11/09/2012 01:05 pm ET Updated Jan 09, 2013

Why United States and Brazil Will Pursue a More Productive Bilateral Relationship

The growing presence of Brazilian global companies in the United Stated, complementing traditionally strong American investments in Brazil, has created a two-way street where common interests are more visible and pressure both governments to recognize the benefits of working together or risk paying a political price for not doing so.

Converging economic interests and similar challenges are emerging as the principal driver of United States-Brazil relations in the years ahead. A reelected President Barack Obama and President Dilma Rousseff, at the half mark of her government, are confronted with daunting tasks. Both need to significantly improve the economic performance of their countries in the face of political major obstacles at home, and an adverse economic outlook abroad. In both countries, sustainable growth will require investment in infrastructure, education and innovation more than consumption. How they respond will determine the success or failure of their administrations. It will also affect the two countries' bilateral relationship and their regional and global standing.

After four years of anemic recovery and a victory on November 6th without a clear political mandate,, President Obama has now to find a path of economic growth that reduces unemployment while avoiding the pitfalls of a fragile fiscal and financial situation, which, if mishandled, could easily throw the United States and the world economy back into recession.

Likewise, President Rousseff's challenge is to reverse the declining trend of economic growth that marked her first two years in office, while continuing to push for inclusion of poor Brazilians into the middle class. She has started working on it. In recent months, Rousseff announced a series of ambitious and, at times, contradictory initiatives, to dramatically improve the country's deficient infrastructure and industrial productivity. Implementation of such measures has been marred, however, by the government's poor management capacity and ideological considerations inherent to the President's Workers Party. The Brazilian executive still needs to tackle long-delayed reforms, first and foremost on taxation policy, which dramatically increases the cost of doing business in Brazil. This and other bottlenecks have reduced Brazilian domestic productivity and international competitiveness. Left unaddressed, they will continue to undermine the government's bold objectives and could very well compromise Brazil's future prosperity and relevance in a world in rapid transformation.

The 2014 World Cup and the 2016 Olympics, to take place in Brazil, and the country's need to continue to attract tens of billions of dollars of foreign investment offer ample opportunities for closer and more productive relations with the American government and its private sector. No longer Brazil's principal trading partner, a position occupied by China since 2009, the United States has remained nevertheless the country's largest source of foreign direct investment and technology and the biggest destination for Brazilian value-added manufacture exports, despite the loss of market share. Unresolved trade disputes and new frictions brought by monetary easing in the United States and growing protectionism in Brazil pose limitations to the expansion of bilateral trade, which doubled in the last ten years, reaching $75 billion at the end of 2011.

Both governments and the private sector have recognized the importance of constructive engagement between the Americas' two economic and political powerhouses. After a period of estrangement caused by foreign policy differences at the end of the Lula da Silva administration, Washington and Brasilia kissed and made up right before Rousseff's inauguration in January 2011. Since then, the two capitals have spurred an array of bilateral and global initiatives and intensified the frequency of their mid and high-level meetings.

Whereas previous conversations between Brazilian and American policymakers might have been limited to a few areas of core interest, it is now all-encompassing. There are mechanisms for regular ministerial cooperation and consultation ranging from challenging topics such as trade, finance and defense, to 21st century concerns such as cyber security, open government, and innovation in science and technology, to issues that directly affect the average citizen such as education and social policies. People to people exchanges are on the rise, strengthening and expanding networks particularly in education and scientific research. Viewed by skeptics as window dressing and no substitute for concrete agreements on hard issues such as trade and taxation, the rapid increase in the breadth and depth of the bilateral dialogue and the Brazilian and American governments' efforts to maintain the doors open for a more productive and consequential relationship suggest, at a minimum, that they understand they need each other, benefit from working together and risk paying a political price for not doing so.

Brazil's emergence as an substantive international actor and its rise as the world's sixth largest economy, have introduced new factors in Brazilian-American relationship that authorities and bureaucrats in Washington and Brasilia cannot afford to ignore. Once the host of numerous multinational companies from the United States and Europe, Brazil is now also home to dozens of Brazilian controlled multinational enterprises that have dramatically expanded their operations worldwide and, in particularly, in the United States. Some occupy substantial positions as investors in key markets, such as the meat, beer, regional aviation and special steel industries. The growing presence of Brazilian companies in the United States offers new perspective to matters such as the negotiation of a tax treaty that the two countries have talked about for four decades.

What was once an issue of interest only for U.S. companies in Brazil is now also a topic on the agenda of Brazilian firms operating in the U.S. market. Participants in the annual meeting of the Brazil-U.S. Business Council, held last month in Brasília, say the political pressure generated by the new reality of Brazilian global companies in the United States has created momentum for the approval by the Brazilian Congress of a bilateral agreement on exchange of tax information that is seen as the first step for a treaty addressing double taxation.

Brazil and the U.S. have also taken on global challenges together, benefiting from Brazil's ability to wield soft power and newfound status in multilateral fora. The Open Government Initiative (OGI) that Brazil and the United States launched last year has attracted over forty countries committed to promoting transparency, fighting corruption and harnessing new technologies to make government more open, effective, and accountable.

As suggested by developments on taxation and the progress made in OGI, gradualism is the crucial ingredient in efforts to advance U.S.-Brazil relations.

It is in trade that this approach will likely get the most bang for its buck. Having rejected the Free Trade Area of the Americas for fear that Brazilian industry would be threatened by American competitors, Brazil now faces a similar threat from China. This has caused the industrial sector in Brazil to warm up to the idea of trade arrangements that preserve their regional markets in the face of Chinese competition. How to build support and advance the idea is one of the challenges of the American and Brazilians leader in the months and years ahead.

On a related topic, the US interest in the Trans Pacific Partnership, which intends to promote greater trade and investment ties between the Pacific nations of North and South America, with Asia's most dynamic economies should be advanced in ways that invite Brazil's participation and avoid the perception held in some pundit circles in Washington that it could be used to somehow isolate or create difficulties for Brazil. The problem with this calculation is that Brazil is the Latin American nation that relevant Asia-Pacific countries are mostly interested in engaging with--because of its size, position as the world's 6th largest economy, abundance of resources much in demand by other major emerging nations, potential for growth and tradition of pragmatism.

On the positive side, under the Obama administration the United States has increasingly recognized Brazil's growing weight and relevance in a region where the United States was once the hegemon and where today Brazil faces new challenges to advance its interest and values, and to assert leadership. Pursuing a strategy of cooperation rather than competition is the wiser decision for both countries.

Paulo Sotero is Director of the Brazil Institute at the Woodrow Wilson International Center for Scholars, in Washington.