Technical Note - 2021 - December - Number 05- Dinte

Economic Impacts Of a Free Trade Agreement Between Mercosur And The US: A General Equilibrium Approach

Autores: Fernando J. Ribeiro e Alicia Cechin

Acesse o PDF (627 KB)

The United States and Brazil developed a profound trade relationship since World War II, not just because they are the two biggest economies in the American continent, but also because of the geographical proximity (at least in comparison to other huge economies in Europe or Asia) and due to a reasonable political and diplomatic alignment between the countries. For decades the US has been the most important export and import market for Brazil, and until the 2000’s they have a share between 20 and 25% of the Brazilian trade bill, rivalled only by the European Union and the neighbors in South America. Brazil’s share in total US trade flows has obviously been much lower, but the country has always played a relevant role for the US economy, not only in trade, but also in terms of foreign investment of US firms.

Another remarkable feature of US-Brazil trade is the product diversification. Brazilian exports to the US include many different kinds of products, with a relatively low share of primary commodities, in contrast to exports for other developed economies. The export bill to the US ranged from vehicles and parts, airplanes, oil derivatives, electronic equipment, machinery and tractors to basic metals, shoes, food, beverages, wood, pulp and textiles. The profile of US exports to Brazil is more similar to other supplying countries, but also diversified, with machinery and equipment, electronic equipment, vehicles and parts, oil derivatives, chemicals, electric appliance and pharmaceuticals. In fact, there has always been a great deal of intra-industry trade between the countries.

The landscape changed somewhat in the last 20 years. China took the place as the most important destiny of Brazilian exports, with sales that, in 2020, were three times larger than the ones going to the US, and imports that are 50% higher than the ones coming from the US. In fact, the bilateral trade flows have been virtually stagnated since 2008, although with significant fluctuations. In this period, Brazil’s market-share on US imports decreased from 1.5%% to 1.0%, and the share of the US in Brazilian export bill fell from 15% to 10%.

The pattern of bilateral trade has also passed through some changes. The share of agricultural, food and mining products in Brazilian exports increased from less than 10% in the beginning of the 2000’s to 25% in 2019-2020, mainly because of crude oil exports, that represented 9% of total bill in 2019-2020. In US exports, the increase of crude oil and refined petroleum products was remarkable in the last 20 years, going from 1% to 34% of the total bill, taking space from other products, like machinery and equipment, vehicles and parts, chemicals, medical and surgery equipment etc.

The low dynamism that was seen in recent, beside the size of the economies and their degree of productive diversification, make clear that there is potential for streamlining the bilateral economic relationship. One possible path, and, in a sense, an obvious one, is to negotiate a free trade agreement. This paper is dedicated to analyze the economic effects of an FTA between the US and Brazil – in fact, the US and Mercosur, as it’s a customs union – using a general equilibrium model. Section 2 presents the model used and the features of the simulations, that involves tariffs and non-tariff barriers reductions. Section 3 shows the results, concerning the main macroeconomic variables in both countries, the welfare effects, the sectoral effects in terms of production levels and foreign trade and the bilateral trade flows. Section 4 discuss the main conclusions of the exercise.