Select Committee on Trade and Industry Seventh Report


Why is the UK lagging behind its competitors?
1.As UK Trade and Investment 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to the media attention given to other rapidly developing economies such as China and India, Brazil suffers from outdated stereotyping and poor knowledge.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." We agree. Lack of knowledge and outdated perceptions among UK businesses appear to us to be the main reasons underlying the lack of UK engagement with Brazil compared with our competitors. We have seen many examples of opportunities in Brazil and the rest of Mercosur that could be exploited, and indeed are being exploited by competitors. We hope that by raising awareness of both the opportunities and risks involved in these markets, this Report and its supporting evidence will make a useful contribution to those companies who are considering trading with or investing in Brazil, Argentina and the other Mercosur countries. (Paragraph 29 and 41)
Opportunities for business in Brazil
2.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 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 Joint Economic and Trade Committee (JETCO) process during 2006/07—aerospace and financial services—are only UKTI opportunity sectors for Brazil in 2007/08. It is imperative that there is consistency between the priorities of JETCO and UKTI. We also 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. (Paragraph 49 and 99)
3.While we welcome the setting up by UKTI of the Financial Services Sector Advisory Board (FSSAB) because of the importance of financial services to the UK economy, we note that the UKTI financial sector strategy mentions Brazil only in passing, and that country strategies are planned for China, India, Russia and the Gulf, but not Brazil. We believe the scale of opportunities for financial services available in Brazil should be recognised by placing the market on a par with China, India and the Gulf, or at least above other emerging markets. As UKTI is developing dedicated China and India financial strategies, with Russia to follow this year, a dedicated strategy for Brazil should be seriously considered. (Paragraph 109)
4.We also hope that these developments and the Lord Mayor's planned visit to Brazil later this year will help encourage the London Stock Exchange to establish a permanent presence in Brazil, as ThinkLondon, London's inward investment agency have in partnership with UKTI. This would have the potential to serve as a base for the whole of South America and increase competition with the New York Stock Exchange. ThinkLondon also recently reached the first bilateral investment promotion agreement between a Chinese and a European city, and we believe there is scope for a similar initiative with São Paulo, for example. (Paragraph 110)
5.In science, as we have discovered in other areas, Brazil receives less attention than China and India. We hope that the Year of Science will ensure due weight is given to Brazil's strengths in life sciences in particular, and to the possibilities for mutually beneficial co­operation between Brazil and the UK. We fully support the Year of Science with Brazil, and hope that it will not only contribute to a better understanding of the potential of Brazil in science, but also result in a positive spill-over effect into the general UK-Brazil trade and investment relationship. (Paragraph 138)
6.We welcome the commitment of the UK and Brazil to a bio­ethanol partnership with South Africa, which was reinforced by expressions of support for renewable energy trade and investment partnerships generally, and particularly in ethanol, in the UK-Brazil JETCO recommendations. In doing so we note that criticism is frequently made of Brazil's bio-ethanol production, including the threat posed to the rainforest. However, all large-scale agriculture has biodiversity implications, and while the rainforest is clearly vitally important, we have been assured that the areas most suitable for sugarcane production are not rainforest areas. (Paragraph 136)
7.We note the unfortunate limitations for UK businesses caused by the Brazilian Government's local content rules for present and future Embraer models, and that the UK remains disadvantaged against competitors with an established local presence. We welcome the selection of Aerospace as a JETCO strategic sector, and hope that the proposed JETCO working group on aerospace will be successful in reducing the barriers. (Paragraph 103)
8.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. (Paragraph 46)
Barriers to trade with Brazil
9.While language is clearly a barrier, the language problem is not unique to Brazil: foreign businesses in China also need to employ Chinese speakers. The damaging presumption, still too widespread in the British business and political culture, that English is the universal language of trade and the only necessary linguistic tool when doing business abroad, is harming our commercial prospects in Brazil just as it is in many other markets around the world. (Paragraph 57)
10.Tariff and customs barriers do impede trade with Brazil. However, though tariff and customs barriers cause annoyance to potential importers and may provide opportunities for corruption, the situation is no worse—and in some cases less serious—in Brazil than in other developing countries. It is important, though, that this issue is addressed in the JETCO process. (Paragraph 61)
11.UKTI said that while local partners were not a requirement, "if you have got a local partner it is a lot easier to get through the mass of regulation. […] it is imperative for British companies that want to really establish themselves in the market to have some local knowledge." We note the strong positioning of UKTI to help UK businesses identify such partners. (Paragraph 69)
12.Brazil's failures in intellectual property rights protection lie in the area of enforcement, not legislation. The UK has a good record in enforcement and could provide useful training and advice. Without advances in enforcement, Brazil may well not receive the investment it needs to develop high-tech and science R&D, from either the UK or elsewhere. (Paragraph 89)
13.Because of the constitutional and political issues that lie behind the non-ratification of Brazil's bilateral investment agreements an Investment Protection and Promotion Agreement between the UK and Brazil is unlikely in the near future. It was perhaps over-ambitious to include such a difficult issue in the JETCO priorities, but it nevertheless remains an important goal for UK business, and we urge the Government to do all it can to ensure that progress is made. (Paragraph 92)
14.A number of our witnesses were very concerned about the lack of a double taxation agreement between the UK and Brazil. 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. It seems there is a certain amount of intransigence on both sides. We therefore urge the Government to re­examine this matter which seems likely to be putting us at a disadvantage vis à vis our competitors, and remains a key priority of UK businesses. If the re-examination demonstrates the significance we anticipate, then such a treaty must become a key objective of the JETCO process. (Paragraphs 34 and 96)
15.We recognise that a number of real, if surmountable, barriers exist to trade with and investment in Brazil, but given that these generally face our competitors as well, we find these insufficient to explain the relatively poor performance of the UK. Other than the problems we have outlined, witnesses did not pinpoint any other factors that would explain this situation. We are therefore led to conclude that awareness and perception issues are the greatest barriers to trading with Brazil. We hope that this Report will help to make British business more aware of the opportunities afforded by, and give indications of how companies can tackle some of the difficulties involved in doing business with, Brazil. (Paragraph 82)
Tackling the barriers
16.We support the creation and work of the UK-Brazil JETCO, but note that its success will depend on maintaining both political and business interest and involvement in both countries. We are pleased to see that events are being planned which will serve to raise awareness of the available opportunities, but while we recognise it is still early in the life of the JETCO with Brazil, progress over the six months since the Ministerial meeting has been limited. Certainly the planning work so far needs to be converted into genuine action: we believe that it is essential that momentum is maintained to ensure the continued support of business and to maximise JETCO's awareness-raising potential. (Paragraph 87)
17.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. 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". (Paragraph 44 and 45)
18.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. (Paragraph 52)
Brazil v. the rest of Mercosur
19.We also note the view expressed by British Expertise that the greatest opportunities may not be in Brazil but in the smaller countries in the region. UKTI must ensure that while focusing on key emerging markets like Brazil it does not miss out on opportunities available from smaller markets in Mercosur and Latin America more generally and ensure that it transmits these opportunities to UK businesses. (Paragraph 177)
20.UKTI told us that in the longer term Argentina's economic recovery would require structural reforms: "combating tax evasion, excessive bureaucracy, corruption and an inefficient judiciary system will be essential to improve Argentine competitiveness. Improvements in legal and judicial security are needed to attract, and maintain, foreign investment." We agree. (Paragraph 155)
21.The British Argentine Chamber of Commerce informed us that UKTI financial support for outward missions to Argentina had been withdrawn in 2005 after changes in government support for export promotion. We believe that this decision should be reconsidered in the light of Argentina's future potential. The BACC also say that they would "welcome the opportunity of working closer with UKTI and having better communication in order to help British companies understand and identify opportunities in Argentina". We support this suggestion. (Paragraph 157)
22.The Argentine Government's so-called price "agreements" with businesses—tantamount to price controls—were the subject of widespread complaint during our visit. Unconventional means appear to have been used to enforce these controls, for example UKTI told us that President Kirchner "encouraged a blockade against Shell in February 2005 after the company decided to raise petrol prices." We were surprised to hear that the Trade Minister was not aware of the problems relating to price controls in Argentina, as in their evidence to us UKTI had cited Argentine government intervention, including price control, as an example of an internal barrier to trade faced by UK companies. These price controls risk deterring UK investment in Argentina. (Paragraph 152)
23.We are concerned that the UKTI service for Uruguay will share the fate of that for Paraguay, which no longer has a UKTI presence and for which very limited information was available for this inquiry. This move seems perverse, given the strong historic ties of friendship between the UK and Uruguay, the country's benign business environment, that UK companies are choosing to invest in Uruguay as a base from which to access other South American countries, the high level of inquiries received relating to Uruguay and that the institutions of Mercosur are based in Montevideo. We are unconvinced that it will prove possible to provide sufficient quality of cover from other neighbouring posts and we therefore urge UKTI to reverse its decision to remove its commercial presence from Uruguay. (Paragraph 165)
24.Although we accept that limits on its resources mean that UKTI must make choices between markets globally, we believe that while Paraguay may not merit a full service there should at a bare minimum be basic market and sectoral information available through the UKTI website, particularly when information is available on the website of one of its parent departments. (Paragraph 166)
Regional free trade agreements v. the Doha Round
25.Mercosur is widely thought to be modelled on the European Union, yet although some see it as an embryonic 'EU in South America' its level of integration falls some way short of that of the EU. Even within the Mercosur countries themselves, we noted that there was a considerable degree of scepticism about the future of the organisation. Mercosur faces significant challenges as its development has been hindered by national interests, internal asymmetries, and disputes between members which have even been taken to the WTO. The Argentine and Brazilian economic crises, subsequent devaluations and trade disputes have been politically problematic for Mercosur. (Paragraph 178)
26.We are broadly supportive of an EU-Mercosur agreement, which should be consistent with trade rules and beneficial to both parties, and which unlike the Doha Round offers an opportunity to address the many non-tariff barriers to trade and to liberalise services further, both of which are important for UK businesses. We note the proposals within the new European Commission trade strategy to pursue trade agreements with a number of partners, including some that we have previously carried out inquiries on: India and ASEAN. It is important that the existing and proposed EU negotiations should not in any way detract from Doha, but seek to build on a successful multilateral outcome which should include strengthening the WTO rules on preferential regional trade agreements. (Paragraph 202)
27.  However, there remains considerable uncertainty regarding the fate of the Doha Round. Ultimately, should the opportunity of Doha be lost, our major trading partners are likely to pursue regional and bilateral preferential trade agreements with renewed vigour, which would encourage the EU to accelerate its regional and bilateral initiatives. If Doha fails, then completion of the EU-Mercosur talks, and bilateral initiatives such as the JETCOs set up between the UK and Brazil, India and China are likely to take on even greater significance. As the Trade Minister noted: "The service sector is one of the areas where I believe we can make major gains for the UK, but the problem that remains is the removal of barriers, whether or not we have Doha." (Paragraph 203)

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