force of Brazil as an exporter can be

explained as monetary policy, as it was shown previously.

When ICONE38 (Brazilian Institute for International Trade Negotiation) analyzed the expansion

of agricultural production, it showed that it intensified in 2000 due to the monetary policy

causing the devaluation of Brazilian currency. ICONE also analyzed the growth rates of

agricultural products between 1990 and 2003. According to the analyses, the expansion in

37 RODRIGUES, H.E. Roberto. Livestock and Food Supply in: Brazil. Business Review/Directory 2004. www.brazilcham.com p. 48. 38 JANK, Marcos S.; NASSAR, Andre M. & TACHINARDI, Maria Helena. Brasil Potencia Agricola Mundial. Icone Brasil. http://www.iconebrasil.org.br/Documentos/Adenauer-Agri.pdf. 22/03/05.

48

production is related to the increase of productivity and demand; as a result of the elimination of

subsidies, liberalization of the market and the control of the inflation.

The same analysis indicates the growth in exportation of a series of agricultural products that, in

some cases, were higher than the international export growth rates. ICONE shows that the annual

growth rate of Brazilian exports during that period was for soybeans 16.9%, corn 53%, cotton

11.7%, sugar 17%. Related to corn and soybeans the world growth rate was 2.1% and 7.5%

respectively. Brazilian corn growth rate was more than 20 times the world growth rate at the

same time Brazilian soybean growth rate was the double of the world in the same period.

Pereira39 argues that the strategy of increasing the surplus on the trade balance through the

agricultural products has been a priority on the Brazilian export agenda since the 1970’s with the

oil crises. The argument is that in order to avoid economic external vulnerability the surpluses on

the trade balance would help to keep a stable relationship between external passive and domestic

GDP. Gouvea, Hranaiova and Kassicieh40 affirm that the main objective behind the export

promotion in Brazil was that the increasing in trade surpluses would be obtained through an

increase in agricultural exports, non-traditional primary, semi-manufactured products. It would

also reduce regional imbalances in the country. Similarly Serafim41 also points out that there are

good results on Brazilian grain production in new agricultural areas, such as the cerrado

39 PEREIRA, Lia Valls. A AGENDA BRASILEIRA DE CRESCIMENTO DAS EXPORTAÇÕES: PRINCIPAIS QUESTÕES. University of Oxford Centre for Brazilian Studies. Working Paper Series "Towards a new export promotion agenda in Brazil", March 14th 2003. pp.4-6. 40 GOUVEA, Raul; HRANAIOVA, Jana & KASSICIEH, Sul. Assessing Optimality of Export Portfolios for five Brazilian Economic Regions. Revista de Economia & Relacoes Internacionais. Fundacao Armando Alvares Penteado. Sao Paulo. vol.2. no.4. 2004. 41 CONSIDERA, Cláudio Monteiro; SOUSA, Eduardo Luis Leão de & BRACALE, Gustavo. Âncora Verde: o papel da agricultura no ajuste econômico. SEAE/MF Documento de Trabalho nº 28. December 2002.pp.4-6.

49

(savannah) areas in the Middle-West of Brazil and the agricultural industry that has grown up in

the region.

The cheapest price of land, compared to other regions in Brazil, the natural resources in those

areas, predictable rain fall, easy arable land and the development of new technologies are the

main factors responsible for the fast growing of grain production in central areas of Brazil42. It is

important to call attention to the fact that the bulk of production on these areas comes from the

agribusiness which is in great part exported-oriented. As a matter of fact as Jank, Nassar and

Tachinardi argue, due to its importance in the Brazilian economy, size and growth potential in

Brazilian agribusiness is among the most competitive in the world. In the case of soybeans, for

instance, the profit from exportation is around 100% per soybean bag of its production cost43.

According to the analyses of Brazilian exports on 2000-2002 periods, Cunha Filho44 identifies the

12 most representative agricultural products in Brazilian exports. These products represent 93%

of all agricultural exports, they are: soybean, sugar and ethanol, coffee, poultry, cow meat, fruit

juices, tobacco, pork, fruits, corn, cocoa, and cotton.

The export of Brazilian agribusiness places the country, as it was said before, as the third biggest

exporter in the world. Regarding orange juice, for instance, Brazilian exports represent 82% of

42 REZENDE, Gervásio Castro de. Ocupação Agrícola, Estrutura Agrária e Mercado de Trabalho Rural no Cerrado: O Papel do Preço da Terra, dos Recursos Naturais e da Tecnologia. IPEA/DIMAC. Rio de Janeiro. 2002. 43Folha de Sao Paulo. Produção de soja alivia crises brasileira e argentina. Folha Online Dinheiro. 20/08/02. http://www1.folha.uol.com.br/folha/dinheiro/ult91u53870.shtml. 29/05/05. 44 DA CUNHAD FILHO, Joaquim Henrique. As Quotas Tarifarias e o Acesso doe Produtos Agroindustriais Brasileiros ao Mercado Internacional. Dissertacao (mestrado).Escola Superior de Agricultura “ Luiz de Queiroz” Universidade de Sao Paulo. Piracicaba. 2004. pp.77-80.

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world production45. Brazil is also the number one exporter of tobacco, soybean, sugar and cow

meat. Needless to say that, because of the size of its exports and the importance of agriculture in

the domestic macroeconomic environment, Brazil is a keen defender of the liberalization of the

international market for agricultural goods.

Despite the fact that Brazil is a great producer of agricultural goods and it has conditions to be the

biggest one, Brazilian participation could increase significantly. The problem that Brazil faces in

the international arena is the trade barriers to its products imposed by developed countries such as

the USA and EU. The issue of the trade barriers and the liberalization of the world agricultural

market has been for a long time (or at least from 1995) the focus of negotiations among most

developing countries that have agriculture as the important sector of their economy. The

expectation of developing countries, such as Brazil, is the elimination of such barriers in order to

improve the international trade granting free access to their products in developed countries

markets.

3.2 Trade Barriers or Export Measures

The globalization process increased the importance of the international trade and the necessity to

improve its conditions. The discussion on free international trade, tariffs, and export measures

has been going on for a long time, since the creation of the General Agreement of Trade and

Tariffs (GATT) in 1947. At first, the idea was to create the ITO (International Trade

45 HELFAND, Steven M. & REZENDE, Gervasio Castro de. Brazilian Agriculture in the 1990s: Impact of the Policy Reforms, edited by Gasques, J.G., and J.C.P.R. Conceição, Brasília: IPEA, 2001.

51

Organization), a UN agency to handle international commerce alongside with the Bretton Woods

institutions, the IMF and the World Bank. The aim was to avoid economic recession and

protectionism after the Second World War, as had happened in the 1930’s46 by liberalizing trade.

The main engineers of the agreement, the USA and England, sought through cooperation, a way

of avoiding future economic problems, and hostilities among countries. There was a new

international economic order, which could be interpreted as an underpinning of peace and

security. The immediately outcome of the agreement was the reduction of tariffs by the amount

of US$10 billions of trade among its members. Although the GATT came to legitimize the

international trade of goods, it was a provisional agreement and did not support all new demands

of the international trade. For instance, the liberalization of international trade in some areas, such

as agriculture and services, was put aside until 1995.

The legal status of agriculture in the WTO only came into discussion in the eighth round of the

international negotiations known as the Uruguay Round (1986-1994). At the beginning of the

negotiations, two opposing parts confronted each other during the negotiations. On one side the

liberals, who had mainly the United States followed by the Cairns group, on the other hand the

protectionists, headed by the EU followed by Japan, North Korea, Switzerland, Norway and other

countries47.

46 WOLFE, Robert Farm wars: the political economy of agriculture and the international trade regime. New York: St. Martin's Press, 1998. p.24. 47 JANK, Marcos S. & ARAUJO, Leandro Rocha. A Agenda Brasileira nas Negociacoes Agricolas da Rodada de Doha da OMC. Revista de Economia & Relacoes Internacionais. Fundacao Armando Alvares Penteado. Sao Paulo. vol.2. no.3. 2003.

52

After eight years of negotiations the countries came to an agreement on the agricultural agenda.

The reform of the agriculture was aimed at increasing market access, and the reduction of

distorting subsidies such as domestic support and export subsidies. The content of the reforms

can be separated in three pillars:

1. expansion of market access, or at least safeguarding of established market access through

a combination of negotiated reductions in tariffs levels, and the use of tariffs quotas;

2. reduction of aggregate levels of domestic support – this includes market price support and

domestic subsidies that were considered to be market distorting; support through

government payments on measures that were deemed to be minimally market distorting or

production limiting were exempted from such reductions; and

3. reduction of limits to both the value of export subsidies and the volumes of subsidized

exports48.

The first pillar or market access determines the procedures for opening the market for foreign

products. According to the WTO agreement this market access should be increased, in other

words, barriers, importation quotas or non-tariffs measures had to be reduced. The second one,

domestic support or domestic subsidies – which can be done through government policies is

aimed to help national producers or farmers; In the third one, export subsidies (the government

incentive to export) the reductions, stipulated by the WTO for developed countries, were –36%

for agricultural product and –21% for the amount exported. These reductions had to occur in 6

48 PODBURY, T., ROBERTS, I., Tielu, A. & BUETRE, B. Agricultural Export Measures in WTO NEGOTIATION, ABARE Research Report 01. 12, RIRDC Publication no. 01/134, Canberra. 2001. pp.8-9.

53

years or until the year 2000. For the developing countries, the reductions were –24% and –16%

respectively, but the period spent to implement those reductions was 10 years. All the measures

of protection were converted in tariffs, which was called ‘tariffication’, and followed the same

standards; every country tariffs that could be now reduced in a fairer way.

The WTO set a ruled based system, which aimed at the reduction of distorting measures in the

international trade. As a matter of fact the reductions of trade barriers in the international market

are still in progress and developed countries markets are still quite protected. In other words

protecting measures such as quotas, domestic supports through subsidised export measures, and

price support are still common in developed countries such as USA and the EU.

According to the OECD, in 2002 EU spent around US$ 100 billion on agricultural domestic

support, at the same time USA had spent US$ 39.6 billions. The bulk of the subsidies in those

countries are used for meat and meat products, grains, dairy products and sugar production.

These are the same products in Brazilian agribusiness sector.

Jank49 affirms that the value of Brazilian agribusiness exports decreased from US$ 15 billions in

1997 to US$12 billions in 2000 because of the low price of commodities, due mainly to high

levels of subsidy by the USA. Another point mentioned by Jank is that the Farm Bill of 1996

legally protects the use of subsidies in America, which have a similar role to the Common

Agricultural Policy (CAP) in the EU.

49 JANK, Marcos S. & ARAUJO, Leandro Rocha. A Agenda Brasileira nas Negociacoes Agricolas da Rodada de Doha da OMC. Revista de Economia & Relacoes Internacionais. Fundacao Armando Alvares Penteado. Sao Paulo. vol.2. no.3. 2003.

54

ICONE’s50 survey of USA expenditures on agricultural subsidy shows that at the same pace the

prices of the agricultural products has fallen and the amount on subsidies to farmers has

increased. According to the survey the (CCC) American Commodity Credit Corporation will

increase its expenditures in agriculture from US$ 10.6 billions in 2003/2004 to the figure of

US$24 billions in 2004/2005. Referring to cotton, the increment will be from US$ 1.4 billions to

US$ 4.8 billions in 2005. Corn and soybean subsidies increase are estimated in US$ 2.3 billions

to US$ 7.5 billions and from US$ 610 millions to US$ 1.5 billions in the same period.

The expenditures with domestic support to agriculture for 2005 announced by the USDA reach

the figure of US$ 24 billions, the third biggest expenditure since 1986. This number represents a

considerable reduction if compared with the total American expenditures in 2002, but the figure

is still elevated.

ICONE observes that the tendency of reduction is happening, in the EU, for instance, the exports

support subsidies in 2000 were US$ 2.5 billions. According to ICONE this figure used to be

superior to US$ 6 billions in the past, which does not change the fact that the European

agricultural sector is still highly subsidized.

As shown above the bulk of the agricultural commodities that is protected in the EU and the USA

represents the same products that Brazil is disputing for a bigger share of the international

market. This parallel between the products that Brazil is keen to increase its exports and the

50 Icone Brasil Gastos com Subsidios Agricolas nos EUA. http://www.iconebrasil.org.br/Estatisticas/EUA_gastos_subsidios-site.pdf. 22/05/05.

55

protection of the same products in the most significant markets to Brazil (EU and USA)51 is one

of the main reasons for the Brazilian wide participation and interest in agricultural trade

negotiations.

As a matter of fact Brazil has already faced both countries, the USA and EU, in agricultural

disputes in the WTO. The Brazilian claim was for a better market access and the elimination of

domestic supports to cotton and sugar production in those countries.

It is relevant at this point to present an overview of one of these two cases in order to provide a

better understanding of the trade barriers imposed by those countries. At the same time these

cases can exemplify a real case based on how Brazil struggles for better trade conditions for its

agricultural products in the WTO and how the organization represents a fair situation to the

international trade negotiations.

3.3.1 The Cotton Case

In September 2002 Brazil representatives in the WTO contested the use of domestic policies of

the USA in the production of cotton, as causing distortions in the international trade of these

commodities. Brazil’s argument in the WTO Dispute Settlement Body (DSB) was that North

American cotton producers were receiving subsidies from the USDA stated in the Farm Bill

51 ARAUJO, Leandro Rocha. Seminario sobre Novos Enfoques para o Agronegocio Brasileiro .at Expodireito Cotrijal. 2005. www.iconebrasil.org.br/Apresenta%C3%A7%C3%B5es/Expodireto-2005-rev.pdf 29/06/05.

56

superior to those agreed with the WTO. The Brazilian contested subsidies against the United

States were52:

• The Marketing Loan Program ($898 million in 2002)

• Counter-Cyclical Payments ($1.309billion in 2002)

• Direct Payments ($617 million in 2002)

• Crop Insurance Subsidies ($194 million in 2002)

• Step Two Subsidies ($415 million in 2002)

• Export Credit Guarantees ($349 million for US cotton exports in 2002)

Brazil claimed that the American export subsidies increased the competitiveness of American

cotton in the international market, thus could increase the American market-share in the

commercialisation of the commodity. The main claims were53:

(1)U.S. domestic support for cotton causes "serious prejudice" to Brazilian interests by

depressing or suppressing world cotton prices and unfairly expanding or maintaining U.S. world

market share.

(2) U.S. export credit guarantees for all commodities confer export subsidies (the United States

has no allowable export subsidies for most agricultural products).

(3) Step 2 payments for cotton are both prohibited export subsidies and prohibited import

substitution subsidies.

(4) FSC/ETI tax benefits are prohibited export subsidies.

52 International Food and Agricultural Trade Policy Council. The Cotton Panel: Implications for US agricultural policy and the WTO negotiations. IPC Seminar Proceedings. 6/21/04. http://www.agritrade.org/Doha/Cotton/Cotton.html. 28/06/05. 53 Embassy of The United States Brasilia-Brazil. USTR Zoellick Vows Appeal on WTO Ruling Against Cotton Subsidies. September 2004. http://www.embaixada-americana.org.br/index.php?action=materia&id=2702&subme...28/06/05.

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The Brazilian argument was, as shown in figure 1 (below), that only by subsidy; can US exports

of cotton increase when world prices were clearly declining. At the same pace the figure 2

(below) shows the increase of American share-market on the international trade as stated by

Brazilian complaint.

FIGURE 1.54

54 Embassy of The United States Brasilia-Brazil. USTR Zoellick Vows Appeal on WTO Ruling Against Cotton Subsidies. September 2004. http://www.embaixada-americana.org.br/index.php?action=materia&id=2702&subme...28/06/05.

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FIGURE 2.55

The USA government claimed the legality of the subsidies using the Peace Clause56, which

generally prohibited challenges to domestic and export agriculture subsidies during the

implementation period of the agreement. It was said that the subsidies of one country could only

be challenged if they were superior to the total amount of subsidies for one particular commodity

agreed in 1992 in the agricultural Agreement from the Uruguay Round (URAA).

According to ICONE57, the USA subsidies to American farmers were around US$ 5 billions,

which was more than the amount allowed by the URAA. From 1999 to 2000 the American

subsidies came to US$ 12.9 billions when the agreed value should have not exceeded US$ 8

55 Embassy of The United States Brasilia-Brazil. USTR Zoellick Vows Appeal on WTO Ruling Against Cotton Subsidies. September 2004. http://www.embaixada-americana.org.br/index.php?action=materia&id=2702&subme...28/06/05. 56 The WTO Agriculture Negotiations: Backgrounder. Phase 1: The Peace Clause. http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd12_peace_e.htm. 26/06/05. 57Icone Brasil. Documento de Trabalho. Clausula de Paz www.iconebrasil.org.br/Documentos%20de%20Trabalho/DT005_Clausula_Paz.pdf. 26/06/05.

59

billions. Brazilian representatives claimed that the value of the subsidies were in discrepancy

with the URAA and, therefore, in breach with the Peace Clause.

The Panel considered that the American subsidies to cotton were superior to the limit agreed by

the USA in the Uruguay Round of the WTO. Although the results of the panel sided with the

Brazilian position; the American representatives in the WTO stated the disagreement with the

outcome of the decision and would appeal on the matter.

"We strongly disagree with some aspects of the panel report, which we will be appealing. The

facts do not show that U.S. farm programs have distorted trade and caused low cotton prices.

Moreover, some aspects of the panel report belong in negotiation and not litigation, namely in the

Doha Development Agenda negotiations. We believe the Appellate Body will agree..."58

Despite the favourable outcome in the Brazilian request, in some aspects of the case, the ruling

was considered mixed59 and not in favour of Brazil’s claims. As the US Embassy in Brazil points

out some of claims were unnecessary, such as the one that the American subsidies “caused

serious injury” to Brazilian interest. Some points of the Panel were pointed out by the US

Embassy on how the Panel sided with Brazil in some claims and how it sided with the US in

others:

58 ARAUJO, Leandro Rocha. Seminario sobre Novos Enfoques para o Agronegocio Brasileiro .at Expodireito Cotrijal. 2005. www.iconebrasil.org.br/Apresenta%C3%A7%C3%B5es/Expodireto-2005-rev.pdf 29/06/05. 59Bridges Weekly. WTO Panels Confirm Victory For Brazil in Cotton, Sugar Cases. Volume 8. Number 30. September 15, 2004. http://www.ictsd.org/weekly/04-09-15/story1.htm. 28/06/04.

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The panel found that the "Peace Clause" in the WTO Agreement on Agriculture did not apply to

a number of U.S. measures, including (1) domestic support measures and (2) export credit

guarantees for "unscheduled commodities" and rice (a "scheduled commodity"). Therefore,

Brazil could proceed with certain of its challenges.

The panel found that export credit guarantees for "unscheduled commodities" (such as cotton and

soybeans) and for rice are prohibited export subsidies. However, the panel also found that Brazil

had not demonstrated that the guarantees for other "scheduled commodities" exceeded U.S. WTO

reduction commitments and therefore breached the Peace Clause. Further, Brazil had not

demonstrated that the programs threatened to lead to circumvention of the U.S. WTO reduction

commitments for other "scheduled commodities" and for "unscheduled commodities" not

currently receiving guarantees.

Some U.S. domestic support programs (i.e., marketing loan, counter-cyclical, market loss

assistance, and Step 2 payments) were found to cause significant suppression of cotton prices in

the world market in marketing years 1999-2002 causing serious prejudice to Brazil's interests.

However, the panel found that other U.S. domestic support programs (i.e., production flexibility

contract payments, direct payments, and crop insurance payments) did not cause serious

prejudice to Brazil's interests because Brazil failed to show that these programs caused significant

price suppression.

61

The panel also found that Brazil failed to show that any U.S. program caused an increase in U.S.

world market share for upland cotton constituting serious prejudice.

The panel did not support Brazil's claim that U.S. domestic support programs threatened to cause

serious prejudice to Brazil's interests in marketing years 2003-2007. The panel declined to find

that U.S. domestic support programs per se cause serious prejudice in those years. The panel also

found that Brazil had failed to establish that FSC/ETI tax benefits for cotton exporters were

prohibited export subsidies. Finally, the panel found that Step 2 payments to exporters of cotton

are prohibited export subsidies, not protected by the Peace Clause, and Step 2 payments to

domestic users are prohibited import substitution subsidies because they were only made for U.S.

cotton.

Although Brazil had not won all the claims in the Cotton Panel it opened a precedent in the

international negotiations where countries such as the USA would have to review their domestic

support policies related to agriculture especially those where subsidies are applied. A similar

outcome happened on the Sugar Panel where Brazil, Thailand and Australia together complained

to Europe about agricultural subsidies and export dumping.

3.3.2 The Sugar Case

At the same time, in September 2002, Brazil contested the domestic policies of the USA in

relation to the production in the WTO, which caused distortions in the international trade of these

62

commodities. Brazil along side with Thailand and Australia complained against European

subsidies at the WTO Dispute Settlement Body. The complaint stated that European sugar

policies were not in accordance with the URAA and, therefore, illegal. The complaint also stated

that export dumping was occurring with sugar as well.

According to ICONE, sugar is one of the most protected commodities in the world. It affected the

three pillars of protectionism. In Europe the protection of sugar, for instance, happened through

quotas (market access), tariffs and domestic support through subsidies. The high tariffs in Europe

kept the domestic prices high, stimulating domestic production. The surplus of production was

exported with high subsidies causing distortion in the international trade.

The WTO panel’s found out that all sugar exported by the EU was subsidized and exports have

led to lower prices in the world market, reducing the export opportunities for other exporters.

Oxfam has estimated that EU sugar export dumping translated into foreign exchange losses in

average of $494 millions for Brazil, $151 millions for Thailand, and $60 millions each for South

Africa and India in 200260.

The result of the panel was favorable for the complaints of Brazil, Thailand and Australia; it

found out that the subsidies for European sugar exceeded three times the value allowed by law.

The ICTDS’ panel shows that the 2.7 million tons of the European exported sugar was cross-

60 ‘Dumping on the World’, Oxfam Briefing Paper 61, April 2004, p. 2. www.oxfam.org.uk/what_we_do/issues/trade/bn_eusugar.htm. 26/06/05.

63

subsidized61. Oxfam also highlights two of the main findings of the panel about the European

subsidies62.

1. The export of around 2.7 million tons of what the EU claims to be unsubsidized sugar (so-

called non-quota or ‘C’ sugar). The panel found that these exports are effectively cross-

subsidized by EU support provided for the production of quota sugar. The EU is only able

to export non-quota ‘C’ sugar at prices below the average cost of production, because the

support prices for quota sugar are sufficient to cover all the fixed costs of production,

while world prices cover only their marginal costs.

2. The panel has also ruled that the EU is contravening its WTO commitments by

subsidising the re-export of an amount equivalent to imports of sugar from the African,

Caribbean, and Pacific (ACP) countries and India (1.6 million tons). These subsidized

exports were not included in the EU’s reduction commitments, and further exceed the

EU’s permitted level of subsidized sugar exports. Crucially, the panel ruling does not

affect the right of the EU to import sugar from the ACP countries and India on

preferential terms. (Oxfam figures).

After the panel results, the EU challenged the Brazilian claims at Appellate Body of the WTO

though the challenge had been rejected. The European argument on the exceeded schedule

61ARAUJO, Leandro Rocha. Seminario sobre Novos Enfoques para o Agronegocio Brasileiro .at Expodireito Cotrijal. 2005. www.iconebrasil.org.br/Apresenta%C3%A7%C3%B5es/Expodireto-2005-rev.pdf 29/06/05. 62 An end to EU Sugar Dumping?’, Oxfam Briefing Note, April 2005, p 2. www.oxfam.org/eng/pdfs/bn_sugar_dumping.pdf. 26/06/05.

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commitments of the subsidies was exclusively a result from an "excusable and common

scheduling error," which the complainants had always been aware of but failed to take action on.

The panel disagreed with the EC, reasoning that the "fact that a Member does not complain about

a measure at a given point in time, cannot by itself deprive that Member of its right to initiate a

dispute at some later point in time63".

The WTO ruled that the European subsidies were definitive, which, according to the Oxfam it

represents a major step forward in the struggle against unfair agricultural subsidies and export

dumping.

As a matter of fact, if Brazil won, the EU would have to revise its sugar policy. The importance

of winning the sugar case by Brazil, Thailand and Australia shows that the rule based on the

environment of the WTO developing countries has the chance to challenge and win trade

disputes. It is important to acknowledge, at this point, that the WTO is a fair ground where

developing countries can de facto struggle for a fairer trade and win. Both cases show that,

despite the fact of being a developing country, Brazil can struggle with developed countries, in

this case the USA and EU, in an arena where the rules are the same for every member of the

organization.

It is possible to infer the importance of a common arena for international trade disputes, such as

the WTO for developing countries as Rubens Ricupero once said about the WTO “Indeed the

reason why developing countries are interested in maintaining the system, i.e., their lack of power

63 Bridges Weekly. Volume 8. Number 35. October 20, 2004. http://www.ictsd.org/weekly/04-10-20/story1.htm. 28/06/04.

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and their greater vulnerability, is the same that make them unsuited to assume a role in absence of

cooperation by the larger trading partners.”64

It can also be observed, from these two cases, the importance of the Brazilian initiative against

developed countries measures in the agricultural trade negotiation. Its increasing participation in

agricultural-related negotiations groups, such as the Cairns Group and more recently the G-20

represents a new conjuncture in the balance of power within the WTO showing an increasing will

to take on a leadership role.

Chapter 4: The WTO and The G-20

The WTO is the international organization responsible for setting the international trade rules in

the world since 1995 with the Uruguay Round of negotiations.

The Uruguay Round represented the beginning of negotiations on international agricultural trade

and its regulation. The implementation of the Uruguay Round agenda happened much more

slowly than expected. Because of this new ministerial meetings were scheduled so that the

countries could come out with more tangible proposals, but it was necessary to present clear aims

and reasonable deadlines to achieve it. This took place in 2001 with a development agenda for the

WTO negotiations setting in Doha, Qatar.

64 JAGADISH, Bhagwati & HIRSH, Mathias, The Uruguay Round and Beyond. Essays in Honour of Arthur Dunkel. Springer. New York, Geneva. 1998. p. 10.

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The Doha Round was an opportunity to improve negotiations on market access, reductions on

domestic support and elimination of trade tariffs. In Particular the Doha Round (Doha Agenda)

would pay attention to the development of poor countries and agriculture. In order to analyse the

development of the agenda, another Ministerial Conference was planned for 2003 in Cancun,

Mexico.

The Doha Ministerial Conference was focused on two main issues; new negotiations and with

more concern the implementation of the present agreements until 2005. By 2003 little progress

was made in relation to the implementation of the Doha Agenda. However, the main reasons of

the failure on implementing the Agenda were the lack of consensus among the WTO members

(in particular among developed countries), lack of commitment from negotiators, among other

issues.

On September 2003 the negotiation collapsed in Cancun and not much was achieved on the

Development Agenda. Otherwise a new coalition in the balance of power within the WTO rose in

Cancun. The G-20, a group from developing countries, changed the multilateral decision-making

scenario. This group is headed by Brazil and India; China joined the group playing an active role

in the group for the trade negotiations.

This chapter will, present thus an overview on the development of Uruguay Round and its

outcomes. Second, the failure of the Doha Round negotiations. Third, it will suggest the creation

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of the G-20 in the Cancun Round as a Brazilian initiative counterbalancing the negotiations

among developing and developed countries.

4.1 The Uruguay Round

The Uruguay Round negotiations started in 1986 as part of the GATT negotiations. It took more

than seven years to be concluded by the Round and by 1995, 123 countries signed with the WTO

creating the World Trade Organization. The Uruguay Round can be considered the most

extensive agreement on trade ever done in the international environment. The array of the

negotiations involved all kinds of products, services and agriculture. Among the signatures there

were countries with different backgrounds, different stages of development and different

economies.

Disagreement and lack of cohesion on how and when to liberalize has been a key part of GATT’s

history. Agriculture, a sensitive sector for both developed and developing countries, was an issue

addressed only by the Uruguay Round. The Round also undertook negotiations on services and

trade, trade barriers, no tariffs barriers, anti-dumping, intellectual property, investment measures

and subsidies among others issues65. The WTO incorporated the GATT. The agreement became

an intrinsic part of the organization.

65 Understanding the WTO: Basics. The Uruguay Round. http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact5_e.htm. 22/06/05.

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It can be inferred that the masterpiece of the Round was the creation of the Dispute Settlement

Body (DSB)66, in which members settled their disputes according to a ruled basis system. The

DSB uses panels for each case in process and complaints from one member or a group were

addressed and could be endorsed or rejected by the other members. Appeals from the losing party

could be requested in the same panels.

However, the point has not to pass judgement. The priority is to settle disputes, through

consultation if possible. By May 2003, only about one third of the nearly 300 cases had reached

the full panel process. Most of the rest have either been notified as settled “out of court” or

remain in a prolonged consultation phase some since 199567.

As mentioned before in chapter three, the Uruguay Round ambitious initiatives referring to

agricultural trade liberalization were undertaken. Reduction of trade barriers, the ‘tariffication’

where all measures of protection converted in tariffs, regulation and later elimination of distorting

66 TUSSIE, Diana e AGOSIN, Manuel R. "El Camino de la Ronda Uruguay". América Latina/Internacional, 2(1). Flacso/Buenos Aires, Outono /inverno, 1995, pp. 5-29. 67 Understanding the WTO: Settling Disputes A Unique Contribution. http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm 22/06/05.

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domestic support policies were part of the Uruguay built-in agenda.

Figure 368

It is important to point that the Uruguay Round has the most active participation from developed

countries in the negotiations, and an active role in the negotiations. Preeng69 observes a

dichotomy among developing and industrialized countries, and highlights the ‘special treatment’

provision in the agreement during the implementation period as a possible reason for future

68 WTO Agriculture Negotiations. The issues, and where are we now. www.wto.org/english/tratop_e/ agric_e/agnegs_bkgrnd_e.pdf. 22/06/05. 69 PREEG, Ernest H. "The Post-Uruguay Round Free Trade Debate". The Washington Quarterly, 19(1), pp. 223-238.

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friction among countries. The Uruguay Round would benefit developed countries to the extent

that it did not demand market access reciprocity.

Rodrick70 points out that if the developing countries were not part of the Less Developed

Countries group (LDC), the Special Treatment provision could help them a little. Rodrick argues

that the agreements of the WTO (e.g. trade and services and property rights) actually created new

responsibilities and obligations to a group of developing countries towards multilateral trade.

For agriculture, the wise Round set the establishment of rules for the sector that, according to

Jank71, would benefit developing countries. The Agreement on Agriculture (AoA) was launched

on January 1st, 1995 determining rules for international trade on agriculture for the first time. The

agreement was signed between USA and EU, which was called the Blair House agreement.

Although improvements on the liberalization of agriculture took place it was a slow process and,

according to Jank, the reduction on the export subsidies was too little, and the market access

could be bigger.

As a matter of fact, just a little could be achieved from the goals set for agriculture liberalization

on the URAA. The protectionism in developed countries still represented a major impediment for

agricultural exports from developing countries. The reduction of the subsidies also agreed on

Uruguay being too shy to represent a real improvement to developing and Less Developed

70 RODRIK, Dani. "Los países en desarrollo después de la Ronda Uruguay". América Latina/Internacional, 2(1). Flacso/Buenos Aires, Outono /inverno, 1995, pp. 5-29. 71 JANK, Marcos S. & ARAUJO, Leandro Rocha. A Agenda Brasileira nas Negociacoes Agricolas da Rodada de Doha da OMC. Revista de Economia & Relacoes Internacionais. Fundacao Armando Alvares Penteado. Sao Paulo. vol.2. no.3. 2003.

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Countries. Despite Jank’s arguments that, with the URAA improvements on the liberalization of

the agricultural sector, this would not be enough to take place. One example of the impediments

on liberalization of the agricultural market was the Peace Clause, as said in the third chapter,

which kept one country challenging another about subsidies in the implementation period of the

negotiations. Developed countries used the Peace Clause as an instrument to keep domestic

support through subsidies72 making the implementation of the URAA built-in agenda more

unachievable.

In the Doha Round of the WTO negotiation, the implementation of the URAA would follow

another way. A new approach to the agricultural issues would take place alongside with issues

related to poverty and developing countries, that is, the Development Agenda.

4.1.2 The Doha Round

The Doha Round negotiations started in November of 2001 although the negotiations on

agriculture had already started in 2000. At that time of the negotiation, the members sent

proposals but no agreement on them was reached. The Doha Round was marked by a series of

proposals from diverse coalitions and groups trying to infer their interest in the settlement of the

agenda. The USA and EU were the two main players on the negotiations from the creation of the

72 Icone Brasil, Fim da Clausula de Paz e os Subsidios Agricolas na OMC. Analise dos Impactos Sobre os Interesses Brasileiros. Documento de Trabalho DT 005/04. www.iconebrasil.org.br/Documentos%20de%20Trabalho/DT005_Clausula_Paz.pdf; 28/06/05.; Bridges Weekly. Volume 8. Number 35. October 20, 2004. http://www.ictsd.org/weekly/04-10-20/story1.htm . 28/06/05.

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WTO. Facing difficulties with the domestic agricultural policies73 and conflicting interest in

several areas, both countries always played important roles consensus reaching in agriculture

issues on the WTO. But the Doha Round witnessed a new realignment of power where other

countries besides EU and USA started to play a more active role in the negotiations, especially

the negotiations related to agriculture.

During the multilateral negotiations about agriculture in the WTO, numerous divergences in the

interest and position of the countries were in fact, a concern to the evolution of the negotiations.

Two major trends on the Round can be emphasized, one more conservative about liberalization

and the other pleaded for a more effective liberalization of the sector.

Jank and Araujo placed the countries in that stage of the negotiation in five groups according to

the countries interests in the agricultural trade liberalization. The first group was made up by

countries, which were members of the Cairns Group, considering their considerable agricultural

competition sector, and the seeking of a more effective liberalization of agriculture in world

trade. This group relied on the elimination of the protectionism measures and subsidies of the

sector, which would allow them to fully benefit from their comparative advantage on agriculture

trade.

In the second group, according to Jank and Araujo’s analysis, we have the USA, which uses

liberal rhetoric and speech about the implementation of strict rules to the liberalization of the

73 DRAPER, Peter & SALLY, Razeen. DEVELOPING-COUNTRY COALITIONS IN MULTILATERAL TRADE NEGOTIATIONS. p.9. In: www.lse.ac.uk/collections/internationalTradePolicyUnit/ Razeen_articles/draper-sallyjnu1.doc. 21/06/05.

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agricultural sector. But in contrast to this liberal rhetoric, the USA adopted very protective

policies in the domestic environment. The Farm Bill74 of 2002 in the USA is an example of the

price support policy that makes American products more competitive posing a difficult situation

to international competitors.

Another group is made up by the traditional protectionists such as most of the countries of

Eastern Europe, Japan and North Korea. These countries have a very sensitive agricultural sector

protected by a series of tariffs quotas and many non-tariffs barriers.

Those countries that rely on Special Treatment on Trade∗ for their main exported commodities

form a fourth group. In this group Jank and Araujo also place the ACP, EBA among others.

Many of these countries had politically positioned themselves alongside with the developed

countries in consequence of their dependency on preferential trade agreements.

Countries such as China, India, Pakistan, Bangladesh, Russia and Ukraine can make up a fifth

group. These countries do not have a fixed position, which means they can change from the

liberal side to the protectionist side of the negotiations according to their interest in the issue in

discussion.

74 2002 Farm Bill Programs. http://www.nrcs.usda.gov/programs/farmbill/2002/products.html 22/06/05.

∗ The Differential Treatment are special provisions give to developing countries special rights. These especial provisions include, for example, longer time periods of implementing agreements and commitments or measures to increase trading opportunities for developing countries.

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As shown before, there are complicated alliances between the rich and the poor countries against

the most competitive ones. In other words, the rich countries grant with ‘special privilege’

concessions e.g., exemptions on groups of products from the negotiations (exemption of tariffs

and quotes) to the small and/or poor countries with the intent of drawing their sympathy75.

The consensus reaching process in the WTO is besides a simple process, background negotiations

in which according to Kwa76 ‘twist arm policies’ (coercive deals) were used in order to grant a

favorable position from developing countries at Doha. ‘Marginalization of the south’ is another

term used by Kwa in order to describe the relationship among countries in the WTO and how the

‘twist arm policies’ were used against developing countries on manufacturing consensus on

issues that could benefit developed countries regardless the outcomes for developing ones77.

It was clear that, at this moment of the negotiation, the positions and interests of the members on

the agricultural liberalization were not in the same position. The European interest was against to

those of the developing countries, the same happened with the USA. One example of the many

problems in negotiation was, for instance, the Cairns Group demand for a phase out of the

subsidies within three years. USA and Europe sought the period of three years too short to

75 JANK, Marcos S. & ARAUJO, Leandro Rocha. A Agenda Brasileira nas Negociacoes Agricolas da Rodada de Doha da OMC. Revista de Economia & Relacoes Internacionais. Fundacao Armando Alvares Penteado. Sao Paulo. vol.2. no.3. 2003. 76 KWA, Aileen. Power Politics in the WTO. Focus on Global South. 2003. www.focusweb.org/publications/ Books/power-politics-in-the-WTO.pdf 22/03/05. 77 BELLO, Walden & MITTAL, Anuradha. The meaning of Doha. Bulletin- 24/25 A South Centre Publication 30 Nov 2001. p.7. http://www.southcentre.org/info/southbulletin/bulletin24-25/bulletin24-25.pdf . 22/05/05.

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implement the reductions or phase out the subsidies. Therefore no agreement was reached on the

phase out period.78

Presser, Madureira and Wolfgang79 analyzed the proposals for the Doha Round and concluded

that there was a pressure to the liberalization of the agriculture from USA and from the Cairns

Group, parts. Despite the efforts and pressure to liberalize there was not much of the consensus

on the proposals for agriculture.

In one attempt to rescue the negotiations from failure, the Ambassador and Chairman of the

Agricultural Council, Stuart Harbinson, submitted a proposal, instantly called the Harbinson

Proposal. The proposal focused on the modalities of the Doha agenda and generated controversial

outcomes among the members.

The negotiation on the agriculture modalities started in 2002 in the Agriculture Council and by

February of the next year the draft of Harbinson proposal was launched. The Draft was an

attempt to balance all the main positions presented in Geneva one year earlier pointing out the

‘key points’ from each member’s interest in the negotiation. Despite Harbinson’s initiative; there

78 Doha Round Briefing Series. Vol. 2 No. 2 of 13 August 2003 Published by the International Centre for Trade and Sustainable Development (ICTSD) in collaboration with the International Institute for Sustainable Development (IISD). www.iisd.org/pdf/2003/wto_doha_agriculture_2.pdf. 22/05/05. 79 PRESSER, Mário Ferreira; MADUREIRA, Frederico Quaresma & LENK, Wolfgang NEGOCIAÇÕES EM AGRICULTURA NA OMC. Economia Politica Internacional Analise Estrategica. No.1 July/September 2004. http://www.eco.unicamp.br/ceri/boletim/boletim1/05-presser%20et%20al.pdf. 23/04/05.

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was no consensus over the proposal by the members and the proposal failed especially to

accommodate the differences among countries80.

For the more liberal countries such as Brazil and countries from the Cairns group the proposal

was considered conservative as towards issues such as market access and domestic support. On

the one hand the Australian Agriculture Minister Warran Truss when speaking on behalf of the

Cairns Group pointed out the lack of ambition towards the cutting of domestic support of

countries such as EU and Japan, 81. On the other hand the EU considered the proposal too bold,

that made more difficult the achievement of the consensus. According to EU point of view, the

proposal was biased against agriculture exporting countries especially because Harbinson’s paper

proposed significant reforms on the three pillars of agricultural protectionism.

In response to Harbison’s proposal a joint proposal from USA and EU was launched in the

negotiation. The USA would retreat from the liberalizing position on the beginning of the

negotiation to a more conservative position. Presser, Madureira and Lenk82 argued that the US

Farm Bill of 2002, the presidential elections on 2004 induced the alignment with the EU in the

joint proposal. The authors defended the idea that there was a trade-off involved in the alliance

where the USA would defend the less ambitious reduction on the tariffs through a mixed

80 JAWARA, Fatoumata. The cunning bully - EU bribery and arm-twisting at the WTO.Focus on the Global South, Geneva, Switzerland. September 2003. http://www.corporateeurope.org/cunningbully/CunningBullyFULLPAPER.pdf. 22/03/05 81 Bridges Weekly. Agriculture: Harbinson’s Modalities Draft Receives Mixed Reactions. Volume 7. Number 6. February 19, 2003. http://www.ictsd.org/weekly/03-02-19/story2.htm. 23/ 05/05. 82 PRESSER, Mário Ferreira; MADUREIRA, Frederico Quaresma & LENK, Wolfgang NEGOCIAÇÕES EM AGRICULTURA NA OMC. Economia Politica Internacional Analise Estrategica. No.1 July/September 2004. http://www.eco.unicamp.br/ceri/boletim/boletim1/05-presser%20et%20al.pdf. 23/04/05.

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reduction formula proposed in the document and at the same time the EU would support the USA

on the legalization of new American subsidies the proposal contained a mixed formula for the

tariffs reductions between the Swiss and the Uruguay Round formulas83. The proposal showed

the initiative from USA and EU in the negotiations driven by both countries particular interests84

rather than the general good outcome of the round. The joint proposal was used as the base to a

draft presented for the Ministerial Conference in Cancun as the Derbez proposal. The proposal

was another attempt to accommodate the positions of the members and to keep the negotiation on

schedule.

4.1.3 The Cancun Ministerial Conference

The Cancun Round of negotiations in Mexico was the continuation of the lack of consensus

coming from Doha. The Round was also stage for the creation of a strong opposition between

developed countries and developing ones. At one side of the negotiations there were developed

countries such as USA and EU, which through a series of maneuvers, apparently tried to maintain

their status quo on the agriculture agenda. And on the other side there were the developing

countries seeking improvements in the liberalization of markets and the continuity of the

Development Agenda set in Doha. Among the developing countries interests agriculture and

transparency in the negotiations were among the most important goals.

83 The WTO. Tariff Negotiations in Agriculture. Reduction Methods. http://www.wto.org/english/tratop_e/agric_e/agnegs_swissformula_e.htm 22/05/05. 84 KWA, Aileen. Power Politics in the WTO. Focus on Global South. 2003. www.focusweb.org/publications/ Books/power-politics-in-the-WTO.pdf 22/03/05.

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The Cancun Round was supposed to serve as an evaluation on the progress of the Doha

Development Agenda, but actually it ended in the same stagnation as seen in Doha. However

Cancun also saw the raising power of coalitions, especially formed by developing countries (G-

20, LDC, ACP, LMG), which were firmed about issues of their interests in the negotiations. In

the Cancun Round there were a confronting number of proposals that exacerbated the inflexibility

on consensus reaching among the members. Coalitions, joint proposals were constant in Cancun

rather than agreement on them. But the participation of developing countries85 did not always

have a positive input on the negotiations. Draper and Sally86 argued that some of the coalitions

formed on the WTO negotiations especially what they call “second division” coalitions (e.g.

LDC) and to a less extent low-income countries (e.g. Pakistan, Bangladesh, Egypt, Kenya and

Nigeria) do not wield the capacity to negotiate the long haul of complex and multiple

negotiations. Sometimes the outcome of their participation on the negotiation has had a more

negative impact on the overall results than a positive one to the extent that through the coalition

these countries have a greater ability to block negotiations rather than a significant positive

bargaining power. Draper and Sally mentioned many times that these countries had the lack of

financial and personal resources in the negotiations. The creation of the G-20 presented an

alternative to these countries at least in the agricultural negotiations.

85 NARLINKAR, Amrita & TUSSIE, Diana. The G-20 at the Cancun Ministerial: Developing Countries and Their Evolving Coalitions in the WTO. Blackwell Publishing Ltd 2004, Oxford. Pp. 949-951. www.lse.ac.uk/collections/internationalTradePolicyUnit/ Events/May2005/G-20inworldeconomy-Amrita.pdf. 01/07/05. 86 PREEG, Ernest H. "The Post-Uruguay Round Free Trade Debate". The Washington Quarterly, 19(1), pp. 223-238.

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Despite the Draper and Sally argument on “second division” coalitions there was an apparent

common knowledge87 that the creation of the G-20 on the developing countries side was a

favorable event in Cancun. The creation of the G-20 was a response to the joint text presented by

the USA and EU for the Cancun Conference.

During the conference the driving forces of the round and the developing countries pushed the

agriculture issues on the negotiation and USA and EU along side with Japan and South Korea

tried to bring the negotiation of the “Singapore Issues”88 which marked the pace of the

negotiations. Due to the number of issues to be discussed in Cancun and in order to facilitate the

negotiations, the Conference was divided in 6 discussion groups: Agriculture, Market access to

non-agricultural products, Services, Development from the Doha Agenda, Singapore Issues and

other issues.

It was clear that the agriculture discussion group would represent the most difficult group of all

negotiations. According to Kwa89 the difficulties on the agricultural agenda started to appear on

the mini-Ministerial meeting in Sydney before Cancun. At Sydney, Kwa points out

disagreements on the agriculture among EU, USA and the Cairns Group as well as splits within

87HELFAND, Steven M. & REZENDE, Gervasio Castro de. Brazilian Agriculture in the 1990s: Impact of the Policy Reforms, edited by Gasques, J.G., and J.C.P.R. Conceição, Brasília: IPEA, 2001, p.4; PREEG, Ernest H. "The Post-Uruguay Round Free Trade Debate". The Washington Quarterly, 19(1), pp. 223-238; KWA, Aileen. Power Politics in the WTO. Focus on Global South. 2003. www.focusweb.org/publications/ Books/power-politics-in-the-WTO.pdf 22/03/05. 88 Doha Round Briefing Series. The Singapore Issues. Vol. 1 No. 6 of 13 February 2003. Published by the International Centre for Trade and Sustainable Development (ICTSD) in collaboration with the International Institute for Sustainable Development (IISD). http://www.ictsd.org/pubs/dohabriefings/doha6-singaporeIssues.pdf. 22/05/05. 89 KWA, Aileen. Laying the Groundwork for Cancun: Another Doha ‘Success’? http://www.focusweb.org/publications/2002/laying-te-groundwork-for-cancun.htm. 01/07/05.

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members in the Cairns group. The non-accordance among the participants of the Sydney meeting

revolved around the formulas proposed to tariff reduction and cuts in domestic support that most

affect the developed countries.

The split of the Cairns group before Cancun according to Abreu90 happened most because of

internal differences between the developed countries of the group and the developing ones. When

the USA-EU joint proposal on agriculture was launched for the Cancun negotiations, the

developed countries from the group accepted it. The developing countries from the group, where

we can include Brazil, sought that the joint proposal did not attend the demands from the

developing countries on tariffs reduction. The document also proposed a classification among

developing countries, which did not please, neither Brazil nor Argentina, for special treatment on

domestic support.

The creation of the G-20 and its proposal were a confrontation between developing countries and

developed ones. The G-20 proposal defended manly the liberalization of agriculture opposing

European and American positions. But as Tussie and Narlinkar91 observed other groups on the

Round also opposed the USA-EU in other areas of the negotiations. The Core Group of

developing countries on the Singapore issues, the coalition on cotton, the coalition on the

Strategic Products and Special Safeguard Mechanism all represented developing countries

coalition against the major players of the WTO, America and Europe.

90 ABREU, Marcelo de Paiva. Política comercial brasileira: impasses e imobilismo. http://www.fgvsp.br/eventoceei/Abreu_paper.pdf. 21/03/05. 91NARLINKAR, Amrita & TUSSIE, Diana. The G-20 at the Cancun Ministerial: Developing Countries and Their Evolving Coalitions in the WTO. Blackwell Publishing Ltd 2004, Oxford. Pp. 949-951. www.lse.ac.uk/collections/internationalTradePolicyUnit/ Events/May2005/G-20inworldeconomy-Amrita.pdf. 01/07/05.

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It can be pointed as motive for the failure of the round the strict position from the G-20 on the

agriculture liberalization on one side and the European and American insistence on the mixed

formula for the market access, as proposed in their draft, on the other side, which would not

easily lead to an agreement and it would probably be a recipe for the collapse of the round.

Referring to the mixed or ‘blend’ formula, proposed by USA and EU, Jank92 argues that the

proposed formula, which gathers together the Uruguay formula, the Swiss and another category

the ‘duty free’, would not solve the question of domestic support in the USA and, in the

European case, the reduction of the tariffs. Jank also argues about Item 4 on the joint proposal,

which would grant special provisions for developing countries, and as a proposal, it would

categorize developing countries as ‘miserable’ and ‘sub-miserable’.

Presser, Madureira and Lenk Wolfgang93 argue that the G-20 proposal brought unsolved

questions from the Uruguay round to the negotiation table. The authors’ argument is that in the

core of the ambitions of the G-20 we have the reforms of the three pillar of agriculture from the

URAA. The same issue was brought to discussion at Doha and was still a key-point on the

developing countries demands on the WTO. But as Doha and Cancun showed no agreement was

reached on agriculture. Despite the ambition of the G-20 for further liberalization of agriculture

it is important to point out that not all developing countries had the same views on the

92 JANK, Marcos S. Há espaço para Cairns avançar. ICONE / Icone na Imprensa. In: Gazeta Mercantil. 15/08/2003. http://www.iconebrasil.org.br/portugues/conteudo.asp?idCategoria=3&idsubCategoria=8&iddocumento=331&Currpage=16&Integra=Sim. 17/03/05. 93 PRESSER, Mário Ferreira; MADUREIRA, Frederico Quaresma & LENK, Wolfgang NEGOCIAÇÕES EM AGRICULTURA NA OMC. Economia Politica Internacional Analise Estrategica. No.1 July/September 2004. http://www.eco.unicamp.br/ceri/boletim/boletim1/05-presser%20et%20al.pdf. 23/04/05.

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liberalization of agriculture. The Least Developed Countries (LDCs) as pointed by Presser,

Madureira and Wolfgang had concerns on food securities and Preferential Trade Agreements

(PTAs). Mkapa94argues that, without the commitment of both developing and developed

countries towards liberalization, it is impossible for small farmers, in countries like Tanzania, to

compete against developed countries subsidized farm products.

However there was no consensus in the negotiations despite the efforts from both developed and

developing countries in Cancun. The Cancun round ended earlier and the negotiation on

agriculture was postponed again. The USA and EU and their behind the scenes strategies95 paid

off in Cancun, proving that the total liberalization of the agriculture sector was not among the

priorities of these nations, rather their priority is the liberalization of sectors that would be in

accordance to their economic interests. Agriculture does not seem to be one of those sectors as

Cancun has proved. Rubens Ricupero, referring to the collapse of the negotiations, declared in a

Brazilian newspaper: ‘in certain circumstances it is preferable to have no agreement rather than a

bad agreement’96. Although the Cancun negotiations collapsed, the emergence of a new

negotiating group, the G-20 is seen as a new hope to agricultural developing members of the

WTO.

94 MKPA, Benjamin William. Cancun’s False Promisse. A View From the South. Foreign Affairs vol. 83. no. 3 pp. 133- 135. in HeinOnline 83 Foreign Aff. 133 2004. 95 JAWARA, Fatoumata. The cunning bully - EU bribery and arm-twisting at the WTO.Focus on the Global South, Geneva, Switzerland. September 2003. KWA, Aileen. Power Politics in the WTO. Focus on Global South. 2003. www.focusweb.org/publications/ Books/power-politics-in-the-WTO.pdf 22/03/05 96 Jornal a Folha de Sao Paulo. http://www.fboms.org.br/doc/promessas_omc.pdf. 07/09/03.

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4.2 The G-20

In the pre-negotiations of the Cancun Round of the WTO, the creation of the G-20 gave another

view to the powerful decision-making structure in the international trade negotiations. The Group

was born as an immediate response to the USA-EU joint proposal and for the first time, since the

Uruguay Round, two major players in the international trade arena faced an opposition of such

importance.

The G-20 is a group formed by initiative of the Brazilian Foreign Minister Celso Amorin on the

eve of the Cancun Round. The other members of the group are: Argentina, Bolivia, Chile, China,

Cuba, Egypt, Guatemala, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Philippines,

South Africa, Tanzania, Thailand, Venezuela and Zimbabwe. The importance of the group in the

agriculture negotiations can be seen through the representative figures that these countries add up

in the group. The group represents 12% of the world’s GDP, 18.5% of the agricultural GDP, 48%

of the world’s population, 60.4% of the rural population, 25.4% of agricultural exports and

15.8% of the imports97.

It is important to observe that, at this point about the G-20, it is the first time that China plays an

active role in the coalition on the WTO. The size of China’s economy, its potential in

international trade that represents almost a third of the world’s population brings weight to the

group, which also accommodates all the emerging powers of the developing world.

97 Ministerio das Relacoes Exteriores. G20. http://www.g-20.mre.gov.br/history.asp. 03/06/05.

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Despite the differences among its members, the coalition built on the Cancun Round was able to

maintain their cohesion, as one-issue group that seek the end of agricultural protectionism.

Narlikar and Tussie point out the Minister Amorin about the reasons behind the formation of the

group.

The real dilemma that many of us had to face was whether it was sensible to accept an agreement

that would essentially consolidate the policies of the two subsidizing superpowers –with very

modest gains and even some steps backward (the new broader definition of ‘blue box ’subsidies

to accommodate the US for instance) – and then have to wait for another 15 or 18 years to

launch a new round, after having spent precious bargaining chips98.

It can be inferred that the G-20 coalition emerged as a response to the necessity for the

representation on the agricultural negotiations against the EU and USA. The idea behind the

creation of the group was to avoid outcomes that did not represent the interest of the developing

countries in Cancun. But instead of avoiding unwelcome outcomes in the negotiations the Group

played an active role in the negotiations.

Although the emergence of the G-20 was sought as a positive outcome from the Cancun Round,

the leadership of the group generated uncertainties among the smaller economies in the group.

98 NARLINKAR, Amrita & TUSSIE, Diana. The G-20 at the Cancun Ministerial: Developing Countries and Their Evolving Coalitions in the WTO. Blackwell Publishing Ltd 2004, Oxford. Pp. 949-951. www.lse.ac.uk/collections/internationalTradePolicyUnit/ Events/May2005/G-20inworldeconomy-Amrita.pdf. 01/07/05..

85

Bello and Kwa99 observed the fact that the most influential members in the G-20 are agribusiness

exporters (e.g. Brazil and Argentina). Their main goal in the negotiations is to put an end to

distorting subsides and trade barriers in developed countries. In order to achieve these goals,

these countries might not consider the interests of small members, which are also interested in the

protection of their small domestic markets. Kwa and Bello also observe the creation of the G-

33100 as consequence of these concerns among small countries.

The G-20 has been gaining space in the WTO negotiations especially on the continuity of the

Doha agricultural agenda. In the WTO the G-20 still plays a proactive and pressuring position on

the agricultural issues as had happened in Canada at the agricultural meeting which took place in

June this year101.

According to the Brazilian position the G-20, it is seen as a huge victory in the multilateral

system. Since the creation of the group led by the Brazilian Minister Amorin, the G-20 has been

seen as a masterpiece of Brazilian foreign policy and diplomacy. The argument is that, with the

creation of the G-20, Brazil would take a more leading position among the developing countries

from the south. The fact is that Brazil has already been the most important member of the

MERCOSUR and the leadership in the G-20 would only reinforce this position in multilateral

organization.

99 BELLO, Walden & KWA, Aileen. Líderes do G 20 vencidos com táticas de “Divide e vencerás” A história atrás do triunfo de Washington em Genebra. http://www.fboms.org.br/doc/omc_nama_bello.PDF. 22/05/05. 100 The G-33 is a group formed by 33 developing countries that that support the concepts of special products (SP) and a special safeguard mechanism (SSM). 101 Bridges Weekly. Agriculture Update: G33 Meeting in Jakarta; Proposals for Thighter Green Box. Volume 9. Number 21. June 15, 2005. http://www.ictsd.org/weekly/05-06-15/story1.htm. 23/05/05. Volume 9 Number 21 15 June 2005

86

The G-20 and its goals represent a better chance for Brazil in achieving its goals towards the

increase of its participation in the international market and the leadership of the group seems to

be the way to it and the WTO the forum for it.

Several speeches from the Brazilian leader102 state that the creation of the G-20 in Cancun

represented a victory for developing countries even on the eve of the failure of the round. As a

matter of fact the G-20 represents a rearrangement of the alliances on the south; new south-south

cooperation in the international system and Brazil has started it. It is clear that Brazil would

benefit with a leading position in the G-20, mainly if we consider the gains in the domestic

agricultural export-oriented sector and thus the gains for Brazilian economy.

As a political leader among the southern developing countries there is still a question to be

answered. In the geopolitical arena for developing countries from the south, Brazilian leadership

has serious competition even inside South America, without even mentioning other members of

the group such as China and India. It is more likely that the actual position of Brazil in the G-20

lasts while it converges to a common goal and interests within the group.

102 Trade Observatory Headlines. Brazil Trade Goals After Cancun. http://www.tradeobservatory.org/headlines.cfm?RefID=18691. 22/06/05.

87

Conclusion

Brazil has been a keen negotiator on agriculture in the international arena, in particular after the

middle 1990’s with the creation of the WTO. Within the WTO, Brazil started to increase its

participation in agriculture negotiations seeking a leadership role in these negotiations.

This thesis suggests an escalating process from a decade of financial crisis to the creation of a

strong coalition of countries, designed by Brazil, to negotiate agriculture in the WTO. It analysed

the domestic and international factors that lead Brazil to play this role in agriculture.

As the far as domestic factors are concerned, Brazilian’s participation in the international

agriculture negotiations, the Real Plan and the liberalization of the market were the most

important. The results of the economic and policies reforms and the liberalization of the market

reflected on Brazil’s agricultural production and Brazilian participation on the international

market. The reforms implemented by the Real Plan were a response to a bankrupt decade of

failed economic plans and high inflation rates. These reforms had direct effects on the

agricultural sector in the late 1990’s.

It was shown that during the 1980’s, a series of economic plans failed to both generate stable

growth and control inflation. The economic problems were sought to be the main reason of the

economic stagnation of Brazil. Since the Collor administration, the agricultural sector started to

play a more important role in the macroeconomic environment of the country. Although the

liberalisation process initiated by the Collor administration had not represented significant gains

88

to all sectors of the economy, the agriculture sector generated positive outcomes to the

agribusiness export sector and increased the importance of agriculture in the Brazilian economy.

It was the ineffectiveness of the economic plans during the 1980’s to solve the economical and

political problems of Brazil, that lead to more effective reforms under the Fernando Henrique

Cardoso administration. The Real Plan was a solution to the financial crises of the 1980’s, in

which the liberalisation of the economy and the agriculture sector played a fundamental role.

As demonstrated in chapter two, initial liberalisation of the Brazilian economy had seen negative

outcomes for the agriculture sector due to high interest rate policies, exchange rate policies and

price regulation. The sector also suffered a reduction in public investment. However the same

liberalisation process helped boost the productivity of the sector, and overcome earlier

difficulties. The importance of the agriculture sector on the stabilisation plan had a social,

economic, and macroeconomics scope.

Despite the fact that agriculture polices were part of an overall strategy of economic stabilisation,

they became a masterpiece in controlling inflation and generated revenue through the surplus in

the agricultural trade balance.

The agrarian reforms of the Real Plan gave more land to rural families in Brazilian history.

Agricultural polices such as the Pronaf helped small farmers to overcome market failures on

accessing land and credit and at the same time provided technological assistance to these small

farmers. The agriculture sector surpluses in the trade balance helped to generate economic growth

89

and stability. The price support policy based in agricultural prices helped to control the inflation

rates by keeping prices stable during the implementation of the Real Plan.

The liberalisation had direct effects on the productivity during the Real Plan especially in the

agribusiness sector, which had an outstanding performance and still presents potential to grow.

The increases in productivity made by the Brazilian agribusiness sector, made Brazil an avid

competitor in the international market.

Chapter three demonstrates the agricultural sector is Brazil’s comparative advantage in

international trade. The size, the variety of production and productivity of the agricultural sector

in Brazilian economy shows that the country has a natural vocation in agriculture. Chapter three

shows how international trade barriers fall on the same products in which Brazil has comparative

advantages when juxtaposed against developed countries. The incidence of the trade barriers in

agricultural trade as explained, led Brazil to become a tenacious defender of the liberalisation of

agricultural trade. Two cases are presented in the end of the third chapter to better demonstrate

the trade disputes in the WTO. Both cases were on agricultural products that Brazil has

comparative advantages in comparison to the USA and the EU, but could not compete with

because of trade distorting measures used by those countries. The victory in both cases

strengthened the Brazilian position in the international negotiations on agriculture especially in

the WTO.

In the international arena, Brazil’s interest in agriculture negotiations can be pointed as result of

the domestic sector to the extent that better conditions to expand Brazil’s agricultural exports and

90

increase the Brazilian market-share of international agriculture trade would benefit the countries

economy. Complementary to Brazilian interests in the international negotiations of agriculture

was the lack of accomplishment on the Uruguay Round agreements and the necessity of

representation for developing countries in the negotiations within the WTO. There was the

necessity to defend the agricultural interest of developing countries and thus Brazilian interests.

Chapter four discusses the lack of achievement on the Uruguay Round proposals that lead to the

creation of coalitions demanding greater transparency and equality in agricultural negotiations.

The chapter shows that unsolved issues on the liberalisation of agricultural trade from the

Uruguay Round endured through the Doha Round to Cancun Round. The unfinished business on

trade distorting measures used by developed countries ended up culminating in the creation of a

strong opposition from the developing countries in the Cancun Round.

It can be conclude that factors that make Brazil so keen to take a leadership role in the

international agricultural negotiation areas follows: Agriculture is a Brazilian comparative

advantage in the international trade; with the liberalization of the agriculture trade Brazil would

better utilize this comparative advantage in the international trade; Agriculture is considered a

strategic sector of the economy because of the role the sector played during the economic

stabilization process and still plays nowadays the sector is responsible for 46% of all Brazilian

exports and increasingly surpluses on the trade balance; Agriculture employs more than a third of

all Brazilian working population and represents an important share of the country’s GDP with

29% of it; Brazilian agriculture has the potential to expand is farmable lands and increase its

production, which mean that can increase its share on the international trade; Through a

91

leadership among developing countries Brazil can ensure its interest on the WTO negotiations;

Ensuring the liberalization of the agriculture, Brazil reaffirms is role among the biggest producers

of agricultural products; A more liberalized agricultural trade would ensure the continuity of the

stabilization in the country and the economic growth.

In other words it can be concluded that the Brazilian development is connected to the agricultural

sector to the extent that the dynamism of the sector include job creations, food production

expansion, income growth, stabilization of the economy. The well being of the sector reflects the

overall results of Brazilian international trade balance. Liberalization of the agricultural trade can

be translated as an instrument to the development process in the country. Brazil is so keen to take

a leadership role in the international agricultural negotiations because the liberalization of

agriculture is sought as insurance policy to development.

92

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