Deglobalization on the radar: Brazil can benefit from change in global supply chains

In recent months, a word has been appearing with some frequency in the conversations of managers, analysts and authorities: deglobalization. The pandemic and the Ukraine war were two events that led countries to contest their dependence on other nations in certain supply chains due to shortages and shortages of products. Now there are those who argue that the “global production processes” may be at stake.

Theresa May, former prime minister of the United Kingdom, for example, spoke about the matter during the XP Expert, which took place in early August.

“I don’t believe that we will face the end of globalization, because we know that the free market is a power for good. It helps develop economies and brings advancements around the world,” he said. “But we are certainly entering a period where companies and countries are having doubts about their supply chain processes.”

More recently, Isabel Schnabel, a member of the Executive Committee of the European Central Bank (ECB), addressed the same issue, saying that the global geopolitical backdrop has been a key factor in the rise in inflation and that recent shocks are not temporary. .

“The pandemic and the war will likely increase instability in the coming years,” he commented in a text. “Today, the world economy is in danger of fragmenting into competing security and trade blocs. The international network that connects our economies is fragile. We are witnessing alarming new forms of protectionism.”

Brazilians eyeing friction around the world

In Brazil, there are also those who comment on the issue – both within the government and outside.

Richard Rytenband, CEO of Convex Research, spoke recently on the topic. “The global economy has been alternating between cycles of globalization and deglobalization in recent centuries”, points out the expert. “Geoffrey Jones, in the book Multinational and Global Capitalism, highlights two cycles. A first wave of globalization from 1840 to 1929, followed by a wave of deglobalization from 29 to 1979. Then another wave of globalization from 1979 to 2008, followed by a wave of deglobalization from 2008 to today”.

According to Richard, the beginning of the cycle of deglobalization begins with the global financial crisis of 2008, which created mutual distrust between countries. Even before the pandemic, China and the United States “already found each other strange, waging” what became known as a trade war.

Covid-19 and the escalation of the conflict in Ukraine, however, accelerated the process.

In 1929, the year of the beginning of the last cycle of deglobalization, there was also an economic crisis that triggered the closure of economies. The period was marked by the Great Depression, the Second World War and the stagflation period of the 1970s.

“It’s a bad arrangement overall for the global economy, with reduced cooperation and wealth creation. It is a moment marked by a closed world and geopolitical tensions”, contextualizes Rytenband. “China itself, for example, is changing its economic regime and has returned to speak of Common Prosperity [termo da era Mao]which brings characteristics of a more closed and interventionist country”.

Brazil can benefit from deglobalization event

For some specialists, Brazil can take advantage of the deglobalization process – having even benefited a little from the changes that have taken place so far.

“The war between Ukraine, which is a major food producer, with Russia, which stands out in terms of fertilizers and fuels, was positive for Brazil as it shifted foreign demand here, mainly for food,” explains Tatiana Pinheiro, chief economist. from Galapagos Capital.

In wheat, for example, Brazil gained part of the international market, exports of the commodity, until July this year, already reached 2.51 million tons, more than the 1.29 million tons exported throughout last year.

“Brazil benefits from being a net exporter of commodities. We have a positive balance. We are leaders in the production of several and in others we are the five largest producers”, adds Tatiana. “In addition, our export agenda is very diversified. Other countries have their exports very concentrated. You look at Argentina, it’s soy. Chile, metals”

The economist points out that Brazil, until 2022, had 18% of its exports based on soybeans. Ore follows behind, with 12%. Oils and fuels, with 9%. In these five products we have 50% of the tariff. “We have another 50%, which includes cotton, coffee, sugar, chicken and so on”, she says.

In addition to supplying non-manufactured products, whose chains were impacted, Brazil, according to specialists, can also benefit from the process of redistribution of the industrial production chain.

“In the process of regionalization, it makes sense for Brazil to benefit. It is in a privileged position, being able to serve both the United States and Europe, and it delivers. And our labor is cheap. The cost of work here is also competitive”, defends the Galápagos specialist.

She recalls that, previously, the country has experienced other industrialization processes – between 2007 and 2010, for example, there was the arrival of several industries, which left, however, when the real strengthened and labor became more expensive.

“In terms of salary, we are competitive again, with a weaker exchange rate, but I don’t know if the lack of qualifications will get in the way. The evaluation of Brazilian students is very low”, explains the economist.

BNDES with an eye on what to do to take advantage of the movement

Brazilian authorities, obviously, do not fail to follow the issue, observing how the country has to behave in order not to be negatively impacted by the side effects of this possible process – and even having some advantage.

“Brazil, even before the pandemic or the Ukraine war, was already positioning itself to become more attractive to foreign capital”, explains Lourenço Tigre, financial director of BNDES. “Over the years, there has been a reduction in speculative risk and an increase in financial innovation, with an increase in the instruments that the bank has to finance infrastructure projects and production chains”.

According to the CFO of the National Bank for Economic and Social Development, for about three years, foreign investors have shown more interest in investing in the country, especially those with a long-term focus.

“We saw that in Davos very clearly. It was an interesting opportunity to find out how we are perceived. And we are seen as an important destination for years to come,” she defended. “In addition, we do road shows frequently and the demand for meetings has grown in recent years. It’s a very noticeable thing.”

For the institution’s executive, it is necessary, however, to continue improving the business environment. The fact that Brazil is a friendly and well-located nation are differentials, but they are not the only factors taken into account.

“There is all the discussion of friend shore and nearshore, having the production of supplies in close and friendly countries, with strong commercial and diplomatic relationships, and with well-established democracies. We fit into it. We have what seems to be a secular opportunity in Brazil, we are keeping an eye on what we need to do so as not to miss it”, explains Tigre.

Another Brazilian differential, for the bank, is the energy matrix, which also helps to attract the attention of investors.

“We already have one of the cleanest electrical energy matrices in the world and the potential to explore this front is enormous. The ability to export clean energy is something that is being discussed. Hydrogen is in the discussion, wind offshore also. We are involved in financing lines for these types of activities”, explains the CFO.

The BNDES, according to Tigre, will continue to do what it has been doing to seize the moment, working to reduce the infrastructure gap in Brazil, working mainly in partnerships with the private sector.

“The bank here has a very important inducing role. There are two ways. First the theme of project modeling. When we have well-defined projects, it becomes easier for the private sector to be interested in financing the projects. On the other hand, the BNDES has been looking at these financial innovations in the quest to be a single-product bank”, debates Lourenço.

He highlights, among other programs, the Fábrica de Projetos, which models privatizations, concessions and public-private partnership programs (PPPs) and the line of credit back stop, in which the BNDES acts as an intermediary in financing processes.

In addition to investing in infrastructure, however, the bank has been taking new initiatives, having started to act, for example, on the education front.

“BNDES, either through capital allocation or through guarantee funds, such as FGI-Sebrae and FGI PEAC (now in its second edition). We work with Sebrae educating entrepreneurs. The effect of this, in the medium and long term, is to increase productivity”, explains Tigre.

Other solutions that can help Brazil to become a destination for industries in the midst of the deglobalization process, however, are beyond the bank’s scope. Tax reforms, to facilitate the payment of taxes, and labor reforms, allowing for easier contractions, would also be differentials. The country, for Tigre, however, is advancing.

“We made solid regulatory frameworks. Brazil is well positioned. It’s bringing the private market into the conversation. The BNDES’ participation should not be limited to releasing funds. We generate much more effect by creating the basis for the market to leverage investments”, she explains. “We are recycling capital in our stock portfolio. We’ve sold R$80 billion in shares so far and we’ve taken a piece of that capital and reinvested it. We managed to leave more mature investments to allocate capital in instruments that are inducing the Brazilian market”, she concludes.

Deglobalization theory meets resistance

Although there are movements by countries seeking to reduce their dependence on global production chains, there are also experts who argue that talking about deglobalization would be an exaggeration.

Otaviano Canuto, a senior fellow at the Policy Center for the New South and former vice president at the World Bank, recalls in an article on the Poder 360 website that, despite recent obstacles, world trade, since 2020, has surpassed pre-pandemic levels. Even the war in Ukraine led, he said, to a drop in transactions below expectations.

“On the financial side, it can also be said that ‘the death of globalization was an exaggerated announcement’, judging by the volumes of external assets of banks in all sectors in the set of countries”, says Canuto to the portal. “They had peaked at the time of the financial crisis, then dropped, but regained exuberance from 2016 onwards.”

For the specialist, current global chains, despite being shaken, have a reason to exist – and this is based entirely on the issue of efficiency. Abandoning the current formation will generate costs and, in the past, protectionist measures have proved negative for companies and also for jobs.

Some rivalry, for Canuto, however, should persist, especially when it comes to cutting-edge technology and national security.

“From the Western Balkans to Latin America, governments see a huge post-covid economic opportunity from reshoring and nearshoring. But such ambitions can prove to be too optimistic”, says Canuto, in partnership with Justin Yifu Lin and Pepe Zhang, in an article to the Project Syndicate.

For experts, countries that want to attract investment, even with the situation, will have to do their “homework”. “Without sustainable improvements in domestic fundamentals – such as macroeconomic stability, regulatory and legal certainty and simplicity, physical infrastructure, education and training, productivity and innovation, as well as export promotion and facilitation – investor interest will be modest and short-lived” , they explain.

They call attention to the fact that governments, even in the midst of this “possible opportunity”, should not support unviable companies.

“Hopes of relocation and proximity – as well as a broader revitalization of national industries or exports – are more viable in countries committed to fundamentals, and less in those that use reforms of their supply chains as political arguments”, they conclude.

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About Yadunandan Singh

Born in 1992, Yadunandan approaches the world of video games thanks to two sacred monsters like Diablo and above all Sonic, strictly in the Sega Saturn version. Ranging between consoles and PCs, he is particularly fond of platform titles and RPGs, not disdaining all other genres and moving in the constant search for the perfect balance between narration and interactivity.

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