Opinion – Rodrigo Tavares: Commercial relationship between Portugal and Brazil can be very deep, says member of the Portuguese government

Bernardo Ivo Cruz was born in Lisbon, but lived in Brazil for several years. In March of this year, he was appointed Secretary of State for Internationalization, being responsible for Portugal’s foreign trade and investment strategies. He stresses that the current moment in the Portuguese-Brazilian trade relationship –with low volumes of trade and investment and focus on traditional food products– will have to be reversed in the short term and cannot be dependent on the “saudade market”.

In an interview with the column, Ivo Cruz reveals the three concrete strategic lines that should allow a deepening of commercial relations and bet on the greater involvement of Portuguese companies in the sectors of renewable energies and hotels.

Before taking on government duties, Ivo Cruz was a Counselor at the Permanent Representation of Portugal to the EU (European Union) in Brussels, monitoring the European bloc’s relations with third countries. He claims that the mistake of reducing relations between Europe and Mercosur to a free trade agreement cannot be made. He also makes it clear that ESG criteria must occupy a fundamental space in any investment and trade strategy, “a reflection of the change in consumer habits and behavior which, in Brazil, is highly valued.” The interview was granted by email.

You lived in Brazil during your adolescence and, later, you headed the office of Aicep (Portuguese Agency for Investment and Foreign Trade) in Brazil. By assuming new functions as Secretary of State for Internationalization, can Brazil become a strategic priority? I was, in fact, lucky to have lived in Brazil in my formative years and then, later, as an adult. No one living in Brazil is immune to its optimistic influence. Brazil is a strategic priority.

We are always evaluating the target markets of Portuguese internationalization in geographical and sectoral terms with the aim of focusing on the application of resources in strategic sectors and markets for the national economy. And Brazil is a strategic market for the Portuguese economy, as are Europe, the USA, the CPLP (Community of Portuguese Speaking Countries) and other markets with which the EU has signed free trade agreements. Currently, it is the target market for more than 1,500 Portuguese companies. In view of the proximity of the two countries and the size of the Brazilian market, these are numbers that can be improved, and Portuguese businessmen will be attentive to the Brazilian government’s priorities regarding the dynamization of the infrastructure, energy, digital economy and health sectors.

Direct investment from Brazil in Portugal is very scarce: 88 million euros in 2021 and 127 million euros in the first half of 2022. How to explain the lack of interest of Brazilian investors in Portugal? In fact, we found that, in the first half of 2022 alone, there was an increase of more than 44% in Brazilian direct investment, compared to the entire year of 2021.

That said, we cannot fail to point out that, in 2021 and 2022, Brazil, like other countries, suffered external constraints resulting from the pandemic and the war in Ukraine. The wave of Brazilian investments abroad has diminished, namely in assets such as shares, fund quotas or financial securities. This is a particularly relevant aspect as it offers an image of the main targets that Brazilian investors are looking for in foreign markets.

At the same time, there was also a growing repatriation of resources by residents in the country, due to the high interest rate in the Brazilian market, the unpredictability of the international economic scenario and more attractive prices of some domestic assets. Signs that allow us to identify the more “domestic” bias of the Brazilian investor who, historically, prioritizes opportunities in the domestic market.

As for the appetite for investing in Portugal, it is a trend that, like trade in goods and services, goes through different cycles, always influenced by the internal (and external) economic, regulatory, social and political framework that the two countries are experiencing. However, there are several data that lead us to believe that investment in both countries tends to intensify in the near future.

Brazil is already the third main investor in Portugal outside the European space. In terms of stock, foreign direct investment (FDI) from Brazil in Portugal represented 2% of total FDI raised by Portugal in 2021. Brazilian investors are particularly interested in the real estate sector (often associated with obtaining authorization of residence), productive sector (intensive capital) and in commerce (franchise). In recent years, it is also possible to observe an intense flow of individual investors who have made investments in the agri-food industry, with emphasis on the wine industry.

The same happens with Portuguese investment in Brazil, which only reached 12 million euros in 2021. Why do Portuguese investors have no appetite for Brazil? Statistical data on the bilateral relationship allow us to signal that it has a more accentuated tendency towards exports in the area of ​​trade in goods and services than towards investment flows. Brazil continues to figure among the priorities of Portuguese companies that intend to export or internationalize their businesses, presenting itself as one of the main markets outside Europe, but the level of investment of our companies can still be increased.

There are, however, regulatory factors that justify the fact that the value of Portuguese investment in Brazil is still low. To begin with, the need to set up a local company, which becomes responsible (and, in some cases, autonomous from the parent company) for managing the company’s entire portfolio in the market. For tax optimization purposes, several Portuguese companies end up acquiring local companies, which allows them a smoother transition to entry and start of activity in the market.

Reality shows that there are several sectors with a large presence of companies of Portuguese origin with concrete investments in the Brazilian market. From the food and beverage sector, through construction and engineering, energy, machinery and equipment and, of course, sectors such as industry, services and tourism. Giving some concrete examples, companies of great importance on the national scene such as GALP and EDP anticipate large investments in solar and wind energy generation projects in Brazil in the coming years, defining this market as the main platform for growth in the renewable energy sector . Portuguese hotel chains, such as Grupo Pestana and Vila Galé, recently announced their intention to invest and open new units in Brazil.

Portuguese trade with Brazil continues to focus on the same products for 500 years (codfish, olive oil, wine and fruit). How to modernize relationships commercials? If, historically, there is a relevant weight of agricultural and food products in exports from Portugal to Brazil, this is not an unquestionable reality. This perception is far from translating the reality of our exports to Brazil, since the portfolio of Portuguese products in the Brazilian market is by no means limited to what, ultimately, can be identified as the “saudade market”.

Firstly, because even products such as olive oil, wine or frozen fish are part of industries that have renewed themselves, which have incorporated state-of-the-art technology into their production processes. They present innovative solutions that are based, in addition to their genuineness, on sophistication. A “modernized” tradition, if that’s what we want to call it.

Consequently, and across all sectors of the Portuguese economy, our offer is also increasingly attentive to ESG principles (environment, society, governance), where consumption is aligned with progress and the sustainable development of companies. A reflection of the change in consumer habits and behavior which, in Brazil, is highly valued.

The attraction of large Brazilian investments to Portugal also works as an anchor for exports in other sectors. Vehicles and other transport materials, machinery and apparatus, plastics and rubber are traded in significant volumes, highlighting, for example, the weight of investment by a company like Embraer in our country – at the same time that they reinforce the mold industry as a major player in the bilateral relationship.

Trade barriers are known. But what can realistically be done for Portugal and Brazil to strengthen their relationship commercial? The commercial relationship between Portugal and Brazil continues to be solid, constant and effective. There is, however, much to be deepened and diversified. To this end, without disregarding other actions that may be taken, I believe there are three concrete strategic lines that will allow reinvigorating the same.

To begin with, strengthening collaboration in international organizations where Portugal and Brazil share a seat, with particular emphasis on the CPLP (where it is vital to consolidate an integrated and aggregating strategy for economic and trade cooperation) and in the regional blocs that Portugal and Brazil form part of ( EU and Mercosur), in order to bring the parties together (even if the ratification of the Agreement remains to be consummated).

Also, with the expansion of actions that make it possible to provide the Brazilian market with information related to the Portuguese offer, treading a path that allows changing the matrix of the relationship to a greater focus on services in the main areas of opportunity for Portuguese companies in Brazil in the short term (highlighting technology applied to health and agribusiness, sanitation and renewable energies).

Finally, we must bet on new states, considering the regional specialization that is verified in the Brazilian market (for example, the clear focus on science and technology in the southern states of the country, in contrast to the weight of agribusiness in the center-west or opportunities of an energy nature in the North and Northeast), without ever obliterating the issue of scale.

It is increasingly important that investment attraction policies are aligned with sustainability principles. What relevance does Portugal give to this topic? Total. The growing concern and environmental regulations are now accompanied by mechanisms and incentives for funding that is intended to be sustainable, and will continue to be so on an unprecedented scale. It is essential that there is a commitment to sustainability, social development and the promotion of environmentally and socially responsible financing. The adoption of responsible investment implementation strategies, anchored in the measurement and public disclosure of the investment’s environmental impact, is a strategy that will necessarily be implemented.

In this context, Portugal has not only followed the new legislative initiatives in the European Union, including the creation of a classification system to identify sustainable economic activities, but also believes that it is a priority to create a clear regulatory framework with attractive instruments to ensure that investment in our country ensures the principles of social development, sustainability, and the energy and digital transition.

What are the Portuguese government’s expectations regarding the ratification of the EU-Mercosur free trade agreement? Will it be possible to achieve it in 2023? The Portuguese government has been a firm supporter of the ratification of the free trade agreement between the EU and Mercosur. We understand that it will be a fundamental instrument for opening up markets and for improving the relationship between Europe and the South of the Americas, and with Latin America as a whole.

But we cannot make the mistake of reducing relations between Europe and Mercosur to a treaty. There is much more to life than the treaty and we must not forget how much unites us and the potential for progress and well-being for Europe and Latin America that comes from working together.