Present Canadian trade policy towards Brazil is governed by the GATT, to which both countries subscribe. We exchange most favoured nation treatment under our trade agreement of October 17, 1941. Due to shortage of dollar exchange, Bra­zil has a quite strict import control directed against all hard currency countries.

Brazilian import controls have latterly had a drastic curtailing effect on their imports of Canadian codfish. We have been trying to have them accept some New­foundland codfish, to which they indicated their willingness on the condition that we make newsprint available to them.

The Economic Division of this Department and the Department of Trade and Commerce are desirous of keeping the Government out of this transaction, and are satisfied that the private entities are making slow but satisfactory progress. The firms involved are: for codfish, NAFEL (Newfoundland Associated Fish Exporters Limited) through their Brazilian agents and other importers; and for newsprint, Bowaters Limited. No action is needed, and our Embassy in Rio has promised to keep us informed of developments.

Resulting from the problems raised at the time of these negotiations it was decided to ask the International Trade Relations Division of the Department of Trade & Commerce to make a general investigation of Canadian-Brazilian trade relations. Their summary, dated July 1951, is attached. It covers general factors, and on Page 7 reviews the history of the codfish negotiations.

[PIÈCE JOINTE/ENCLOSURE]

Note de la Direction des Relations internationales du commerce
du ministère du Commerce

Memorandum by International Trade Relations Division,
Department of Trade and Commerce

CONFIDENTIAL                                                                                       [Ottawa], July, 1951

SUMMARY OF INFORMATION ON CANADIAN - BRAZILIAN TRADE RELATIONS

1. Canadian Trade with Brazil

Canadian Exports

In the four years 1945-1948, Brazil was Canada's largest market in Latin America, taking over $101 million worth of goods out of total Canadian exports of $404 million to all Latin America in the same period. Canadian exports to Brazil during this period included: wheat flour, codfish, woodpulps, newsprint, farm machinery, sewing machines, aluminum, copper, asbestos, electrical equipment, chemicals and a host of consumer goods.

In July 1949, Brazil initiated strict import restrictions in trade with the hard cur­rency area. A wide range of Canadian products has been affected thereby, and Canadian exports to Brazil have declined sharply from their peak 1947 levels. Bra­zilian import restrictions are still in effect, although they have been relaxed since Korea in the case of items in short supply.

                                                       Canadian Exports to Brazil

                                           (In million Canadian dollars. DBS statistics)

1947                   1948                   1949                   1950                   4 months 1950              4 months 1951

31.6                     28.6                   17.2                   15.8                             2.9                                    8.6

Many of the Canadian products that have been affected by Brazilian import restrictions are items considered non-essential by the Brazilian authorities, such as: whiskey, apples, radios and refrigerators. Others are non-continuing items such as ships, which added over $8 million to our export figures in 1947 and again in 1948.

However, several Canadian items of a more essential nature, and traditional to our trade, have been seriously affected. The following are the main products under this heading:

Codfish, wheat flour, wood pulp, sewing machines, newsprint (until the Korean war).

The only important categories of Canadian exports to Brazil that have not exper­ienced a general decline are: farm machinery and electrical equipment.

Canadian Imports

Imports into Canada from Brazil consist mainly of coffee (over 60% in value), followed by cocoa, nuts, sisal, waxes, oils. Due principally to the increased value of coffee, Canadian imports from Brazil have been rising in value as our exports to Brazil declined:

                                                    Canadian Imports from Brazil

                                         (In million Canadian dollars. DBS statistics)

1947                   1948                   1949                   1950                   4 months 1950             4 months 1951

13.8                    20.5                    21.1                    28.2                           7.1                                   12.7

Balance of Payments

Brazil's unfavourable balance of trade with Canada in the immediate postwar period turned into a clearly favourable balance after 1949 as a result of Brazil's import controls and of rising prices for coffee.

                                                                        Balance of Trade

                                                        (In million Canadian dollars. DBS statistics)

                                             1947      1948      1949       1950     4 months     4 months

                                                                                                       1950            1951

Canadian Imports from Brazil           13.8      20.5       21.1         28.2          7.1              12.7

Canadian Exports to Brazil               31.6      28.6       17.2         15.8          2.9               8.6

Brazil's Trade Balance                     -17.8      -8.1       +3.9      +12.4        +3.2             +4.1

Brazil's favourable trade balance with Canada is even more satisfactory than appears from the statistics when account is taken of the substantial imports of elec­trical and other equipment from Canada, paid for by Brazilian Traction out of I.B.R.D. loans and not from current trade receipts. In January 1949 the I.B.R.D. extended Brazilian Traction a loan of U.S. $72.4 million, of which the equivalent of U.S. $40.5 million had been drawn by October 1950. Of this amount, several mil­lion dollars were in all probability spent by the Company on Canadian electrical and other equipment.

On the other hand, Brazil's balance of payments with Canada includes a contin­uing deficit item of about $14 million (Canadian funds) released each year by Bra­zil for the payment of Brazilian Traction dividends. Not even at their high point in 1950 were her earnings from trade with Canada sufficient to meet this item.

2. Improvement in Brazil's General Position

Present Position

The decline in Canadian exports to Brazil has been paralleled by a sharp fall in U.S. exports to Brazil after 1949. This trend has been the result of three main factors:

(i) Brazilian import restrictions against hand-currency goods, originally imposed to compensate for the heavy post-war drain of exchange and the accumulation of commercial arrears.

(ii) Renewed overseas competition, from the U.K., Belgium, Norway and W. Germany, by means of bilateral trade agreements and barter transactions.

(iii) Rapidly increasing industrialization in Brazil itself (i.e.: wheat flour, paper, rubber tires, iron and steel manufactures, pharmaceuticals, textiles, cement). For example, Brazilian steel production in 1950 is estimated to have saved Brazil over US$ 40 million in foreign exchange, which would have had to be spent on imported steel.

As a result of these factors and of high world prices especially for coffee, but also for cotton, cocoa, carnauba wax and tobacco, Brazil's overall dollar balance has shown a marked improvement. This improvement has been accentuated by events following the outbreak of the Korean war.

Rising export earnings in 1950 went largely to clear up commercial backlogs which stood at US$ 226 million in October 1949. In 1951, a major part of foreign exchange earnings will be used to reduce a large backlog of frozen remittances on foreign investments.

Thus, although Brazil's trade balance on dollar account has been running a sur­plus of over $250 million (average) in 1949 and in 1950, holdings of gold and foreign exchange are up much less than the trade balance.

Bank of Brazil foreign exchange assets which stood at U.S. $402 million in December 1949, had fallen to U.S. $270 million by June 1950 and have been rising to $391 million by March 1951. Gold assets have similarly risen from a low point of U.S. $586 million in June 1950 to U.S. $708 million in March 1951.

Short-run Prospects

In the immediate future a narrowing of Brazil's trade surplus with the dollar area may be expected. This would follow from increased imports of essential materials and machinery for stockpiling purposes (imports from the U.S. this year are up almost 40 per cent from the 1950 rate). Although coffee prices are expected to remain high and coffee exports have risen from last year's record rate of $60 mil­lion a month to $85 million a month in 1951, there are reports showing that U.S. imports of coffee have been running ahead of consumption so that stocks are piling up.

But with her commercial debts and her financial arrears liquidated, and with import restrictions on non-essentials still in effect, Brazil will probably continue to finance her increased dollar imports without difficulty. Brazil may be expected, therefore, to increase her level of dollar expenditures. On the other hand, in their desire to obtain adequate supplies of scarce materials, the Brazilians may be expected to maintain strict import controls on non-essential dollar products, this latter with strong protectionist overtones.

Long-term Prospects

Brazil, with a population of over 52 million, is already the most highly industri­alized and one of the most rapidly developing countries in Latin America. Sao Paulo, for example, is today the world's fastest growing city.

Present restrictive policies, coupled with high world prices for coffee and other Brazilian products, have contributed to the improvement of Brazil's balance of pay­ments position. A more fundamental long-term factor in strengthening Brazil's economy is the growth of new industries in Brazil and the exploitation of as yet undeveloped mineral resources.

 In the long run, Brazil could well become the most important expanding market in Latin America, and one based on an increasingly stable and diversified economy.

The increased industrialization of Brazil may cause a shift in the traditional composition of Canadian exports to that market, but it is possible that future exports will be at even higher levels than in the past.

3. Canadian Trade Policy Towards Brazil

Present Canadian trade policy towards Brazil is governed by the GATT, to which both countries subscribe. Canada and Brazil exchange most-favoured-nation treatment in all tariff and trade matters under the Trade Agreement between the two countries dated October 17, 1941.¹ Canada and Brazil are both bound under the GATT to non-discriminatory application of import restrictions.

Brazil's import restrictions conform to the balance of payments escape clauses of the GATT since they are directed against all hard-currency countries and not against Canadian products as such.

The Department of Trade and Commerce has facilitated private compensation or barter transactions undertaken by Canadian firms. Such private barter transactions have been carried out by Canadian codfish exporters, for example. The difficulties inherent in such complicated dealings have been made even greater by the Brazilian Government's limitations on the range of products available for barter. Only "surplus products", difficult to sell in the dollar markets, have been permitted for barter by Brazil. Under new Brazilian regulations, only those barter transactions approved before February 1951 are now permitted, thus practically eliminating any possibility of arranging further private barter deals for the present.

The suitability of our present trade policy to deal with the serious situation for our exports in Brazil, was questioned by the Canadian Ambassador, Mr. J. Scott Macdonald, in his report of April 3, 1950 and again in November 1950. In these reports, the Ambassador urged that the advisability of entering into a bilateral trade agreement with Brazil be seriously considered.

Following a detailed study of the various measures that could be taken by Canada, (see: ISCETP Document No. 51-3, circulated to all Trade Commissioners under Circular Letter M1725),? the Canadian Ambassador was advised as follows:

"A bilateral agreement with Brazil would appear to be neither desirable nor feasible under present conditions. It would represent a major change in Canadian trade policy, requiring the imposition of discriminatory trade controls in contravention of GATT, and would react unfavourably on Canada's commercial relations with other countries.

"Measures of a retaliatory nature whether under GATT or outside GATT, are strictly limited in number, and would likely cause more harm than good for our total trade. Such measures should be employed only as a last resort.

"In view of Canada's strong economic position at present, and of Brazil's improving exchange position, it would appear advisable to adopt a policy of continued pressure for the easing of restrictions against those dollar goods of particular importance to us and traditional for the Brazilian market.

"Such pressure could stress the undertaking under GATT, Article XII 3(c)(iii), "to apply restrictions (to safeguard the balance of payments) in such a way as to avoid unnecessary damage to the commercial or economic interests of any other contracting party". Emphasis should also be placed on Brazil's increasingly favourable exchange position.

"The next meeting of the GATT Contracting Parties in September 1951, could provide an opportunity for a thorough review of Brazil's import restrictions and of her exchange reserves. In the light of this review, the justification or other­wise of continued import restrictions by Brazil will become clear."

4. Codfish Exports to Brazil

(i) Brazil (in particular Northern Brazil) has long been one of the most important traditional markets for Newfoundland salt codfish.

Prewar exports of Newfoundland cod to Brazil ranged between 25 and 31 mil­lion pounds. In 1948 exports amounted to about 13 million pounds (almost $2 mil­lion), representing 33 per cent of Brazil's total imports of cod in that year.

In 1949, as part of its stringent import restrictions, Brazil imposed a complete ban on dollar imports of codfish. This ban is still in effect, and since that time only small quantities of Canadian fish have been exported on a private barter basis. In 1950, only about 250 thousand pounds of codfish were permitted entry into Brazil from Newfoundland, roughly 0.5 per cent of all Brazilian imports of cod in that year.

(ii) Norway has now become Brazil's chief supplier of codfish, providing nearly three-quarters of the total quantity imported in 1950. Exports of Norwegian codfish to Brazil rose from 16 million pounds in 1947 to 30 million pounds in 1949. Nor­wegian supplies are entering under a long-term barter arrangement which provides for the direct exchange of codfish for Brazilian coffee. Similar facilities for the exchange of coffee have been denied Canadian codfish exporters, on the grounds that only inferior grades of coffee, unsuitable for the dollar market, were being allowed in the barter arrangement with Norway.

(iii) In December 1949, the Canadian Ambassador to Brazil made formal repre­sentations to the Brazilian Government with respect to the urgency of securing import quotas for Canadian codfish and sewing-machines.

In November 1950, the Canadian Ambassador was asked to make the "strongest representations" to the Brazilian government to re-open the Brazilian salt fish mar­ket to Canadian exporters.

In February, 1951, Mr. Howe gave the Brazilian Ambassador to Canada a mem­orandum strongly urging the relaxation of import controls on codfish. This memo­randum noted the substantial improvement in Brazil's dollar position, recalled the provisions of the GATT under which "unnecessary damage to the commercial inter­ests" of another country were to be avoided in the application of import restrictions, referred to the fact that coffee had been made available for barter with Norwegian exporters but not to Canadian firms, and outlined the importance of Canada's tradi­tional interest in the Brazilian salt fish market.

In May 1951 the Brazilian authorities convened a conference with Canadian rep­resentatives in Rio for a full discussion of the problem. After prolonged discussion, the Brazilians said they would be prepared to sanction the import of codfish only if (a) specified quantities of newsprint, aluminum and tinplate were also made availa­ble by Canada, or (b) if Canada would increase her imports of surplus Brazilian products, such as rice, oranges, nuts.

In reply to these proposals, it was again pointed out that the Canadian Govern­ment is not in a position to enter into commitments as to products which are subject to private business control. However, at the request of Mr. Howe, the Newfound­land Provincial Government would attempt to have the Bowater's Pulp and Paper Mills make available additional supplies of newsprint for Brazil, in order to encourage that country to purchase supplies of cod from Newfoundland.

Preliminary reports lead to the hope that some 5,000 tons of newsprint may be made available for Brazil in 1951 under this arrangement, which would pernut the entry into Brazil of codfish to the value of approximately 1/2 million dollars this year.

5. Conclusions

(1) Brazil has traditionally been an important market for Canadian codfish, wheat flour, newsprint and a wide range of other products, many of which have been kept out of Brazil since 1949 due to strict dollar-saving import restrictions.

(2) Brazil's import restrictions are legitimate under GATT and do not discrimi­nate against Canadian products as such, as compared with other hard currency products. They have undoubtedly contributed to Brazil's greatly improved balance of payments position.

(3) From the long-term point of view, Brazil, as the largest and most rapidly developing country in Latin America, should again become the most attractive market in that area.

(4) Unless there is evidence to the contrary, Brazil's present restrictive policy must be regarded as a necessary temporary step in rehabilitating the Brazilian for­eign payments position for the future. As long as no new problems develop, the objective for Canada should be to maintain as firm a foothold as possible in the Brazilian market, in anticipation of the day when Brazil will again become Can­ada's best customer in Latin America.

(5) With respect to codfish, in particular, we have strong grounds for continuing to press for a lifting of import restrictions by Brazil.

¹ Voir Canada, Recueil des traités, 1941, N°. 18./See Canada, Treaty Series, 1941, No. 18.