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My comments at the BNP Paribas Food & Agro Conference 2021 “FIT FOR GREEN DEAL – food for next generations. Ready for the European Green Deal”

My comments at the BNP Paribas Food & Agro Conference 2021 “FIT FOR GREEN DEAL – food for next generations. Ready for the European Green Deal”

How will regulations and changes related to the Green Deal affect Brazil’s trade relations with EU countries? What is the biggest challenge?

The regulations related to the EU Green Deal will have an important impact on EU trade with Brazil. The carbon border adjustment mechanism and the coming regulations that will require EU importers of beef, soy, coffee, cocoa, timber and palm oil to certify that these six commodities come from lands that have not been deforested or contributed to land degradation will require adjustments and creation of additional reporting and certification for the traded agricultural goods. With the need to establish effective traceability and certification mechanisms, the tendency is to further reduce the trade flow in the coming years.

The EU once was Brazil’s major agricultural trade partner. Not anymore. Brazilian agricultural trade has been shifting towards China since it joined the World Trade Organization 20 years ago. Now, almost 40% of all Brazilian ag products go to China and only 15% to the EU. For some commodities, the numbers are higher: more than 70% of soybeans and 50% of beef are sold to China. Besides the new regulations, the major problem for the trade between Brazil and EU are tariffs and non-tariff barriers. The EU and Mercosur (which is a bloc that includes Brazil, Argentina, Paraguay and Uruguay) negotiated a free trade deal, that reduces or eliminates tariffs and barriers, and has a very good environmental chapter, but still has to be signed and ratified by the parliaments. This trade deal would foster trade and introduce higher environmental standards – important for both EU and Brazil. Without it, the agricultural trade will continue getting smaller.

What steps your country is taking towards a zero-carbon economy and food & agricultural sector?  What are the most important / recent challenges?

President Bolsonaro announced ambitious commitments at the Leaders Summit on Climate in April this year: to end illegal deforestation by 2030 and to reach carbon emissions neutrality by 2050. At the same time, Brazil has yet to announce its adjusted Nationally Determined Contributions and allocate additional funding for the implementation of the environmental commitments. Brazil has one of the most rigorous environmental legislations in the world. Around 66% of the country is still covered by native vegetation, including a certain portion of vegetation on agricultural lands that farmers are required to preserve. At the same time, in order to meet the announced climate targets – especially with regard to deforestation, the country will need to improve enforcement and deal with conflicts related to land ownership, indigenous land and other challenges. There will be a need to significantly increase public and private sector funding and create efficient market mechanisms. Everyone is looking forward to Brazil’s commitments in Glasgow. As Brazil is one of the biggest agricultural producers and also a leader in agricultural technology and productivity, it will be essential for the global effort to fight climate change.

Can South America Make Agriculture More Resilient?

Can South America Make Agriculture More Resilient?

Commentary on the outlook for South American ag exports for the Latin America Advisor, a publication of the Inter-American Dialogue.

Question: Unusually cold weather has damaged crops in Brazil’s main coffee-growing regions, driving up prices to their highest point in more than six years, MarketWatch reported in July. Meantime, Argentina’s government urged citizens to curb water use to alleviate pressure on the Paraná River, where water levels at a 77-year low due to severe droughts are hurting shipments of cereals including soy and wheat. What is the outlook for agricultural exports this year in Brazil and Argentina? Where are commodities prices headed? What can South American countries with agriculture-reliant economies do to improve the resiliency of their food systems in the wake of extreme climate events and other disruptions?

Commentary: Tatiana Palermo, president of Palermo Strategic Consulting and former vice minister of agriculture and chief agricultural trade negotiator in Brazil

“Adverse weather conditions are increasingly affecting major crops in Brazil and Argentina. The intensity of the impact of these conditions on specific crops (for example, coffee) are still being assessed. Still, projections show that both countries are expected to harvest record total crops in 2021-2022. International food prices recently surged to their highest margins in a decade and, according to FAO and OECD, this trend will continue. Covid-19 is bringing extra challenges, causing economic constraints, logistical hurdles and labor shortages. Mercosur countries also have one the world’s highest import tariffs, which makes already costly imported agricultural inputs (fertilizers, seeds, equipment) even more expensive. Meanwhile, global food demand is rising. China is increasing purchases of agricultural commodities from Mercosur. Brazil’s total agricultural exports reached a record $61 billion in the first half of 2021, 56 percent of which went to Asia—China bought 39 percent. Pent-up demand in Asia, Europe and the Americas is also boosting Brazilian agricultural exports, which are likely to reach a record-high by the end of this year. Argentina is also set to reach record exports of grains and oilseeds, while government-imposed trade restrictions negatively affect meat exports. Although short- and medium-term export projections are good, both countries face long-term challenges because of their high concentrations of production in just a few crops. Ninety percent of all grains and oilseeds in Brazil are concentrated in just five crops; in Argentina, in three. Adverse climate creates a vicious circle, as farmers plant an increasingly smaller variety of weather-resistant crops. Monocultures, in turn, are bad for the environment. This also creates a global health challenge, as more than three billion people (around 40 percent of the world’s population) cannot afford a healthy and nutritious diet. Climate, agriculture and health are interconnected. Food systems’ transformation is necessary and will largely depend on innovation and biodiversity. Brazil and Argentina are not only among world’s largest food powerhouses, but also important sources for both technology and biodiversity. If they embrace change, the prospects for the agricultural sector are very good.”

https://www.thedialogue.org/wp-content/uploads/2021/08/LAA210816.pdf

EDITOR’S NOTE: The comment above is a continuation of the Q&A published in the Aug. 9 issue of the Advisor.

World race to self-sufficiency in strategic manufacturing

  • Global value chains in manufacturing are under pressure 
  • Governments want to limit economic reliance on China
  • Companies are seeking to streamline logistics and curb risks 
  • The goal is enhancing strategic sovereignty

The last decade was marked by the rethinking of global supply chains. Excessive reliance on just one or a few suppliers or export markets, coupled with political tensions, economic nationalism and trade protectionism, forced global value chains (GVCs) to become more regionalized. According to the Organisation for Economic Co-operation and Development (OECD), goods crossing the ocean reached their peak around 2011. 

Since then, the foreign value-added content of exports has gradually fallen for many major economies, and the expansion of GVCs has stopped. In some sectors, though, a few Asian countries, especially China, maintained their central role as the main manufacturing hub. The Covid-19 pandemic revealed the fragility of GVCs in such sectors. 

Disruptions and shortages of specific products forced governments in large economies to examine critical dependencies and reconfigure strategic GVCs. Such decisions include diversification of suppliers and reshoring manufacturing, bringing part of the industry “back home.” 

Global economic development in the next decade will be defined by the U.S. and Europe’s attempts to find non-Chinese supply alternatives, build domestic production facilities in strategic sectors, and make supply chains more sustainable and responsible.  Read more about this in my latest Report Scenarios “World race to self-sufficiency in strategic manufacturing” for the GIS – Geopolitical Intelligence Services.

OECD-FAO Agricultural Outlook 2020-2029

The OECD-FAO Agricultural Outlook 2020-2029 main projections:

  • The relative importance of food, feed and biofuel use will not change significantly, as no major structural shifts in demand for agricultural commodities are expected.
  • Besides the #Covid_19 pandemic, the world agricultural markets face a range of uncertainties: (i) on the supply side, the spread of diseases/pest such as African Swine Fever or locust invasions, growing resistance to antimicrobial substances, regulatory responses to new plant breeding techniques, and responses to extreme climatic events; (ii) on the demand side, evolving diets, reflecting perceptions with respect to health and sustainability concerns, and policy responses to trends in obesity; (iii) the digital innovation in agro-food supply chains will have important impacts on both supply and demand; and (iv) future trade agreements and changing trade relations between several important players will also impact agricultural markets.
  • Per-capita food expenditure expands globally, but falls as a share of income, most significantly in middle income countries. Average per capita food availability is projected to reach about 3 000 kcal and 85 g of protein per day by 2029, fats and staples accounting for about 60% of the additional calories. By far the highest growth rate is projected for fats at 9% over the coming decade. Due to the ongoing transition in global diets towards higher consumption of animal products, fats and other foods, the share of staples in the food basket is projected to decline by 2029 for all income groups.
  • The Outlook assumes a further intensification of livestock and fish production, combined with ongoing feed efficiency gains these result in a globally fixed relationship between animal food production and the necessary energy and protein feed over the coming decade. Global livestock production is expected to expand by 14% supported by low feed prices and stable product prices ensuring remunerative profit margins to producers. Poultry remains the fastest growing meat accounting for about half of the projected increase in total meat output.
  • Biofuel use of primary agricultural commodities is not expected to increase significantly beyond current levels, mainly due to their declining role in the reduction of greenhouse gas emissions and the declining use of low-blended gasoline-type transportation fuel in two of the main ethanol markets, the United States and the European Union.
  • About 85% of global crop output growth over the next ten years is attributed to yield improvements resulting from more intensive input use, investments in production technology and better cultivation practices.
  • #trade is going to be increasingly important for #foodsecurity in resource-constrained countries, where imports account for a large share of their total calorie and protein consumption.

Coronavirus outbreak is reshaping the global supply chains

New technologies, the trade war and now the coronavirus outbreak are challenging the logic of the global supply chains and China’s dominance in global manufacturing.

“The outbreak of coronavirus is changing how companies view the extended, ocean-going route of container ships carrying manufactured goods and components between the Chinese mainland and North America and Europe”, writes Rick Kelley at The Monitor. He adds: “Experts say this long supply chain is now being viewed as a liability, too susceptible to disruption from natural- or man-made disasters.”

Yet the change started even before the spread of the disease. In “Globalization in transition: The future of trade and value chains”, the McKinsey Global Institute found that between 2007 and 2017, less than 20% of the goods trade was based on labor-cost arbitrage, and in many value chains, that share has been declining over the last decade. “Goods-producing value chains (particularly automotive as well as computers and electronics) are becoming more regionally concentrated, especially within Asia and Europe. Companies are increasingly establishing production in proximity to demand.”

The coronavirus outbreak is triggering further changes and disruptions. The Financial Times reported that China’s National Bureau of Statistics released a record low figure for its official manufacturing purchasing managers’ index for the month of February and China’s customs administration registered a 17% annual fall in the value of January-February exports.

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What is at stake when we talk about reshaping the global supply chains?

Bloomberg has recently published a map of possible disruptions that the coronavirus can bring to the global value chains, considering that China is currently the “world’s largest exporter of intermediate manufactured products – components destined for use in supply chains across the world”. According to Bloomberg Economics’ calculations based on OECD trade data, about 20% of global imports of those products came from China in 2015. “The longer the coronavirus curtails China’s industrial output, the bigger the risk of disruption to factories elsewhere. For countries in the Asian supply chain, the exposure is bigger – about 40% of all imports of intermediate manufactured products consumed in Cambodia, Vietnam, South Korea and Japan came from China in 2015.”

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For the U.S., the exposure to the imports of the intermediate manufactured products from China is also significant – above 30%.

Besides auto-industry, metals and electronics, there is a huge dependence on China in the pharmaceutical and medical equipment sector. The New York Times reports that “Chinese pharmaceutical companies have supplied more than 90 percent of U.S. antibiotics, vitamin C, ibuprofen and hydrocortisone, as well as 70 percent of acetaminophen and 40 to 45 percent of heparin in recent years.”

According to the NYT, China is also a key producer of the chemicals that are used in the pharmaceutical industry. Based on the Food and Drug Administration’s data, the newspaper informs that 72% of manufacturing facilities making active pharmaceutical ingredients for American drugs are located overseas, 13% of them in China.

Due to the coronavirus outbreak and subsequent decrease in production, logistical difficulties or direct restrictions imposed by governments, China, India, Germany and several other countries cut their exports of drugs and pharmaceutical ingredients, face masks and other medical supplies. The NYT reports that such disruptions are forcing the U.S. government to implement measures to enable manufacturing of these products in the U.S.

It will not be possible to produce everything in the U.S., but it is clear that the pandemic crisis together with the ongoing technological decoupling from China are making the U.S. rethink its excessive reliance on China and eventually reshape its supply chains.

The renewed NAFTA (the United States-Mexico-Canada Agreement – USMCA) offers new opportunities for shifting production regionally. There is also room for expansion of trade and investments with other big regional players, like Brazil.

Britain publishes its negotiating objectives with the U.S. and starts negotiations with the EU

On March 2, 2020, the United Kingdom published its objectives in trade negotiations with the United States. The document states that the UK “will be a champion of free trade and will seek Free Trade Agreements (FTAs) with like-minded democracies”.

The document also says that an FTA with the US, which is a “developed, high-wage economy with high standards” and is Britain’s “top source of investment and the top destination for UK investment”, represents significant opportunities throughout the economy, from agriculture to professional services.

According to the UK government’s data, the UK-US total trade was valued at £220.9 billion (around US$ 280 billion) in the last year, including 19.8% of all British exports. The government’s analysis shows that a UK-US FTA could increase trade between both countries by £15.3 billion (around US$ 19 billion) in the long run, in comparison to 2018, and increase UK workers’ wages by £1.8 billion (around US$ 2.2 billion).

In February last year, in its “Summary of Specific Negotiating Objectives”, the Office of the United States Trade Representative (USTR) pointed out that, “as the first and fifth biggest global economies, the U.S. economic relationship with the UK is one of the largest and most complex in the world”, and that the “aim in negotiations with the UK is to address both tariff and non-tariff barriers and to achieve fairer and deeper trade”.

The UK’s negotiating objective is to agree with the U.S. on an “ambitious and comprehensive” FTA, which “will ensure high standards and protections for consumers and workers, and will not compromise on our high environmental protection, animal welfare and food standards.”

The adherence of the UK to the EU regulatory standards after the transition period that ends on December 31st , 2020,  will be the main battlefield in the UK’s trade negotiations with the European Union, which are formally starting on March 2nd, 2020.

The EU’s negotiating directives released on February 25th, 2020, state that the only way to establish a free trade with no tariffs or other quantitative restrictions across all sectors would be ensuring a level playing field, with the UK using the EU standards as a reference point, in the areas of State aid, competition, state-owned enterprises, social and employment standards, environmental standards, climate change, relevant tax matters and other regulatory measures and practices in these areas.

At the same time, in the document “The Future Relationship with the EU”, the UK government  defines that the relationship with the EU should be “based on friendly cooperation between sovereign equals, with both parties respecting one another’s legal autonomy and right to manage their own resources as they see fit.”

With regard to the food standards, for example, the UK “will continue to pursue a risk-based approach to disease management and surveillance, based on scientific evidence” and “should encourage the use of relevant international standards, guidelines and recommendations of the International Plant Protection Convention (IPPC), the World Organization for Animal Health (OIE) and Codex Alimentarius, and encourage cooperation in these international fora”.

Both UK’s negotiations will be tough. But the price of not having a free trade area with the EU will be higher. Almost have of British exports go to the EU. With no deal, theses exports will be subject to tariffs negotiated at the World Trade Organization, starting from January 2021.

In a recent article, the Wall Street Journal wrote that “the negotiations will boil down to a simple trade-off: how much economic pain the two sides will accept to protect their respective sovereignty. Such is the deep level of integration between the two economies, this decision is fraught with political complexity… Foreign direct investment into the U.K. has fallen since the 2016 referendum. The failure to secure a zero-tariffs deal could cut British exports by 14%—and even under a standard trade deal, U.K. exports to the bloc could fall 9%, according to a new study by the United Nations.”

President Bolsonaro’s visit to the U.S. last year

I closely followed President Jair Bolsonaro’s visit to Washington in March, 2019. After participating at the World Economic Forum in Davos in January, the President launched his international dialogue with his visit to the United States.

There is great symbolism in this choice, both for Brazilian foreign policy and in the geopolitical context. Despite the general positive assessment, there are people here in Washington who called the visit shocking, due to the enormous sympathy expressed by the two Presidents to each other and for the genuine admiration and affection with which Bolsonaro treated Trump. He even declared support for Trump’s re-election in 2020, a rare gesture for a foreign Head of State.

China was mentioned several times. It looked like a message to Beijing and to the whole world: before, Brazil would never choose a side, but now it chose the United States. Until then, both in the political and economic spheres, Brazil was adopting multilateralism. Now, there is a different trend.

Soon after returning from the United States, President Bolsonaro went to Chile. This agenda, again, was an unusual choice: to begin the international dialogue with Argentina, Brazil’s main partner in the Mercosur, would have been more conventional.

In Santiago, Bolsonaro, along with right-wing presidents Sebastian Piñera (Chile), Mauricio Macri (Argentina), Mario Abdo Benítez (Paraguay), Martin Vizcarra (Peru), Iván Duque Márquez (Colombia) and the newcomer to the rightist’ club Lenin Moreno (Ecuador), created an alliance called Prosul, a replacement for the Unasul (Union of the South American Nations), which is considered to be left-leaning.

Besides Uruguay, Brazil’s loyal partner in the Mercosur, other countries were left behind: Bolivia, Guyana, Suriname and Venezuela. The Uruguayan president, Tabaré Vázquez, has already stated that he will not sign the new agreement, for being an ideological construction, as was the case of Unasur, which it is supposed to replace.

In a week, President Bolsonaro plans to go to Israel. He announced a broad business agenda there, but the controversial decision to transfer the Brazilian embassy from Tel Aviv to Jerusalem, following the United States’s example, is pending. Trump’s recent decision to recognize the Golan Heights as Israel’s territory, contrary to the United Nations resolutions, created friction with Iran and may have a negative impact on Brazil. It could cause tension with Arab countries and Iran, all of them important trading partners, mainly in the agricultural area.

Now the question remains: why did Bolsonaro choose the United States? Because it is the world’s largest economy or because of his personal sympathy for Trump? The visit here was prepared in a hurry and there were only a few concrete results. The rapprochement between the two countries is extremely positive. There are numerous opportunities for trade, investment and technological cooperation. And a good relationship helps a lot.

But what if Trump does not get re-elected next year? Will Brazil change partners? If a Democrat is elected in 2020, will the partnership lose its charm in the eyes of Bolsonaro? The bet seems very risky for our country.

The Brazilian economy, which is struggling to get out of one of the most severe recessions in history, faces the challenge of increasing productivity and needs investment in capital and in technology transfer. Foreign investors are worried about Brazil’s foreign policy decisions. What leaves the market apprehensive is not the shift in ideological bias, but the confrontational way in which this transformation is taking place.

One of the most striking examples is our relationship with Mexico. As in Brazil, the Mexican population made political choices because of the revolt against corruption and violence. The only difference is that in our case, we had a left-leaning government and the population chose the right-wing candidate. In Mexico, it was the opposite − they elected the left-leaning candidate because they were dissatisfied with the previous center-right government.

And now? As Mexico is an important business partner of Brazil, will Bolsonaro invest in the relationship with President AMLO (Andrés Manuel López Obrador)? Are we going to expand free trade and cooperate in other areas? Or will our president alienate Mexico for ideological reasons?

Returning to the US visit, we should not underestimate the declaration of the United States’ support for Brazil’s accession to the Organization for Economic Cooperation and Development (OECD), known as the “rich countries’ club.” It is a very impressive result and a few weeks ago it was considered very unlikely. In this respect, the relationship probably helped.

In exchange for support in joining the OECD, Brazil agreed to begin to forgo the special and differential treatment it now enjoys within the World Trade Organization (WTO). But what does it mean?

Currently, a quarter of WTO members have the status of developing countries, including large economies such as China, Mexico and South Korea. This status allows longer time periods for implementing agreements and commitments, and more flexibility in negotiating trade agreements. Agreements negotiated until now are still valid, but from now on Brazil will have to change. I think it is fair – if we want to join the club of developed countries, we will have to start acting like one.

The perspective of OECD membership is extremely positive for Brazil, because it will force us to do what I have always been advocating here in this column: opening our economy, now considered one of the most closed in the world, and expanding our interaction with the rest of the world, both through trade and through investments.

But to be actually approved as a member of the OECD, Brazil will have to do a hard job at home, especially with regard to the regulatory and business environments. And for that, Bolsonaro will have to rely much more on internal support – from the Congress and from his constituency – than on outsiders. The social security reform and other major structural reforms are part of this challenge.

Furthermore, it is important to eliminate the difference that exists between the discourse of the government’s economic team and the practice. Much has been said, but there is still no clear action plan. For example, one of the stated goals is to increase Brazilian foreign trade as a share of GDP from the current 23% to 30% in four years. According to the government, this objective will be fulfilled through new trade agreements “with no ideological bias”. 

However, the negotiating agenda that the government intends to complete to meet such an ambitious goal in such a short time has not been released so far. International negotiations are very time-consuming and require a lot of political effort, so we need to act soon.

Here in the United States, for example, there was hope that the presidents would announce the the negotiation of a free trade agreement. Why do we not take advantage of the opportunity for rapprochement? Why was the creation of an import quota of 750,000 tonnes of wheat with zero tariff (instead of the current rate of 10%) an isolated act and not part of a tariff reduction encompassing a larger product group from both sides?

If we really want to join the OECD, with all the investment and growth that this brings, Bolsonaro’s government needs to mobilize the country around this agenda. The dramatic fall in the president’s popularity, reported by Ibope (a pollster) this week, demonstrates the size of the challenge. Pragmatism, and not personal ideological choices in international politics and in the domestic context, would be a better option.

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