How Brazil can diversify trade relations with Germany – 12/04/2023 – Market

One of Brazil’s main trading partners, Germany is President Luiz Inácio Lula da Silva’s last international destination this year. This Sunday (03), the head of the Executive arrived in Berlin for commitments that extend until Tuesday (5).

The official objective of the trip is to strengthen cooperation in commercial exchanges, close research partnerships and join forces in the fight against climate change.

One of the main commitments of the Brazilian government’s mission in German lands will be this Monday (4), when Lula and the Minister of Finance, Fernando Haddad, participate in the Germany-Brazil Business Forum.

On the German side, Federal Chancellor Olaf Scholz, from the Social Democratic Party (SPD), and Vice Chancellor and Minister of Finance and Climate Protection, Robert Habeck (Green Party), confirmed their presence at the event.

According to ApexBrasil (Brazilian Export and Investment Promotion Agency), organizer of the forum, Brazilian and German authorities will use the meeting to discuss the opening of new economic opportunities, with an eye on the Mercosur-European Union free trade agreement. .

Unfavorable balance for Brazil

Germany is fourth in the ranking of Brazil’s trading partners by business volume, ranking first among European countries.

The economic relations between the two countries, however, are quite clear: Brazil exports mainly primary products, while the German country’s imports are mostly industrialized products.

This means that the trade balance always tilts in favor of Germany. In 2022, the balance was negative at US$6.5 billion for Brazil, with US$12.8 billion in imports and US$6.3 billion in exports in the bilateral relationship.

From 2004 to 2022, the Brazil-Germany economic relationship experienced significant growth until the beginning of the 2010s, when it began to decline, before growing again from 2021 onwards.

That year, 0.6% of supplies from foreign countries to the German market were Brazilian – a number that was 0.7% in 2003 and reached 1% in 2013.

Germany, on the other hand, had 5.2% of the supplier market share in Brazil, after reaching 8.4% of the Brazilian trade share in 2003 and falling to 6.2% in 2013. The data are from the International Trade Trade Map Center (ITC).

“In recent years, Brazil and Germany have lost mutual relevance as suppliers, the latter, in particular, due to strong Chinese competitiveness”, explains Igor Celeste, Market Intelligence manager at ApexBrasil.

He recalls that more than half of what Brazil sells to Germany is concentrated in commodities such as coffee, soybean meal and copper ore, which points to the need for higher value-added exports from the country to Germany – which could benefit from trade between industries, for example.

“Germany is the tenth largest investor in Brazil and, among the thousand largest companies operating in Brazil today, 17 are German. In this sense, the opportunities are enormous in the renewable energy, health, mobility and infrastructure sectors. All of these sectors can use Brazil not only through its large domestic market, but as an export platform to Europe and other regions”, he adds.

Strategic partnerships

Another entity that will be present in conversations between the two countries during Lula’s trip to Berlin is the Brazil-German Chamber of São Paulo (AHK), which has represented German business in Brazil since 1916.

As Barbara Konner, vice-president of AHK São Paulo, explains, Brazil, as Germany’s only strategic partner in Latin America, can expand its presence in the German market.

To this end, she lists as main points the ratification of a Double Taxation agreement between Brazil-Germany, the conclusion of the Mercosur-European Union economic pact, in addition to actions in research and innovation, mainly in the field of sustainability and energy transition.

“[O Brasil] is the country predestined to be the major supplier in the area of ​​clean and renewable energy for Germany – and for the world”, highlights Konner, adding that Germany and Brazil can accelerate the green transition process through technology transfer and cooperation.

To achieve this, a bilateral strategy is needed with a focus on transition and the definition of standards, such as regulation for the international carbon market.

One of the main sectors for this energy transition, which became even more urgent with Russia’s invasion of Ukraine, is green hydrogen (H2V), highlights Igor Celeste, from ApexBrasil.

“The European Union and Germany intend to use the fuel to achieve carbon neutrality by 2050, but they are unable to produce it in the necessary quantity. In this case, Brazil has a lot to contribute, as it has been preparing to become a global hub for this clean energy”, he adds.

A study by the American business consultancy firm McKinsey states that the demand for H2V in Brazil could attract investments of US$ 200 billion by 2040.

Mercosur-European Union Agreement

Unofficially, the meeting of the leaders of both countries should have as its central point the trade agreement between Mercosur and the European Union, which has been stuck in recent years, but has the governments of Berlin and Brasília as two of the main parties interested in signing the treaty.

President Lula’s own roadmap points in this direction. The President of the Republic lands on German soil shortly after an incursion into the Middle East that ended with Brazil’s participation in the 28th United Nations Conference on Climate Change (COP28), in Dubai.

On December 7th, Lula will be in Rio de Janeiro to participate in the Mercosul Summit, Brazil’s last event in the rotating presidency of the South American bloc.

According to a study by ApexBrasil, export opportunities for Brazil with the reduction of tariffs between the two economic blocs would immediately exceed US$3 billion. The survey places 242 Brazilian products capable of competing on equal terms in the European bloc with the changes foreseen in the agreement.

“Germany concentrates 41% of these opportunities”, points out Igor Celeste. Sectors ranging from food and beverages to auto parts would benefit directly.

On the European side, AHK São Paulo estimates that European companies could save up to 4 billion euros per year in taxes and fees, if the agreement comes into force.

“This brings us to the sustainable aspect of this cooperation: we are talking about complying with the Paris Agreement and acting even more on the sustainability front”, highlights the vice-president of AHK São Paulo, Barbara Konner.

Political negotiations

However, a device proposed by the Europeans was harshly rejected by Lula and other South American leaders in the first half of this year.

The instrument provides for sanctions in the event of non-compliance with environmental requirements, banning exports of Mercosur products, such as coffee and soybeans, produced in deforested areas.

Unlike Germany, France is one of the countries that views the trade agreement between the two economic blocs with criticism, fearing that its producers will not be able to compete with South American producers.

“This trip is the last chance to move the Mercosur-EU agreement forward”, says the professor at the Institute of International Relations at UnB (University of Brasília).

He recalls that, as an argument for protecting the environment, the Brazilian government takes numbers that indicate a 22.3% drop in deforestation between August 1, 2022 and July 31, 2023 compared to the same period of the year previous, according to data from Inpe (National Institute for Space Research).

“Germany has every interest in this, as it is the most industrialized country in Europe. What Lula is doing on the trip is passing the ball to the European Union, hoping that Germany will put its weight in this direction. Because, if not If it happens now, the agreement will die”, he adds, remembering that, this month, the presidency of Mercosur will pass to Paraguay.

For Lia Valls Pereira, associate researcher at Ibre-FGV (Brazilian Institute of Economics of the Getulio Vargas Foundation) and senior fellow at Cebri (Brazilian Center for International Relations), the ratification of the agreement would also have a political effect that interests both countries: the multilateralism.

“It’s the idea that the Mercosur-European Union agreement is not just for Germany, but for Europe, and that it would reinforce the multipolar system and the multilateralism that they both defend”, he concludes.