Select Committee on Trade and Industry Written Evidence


APPENDIX 23

Memorandum submitted by UKTI

CHAPTER 1:  INTRODUCTION

  1.1  The past decade has seen an increase in the pace of global economic activity underpinned by the rise of key emerging markets which account for over 37% of the planet's population. China and India have spearheaded this with average growth of 9% and 6.4% per year since 1996. Brazil's economy has grown more slowly than this averaging at 2.6% per year since 2000. However, this relatively poor growth performance is not the whole picture. Brazil's economic policy stance under the previous, current and likely future governments is the pursuit of macroeconomic stability. Brazil is aiming at consolidating a base for healthy, but not spectacular, growth. Its aim is for a trend growth rate of 4-4.5%.

  1.2  Brazil still remains one of the largest emerging markets and an increasingly leading voice among developing countries. In terms of GDP, Brazil is rated as second to China amongst Emerging Markets (see paragraph 8 of Annex A) and despite slower growth rates than others in the top five it is unlikely that Brazil will drop out of the top five for a quarter of a century if at all. So even if Brazil is not meeting the globalisation challenge in a manner comparable to China and India, one must not lose perspective about its place in the world.

  1.3  Brazil has become much more open to trade over recent years. Total trade in 2004 was 26% of GDP up from around 13% in 1996. The country's abundance of natural resources has helped it experience its first period of export led growth in 20 years.

  1.4  Against this background Brazil has immense potential as a trade and investment partner.

CHAPTER 2:  BRAZIL'S INDUSTRIAL AND TRADING CLIMATE

  2.1  Successive Brazilian Governments have supported free enterprise and the free trade system. However some state and semi state entities still control part of the public utilities sectors. There is significant bureaucracy with regulations constantly changing and complex labour and tax laws. On the other hand there is a motivated work force and a development of labour intensive industries directed towards exporting. The Brazilian economy is broad-based covering most industries. It is a mixed economy and includes listed companies, state monopolies, foreign owned companies, joint ventures, family enterprises and many small businesses. In 2002 the number of companies in Brazil by size was:


Size of company
Numbers
Percentage of total

Micro
4,605,607
93.6%
Small
274,009
5.6%
Medium
23,652
0.5%
Large
15,102
0.3%
Total
4,918,370
100%

CHAPTER 3:  BRAZIL'S ROLE IN THE GLOBAL MARKET PLACE

  3.1  Brazil is a key player in the WTO as leader of the G20, which Brazil founded, and a member of the G6. They are a founder member of the Common Market of the Southern Cone (MERCOSUR) which is currently composed of Brazil, Argentina, Paraguay, Venezuela and Uruguay with Chile and Bolivia as associated countries. Under the MERCOSUR agreement tariffs are reduced to zero; movement of labour, goods and services are unrestricted; capital investment encouraged; macroeconomic policies coordinated; and policies and tariffs for non member countries harmonised. Negotiations for an inter-regional Association Agreement between the EU and Mercosur began in November 1999. (See Annex B)

  3.2  Brazil has played a crucial role in WTO. They share the UK's objective to restart the negotiations at the earliest opportunity. The overwhelming consensus in Brazil is that movement on agriculture ie the dismantling of protectionist policies by developed countries has to come before there is any movement on industrial tariffs and services. Within the G20 grouping Brazil is probably one of the more willing to be flexible if the right deal on agriculture is on the table.

CHAPTER 4:  THE UK'S TRADE & INVESTMENT PERFORMANCE WITH BRAZIL

  4.1  Brazil is the UK's most important trading partner in Latin America. In 2005 we were the 13th largest exporter to Brazil, down from 9th in 2003 with a market share of just under 2%. UK market share slipped in relative terms due to the strength of sterling against the US dollar, fluctuating oil prices, growing ICT exports to Brazil from South Korea and increased imports of minerals from Chile used in the booming steel industry. A full summary of UK's performance against our EU competitors and the rest of the world is at Annex C.


UK Trade in Goods
% Change
£ million
2001
2002
2003
2004
2005
2004-05

UK Imports from Brazil
1,328
1,415
1,512
1,581
1,771
12.0%
UK Exports to Brazil
814
888
829
792
840
6.1%



UK Trade in Goods
£ million
Jan-May
2005
Jan-May
2006

UK Imports from Brazil
665
745
UK Exports to Brazil
293
348


  4.2  Currently, around 92% of UK exports to Brazil are manufactured goods. Top exports include organic chemicals, pharmaceutical products, power generation machinery and equipment, professional scientific instruments and apparatus, electrical machinery and road vehicles. Brazil's main exports to the UK are meat and meat preparations, foodstuffs for animals, pulp and paper, footwear, cork and wood manufactures, tobacco and tobacco products, power generation machinery and vegetables and fruit.

  4.3  UK's trade and investment performance remains significantly below its potential. UK has a share of some 6% of world trade but by contrast the share of Brazilian trade is just under 2%. This represents a significant under performance but highlights the scale of the opportunity for growth that the Brazilian market represents.

  4.4  The UK's trade in services increased by 15% between 2004 and 2005.


UK Trade in Services
% Change
£ million
2001
2002
2003
2004
2005
2004-05

UK Imports from Brazil
231
251
176
219
263
20.1
UK Exports to Brazil
382
313
326
307
353
15.0


  4.5  The total new FDI in Brazil last year was some US$16 billion (compared to US$5 billion to India and US$61 billion to China). According to the Brazilian Central Bank, Foreign Direct Investment (FDI) inflows from the UK in 2005 amounted to 0.7% of the total, behind the US with 21.5% but also behind France with 6.7%, Germany with 5.9% and Japan with 3.6%. However the UK remains, in global terms, the second largest foreign direct investor overall. That the UK ranks well below our principal competitor nations in terms of Brazilian FDI highlights the extent to which the UK is under performing in one of the main growth markets for FDI.

  4.6  Although 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. As can be seen from Table 6 in Annex C the Netherlands investment figures for Brazil are unrealistically high. Household names such as Astra Zeneca, British American Tobacco, BG, BP, Cadbury, Umbro, GlaxoSmithKline, HSBC, ICI, Rio Tinto, Shell and Unilever are a solid part of the Brazilian economy.

CHAPTER 5:  BARRIERS TO TRADE AND INVESTMENT IN BRAZIL

  5.1  There are some practical obstacles to doing business in Brazil (as detailed in Annex E). Furthermore, while Brazil is in many ways a sophisticated market economy it is still highly regulated and prey to bureaucratic blockages and the power of vested interests (some of which have been enshrined in the constitution). Brazil is also a relatively new entrant to world markets having emerged from an inward looking and protectionist approach to trade only in the early nineties. Some of the old protectionist instincts remain, as do some of the regulations that impede the import of goods and services perceived to represent a potential threat to local interests (eg legal services and reinsurance).

CHAPTER 6:  UKTI AND BRAZIL

(a)  Assistance available from UKTI to UK companies looking to do business in Brazil

Services available to UK companies

  6.1  UKTI's aim is to enhance the competitiveness of its customers in the UK through overseas sales and investment. This is achieved by assisting companies, in the main SMEs, with:

    —    advice and support;

    —    information and opportunities; and

    —    market entry.

  For any market, customer demand is a key factor in the support and services UKTI makes available.

  6.2  Advice and support from UKTI's trade advisers in the English regions can help companies develop export plans for tackling markets and in conjunction with the teams overseas help them establish themselves in markets such as Brazil.

  6.3  UKTI also helps by providing information about the market and opportunities that exist. Sales leads are the lifeblood of any business. UKTI's overseas staff are always looking for business opportunities. A typical example was a recent enquiry by a small Brazilian company acting on behalf of Petrobras seeking a supplier for valves for the oil and gas industry. This opportunity was posted on the UKTI website for companies to access.

  6.4  Support is also available for larger companies in terms of lobbying where Ambassadors and senior members of the Post play a crucial role in securing business for UK companies. The UKTI team in Brazil has assisted several large companies in this way.

  6.5  UKTI in-market teams also produce sector reports on opportunities in the market as well as specific tailored reports for individual companies to identify potential partners, agents, distributors or direct customers. Companies are charged for the latter reports under the On line Market Introduction Service (OMIS).

  6.6  To be a successful exporter companies need to spend time in the market and Brazil is no different. UK Trade & Investment can help UK businesses take part in overseas exhibitions such as Rio Oil and Gas; and support companies visiting the market through the Market Visit Support Scheme.

  6.7  UKTI also supports a programme of sectoral missions to and seminars in Brazil. A summary of the key sectors that UKTI is focusing on follows. Annex F provides further detail.

Business Sectors (UKTI International Sectors Group)

  6.8  As well as supporting companies on an individual basis, UKTI also works with sectors of industry in promoting markets for UKTI support. The following sectors of industry have regarded Brazil as a priority market.

Priority Sectors

  6.9  Aerospace: Brazil has one of the world's largest aerospace companies in Embraer and a vibrant aircraft fleet covering agricultural aircraft, air taxis and helicopters. The key to the Brazilian market for UK companies is Embraer. Most of Embraer's sales are overseas as is most of its supply chain mainly based in the USA, Europe and Japan. UK content on Embraer aircraft is very low (less than 2%) but the current relationships with existing partners make it very difficult to displace the existing supply chain for existing programmes. New programmes will demand a higher level of local content (to meet the requirements of the Brazilian Government) but will require overseas companies actively to invest in the Brazilian based aerospace supply chain. Currently this is unattractive to UK companies.

  6.10  UKTI organised a series of Seminars in the UK in February 2005 to make UK companies aware of the changes to the policies of the Brazilian government and how this might impact on Embraer. Embraer, the Brazilian Government and the Banco Nacional de Desenvolvimento Economico e Social (BNDES—the Brazilian Development Bank) took part in seminars held in London and in Warrington. Over 50 UK companies attended. UKTI followed this up with a mission to Brazil—only four companies engaged in the programme which gave access to Embraer, BNDES and introduced UK companies to indigenous companies already in the Brazilian supply chain and European companies who had invested in Brazil. The mission took place in October 2005. As a result of the low take up to a very structured mission, the UKTI Aerospace Sector Advisory Group demoted Brazil from being a priority sector for Aerospace in November 2005. Annex F1 provides more detail on this sector.

  6.11  Financial Services: Brazil has been singled out as one the potential key growth economies under the "BRIC" projections, and has been targeted in UKTI's Financial Services Market Strategy. However, it is perhaps the weakest of the candidates in the group, with its ability to fulfill the promise of economic growth being strongly dependent on the political willpower to maintain a framework within which business can flourish. Annex F2 provides more detail on this sector.

  6.12  ICT: The strategy UKTI has adopted in this sector is to develop a focused dialogue with one or two key Brazilian companies. An example is CESAR (Recife Centre for Advanced Studies and Systems). This is a private innovation institute that creates products, processes, services and innovative companies using ICT. The Centre has been talking to UK innovation institutions to explore the potential for technology creation and its transference to Brazil. This approach is being supported by a series of trade missions in both directions. Annex F3 provides more detail on this sector.

  6.13  Life sciences: Brazil's strengths lie in its scientific capabilities and the quality of the research being carried out in the biotechnology clusters and universities. In addition to this, the country has numerous assets, whether purely scientific or based on the great biodiversity of its territory. Opportunities exist for the UK to invest in Brazil, whether directly or through partnerships with local Brazilian companies.

  6.14  Brazil's research level is impressive, but technology transfer is much less active than in the UK. The pharmaceutical market has a current value of US$8.3 billion and a 12% compound annual growth rate (CAGR) forecast to 2010. The vaccines market of US$221 million in 2005 is still mainly publicly owned and has tremendous expertise and production capabilities. The potential for new vaccines is evidenced by the increasing involvement of multinationals. Annex F4 provides more detail on this sector.

  6.15  Oil and Gas: Brazil is a Priority A Market for UKTI oil and gas trade development activity as agreed with the industry/government International Oil & Gas Business Advisory Board.

  6.16  Brazil is the largest energy market and has the second largest oil reserves in South America. Brazil, the Gulf of Mexico and West Africa are considered by industry the "golden triangle" of deep water Exploration and Production (E&P), a significant area of the UK's industry capability. The country achieved net oil self-sufficiency in early 2006 as production reached 1.7 million barrels of oil per day (bpd). The domestic oil production of Petrobras, the national oil company, will grow to 2.3 million bpd by 2010 and output from other operators should add to this volume. In the same period the production of natural gas should increase from the current 48 to 70 million cubic metres per day. Petrobras' investment from 2007-11 will total U$87.1 billion, averaging US$17.4 billion per year of which 47% will be for E&P. There will also be substantial investment in the downstream area with more than US$8 billion being targeted for a large revamp programme for all the existing refineries and two new plants being considered. Another US$4.5 billion will be invested to expand the pipeline network for natural gas. Annex F5 provides more detail on this sector.

  6.17  Environmental Technology: The environmental market in Brazil is expected to reach US$4.9 billion by 2010. The market is sophisticated and overseas companies must offer something new to the market. Opportunities exist for UK companies offering innovative technologies, services, and equipment.

  6.18  The Government is looking at models for PPP to fund numerous proposed sanitation projects. This will involve multi-million dollar investments ($25 billion over 15 years is the usual quote), but it will take some time for the regulatory framework to be introduced. In the meantime, several states have introduced their own legislation and frameworks, with PPP projects already under development.

  6.19  Investment in the environment sector in Brazil in 2006 is expected to grow at a faster rate than previous years, reaching an estimated value of US$3.5 billion to US$4 billion this year alone. This is, at least in part, due to an increase in private sector investment (larger industries with reputations to protect), with companies moving to new, more efficient and environmentally friendly technologies. The following industry sectors should be responsible for a larger share of total investments: cement, pulp and paper, chemical and petrochemical and steel. Expenditure on environment is most likely to be for equipment, engineering and consulting services and instrumentation associated with pollution control and cleanup projects. Annex F6 provides more detail on this sector.

  6.20  Healthcare: Brazil has the largest healthcare market in Latin America, with over 7,000 hospitals, 280,000 doctors and an annual spend of US$20 billion—private and public combined. It also has the largest medical devices market in Latin America, with imports in excess of US$980 million and a total internal market of almost US$2.8 billion. Expansion and sophistication of private healthcare network allows for continuous technological and managerial improvement of services, generating opportunities for state-of-the-art medical products/services. The large local medical devices/technology industry, comprised of over 500 companies, generates substantial opportunities for joint-ventures, OEM supply, technology transfer and outsourcing. Modernisation of Brazil's communications network is encouraging IT projects in Healthcare, varying from software development to telemedicine and e-health training/services. Annex F7 provides more detail on this sector.

Inward Investment

  6.21  Brazil has been identified as a potential source of viable inward investment projects. The United Nations Conference on Trade and Development (UNCTAD) has measured Brazil's outward investment stock at around $50 billion. In addition, OCO Consulting has identified activity in a number of key sectors including Financial Services, Aerospace and ICT.

  6.22  In the last six months UKTI has seen a marked increase in potential projects from Brazil—one of which involves locating a European HQ in the UK. An inward mission into the UK from Brazil is planned for November, where mobile content companies will be targeted.

  6.23  UKTI has identified potential areas of opportunity in the Foreign Direct Investment (FDI) area and has committed resource in 2006-07 to placing a team in Sao Paulo to further explore these opportunities.

How UKTI delivers its services through Regional Teams and Devolved Administrations

  6.24  UKTI delivers advice and support on international trade to companies in the English regions, and provides them with access to UKTI's global network, through a network of nearly 40 International Trade Teams, provided typically by Chambers or Business Link operators, employing between them around 380 International Trade Advisers.  In each region UKTI has an International Trade Director who, with their regional core team, are co-located with the Regional Development Agency (RDA), and who are responsible for UKTI's strategy, delivery and stakeholder relationships in the region.

  6.25  UKTI operates as the RDAs' international trade arm. This relationship reflects the importance of UKTI giving coherence to regional and national demands on the overseas network. We work in partnership with the RDAs on strategy and priorities through a nationally-agreed Dual Key Framework (attached at Annex G (not printed here)), and jointly signed-off delivery plans at regional level. UKTI has a commitment in its 2006 Strategy to, by March 2008, have worked with the RDAs to review its international trade operations in the regions.

  6.26  A summary of the activity being undertaken by the regions and devolved administrations in respect of Brazil is at Annex H.

(b)  UKTI and Brazil—the future

  6.27  In July 2006 a new strategy was launched by UKTI following the Chancellor's statement in the Budget. Requiring UKTI to refocus resources on emerging markets, one of its main objectives is to maximise UK's ability to win market share in the new high growth economies such as Brazil. More than £5 million of UKTI resources is to be transferred from mature markets to focus on emerging markets including Brazil where the UK needs to increase its impact and take advantage of the shift in international economic activity towards the emerging markets.

  6.28  In recognition of the growing importance of Brazil as an emerging market, UKTI has started to increase its activity to promote the opportunities that exist in Brazil. The visit in March of this year of President Lula during which a number of key commercial events were organised acted as a catalyst to boost bilateral trade and investment. At the end of the visit a joint declaration was signed by President Lula and the Prime Minister which included the following commitment:

    "To maximise the potential for closer economic and commercial links, we will establish a Joint Economic and Trade Committee between our Governments."

  6.29  The JETCO was established in May of this year following the signing of the document at Annex D (not printed here) by the Secretary of State for Trade and Industry and the Minister of Development Industry and Foreign Trade, Brazil. The JETCO will systematically examine why UK companies appear to under perform in terms of trade and investment with Brazil. It will also seek to agree joint strategies to tackle the perceived impediments to bilateral trade and investment.

  6.30  Memoranda of Understanding have also been signed specifically for the energy and healthcare sectors.

(c)  UKTI resources devoted to Brazil

Staff Resource

  6.31  UKTI has representation in five cities—Sao Paulo (Commercial centre), Rio de Janeiro, Brasilia, Porto Alegre and Recife. A total of approximately 32 work on UKTI business. The cost is approximately £2.1 million.

  6.32  There are three full time staff based in UKTI HQ in London.

Finance for Programmes Relating to Brazil

  6.33  The cost of UKTI's sector focused activity, trade missions, exhibitions, seminars and other trade development activity relating to Brazil during the last three years is detailed below.


£,000
2004-05
2005-06
2006-07

365
490
288*

*  Expenditure already defrayed and committed.

CHAPTER 7:  UKTI ACTIVITY WITH OTHER STAKEHOLDERS

Science and Technology

  7.1  Sir David King and Dr Sergio Rezende, Brazilian Science and Technology Minister, signed a UK/Brazil Joint Plan of Action on Science, Technology and Innovation on 7 March during President Lula's state visit. This represents an opportunity for both countries to make real gains both in retaining our market edge in an increasingly competitive and globalised environment, and in finding solutions to social, environmental and economic problems.

  7.2  The Plan of Action will promote co-operation and encourage the development of joint scientific and technological projects in areas of common interest, particularly in relation to climate change, agriculture and health.

  7.3  The Plan includes a Year of UK-Brazil Partnership in Science through calendar 2007. Office of Science and Innovation (OSI) and FCO (GOF Economic Governance programme) have agreed to provide £150,000 each (split between the financial years). Planning for the year is in hand in Brazil. Individual projects and events will be run under the banner of the campaign by organisations such as the Research Councils, the British Council and the Royal Society. A very successful Brazil Day was held at the Royal Society on 22-23 May as a precursor, with Sir David King and Rezende both attending.

  7.4  The UK has also committed to providing £50K for a new UK:Brazil science networking fund. This would operate in a similar way to other OSI networking schemes managed by the Royal Society. We are awaiting confirmation of matched funding from the Brazilian side.

Trade and Investment Climate

  7.5  The Department for International Development (DFID) believe that an improved investment climate in Brazil and its greater insertion into global markets, including through increased trade with the UK, could have positive, poverty reducing effects, depending on the nature of the benefits and how they are distributed. DFID is working with international financial institutions and others to promote a better understanding of these issues in the region and more pro-poor policy decisions relating to them.

  7.6  DFID's Latin America Markets and International Trade programme (£7.5 million) is aimed at delivering new knowledge and strategies for poor people's access to domestic and international markets that will help strengthen the operations of the World Bank and Inter-American Development Bank. The programme is implemented through trust fund resources at the two Banks as well as through allocations of funds by DFID offices in the region, including Brazil. Among other activities, the programme has supported work by the International Finance Corporation (IFC), part of the World Bank Group, to address regulatory barriers to formalisation of businesses in the Sao Paulo municipality of Brazil.

  7.7  In addition, DFID is developing a programme to promote lesson sharing in the region on trade and poverty issues, whilst it also contributes to thinking on Brazil's regional and global role on trade agendas with a view to achieving poverty reduction in Brazil and beyond.

Sustainable Development

  7.8  The UK is establishing Sustainable Development (SD) Dialogues with China, India, Brazil, Mexico and South Africa. These are cross-departmental initiatives that provide an effective mechanism to promote collaboration and exchange of good practice on sustainable development and integrate sustainability in the UK's bilateral relationship with these countries.

  7.9  A joint statement on the UK-Brazil SD Dialogue was signed during the State Visit by Margaret Beckett and Brazilian Foreign Minister Amorim. The SD Dialogue will build on, and provide a framework for, existing country level activities as well as identify new areas of collaboration under six priority themes:

    —    Natural Resource Protection & Sustainable Management (including protecting biodiversity, tackling illegal logging, and working together to support regional and international measures on sustainable forest management);

    —    Climate Change, and Energy for Sustainable Development (through the Working Group on Climate Change).

    —    Sustainable Consumption and Production.

    —    Poverty and Inequality.

    —    Capacity Building and Institutional Development.

    —    Science for Sustainable Development.

  7.10  The Dialogues are led by Defra but are supported by other government departments, including FCO. Financial support comes from Defra's WSSD Implementation Fund and the FCO's SD Programme under the Global Opportunities Fund.



 
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