David Ricardo postulated the rationale for free trade some 200 years agowhen he argued that countries could improve their national welfare if they exploitedtheir comparative advantage by exporting those goods at which they were relativelymore efficient at producing and importing the rest. Later arguments for trade pointedto the benefits arising from intra-industry trade (and investment) in which specializedproduction along with scale economies could lead to even more efficient exchangeand innovation-driven productivity increases. These foundational ideas, whichrecognize the value of both imports and exports, remain valid today for explainingwhy countries generally wish to pursue freer trade and why trade liberalization hasbeen at the center of the economic reform debate in much of Latin America. In practice, however, few countries have opted unilaterally to throw opentheir borders to unfettered free trade, and the call to maintain trade barriers iscommon even if it is understood that they come with a cost to society as a whole. There are many reasons for this. Perhaps most transparent is resistence by firms andworkers who stand to bear most of the adjustment costs of freer trade, even ifnational welfare is ultimately enhanced through lower priced goods and services, agreater selection of choices from imports, and overall efficiency gains that can leadto higher national income. Less obvious is that countries adopt diverse trade policiesbased on historically, socially, and politically determined "trade preferences" thatcannot be explained solely by a calculus of economic costs and benefits. The "trade preference" framework helps explain Brazil's trade strategy. Itpegs Brazil as a "regional leader" based on its leadership in pressing for SouthAmerican economic integration, its conditional support of multilateral negotiations,and its reticence to consummate separate trade deals with developed countries. (3) Brazil's tradepreferences in order of priority are: 1) expand and strengthen Mercosul, where Brazilis the undisputed industrial hub and political leader; 2) advocate developing countryinterests in the Doha Round, especially on agricultural issues, and; 3) resist what itviews as a welfare reducing, U.S.-designed FTAA, and to a lesser extent, also apreferential trade arrangement with the European Union unless it serves as a counterinfluence to the FTAA. (4) Brazil and the United States approach trade liberalization from differentperspectives. U.S. trade strategy has been characterized as "competitiveliberalization," (5) where simultaneously negotiating comprehensivemultilateral, regional, and bilateral pacts allows gains to be achieved where partiescan agree. It is competitive in that gains at one level of negotiation (e.g. bilateral orregional) can create new incentives or pressures to make breakthroughs at otherlevels (e.g. regional or multilateral). It is comprehensive by its inclusion of issuesthat go beyond market access such as services trade, intellectual property rights,government procurement, and investment. Brazil has a narrower and more cautious tack, restricted largely to marketaccess and dominance in regional trade, where it feels most ready to compete. Theperceived benefits of Brazil's strategy include attaining greater bargaining powerthrough the Mercosul coalition, slowing the multilateral trade liberalization processto allow more time for economic adjustment, and enhancing its national influence inthe world by protecting domestic economic (industrial) capacity. These "tradepreferences" are not randomly determined, but are deeply embedded in the country'sindustrial, foreign, and macroeconomic policies, discussed below. The "regional leader" category captures well the influence Brazil's economicdevelopment strategy has had on its trade preferences and policy. Brazil adopted itsown version of the import substitution industrialization (ISI) model employedthroughout much of Latin America in the 20th century. To promote industrialdevelopment, Brazil created, and protected from foreign competition, importantgovernment sponsored enterprises that still operate today, although some are nowprivatized. These include the National Steel Company (CSN) founded in 1942;Petrobras, the national petroleum company, established in the 1950s; the NationalEconomic and Social Development Bank (BNDES), created in 1952; and Embraer,a leading manufacturer of regional jets, incorporated in 1969. (6) BNDES wasat the heart of this policy, providing financing for public infrastructure and strategicindustries. It continues today as a necessary major source of long-term businessfinancing given the unique structure of Brazil's financial system. Brazil's industrial policy achieved notable results for decades, but withpredictable tradeoffs. The inward orientation of the ISI model shielded domesticindustry from global competition, diminishing market incentives to innovate andbecome more efficient. Trade policy was essentially administeredprotectionism. (7) The large state bureaucracy also contributed toinefficiency and the high cost of doing business in Brazil. Although privatizationefforts in the 1990s have improved the competitive landscape in Brazil, the so-calledBrazil cost or "Custo Brasil" endures, which is one way of saying there are numerousmicroeconomic distortions introduced by excessive taxation, high interest rates,cumbersome regulations, and corruption. (8) The large untaxed informal economy combinedwith Brazil's big government, for example, mean that formal businesses pay up to85% of the tax burden, more than twice that of the United States. (9) These issuesdirectly diminish Brazilian productivity and indirectly deter trade liberalization. Yet,continuing to protect this regulatory regime and Brazil's "national productionstructure" remains an important aspect of the national trade strategy, a priority Brazilpursues unilaterally and through Mercosul. (10) As with all countries, Brazil's foreign policy shapes its trade preferences, butcompared to the United States it plays a more prominent role. Unlike the UnitedStates where trade policy is constitutionally defined as the responsibility of Congressand carried out in a separate cabinet-level agency (the United States TradeRepresentative -- USTR), in Brazil it is undertaken by the executive branch under thepurview of the Ministry of Foreign Relations. The most important aspects of tradepolicy, therefore, are driven less by commercial interests and often are subordinatedto a larger foreign policy imperative, primarily, enhancing Brazil's influence in LatinAmerica and the world. In the Western Hemisphere, this implies taking on theUnited States. In the words of one Brazilian expert, "Brazil's foreign policy over thepast four decades is characterized by competition with the United States, and theobjective of developing the nation's industrial capacity as a key condition forindependent activities within the international system." (11) Economically, there are two sides to this policy: offensively, it seeks tointegrate South America; defensively, it seeks to deter encroaching U.S. economicinfluence in the region. Brazil's government has taken steps recently to realize thisagenda, by establishing in 2004 the South America Community of Nations as aloosely interwoven example of political and economic integration and by limitingprogress on the U.S. version of the FTAA. Although intentions may not be overtlyadversarial, these two policies do present a challenge to the U.S. trade agenda. Byextension, Brazil's leadership in the region is played out at the WTO where it is anunyielding force in pushing for reductions in agricultural barriers in the Doha Round. The foreign policy aspect of trade policy may also be seen in the emphasis ondeepening developing country trade relations. In addition to negotiating fordeveloping country interests in multilateral and regional trade talks, Brazil has alsoconsummated an agreement with the Andean countries, India, and South Africa, anddeepened relations with Portuguese-speaking African countries, by concludingvarious commitments on trade. Progress in the Doha Round, FTAA, and EUnegotiations has proven harder to achieve. (12) Macroeconomic challenges have and continue to constrain Brazil's tradepolicy options. Brazil, for example, is known for its historical accommodation toinflation, having employed for decades a comprehensive system of wage, price, andinterest rate indexation as part of its macroeconomic management. Inflation ran at"manageably" high rates for years and was fought, albeit unsuccessfully, with anumber of stabilization plans. By the 1970s, however, it eventually spiraled out ofcontrol following the oil price shocks. This led Brazil to the 1980s debt crisis alongwith much of Latin America. (13) By the 1990s, the economy was defined by itsgrowing deficits and debt, failed efforts at stabilization, slow growth (averaging only2.3% from 1980 to 2004), and reluctance to embrace reforms. An important factorin Brazil's sluggish economic performance was poor productivity growth due tomicroeconomic policy distortions discussed above, macroeconomic problems, andto some degree, also its closed trade policy. (14) Brazilian trade policy also had to adjust to encroaching globalization in the1990s, including multilateral efforts (the conclusion of the Uruguay Round), newregional talks (the FTAA), and U.S. subregional initiatives (the North American FreeTrade Agreement -- NAFTA). Brazil responded with some unilateral liberalization,the formation of Mercosul in 1991 with Argentina, Uruguay, and Paraguay toconsolidate its trade positions in South America, and the adoption of agovernment-assisted export promotion policy to help address its large and growingexternal debt. The average tariff in Brazil fell from 51% in 1988 to 14% in 1994, butthe selective preferences given under Mercosul belied the liberalization message asBrazil continued to limit trade outside the regional pact, allowing it to managecarefully the degree to which foreign competition would be accepted. (15) Brazil's trade policy shifted again in 1994 to accommodate the Real Plan, aprice stabilization policy imposed by then-Finance Minister (and later-President)Fernando Henrique Cardoso.