Brazil being a forward thinker by pulling Venezuela into Mercosur?

Dilma Rousseff’s government in Brazil has been heavily criticized by a large number of internal and external critics for cynically branding Lugo’s ouster in Paraguay a coup. This was promptly followed by the decision, along with Argentina and a reluctant Uruguay, to suspend Paraguay’s political rights in Mercosur, thereby negating the Paraguayan Congress’s veto over Venezuela’s  accession to the South American trade bloc. Uruguay’s justified complaints of marginalization aside, Venezuela’s entry into the bloc raises serious questions about the economic rationality of the grouping. Hugo Chávez is likely to be a huge barrier to a further widening of the bloc and a successful tackling of the myriad internal economic contradictions plaguing the trade arrangement. The chief complaint is that the Dilma/Cristina decision has effectively killed the economic logic of Mercosur and turned it into little more than a political plaything.

A quiet riposte to this critique is being whispered into the ether by Mercosur country officials (posted outside Australia). Their argument is that Brazil took a long view on Venezuela’s membership in Mercosur. Venezuela has become a good export market for Brazil, and officials not only hope it will continue to grow, but also will grow faster in the post-Chávez era, whenever that is.

Does this make sense?

The quick answer is perhaps, but you need to be a little bit optimistic. While Venezuela is not an insignificant market for Brazil, it is a bit of a volatile one thanks to the vagaries in oil prices.

Drawing on trade data from the Inter-American Development Bank Trade and Integration unit we get a picture of Venezuela as generally being under 2% of Brazil’s exports over the last decade. More to the point, we don’t really see any sustained growth past the 2007-2008 spikes in oil prices which predated the most aggressive period of the Brazilian real’s appreciation against global currencies.

Perhaps of more interest to Brazilian policy makers is  Venezuela’s share of exports from Brazil’s value-added industries. These are the economic sectors that create wider spread employment.

First, the total value-added export picture.

Over the last ten years Venezuela’s share of Brazilian value added exports has oscillated between 1.3% and 5.4% of the total, but in general has been fairly flat and in decline since 2007.

The picture is pretty much the same if we look at Brazil’s market share in Venezuela.

Brazil’s share of Venezuelan imports is relatively stable, experiencing a rise in share from when Lula was elected to the presidency in Brazil, but then entering into a period of sustained, if mild decline.

The significant point is that in the Chávez era the spikes in value-added exports from Brazil closely follow oil prices.

Again, the picture is rather mixed. Exports to Brazil as a percentage of total Brazilian exports vary with shifts in oil prices. But, what matters for Brazilian exporters struggling with competition from China is the rising importance in sectors such as textiles and ceramics.

There are two problems with this rosy spin. First, Venezuelan imports appear to be tightly tied to oil prices and are in decline.

The second is that Brazil appears to be losing value-added market share in Venezuela.

The overall message from the IADB/Intal trade data is that while the Venezuelan market matters for Brazil, it is not nearly as important as Argentina, Europe or the US. Clearly the hope behind the whispers is that this will change with Venezuela’s full accession to Mercosur. Of course, this leaves the question of how the bloc’s internal trade spats are going to become easier to manage with the entrance of another member, and a decidedly vocal and anti-capitalist member at that.

The spoiler in the negative analysis presented here is an account of business that Brazilian construction companies are doing in Venezuela and FDI flows, both of which are extremely difficult to track with any accuracy. Although exports in services (i.e., engineering services) do not show through the IADB trade stats, the transport equipment line in the last chart gives a sense of the importance of service exports — Brazilian firms have played a major role in projects such as expansion of the Caracas subway system.

Still, trade flows are not overwhelming and do raise questions about why there was suddenly a need to rush Venezuela into the bloc over the objections of Paraguay’s congress. Asunción’s beef was with Chávez (partly as a proxy for Lugo), not Venezuela, presumably making it likely that the Paraguayan Congress would have removed its veto fairly quickly once Chávez is out of office. Maybe Brazilian policy makers feel they can capture markets and contacts before the post-Chávez era begins. Of course, links to Chávez of any kind could be a major handicap should there be a major political change in Venezuela.

At the moment the whisper’s slipping into the ether are a tempting, but not quite a convincing explanation.

–Sean Burges

1 Comment

Filed under Analysis, Brazil, Foreign Policy / Diplomacy, MERCOSUR, Trade, Uncategorized, Venezuela

One response to “Brazil being a forward thinker by pulling Venezuela into Mercosur?

  1. Diana Tussie

    Construction services is the name of the game , plus the encirclement of Chavez , I think

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