Brazil WT/TPR/S/75
Page 1
I. ECONOMIC ENVIRONMENT
(1) OVERVIEW
1. The main macroeconomic development since Brazil's previous Review in 1996 has been
the adoption of an inflation-targeting framework (June 1999) following the floating of the real in
January 1999, triggered in particular by a series of external and domestic financial difficulties but also
by a deterioration in terms of trade.  Developments in economic activity have been better thanexpected after the float;  GDP recorded slightly positive growth in 1999 and underwent rapid
expansion in the first half of 2000.  This rapid recovery was facilitated by the marked change in
Brazil's economic policy stance since the early 1990s, moving away from market management
towards an outward-oriented, market-driven economy, supported by disciplined financial policies.  In
consequence resource allocation has become more flexible, allowing the economy to deal moresuccessfully with external and other stocks.  The improved output performance was reflected in a
slight decline in unemployment, while inflation has been kept in line with the Government's target.
However, up to mid-2000, developments in the external trade balance were less favourable than the
authorities expected: although the current account deficit declined, export growth has been dampened
by a deterioration in the terms of trade.  In 1999, net capital flows were negative despite a substantialincrease in foreign direct investment.
2. By removing the distortions created by an overvalued exchange rate, the floating of the real
should have reduced the previously perceived need to adopt trade-related measures to restrict
imports
1;  the same is true for export promotion, aspects of which have been successfully challenged
at the WTO (Chapter II).  Although some of those trade measures have in fact been removed or are
scheduled to be phased out, others remain in place.  This is in part linked to continued high domestic
interest rates, which the authorities deem impose an unjustifiable handicap on Brazilian producers vis-à-vis foreign competitors (Chapter III).
(2) M
AIN ECONOMIC DEVELOPMENTS
(i) Economic growth and structure of the economy
3. Since 1996, economic growth has been uneven, in large part as a result of external shocks.
In 1997, GDP expanded by 3.6%, compared with 2.7% in 1996;  the economy stagnated in 1998,partly reflecting the adverse impact of the Asian and Russian crises and domestic fiscal difficulties,
which triggered the adoption of a restrictive monetary policy, before beginning to recover in 1999
(Table I.1).  The better performance of GDP helped to enhance confidence, both domestically and
abroad, which eased financing constraints and facilitated a gradual reduction of interest rates.
In 2000, GDP growth was projected to accelerate to around 4%.
2  Despite recent gains, real GDP per
capita in 1999 was just above the level attained at the end of the 1980s.3
4. Growth has been mainly led during the period by domestic consumption, at the expense of
savings and with a consequent widening (except in 1999) of the trade deficit.  Investment (i.e. fixed
capital formation plus changes in inventories) has remained stable, at around 21% of GDP.  An
increase in investment in machinery and equipment has been associated with an increase in labour
                                                     
1 Central Bank (1997).
2 Ministry of Finance (1999).
3 Central Bank (2000a) Table I.2.WT/TPR/S/75 Trade Policy Review
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productivity4;  those gains have contributed to economic stabilization by reducing costs and prices
although they have also generated layoffs in the short term, particularly in the manufacturing sector.5
5. Unemployment increased throughout the 1996-98 period.  This was to some extent a result of
both the adoption of labour-saving technologies an d of restrictive macroeconomic policies. In 1999,
the unemployment rate showed a slight reduction due to an expansion of jobs in the services sector.
Unemployment was expected to decline further in 2000, as GDP growth accelerates.  Out of Brazil's71.7 million persons employed in 1997, some 9.3 million were employed in the urban informal
sector.
6  Within the informal sector, the most important activity in terms of employment is commerce
and services, i.e. the provision of domestic, repair, personal, and entertainment services.
6. There has been little change in the structure of the Brazilian economy since 1996.  Services
continues to be the most important sector of the economy (Table I.1), and one that has undergone a
considerable process of modernization in recent years (Chapter IV(5)).  Manufacturing is the second
largest sector, followed by agriculture and mining.  Brazil has a diversified and advanced modern
manufacturing sector;  its well developed agricultural sector has made Brazil one of the world's largest
producers and exporters of agricultural goods.
7. Macroeconomic policy changes affected the performance of the various sectors in the
1996-99 period.  The manufacturing sector, especially the production of intermediate and capital
goods, experienced strong growth in 1997, but contracted in 1998, partly as a result of weaker demand
and the negative impact of higher interest rates.7  The decline continued in 1999 (Table I.1).  A survey
by the National Confederation of Industry (CNI) shows that the number of hours worked in
production, and the level of capacity utilization also fell in 1999;  the capital goods sector, together
with consumer durable goods, displayed the largest drop.
(ii) Fiscal policy
8. Since the introduction of the Real Plan in 1994, fiscal equilibrium has been a priority for
Brazil.  The country has been running small fiscal deficits of some 1% of GDP since 1996 (Table I.1).
Fiscal austerity became a key element for Brazil to recover from the effects of the Asian and Russian
crises.  Thus, in 1998, Brazil adopted a fiscal package aimed not only at balancing public finances butalso at attaining a surplus in the public sector accounts.  As a result, in 1999 the public sector accounts
improved:  the overall deficit fell to 0.5% of GDP, while the primary balance reached a surplus of
3.1%.
8  However, following an announcement by Minas Gerais and other States concerning the
renegotiation of debt repayment to the Federal Government, market confidence in the success of
Brazil's fiscal stabilization plan decreased and led to a net outflow of capital.9  Brazil agreed with the
IMF to attain primary surpluses of 2.6% of GDP in 1999, 2.8% in 2000 and 3% in 2001.10
                                                     
4 Capital formation increased from R$163 billio n in 1996 to R$ 191 million in  1998 (Central Bank,
2000a).
5 Productivity estimated as the quotient between industrial production and hours paid in production.
Central Bank (1997).
6 Government of Brazil.
7 Central Bank (1998).
8 Ministry of Finance (2000a) and Government of Brazil.
9 IMF (1999b).
10 Ministry of Finance (undated).Brazil WT/TPR/S/75
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Table I.1
Basic macroeconomic indicators, 1995-99
1995 1996 1997 1998 1999
I. Gross domestic product
GNP current (R$ million) 636,038 766,659 847,001 877,452 978,782
GDP current (R$ million) 646,192 778,887 864,111 899,814 1,011,931
Share of GDP (%)
   Agriculture 9.0 8.3 7.9 8.4 n.a.
   Mineral extraction 0.9 1.0 0.9 0.7 n.a.
   Other industrya35.8 33.8 33.9 33.3 n.a.
   Services 54.3 57.0 57.3 57.6 n.a.
Real GDP  (% change)
   Total 4.2 2.7 3.6 -0.1 1.0
   Agriculture 4.1 3.1 -0.2 0.0 9.5
   Industry 1.9 3.3 5.8 -1.3 -1.7
   Services 4.5 2.3 2.7 0.8 1.3
As % of GDP
      Private and government consumption 79.5 81.0 80.9 81.4 n.a.
      Gross investment 22.3 20.9 21.7 21.3 n.a.
      Gross domestic savingb19.0 17.4 17.1 16.1 n.a.
Resource balance as % of GDP
   Exports of goods and NFS 7.0 6.6 7.1 7.2 9.4
   Imports of goods and NFS 8.4 8.2 8.9 9.1 10.5
II. Employment and prices
% change
Rate of unemployment  (Dec)c4.44 3.82 4.84 6.32 6.28
Consumer price index (IPCA) 66.0 15.8 6.9 3.2 4.9
III. Money and interest rates
Monetary survey (end of period;  annual change)
    Money as means of payment (M1) 25.1 4.6 58.9 7.1 22.7
    M2d52.0 55.6 21.4 24.5 38.0
    M4 (M2 plus savings deposits and private securities) 44.8 28.5 21.8 15.5 21.4
Interest rates (%)
   Savings (compound annual rate) 39.74 16.34 16.55 14.43 12.24
   Deposits 90 days to 1 year n.a. 26.18 23.86 26.21 24.71
   TJLP or long-term interest rate (compound annual rate) 17.72 11.02 9.89 18.06 12.50
   Lending 90 days to 1 year 154.51 74.12 61.59 64.69 61.36
IV. Fiscal balancee
As % of GDP
   Government revenue 13.4 12.5 13.4 15.5 15.7
   Government expenditure 14.0 13.6 14.1 16.5 16.2
   Surplus/deficit -0.6 -1.2 -0.7 -1.0 -0.5
V. Public sector borrowing requirementf
As % of GDP
   Total primary -0.36 0.09 0.98 -0.01 -3.12
   Federal Government and Banco Central do Brasil -0.58 -038 0.32 -0.56 -2.28
   State and local governments 0.17 0.55 0.73 0.19 -0.22
   State enterprises 0.05 -0.08 -0.07 0.35 -0.82
a Manufacturing, construction and electricity, gas, and water.
b GDP less consumption.
c Ratio of number of people seeking employment or awaiting the result of an employment offer at the time of the survey to the 
number of economically active people aged 15 years or older.
d M1 plus financial investment and short-term fixed income funds plus federal, state and municipal securities.
e Based on National Treasury performance summary on cash basis.f Based on Banco Central do Brasil – Press Release.
Source : Banco Central do Brasil, May 2000 Bulletin [Online].  Av ailable at:  http://www.bcb.gov.br/ingles/economic/, and
past issues;  and  Instituto Brasileiro de Ge ografia e Estatística [Online].  Available at:
http://www.ibge.gov.br/estatistica/indicadores/PIB.WT/TPR/S/75 Trade Policy Review
Page 4
9. In order to consolidate fiscal equilibrium in the long run and promote efficiency in tax
collection, the authorities adopted a  Fiscal Stabilization Programme in 1998, which has two
components.  The first, aimed at dealing with the roots of the fiscal disequilibria, encompassed the
approval of constitutional and legal reforms in areas such as social security, public administration, and
taxation, as well as the introduction of a Fiscal Responsibility Act, addressing fundamental fiscal
issues at the three levels and branches of government (Box I.1).  The second, the Plan of Action for1999-2001, was aimed at stabilizing the debt/GDP ra tio.  The Plan contemplates the reduction of
budget expenditures as well as revenue increases.  Particular attention is attached to the main cause of
fiscal disequilibria, i.e. the social security deficit at the three levels of government.
11
Box I.1:   Selected fiscal initiatives
Administrative reform regulation:
The constitutional amendment for the reform of the public administration was approved in June 1998.  The
reform covers the following points:  (i) enacting a ceiling for payroll expenditures at the federal government
level;  (ii) criteria for dismissal of civil servants whenever payroll expenditures exceed 60% of revenues;
(iii) establishment of a new regime for federal government public officials, introducing greater flexibility tothe present regime and a swifter process of dismissal in case of unsatisfactory performance.  Implementationshould be in effect in a maximum period of two years. Sanctions for States and municipalities are establishedfor non-compliance.  In the transition period States cannot increase salaries or benefits nor are they allowed to
admit new officials.
Social security reform:
The reform of the social security would establish a ne w regime for public and private employees.  The main
features are:  (i) elimination of the possibility of retirement based exclusively on the number of years inservice; (ii) establishment of a minimum age for retirement (60 for men and 55 for women) as well as of aminimum period of contribution to social security before retirement (35 years for men and 30 years forwomen);  (iii) elimination of exceptions to the retirement rules and of special privileges associated to it;
(iv) establishment of a ceiling for social security benefits payments;  and (v) prohibition of the establishment
of special funds within public administration to grant special retirement benefits.
The Fiscal Responsibility Law:
The absence of a general law providing prudential rules for fiscal management, expenditure control and level
of indebtedness is one of the main structural caus es of public sector fiscal disequilibria.  A Fiscal
Responsibility draft law, approved by Congress on 4 May 2000, will define principles and rules of a prudent
management of public resources.  It will also establish ceilings to public sector expenditure at the three levelsof government, indebtedness at all levels of government, as well as the imposition of sanctions associated withnon-compliance of the established principles and rules.  St ates will be required to define fiscal targets and give
them legal force.
The tax reform:
The main objectives of the tax reform are:  (i) to redu ce the number of taxes and other contributions of a social
nature on consumption;  (ii) to simplify the tax system and reduce the cost of tax collection without reducingtax revenues;  (iii) to ensure a tax burden not lower than the present level;  and (iv) to restructure taxcollection. Indirect taxation is also to be reformed.  The proposal entails the consolidation and streamlining ofmost of the existing indirect federal, state and munici pal taxes into a national VAT, to be shared among all
levels of government, complemented by a retail sales tax with a low rate and by selected excises at the federal
and state levels.  The proposed reform is aimed at eliminating the scope for "fiscal wars" among States,
reducing evasion, and minimizing distortions due to tax cascading.
Source: "The Brazilian Fiscal Stabilization Programme" [Online].  Available at:
http://www.fazenda.gov.br/ ingles/ipef.html [18 January 2000];  and Ministry of Finance (1999),"Memorandum of Economic Policies", 5 July [Online].  Available at:  http://www.fazenda.gov.br/ingles/ ajuste/ifmimte01.html [18 January 00].
                                                     
11 Ministry of Finance (undated).Brazil WT/TPR/S/75
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10. In 1999, additional measures were announced to improve the fiscal balance, in the event
leading to an increase in domestic energy prices and other public tariffs and the submission to
Congress of legislation increasing the social security contributions of military personnel.  Most of the
privatization receipts have been used for debt reduction, thus facilitating a decline in the overall
public sector deficit and debt.
11. On the expenditure side, the Federal Government contained its payroll, reducing the budgeted
federal expenditures on wages and salaries in an amount equivalent to 0.18% of GDP.  The recent
legislation regulating the implementation of the constitutional administrative reform will require
similar, or even greater, efforts by state and local governments.  A moderation of the growth of social
security benefits should result from the implementation of the constitutional amendment for the
pension reform and from ongoing administrative efforts in this area.  The remaining subsidyprogrammes will continue to be contained, and other current and capital spending in the federal
budget will also be capped.  Moreover, the authorities have identified expenditure priorities, which
include programmes linked to development strategies centered on specific regional axes.
12
(iii) Monetary policy
12. Monetary policy has remained cautious since 1996.  Brazil's overriding objective of monetary
policy is to secure low inflation at one digit level (see below).13  During 1996, the Central Bank of
Brazil (BCB) gradually reduced the interest rates in line with the decline of inflation.  In April 1997,
the BCB departed from the secondary policy objective of gradually reducing interest rates, leaving its
basic intervention rate unchanged until the end of October, when Brazil’s currency came under
pressure following the turmoil in financial markets in Asia.  The authorities reacted by doubling
interest rate on 30 October 1997.14  After the Russian moratorium in August 1998, which generated a
large capital flight from emerging markets, Brazil raised short-term interest rates and announced astrong tightening of the fiscal regime.
15
13. Until the beginning of 1999, the Government had opted for a flexible system of adjustable
exchange rate bands consisting of a wider band (adjusted once a year) and a narrower band (adjusted
several times a month).  Following strong pressures on foreign exchange reserves, in January 1999,
the BCB widened the exchange rate fluctuation band, and stepped up interventions in the spot andfuture markets.  Pressures, however, did not abate, and by mid-January the real was allowed to float.
The exchange rate averaged R$1.52/US$ in Janu ary and R$1.91/US$ in February compared with
R$1.21/US$ just prior to the change in regime.
14. Under the new exchange rate regime, the use of the Central Bank's reserves is limited to
countering disorderly market conditions.  In line with its commitment to a freely floating exchangerate regime, the BCB has largely refrained from direct intervention in the foreign exchange market.
16
15. Following the shift in mid-January 1999 to a flexible exchange rate regime, monetary policy
was geared at avoiding sustained acceleration of in flation and inflationary expectations due to the
depreciation.  Interest rates were increased;  this , in conjunction with restraining growth in the
monetary and credit aggregates, was instrumental in  allowing an early correction of the exchange rate
                                                     
12 Ministry of Finance (1999).
13 IMF (1999a), 8 March.
14 IMF (1997), IMF Concluded Article IV Consultation with Brazil [Online].  Available at:
http://www.imf.org/external /np/sec/pn/1998 [26 October 1999].
15 Central Bank (undated).
16 IMF (1999a), 12 November.WT/TPR/S/75 Trade Policy Review
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overshooting, and achieving a rapid decline in the monthly rate of inflation.  Since then, the BCB has
reduced interest rates in steps, and has kept a downward bias.17
16. Despite the systematic reduction both in base interest rates and compulsory deposits/reserve
requirement, the cost of credit remains high (Table  I.1).  The persistence of large spreads is caused
mainly by the risk of default, administrative costs, indirect and direct taxes, and the bank profits.18
The BCB has adopted a set of measures to reduce the cost of credit, inter alia , a reduction from 6% to
1.5% in the tax on financial transactions (IOF) rate for operations with individuals;  a reduction of
compulsory deposit on balances of time deposits and other funds;  and the inclusion of borrowers of
sums exceeding R$20,000, as against R$50,000 so far, in the Central Bank Risk Centre(Chapter IV(5)).
19
17. In mid 1999, the Government instituted a formal inflation-targeting framework for monetary
policy.20  The Minister of Finance announced the targets for inflation in consumer prices, as measured
by the increase in the Broad Consumer Price Index (IPCA) through the year:  8% in 1999, 6%
in 2000, and 4% in 2001 (in each year with a tolerance interval of +/-2 percentage points).21
18. Under the inflation-targeting framework, m onetary policymakers make decisions based on
conditional forecasts of future inflation, conditional on alternative interest rate paths on the best
estimate of the current state of the economy and the probable future development of exogenous
variables.22  In its quarterly reports the BCB states the considerations that guided its policy in the
preceding quarter, and the inflation performance during that period, as well as its forecast of future
inflation and its policy response to them.  Inflation forecasts are based on a range of indicators,inter alia,  an ongoing survey of market expectations;  short-term forecasting models and structural
econometric models of the transmission mechanisms of monetary policy;  and an ongoing assessment
of prospects for relevant economic variables, including the exchange rate, fiscal policy, and aggregate
demand conditions.  In its conduct of interest rate policy, the BCB responds to any pressures on net
international reserves or to exchange rate develo pments that may threaten the achievement of the
inflation target.
23
19. During 1996-98, the IPCA decreased, but in 1999 it edged up due mainly to the depreciation
of the real (Table I.1).24  However, the passthrough of the exchange rate depreciation to consumer
prices was low, as a result of the firm stance of macroeconomic policies, the absence of formal
indexation mechanisms, and the still significant output gap.25  Other factors were an adequate supply
in agricultural products, and the enhanced foreign competition generated by the process of economic
liberalization that has marked recent years.26  A prudent monetary policy, along with strengthened
fiscal adjustment and a firm wage policy in the public sector, remain instrumental in preventing the
recurrence of an inflationary spiral and ensuring a ra pid deceleration of the rate of inflation, following
the initial impact of the depreciation of the real on the prices of tradeable goods.
                                                     
17 Ministry of Finance (1999).
18 Central Bank (1999a).
19 Ministry of Finance Directive No. 385, 14 October 1999 in Central Bank (1999b);  Central Bank
Circular No. 2.938, No. 2.939, No. 2.940, and No. 2.941, 14 October 1999.
20 Decree No. 3.088, 21 June 1999.
21 Ministry of Finance (1999).
22 Central Bank (undated).
23 Ministry of Finance (1999).
24 Annual accumulated end-year IPCA figures would produce different results.
25 IMF (1999a), 12 November.
26 Central Bank (1998).Brazil WT/TPR/S/75
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(iv) Balance of payments
20. Brazil consistently ran a current account deficit in the period 1996-99, reflecting net deficits
in both trade in goods and services (Table I.2).  The performance during this period of the trade
account could be attributed, inter alia , to the relatively depressed demand conditions in some of
Brazil’s major trading partners;  a slow response of e xport volumes to the float of the real in 1999;  a
less steep decline in import volumes (in line with  the stronger than anticipated domestic demand);
and a significant deterioration of the terms of trade (i.e. international oil prices recovered, while the
price of commodity exports remained depressed).  Deficits in the services account are largely due to
interest payments negative profits and dividend net flows.
Table I.2
Balance of payments, 1995-99
(US$ million)
1995 1996 1997 1998 1999
Overall balance 13,479 9,016 -7,846 -17,284 -10,739
Current account balance -17,973 -23,142 -30,909 -33,615 -24,379
   -Trade balance -21,947 -26,042 -33,125 -35,394 -26,419
     - Merchandise trade balance -3,352 -5,599 -6,846 -6,593 -1,207
        - Merchandise exports, f.o.b. 46,506 47,747 52,994 51,140 48,011
        - Merchandise imports, f.o.b. 49,858 53,346 59,840 57,733 49,218
     - Services -18,595 -20,443 -26,279 -28,801 -25,212
        - Revenues 8,708 10,377 11,890 13,220 12,020
        - Expenditures 27,303 30,820 38,169 42,021 37,232
  -Unrequited transfers 3,974 2,900 2,216 1,779 2,040
     - Revenues 4,225 3,168 2,542 2,221 2,335
     - Expenditures 251 268 326 442 295
Capital account balance 29,359 33,958 25,974 20,197 13,805
   - Investment & reinvestment 5,047 16,071 20,813 20,644 30,122
   - Long & medium-term capital loans 14,736 22,886 28,964 41,596 27,963
   - Financing 2,834 4,307 19,621 20,702 16,033
   - Amortizations -11,023 -14,419 -28,714 -33,587 -51,905
   - Short term capital 18,834 5,403 -18,934 -27,299 -5,861
   - Other capital -1,069 -290 4,224 -1,859 -2,547
Errors and omissions 2,093 -1,800 -2,911 -3,866 -165
Changes in reserves (- = increase) -13,479 -9,016 7,846 7,960 7,773
Exceptional financing 0 0 0 9,324 2,966
Memo items:
  Average buying rate (R$/US$) . 916 1,004 1,078 1,160 1,815
  Real effective exchange rate (Aug94=100; R$/US$) 93.8 98.8 98.0 99.4 134.5
  Terms of trade index (1987=100:  US$ based) 95.5 105.8 100.0 98.4 85.6
  External debt  (US$ billion) 159.3 179.9 200.0 243.2 236.9
  Debt service (% of XGS and NFS)a43.6 53.3 71.2 88.2 134.1
a As per cent of exports of goods and non-factor services.
Source : Banco Central do Brasil, March 2000 Bulletin [Online].  Available at:  http://www.bcb.gov.br/ingles/economic/;
and data provided by the Banco Central do Brasil FUNCEX, Balança comercial.WT/TPR/S/75 Trade Policy Review
Page 8
21. The deficit in the current account has been partially financed by foreign direct investment
(FDI), which has increased strongly since 1996, partly as a result of the privatization programme
(section (3) below).  However, in turn, the profits and dividends on FDI contribute to the current
account deficit.  Moreover, FDI is concentrated in the services sector;  investment in this sector does
not yield immediate benefits in terms of export volumes, while relying heavily on imports, again
feeding the current account deficit.  Over time, however, it should lead to productivity gains.
22. Although developments in the trade balance have  been less favorable than expected following
the real's depreciation, of some 30% against the U.S. dollar in mid January 1999 (Chart I.1), the
current account deficit declined in 1999 compared with 1998.  This reflected, in addition to the
decline of the trade deficit, an improvement in the service balance.  The trade balance is expected to
improve in 2000, as exports respond to the exchange rate depreciation, and the terms of trade
stabilize.  In the first trimester of 2000, exports increased by some 20% in relation to the first
trimester of 1999.  Manufactured products, i.e. aircraft, automobiles, and telecommunication
appliances, have led export growth.27
-30-150153045607590
1995 1996 1997 1998 199985
100
115
130
145Chart I.1 
Trade in goods and non-factor services and average exchange rate,  1995-99
US$ Bn
a
Source: Exports Imports Trade balanceREER index
Aug 94 = 100
Real effective exchange rate a
 (right hand scale)
REER against the U.S. dollar. 
WTO Secretariat estimates, based on data provided b y Banco Central do Brasil  and FUNCEX, Balança 
Comercial.
23. Brazil has a high level of external debt and debt service in relation to exports, thus the
authorities attach importance to securing further reductions of the current account deficit in the
                                                     
27 Ministry of Finance (2000b).Brazil WT/TPR/S/75
Page 9
coming years, through sustained improvement in competitiveness and further growth of exports.  For
instance, during 1996-99 the amortization and servicing of the external debt increased fourfold.
24. The capital account balance has been positive during the period under review.  It has,
however, been affected by significant uncertainties related to the external environment.  Like other
economies, Brazil is not immune to shocks in international financial markets, but the strengthening of
economic policies, the shift to a floating exchange rate regime, and the reduced reliance on short-termcapital inflows have significantly reduced this vulnerability.  Since 1996, FDI and medium- and long-
term loans have financed current account deficits.
(3) D
EVELOPMENTS IN INVESTMENT
25. Direct investments have played an important role not only as means of financing the current
account, but also in increasing the dynamism of various sectors of the economy.  Since 1996, FDI
flows have increased substantially, to reach US$30.1 billion in 1999.28  Up to 1995, FDI was
predominant in the manufacturing sector, but this has been overtaken by investments in the services
sector.29  Since 1996, the sectoral pattern of investme nt has not changed substantially (Chart I.2).
0510152025
1996 1997 1998 1999Chart I.2
Foreign direct investment by sector,  annual flows, 1996-99a
US$ Bn
a
b
Source: Agriculture & mining Manufacturing Servicesb
Up to September 1999. 
Includes construction, and electricity, gas and water.
WTO Secretariat estimates, based on data from Banco Central do Brasil.
                                                     
28 Government of Brazil.
29 WTO (1997a).WT/TPR/S/75 Trade Policy Review
Page 10
26. Although FDI has been stimulated by privatiz ation, an important share has been autonomous,
reflecting a number of factors, including the large internal market, better access to other MERCOSUR
markets and the improved market-orientation of the policy environment.  For instance, in 1999
investments – excluding privatizations and including only operations contracted in amounts of more
than US$10 million – amounted to US$17.6 billion.  While in the January-April 2000 period, FDI
operations contracted in amounts of more than US$1 million – excluding privatizations – came to atotal of US$7 billion.
30
27. The most important investors in Brazil are European countries, the Unites States, and Canada,
followed by the rest of the Americas, of which the Cayman Islands is the most important source of
FDI (Chart I.3).  The United States remains the mo st important single investor.  Since 1995, the origin
of FDI has become more concentrated with Europe accounting for 48% of total FDI, and Canada andthe United States investing 28%.  FDI from Asia  has declined substantially from 6.3% in 1996 to
3.4% in 1999.  In the first quarter of 2000, operations originating in the United States accounted for
37.62% of FDI, followed by those carried out with France and the Netherlands, with respective shares
of 17.3% and 11.3%.
31
Government of Brazil.Chart I.3
Foreign direct investment stocks by source, 1995 and 1999
(As % of total)
Source : US$42,530 million  US$117,257 million1995 1999
Europe
40.3%
United States & Canada
29.8%Asia
6.3%
Other Americas 
14.0%
Others 
9.7%Europe
47.7%
Asia
3.4%
Other Americas
15.9%
U.S. & Canada
28.1%Others 
4.9%
(4) DEVELOPMENTS IN TRADE
28. Market liberalization and economic stabilization have significantly enhanced Brazil's growth
prospects, however this has not been translated into a growth in trade.  Despite its size, Brazil
accounts for only 0.9% of world exports and around the same share of imports.32  Since 1996, exports
                                                     
30 Central Bank (2000b).
31 Central Bank (2000b).
32 WTO (2000a).Brazil WT/TPR/S/75
Page 11
and imports of goods and non-factor services as a percentage of GDP have remained stable, showing a
significant increase only in 1999 (Chart I.4).
0510152025
1995 1996 1997 1998 1999Chart I.4
Trade in goods and non-factor services as shares of GDP, 1995-99
Per cent
ExportsImportsTotal trade
Source:  WTO Secretariat estimates, based on data from Banco Central do Brasil.
29. In contrast to 1996-97 when imports and e xports grew, during 1998-99 both exports and
imports showed a considerable decline;  imports declined at a faster rate (Tables AI.1 and AI.2).
The downward slide of imports could be attri buted to decline in internal demand, and to
the trade restrictions adopted (e.g. the three percentage points tariff increase at the end of 1997,Chapter III(2)(iii)).  In 1999, the decline in imports could  also be explained by  the process of import
substitution by domestic production as a result of the devaluation;  imports of consumer durables and
non-durables were affected the most.
33  For instance, in 1999, total imports by use categories, showed
larger reductions in consumer durables and non-durables.34
30. The drop in exports in 1998-99 was caused both by the decline in export volume and the drop
in the value of exported basic goods.  Brazilian exports (volume) started to pick up in 1999 because of
the recovery of the Asian economies and the good performance of the European Union and the United
States economies.35  Exports were also stimulated by the Government's foreign trade policy, designed
to foster foreign sales through the creation of and/or expansion of incentive programmes and
deregulation measures (see also Chapter III).36
                                                     
33 Central Bank (1999b).
34 Central Bank (2000a)
35 Central Bank (1999b).
36 Central Bank (1998).WT/TPR/S/75 Trade Policy Review
Page 12
(i) Composition of trade
31. There has not been a major change in the composition of Brazilian merchandise trade
since 1995.  The share of primary products in total exports declined slightly with a corresponding
increase in manufactured exports.  Manufactures remain the most important category, accounting for
more than 50% all exports, of which the major sub-group is machinery and transport equipment
(Chart I.5).  Except in 1999, automotive products and aircraft have been the two most dynamic sectorsduring the period.  Primary products account for some 44% of total exports, with agriculture
accounting for 33% and mining for 12% in 1999.  Brazil is a net exporter of agricultural products.
In 1999, Brazil was the world's number one exporter of several agricultural exports, inter alia , coffee,
orange juice, and sugar, although these account for less than 10% of total exports (Table AI.1).
32. The composition of imports has remained relatively stable, with manufactured goods
accounting for some 76% of the total.  Machinery and transport equipment continues to be the most
important item, amounting to more than 40% of total imports of goods in 1999.  Imports of primary
products account for 24%;  of this, fuels is the major import (Table AI.2).
(ii) Direction of trade
33. During the period 1995-99, there was no substantial change in the destination of Brazilian
exports, nor in the origin of imports.  The main destination of exports was the Americas, especially
the United States and MERCOSUR whose combined importance has increased, attracting some 37%
of total Brazilian exports in 1999 (Chart I.6).  After the United States, Argentina is the second single
most important destination, despite Argentina's share suffering a decline in 1999 after expanding
substantially.  Other main destinations for Brazilian exports are Europe, whose share increased, and
Asia and the Middle East whose share decreased.
34. The main suppliers in 1995 were the EU and the Americas, where the United States and
Argentina were again the most important, accounting for some 24% of Brazil's total imports.  The
relative importance of the EU as a source of imports increased throughout the period, while that of the
Asian countries declined slightly (Tables AI.3 and AI.4).
35. Trade with MERCOSUR remains important; however, MERCOSUR's share in Brazilian trade
declined at the end of the period under review.  The share of exports and imports, which had increasedduring the 1995-98 period, decreased substantially in 1999.  This is as a result mainly of the depressed
demand in the region, and the devaluation of the real in 1999.Brazil WT/TPR/S/75
Page 13
Chart I.5 
Merchandise trade by product, 1995 and 1999
1995 1999
(a)    Ex ports (f.o.b. )
Total:   US$46,505 million Total:   US$48,011 million
Total:   US$53,737 million Total:   US$51,747 million
     Source :  UNSD, Comtrade database (SITC Rev.3).Per cent
Agriculture
Manufacturing 
and OthersMining
(inc gold)
Food
10.7%(b)    Im ports (c.i.f. )
Manufacturing 
and Others
Chemicals
15.2%AgricultureCoffee
4.2%
 MiningFuels
12.1%Other 
agriculture
22.3%Other 
manufactures
19.5%
Machinery and 
transport eqpt.
19.0%
Other 
mining
5.6%Iron and 
steel
9.2%
AgricultureOres and 
minerals
6.3% Chemicals
6.6%
 Machinery and 
transport eqpt.
39.2%Other 
manufactures
16.6%Soya
1.7%
Orange juice
2.4%
Sugar
3.1%Mining
(inc gold)Manufacturing 
and OthersCoffee
4.6%Soya
3.3%
Other 
agriculture
20.3%
Orange 
juice
2.6%
Sugar
2.4%
Ores and 
minerals
7.0%Other 
mining
4.7%Iron and 
steel
6.5%Chemicals
6.3%Machinery and 
transport eqpt.
23.7%Other 
manufactures
18.5%
Agric raw 
materials
2.7%
Other 
mining
3.4%Manufacturing 
and Others MiningAgricul-
tureFood
7.9% Agric raw 
materials
2.0%
Fuels
11.3%
Other 
mining
2.9%
Chemicals
18.7%Machinery and 
transport eqpt.
43.0%Other 
manufactures
14.2%WT/TPR/S/75 Trade Policy Review
Page 14
Chart I.6 
Merchandise trade by partner, 1995 and 1999
1995 1999
(a)    Ex ports (f.o.b. )
Total:   US$46,505 million Total:   US$48,011 million
Total:   US$53,737 million Total:   US$51,747 million
     Source :  UNSD, Comtrade database (SITC Rev.3).Per cent
AmericasAsia &
 Middle East
Europe
Others
3.5%(b)    Im ports (c.i.f.)
Asia  &
Middle EastMERCOSUR
14.1 %United States
22.6%
MERCOSUR
13.5%
Other 
Americas
7.9%Others
5.0%
Americas
EuropeUnited States
18.9%
 EuropeOthers
5.4%
 AmericasAsia  &
Middle East
Europe United States
23.7%
EU(15)
30.1%United States
24.0%
MERCOSUR
13.6%MERCOSUR
13.2%Others
5.0%
Japan
6.7%
Other 
Americas
10.9%
Japan
5.1%EU(15)
27.8%EU(15)
28.7%Japan
4.6%
AmericasOther Asia & 
Middle East
13.7%
Other 
Americas
11.0%Other Europe
3.7%Other 
Europe
3.8%Other Asia & 
Middle East
10.4%
Other 
Americas
10.0%Other 
Europe
3.6%Other Asia & 
Middle East
12.6%
Japan
5.2%
Other Europe
3.4%Other Asia & 
Middle East
10.4%
EU(15)
27.9%Asia &
 Middle EastBrazil WT/TPR/S/75
Page 15
(5) OUTLOOK
36. The aim of the Brazilian Government is to continue the steady downward trend in inflation,
and to maintain long-term sustainable growth in output, investment, employment, and of the average
productivity of the economy.  The achievement of equilibrium in government finances through further
reforms in the social security, tax and administrative systems, and continued implementation of theprivatization programme, will make it possible to lay the foundation for a successful long-term
stabilization and growth strategy.
37. A concern of the authorities is the ability to finance the current account deficit.  FDI flows
have covered the deficit but these flows may decrease as the process of privatization is completed.  In
addition, the dividends on FDI, plus interest on Brazil's large external debt, imply a structural currentaccount deficit of about 2.5%.  In consequence the authorities perceive the need to improve export
performance, to narrow the trade deficit, and perhaps even move it into surplus.
38. In 2000, macroeconomic policy is focusing on continued fiscal consolidation, a monetary
policy geared towards securing a decline in the yearly inflation rate to around 6%.  The authorities
expect GDP to grow at 4% in real terms, the deficit in the current account to decline to 3.5% fromsome 4.5% in 1999, and the overall balance of payments to reach a surplus.  The budget proposal for
2000 envisages a primary surplus for the Central Government equivalent to 2.6% of the projected
GDP.
37
                                                     
37 Ministry of Finance (2000), Memorando de Políti ca Econômica, 1 June [Online].  Available at:
http://www.fazenda.gov. br/portugues/fmi/ [26 June 2000].