House of Commons - Trade and Industry

Select Committee on Trade and Industry Seventh Report

2 BRAZIL & THE UK

UK-Brazil trade & investment relations

30. Brazil is the UK's most important trade partner in Latin America. With total UK goods exports to Brazil valued at £836 million, it was the 35^th largest export market in 2005, and with imports valued at £1,739 million Brazil was the 32^nd largest import source.[75] Brazil accounted for 0.4% of total UK exports in 2005,[76] a much lower share than for the other BRICs, although slightly above that for Mexico; the picture is similar for imports:Figure 4: BRIC countries plus South Africa & Mexico - Shares of UK imports & exports, 2005

Country	% of total UK exports	% of total UK imports
Brazil	0.4	0.6
China	1.3	4.6
Russia	0.9	1.8
India	1.3	1.0
South Africa	1.0	1.4
Mexico	0.3	0.2

Source: ONS, Monthly Review of External Trade Statistics, January 2007, tables A1, F8 & G

31. In 2005 Brazil's main sources for imported goods were the US ($15.3 billion), Germany ($6.7 billion), Argentina ($6.4 billion), China ($4.8 billion), and Nigeria ($4.8 billion).[77] The UK is Brazil's 13^th largest source for imports, down from 9^th in 2003.[78] As the Trade Minister said "We have only about a 2% penetration in this marketplace"—"ridiculously low" given its capacity.[79]

32. Around 92% of UK exports to Brazil are manufactured goods, with main products including: organic chemicals, pharmaceuticals, power generating equipment, scientific instruments, electrical machinery and road vehicles. Imports from Brazil were primarily of meat, animal foodstuffs, pulp and paper, footwear, cork and wood manufactured goods, tobacco, power generation machinery, and vegetables and fruit.[80] Among EU countries the UK ranked 4^th for exports in 2005 behind Germany (whose exports were almost 4.5 times those of the UK), France and Italy.[81]

33. The stock of foreign direct investment into Brazil increased from $103 billion in 2000 to $200 billion in 2005.[82] The UK had the 4^th largest foreign direct investment (FDI) stocks in Brazil as at the end of 2003, behind France, the Netherlands, and Germany. FDI from the UK is concentrated in a small number of relatively large investments, which include HSBC, Cadbury, ICI and British Gas.[83] In 2005 the UK accounted for 0.7% of total FDI inflows behind the US (21.5%), France (6.7%), Germany (5.9%) and Japan (3.6%).[84] However, UKTI told us that while "UK investment appears low it is likely that the real figure is much higher. British companies investing in Brazil often invest through third countries typically the Netherlands" and that the Netherlands' investment figures for Brazil were "unrealistically high."[85]

34. It is unclear whether this situation reflects substantial investments from Shell and Unilever in Brazil which are attributed to the Netherlands rather than the UK, or whether companies are opting to invest via the Netherlands perhaps to take advantage of double taxation arrangements it has with Brazil, which the UK does not share. The British Chambers of Commerce in Brazil noted that while the Netherlands was the second largest source of FDI from 2000—2004, it did not "appear to have strong cultural, language or historical ties with Brazil", but while the British Chambers suggested that taxation agreements could be driving high levels of investment, they only specifically referred to the strong performance of the Cayman Islands, the British Virgin Islands and Bermuda.[86] UKTI said that the reasons behind the route of investment by UK multinationals were varied, and "not always tax related", stating that HM Revenue & Customs was not aware that investment in Brazil is being channelled through any one EU state (such as the Netherlands) as a result of a particular tax treaty.[87] The double taxation agreement issue was highlighted by a number of witnesses, including the CBI, the British Chambers of Commerce in Brazil and UKTI, and again in the bilateral JETCO process. During our visit we were also told of UK businesses that had invested via Italy in order to benefit from the better tax situation. We find it difficult to believe, therefore, that this is having no effect on statistics regarding UK investment in Brazil. Progress towards the JETCO priority of a double taxation agreement issue is discussed in Chapter 3 below.

Brazil: The challenge for UK companies

35. We have learned that Brazil is a challenging market: there are significant opportunities, but not without significant barriers. These are explored in more detail in Chapter 3. The CBI told us that while Brazil has market size, natural resources, stable government and a healthy macro-economic climate it was "not the easiest market in which to do business and, in common with other emerging economies, companies need to be aware of these dynamics in order to execute a successful market strategy."[88] UKTI told us that Brazil has significant bureaucracy, constantly changing regulations, and complex tax and labour laws, but that Brazil also has a motivated work force and developing export-focused labour intensive industries.[89]

36. The World Bank ranked Brazil 121^st out of 175 countries on ease of doing business in 2006, having ranked it as 122^nd in 2005.[90] Among the various areas considered in this measure Brazil ranked best on trading across borders (53^rd), protecting investors (60^th) and getting credit (83^rd), and worst on paying taxes (151^st), dealing with licences (139^th), closing a business (135^th), registering property (124^th), enforcing contracts (120^th) and starting a business (115^th).[91] As regards investment, AT Kearney's FDI confidence index, which measures the likelihood of making investments in particular markets, ranked Brazil 7^th at the end of 2005, behind China (1^st), India (2^nd) and Russia (6^th).[92] However, the Economist Intelligence Unit ranked Brazil 44^th on the quality or attractiveness of business environment in its World Investment Prospects for the period 2006-2010, comparing it favourably with the other BRICs, with China ranked 51^st, India 58^th, and Russia 59^th.[93]

37. However, while in general the same barriers face all foreign companies doing business with Brazil, the UK appears to be underperforming compared with its competitors: UKTI said that "our performance in Brazil is less impressive than it should be. I do not think there is any doubt about that."[94] The Trade Minister followed this by saying :"I believe that the time is now overdue for us to up our game."[95] UKTI also spoke of "something of a blind spot" that British industry has had on Latin America.[96] The CBI spoke of a "perception gap or lag" or "perception legacy" about Brazil, what one could call a 'South American stigma' which, while not borne out by the economic reality, affects decisions, as "One tends to make a decision based on one's perception of reality."[97]

38. UKTI suggested that existing cultural relationships—long-standing links with Germany, Japan, Italy and France, for example—have their effect.[98] UKTI noted that, as we had also seen in India, "British companies can be quite risk averse to markets like Brazil and that may be a difference between British companies and companies in Germany, France or elsewhere."[99] They said that Brazil was "very distant", and that "British companies feel that there are easier fish to fry", with a "general perception amongst British companies that doing business with Brazil can be quite problematic", with "a range of reasons why companies perhaps do not look at Brazil as positively as they ought to do."[100]

39. UKTI also told us that Brazil is an exception within the region, standing alone on the strength and size of its economy (the world's 11th largest) and being Portuguese-speaking, and that the experience of working with other markets would probably not give companies as much knowledge and understanding of doing business in Brazil as they may wish.[101] The Director of Europe and the Americas at UKTI suggested that Brazil:

102

40. There are, of course, notable UK success stories in Brazil, including HSBC and Cadbury among others. There is a well established British Chamber of Commerce in Brazil (Britcham) with trade and investment committees in São Paulo, Rio de Janeiro and Porto Alegre.[103] The CBI also had some grounds for optimism, seeing increased inquiries about and interest in Brazil, and a greater willingness to look at the opportunities offered by the Brazilian market in the past 2—3 years, hence the "upbeat tone" of their evidence.[104] The CBI added that, unlike 10 or 15 years ago, "we are now seeing a group of managers coming through into the top and upper echelons of British business who have had experience of working in the region […] So you are now seeing people who understand the region, understand the dynamics and, therefore, in the sort of inquiries and conversations we have with our member companies, we believe there is an increasing degree of seriousness and reality about the conditions in Brazil."[105]

41. As UKTI said: "Compared to the media attention given to other rapidly developing economies such as China and India, Brazil suffers from outdated stereotyping and poor knowledge. UKTI and other agencies could help importantly to fill this knowledge gap."[106] We agree.

UK Trade & Investment (UKTI) in Brazil

42. Brazil is benefiting from the new UKTI strategy, which—backed with £5 million of funds in total—switches focus from mature markets to key emerging markets.[107] The Government has stated that UKTI's corporate strategy now recognises Brazil as a growth market that presents both opportunities and challenges for UK companies.[108] The Trade Minister told us that under the new strategy he had been keen "to ensure Brazil was one of the countries in our champions' league of increased investment."[109] He said that UKTI would now be better at providing support to UK companies that wish to trade, inwardly invest or seek a partner for trade or investment.[110] We have explored the new strategy in a parallel inquiry, although this Report has given us a practical case study of its impact.[111] The consequences of the new strategy more widely across Mercosur are discussed in Chapter 6.

RESOURCES

43. The CBI told us that UKTI has a "very good team focussing on Brazil".[112] Also, the University of Birmingham's study into Small and Medium-sized Enterprises (SMEs) and Brazil found that companies coming new to Brazil appreciated that UKTI and its countrybased staff were able to provide a first-hand analysis of business opportunities there, and help them to develop business contacts.[113] UKTI's Brazil team comprises approximately 32 people in São Paulo, Rio de Janeiro, Brasilia, Porto Alegre and Recife, and three full-time London-based staff.[114] Expenditure on sectorbased activities related to Brazil—trade missions, exhibitions, seminars, etc.—was £365,000 in 2004/05 and £490,000 in 2005/06, but was down to £288,000 (provisional) in 2006/07.[115] The 2004 Spending Review resulted in UKTI offices in Belo Horizonte and Curitiba (both in the southwest of the country) being closed with the loss of four local jobs. Under UKTI's new strategy, resources in Brazil will increase by six posts from 2005/06 levels over the course of 2006/07 and 2007/08. These will be made up of:

— two locally engaged São Paulo-based inward investment posts (see below);

— three UK-based trade posts (meaning an official from the UK on a long-term posting in the market) in Brasilia (working mainly on the Joint Economic and Trade Committee, or JETCO, as discussed in paragraphs 83-87 below), Rio de Janeiro (focusing on oil and gas), and São Paulo (to develop business opportunities in priority sectors); and

— one local trade post in Rio de Janeiro.[116]

44. Brazil compares unfavourably with both India and China on the number of UKTI commercial officers. We acknowledge, but do not fully share, the CBI's view that, for UKTI generally "an excessive concentration of resources on China and India could lead to missed opportunities elsewhere".[117] There have also been fewer officers in Brazil than in the Gulf States, although this situation will reverse in the current financial year (2007/08):Figure 5: UK Trade and Investment commercial officers

	2003/04	2004/05	2005/06	2006/07	2007/08	2008/09
Brazil	51.1	39.1	39.0	42.0	45.0	45.0
China	87.7	94.6	98.8	106.1	113.0	113.0
India	81.3	76.1	76.3	80.3	91.3	91.3
Russia	17.2	17.9	16.0	20.0	26.5	26.5
Gulf States	46.9	46.4	41.3	45.5	43.3	43.3

Source: HC Deb, 11 Dec 2006, col 810W (rounded)

45. We welcome the positive contribution of the new UKTI strategy on resources committed to the Brazilian market. We note, however, that these resources have only partially reversed the decline seen after the 2004 Spending Review and the closure of UKTI's regional offices in Brazil, and that these remain more than 10% below the level seen in 2003/04.

46. With its apparent image problem among UK businesses, UKTI noted that trade visits to Brazil have made "some of the preconceptions disappear", with nine trade missions last year.[118] While SMEs had been a major focus of the attention of UKTI as a whole in recent years, UKTI's Brazil team had recognised that this was a difficult market for many SMEs, and so had looked at larger companies.[119] The CBI also said that Brazil was "not going to be a destination that new-to-export companies would be looking at, or necessarily an 'S' of the 'SME' ": Brazil, in common with the other BRICs, was more for the experienced exporter able to manage the risks involved.[120] We were also told that UKTI is taking on fifteen business advisors to focus on medium-sized companies that have the potential to succeed in the emerging markets, including Brazil.[121] The Trade Minister agreed that the Brazilian market was more suitable for larger investors, but said that opportunities remained for small investors and SMEs, noting that a UKTI priority was to work with such companies to secure market access directly in emerging economies directly through partnerships or other activities.[122] Classed as an emerging market by UKTI, Brazil is now eligible for market visit support—financial assistance for new-to-export and new-to-market SMEs.[123] The University of Birmingham SME and Brazil study concluded that UKTI should work to increase awareness of opportunities in Brazil, and prioritise SME access to relevant networks in Brazil and the UK while generally reducing confusion among SMEs about accessing UKTI services.[124] Brazil is unlikely to be a market that presents immediate or easy wins for SMEs, and we therefore agree that medium-sized and large companies should be the focus of UKTI support for this market. However, the experience of our EU competitors shows that it is possible to open up opportunities for smaller companies as part of the supply chain for larger companies breaking into the Brazil market. We would welcome more emphasis on this area in UKTI's work. Moreover, where niche companies are looking to trade with Brazil or opportunities for smaller companies present themselves, UKTI should provide them with the necessary support and information.

PRIORITY SECTORS

47. UKTI's sector teams are setting a maximum of five priority markets in each sector across the world for 2007/08 on which to concentrate. Up to a further seven more 'opportunity markets' will get "one key activity during the financial year".[125] The priority markets are based on factors such as the level of opportunity, the need for government support, their fit with the UK's strengths, and industry views, and are subject to annual review.[126] The only sector in which Brazil is a global priority market is oil and gas, while the only other priority in Mercosur is Venezuela, also in oil and gas.

48. As well as taking a global view, UKTI determines its priority sectors within markets. For 2007/08 Brazil's priority sectors are: agriculture, engineering, environment, healthcare and life sciences, oil and gas, sports and leisure infrastructure, and chemicals.[127] Two priority sectors from 2006/07 have been downgraded: education skills and leisure, and textiles and carpets. The opportunity sectors in Brazil for 2007/08 are: aerospace, construction, creative and media, education and skills, financial services, and ports.[128] We consider the opportunities available for UK companies by sector in Chapter 3.

49. We generally agree with the selection of the seven priority sectors (agriculture, engineering, environment, healthcare and life sciences, oil and gas, sports and leisure infrastructure, and chemicals) and six opportunity sectors (aerospace, construction, creative and media, education and skills, financial services, and ports) selected by UKTI for 2007/08. However, given Brazil's BRIC status it is perhaps surprising that only one sector—oil and gas—is considered a global priority. It is also unclear why two out of the three strategic sectors identified bilaterally as part of the JETCO process[129] during 2006/07—aerospace and financial services—are only UKTI opportunity sectors for Brazil in 2007/08. We examine the UK's involvement in the financial services sector later, but we hope that the UKTI sector strategies currently under development (covering ICT, life sciences, creative industries and energy) will reflect the due importance of Brazil alongside the other BRICs, particularly China and India.

INWARD INVESTMENT FROM BRAZIL

50. The Trade Minister told us that there had been only £77 million of inward FDI from Brazil into the UK, "such a small sum you cannot identify specific projects", although all in the financial services sector, and contrasted this with the £500 million of Indian inward FDI last year.[130] However, the Economist Intelligence Unit states that Brazilian companies had been leading in foreign investment among emerging markets for some time, and that Brazilian companies that have foreign interests employ 42,000 workers in 48 countries.[131]

51. UKTI told us of increased interest during 2006 in the UK as a destination for Brazilian investment, for example through establishing European headquarters in the UK.[132] ThinkLondon, the capital's investment agency, told us that its strategy reflected the relative immaturity of Brazil as a source of FDI compared with India and China, where it has established offices. It nevertheless accepted the potential of Brazil, noting that there were at least twenty large Brazilian companies with a London presence, and also recent interest from the telecommunications and cosmetics sectors. ThinkLondon said that it believed a long-term base in São Paulo in partnership with UKTI to be the best approach.[133] The new inward investment posts based in that city, part of the increase in UKTI resources over the course of 2006/07 and 2007/08, should help to increase Brazilian interest in investing in London.

ACTIVITY OF UK COUNTRIES/REGIONS IN BRAZIL

52. UKTI was not aware of any physical presence of the English Regional Development Agencies (RDAs) in Brazil.[134] We were presented with evidence of some significant regional activity regarding Brazil, arranging visits and so on.[135] UKTI also pointed out matches between its priority and opportunity sectors and Scottish Enterprise's priority industries: energy, financial services, life sciences, electronic markets, food and drink, and tourism.[136] International Business Wales, the Welsh Assembly Government's trade and investment body bringing together the former responsibilities of WalesTrade International and the international aspects of the Welsh Development Agency, has visited Brazil four times since the Welsh Assembly Government was created.[137] We have previously raised concerns about unhelpful competition between the English Regional Development Agencies, and the vital need for cooperation between UKTI and them. We were therefore relieved to hear that these bodies do not have permanent on-the-ground presence in Brazil, and there is little sign of damaging competition between them in their Brazil-related activities.