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Brazil Fights For Its Manufacturing Life

Brazil feels the jaws of a familiar trap closing on its leg — and it is determined to struggle. As its finance minister told the Financial Times in a recent interview (paywall alert):

“We don’t want to lose our manufacturing sector. Brazil is not merely an exporter of commodities… We are not going to just sit by and watch while other countries devalue their currencies to give them a competitive advantage.”

As cheap Chinese goods manufactured flood into the country, as the US, the EU and Japan deploy unconventional financial techniques that keep interest rates low and therefore tend to depress the value of their currencies in international markets, and as Brazil’s booming commodity exports and high domestic interest rates keep its currency expensive, Brazil’s manufacturing sector is under pressure. Automobile manufacturing is particularly hard hit, with production falling an alarming 30 percent in January.

This is an old battle in Brazil; the US, Canada, Argentina, Australia and Brazil were all commodity producers in the 19th century; the English speaking countries went on to become first world economies with a healthy mix of industrial, mining, services (like banking) and agriculture.  Brazil and Argentina, despite some industrial achievements (especially in Brazil), never quite climbed out of the commodity pit.

The power of rent seekers and vested interests in both Brazil and Argentina helps explain their failure. Some of these groups were foreign — owners of mines, investors in railways and so on — and some were domestic: oligarchic families, self-defeating populists, large landowners. Protectionism in both countries historically turned very quickly into a counterproductive mix of special interest giveaways that mostly reduced growth and efficiency without building a powerful industrial sector. (Brazil had more success than Argentina).

Now the Brazilians are taking another look at the protectionist toolkit, wondering whether there are any drugs on the shelf that have fewer side effects than the nostrums they used to take.

The finance ministry is clearly hoping that a more technocratic, nuanced approach can give better results at less costs than the old protectionism. In particular, it is looking at replacing payroll taxes (in Brazil, 20 percent of total payroll) for hard hit manufacturing companies with a lower tax on their total revenue. This in effect subsidizes employment in industries facing tough foreign competition; textiles in particular, the Brazilians hope, will benefit from this treatment.

It’s easy to blame Brazil for protectionism, but to be fair, when the US, the EU and Japan are all pursuing unorthodox monetary policy and China is systematically promoting exports through, among other things, a policy of state-directed lending through the financial sector, the Brazilians can be excused for looking to their defenses.

The question isn’t whether Brazil is justified in unorthodox measures; the question is whether these measures will work. That remains very much to be seen; special, rent-seeking interests remain extremely powerful in Brazilian politics and the country is not all that far from the bad old days of hyperinflation.

The idea of shifting the tax burden from employment to other activities is, in itself, a very good one. Via Meadia would like to see payroll taxes permanently abolished or deeply cut in the US in some revenue neutral tax shift to consumption taxes or, to make our dear green friends happy, carbon taxes. We should be promoting employment rather than taxing it to death.

Perhaps Brazil should think more about reducing the payroll tax generally on all its employers rather than restricting the relief to a handful of favored, pet companies. In any case, Via Meadia wishes Brazil every success in climbing out of the commodity pit; the world needs a strong, prosperous and self-confident Brazil.


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  • Bart Hall (Kansas, USA)

    Many years ago I read an interesting technical treatise in economics examining then-current differences in the economic situations of Argentina, Australia, and Canada, which in 1930 had nearly identical economies.

    It looked in detail at what each nation had done by way of economic policy from 1930 onward that might explain Argentina’s utter failure to progress at anything like the pace of Australia and Canada.

    The principal culprit? Argentina maintained, and even tightened protectionist policies, decade after decade. The other two countries rapidly abandoned protectionism in the 1940s.

  • Jacksonian Libertarian

    Consumption taxes are regressive, hitting the poorest who spend everything on every day needs, the hardest. Protectionism is self defeating shrinking the markets and therefore the efficiency of those markets, and hurting the businesses they are meant to protect. The best strategy is to accept the increased competition, and demand that the businesses rise to meet the challenge. This strategy creates strong well managed and productive businesses that will gobble up world market share when the economic conditions reverse themselves, as they always do to preserve balance. The best thing a Government can do in the face of increased competition, is nothing.
    What has China gained from decades of currency and trade manipulation? It’s products are of poor quality, it’s businesses provide poor service, they have no world class brands, and so no loyal customers that won’t drop them for a lower price elsewhere.

  • Luke Lea

    China is so big and so poor that it can ruin the manufacturing sector of any country whose private firms are free to do business there. Look at what happened to poor Mexico after Nafta: Gatt soon followed and all those American companies that were supposed to move operations to Mexico went to the far east instead. Meanwhile corn imports from the US ruined a lot of peasant farming communities in Mexico, many of whose members ended up emigrating to the US illegally. This particular “unintended consequence” was widely predicted at the time but our free trade lobby in Washington refused to listen. Just one more instance of our governing elites not having the interests of their own country at heart.

  • Brett

    I’m not sure being a commodities exporter is what’s held Brazil back. The Canadians, Australians, and New Zealanders have diverse domestic economies, but their exports are still largely natural resources (and a big chunk of their industries are built around the extraction and processing of natural resources).

    I think it has more to do with internal protectionism. The US may have had a fair amount of tariffs back in the late 19th century/early 20th century, but we had a big internal market with sporadic regulatory capture that allowed for a great deal of competition and business development.

  • Kris


    I once again issue my periodic invitation for you to look up actual data on US manufacturing, which does not support the idea of an absolute decline, let alone devastation. What has indeed declined is manufacturing employment, but as this is a result of the constant increase in productivity, this can hardly count as an indication of ill health.

    Now there certainly is room for concern about this job loss, but blaming China for this seems like a mistaken diagnosis.

    [Given my last few comments directed at you, I will emphasize (hopefully unnecessarily) that I am hardly the biggest fan of the Chinese regime. (The preceding was an understatement.) But if we want to improve things, we need a clear view of the true situation.]

  • Luke Lea

    Kris @5:

    Point taken. Labor-saving technologies by definition reduce the demand of labor.

    But you are simply mistaken if you think it is the only factor. Trading with poor countries that are relatively well-endowed with low-skilled labor (which most manufacturing labor is) will specialize in labor-intensive industries leaving those relatively well endowed with capital to specialize in capital-intensive industries.

    Furthermore, when a country like China uses government policy to over-value its currency so that it will export more than it imports from a country like the U.S. this further reduces the demand for our manufactured goods for export to (in this case China), thus further reducing manufacturing employment.

    I don’t think this controversial.

  • Luke Lea

    @ Kris — I wasn’t trying to argue that the total value of goods manufactured in the U.S. had gone down, only that whole industries — those that employ a lot of people, which includes a lot of vital industries — have been badly hurt. We are strong in high-tech goods, obviously, and they are important. But they are not the only thing that is important.

  • Luke Lea

    @ Kris – one further note, on the positive side: eventually our balance of trade with China will be restored whether they like it or not. And when that happens our manufacturing employment will pick up and a lot of new factories will be built, making things not only for export but also things for consumption here which we currently import. I like that because it might be a chance to try my idea for factories in the countryside run on four-hour shifts. See my website.

  • Kris

    Luke: My concern is that there are loud voices which basically blame our economic/employment problems on a Chinese bogeyman. Given the obvious limits of blog comments (we don’t all have the time or assurance to write WigWagian essays 🙂 ), you could be understood to be one of them. The trouble with this outlook is that it could precipitate actions which, in my opinion, will cost us the substantial benefits of our Chinese trade without solving any underlying problems.

    I am happy to read your clarifications (6-8), and I certainly agree that our increasing ties with China have not been costless. I won’t insult anyone with any facile answers, I just want us to be careful not to throw out baby with the bathwater.

    (All of this is purely on the economic plane.)

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