Trade Liberalization Since the Early

Trade Liberalization

Since the early 1980s, Brazil has undergone a number of different regimes and therefore has had a number of different approaches to trade. Under the Cardoso regime, Brazil began its first serious policy of trade liberalization in the 1990s. This involved privatization, a real pegged to the dollar, and more encouragement of foreign direct investment, bringing Brazil into the global economic system (Pereira, n.d.). When the Cardoso regime collapsed amid a currency crisis, the Lula regime continued the process of trade liberalization, but with tighter controls and greater emphasis on the distribution of wealth throughout the entire economy (Morais, 2005). The country is now an active participant in the World Trade Organization and in Mercosur.

As a member of the WTO, Brazil is obligated to reduce its trade barriers. Import duties, which in the late 1980s were at around 50%, have now been reduced to an average of 14.2%. Non-tariff barriers have also been reduced dramatically in recent years (No author, 2011). There are still high trade barriers in some sectors, however, such as automobiles (Pearson, 2011) and telecom (EurActiv, 2010). In the past year, Brazil has increased trade barriers to protect local industries from a dramatic rise in the value of the real (Pearson, 2011).

Over the past thirty years, Brazil has also made significant changes to its exchange rate policy. Under the Cardoso regime, the real was fixed to the dollar. This was done in order to curb rampant inflation. This plan failed, however, and capital fled the country. The Central Bank was forced to raise interest rates to nearly 50% in an effort to defend the real, an effort that ended in failure. Eventually, the real collapsed in steep devaluation (Gabriel, 1999). The current exchange rate policy is more reasonable. While the real is nominally a floating currency, the central bank frequently takes measures to stabilize the value of the currency within a range acceptable to the government (Bristow & Soliani, 2011). The currency valuation is typically related to trade policy -- recent moves to curb the appreciation of the real have been designed to protect Brazil's exporters from the negative effects of currency appreciation.

The historical exchange rate between the real and the dollar is as follows (source: IndexMundi):

Inflation was very high in the early 90s, then was calmed under the pegged exchange rate regime. Since the real's collapse, inflation has remained relatively high in Brazil, but has been under control. In recent years, inflation is increasing as Brazil's economy is performing well. This puts downward pressure and the real and in turn has a negative impact on the country's export-driven businesses.