Hearing on U.S.-Brazil Trade and Investment Relationship: Opportunities and Challenges
SUBCOMMITTEE ON TRADE
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
June 12, 2013
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
SAM JOHNSON, Texas
|SANDER M. LEVIN, Michigan
CHARLES B. RANGEL, New York
JIM MCDERMOTT, Washington
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
XAVIER BECERRA, California
LLOYD DOGGETT, Texas
MIKE THOMPSON, California
JOHN B. LARSON, Connecticut
EARL BLUMENAUER, Oregon
RON KIND, Wisconsin
BILL PASCRELL, JR., New Jersey
JOSEPH CROWLEY, New York
ALLYSON SCHWARTZ, Pennsylvania
DANNY DAVIS, Illinois
LINDA SÁNCHEZ, California
JENNIFER M. SAFAVIAN,Staff Director and General Counsel
SUBCOMMITTEE ON TRADE
KEVIN BRADY, Texas
|CHARLES B. RANGEL, New York
RICHARD E. NEAL, Massachusetts
JOHN B. LARSON, Connecticut
EARL BLUMENAUER, Oregon
RON KIND, Wisconsin
Mr. Thomas F. McLarty III
Chairman, McLarty Associates
Dr. Andrés R. Gluski
Chief Executive Officer, AES Corporation
Mr. Doug Hundt
President of Underground Solutions, Vermeer Corporation
Mr. Roberto Marques
Company Group Chairman, Johnson & Johnson Consumer Companies of North America
Hearing on U.S.-Brazil Trade and Investment Relationship: Opportunities and Challenges
U.S. House of Representatives,
Committee on Ways and Means,
[The advisory of the hearing follows:]
The subcommittee met, pursuant to call, at 10:00 a.m., in Room 1100, Longworth House Office Building, Hon. Devin Nunes [chairman of the subcommittee] presiding.
*Chairman Nunes. Welcome, everyone, to our hearing on the U.S.‑Brazil Trade and Investment relationship.
I would first like to recognize the Deputy Chief of Mission at the Brazilian Embassy, Mr. Araujo. Thank you for coming, Mr. Araujo.
Last week Mr. Rangel and I met with the Brazilian Government folks from the Embassy to try to air out some of the issues on the Brazilian side as it relates to trade, and we had a very good meeting. So I would like to thank the Brazilian Embassy for being here.
The U.S. trade and investment relationship with Brazil deserves to be recognized as one of our most important. Brazil has been our eighth largest trading partner in recent years, accounting for nearly $60 billion in trade and a U.S. surplus of over $5 billion.
Since 2000, Brazilian investment in the United States and U.S. investment in Brazil have more than doubled. Brazil’s economy is now the sixth largest in the world, roughly a third larger than India and Russia’s, And yet the relationship still has a lot of room to grow. Brazil’s trade‑to‑GDP ratio, for example, is among the world’s lowest.
However, the ratio is increasing fast. As Brazil’s middle class rapidly grows, it consumes more and helps drive increased trade flows. The drive by Brazilian businesses for global competitiveness will have the same effect.
Viewing Brazil simply through the lens of the BRICs sells the country short. It is a strong democracy and a rapidly developing regional power that is unaffected by the chronic mis-government and social pathologies that plague some of our other BRIC nations.
Our relationship also faces some challenges. For example, Brazil has ratcheted up its local content requirements, limiting the access of Brazilian businesses to U.S. goods and services that could otherwise help boost Brazil’s global competitiveness. But overall, we have arrived at a promising moment to seize opportunities and resolve trade irritants by pursuing a constructive, mutually beneficial bilateral trade agenda.
Currently there are around 30 U.S.‑Brazil bilateral dialogues. About half focus on trade and economics with the White House, USTR, Commerce, State, Treasury, and USDA all leading different dialogues with numerous Brazilian agencies. One of the dialogues, the CEO Forum, on which one of our witnesses, Mr. Gluski, has served, helpfully allows policy makers to tap the expertise of senior business leaders from both countries.
But the dialogues lack common branding and a common schedule, which undermines visibility. I am exploring how we can successfully elevate the U.S. Brazil relationship on the Hill by slotting these dialogues into a new, and overarching strategic economic dialogue. Congress could then more effectively provide oversight, incorporate parliamentary level engagement, and ensure accountability for results.
I plan to introduce a bill to advance that goal, and I welcome input from our witnesses.
I would like to welcome amd introduce my Ranking Member, Mr. Rangel. This is our third hearing in a row ‑‑ all the witnesses were agreed to on a bipartisan basis. So we have now set a record, I think, for this Committee for the most bipartisan cooperation.
With that, Mr. Rangel.
*Mr. Rangel. Thank you, Mr. Chairman, and thank you for holding these hearings.
As most of you know, we have been dealing with Russia, India, China, and certainly we cannot ignore the terrific rise in international power of the great nation of Brazil and the fact that one of you has been chosen to lead the World Trade Organization, it means that we do expect that Brazil would be that closing connection between the United States and other countries in Central and South America so that, indeed, the hemisphere would be in a much better economical and political position to improve the quality of life for all of our people.
I do hope, not at this hearing, that we will be able to see how the African Brazilian population that has been able to enjoy this sharp increase in the improving economy of Brazil and what is being done educationally, as well as politically, to make certain that as in the United States we are able to incorporate all of the talents that all of our citizens have. Discrimination and poverty is a very costly commodity, and the quicker that we can overcome that in the United States and in other countries, the better it is, I think, for the entire world. And I know our witnesses agree.
So at the appropriate time I hope you can direct me to the areas that you are proudest of in the assimilation of all Brazilians into this ever shining and ever growing economic success.
And I thank you for this opportunity, Mr. Chairman.
*Chairman Nunes. Thank you, Mr. Rangel.
Our first witness is Ambassador Mack McLarty, Chairman of McLarty Associates. Mr. McLarty was White House Chief of Staff and then Ambassador‑at‑Large to Latin America under President Clinton.
Our second witness is Mr. Andres Gluski, who is CEO of AES Corporation and has a Ph.D. in economics. He has been serving on the Commerce Department’s Bilateral CEO Forum, and is a member of the Brazil‑U.S. Business Council.
Our third witness is Mr. Doug Hundt, President of Vermeer, Underground Solutions.
And we will finish with our fourth witness, Mr. Roberto Marques, Chairman of Johnson & Johnson’s North American Consumer Products Business. He will testify on behalf of both J&J and the Brazil‑U.S. Business Council where he serves on the board.
We welcome all of you, and we look forward to your testimony. Our time this morning is limited. So please limit your statement to five minutes, and we will limit questioning to five minutes per member in the hope of giving as many members as possible the opportunity to be recognized.
With that I now recognize Mr. McLarty for five minutes.
STATEMENT OF THOMAS F. McLARTY, III, CHAIRMAN, McLARTY ASSOCIATES
*Mr. McLarty. Chairman Nunes, distinguished members of the Committee, thank you for hosting this very timely and important hearing on Brazil and the growing bilateral relationship between our two countries.
I have already submitted my written testimony for the record. So today I will be very brief in my comments.
As you know, Brazilian President Dilma Rousseff will be traveling to Washington in October. This will be the first state visit by a Brazilian president since President Clinton hosted President Cardoso in 1995. And after 18 years, both our countries and, indeed, the world have changed considerably.
Brazil’s rise, as you appropriately noted, Mr. Chairman, together with other emerging countries and markets, such as China and India, have shifted and have altered the global dynamics. I strongly and sincerely believe the United States has much to gain from a more intensive, more focused engagement with Brazil.
With that in mind, I would like to very briefly outline four areas of strategic cooperation that I believe have real potential for mutual benefit: energy; democracy, peacekeeping and defense; China; and trade and investment.
First,energy. As you know, Brazil has discovered enormous pre‑salt oil deposits off its coast, but deep water drilling is risky, to state the obvious. Then United States’ technology and operational safety expertise could clearly be coupled with Brazilian know‑how to produce meaningful results, a natural area of collaboration.
In addition, Brazil, like the United States, is rich in shale gas reserves. Mr. Chairman, as you know, a Brazilian delegation, both congressional and business delegation, recently visited the United States to learn more about our experience in this are, again, highlighting the potential for bilateral cooperation.
And lastly, thanks to this Committee’s leadership in lifting the ethanol tariff, our two countries are more aggressively able to pursue business opportunities in ethanol production, as well as jointly create development opportunities in third markets.
The second area is cooperation in democracy, peacekeeping and defense in our hemisphere and beyond. Though Brazil’s cultural tendency towards nonintervention can limit the depth of its cooperation on certain issues like nonproliferation, Brazil has been a steadfast partner in peacekeeping, in Haiti, in Democratic Republic of Congo, and is seeking greater influence in the world.
More broadly, Brazil is taking a strategic approach to defense cooperation and force modernization. The Defense Cooperation Agreement our Nation signed in 2010 is already helping Brazil enhance its military capabilities and helping us cement a strategic relationship with a potential global security partner.
Third, China. Both our countries have much to gain from China’s rise as millions of new consumers join into the marketplace. At the same time, we are mindful of and understandably concerned about China’s potential impact on domestic competitiveness. Our countries can benefit from jointly encouraging China’s emergence not only as a global leader and participant, but also as a global stakeholder certainly in the area of more balanced and stable international monetary system.
Finally, trade and investment. Since 2006, goods and services exports from the United States to Brazil have more than doubled, approaching $63 billion in 2011, and in addition, the United States has long been one of the largest investors in Brazil. We have got a broad range of investment from agriculture in the plans to Embraer in Florida. This creates good jobs here in the United States, an area for further development here.
So, Mr. Chairman, for many years and for many reasons Brazil has been a secondary focus in many ways of U.S. foreign policy. Today, however, our neighbor’s rising role creates an opportunity for our two nations to work together in shaping a more peaceful and prosperous future, reflecting our democratic values.
Sustained, purposeful, high level U.S. engagement and commitment will be essential to realizing the promising opportunities I have outlined here. I am encouraged by the leadership that you have shown with this hearing, and I certainly look forward to responding to and answering any questions you or your committee members may have.
[The statement of Mr. McLarty follows:]
*Chairman Nunes. Thank you, Mr. McLarty.
Mr. Gluski, you are now recognized for five minutes.
STATEMENT OF MR. ANDRES R. GLUSKI, CHIEF EXECUTIVE OFFICER, AES CORPORATION
*Mr. Gluski. Thank you very much, Chairman Nunes, Congressman Rangel, and members of the Committee.
It is an honor to be here today to assist in any way I can to better U.S.‑Brazilian relations and understanding.
I am the CEO and President of the AES Corporation, a Fortune 200 company headquartered in Arlington, Virginia. We own and operate electric generation plants and electric distribution companies in 25 countries, including Brazil, where we serve about 6.5 million customers in the City of Sao Paulo,and another 1.2 million customers in Rio Grande do Sul. In addition, we operate 3.3 gigawatts of hydro and thermal generation capacity in the country.
As Brazil is one of our most important businesses, I am a member of the U.S.‑Brazil CEO Forum. I am also a member of the Business Roundtable and one of the Directors of the Council of the Americas.
When speaking of U.S.‑Brazil trade relations, there is much we can do to increase trade and investment between the two largest economies in the Americas. Brazil’s economic policy differs from the U.S. in having a more prominent role for the central government. It is for this reason that the National Development Bank, BNDES, has played an instrumental role in the execution of Brazil’s industrial policy.
In this regard, they have actively financed various sectors of the economy, lending more money last year than the World Bank and Inter‑American Development Bank combined.
However, the private sector still plays the key role in domestic capital markets. Sao Paulo’s stock exchange, the Bovespa, is one of the largest stock exchanges in the world by capitalization.
Brazil is not only a destination for U.S. investments. It is also a source of capital for partnerships and even a source of direct foreign investment in the U.S.
AES’ two largest companies in Brazil, AES Tiete and AES Electropaulo, are listed on the Bovespa, and we are controlling partners together with BNDES in both. It is important that the U.S. tax policy recognizes the new realities of the growth of emerging capital markets and does not discriminate against investment in controlled companies that are locally listed versus private partnerships.
A bilateral taxation treaty between the two countries would further incentivize investments in both countries.
Today there are tremendous complementarities between the two economies. Brazil is in the midst of an offshore oil boom which will require U.S. technology services and investment. The country is also fortunate to have substantial shale gas deposits, an area where U.S. companies possess a clear competitive advantage.
While certain property ownership issues must be resolved in Brazil, U.S. companies should be prepared to participate.
Another area for collaboration is the use of Brazil’s strength as a bioethanol producer, both to increase the availability of ethanol products in the U.S. and to establish a dependable base for U.S. bioengineering technologies.
There are many good examples of successful binational cooperation. Embraer is a world leader in the production of regional jets and relies on U.S.‑made avionics and turbines. AES has also become one of the leaders in the Brazilian electricity sector and recently spun off a $1 billion telecommunications company that it built from the ground up in Rio de Janeiro and Sao Paulo.
GE currently produces electric components in Brazil, including wind turbines, to comply with high domestic content requirements. High domestic content requirements admittedly increase the cost of doing business in Brazil, but it is a national policy aimed at increasing domestic value-add.
Brazil and the U.S. share many common values which facilitate strong ties. In Brazil AES helped normalize electricity service and brought the benefits of electricity to two and a half million people in the shanty towns or favelas of Sao Paulo and the rural areas of Rio Grande do Sul. Together with USAID, another two million people will benefit from improved electrical service in Sao Paulo.
Public‑private partnerships can work. As the first private company to partner with the Millennium Challenge Corporation established by Congress in 2004, AES brought electricity to more than 180,000 people in El Salvador in only three years.
We thank you for your support in helping us make a difference.
[The statement of Mr. Gluski follows:]
*Chairman Nunes. Thank you, Dr. Gluski.
Mr. Hundt, you are recognized for five minutes.
STATEMENT OF DOUG HUNDT, PRESIDENT, UNDERGROUND SOLUTIONS, VERMEER CORPORATION
*Mr. Hundt. Chairman Nunes, Ranking Member Rangel, and members of the Trade Subcommittee, thank you for the opportunity to testify today.
My name is Doug Hundt, and I serve at Vermeer Corporation located in Pella, Iowa, and I am President of our Underground Solutions and our global operations for Vermeer.
For more than 65 years, Vermeer Corporation has been a leader in providing agricultural and industrial equipment that is built tough, that is reliable, and that has value, and we also back that by a tremendous customer service. Vermeer is a privately held company. We have 2,400 people located in Pella, Iowa and an additional 600 people throughout the world, and we reach our customers in more than 60 countries. Our footprint extends around the world, including Brazil.
Vermeer has had a presence in Brazil for over 30 years through its dedicated in‑country dealers. Most recently, three years ago, we invested in a facility to enhance our distribution and also localize and support our subsidiaries in the region, and we are extremely bullish on Brazil. It is a market with a great need for the products we manufacture across all of our segments.
We serve the infrastructure, energy, renewables, and mining markets, and our business is growing rapidly. Brazil, as I said, has tremendous growth, and we have that as one of our top focuses for our company.
While there is great potential in Brazil and we are very bullish on Brazil, there is also great challenges. Beyond the normal challenges of doing business internationally, in Brazil we do engage in complexity in trying, for example, to get our business licenses, to get our export licenses, that has taken us between six months and 12 months, and in other countries we often see that process in a shorter time period. So although those are challenges, those are also things that we continue to work through in country.
Perhaps our most pressing challenge facing our country and Brazil is the cost of importing equipment. After factoring in freight, insurance, import duties, three cascading taxes, and 13 additional fees, the purchase price for a customer in Brazil purchasing our equipment is oftentimes 60 percent higher than a customer who had purchased the equipment in the United States. So often for our customers that certainly becomes a big challenge, and again, that is our most pressing issue to date for our company.
So lowering the costs, what that does is obviously increases the accessibility for our products and creates jobs in the United States.
We strongly support constructive and positive ways in which the United States can build a closer economic and trading relationship with Brazil. Our CEO, Mary Andringa, feels also strongly about this relationship, and she, too, serves on the U.S.‑Brazil CEO Forum, a unique venture where both the private sector and government of both countries engage issues and seek results in a positive way.
Both the United States and Brazil face political and structural realities that affect the discussion. Yet we believe the timing for increased conversation with Brazil is right. We believe in more visible, transparent, and higher profile U.S.‑Brazil dialogue ought to occur regularly. It should establish clear milestones to measure progress, building off early dialogues and efforts.
We believe as well that Brazil and the United States can and should be working closely together in the World Trade Organization and other forums to advance more open and competitive international economy to achieve common interests.
Working to grow Brazilian and U.S. economies and working together in common international goals will help grow manufacturing, jobs and opportunities.
Thank you, and again, I appreciate the opportunity to testify today.
[The statement of Mr. Hundt follows:]
*Chairman Nunes. Thank you, Mr. Hundt.
STATEMENT OF ROBERTO MARQUES, COMPANY GROUP CHAIRMAN, JOHNSON & JOHNSON CONSUMER COMPANIES OF NORTH AMERICA
*Mr. Marques. Thank you, Chairman Nunes, Ranking Member Rangel, and distinguished members of the House Ways and Means Subcommittee on Trade for allowing me the opportunity to testify today.
My name is Roberto Marques, and I am the Company Group Chairman for Johnson & Johnson Consumer Companies of North America. I am really honored to testify today on behalf of the U.S. Section of the Brazil‑U.S. Business Council.
The council is a leading organization dedicated to strengthening the economic and commercial relationship between the United States and Brazil. The council was established in 1976 and represents more than 100 major U.S. companies with investment and business in Brazil. It is the oldest and largest bilateral private sector group focusing on the U.S.‑Brazil commercial relationship.
Johnson & Johnson is proud to serve on the board of the directors of the U.S. Section of the council.
As you might have guessed from my accent, I am actually a Brazilian citizen, born and raised in Sao Paulo. So for my colleagues here from Brazil (speaking in foreign language).
I joined Johnson & Johnson in Brazil in 1987, before moving to the United States. In my more than 20 years with the company, I had the good opportunity and fortune to work across Johnson & Johnson’s three business sectors: the pharmaceutical sector, the medical device and diagnostic and consumer business. And I have served around the world in three different continents.
So it is really very exciting personally and professionally to be here on behalf of the U.S. Section of the Brazil‑U.S. Business Council. My first observation is that there is a great opportunity for the combining of strengths to benefit both Brazil and the United States. Brazil currently needs a great deal of infrastructure to be developed as it grows and takes on several challenges on the world stage in the next few years, such as holding the World Cup and the Olympics-The World Cup next year, and the Olympics in 2016 in Rio de Janeiro.
At the same time, Brazil needs to signal that it is welcoming investment and the involvement of world class businesses to develop its economy further. As the world’s sixth largest economy, Brazil has become a vital market for U.S. companies.
Growing trade; significant oil discovery; financial stability; inflation under control; rising investment; a booming 50 million middle class who over the last ten years moved from poverty to now actually be growing and consuming products, traveling, and really, you know, enjoying the benefits of the middle class; political stability are some of the factors that have contributed to Brazil’s rise as a prospering and influential country on the world stage.
I do remember on a personal note for many, many years Brazil was called the “Country of the Future” and the future never arrived. I would say now they are really glad to see that the future has finally arrived, and we are experiencing that in growing opportunity in Brazil.
U.S.‑Brazil trade has seen significant progress in recent years. U.S. merchandise exports to Brazil reached $44 billion last year. Brazil’s growing middle class made it an attractive market for U.S. exporters and for U.S. investors, many of which are in sectors such as service that can only tap the local market by means of a local presence.
In my industry, for example, health care benefits this growing middle class that demands, among other things, higher levels of health care. Johnson & Johnson is very proud of our company presence in Brazil. We have operated there fo over 80 years. Our sales are almost $2 billion and growing 20 percent.
Our exports from the U.S. to Brazil last year were over $165 million, and we are committed to doing business in Brazil and have made substantial investments that support 6,000 direct and 25,000 indirect jobs.
However, it is clear that U.S. and Brazilian firms have barely tapped the possibilities of this relationship. Brazil markets are far more open to imports than they were 15 years ago, but tariffs and other barriers are on average significantly higher than those of most of other middle income economies.
The Brazil‑U.S. Business Council has labored for years to facilitate companies’ access to the Brazil market via its strategic policy deliverable of the many issues that the council works on. I would like to mention three of our top priorities.
First, the council has been actively promoting the idea of a bilateral trade agreement known informally as “bilateral economic partnership agreement.”
The council’s second priority is the launching of negotiations for a bilateral tax treat. Brazil is the largest market in the world with which the U.S. has not negotiated such an agreement, and doing so would support growth and job creation in both countries.
Thirdly, the council advocates for facilitated entry and ultimately visa free travel between the United States and Brazil. Visa free travel is a win‑win for both countries. Brazilians are almost the highest spending visitors to the United States in terms of outlays for travel. Believe me, I know that for a fact.
This means U.S. jobs. To that end, the council supports the inclusion of Brazil in the U.S. visa waiver program and the U.S. global entry program. In both cases we support reciprocal actions by Brazil.
We greatly appreciate the efforts of this Subcommittee in organizing this hearing and providing congressional leadership of U.S.‑Brazil trade issues. The Brazil‑U.S. Business Council is at the disposal of this Subcommittee to work on issues relating to trade and investment between the United States and Brazil.
Thank you for this opportunity.
[The statement of Mr. Marques follows:]
*Chairman Nunes. Thank you, Mr. Marques.
In my opening statement I mentioned a plan of trying to streamline all of these dialogues. A few of us were down in Brazil and then working here. In talking to the Brazilians, there are many dialogues, and I know, Mr. Gluski, you serve on one of these dialogues.
So I would ask you for your advice on how we could structure thE overall strategic, you know, framework, and then of course, any of you can comment if you have any opinions on it.
*Mr. Gluski. Sure. I think in terms of the strategic framework, what we have seen at the U.S.‑Brazil CEO Forum, we have made progress in specific areas. So, for example, one of the issues was the professional skilled technicians being able to enter Brazil. So they have made changes to be able to grant 90‑day visas.
There was the bilateral trade treaty, which has been in discussions for 20 years, has suddenly started to move. So we had the Tax Information Exchange Agreement in terms of the tax information advancement.
So I think that my advice here would be to look at specific areas and, as you are doing, involve the private sector in helping make these executable on the ground.
*Chairman Nunes. Mr. McLarty?
*Mr. McLarty. Well, certainly I think all the efforts I applaud and endorse them, but I think you are on the right track in terms of trying to streamline them, better focus them. I think the upcoming state visit gives a real time line to help do that.
We certainly face some of the same dynamics when I had the privilege to serve in government where you had good intent, but I think you have to establish a clear track. I think we have done a pretty good job over the years in both Republican and Democratic White Houses in terms of China, how that has been organized, and I think that is kind of the model, so to speak, or direction that you are moving.
I think accountability is absolutely key in these efforts and can really enhance what can be done. I would agree the private sector certainly needs to be fully engaged in part of that.
*Chairman Nunes. Thank you, Mr. McLarty.
Anyone else? Mr. Marques.
*Mr. Marques. I would agree with their points. I think we are progressing well in a lot of those conversations and dialogues. We should keep the private sector very much involved. We are seeing a lot of progress and inroads in that. So getting that kind of sponsorship from the Congress and government, but keeping the private sector well involved I think will make a difference.
*Chairman Nunes. Thank you.
Mr. Hundt, do you have any thoughts?
*Mr. Hundt. I would just echo my colleagues. I think elevation at the highest level is important and also putting real clear goals and tangible goals in place so we k now how to support those goals, but also to really make progress on some of the issues outlined today.
*Chairman Nunes. Thank you.
I recognize Mr. Rangel for five minutes.
*Mr. Rangel. Thank you, Mr. Chairman. And thank all of you. I can only see a win‑win for both countries to work more closely together, and I do hope at the conclusion of this hearing we may get some ideas how we can start to iron out those differences we do have, whether it’s currency manipulation or high tariffs or the complex taxes in your country as well as ours.
And I hope it goes without saying that we hope that your leadership and international community could concentrate on Central and South America to bring our continents closer together because this hemisphere has not had a history of mutual respect and mutual cooperation, and we have so many people that have not been pulled into the general society not only to receive the benefits, but more importantly, to make the contributions that they can make to the countries.
And so, Mr. Chairman, I look forward to see what we can do since there is nothing on the table right now that we can be discussing. So we will be depending on the private sector and our State Department to see what we can do to take advantage of this spirit of goodwill and cooperation which we are enjoying now.
Also I was very, very active in working with the Colombian Government on the free trade agreement we have there, and I was so pleasantly surprised to see how the African Colombian community had been brought into their political and economic life so that they were actually coming here to the United States to lobby African Americans in showing that it was a civil rights issue, and how the more people who can get into their middle class, the more they would be able to buy from Americans.
Of course, that is what America is all about, regardless of what the color is, is the middle class, and while we have a great disparity in our country, your country, Brazil, really has the same thing, and without bringing that into trade agreements, you are going to have to help me to get a better understanding about what the government of Brazil is doing to break down these historic barriers that separated the majority of people of color from the minority of those of wealth.
Because a part of trade is freedom, democracy, and that is really more than any one thing what makes Brazil our friend. It is what you think of human life and the principles that you and I enjoy.
So this has been a good beginning, and I am very anxious to take the next step, Mr. Chairman. Thank you.
*Chairman Nunes. Thank you, Mr. Rangel.
Mr. Buchanan is recognized for five minutes.
*Mr. Buchanan. Yes. I want to thank the Chairman for holding this important hearing and thank all of our witnesses.
Just looking at the numbers, $30 billion exported, 32, 34 billion, ten billion of that comes out of Florida. So when I look at what is happening and part of our recovery in Florida, we talk about tourism. We talk about construction picking up a little bit. There is no question about that. Ag. has been pretty good, our ports and stuff, but there is no question in my mind Central and South America play a huge role for our recovery, and it is a big opportunity, not just to the country, but as I focus a little bit more narrowly on Florida.
Then as you mentioned earlier about one company somewhat I’ve followed for the last seven, eight years, Embraer, they had facilities in Broward County. Now, they are opening up a lot more facilities in Melbourne, which is further north. So that gateway to Central and South America and also in terms of these free trade agreements with Panama and Colombia, but we always think about doing business, and I am very pro doing business. That is what I did for 30 years.
We think about going east and west, and as I think about Florida, we need to be going more south. We are, but we need to be doing a lot more in terms of that opportunity, not just with Florida, but with the country.
So I guess I would add I heard your opening statement, but distilling down, what are a couple of things that we could do to continue? We have got a good relationship, but to take that relationship to another level on a win‑win basis?
Because there are parts of the world that we trade with and we have huge negative surpluses, and Brazil is one of those countries that I think has been more than a win‑win for the U.S., especially Florida, and we would like to find a way to do more business because at the end of the day we are looking to create more jobs, positive jobs, and a lot of the people that are doing business I know in Florida, they have created a lot of jobs that have benefitted a lot of our people in terms of recovering out of this recession.
Mr. McLarty, do you want to mention your thoughts? What are two or three things that we could do more of to take this relationship to the next level?
*Mr. McLarty. Yes, I will be pleased to. Well, first of all, I think you and Congressman Rangel really encapsulated the right theme, and that is we have a win‑win situation here. I think that is really the thrust of this hearing.
I take your point that sometimes we do look east and west, and those are large, emerging markets for sure, but the natural market for the United States in terms of exports and to grow our economy and to grow jobs and to replace the jobs we lost, we are going to have to have top line growth of revenues, and that is going to have to come partly from exports.
So Latin America is a natural market, but one we cannot and should not take for granted, and I think it is the same for Brazil. I think it is a two‑way street, and I think we have got to be mindful of that in the United States.
I think to simplify the ability to invest and to trade, whether that goes as far as the free trade agreement, that may be one step too far, but I think enhancing of customs, procedures, reducing tariffs, and other barriers to trade, we must work on diligently on both sides to make the flow easier.
And we are already seeing in our country investment from Brazil. You mentioned Embraer. JBS has made a large investment in the agricultural sector as you know in the heartland. So I think that in itself creates jobs. So those are two or three items that I would emphasize and build on going forward.
*Mr. Buchanan. Yes, it is amazing to me because we are in pretty much the same time zone, and I just feel like I see the huge impact it has had on Florida and continues to have. I want to make sure we can do more across the country.
*Mr. Gluski. Well, I very much agree with what Mr. McLarty said. I think that the key is to expand a little bit of our understanding of Latin America-Brazil in particular- in terms, of the size of their domestic capital markets, the sophistication of the deals that we are doing. For example, it has a lot of imbedded U.S. value add and cases such as ourselves where we are able to raise money and make investments in the countries themselves.
So when I see a lot of the discussion, it is very much just thinking of, let us say, direct trade in goods and not realizing that today how much more intertwined things are, how production has changed. Today, for example, NAFTA has created a production chain from Mexico all the way north. So I think that is going to be expanded in the case of Brazil.
So how to make this a reality, I think, is to continue the discussion that you are having at a high level; try to simplify a lot of the barriers that make this more difficult; and then I think the business sector can, follow once those doors are open.
*Mr. Buchanan. Mr. Hundt.
*Mr. Hundt. Yes, maybe speaking from a small and medium perspective, the size company, I would agree completely, but if you look at the competencies in the United States and of U.S. manufacturing energy and transportation and agriculture those are our core competencies that we have expertise that we can assist Brazil in moving their economy along.
What I referred to earlier as far as the complexity for small and medium size business because sometimes it can be very difficult to maneuver through and also, again, the landed cost with the tariffs, and it does go both ways, but oftentimes, for example, there is a city in northeast Brazil that is going to be putting sewer in for the first time. It is a city of a million people, and we have a technology that can put the sewer infrastructure in without really open‑cutting any of their streets. So it is an advanced technology. We are very interested in introducing it to the country, but that system in the United States would cost a contractor a million dollars. Well, it is going to cost the contractor in Brazil 1.6 million because of the tariffs and the duties that I spoke to earlier.
So it is a significant issue. In our case, we are exporting to Brazil, and we have 2,400 people in Pella, Iowa, and 700 of those jobs are attributed directly to exports. So the more we can an export friendly environment, bilateral trade, it is only going to create more jobs in the United States.
*Mr. Buchanan. Mr. Marques.
*Mr. Marques. Thank you.
Not to repeat what my other colleagues mentioned here, which I do agree with in terms of bilateral trade agreements and how can we facilitate the inflow and outflow, I would mention your point on Florida, which I think is a very good example of how the Brazilians really love coming to the United States. So I will go back to the point in terms of action to facilitate the entry.
Miami is a very important port of Latin American, in general, for coming to the United States, as is New York. So facilitating that inflow of people coming to the United States to spend money, buying a second home or spending money in malls and shopping and tourism is such a huge opportunity for the United States.
And there is a very strong bond between the Latin Americans and Brazilians in the United States, they are very similar. Brazil is a well-established democracy was a very strong middle class, an emerging middle class, a very strong internal market and very strong private sector. There are so many similarities that establishing that close relationship I think, again, is a win‑win for both economies and both countries.
*Mr. Buchanan. I want to thank all of our witnesses, and I yield back.
*Chairman Nunes. Thank you, Mr. Buchanan.
Mr. Smith is recognized for five minutes.
*Mr. Smith. Thank you, Mr. Chairman, and thank you to our witnesses for sharing your perspective here today.
Obviously Brazil and the United States have tremendous trading potential, and representing a good bit of agriculture in Nebraska, I know that agriculture is a major part of the Brazilian economy as well.
I do have some concerns though. Take, for example, Brazil being the second largest producer and consumer of ethanol. It is obviously an appealing market, and while the main U.S. ethanol tariff expired at the end of 2011, Brazil has only suspended its ethanol tariff, meaning it could be reinstated without notice.
And also I have concerns about beef trade in Brazil, keeping U.S. beef out of their country even though the experts say that BSE is of negligible risk. And so I have those concerns.
But, Mr. McLarty, could you reflect on those a bit and maybe give me some hope that we can iron some of these things out?
*Mr. McLarty. Well, being from an agricultural State as well, I certainly understand and identify with the points and the concerns that you raise. I think the real heart of your points is that it has to be the proverbial two‑way street if we are going to really raise this relationship to a more robust level and achieve the potential, the natural collaboration. We are going to have to reduce barriers on both sides, and we are going to have to make it easier for trade to flow between both countries, as well as investment.
I certainly think in terms of some of the non‑tariff barriers, we need to depend on sound science and not have those get in the way, for example, of beef and other matters that you raise.
The agricultural issues are going to be the toughest, as they usually are, and you know that so well, but I am hopeful that because Brazil has become so much more of an outward looking country in terms of their ability in terms of exports, that they will see the reciprocal nature of the essential, essential move toward liberalizing their trade and opening their markets as well.
The real issue here is not only creation of jobs, but you have got to increase productivity in Brazil to really raise their standards of living and to continue to build their middle class, as Congressman Rangel noted. So that is the key.
So I think there is some hope. It will have to be pressed, and some of it is getting to understand each other’s perspectives better as you well know in reaching common ground, easier said than done, but essential, essential for both countries.
*Mr. Smith. Thank you.
Anyone else wishing to comment on that?
*Mr. Smith. Again, I appreciate a little reflection on this issue and the need to base our trading standards and our policies on sound science, I think, allows us a great opportunity to establish an objective viewpoint so that producers themselves, consumers as well, kind of know what to expect.
So thank you for your time, and I yield back.
*Chairman Nunes. Mr. Boustany is recognized for five minutes.
*Mr. Boustany. Thank you, Mr. Chairman.
I come from the State of Louisiana, and the energy sector is a very important part of our Louisiana economy, and as I traveled through Brazil back in April, I was struck by the tremendous opportunity for a win‑win in the energy sector as we are seeing this revolution in energy markets today.
We have seen the advantage of integrating the U.S. and Canadian energy markets, and I see amazing potential to further integrate energy markets between the U.S. and Brazil, and I know Brazil is carrying out a series of auctions for both conventional and unconventional oil and gas. U.S. companies are certainly well positioned to participate in this, but Brazil has a number of local content requirements and other issues that create barriers.
I have heard from companies back in Louisiana who are trying to do business in Brazil, and so whether it’s the pre‑salt finds dealing with technology, which we are well equipped to do here in the U.S. or looking at shale plays where we have had tremendous success, trying to get through local content requirements with regard to services and equipment is a big issue, and, Mr. Gluski, if you could comment on this.
*Mr. Gluski. Yes. I think recently, as you know, Petrobras has tried to lower some of the domestic content rules to lower its cost and increase productivity. I think there are companies that have adapted to this. For example, General Electric actually has the highest domestic content in its wind turbines that it produces in Brazil.
So I think here the point is that U.S. technology is the leading technology, and we need ways for the U.S. companies to participate in the Brazilian economy. Some of it may be, quite frankly, establishing, some manufacturing in Brazil so they can bring in components from the U.S. and then comply with these requirements.
But I certainly agree with you this is a great opportunity for U.S. businesses and those U.S. businesses in your district. It is natural this progresses. It may take some time to develop, but I certainly see the great potential.
*Mr. Boustany. Others want to comment on the energy sector?
*Mr. McLarty. Well, having spent a decade in the natural gas business and having the privilege to serve Lake Charles, Louisiana through Entex, which was part of our company, I certainly identify with the opportunities that are present in Brazil with Petrobras, with the oil find and more broadly.
I think Petrobras, as Mr. Gluski noted, has recognized the need to show some flexibility in terms of local content. It is an enormous opportunity for Brazil, not only in development of their reserves and from an energy standpoint, but again, to support and lift their economy and the middle class.
But I would certainly underscore that from a Petrobras and broader standpoint of Brazil, they can enormously gain from U.S. expertise. So they need to be encouraging that, not impeding it, in the right way.
And secondly, I think they need to minimize or at least mitigate some of the risk that is associated with deep water drilling and not have all their eggs in one basket. I think the senior management of Petrobras recognizes that.
So I think it is a natural opportunity. I think we are already on the right path. It may take a little more time than some of us would like, but natural areas of collaboration in energy and agriculture, both countries are blessed, fortunate to have tremendous resources in those areas.
*Mr. Boustany. Thank you.
And I also believe that Brazil would benefit tremendously from joining the ongoing negotiations involving the Trade and Services Agreement at The WTO. They have been reluctant to do so. There are some 50 countries that are now representing two‑thirds of global services involved in this, which also includes energy services trade, and so I am still trying to understand the reticence on the part of Brazil to participate in TISA, or the Trade and Services Agreement, and I would like for each of you to comment if you would on this.
*Mr. Gluski. I really do not have any particular insight into that, only that in Brazil there are domestic content requirements, if you will, and services as well, and all the arguments that we have made in the other case apply as well.
*Mr. Boustany. Thank you.
Anybody else care to comment on this? Mr. Marques.
*Mr. Marques. No, I would agree with that. I think Brazil can benefit from participating and being more engaged in some of those trade agreements more broadly. I think there has been a lot of progress in reducing the cost of doing business in Brazil, and I think that is a major component.
You know, the private sector continues to work with the government in making sure that Brazil will increase its productivity and efficiency in doing business, and this will allow, I think, Brazil to be more externally driven and participate more broadly in those kinds of trade agreements, but I think we are seeing a lot of progress in many fronts.
*Mr. Boustany. Thank you.
I see my time has expired. Thank you, Mr. Chairman.
*Chairman Nunes. Thank you, Mr. Boustany.
Mr. Kind is recognized for five minutes.
*Mr. Kind. Thank you, Mr. Chairman, and I want to thank our witnesses for the testimony today. I think it is pretty self‑evident that it is going to be important for the U.S. and Brazil to maintain a constructive, active working relationship if there is hope for continued economic growth and progress throughout the Western Hemisphere.
I know there has been a lot of focus so far in this hearing of some of the trade irritants that we have seen pop up in Brazil from higher tariffs to forced location. Some of my colleagues talked about agriculture, but Brazil has a few asks of us as well, when it comes to ethanol, when it comes to cotton subsidies, in particular.
I have introduced legislation here that would reform our domestic cotton subsidy program to get us out of the WTO box that we find ourselves in with Brazil. I think the average taxpayer back home would be astounded if they knew that because of our unwillingness or inability to reform our own cotton subsidy program within our farm bill, we are now subsidizing Brazil cotton producers to the tune of $150 million a year. This is crazy. This is nuts.
And we have a farm bill coming up. I will be offering an amendment that would change our domestic cotton program so we do come into compliance with WTO so we can end $150 million of basically blackmail payments to Brazil so they do not level sanctions against us because of that WTO case.
How much of an irritant ‑‑ Mr. McLarty, let me start with you ‑‑ is that cotton case between us and Brazil right now? And what practical steps do you think we can take right now in order to deal with it and get it off our plate?
*Mr. McLarty. Well, your feelings are understandable, and they came through loud and clear, and I certainly again identify with them from my own State perspective.
It is a matter of tension, and you are going to have some issues and tensions in trade, as you well know. But I think on the broader picture we have to comply with WTO, with our trade agreements and move forward here.
The key is I think leaving the agreement in place for the moment, but as you suggest and as you’re earnestly trying to do, is to move forward with a comprehensive farm bill that puts this issue and others in a much better place, absolutely essential for us to do.
*Mr. Kind. Mr. McLarty, let me ask you. Given what you have seen coming out of the Senate right now with the farm bill that they just reported out and what the House is working on, would that fix the cotton problem for us in its current form?
*Mr. McLarty. Well, I am not an expert on farm legislation, but I think it is essential to move forward, and I would hope it would, Congressman. I would hope it would. You are obviously working very, very diligently and earnestly to do that, and I commend you for it.
*Mr. Kind. Let me ask you and the others on the panel here if you have an opinion, but obviously Brazil has not been from my perspective an honest broker in the lead they have taken in trying to represent the developing world in WTO discussions. Ambassador Azevedo now has taken over the directorship of WTO. That means he has got a different constituency, a much wider constituency that he has to answer to.
Does this provide some hope or an opportunity as far as what Brazil has historically done to the talks in WTO now that Ambassador Azevedo is the Director of it?
*Mr. McLarty. I will start and then defer to my other colleagues. I think it definitely does. I think that was in 2008 on the DOHA round that you’re referring to. A lot has changed in both our countries and, indeed, the world economic landscape as I noted in my testimony. So I would very much hope that we would again move forward with agreements, and I think that Brazil actually can play a singular role in future discussions on the world trade front, and I had hoped that would be the case.
I think Brazil has changed, Congressman Kind. I think they have stepped on the world stage, and I think they recognize the responsibility there.
*Mr. Kind. I hope you are right.
Anyone? Mr. Marques?
*Mr. Marques. Yes, I would agree with Mr. McLarty. I think the appointment of Roberto Azevedo to be the new Director‑General of WTO is a very important signal of, again, continuous progress of Brazil as a country in the direction of really being more open in terms of trade agreements and progressing in that sense.
So I do agree that it is absolutely in the right direction.
*Mr. Kind. Okay. Thank you. Thank you all for your testimony today.
Thank you, Mr. Chairman. I yield back.
*Chairman Nunes. Thank you, Mr. Kind.
Mr. Reichert is recognized for five minutes.
*Mr. Reichert. Thank you, Mr. Chairman, and thank all the witnesses for taking time from their busy schedules to be here today with us.
And I would like to follow up on the line of questioning that Mr. Kind just concluded with just to be a little bit more specific.
So it is great that we have Brazil’s long time ambassador now as the Director‑General of the World Trade Organization, and I heard the positive comments that you think that this appointment will be beneficial for Brazil moving toward WTO agreements, but just more specifically directed to the Government Procurement Act, what do you think our new direction will be and what do you propose that Brazil might do to push that along a little bit?
That is a stumbling block between the United States and Brazil as well. Anyone on the panel wish to address that?
So far Brazil has not signed onto the GPA agreement.
*Mr. McLarty. Well, I think in a general manner, it is very hopeful that Brazil will show more flexibility. That is what you are suggesting, and again, I think it is so essential that the private sector have a voice and an engagement with both the U.S. Government and with Brazil, and I think that can at least put these issues in a much more realistic perspective.
I would not make any predictions on these issues. I am not an expert on them, but I understand very much your concern. I do think that this is a new time and place from a global trading standpoint for both our countries, for both the U.S. and for Brazil, and that is what leads me to the hopeful nature that I noted.
But flexibility is required on a number of these issues.
*Mr. Reichert. Anyone else wish to comment? Mr. Marques, do you have a thought?
*Mr. Marques. Yes, I would say that again, on behalf of the Council we see that improving supply chain integration is really crucial to our members as well. So we agree with that and would like to continue to push, you know, the agenda on that.
We have seen some progress with some of our members. The private sector continues to work together to be more efficient on that count, but we also need the government to demonstrate the action and commitment on that front.
We have seen some good wins from the Brazilian Government which we applaud. Brazil expressed delivery at the Istanbul convention, and so there are some examples that, again, I think the government and Brazil is actually showing more support and better integrating supply chain. So, again, I think the signs are very positive, but we need to continue to work diligently with the private sector and government continue to make inroads there.
*Mr. Reichert. Thank you.
Mr. Chairman, I would like to enter into the record a document that has been prepared by Donna Hrinak, who is the former U.S. Ambassador to Brazil and now the President of Boeing‑Brazil, who stresses the importance of joint R&D currently being done in the aerospace sector.
*Chairman Nunes. Without objection.
[The information follows: The Honorable Dave Reichert]
*Mr. Reichert. I would also like to point out that there is another great partnership from Pacific Northwest, Washington State, specifically Pacifically Car and Foundry that has a great friendship and partnership with Brazil and also engaged in research and development opportunities there.
So, Mr. Marques, there is, I think you would agree and the panelists might agree and most everyone in here would probably agree, that research and development is an important aspect of trade, and there is great opportunities for both the United States and Brazil.
In this arena what opportunities specifically do you see rising between the United States and Brazil in the area of research and development?
*Mr. Marques. Again, I think this is a very important point on the agenda. I think the regulatory agency in Brazil, ANVISA, still a young agency, but they’re a global reference in terms of some of the technical capabilities, but we do believe that, again, especially in terms of IP, there is an opportunity to improve, to protect innovation and discovery and development, and that I think will serve both countries well.
It is a topic that it is priority also within the counsel to continue to work with the government and the regulated agencies in Brazil to progress with that and to make sure that the inventions are protected with the appropriate rights of IP protection.
*Mr. Reichert. My time has expired, Mr. Chairman.
*Chairman Nunes. Thank you, Mr. Reichert.
Mr. Roskam is recognized for five minutes.
*Mr. Roskam. Thank you, Mr. Chairman, and witnesses, thanks for your time and your expertise today.
I want to shift gears a little bit and focus in on the relationship between Brazil and China. China is Brazil’s number one trading partner, and there are some interesting statistics. Let me look down and cite them, but then come back, and I am interested in your reflection not so much on the numbers, but on the nature of the trade and how the nature of that trade brings questions forth.
So here it is in a nutshell. Brazil exported $41 billion in exports to China in 2012; imported 34 billion, whereas it exported 27 billion to the U.S. and imported over 32 billion.
More interesting though is this relationship between raw materials going out of Brazil, finished goods coming into Brazil, whereas my understanding of the relationship between Brazil and the U.S. is far more balanced, balanced in the totality.
What is the significance of that? Where are the opportunities for Brazil and the U.S. to work together vis‑a‑vis international standards, third party questions, just kind of open field running?
What is the significance of that for us as a committee, as we need to make decisions in U.S. policy going forward?
*Mr. Gluski. I’m going to take it.
Basically not only Brazil, but all Latin America is much more, let us say, engaged with the U.S. economy and products for a long historical period. So when their economies grow, they are much more likely to draw in U.S. exports and also to make joint ventures with U.S. companies.
The relationship with China is much newer and much more focused, as you say, on exporting raw materials, whether it be soybeans or iron ore, for example, to China. So numerically that will predominate, but I think that given the greater similarities between the two economies’ longstanding relationships, it is a different type of trade that they are having with the United States, and you also have longstanding relationships like Johnson & Johnson 80 years in Brazil, and lot of other U.S. companies as well. That makes a significant difference.
I think there is an opportunity also for the U.S. to attract more Brazilian investment going forward, and that would also help the relationship become a relationship where you have more equal interests from both sides in terms of the bilateral treaties, investment protection, et cetera.
*Mr. Roskam. Thank you.
*Mr. McLarty. Well, I think you certainly raise some very important points, and I thought you did so in a particularly thoughtful and precise manner.
First of all, it underscores how increasingly our worlds and our economies are connected. I think on balance if handled properly, that is a positive. I think it will lift living standards if done properly. It will strengthen the middle classes. It will lead to more stability in emerging countries and emerging economies.
I do think it puts Brazil and the United States much more aligned than not in terms of encouraging China to be a responsible stakeholder in the multinational, multilateral organizations in terms of transparency, in terms of governance, in terms of currency.
So I think it aligns us in the proper way, but it also underscores, which I noted in my testimony; it also underscores some of the points that we have made about some of these issues of tension or disagreement. Clearly both countries are focused on job creation and understandably and commendably so, but part of that goes with increasing productivity in order to be competitive.
And so I think it has to go to lower barriers and complications of doing business where Brazil can be competitive and we certainly can keep our country competitive.
*Mr. Roskam. That alignment that you just mentioned, is that naturally happening? No, no, that is not my question.
So there is the alignment that you mentioned. That is a natural alignment?
*Mr. McLarty. In my judgment.
*Mr. Roskam. Are there things that now we need to do as policy makers to move forward on that, to take advantage of the alignment?
It is one thing to line up, and it is another thing to act.
*Mr. McLarty. Yes.
*Mr. Roskam. Are there affirmative things that we need to do? And my time is dwindling. So why don’t you be the last word?
*Mr. McLarty. All right. I will try to be brief to sum it up. I think you have got a strong running start at it today with this hearing. I mean, you have to engage in order to better understand where there is alignment and a natural mutuality of interest and what concrete steps can be taken. I think you will find the Brazilian Government and the private sector very receptive in that regard, Congressman.
And, again, I think you have raised some very fundamental points.
*Mr. Roskam. Thank you.
Mr. Chairman, I would like to enter into the record a graph from The Economist, the results of which I have basically cited.
*Chairman Nunes. Without objection.
[The information follows: The Honorable Peter Roskam]
*Chairman Nunes. The gentleman’s time has expired.
Mr. Larson is now recognized for five minutes.
*Mr. Larson. Thank you, Chairman Nunes and Ranking Member Rangel. I want to thank all of our witnesses for your expert testimony.
I would like to underscore a number of things that have been said by my colleagues, most notably Mr. Rangel and Mr. Buchanan, who underscore the incredible potential for a win‑win situation here between the United States and Brazil. The great opportunity abounds.
Hailing from the State of Connecticut and in the aerospace industry as was also noted by Mr. Reichert as it relates to Embraer, we are deeply excited about this, and also the Chairman’s most recent trip to Brazil, along with the Vice President.
And yet in these very difficult times we continue to see countries reflexively act in a protectionist manner, and so suffice it to say that that is a concern, and some of the monetary concerns that were raised by Brazil, especially we certainly deeply understand the concern as it relates to China, but not as it relates to the United States, a country that does not partake in that kind of activity.
So my question is, and it is kind of a follow‑on to what Mr. Roskam was saying, Mr. McLarty. In terms of looking at this economic slowdown, what kind of effect do you think that that might have on our trade relations if Brazil is not able to quickly regain growth rates that it had over the past two decades?
Do you foresee the Brazilian Government implementing additional protectionist measures?
*Mr. McLarty. Congressman Larson, I think you have certainly raised the right concern. I think there is a natural tendency ‑‑ we have seen it in our country ‑‑ to be a bit more defensive or look a bit more inward in times of economic slowdown.
I would say that Brazil has benefitted with their increasingly outward looking stance and moving onto the global stage both in terms of exports and how they have conducted their affairs internally. So I would hope they would continue that and not raise but actually decrease any sources of tension and protectionism, although they will be looking for the proverbial two‑way street in that regard.
Again, I go back to the point I tried to make earlier. It is essential in my judgment for Brazil not to only look at job creation, but also increased productivity. I think the private sector in both Brazil and the United States and other countries to engage with government agencies, engage with the private sectors are absolutely essential there.
So I would hope that would not be the case, bearing in mind Brazil has a history of very understandable deep concern about the rekindling of inflation that has led to high interest rates. So that will always be a part of their economic mindset, and I think appropriately so. And I think that has to be taken into account in the overall scheme of things.
But much as it is in our country, exports are key to some of the Brazil continued growth and job creation, and I think that goes with more liberalized trade not a more insular look.
*Mr. Gluski. Recently Brazil has removed certain restrictions to capital inflows. So in terms of making the currency more market determined, I very much echo what has been said. I think if the economies are slowing down, what they actually need is to make sure to incentivize trade and to lower barriers rather than raise them at this point in time.
*Mr. Hundt. I would just comment that what was said earlier is absolutely true, but to gain productivity, I think the access to American technology and American exports is essential. Therefore, IP protection and, again, lowering the cost of tariffs and duties into the country will only help Brazil become more efficient, more effective in order to grow their own exports.
*Mr. Marques. Yes, I would agree with what the panel said, but again, the point that I would make, which is very much in line to your concern, is what happens if the economy slows down growth because that can trigger more protectionism.
I think there is a very clear sense right now in the private sector in Brazil of the importance of fostering economic growth through exports as well, that just internal markets are not going to be enough, even though it is a very robust internal market.
So I think all of the industry is very committed to continue to drive an increased productivity and rely on exports to foster growth and create job demand. So I think, you know, there is a pressure coming from the private sector on this idea of trade and that potential to help us in that regard.
*Mr. Larson. My time has expired.
*Chairman Nunes. Thank you Mr. Larson.
Ms. Jenkins is recognized for five minutes.
*Ms. Jenkins. Thank you, Mr. Chairman, and I thank the panelists for their testimony this morning.
Brazil is the third largest beneficiary of the United States generalized system of preferences, which allows certain goods to be imported into the United States without duties. The program expires at the end of July, and I strongly support its extension because it allows U.S. businesses and consumers the access they need to maximize our competitiveness.
However, the same logic holds when it comes to Brazil’s tariffs. High tariffs make it more difficult for Brazilian businesses to have access to the U.S. goods that they need to remain globally competitive. But Brazil seems to be taking a contradictory step in this regard. For example, Brazil increased 100 industrial tariffs last year and has plans to increase 100 more later this year. These increases are counterproductive.
At the same time Brazil has a promising X tariff program that should be expanded. X tariffs are the rough equivalent of the U.S. miscellaneous tariff bill through which Brazil reduces its tariffs on a specific set of imports that its businesses need.
I would be interested in anyone’s thoughts on a couple of questions, but maybe directly primarily to Mr. Hundt.
How do you see Brazil’s attitude toward tariffs in your sector?
Secondly, have you been hurt by the tariff increases or helped by the special tariff reductions?
And then finally, how would reduced tariffs in your exports impact Brazil’s competitiveness?
Mr. Hundt, if you would maybe lead off.
*Mr. Hundt. Sure. Thank you.
As I said earlier, I will go back to those examples, and it is a very important issue for our company and certainly for a lot of U.S. manufacturers that the importance of the bilateral trade agreements, it really has to be bilateral.
But in this case, in our instance our experience is our landed cost of products exported from the U.S. to Brazil is an average of about 60 percent higher. So clearly that is a large percentage. It is an inhibitor to technology acceptance in countries, in Brazil sometimes, but more importantly, these are technologies that could help them become more productive. They are technologies that would help them advance their own economy, and in this case by lowering it is only going to create a wider adopting to technologies to help Brazil become more productive.
So we are quite optimistic. The timing is good. We feel that certainly the bilateral agreements are very, very important, and again, the net effect will be an increase in U.S. jobs as well.
*Ms. Jenkins. Thank you.
Are there others that would like to respond?
*Ms. Jenkins. No? All right. Thank you.
I yield back.
*Chairman Nunes. Thank you, Ms. Jenkins.
Mr. Marchant is recognized for five minutes.
*Mr. Marchant. Thank you, Mr. Chairman, and thank you for inviting me to go on our latest trade mission to Brazil. We had a whirlwind trip. We got to see the growth in Brazil. We got to see massive preparation for the World Cup and the Olympics and probably more infrastructure projects than I have seen anywhere except in Texas. We have a lot of infrastructure going in Texas.
A couple of questions have come from that. I understand that there are some restrictions on reinsurance and the liability insurance in Brazil. There is some issue about allowing foreign companies to come in and write reinsurance insurance.
Is there any response to that?
*Mr. Gluski. AES is very capital intensive. We insure about $42 billion of assets around the world, including Brazil. We have not had any issues with reinsurance. We have a captive insurance program that we run from Arlington here in Virginia and that Brazil participates. So we really have not had that issue directly.
*Mr. Marchant. Okay. Another question. We just in the news recently read about Brazil’s abandoning its tax on foreign investment inflows. Apparently the worries about hot money have dissipated, and Brazil is now concentrating on, basically concerned about currency depreciation.
And what does this mean for U.S. investors? Has it changed the climate of the way U.S. investors, big investors, are looking at Brazil?
*Mr. Gluski. Well, again, people like us who invest in infrastructure projects, we invest for 30 or 40 years. So basically I think I have not seen any. You know, that policy in and of itself is favorable in terms of people being able to make more investment, but really these are driven by fundamentals in your long‑term views.
So I do not see it will have an impact more in terms of financing, but I do think that especially for large infrastructure projects we prefer to finance them in the local currency to avoid having liquidity issues due to devaluations, et cetera.
*Mr. Marchant. We have a couple of companies in my area, Vermeer and Johnson & Johnson, that have significant operations in Brazil, and I would just like to solicit the comments of both of those companies on your experiences and your plans to expand there.
*Mr. Marques. Yes. Thank you, thank you, Congressman, for the question.
Again, the thing I would like to add, I mean, our presence in Brazil with Johnson & Johnson is for more than 80 years. We always think more in terms of long term. Brazil is our second biggest consumer affiliated company outside of U.S. in terms of size. We do have one of our largest manufacturing facilities in Sao Jose Dos Campos that produces both pharmaceutical device and consumer products for the Brazilian market, and we also export as we also import to the Brazilian market a lot of products, some of those produced in the United States.
So we continue to be very bullish on the Brazil economy and, you know, in terms of our future growth in the country we continue to invest and be very committed to the market.
I would say that some of the short‑term changes in the investor’s market was already was said here. There is a high level of sensitivity on inflation, and the central bank continues to act pretty diligently in order to make sure that we contain continuing inflation under the parameters and the agreed target. So I think that is what we might see short term, but I do not think that changes our view long term.
*Mr. Marchant. Okay. Mr. Hundt?
*Mr. Hundt. I think in our case we only see our investment ramping up in Brazil. Again, the markets we serve -infrastructure, energy, renewables, and agriculture- we believe are at the beginning stage of development. So our investment will increase, but really in the near term I would say the next five years we see primarily most of our business being generated out of manufacturing from the U.S.
In the future we may do more manufacturing in Brazil, but for our focus right now, it is really building out local distribution. It is building out the relationships and really extending into the markets that I described earlier.
So it is our top market that we are focused on, and again, I think normally for Vermeer, which is a medium size company, if we can help companies like ours navigate the opportunity in Brazil, much simpler, lower cost, make it more efficient to export. I think there are many companies like Vermeer that can come along and enjoy tremendous success in Brazil and have just a very, very exciting future.
*Chairman Nunes. Thank you, Mr. Marchant.
Mr. Rangel is leaving, but I did want to announce that yesterday was his forth‑third birthday. Happy Birthday, Mr. Rangel.
[Laughter and applause.]
*Chairman Nunes. Mr. Young is recognized for five minutes.
*Mr. Young. Well, thank you, Chairman Nunes, Ranking Member Rangel, for allowing me to be a guest of this Subcommittee.
I represent a district in south central Indiana where Cummins has a major presence, and Cummins has been involved in trade and other economic activities in Brazil since the 1960s really, more robustly starting in the 1970s. They manufacture there; they distribute; they sell; and they export out of the United States into Brazil.
They are a major beneficiary of the generalized system of preferences, which I support and support its extension. And I hear in speaking with them that high tariffs remain a concern of theirs.
One of the issues that I do not believe has been addressed though as it pertains to them and so many others is the customs side of things, goods moving in and out of Brazil and the efficiencies related to that or lack thereof.
What sort of progress in terms of modernizing the customs system are being made, and how can we make a difference here at the federal level in terms of moving that effort forward.
I see potential practical reforms that could be made. I understand there is a ports reform bill that is currently very much on the radar, and that holds promise because it allows, as I understand it, more private investment to go into Brazil, to expand and modernize their port system.
But I will open this up to any members of the panel that want to speak to it. How can we improve the customs system there in Brazil?
*Mr. McLarty. Well, I think you are absolutely right that the customs regime is simply not where I think it needs to be, and I think it is probably not where the Brazilians would like it to be. So I think the trend line is better, but there is much more work to be done.
You are right. The President did introduce a port bill to reform that that has passed. I do not believe by the Brazilian congress. But there is still work to be done in that area as well.
But I think when you get down to these essential ‑‑ I will not say mundane ‑‑ but essential blocking and tackling issues, all of this goes to making Brazil in my judgment more competitive and, therefore, more prosperous, and it presents opportunities for U.S. firms.
I think the private sector, again, through the CEO Forum, the U.S.‑Brazil Business Council, other private sector initiatives can be singularly helpful. I am well aware and have had first‑hand meetings and dealing with the Cummins people in Brazil, and they are highly professional. They have been there a long time, highly respected.
So I think you put your finger on a key important issue
*Mr. Gluski. We have some Cummins equipment in different places around the world. I would say both the U.S. and Brazil need to modernize their ports, and the U.S. certainly needs to do a lot more to improve its infrastructure.
So as a buyer of heavy equipment really what I care about the time that it takes to manufacture it and to get it on my facility. I would really recommend that in addition to besides everything that Ambassador McLarty said, it is also important to think about investment in U.S. ports and facilities to make us more competitive, and the same applies to Brazil.
In the case of Brazil, they have grown rapidly. Their trade has grown very rapidly, and in some cases their facilities are lagging behind.
*Mr. Hundt. We, too, are big user of Cummins engines. So we are quite familiar with that team, but I would say this is a major issue, and it leads to the complexity of doing business there, but in our case, our average of the time a machine leaves the U.S. to it arrives to our distributors is an average time of about four months. So clearly there is capital. There is time. There is a lot of just waste in the process.
So the more efficient we can be, certainly that is a big issue, and efficiency there would have a large impact on our industry.
*Mr. Marques. Again, I would say that in general infrastructure is a major opportunity in Brazil ports, customs, and how, again, the private sector is a very important topic on our Brazil‑U.S. Council with our members. I think there is an opportunity to share best practice. There is an opportunity for the private sector to invest more in upgrading the infrastructure in Brazil, and that will help, you know, the business to become more efficient and more competitive.
*Mr. Young. Well, thank you.
I, for the record, would agree with your assessment of the need here. Domestically also investment in our infrastructure, I think our inland waterway system, I would add that to the mix, our interstate highway system.
There is a sort of political science issue that sometimes creates a challenge, and that is the sequencing of these various things. Are we, in fact, going to deal with the largest spending programs of government in conjunction with these important investments?
So we will continue to have that dialogue. Thank you very much, and, Mr. Marques, perhaps in the future we could engage in a dialogue on regulatory reform. That is very important to Eli Lilly, which also has a major presence outside our district, and I know you have written on this issue.
I yield back. Thanks so much, Mr. Chairman.
*Chairman Nunes. Thank you, Mr. Young.
Mr. Neal is recognized for five minutes.
*Mr. Neal. Thank you, Mr. Chairman.
I thought you did a good job last week with the informal get‑together that we had. I thought it was very helpful to the dialogue, and let me follow up on the questions that have been raised.
Perhaps, Mr. Marques, you could speak a bit about your experience in exporting to Brazil and what the hurdles are that you have faced. Frequently as we have done trade policy here in the more than two decades I have been on the committee, seldom do the trade agreements turn out to be as good as the supporters say nor as bad as the critics say, and there are a number of hurdles that we discover along the way that had not been anticipated in terms of implementation. So perhaps you could speak specifically to your experience.
*Mr. Marques. Thank you, Congressman.
Our experience in selling to Brazil has been very successful. I would say, you know, some of the tariff and the hurdle rates are always a challenge, but I will tell you that one of the things that is more challenging is to make sure that we develop the products that the consumers in Brazil really want, and having that deeper understanding sometimes of what really is important and relevant for the Brazilian consumer, especially the emerging middle class, sometimes it is more challenging than the trade agreement.
So having that consumer insight and understanding the local markets and capturing that opportunity sometime require investments, R&D, and local talent to really make sure that we can develop products that can, you know, meet the Brazilian needs.
*Mr. Neal. Perhaps the other panelists could speak to the challenges that they see. I mean this is a very important part of the world for America, and your insight is important.
*Mr. Hundt. Sure, and again, in our case it is the complexity of doing business in Brazil, but also the landed cost with the tariffs, the duties.
I think, in summary, if we have a level playing field, we as Vermeer and as American manufacturers with innovation, with productivity, we are not afraid to compete against anybody as long as there is a level playing field. So if that can be engaged and clear the path, you know, we are bullish on the future of Brazil and anxious to complete and look forward to much success in the future.
*Mr. Neal. Doctor?
*Mr. Gluski. We are basically in a non‑tradable goods sector.
*Mr. Neal. All right.
*Mr. Gluski. But we do obviously import capital goods, and I agree with my colleagues.
*Mr. Neal. Mr. McLarty?
*Mr. McLarty. Well, I certainly think you have got trade agreements and the dynamics surrounding them absolutely correct in your assessment of not quite as good or quite as bad.
*Mr. Neal. I remember being lobbied on some of them.
*Mr. McLarty. Yes, I think I remember that as well. It is good to see you again.
*Mr. Neal. Nice to see you.
*Mr. McLarty. No, I think my colleagues have really made the right points in terms of just the absolute necessity to streamline the ways that we do business. It will lift the standard of living in Brazil, and it will lift the standard of living in our country as well, and we surely need that in our middle class, as you know.
*Mr. Neal. Could any of you speak to the patents issues as it relates to the new Health Regulator? That would be of interest to the people of Massachusetts. I can assure you of that.
*Mr. Marques. Again, it is one of the areas that is a high priority for the council working with the private sector, making sure that we can progress legislation in Brazil to protect intellectual property and protect, you know, discovery and innovation. It is something that we are seeing some progress with the congress in Brazil, progressing the agenda there. We are not where we need to be, but that is one topic that we will continue to push pretty aggressively.
*Mr. Neal. That will be very important, Mr. Chairman, to my constituency.
*Chairman Nunes. Thank you, Mr. Neal.
I want to thank each of you for your testimony today and to help us think through how we can advance in a constructive way this bilateral relationship. I look forward to working with Mr. Rangel and Mr. Froman when he gets confirmed to try to have something prepared. It will be our goal to get something prepared before Ms. Rousseff arrives in the United States in the fall.
So I want to thank all four of you for your time and presence today. The record will be open until June 26th of 2013, and I urge all interested parties to submit statements to inform the Committee’s consideration of the issues discussed today.
This hearing is now adjourned.
[Whereupon, at 11:30 a.m., the subcommittee was adjourned.]