Trade Deficit Widens, Tech Imports Rise

By Maria Lopez Conde, Senior Contributing Reporter

SÃO PAULO, BRAZIL – As Brazil’s balance of trade widens to a historic high, data from the Institute of Studies for Industrial Development (IEDI) has shown the trade deficit generated by imports of medium and high-technology products reached US$46.8 billion in the first seven months of the year. That figure is 16.3 percent higher than in the same time period in 2012.

According to the Secretariat of Exterior Commerce, Samsung, the Amazonas branch of the South Korean electronics maker, was the company that imported the most in 2012, second only to Petrobras, as published by O Globo.

Brazil only achieved an US$18.9 billion surplus in its 2012 trade balance from exporting low-tech industrial products, which include wood-related goods, pulp and paper, food, beverages and tobacco. Experts believe this shows Brazil, a big player in the commodities market due to its natural resources, is still highly dependent on foreign-made high-tech products.

Ironically, the driving force behind Brazil’s boom in recent years has been fueled by commodities like iron-ore, and not industrial production, which the country had made its official priority as it embarked on import substitution industrialization policies aimed at creating a domestic industry in the 20th century.

Those aggressive industrialization policies did not create an industry that is entirely competitive with large global players. The country’s high labor costs, labyrinth-like bureaucracy, complicated tax system and poor infrastructure have driven industrial production costs up, so that importing becomes cheaper.

“The world of commodities is not the same anymore, it continues to be good, but it is not spectacular enough to neutralize Brazil’s lost competitiveness in the industrial sector,” economist Júlio César Gomes de Almeida told O Globo. “Technological dependence is strong, and in a world thirsty to win markets, the difficulty to export increases.”

In Brazil, a country without a proper railway system, transportation costs are high. Sending a car made in São Paulo to a car dealer in Salvador (1,900km) is four times more expensive than transportation between Shanghai and Beijing (1,200km), according to a report from Superinteressante magazine.

Although industrial production rose 1.9 percent from May to June, rising imports show uncertainty from Brazilian producers and lost competitiveness.

“Industrial production is on a path of growth, but it’s very timid,” an IEDI press release from August 1st explained. “It is likely that industrial production will close the year with a 2.5 percent expansion, a rate which is not very favorable because it only ‘covers’ the 2.6 percent fall seen in 2012.”

Industrial production in the first seven months of 2013 showed major decreases in petroleum refining and alcohol production, for example, which saw a 4.1 percent fall. Overall, extraction of minerals increased by 2.4 percent in July 2013, which was not enough to cover its 2.7 percent June loss.

Brazilian industry saw bright spots in pharmaceuticals, which saw an 8.8 percent growth, machinery and equipment, with a 3.2 percent advance and vehicles at a two percent increase. Production in the information technology sector also stood out with an 11.4 percent growth.

Despite the slower growth pace as a result of economic woes in Europe and China, which might result in less demand for Brazilian products, Treasury Minister Guido Mantega believes Brazilian industrial production is recovering from last year’s tumble.

“Last year, the Brazilian industry was suffering from a strong harassment of imports and the exchange rate was not favorable. Now we have the conditions to reduce it to the previous benchmark,” said Mantega on August 1st.

According to Mantega, Brazil’s industry should see increased competitiveness as a result of the favorable exchange rate, which at the beginning of this week hovered at around R$2.29 per U.S. dollar. “With the exchange rate we have today, the industrial sector has won a natural defense,” Mantega affirmed.