Why not an FTA with Brazil?

Tuesday, 20 January 2015 00:47 -     - {{hitsCtrl.values.hits}}

  • Overall market size on imports worth $ 226 b in Brazil
  • Sri Lanka’s exports to Brazil $ 48 m at 0.021% share
  • Lanka within top 10 importing countries in many product sectors
FTA struggling Whilst we can be proud of the export performance, the fact of the matter is that the FTAs are not generating the desired results they were intended to bring into the country. We are struggling with the Indian FTA whilst the Pakistan FTA is somewhat more positive but yet in rough waters. Given the private sector-savvy administration coming into play post 8 January, the public sector feedback is that Sri Lanka’s overall engagement with the world will change and this will result in a positive rub-off on the trade agreements of Sri Lanka.                             Brazil – 11 SL products leading In this backdrop we see the market opening up in Brazil for Ceylon Tea and I see there is stronger synergy for a possible FTA with Brazil than China given the asymmetrical trade between the two countries. Even though the overall market size for imports is almost $226 billion dollars and Sri Lanka commands below 1% of the share, the fact remains that Sri Lanka is within Brazil’s top 10 importing countries in many product sectors – retreated and used solid tyres, industrial and surgical gloves, desiccated coconuts, apparel and plastic accessories, activated carbon, ceramics and porcelain, spices, fruits and coconut oil, hence, the logic of a Preferential Trade Agreement with Brazil that can lead to a FTA. We can include black tea into this basket of goods given that currently around 150,000 dollars of export move into Brazil from Sri Lanka.     Brazil – $ 225 billion market Officially called the Federative Republic of Brazil, it spreads across eight million kilometres of land area with a population of 193 million people. The official language is Portuguese and the currency is the Real (R$). One US dollar is equivalent to approximately two Real (R$) which gives us an idea of the strength of the economy in relation to the number one economy globally. The per capita income is 12,000 dollars which is not that high but the reserves in foreign exchange and gold is estimated at 371 billion dollars that gives power to the nation. Real GDP growth is at 1.3% and inflation at 5.5%. Overall trade balance is at $17 billion positive on a base of 500 billion dollars in trade, which once again captures the economic strength of the country and why it is a member of the BRIC.     Entering Brazil? There are many ways of doing business with Brazil. A point to note is that that the procedures are the same as any other country but one needs to understand the market dynamics of the country before selecting the method of entry. I would go with the appointment of a commercial representative from Brazil as mode of doing business. The person will be remunerated by a commission he gets on the volumes traded. For instance, the Sri Lanka Tea Board has selected this option post a private-public visit to Brazil and a representative legally bound with a MOU. This is ideal for a small-scale exporter as the detailed knowledge of the market can be sought whilst the language issue of dealing with retailers and media can be worked around. If need be detailed market research studies like test marketing and product concept feedback can be secured whilst making the representative handle all Customs procedures and related logistics.           The weakness in this option is that the export company does not have contact with the customers such as supermarket chains but given the complexities of doing business in Brazil this can be the most practical method of entry. Once the business grows an exporter can set up a local office in Brazil and have more control over the market. This means that an exit clause must be agreed upon with the commercial representative which will require strong negotiation. One option is the appointment to be confined to a three-year duration so that at the time of renewal one can explore this option.     Brazil – Issues? One of the key issues of doing business in Brazil that one must be aware of is the high tariff structure and the complexity of the system. Incidentally, the Sri Lankan portfolio of products currently exported attracts the highest taxes, which is where the opportunity lies for a Preferential Trade Agreement between the two countries. There are varied types of taxes charged for export items: Import Tax (IT) where the percentage charged varies based on the country of origin; Exercise Duty based on the type of product; Goods and Services tax to protect local industries; a social and security tax called COFINS at 7.6% and PIS at 1.65% which are standard to any product that comes into the country; another tax called AFRMM aimed at supporting the Brazilian merchant marine and shipbuilding/repair industry; SISCOMEX use fee that covers import declaration registration costs; and over and above that the usual costs associated with wharfage that is on movement of goods in a port is added to the end product.     With the integration of the economy with the rest of the world given that 223 billion dollars of export products come into the country, the above complexity will get ironed out. But, one must be cognisant of the above challenge. One option is to do a dummy costing or a shadow costing before arriving at the end product and meeting prospective customers in Brazil. This must be compared against the competitor products and may be indexed to determine attractiveness. A point to note is that price is a key determinant to purchase in the Brazilian market given the pressure on the purse which is a reality all over the world.     Current SL exports to Brazil For a typical Sri Lankan exporter, the current opportunities are industrial surgical gloves made with rubber in which Sri Lanka does around 15 million dollars of business on a market size of 230 million dollars in Brazil. Then comes woven fabric at 10 million dollars on a market size of 270 million dollars in Brazil. Apparel accessories and rubber tyres account for four million dollars each with a market size of one billion dollars each in the country which Sri Lanka must pursue and see how this can be driven with the Preferential Trade Agreement.   Next steps 1) It is worth categorising ‘Brazil as an export opportunity’ program for potential exporters that can be on a private-public partnership. The reason being that post the program, a private-public delegation can make a ground visit like what the Sri Lanka Tea Board tested successfully last year. 2) Probable commercial representatives can be lined up so that sector-wise relationships can be tied in, such as one dedicated for tea, fruits and vegetable, porcelain, rubber products, or it can be selected baskets of goods. 3) Based on the pick-up, may be a Sri Lanka export drive can be staged in key markets. For instance, Brazil’s northern region has a free trade industrial zone called Manaus where many consumer electronics assembling companies are housed. Hence market connectivity can be established with such programs. 4) Once the private enters and the critical mass comes into place there will be many agents appointed and some even opening liaison offices and subsidiary operations. 5) Whilst the penetration increases in the private sector, the policymakers can work on a Preferential Trade Agreement between Sri Lanka and Brazil taking into account the lessons learned on the FTA with India and Pakistan. [The author is a Board Director in the private and public sector in Sri Lanka and an award winning marketer by profession in his 15-year stint in top global multinationals and is a merit performer in the United Nations systems (UNOPS).]

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