Brazil's Dangerous Gamble

As the world’s fifth-largest cotton producer, Brazil has long been infuriated by the huge US cotton subsidies that skew the global market, undermining farmers from Mato Grasso to Mali. The World Trade Organization agrees--but Brazil's solution will do itself more harm than good.

Brasilia has announced a host of punitive tariffs on many US exports, from fruit to cars, plus a 100% tax on cotton. But the big threat is to temporarily suspend protection of American intellectual property rights or to abrogate them entirely. This includes patents protecting medicines and copyrights on audiovisual works.

The WTO gave Brazil permission last year for trade sanctions of up to US$830 million on US goods and Marcio Cozendey of Brazil’s foreign ministry said last week that Brasilia’s intention was “to distribute the retaliation broadly in order to maximise pressure.”

Brazil’s decision to target patented goods says a lot about its present economy and bodes ill for its future. Recent history shows its ambivalence towards the property rights of inventors--particularly foreign ones. Since 2001, Brazil has repeatedly threatened “compulsory licences” for US pharmaceuticals, which would allow local companies to copy patented drugs. Although this has mainly been a tactic to beat down prices, it did follow through in 2007 with a compulsory license on the HIV drug Efavirenz.

These actions are not without cost, as they send a signal that Brazil is hostile to innovation. This could leave the country stuck as a producer of low-value manufacturing and commodity-based exports. In the long run, this will cost it far more than it could gain from the removal of US cotton subsidies.

Despite emerging innovation in specialist sectors such as oil exploration and aeronautics, Brazil remains an ideas laggard. It produces only 1.7% of all global knowledge, versus the 8 to 9% produced by the far smaller United Kingdom, for example. Local research and development (R&D) accounts for less than 3% of what is spent in the United States, and most is funded by the public sector. The private sector in the USA spends 50 times more than total R&D in Brazil.

This is hardly surprising: investors are not going to risk their capital in Brazil when other jurisdictions offer stronger protection for their intellectual property rights. The 2010 International Property Rights Index ranks Brazil alongside the likes of Ghana and Burkina Faso--hardly powerhouses of innovation.

It is no coincidence that countries higher up the index, such as the USA, the UK, Switzerland and France, have international R&D-based pharmaceutical industries that deliver enormous benefits to the wider economy. Their Brazilian counterparts, by contrast, mostly confine themselves itself to low-value copying of others' inventions.

Agriculture and manufacturing have historically been important engines of growth for Brazil but, if it hopes to take a place at the top table of global economies, it has to diversify beyond such low-value-added industries. Innovative industries such as pharmaceuticals, aerospace and biotechnology are very important. Rattling the sabre at property rights-holders only delays this transition.

US subsidies are indeed an international problem and a major sticking-point of the ailing “Doha Round,” the WTO negotiations launched in 2001 to free trade for developing countries.

When the US Farm Bill was renewed in 2008, pressure group Oxfam stated:  “US cotton producers will receive about $1 billion annually in subsidies over the next five years,” and claimed these mostly go to the wealthiest farmers. In recent years, almost all US cotton has been exported, hitting smaller African farmers particularly hard.

But Brasilia is playing a dangerous game if Congress decides against scrapping the Farm Bill when it comes up for renewal in 2013, as it could degenerate US-Brazil trade relations into a mutually-harmful tit-for-tat. Other important industries such as energy, chemicals and aerospace could get caught in the cross-fire--hindering the global economy's uncertain recovery.

In this latest gamble, Brasilia will be staking domestic innovation and investment on one throw against the US farm lobby, trying to apply pressure on US legislators via their pharmaceutical industry. Even if Brazil wins against cotton subsidies, it will not have helped its own prospects. Growth needs secure institutions, not a patent system periodically shaken in the government’s hand like a cup of dice.

Hillary Clinton, U.S. Secretary of State, obliquely hinted that “we will be presenting ideas” and U.S. Trade Representative Ron Kirk has said that he hopes to strike a deal before April when Brazil begins to implement the sanctions. 

But if Brazil actually follows through, it will score a major own goal.