This paper examines Brazil's evolving approach to trade liberalization and exchange rate policy from the early 1980s through the early 2010s. Beginning with the Cardoso regime's privatization efforts and dollar-pegged currency in the 1990s, it traces the country's transition to the Lula era's more socially conscious liberalization, participation in the WTO and Mercosur, and gradual reduction of import tariffs. The paper also analyzes Brazil's turbulent exchange rate history — including the collapse of the pegged real, the subsequent shift to a managed float, and the tensions between currency appreciation and export competitiveness — concluding with a brief assessment of how these policies have affected economic growth and trade.
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Since the early 1980s, Brazil has undergone a number of different political regimes and, consequently, 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 currency pegged to the dollar, and greater 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 stood at around 50%, have since been reduced to an average of 14.2%. Non-tariff barriers have also been reduced dramatically in recent years (No author, 2011). High trade barriers remain in certain sectors, however, including automobiles (Pearson, 2011) and telecommunications (EurActiv, 2010). In the period covered by this paper, Brazil had also increased trade barriers in some areas to protect local industries from a sharp rise in the value of the real (Pearson, 2011).
Over the past thirty years, Brazil has made significant changes to its exchange rate policy. Under the Cardoso regime, the real was fixed to the dollar in order to curb rampant inflation. This plan ultimately failed, 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 also ended in failure. Eventually, the real collapsed in steep devaluation (Gabriel, 1999).
The subsequent exchange rate policy proved more sustainable. While the real is nominally a floating currency, the central bank frequently intervenes to stabilize its value within a range acceptable to the government (Bristow & Soliani, 2011). Currency valuation is typically linked 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 a strengthening currency. For a broader overview of how exchange rate policy affects international trade, the dynamics at work in Brazil illustrate many of the classic tensions between export competitiveness and currency stability.
"Inflation trends linked to exchange rate regimes"
"Evaluating policy outcomes and trade-offs"
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