Brazil’s Port Costs Hamstring Trade

For insight into why Brazil has fallen far short of becoming a global trading and economic power, look no further than the congested docks at its port of Santos, South America’s largest and perhaps most inefficient shipping hub.

Until Thursday, when 11,000 union workers finally returned to work, trade had been paralyzed by a 15-day strike at the port 70 miles from Sao Paulo, South America’s largest city. The result: a monumental backup of containers and bulk commodities such as soybeans, coffee and orange juice concentrate.

It’s no isolated occurrence. Work stoppages are chronic here, as are customs delays and high dockage fees. Together, they make the average cost of moving freight through Santos twice what it is in competing South American ports. That prompts shippers to go through Buenos Aires or other hubs and adds to the “Brazil cost”--the extra expense and hassle of doing business in South America’s biggest economy.

Resolution of the recent strike speaks volumes about the difficulties Brazil faces in breaking out of its once-closed economy, overcoming its mediocre trade status and achieving its often-touted potential as a emerging world economic power.

Port operators say that the strike settlement gives them “productivity gains” but that the unions still retain too much arbitrary control over work rules, adding unnecessarily to freight-handling costs and hurting the port’s competitiveness.

The stakes are high in these skirmishes, not just for this resource-rich nation of 170 million, but for its neighbors, including the United States. They stand to gain from a stronger Brazilian economy and, by extension, a better market for their exports.

Economists point out that trade is one of several crucial contributors to any economy’s growth. Trade makes an economy efficient and gives it access to the latest technology, said Richard Newfarmer, a World Bank economist. Poor trade levels hold an economy back by stunting domestic production and depriving it of foreign exchange, weakening a nation’s own currency.

“When Brazil is growing more rapidly, it is buying more [from the United States],” said Albert Fishlow, senior economist at Violy, Byorum & Partners in New York and a specialist on Brazil. “Our exports’ rate of growth to Brazil in the 1990s, when it was opening its economy, was among the most rapid that the U.S. enjoyed anywhere.”

No one expects Brazil to immediately become a trading tiger on the order of a South Korea or Singapore; it is relatively new to the world trading scene. Brazil is still converting to open markets from its formerly closed economy, in which imports were effectively kept out.

Only in 1992 did Brazil begin allowing outside investment and competition in a big way.

Still, Brazil’s trade performance has been disappointing. Its combined exports and imports totaled $111 billion last year, far under targeted levels and only half of Mexico’s trade, even though Brazil’s economy is 50% larger. Although Brazil’s economic output ranks 10th in the world, its trade lags, ranking just 14th.

Compounding Brazil’s anemic overall trade last year was a trade deficit that caught everyone here by surprise. A January 1999 devaluation of the currency, the real, made Brazilian goods 30% cheaper on world markets, giving the government reason to expect a trade surplus of as much as $10 billion last year. Instead, it got a $700-million deficit.

Brazil’s economy is expected to grow at an annual rate of 4% this year, still lackluster for an emerging economy that needs to raise living standards for an expanding and impoverished population. Mexico and Chile, both better traders than Brazil, have registered annual growth rates of 6% or more in recent years.

Two decades ago, inefficient trade in Brazil was not only tolerated, it was encouraged. In the ports, make-work jobs padded payrolls but won votes. That approach also drove port handling costs sky-high. The discouragement of trade was of secondary importance.

Times have changed. Brazil now is aggressively courting foreign investment in a wide range of domestic industries, from autos to consumers goods, seeking to retool its economy. And it has been highly successful. In luring $30 billion worth of direct foreign investment last year, Brazil ranked second only to China.

But Brazil needs exports to balance its trade accounts to ensure growth, said Edmar Bacha, senior economist at Banco BBA Creditanstalt in New York and former head of Brazil’s National Economic and Social Development Bank.

“When Brazil was a closed economy, exports didn’t matter much; but now they do,” Bacha said. “We need to generate dollars with exports so we can import goods and services and attract direct investment without creating a deficit.”

Brazil’s exports actually have grown, but not fast enough to keep pace with the rising flow of imports impelled by growing consumer demand in what might be Latin America’s most rapidly expanding economy this year, said Paulo Levy of the Institute of Applied Economic Research in Rio de Janeiro.

Exports, especially of manufactured goods, have been growing strongly, Levy said, rising 15% last year. But import growth has been much higher than anticipated, driving the trade balance into “negative terrain,” he said.

The clogged and costly port system is not the only reason for Brazil’s disappointing trade. Prices of Brazil’s main exports, half of which are farm products and raw materials, fell an average 15% due to a global commodities slump last year. Meanwhile, the price of oil, which Brazil must import, rose.

But the ports and other poor transportation infrastructure are symptoms of a malaise costing the nation billions in trade dollars. Increasing numbers of ships simply bypass Santos altogether, sending freight containers and big-ticket manufactured goods to Buenos Aires to avoid the delays and union rules that drive up the cost of handling containers in Santos.

Incredibly, Buenos Aires recently surpassed Santos as South America’s largest handler of container cargo, further testimony to shippers’ preference for skipping Santos. That’s despite the fact that Santos serves an immediate market--the state of Sao Paulo--as big in population as the entire nation of Argentina.

Shipments destined for the Brazilian market are often trucked from Buenos Aires back across the border, adding costs that make imports less affordable. Brazilian exports that make the same detour become less competitive. That adds up to less trade.

To make the Santos port run more efficiently--and avoid going broke--private port operators are trying to impose what they say are their legal rights to streamline work crews and rules, reduce costs and ultimately make the port more competitive. But the unions are fighting that effort and last month ordered thousands of workers off the job or to slow down work.

For years, the Brazilian government, which controlled the ports, complained about the power of the unions, but it lacked the political will to challenge them. Now, with all Brazilian ports privatizing, labor’s power is being contested by private operators such as Santos Brazil, which runs Santos’ largest container freight operation.

In fact, the recent strike was partially provoked by Santos Brazil, whose investors include Darby Overseas Investments, a U.S.-based partnership formed by former Treasury Secretary Nicholas Brady. Santos Brazil was attempting to assert what it claims is its legal right to determine the number of stevedores in work gangs.

When Santos Brazil refused last month to adhere to a long-standing union rule that a minimum of 12 stevedores be used to unload a shipment of containers, instead specifying just two, the strike was launched.

“We were complying with the law that’s been on the books since 1993,” said Joao Pereira de Mello, Santos Brazil’s corporate affairs director. “It’s just been difficult to enforce it, to make them work in the proper way.” Mello said a federal labor tribunal upheld the company’s right to shape work crews in a ruling just last December.

The unions maintain they were not on strike but had walked out to protest what they say is operators’ efforts to do away with work rules altogether. The unions say that could ultimately raise port costs by creating unsafe working conditions and giving operators too much control.

“Logically, workers are against that,” said Joao Saldana Fonseca, head of the stevedores union.

Mello said the port operators “managed to get half the things we wanted and showed the unions that we can operate without them, at least in some capacity. But the union still has too many privileges, and the ‘Brazil cost’ is still there.”