June 22, 2009

It's been a long-lasting friendship. And President Obama is trying to cultivate this country's relationship with Brazil, Latin America's biggest economy. The two countries are major trading partners that have given American businesses access to lucrative energy markets while providing Brazil with foreign capital and technology.

During the 1990s, Brazil undertook several measures to deregulate its energy economy. And while some of those efforts have been scaled back, the country has remained largely friendly to private companies seeking to invest there. If Brazil is to meet its expected future needs for energy that are estimated to double in 30 years, it must attract even more investment. Its petroleum sector alone will need $100 billion over the next 10 years.

"The government has laid the foundation for strong economic growth by improving the external solvency and liquidity indicators, as well as fiscal and public debt position," says Srinivasa Reddy, research analyst for Frost & Sullivan. "The increasing macroeconomic stability can help sustain economic growth and may have a positive impact on energy demand." The analyst adds that Brazil will grow at 4 percent a year until 2013 -- growth to be spearheaded by electricity and renewable energy resources.

Clearly, foreign enterprises from around the globe are interested in tapping this wealth. And while Brazil has shown itself to be a moderate democracy, its credibility has been undermined by an international child abduction case. It's a matter that the President Obama has discussed with Brazil's President Lula and one that has been taken up by U.S. Secretary of State Hillary Clinton.

Meantime, the U.S. of House of Representatives has passed a unanimous resolution demanding that Brazil release custody of this 8-year-old boy. He was taken from his New Jersey-based father to Brazil by his mother, who divorced him and remarried. She later died but now the well-connected stepfather calls the boy his own. The matter prompted Rep. Chris Smith, R-N.J., to introduce legislation to impose trade sanctions on Brazil if it will not honor an international child abduction treaty it signed.

So, despite Brazil's potential, its credibility both as a trading partner and a global community citizen has been undermined by its bobbing and weaving in this high-profile abduction case. If the country can't be trusted to return a boy to his true father, how could a business trust it with its multi-million investment?

The whole mess actually gets to a broader question. That is, what effect would the proposed trade sanctions have on Brazil's broader economy and would such treatment earn the release of this child? The short answer, according to some experts, is that targeted trade sanctions are more effective if they are levied against friendly governments. Broad economic sanctions, on the other hand, will hurt the general populace as opposed to bring down hostile governments.

Sanctions or Not

According to the International Institute for Economics, economic sanctions have contributed to achieving foreign policy goals in about a third of cases over the past century. Such "successes," though, are dependent on the "objectives" being sought. Partial achievement, it concludes, is far more common than outright victories.

"Since 1990, sanctions cases targeted an ever wider spectrum of issues: ethnic strife, civil chaos, human rights and democracy, narcotics trafficking, and terrorism," says the institute. "Economic sanctions are most effective when aimed against erstwhile friends and close trading partners. These countries have more to lose, diplomatically as well as economically, than countries with which the sender has limited or adversarial relations."

South Africa is a case in point where sanctions worked to destroy apartheid. Cuba, obviously, is an example where economic embargoes have failed to bring down the Communist regime there. The institute goes on to say that in nations where sanctions have worked, gross domestic product has fallen by 2.4 percent -- a significant blow to a country's wealth and definitely a worthy lever to ply change.

In the case of Brazil, it benefited last year to the tune of nearly $3 billion under a trade pact signed between the two nations in 1974. Those advantages would be wiped out if Rep. Smith's bill should pass.

To be sure, modest sanctions could lead to an all-out trade war. This is in no one's interest. Brazil desperately needs to expand its energy mix. Hydroelectricity supplies 80 percent of its generation. But the construction of the resulting dams is wreaking havoc on its coveted Amazon rainforest that is a resource to fight global warming.

The government therefore enacted laws in 2001 to encourage the purchase of more than 3,000 megawatts of green power by 2016, says research firm Frost & Sullivan. It's also widening its economic base by exporting more ethanol -- a growing business, given that countries are now trying to minimize their petroleum usage and shift to biofuels.

Meantime, Brazil's oil industry could potentially boom. With potential access to 100 billion barrels, it has an opportunity. But most of that Brazilian oil is far out at sea and costly to recover, necessitating the involvement of foreign companies.

The United States and Brazil assuredly need each other. But Brazil cannot grow at its desired pace unless its markets remain friendly to foreign capital and the advanced technologies that come with it. And while this child abduction may get resolved in the court system there, investors may draw a negative inference from it all. If a satisfactory resolution is not forthcoming, then sanctions will have a place here.

 

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Ken Silverstein EnergyBiz Insider Editor-in-Chief
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