Lula's Rules

Just when it was looking as if the Bush administration would stamp its economic model on the entire Western Hemisphere, a credible challenge has emerged. South America's largest and most self-reliant economy is very likely to elect a popular moderate leftist. Luiz Inacio Lula da Silva of the Workers Party in Brazil has campaigned vigorously against President George W. Bush's proposed Free Trade Area of the Americas (FTAA). First imagined by Ronald Reagan, it would essentially extend the North American Free Trade Agreement from the Arctic Circle to Tierra del Fuego. With a crucial negotiating session co-chaired by the United States and Brazil in Quito, Ecuador, set for just after Brazil's Oct. 27 runoff elections, and negotiations scheduled to continue until January 2005, the FTAA will not be the cakewalk the United States wants.

But the United States has substantial leverage to impose its vision -- or impose heavy costs on those who reject it. The International Monetary Fund, working hand in glove with the U.S. Department of Treasury, is taking advantage of Brazil's nasty public-debt situation to impose its usual conditions on Brazil in exchange for a bailout: high interest rates, fiscal surplus, reduced social spending and more subtle pressure to cooperate with the norms of neoliberal trade. The fact that Lula, as the Brazilian favorite is universally known, has already pledged to continue Brazil's debt payments and to run a budget surplus speaks volumes about how even large economies can eventually succumb to the pressure of trade and investment flows. Twenty years ago, Brazil never would have accepted such restrictions on its economic sovereignty.

From the Brazilian perspective, the FTAA is not a genuine free-trade area at all but a preferential trading system that benefits the United States at the expense of its Latin-American trading partners. The trade deal would not address many elements of U.S. protectionism such as agricultural subsidies and steel tariffs. Lula has called the current FTAA "an annexation of the Latin-American economies to the economy of the United States." His largest supporting union confederation, the Central Unica de Trabalhadores, has been highly active against the FTAA. Even the current Brazilian president, Fernando Henrique Cardoso, and his handpicked candidate for successor, José Serra, have questioned the FTAA.

While Lula has become the darling of global anti-FTAA activists, his resistance to the FTAA does not reflect crude anti- American leftism but a broadly based resentment against a palpable double standard. The agricultural subsidies in the latest U.S. farm bill, along with recently enacted steel tariffs, hit Brazil particularly hard on its most important exports: soy, orange juice, beef, sugar and steel. Yet the Bush administration has refused to discuss these trade barriers at the FTAA negotiations, contending that these should be addressed at the global World Trade Organization talks. "To be productive for us it has to be a total negotiation," says Giancarlo Summa, Lula's spokesman, because in its current form the FTAA "is a very good deal for the United States, but not a very good deal for us."

The current draft of the FTAA would also strip Brazil of its tools for encouraging industrial growth, making South America's largest nation more dependent on American capital. For example, it would eliminate Brazil's domestic-content policies, in which multinational corporations selling in Brazil, such as General Motors, agree to include a percentage of domestically manufactured parts. (The United States encouraged Toyota and Honda to locate factories in America as evidence of Japan's openness.) Domestic content helps Brazil transfer technology and stimulate nascent industry. The current FTAA, building on NAFTA's infamous regulation-busting Chapter 11 [see Chris Mooney, "Localizing Globalization," TAP, July 2, 2001], would also give corporations the power to sue national and local governments over a whole range of health and safety regulations as restraints of free trade.

On the issue of intellectual property, the Bush administration wants Latin-American nations to accept a degree of patent protection for multinational corporations that even the World Trade Organization has refused. Using World Bank statistics, Mark Weisbrot, co-director of the Washington-based Center for Economic and Policy Research, has calculated that Brazil's net losses from increased royalties and licensing fees would outweigh the benefits from increased trade. These investment and intellectual property rules are not ones that the United States or any other industrial country followed at earlier stages of its development. All of which has Antonio Prado, an executive coordinator of Lula's proposed government program and an economic adviser to the Workers Party, wondering why Brazil should join the FTAA. "Right now there is no element that is good for Brazil," says Prado, who quickly qualifies this with, "It is not a question of total negation of the FTAA. It is a question of mutual benefits."

In light of Lula's resistance, the United States is trying to ensure that he does not become the rallying point for a more global attack on the Washington Consensus. The Bush administration has stepped up efforts to peg Lula as an anti-trader, an image encouraged by the fact that, in the event of a standoff, some of Lula's supporters think they can walk away from the FTAA altogether. "Brazil could continue negotiations with Europe and find other markets like India, China, South Africa, Europe," says Prado. "The U.S. market is not the only one." In principle, the Brazilian economy, the eighth largest in the world, is big enough to raise its own capital and produce mainly for its own market (as the United States long did for its market). While Brazil is unlikely simply to walk away from the FTAA, its relative independence will strengthen its hand at the negotiating table. Taking this position is a luxury most other economies in Latin America cannot afford.

Even with this unusual latitude, however, Brazil may yet be brought to heel. Over the past year, the United States has been negotiating separate trade deals with Central-American nations, Caribbean ones, the Andean countries and Chile. The United States already has the bigger economies of Mexico and Canada locked into NAFTA. The Bush administration has even suggested it will negotiate a regional trade deal that excludes Brazil, if necessary, leaving Brazil to face higher trade barriers in its dealings not just with the United States but with its Latin-American trading partners. Nonetheless, even this strategy may not be wholly successful for the United States. The normally pliant Argentina recently rejected an American offer to speed up FTAA negotiations.

Bush's ace in the hole is the International Monetary Fund. Under the Cardoso administration, Brazil's public debt exploded from less than 30 percent of gross domestic product in 1994 to more than 60 percent at present. This was due mainly to the Cardoso administration's persistently high interest rates, which encouraged investors and financial speculation but slowed growth and kept debt payments high. A $30 billion IMF loan on Aug. 7 calmed panicky investors for a time, but it also brought the restrictive conditions Lula reluctantly agreed to after a meeting for hours with President Cardoso. Even worse, those concessions may have been for naught. "We actually did the numbers based on optimistic assumptions, and it doesn't work," says Weisbrot. "Either they are going to default or they are going to have a new interest-rate regime." Summa agrees, saying "It's urgent to lower the interest rate as low as possible." But lower interest rates will also scare off some investors, decreasing the value of the Brazilian currency and thus increasing the cost of that portion of debt denominated in U.S. dollars. A post-election investor panic would force Lula either to bargain away more sovereignty for more IMF dollars or to go the way Prime Minister Mahathir Mohamed did in Malaysia and implement capital controls. The latter would burn bridges with the IMF and alienate foreign investors.

But if Lula's position is shaky in relation to the IMF, his stance on the FTAA appeals beyond the constituencies of labor and the poor. Large swaths of Brazilian business and agriculture hope Lula will negotiate fairer trade arrangements with the United States. He even picked a textile magnate, Jose Alencar, from a conservative party to be his vice presidential running mate. For those reasons, though Lula has the political support at home to give the United States hell, he may not fulfill the hopes of his most radical anti-FTAA supporters, who have no other powerful figurehead to turn to.

Even though Lula has more running room than any other Latin American economy would allow, he may not end up using his leverage to its full potential. Caught between the constraints of U.S.-dictated rules of trade and finance on the one hand and widespread popular sentiment against the FTAA on the other, Lula will pay a heavy price for any decision he makes. Regardless of his final choice, his limited options illustrate how even moderate leftists usually end up sounding like everyone else when it comes to obeying the neoliberal formula. If Lula bends to Washington's will, he would be following in a grand tradition of Latin-American presidents who enter stage left and exit stage right.