[PEN-L:31557] Barzil and the future of the FTAA

["Ian Murray" <seamus2001@xxxxxxxxx>]

[from The American Prospect]
Lula's Rules
Brazil could undo Bush's trade scheme.
Alex Gourevitch
http://www.prospect.org/print/V13/21/gourevitch-a.html

Just when it was looking as if the Bush administration would stamp its
economic model on the entire Western Hemisphere, a credible challenge has
emerged. South America's largest and most self-reliant economy is very
likely to elect a popular moderate leftist. Luiz Inacio Lula da Silva of the
Workers Party in Brazil has campaigned vigorously against President George
W. Bush's proposed Free Trade Area of the Americas (FTAA). First imagined by
Ronald Reagan, it would essentially extend the North American Free Trade
Agreement from the Arctic Circle to Tierra del Fuego. With a crucial
negotiating session co-chaired by the United States and Brazil in Quito,
Ecuador, set for just after Brazil's Oct. 27 runoff elections, and
negotiations scheduled to continue until January 2005, the FTAA will not be
the cakewalk the United States wants.

But the United States has substantial leverage to impose its vision -- or
impose heavy costs on those who reject it. The International Monetary Fund,
working hand in glove with the U.S. Department of Treasury, is taking
advantage of Brazil's nasty public-debt situation to impose its usual
conditions on Brazil in exchange for a bailout: high interest rates, fiscal
surplus, reduced social spending and more subtle pressure to cooperate with
the norms of neoliberal trade. The fact that Lula, as the Brazilian favorite
is universally known, has already pledged to continue Brazil's debt payments
and to run a budget surplus speaks volumes about how even large economies
can eventually succumb to the pressure of trade and investment flows. Twenty
years ago, Brazil never would have accepted such restrictions on its
economic sovereignty.

>From the Brazilian perspective, the FTAA is not a genuine free-trade area at
all but a preferential trading system that benefits the United States at the
expense of its Latin-American trading partners. The trade deal would not
address many elements of U.S. protectionism such as agricultural subsidies
and steel tariffs. Lula has called the current FTAA "an annexation of the
Latin-American economies to the economy of the United States." His largest
supporting union confederation, the Central Unica de Trabalhadores, has been
highly active against the FTAA. Even the current Brazilian president,
Fernando Henrique Cardoso, and his handpicked candidate for successor, José
Serra, have questioned the FTAA.

While Lula has become the darling of global anti-FTAA activists, his
resistance to the FTAA does not reflect crude anti- American leftism but a
broadly based resentment against a palpable double standard. The
agricultural subsidies in the latest U.S. farm bill, along with recently
enacted steel tariffs, hit Brazil particularly hard on its most important
exports: soy, orange juice, beef, sugar and steel. Yet the Bush
administration has refused to discuss these trade barriers at the FTAA
negotiations, contending that these should be addressed at the global World
Trade Organization talks. "To be productive for us it has to be a total
negotiation," says Giancarlo Summa, Lula's spokesman, because in its current
form the FTAA "is a very good deal for the United States, but not a very
good deal for us."

The current draft of the FTAA would also strip Brazil of its tools for
encouraging industrial growth, making South America's largest nation more
dependent on American capital. For example, it would eliminate Brazil's
domestic-content policies, in which multinational corporations selling in
Brazil, such as General Motors, agree to include a percentage of
domestically manufactured parts. (The United States encouraged Toyota and
Honda to locate factories in America as evidence of Japan's openness.)
Domestic content helps Brazil transfer technology and stimulate nascent
industry. The current FTAA, building on NAFTA's infamous regulation-busting
Chapter 11 [see Chris Mooney, "Localizing Globalization," TAP, July 2,
2001], would also give corporations the power to sue national and local
governments over a whole range of health and safety regulations as
restraints of free trade.

On the issue of intellectual property, the Bush administration wants
Latin-American nations to accept a degree of patent protection for
multinational corporations that even the World Trade Organization has
refused. Using World Bank statistics, Mark Weisbrot, co-director of the
Washington-based Center for Economic and Policy Research, has calculated
that Brazil's net losses from increased royalties and licensing fees would
outweigh the benefits from increased trade. These investment and
intellectual property rules are not ones that the United States or any other
industrial country followed at earlier stages of its development. All of
which has Antonio Prado, an executive coordinator of Lula's proposed
government program and an economic adviser to the Workers Party, wondering
why Brazil should join the FTAA. "Right now there is no element that is good
for Brazil," says Prado, who quickly qualifies this with, "It is not a
question of total negation of the FTAA. It is a question of mutual
benefits."

In light of Lula's resistance, the United States is trying to ensure that he
does not become the rallying point for a more global attack on the
Washington Consensus. The Bush administration has stepped up efforts to peg
Lula as an anti-trader, an image encouraged by the fact that, in the event
of a standoff, some of Lula's supporters think they can walk away from the
FTAA altogether. "Brazil could continue negotiations with Europe and find
other markets like India, China, South Africa, Europe," says Prado. "The
U.S. market is not the only one." In principle, the Brazilian economy, the
eighth largest in the world, is big enough to raise its own capital and
produce mainly for its own market (as the United States long did for its
market). While Brazil is unlikely simply to walk away from the FTAA, its
relative independence will strengthen its hand at the negotiating table.
Taking this position is a luxury most other economies in Latin America
cannot afford.

Even with this unusual latitude, however, Brazil may yet be brought to heel.
Over the past year, the United States has been negotiating separate trade
deals with Central-American nations, Caribbean ones, the Andean countries
and Chile. The United States already has the bigger economies of Mexico and
Canada locked into NAFTA. The Bush administration has even suggested it will
negotiate a regional trade deal that excludes Brazil, if necessary, leaving
Brazil to face higher trade barriers in its dealings not just with the
United States but with its Latin-American trading partners. Nonetheless,
even this strategy may not be wholly successful for the United States. The
normally pliant Argentina recently rejected an American offer to speed up
FTAA negotiations.

Bush's ace in the hole is the International Monetary Fund. Under the Cardoso
administration, Brazil's public debt exploded from less than 30 percent of
gross domestic product in 1994 to more than 60 percent at present. This was
due mainly to the Cardoso administration's persistently high interest rates,
which encouraged investors and financial speculation but slowed growth and
kept debt payments high. A $30 billion IMF loan on Aug. 7 calmed panicky
investors for a time, but it also brought the restrictive conditions Lula
reluctantly agreed to after a meeting for hours with President Cardoso. Even
worse, those concessions may have been for naught. "We actually did the
numbers based on optimistic assumptions, and it doesn't work," says
Weisbrot. "Either they are going to default or they are going to have a new
interest-rate regime." Summa agrees, saying "It's urgent to lower the
interest rate as low as possible." But lower interest rates will also scare
off some investors, decreasing the value of the Brazilian currency and thus
increasing the cost of that portion of debt denominated in U.S. dollars. A
post-election investor panic would force Lula either to bargain away more
sovereignty for more IMF dollars or to go the way Prime Minister Mahathir
Mohamed did in Malaysia and implement capital controls. The latter would
burn bridges with the IMF and alienate foreign investors.

But if Lula's position is shaky in relation to the IMF, his stance on the
FTAA appeals beyond the constituencies of labor and the poor. Large swaths
of Brazilian business and agriculture hope Lula will negotiate fairer trade
arrangements with the United States. He even picked a textile magnate, Jose
Alencar, from a conservative party to be his vice presidential running mate.
For those reasons, though Lula has the political support at home to give the
United States hell, he may not fulfill the hopes of his most radical
anti-FTAA supporters, who have no other powerful figurehead to turn to.

Even though Lula has more running room than any other Latin American economy
would allow, he may not end up using his leverage to its full potential.
Caught between the constraints of U.S.-dictated rules of trade and finance
on the one hand and widespread popular sentiment against the FTAA on the
other, Lula will pay a heavy price for any decision he makes. Regardless of
his final choice, his limited options illustrate how even moderate leftists
usually end up sounding like everyone else when it comes to obeying the
neoliberal formula. If Lula bends to Washington's will, he would be
following in a grand tradition of Latin-American presidents who enter stage
left and exit stage right.