The birth of a contentious relationship www.coha.org

Elections in Brazil this weekend will mark an historic watershed in that country’s relations with the U.S. in the event of a victory by left-wing frontrunner Luiz Inácio Lula da Silva (Lula).  With a population fast approaching 200 million within a matter of years and a geographical area larger than the contiguous United States, Brazil is now set to break out from its more than 100-year run as playing a subordinate role to that of the U.S., as it strikes out on a new, more independent position in its bilateral relations with its northern neighbor.

In recent months, behind-the-scene tensions have slowly developed between the two nations over Brazil’s mounting assertions regarding its claim for a permanent position in the U.N. Security Council, its outrage over Washington’s application of punitive tariffs on Brazilian steel exports and the Bush Administration’s heavy subsidies of U.S. agricultural exports. The last undercuts the competitive standing in international markets of Brazilian commodities and industrial goods, most notably those of orange juice, sugar, cotton and soy beans.

In a weekend interview with Reuters television, Council on Hemispheric Affairs (COHA) director Larry Birns observed that Washington is ill-prepared to relate to Brazil in its new role as the hemisphere’s other giant, and that U.S. negotiators will have to make tough concessions to Brazil in upcoming Free Trade Area of the Americas (FTAA) trade talks, once a Lula administration takes office, especially if it intends to keep the country within the hemispheric trade zone it is now fashioning, and not lose it and other regional nations to the European Union bloc.

While Lula certainly will not become another Fidel Castro, and while the likely new president has stated he will honor all of Brazil’s current commitments to the international lending agencies, debt default cannot be entirely locked out, but would occur only in the most extreme of circumstances. There is no question that in terms of tone, style and content, Lula is not at all likely to follow the lead of current President Fernando Henrique Cardoso, who moved significantly to the right after taking office in 1994.  Under Lula’s leadership, Brazil is scheduled to have much closer relations with Cuba and cooler dealings with Mexican President Vincente Fox, who Lula is known to see as playing a surrogate role for the U.S. in pressuring Cuban reforms.  Significantly, more budgeting weight and concern will be directed to the country’s social needs, with less emphasis on privatization, deflation and contractionist fiscal policies.

Brazil’s current growing role in the international system has its origins in the period of 1902-1912, when foreign minister Baron de Rio Branco developed the Ministry of External Relations, known as Itamaraty, as an important institution for administering the country’s foreign policy. Rio Branco’s tenure witnessed a singular evolution in Brazil’s diplomacy, which defined the perimeters of the Brazilian nation and established inter-American commercial arrangements, legal processes and regulatory frameworks, but never challenged Washington’s supremecy. Washington’s perspective on Brazil’s role in international and Latin American politics also has evolved, filling it with some unease, as the “sleeping giant” has gradually assumed a larger role in both regional and global politics and commerce.

In the mid 1980s, Brazil, like most Latin American countries, experienced an economic revolution resulting from increased access to the U.S. and global market. However, the imbalance in U.S.-Brazilian bilateral economic relations is evidenced by the often asymmetrical nature of both countries’ trade ties. The tariff and non-tariff barriers affecting Brazilian goods, which has impeded the U.S. import of Brazil’s relatively inexpensive product-line, and the overvaluation of the Real in the early 1990s, reduced Brazil’s competitiveness and contributed to negative trade balances.

Recently, Lula’s popularity has caused a stir in financial markets as he came to almost double his lead in poll results ahead of Cardoso’s handpicked candidate, Jose Serra. International investors regard Lula’s leftist leanings and inexperience in managing a national economy with uncertainty, if not outright apprehension. Lula, who opposed the FTAA in the past, says he will support it only if the U.S. and Brazil are treated as equals in negotiations. In this context, there is speculation that Lula, whose views differ from the current government’s somewhat-idealized vision of hemispheric integration, would possibly be inclined to facilitate the establishment of bilateral negotiations over trade with the U.S., if he takes office. If a U.S.-Brazilian bilateral free trade area is established as an immediate step (which is highly unlikely at this time) the presently undefined future of FTAA could be relegated to a matter of secondary importance as the two continental giants end up turning their trade ties to their mutual advantage.

This analysis was prepared by John Galante, COHA research associate.

The Council on Hemispheric Affairs, founded in 1975, is an independent, non-profit, non-partisan, tax-exempt research and information organization.  It has been described on the Senate floor as being "one of the nation's most respected bodies of scholars and policymakers." www.coha.org

Spotlight By Roger Burbach* 29 October 2002

Elected in a landslide victory with over 61 per cent of the vote, Luis Inacio Lula da Silva will become president of Latin America's largest country, with 175 million inhabitants, on 1 January 2002. Lula, as he is commonly known, received three million more votes for president than George W. Bush did in the United States in 2000.

Leonardo Boff, a progressive theologian in Brazil, declares that Lula's triumph "represents the victory of a project from below, one of the poor". Lula's first act as president-elect was to create the Secretariat for Social Emergencies. Its primary responsibility is to end hunger and malnutrition among more than 20 million Brazilians. "If at the end of my presidential mandate every Brazilian has three meals a day then I will have realized my life's mission," Lula proclaimed.

This was Lula's fourth run for president. In this campaign he abandoned much of the leftist platform of previous campaigns, forging an alliance with more centrist political forces. This shift is symbolized by his choice of vice-president, Jose Alencar, who is Brazil's largest textile magnate and a leader of the centrist Liberal party. Alencar declares that the alliance is the product of a "novel political society", reflecting a new social pact, "where Lula represents labour and I represent capital". Asked why he accepted the position of vice-president, Alencar said: "In the history of civilization labour came first, and then capital. And also in my personal history... [I]t was labour that built my capital."

But it is an open question whether the United States and international bankers will adopt as enlightened a position as Alencar. Brazil has a public debt of 240 billion US dollars, the largest in Latin America. In the run up to the election on 27 October, foreign capital began to flee Brazil, leading to a depreciation of the country's currency, the Real, by over 40 per cent. Much of Lula's campaign questioned the free trade policies launched under the "Washington Consensus" during Ronald Reagan's administration in the 1980s. The consensus has meant not only the opening of Latin American markets to US trade, but also the privatization of state enterprises and the slashing of social spending in health and education.

According to a Brazilian financial advisory firm, ABM Consulting, the 10 largest banks in Brazil, including Citibank and BankBoston, earned returns of 22 per cent on their holdings in Brazil in 2001 compared to 12 per cent on a global level. George Soros, a forward-thinking international financier with significant holdings in Brazil, declares: "The system has broken down," it "does not provide an adequate flow of capital to countries [like Brazil] that need it and qualify for it."

The Bush administration, in its initial response to Lula's victory, declared that it "looks forward to working productively with Brazil". But, even before Lula's victory, the US under secretary of the treasury, Kenneth Dam, stated, "we have a contingency plan" if Brazil declares a moratorium on its international debt.

Dam provided no details, but the International Monetary Fund (IMF), the leading financial institution backing the position of Washington, moved to lock the future government of Brazil into an economic straightjacket when it lent 30 billion US dollars to the outgoing government of Fernando Henrique Cardoso, in an attempt to prop up the Real. Only 6 billion US dollars will actually be spent under Cardoso, while the remainder will be released to the incoming government if it has a budget surplus of 3.5 per cent. No government in South America has achieved such a surplus in recent years.

Right-wing pundits and policy strategists in the United States have already begun to criticize the Lula government. Constantine Menges, a Senior Fellow of the Hudson Institute who served as the Latin American adviser in the National Security Council under Ronald Reagan, recently released a study entitled "A strategic warning: Brazil". In it, he decries the "Castro-Chavez-Lula axis", referring to Fidel Castro of Cuba and populist President Hugo Chavez of Venezuela. Menges argues that these countries are "capable of pushing other South American countries to the left and establishing a dangerous alliance with communist China, as well as with Iran and Iraq, two terrorist countries". This would constitute a gigantic "South American left bloc", which would have a domino effect in countries like Colombia, Bolivia, Ecuador and Argentina.

While Lula certainly is not intent on provoking the United States by consorting with Iraq, he is looking to other Latin American countries to strengthen an independent economic stance and to expand regional trade agreements. His first international trip will be to Argentina, which has defaulted on its international debt and is Brazil's leading partner in the regional trade bloc known as Mercosur.

Lula has made it clear that he will not support the trade initiative of the Bush administration, the Free Trade Area of the Americas (FTAA), unless the United States abandons trade policies that discriminate against Brazil. Among other provisions, the FTAA advocated by the United States envisions the protection of Florida orange juice interests and Midwest soybean producers along with US steel exporters. Brazil is the world's largest exporter of orange juice, a leading exporter of soybeans and also exports large quantities of steel. (Interestingly, Lula began working in the metallurgical industry when he was just 14 years old.)

If there is one position Lula consistently articulated in this presidential campaign, it was his call for "expanding Brazil's productive capacity". In his last presidential debate with Jose Serra, who represented the outgoing government, Lula stated: "Brazil is a great country. It has enormous resources that we have not even begun to turn to the benefit of our people." The day after his election Lula proclaimed that budgetary restrictions would not prevent him "from expanding social programmes", decreasing unemployment and "expanding educational opportunities for Brazil's poorest".

*Roger Burbach is co-editor, with Ben Clarke, of September 11 and the US War (City Lights, 2002), and author of the forthcoming book The Pinochet Affair: Globalizing Human Rights. He is director of the Center for the Study of the Americas (CENSA) in Berkeley, California, USA.