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SPEECH/12/333

Karel De Gucht

European Commissioner for Trade

Brazil and the European Union:

Allies in a Changing World

International Conference: Strategic challenges in the EU-Brazil Relationship

Brussels, 7 May 2012

Ladies and Gentlemen,

One of the things we have learned over the course of this crisis is that no country or region is an island.

The torrents of goods, services and capital that flow physically and electronically between our economies bind us tightly to each other, for good or for ill.

In such a world the European Union needs an informed, strategic perspective on its key economic relationships.

So I am encouraged to see an event such as this in the heart of Europe and very pleased to be able to participate.

I will argue that the relationship between the European Union and Brazil is of strategic importance to both sides, and that we must both maintain policies favourable to open trade and investment if we are to maximise its potential.

To do this, I want to start by looking at the context of the relationship by asking three questions.

In the old Brazilian joke, the day the country's enormous potential would be reached was constantly retreating into the future. The first question, then, is whether the "country of the future" has finally arrived.

There is much to suggest that it has. When Brazil hosts the Rio+20 summit next month, the World Cup in 2014 and the Olympics in 2016 it will be presenting a new face to the world.

Already last December, its economy passed a milestone, overtaking the United Kingdom as the world's sixth largest national economy. So the scale of Brazil's expansion is impressive.

But its nature is even more so:

Brazil's growth has been broad-based: 40 million people were lifted out of poverty and into the middle class between 2003 and 2011.

Brazil's growth has also been stable: Low inflation rates have prevailed since the 1990s – a major achievement for an economy once ravaged by uncontrolled price rises.

And Brazil's growth has proven resilient: The economy did contract in 2009 but while the developed world saw dramatic falls in response to the financial crisis, Brazil shrank by less than 1% before clocking up a 7% increase the following year.

However, it would be wrong to stop there because, unfortunately the future looks less bright than before.

Last year, the economy grew by under 3%. This year it will likely grow faster, but still nowhere near the rate of 2010. And that is worrying because GDP per capita has quite a way to go before it reaches developed country levels: for example it currently stands at roughly one third of the European average.

Part of the reason for the reduced growth outlook is that Brazil's economy remains focused on primary products. It is a huge producer of ethanol and likely to become a significant oil exporter in the coming years. It is also the world's third largest agricultural exporter and one of the biggest exporters of minerals.

These are, of course, marks of success. But that success may also be hampering the economy's ability to produce products with a higher added value. This is because success in commodity markets and high commodity prices, create inflationary pressures and have played a role in the 29% appreciation of the real since 2007.

A second challenge is the business environment, where the so-called "Custo Brasil" – which includes infrastructure, regulation and financing - has been a limiting factor on companies' growth. Brazil, like Europe, needs policies of smart regulation, infrastructure development and improved access to finance.

A third risk is the growing tendency towards protectionism across Latin America. There has for many years been a debate about open markets in the region. In recent weeks we have seen that debate heat up again with Argentina's move against a Spanish company's stake in YPF, an oil company. Argentina has also continued other trade restrictive policies, like its import-licensing regime. And just last week we saw Bolivia take another step towards nationalising utility companies at the expense of a Spanish firm.

These types of moves are of course a problem for Argentina and Bolivia – which will find it harder to secure the international investment they need.

They are also a problem for the European Union – as our companies are directly affected. That is why we will soon be moving forward with a response to Argentina's action in the REPSOL case, in particular.

But they are also a problem for Brazil - because it has so much to lose from a trend towards protectionism in the region. It is worth remembering that 20% of Brazil's exports are to other Latin American countries. An integrated Latin America would allow Brazil to expand that trade. But it would also create continent-wide economies of scale, making it easier to compete on global markets.

Brazil should be proud of the enormous progress it has made in recent years but must also know that it cannot sit still if it wishes to move to the next stage of its development.

The second question we need to answer is where Europe stands today.

Certainly the global economic crisis has affected Europe more than it has Brazil.

It is tempting in such a scenario to focus on the negative.

But while I recognise that major risks persist I think it is very important to stress the enormous progress that Europe has made. On the fiscal side we have created an immense firewall, provided assistance to countries who have needed it and put in place a reinforced system of economic governance. At national level Member States across Europe are taking tough but necessary measures to improve their fiscal position.

And we also know that a bird doesn’t fly on one wing. Austerity alone will not bring fiscal stability. That is why we are also moving to reinforce growth, through the Europe 2020 strategy, the completion of the Single Market, targeted infrastructure spending and - last but certainly not least – an active trade policy.

Indeed, if you look at Europe's performance on international trade and investment the picture is very positive. We remain the world's largest exporter, importer, foreign direct investor and recipient of foreign direct investment. And our share of world exports has held steady at around 20% though new trading powers have emerged.

So even if Europe is in tough times we are moving in the right direction, and international trade and investment are crucial parts of our strategy.

The third question we need to answer is what direction the world is taking. The answer is towards increased multi-polarity and economic interdependence.

Brazil is only one of several emerging powers playing an increasing role internationally. This makes decision-making on global issues more complicated. I believe that we are well prepared to face this change in Europe, with our traditions of compromise and cooperation. But it is a new era nonetheless and one where all players will need to learn.

Part of the reason for the rise of these new powers are the great changes we are seeing in the intensity of global economic interdependence. World trade now amounts to nearly half the value of world output, compared to under 20% in 1960.

And the phenomenon of global value chains means these figures in fact underestimate the extent of economic integration. Today, products are no longer made in one place from start to finish. Instead they are put together over a long series of individual steps in different parts of the world. In fact, in many sectors, no single country has the capacity to make the products on its own any more.

Given the answers to those three questions about Brazil, Europe and the world I think you will agree that we should seek to strengthen our relationship.

So what can we do for each other specifically?

Let's look first at what Europe can offer Brazil.

On one level of course, it's simply economic: Europe is already Brazil's biggest trading partner, making up 22% of its total trade. We are also the largest investor in Brazil, holding more than 40% of the total in 2009.

So Brazil would clearly benefit greatly from greater European investment and from enhanced access to our Single Market of 500 million consumers.

By the way, our other trading partners also know this, which is why they are flocking to our door demanding free trade agreements. As a result, we are creating a comprehensive network of these arrangements, starting with Korea and continuing across the globe. Staying outside that framework therefore doesn't mean keeping the status quo. Rather it means a gradual increase in the intensity of competition faced on the European market.

A close economic relationship with Europe also allows Brazil to balance its relationships with its other major partners – the United States and, increasingly, China.

On top of this, economic relations with Europe also offer opportunities for Brazil to move up the value chain. European investments in Brazil are in key sectors like banking, telecoms and automotive and – in addition to primary products - Europe imports products like jets, software and processed foods.

European companies are also world technological leaders in the infrastructure that Brazil needs to take it to the next stage of development - whether in transport, sanitation, logistics or oil and gas exploration. Many European companies are already assisting in upgrading Brazil's infrastructure under the Accelerated Growth Programme. This is an area that could certainly be enhanced.

And on a broader point, strategic cooperation with Europe can help Brazil advance its objectives on global issues. This is because we have many of the same concerns thanks to our shared values born of a shared heritage: Over a third of Brazil's population is of European descent.

We have already been able to find common cause on a wide range of issues, be they economic, social, environmental or the more fundamental questions of democracy and human rights. More is possible.

Looking in the other direction, what can Brazil do for Europe?

Again, economics are at the core. Brazil, as we have seen, is a now a leading emerging market that European companies cannot afford to ignore. Europe's investment stock in Brazil exceeds our investments in China and India combined. Brazil is also an export destination and a source of raw materials, components, finished products, and capital.

But it is also a country with a rising influence on the world stage. As the "B" in BRIC, it has become a crucial actor in international fora like the G20, the WTO, the World Bank and the IMF. And given the shared values I already mentioned, Brazil is a natural ally for the European Union. Our fundamental goal is the same: we both wish to promote a fair and predictable international order based on the rule of law rather than the law of the strongest.

There is, then, a long list of reasons why Europe and Brazil should work more together.

Allow me to conclude by suggesting two specific actions:

The first is on protectionism. As regional and global leaders, both the European Union and Brazil have responsibilities on this issue. And yet, while Brazil has been heavily affected by Argentina's import licensing regime, for example, its leaders have not taken a strong public stand against it.

Instead it has kept relatively quiet while adopting a number of questionable policies of its own, such as discriminatory taxation on imported cars, local content requirements in telecommunications, and burdensome import procedures for textiles. Brazil has also begun to raise the issue of exchange rates in the context of the World Trade Organisation. We support exploring this issue but not if it is an excuse to raise tariffs and close markets.

I believe Brazil should be taking just the opposite approach here – speaking out forcefully and leading by example. That is, after all, where its interests lie. For Brazil to grow it needs more economic integration in the region and with the wider world.

Which brings me to the second area for action, our on-going negotiations to establish a free trade agreement between the European Union and MERCOSUR.

That they have lasted for so long is unfortunate because a deal would deliver real benefits. Our estimates show that trade between the regions would increase by roughly 9 billion euro a year. This would be followed by enhanced investment in both directions.

If this deal is to be done it is important that we do not see our respective interests too narrowly. They are not limited to agricultural products for Brazil and Mercosur and manufactured ones for the EU. The reality is that we all want to produce and trade high value products and components. We all have an interest, therefore, in broad-based opening.

Brazil will take over the presidency of MERCOSUR from Argentina in July. I believe that means there is a window of opportunity to make progress. We should use it.

Ladies and Gentlemen,

The European Union and Brazil are natural partners in a changing world. I believe that if we can make progress on our economic agenda we will be laying solid foundations for a stronger alliance across all areas.

Your discussions over the next few days will also contribute to that alliance. I look forward to hearing the results.

Thank you very much for your attention.


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