Full Dissertation - Emerson Galina - Final After Defense - March 12th - 2019 PDF

PERFORMANCE OF VEHICLES EXPORTS FROM BRAZIL TO MEXICO
THE RELEVANCE OF EXCHANGE RATE FLUCTUATIONS IN

THE PERFORMANCE OF VEHICLES EXPORTS FROM BRAZIL
TO MEXICO
Emerson Luís Galina
1

TO MEXICO
2

TO MEXICO
DBA Thesis
Defended in February 25th, 2019
Board Room - Building 1 – Rennes School of Business
Thesis submitted in fulfilment of the requirements for the degree of
Doctor in Business Administration
Rennes School of Business - Rennes, France
Advisor: Dr. Roman Matkovskyy – Associate Professor – Finance and Accounting

Co-advisor: Dr. Taoufik Bouraoui – Associate Professor – Finance and Accounting
Chairman: Dr. Michael Dowling – Director of Doctoral Programmes & Associate Prof.
Examiners: Dr. Saqib Aziz – Assistant Professor – Finance and Accounting

Dr. Christos Alexakis – Associate Professor – Finance and Accounting
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DECLARATION
I declare that this thesis is my work and was not submitted in any form for another
degree or diploma at any university or other institution of tertiary education.
Information derived from the published or unpublished work of others has been
acknowledged in the text, and a list of references is given.
I declare that the electronic copy of this thesis provided to Rennes School of
Business is, within the limits of the technology available, an accurate copy of the
print thesis submitted.
I, as the copyright owner of this thesis, and following the award of the degree:
Grant Rennes School of Business a permanent non-exclusive licence to store,
display or copy any or all thesis, in all forms of media, for use within the Rennes
School of Business, and to make thesis freely available online to other persons
or organizations.
Rennes, March 12th, 2019
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DEDICATION
To my father Pedro and mother Vandira, who since I was a little kid had motivated me
to keep studying and supported me in my early English course.
Second, I need to thank very much my wife Shirley and my sons Giovanna and Lucas
for all patience and love during those endless days, months and years dedicated to
this study.
Finally, to BENTELER without whom this study would have been completed one year
earlier.
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ACKNOWLEDGEMENTS
First, I would like to express my sincere gratitude to my advisors Dr. Roman

Matkovskyy and Dr. Taoufik Bouraoui for the continuous support of my doctoral
study and related research, for their patience, motivation, and insightful
comments. Without their guidance it would be impossible to complete this
doctoral thesis.
I would like to thank Dr. Murillo Dias, DBA Academic Coordinator, for his guidance
and partnership during our classes and residence at Fundação Getulio Vargas -
Rio de Janeiro and Rennes School of Business.
My sincere thanks also go to my bosses at BENTELER – Mr. Ralf Göttel and Mr.
Laurent Favre, who envisioned a broader perspective and provided the unique
academic and business enrichment opportunity. I would not have this opportunity
without their invaluable support.
My sincere thanks to Professor André Paiva Ramos, who also supported me

during this journey in several opportunities with his wisdom and Brazilian
economy knowledge.
My thanks to the classmates for the learning opportunity. In particular, Jorge

Montenegro Barros Neto, Rodrigo Navarro, Marcela Castro, Haroldo Monteiro
and Fabiano Gomes which constant support proved invaluable in these four
years.
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DECLARATION
I declare that this thesis is the result of my work, where information has been
derived from other sources, I confirm that this has been indicated in the document
and fully and unambiguously referenced. Neither this thesis, nor the essential
research work, has been previously submitted, in part or whole, to any university
or institution for any degree, diploma, or other qualification.
Date: March 12th, 2019
Rennes, France
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ABSTRACT
From the 80´s on, the globalization process fostered the formation and
development of global productive chains and a deregulated international financial
system with free capital mobility. Looking forward benefiting from business
expansion and improve financial results, companies in the automotive sector,
especially automobile manufacturers, started to deploy their global strategies by
decentralizing production and launching new plants and products into several
countries in Asia, America and Europe. In Latin America, Brazil and Mexico
became the main vehicles producers reaching an annual capacity of 10 Million
cars (15% of global production volume) and USD 3,0 Billion bilateral trade.
Having few published researches in Latin America about this specific regional
automotive market and with the support of a vast local and international
bibliographic and statistics reviews, this study focus on the analysis of the main
relevant variables of the performance of vehicle exports from Brazil to Mexico in
the period from 1997 to 2017. Embodied in a volatile, uncertain, complex and
ambiguous (VUCA) market, the Autoregressive Distributed Lag (ARDL)
cointegration method was performed and a detailed identification of short and
long-term variables´ impacts can be demonstrated when combining the effects of
exchange rate variation and Gross Domestic Product (GDP), price levels and
bilateral trade agreement. Nonetheless, differently from general literature review
and market specialists beliefs, this study concludes that exchange rate during the
last two decades had only a support effect in the trade, although positive effects
demonstrated during Brazilian currency devaluation (2002-2004) and negative
effects hurting the trade balance during appreciation (2007-2012). In the other
hand, the implementation of a formal bilateral trade agreement (ECA#55) and
GDP growth levels generated positive effects for the industry and country
development, confirming existing theoretical framework.
Keywords: Exchange rate; Trade balance; Export; Automotive industry; Trade

agreement; ARDL.
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SUMMARY
LIST OF FIGURES ..................................................................................................... 10
LIST OF TABLES ....................................................................................................... 11
INTRODUCTION ........................................................................................................ 12
FIRST CHAPTER - Exchange rate and trade balance: the Brazilian context ............. 19
1.1 Introduction ....................................................................................................... 19
1.2 Brief Summary On The International Monetary System ..................................... 21
1.3 Analysis of the economic performance and the main macroeconomic measures
adopted in Brazil from 1980 until 2016 .................................................................... 28
1.4 Exchange rate, Competitiveness and the Brazilian trade balance ..................... 40
1.5 Conclusion ........................................................................................................ 51
SECOND CHAPTER - The relevance of Economic Complementation Agreement #55
in the performance of the Brazilian automobile trade balance with Mexico .................. 53
2.1 Introduction ....................................................................................................... 53
2.2 Theoretical methodological framework .............................................................. 56
2.2.1 Bilateral trade agreements .......................................................................... 56
2.2.2 Characteristics of the automotive industry ................................................... 58
2.2.3 Methodology ............................................................................................... 61
2.3 Analyses............................................................................................................ 62
2.3.1 - The evolution of the bilateral trade agreement between Brazil and Mexico
under the ECA – Economic Complementation Agreement #55 ............................ 62
2.3.2 - The effects of changes to the bilateral agreement on performance of
Brazilian trade balance ........................................................................................ 67
2.4 Conclusion ........................................................................................................ 72
THIRD CHAPTER: The relevance of exchange rate fluctuations in the performance of
vehicles exports from Brazil to Mexico ........................................................................ 74
3.1 Introduction ....................................................................................................... 74
3.2 Theoretical Background and Literature Review ................................................. 77
3.3 Methodology...................................................................................................... 79
3.4 Analysis of the model results ............................................................................. 81
3.5 Conclusion ........................................................................................................ 90
CONCLUSION ............................................................................................................ 91
REFERENCES ........................................................................................................... 94
ATTACHMENTS ....................................................................................................... 103
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LIST OF FIGURES
Figure 1 – Exchange rates regimes 1880-current………………………………. 22

Figure 2- Brazil: Evolution of the National Broad Consumer Price Index -
(IPCA), in percentage - in 12 months - from Dec / 1980 to Dec / 2000 ………. 30
Figure 3 - Brazil: Evolution of the real interest rate (Selic) in percentage - in 12

months - from 1999 to 2016 ………………………………………………………. 34
Figure 4 - Brazil: GDP Evolution – Real variation rate in the year - Var. %
Yearly……………………………………………………………………………….....38
Figure 5 - Brazil: Annual real exchange rate index (IPA-DI), from 1994 to 2016
………………………………………………………………………………………….42
Figure 6 – Main reasons for an active exchange policy………………………… 44
Figure 7 - Evolution of Exchange rate (R$ / USD) and Trade Balance (USD bi) in
the period of 1994 to 2016………………………………………………………….. 46
Figure 8 - Brazil: Annual evolution of the exchange rate (R$/US$) and the balance
trade by aggregate factor (US$ bi. FOB p.a.)…………………………..................47
Figure 9- Brazil: Annual balance of the total trade balance and by technological
intensity, in US$ billion FOB - from 1997 to 2016………………………………….48
Figure 10 - Summary of ECA #55 and the modification decrees in bilateral

automotive trade between Brazil and Mexico……………………………………..66
Figure 11 - Brazil and Mexico: vehicle trade current (in US$ million)…………..68
Figure 12 - Brazil: vehicles exportation and importation from Mexico (in US$
million) and exchange rate (R$/US$)………………………………………………70
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LIST OF TABLES
Table 1 - ECA #55 Decree nr 4.458 Quotas and tariffs in bilateral automotive
trade between Brazil and Mexico……………………………………………………64
Table 2 – ECA#55 Decrees 7.706 and 8.419: Quotas* in the bilateral automotive
trade between Brazil and Mexico……………………………………………………65
Table 3 - Vehicles trade balance, exchange rate and GDP ( from 1997 to
2017)…………………………………………………………………………………..69
Table 4 - Stationarity test ADF test results…………………………………….……82
Table 5 - F-Test results…………………………………………………………..…. 83
Table 6 - Long-term regression……………………………………………………. 83
Table 7 - Short-term regression………………………………………………….….84
Table 8 - Annual variation of inflation in Brazil and Mexico (CPI)…………….…85
Table 9 - Long-term regression..........................................................................86
Table 10 - Short-term regression........................................................................86
Table 11 – List of the empirical studies on the relationship between exchange

rate and trade balance ………………………………………………………….…..88
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INTRODUCTION
International trade has a historical importance for the economic growth and
development of countries and it is a present theme in the theoretical formulations
and in the advancement of research in the economic area. The process of
productive globalization resulted in the formation and development of global
production chains, especially from the 80´s on. Consequently, countries identified
the importance of being inserted in these chains to boost the level of technology
and activity.
At the same time, transnational companies began to deploy their strategic

initiatives at global level, decentralizing their productive and commercial activities
in different countries looking forward to improve financial results by reducing their
costs and increasing sales/revenues. Being a sector that presents one of the
most relevant global value chains, the companies in the automotive sector,
especially automobiles manufacturers, started massively to implement this
strategy.
Automobiles companies increased their investments in several countries,

decentralizing and outsourcing a large portion of their activities, mainly in regional
terms, where they implemented production and sales platforms. They aimed to
optimize costs, increase the consumer market capacity in a country and / or a
region and to generate new consumer markets. Therefore, the companies
targeted at increasing their sales, profits and market share in a global scale.
Although the general strategy´s simplicity, it should be emphasized that this is a
very competitive sector with profit margins rarely reaching double percentage
digits, and it demands high capital expenditures by increasing investments in
research and development, new products and technology and production means.
In the formulation and definition of global production and marketing strategies,
aspects inherent to intra-firm or inter-firm activity (suppliers, producers and
traders) are taken into account as well as aspects related to infrastructure and
logistics costs, macroeconomic policies and variables, trade agreements
between countries, regional trade agreements and access to consumer market.
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Latin America, especially Brazil and Mexico, which have large domestic markets
( approximately 6 million vehicles per year ) and supply capacity for other relevant
markets, became strategic for the automotive sector. Therefore, the main
companies in this sector increased their investments and installed new
production plants in these two countries. These new plants began to supply not
only intrafirm trade and niche markets and specific regions, but also other
countries in South America, Central and the North America (United States and
Canada).
With the financial globalization, in which there were financial deregulations and
free capital mobility, the characteristics of the international financial system are
currently relevant for the economic performance of countries and for the
strategies of transnational corporations. At this point, the role of the exchange
rate became central, mainly due to the competitiveness aspects of the companies
installed in a country to compete and attend the demand in domestic and
international markets. In Brazil, the exchange variation impacts sectors
differently, but the over-valued exchange rate in the last two decades has
presented challenges and difficulties mainly to the industrial sector, including the
automotive business.
Taking the new globalization characteristics into consideration, governments aim

to attract transnational corporations to operate in their countries and, therefore,
raise participation in the main global value chains. The implementation of trade
agreements between countries, the creation of regional blocs and local
development strategies, are considered important measures to stimulate trade
between countries. In addition, such international agreements also seek to attract
transnational corporations to increase their participation in these countries,
mainly in order to boost employment and income generation.
In view of the new challenges presented in the global competitive and open
economic context, the Economic Complementation Agreement 55 (ECA#55) was
implemented between Brazil, Argentina, Paraguay, Uruguay (Mercosur
countries) and Mexico in September 2002. Specifically in the case of the bilateral
agreement between Brazil and Mexico under the ECA #55, annual quotas and
tariffs were defined until the future establishment of a complete free trade in June
2011.
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However during the last 15 years, 8 relevant changes (3 out them modified quotas
and limited trade) were implemented and the new planned target date for free
trade implementation is postponed to March 2019, representing a delay of 8 years
versus the original plan. Although proven benefits embodied in this agreement,
both governments did these amendments to protect their internal market
whenever they experimented any unfavourable condition. This unpredictability
certainly raised important and decisive questions for the allocation of resources
in the involved countries by not having the adequate financial and legal protection
that investments in long-term assets requires. As a matter of fact, a new round of
negotiation was already announced in early 2019 and Brazil was proposing to
postpone again the free trade implementation at least until 2022.
Based on the globalization and creation of global value chains, this study aims to
evaluate the effects of the variations in the exchange rate levels on the
performance of vehicle exports from Brazil to Mexico - two main producing
countries in Latin America - in the period from 1997 to 2017. Additionally, it aims
to identify the relevance of ECA #55 for the performance of the vehicle trade
balance in Brazil in relation to Mexico.
The main hypotheses regarding the objectives of this research are: 1) the
exchange rate devaluation of the Brazilian Real positively influenced the exports
from Brazil to Mexico; 2) The ECA #55 benefited the current trade of the vehicle
sector between Brazil and Mexico; 3) The ECA #55 negatively influenced the
export of Brazilian vehicles to Mexico in the medium and long term. 4) The
performance of Gross Domestic Product (GDP) and exchange rate level were
determinant factors for the performance of vehicle´s trade balance from Brazil to
Mexico.
Mohsen Bahmani-Oskooee et al. (2007) quantitatively analysed the influence of

exchange rate in the trade among several countries. The conclusion is that
depending on the goods trade, very different effects could be identified. In his
study, while agricultural exports from Brazil are negatively affected, certain
manufactured products are lesser affected. Contradictorily, Brazil was the subject
of an early sectorial-level study by Coes (1981). Examining 13 manufactured
goods and 9 primary products over the period from 1957 to 1974, he found that
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manufactured goods were affected by uncertainty more than were agricultural
products, and that these effects tend to be positive
Although not measuring exchange rate fluctuation influence as an independent

variable, Hernandez-Rodriguez (2011) identified positive effects on the Andean
Community and Mercosur countries by fostering bilateral regional trade and
integration. The econometric results confirmed the theory that geographical
position and GDP were significant. Similarly, Magee´s (2008) also confirmed
positive effects of bilateral regional trade agreements.
This thesis is based on a vast bibliographical review, considering historical,

structural and conjunctural aspects of the research subject and an analysis of
both official macroeconomic and sector statistics, as well as official documents of
ECA #55 and other legislation. In addition, econometric modelling was also used
based on the Autoregressive Distributed Lag (ARDL) cointegration method.
The conclusions of this study confirms that Brazilian commercial performance in

the automotive sector in relation to Mexico is not associated to only one variable,
such as changes in the exchange rate levels. Several competitiveness factors
influenced the production and commercialization strategies, as below:
❑ Exchange rate – presented a support function in the econometric but it

was very important during Brazilian currency (BRL) devaluation from 2002
to 2004, when trade with Mexico was effectively encouraged.
Nevertheless, it hurt trade balance during currency appreciation specially
from 2007 to 2012. Theoretical background - Bahmani-Oskoee et al.
(2007); (2016) supported a stronger negative or positive effect, which was
not confirmed in this study
❑ Bilateral trade agreement was the key to increase business opportunities

and definitively fostered a broader regional integration, even without the
expected free trade agreement implementation. Magee (2008) and Baier
(2005) theoretical frameworks were confirmed. In the long-term, Mexico
has a competitive advantage against Brazil by having access to bigger
markets (trade or commercial agreements reaching 1,0 billion consumers
and 60% of world´s GDP), 10 free trade agreements with 45 countries and
lower costs while Brazil, on contrary, is still locked into the Mercosur
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agreement, limiting international exposure and potential market access
enlargement.
❑ GDP growth is relevant – It has been hardly proved that during economic
slowdown in 2015 and 2016, vehicles sales and production are
dramatically affected (>50% volume reduction). GPD development has
been confirmed through econometric results in short and long-term
regressions as an important independent variable to influence trade
volume and theoretical background, such as demonstrated by Bahmani-
Oskooee (2007) and Hernandez-Rodriguez (2011), confirms similar
results.
❑ Inflation is relevant – During the studied period, Mexico and Brazil

presented mostly acceptable (average below 5% p.a) and controlled
inflation index, driving predictability for consumers and investors.
Econometrics results confirmed theoretical framework proposed by Rossi
(2016) demonstrating that exchange rate fluctuation does not necessarily
increase cost or generate inflation increase pressure due to the
asymmetries and market dynamics concerning commodities, industrial
products, and services prices.
This research presents an innovative approach to evaluate the performance of

Brazilian´s vehicle trade balance in relation to Mexico based on macroeconomic
variables, mainly focusing on exchange rate, GDP performance, and in ECA#55
and its respective changes. Therefore, it presents several contributions not only
to the advancement of academic research in the area of economics, but also to
a more in-depth understanding of the vehicle sector looking forward to support
company´s strategies and trade agreement negotiations by regional authorities,
sector´s entities – such as ANFAVEA and Sindipeças - and entrepreneurs. It is
also worth mentioning that, although the impact of the exchange rate on the trade
balance have already been the subject of important researches in various
institutions, this topic, especially when it deals with other aspects and variables,
is constantly debated in academic literature and business decision making
process.
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On top of the econometric model itself, the contribution of the research to the
academic area can be highlighted once the research methodology was based on
the complementary evaluation of the impact of different variables and
investigated aspects. It should be noted that the performance of the vehicle trade
balance was definitively affected by a set of variables, especially exchange rate
and GDP, which present different results depending on the short, medium and
long-term frame. Additionally, the study also demonstrates the relevance of
ECA#55 terms in the performance of trade balance and for definition of productive
and commercial strategies of main companies in automotive sector. The
implemented quotas regime on volume (quantity of vehicles) and afterwards in
value in two important global economies within a sector that operates in global
chain is presented as an unique and unusual amendment that consequently
limited the trade prior to expected future free-trade implementation. Therefore,
the study demonstrates its importance to the academy as it is not restricted to
economic variables and econometric, but rather it deals with the complex
business environment present in the current international framework such as
financial globalization, geopolitical and governments changes, the particular
characteristics of automotive sector, and finally the necessary and constant
attention concerning negotiations of various trade agreement´s terms in different
sectors and countries.
This study is also relevant to the industry and institutions as it transfers

knowledge to the community by demonstrating the relevance of the exchange
rate combined with other analysed aspects. Companies will have a new, broader
and more solid approach to strategically define short, medium and long-term
operation at global level. It demonstrates the importance of combining
macroeconomic variables, especially the ones related to exchange rate level, to
other structural aspects of international economy and to trade agreement terms.
Moreover, any entrepreneur investing in this business could benefit from this
study by utilizing the studied variables and impacts to estimate its particular
business scenarios, understanding beforehand the effective results of a change
in economic variables and/or a negotiation of a commercial agreement, enabling
companies to anticipate effects and therefore drive its strategies and decision-
making process. Such strategies can be adopted to mitigate possible negative
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impacts, optimize positive impacts and increase competitiveness. Therefore, this
research transfer knowledge to companies, generating synergy between
academia and the business sector, and also provide expertise to the ones who
devise international trade agreements.
Besides this introduction, this thesis is divided into three complementary

chapters. The first chapter aims to present an approach on the relevance of
exchange rate to competitiveness and to the performance of the Brazilian trade
balance. The chapter starts with a brief contextualization about the significant
aspects of international monetary system and Brazil´s economic performance
from the 80´s on. Finally, it shares the importance of exchange rate for
competitiveness and for performance of the Brazilian trade balance, highlighting
the most technologically intensive industrial sector.
The second chapter analyses the relevance of ECA #55 to the performance of
Brazilian's vehicle trade balance in relation to Mexico based on statistics from
1997 to 2017 and the relationship with exchange rates and Brazilian´s GDP
evolution. The chapter also deals with main general characteristics of the global
and regional automotive industry context and it presents the bilateral trade
agreement between Brazil and Mexico within the scope of ECA #55 and its
changes over the years.
The third chapter presents the econometric model based on the Autoregressive
Distributed Lag (ARDL) cointegration methodology, relating the variables of GDP
and inflation in Brazil and Mexico, vehicles exports from Brazil to Mexico, vehicles
imports from Mexico to Brazil and Brazilian exchange rate in relation to Mexican
currency. Finally, there is the conclusion of the thesis relating the approaches
and analysis developed in the three chapters that comprise it and
recommendations for future research regarding such important and relevant
market.
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FIRST CHAPTER - Exchange rate and trade balance: the
Brazilian context
1.1 Introduction
This paper aims to present a literature review concerning the impacts of

exchange rate on the competitiveness and performance of the Brazilian trade
balance. International trade is of undeniable importance in the context of modern
economies, especially to drive growth and economic development strategies, to
increase productivity, competitiveness, business performance and to foster
technological development. With globalization, international trade became
increasingly important in the composition of domestic production and
consumption in the countries and consequently it is vital to create vectors that
result in the improvement of a country's level of activity.
Exchange rate behaviour and its respective impacts, especially on trade balance,
remain an area of great importance in which important institutions and
professionals around the world focus their researches. However, even with new
econometric techniques and the development of a broad academic literature on
related topics, this subject is still in constant debate. Bahmani-Oskooee et al.
(2007) had published several articles confirming positives and negatives effects
utilizing different countries and bilateral trade.
In this context, for an emerging market with an open economy like Brazil, one of
the most relevant variables is precisely the exchange rate. Particularly in the
current economic scenario, when Brazil is in the midst of the worst economic
recession since the 30’s, the exchange rate policy directly affected economic
activity, production structure, trade balance, inflation indexes, international
competitiveness, and thus economic performance and growth.
In Brazil, it can be pointed out that exchange rate fluctuation impacted each
sector with a different intensity. Even with an appreciated exchange rate, the
agricultural sector was able to remain competitive and obtained good commercial
results. On the other hand, the industries have difficulties in competing both in
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international and domestic market. Thus, to meet domestic demand, finished
manufactured goods, raw materials and components started to gain market
share, directly affecting the performance and growth of the industries.
Indeed, since the mercantilism - from the sixteenth to the end of eighteenth
century - marked by commercial activities aimed to achieve a "favourable" trade
balance, which would bring gold and silver to the country and would develop the
domestic employment at same time, the international economy was a relevant
factor. Adam Smith and David Ricardo, in 1776 and 1817 respectively, heralded
the formulation of a theory of free trade and also addressed the importance of
international trade and competitiveness in their theoretical formulations. In
addition, historically, the great emphasis on the relevance of the expansion of
commercial activities can also be exemplified by the colonial pact, limiting the
trade of the colonies to their cities and ensuring the best possible price
relationship.
Bearing this in mind, it can be noticed that international trade and competitiveness
have always played an important role in economic history and development of
theoretical formulations. Moreover, the trade among nations was never put aside,
but reaffirmed with the theories that emerged throughout the development of
economic thought. With regards to this fact, theories recurrently demonstrated
that international trade is one of the main factors to foster the growth, citizen’s
well-being, and economic development of countries.
Transactions in foreign trade also depended on the price relation of the various
goods or services and therefore were associated with the international monetary
regime. From the gold standard and limitations presented in this system, the
international financial system underwent relevant changes throughout decades.
With the end of the Bretton Woods system in the early 70’s, the dollar-gold
standard was terminated, elevating the USA dollar as the currency of the
international financial system.
The international monetary standard, the characteristics of the international

financial system and globalization are currently factors of great importance for
economic performance of the countries. In that way, emphasizing the role of the
exchange rate in this process, especially with respect to the aspects of
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competitiveness, becomes essential. The exchange rate has a direct impact on
prices of domestic goods and foreign prices and is therefore important to
determine external competitiveness and productive structure of the countries.
Thus, in recent years there has been a growing interest in evaluating the effects
of exchange rate policies on the trade balance.
The chapter is structured as follows: the second section deals with a brief context
on relevant aspects of international monetary system; the third section describes
the economic performance of Brazil since 1980 and main macroeconomic
measures adopted during this period; and the fourth section analyses the
importance of the exchange rate for competitiveness and performance of the
Brazilian trade balance, mainly focusing upon the industries which represents the
sector with high investments in technology.
1.2 Brief Summary on The International Monetary System
Until the beginning of 20th century, the so-called "Gold Standard" predominated
in international monetary system. As international trade expanded and due to
limitations that this pattern established regarding the constraint imposed by the
gold stock, there was the need to implement a new way of determining the
equivalence between different currencies.
After the end of II World War there was the substitution of the system based on
the gold standard and the adoption of a system based on fixed rates, but with an
adjustable exchange system. This new system was created in 1944 at the Bretton
Woods Conference, when the International Monetary Fund (IMF) was also
conceived and became the organization responsible for authorizing changes in
fixed exchange rates.
Another important decision taken in the Bretton Woods Conference was the
establishment of an extensive control over financial flows, therefore the system
emanated sought to stimulate most of the expansion of international trade, but
with broad control of financial flows. The only measure of commercial control
explicitly accepted was the customs tariff, or "ad valorem" import taxes. Quotas
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and other forms of direct control of trade flows were formally banned and thee
rules governing world trade were explained in the General Agreement on Tariffs
and Trade (GATT).
The application of these principles allowed vigorous expansion of international

trade, following the recovery of economies destroyed by II World War. According
to Rossi (2016), based upon the influence of Keynes theory, the post-war
consensus was that national states should aim to pursue full employment and
economic stability through the adoption of active economic policy.
The system adopted in Bretton Woods was even effective to ensure high growth
rates associated with the lower variation in relation to the gold standard as stated
by Marcondes (1998). Nevertheless, in the early 70’s there was a devaluation of
the dollar leading to the end of the implemented logic. Thus, the dollar-gold
standard was phased out, making the USA dollar the reference currency for
international financial system1. Figure 1 below shows the chronology of exchange
rate regimes:
Figure 1 – Exchange rates regimes 1880-current
Period Description
Specie: Gold Standard (bimetallism, silver); currency unions; currency boards;

1880-1914
floats.
Gold exchange Standard; floats; managed floats; currency unions (arrangements);

1919-1945
pure floats; managed floats.
1946-1971 Bretton Woods adjustable peg; floats (Canada); Dual/Multiple exchange rates.
Free float; managed float, adjustable pegs, crawling pegs, basket pegs, target
1973-
zones or bands; floating exchange rate; fixed exchange rates, currency unions,
current
currency boards; Free capital mobility and deregulation of the financial Market.
Source: Bordo (2003) / IMF
1
According to Ramos (2015, p.40) "the role of the dollar as an international currency, which
gives the issuing country, the United States, enormous economic, strategic and geopolitical
privileges." As for the privileges of the US see Eichengreen (2011).
22
The end of Bretton Woods in 1973 is the genesis of the international economy.
From that moment on, there have been only two options in relation to the US
dollar: floating or fixed once for all. Major economies governments, such as the
USA and Japan, allowed free floating exchange rates, although it was brought
some acceptable level of uncertainty into their current international transaction.
Small and developing countries - such as Brazil - have adopted a fixed exchange
rate with rigid capital control to defend its economy by avoiding drastic
fluctuations. Eichengreen (2000) pointed out that due to the collapse of the
Bretton Woods system, the transition to the floating2 exchange rate was a "leap
in the dark" since few predicted the exchange rate instability of the main currency.
Over most of the 70’s, all countries were forced to adapt their economy to the
new international monetary system, when it was not necessary to maintain their
exchange rate under predetermined fluctuation bands. Beginning in 1978, a
second agreement legalized exchange rate fluctuations, diminishing the special
role that the gold exchange pattern (IMF, 1984) had in the international financial
community. Eichengreen (2008) and other economists opposed to the floating
system and believed in chaos due to the high fluctuations in that period (2 to 3%
per month), which did not occur at the end.
The lack of a rigid system, such as Bretton Woods, allowed and certainly
encouraged the emerging of new financial operations that were not under the
control of central banks. The main reason for this establishment was the excess
of Petro-dollars that developed countries actively integrated into the monetary
system after the oil shock in 1973.
In addition, the international financial operations during that period gave the US
Dollar a leading currency role for global payment and financing system, to the
detriment of nominal deposits. On that occasion, the IMF was also trying to get
involved in a new international currency reference based on some currencies, but
2
Two additional models emerged from the concept of fixed and floating exchange system. The
first one was the administered exchange rate, where, even at floating rates, governments and
central banks operated through monetary policy to affect domestic and foreign currency volumes,
leading to changes in the terms of trade. The second model was known as exchange bands,
where the rate fluctuated in a predetermined range of variation.
23
was left out when the US dollar managed to preserve its nominal value, even with
the abrupt rise of the USA interest rate in 1979.
Then, from 1980, the behaviour of central economy changed dramatically. USA
President Ronald Reagan implemented a new liberal approach, reducing central
government influence and interference in the economy. The main objective was
to reduce the level of public debt by having less state investment combined with
a lower tax burden on workers and entrepreneurs. As reported by Baer et al.
(1995), this economic policy did not achieve its goal and, in addition, reduced the
welfare of regular American citizens.
Failing to meet expected level of public debt, the Federal Reserve (FED), which
had already raised interest rates, decided to decrease international liquidity. Such
action exposed the weaknesses of several commercial banks generating deep
exchange rate crisis and debt moratorium in under-developing countries like
Mexico, Chile and Poland.
Huge speculation and currency crises in Europe and emerging countries also
occurred in the 90’s. The critical moment began in 1992 when Western European
countries went through the crisis of the European Monetary System (EMS). At
that period, the sterling pound reached its lower parity level in the ERM
(Exchange Rate Mechanism) and two days later in August, its lowest historical
level. It is true that introduction of the ERM in Europe, whose main objectives
were the reduction of exchange rate fluctuations and monetary stability to
introduce a single future currency – the Euro, was not fully effective.
According to Higgins (1993), once the ERM was inherently susceptible to shocks,
fundamental changes would be needed to reduce the currency crises in the EMS.
It would have been necessary to implement a reform that entailed restrictions on
capital mobility, acceptance of a single monetary policy for all members of ERM,
or a permission to adjust exchange rates to divergent policies and results across
countries.
From the perspective of the important roles played by domestic financial fragility
and capital movements during the episode of 1992/1993 EMS crisis, according
to Eichengreen (2000), it was considered as the predecessor of the exchange
rate crisis which took place in developing countries later. Due to the fragile
24
financial system, these countries were certainly not prepared for these new cash
flows scenarios and therefore the entire economy was compromised having a
significant impact through distortions in allocation of resources and industry
events in the country.
While Europe was undergoing through the crisis of EMS, developing countries
protected their currencies under the control of capital flows. More than 50% of
these countries maintained a fixed exchange rate regime, while others were
moving rapidly to a floating system that in fact was not fully floating due to the
intervention of their Central Banks in order to avoid high volatility.
Mexico, which adopted a fixed exchange rate system, also faced an intense
outflow of capital in December 1994, which generated an unprecedented pattern
of default. Calvo and Mendonza (1996) reported that Mexican crisis is an example
of payment balance crises in the era of global capital market. Since 1945, Mexico
has implemented six fixed exchange rate systems that have collapsed. The last
episode was unique and caused the worst recession in Mexican history and left
the banking system on the verge of a collapse and its aftermath upon emerging
markets around the world.
It is a fact that the question of the effects of "spill over or contagion" was
considered very important in the light of Mexican crisis, affecting not only Latin
America, but also Asia. In the 90’s, Southeast Asian countries presented
consistent macroeconomic indicators - high GDP growth, low inflation and
balanced fiscal position - but they also experienced speculative currency attacks.
Initially, the countries that had attracted substantial capital inflows (India,
Indonesia, Korea, Malaysia, Philippines, and Thailand) were not affected by
events in Latin America. However, during 1995 mid-January, exchange rates in
most countries experienced an increase in speculative pressure and stock
markets suffered heavy losses. In many cases, central banks responded to these
events by raising interest rates in an effort to defend the currency. As in Latin
America, not all countries experienced the same degree or persistence of
pressures, added Calvo and Reinhart (1996).
25
Even before Brazil, speculative attacks also reached Russia in August 1998.
Münch (1998) reported that its short-term domestic debt was approaching US$
40bn, but international reserves amounted to only US$15bn. The central
government raised sharply interest rates between the second half of 1997 and
the first half of 1998 to counteract speculation. Still, given the political and
economic instability, the government also decided to devaluate the Russian
Rubble, which lost more than 70% of its value.
It can therefore be observed that soft-linked exchange rate regimes were part of
the major international crises that occurred in Mexico in 1994, Asia (Thailand,
Indonesia and Korea) in 1997 and Russia in 19983. Fisher (2001) reported that
during that tense period in the 90’s, several politicians warned against using
adjustable exchange rates or other flexible exchange rates for countries open to
international flows. They were convinced the best option would be to fix their
currencies hard (as on a currency board) or to allow their currencies to float freely.
Due to the end of the Bretton Woods system, there is until today a significant
international financial integration not only of commercial part but also of financial
system. Therefore, mainly after the 80´s, there was an increase in the pressure
to liberalize domestic financial systems and to adhere to free capital mobility.
Based on that reason, there was also an increase in international portfolio
diversification and in capital movements as well. Moreover, by combining this
integration with floating exchange rate regime, there was an increase in payment
balance problems in several countries and an expansion of exchange rate
fluctuations.
These oscillations are usually related to large movements of short-term capital

with speculative behaviour having in fact a finance predominance (Freitas and
Prates, 2001) with its main characteristics linked to free mobility, elimination of
capital controls, deregulation of financial market, flexible exchange rate and the
link between different national credit systems with information exchange and
instantaneous capital flow.
3
Brazil will also be included in this list in the next section.
26
In addition to these characteristics, the development of financial innovations -
such as derivatives, securitizations, structured financial products - resulted in the
multiplication of debts and, in this way, it also provided a much higher degree of
leverage for economic agents. Moreover, institutional funds, such as pension
funds, mutual funds and insurance companies, increasingly played an extremely
important role in the international financial system. Institutional funds manage
huge resources in search of financial profitability, thus boosting international
financial flows and instability. (Ramos, 2015). As a consequence, the effects of
speculation on exchange rates4 and the relevant fluctuations of such rates
increased significantly.
Baer et al. (1995) listed as three main private financial agents that were relevant
during this speculative dynamic: 1. Global Hedge Funds - Composed of private
investors, leveraged and excellent speculators; 2. Institutional Investors - pension
funds, mutual funds, insurance companies and industries; 3. Banking System -
which main role was to bring credits for institutions looking for payments of their
vulnerable debts exposed to currencies under attack, supplying hedges for this
position and establishing short-term open positions.
After the 80’s, started the largest increase in the financial assets value in relation
to the real assets value. In 2006, there was a ratio of three units of financial assets
to a real production unit. It is worth pointing out that with the subprime crisis of
2008 there was a decrease in financial assets, but soon after, they resumed a
relevant growth trajectory. (Mollo, 2008,).
In addition to currency crises and the already addressed instability of exchange

rates, the combination of international economy characteristics coupled with
increase in global speculative processes, resulted in the subprime crisis in 2008.
This crisis, which in its beginning strongly affected the main actors of global
economy, soon showed systemic developments worldwide with impacted not
only on financial system but also on real economy. It is worth noting the
characteristic of financial globalization, whose increasingly integrated financial
market resulted in a rapid international unfolding of the crisis, demonstrating in
4
At this point, we highlight the hedge mechanisms applied to protect assets from high price
volatility. The hedge is aimed at hedging against exchange rate risk.
27
practical the existence of the correlation between real economy and international
financial system. The seriousness and negative effects of this crisis placed it at a
level only compared to 1929 crisis5. (Ferrari Filho and Paula, 2012).
Although several economic measures to combat the subprime crisis were

adopted by the main countries in the world, their effects generated additional
crisis, such as in Europe during 2011. Additionally, it can be affirmed that
negative effects of the subprime crisis still remain in international economic
environment, generating difficulties in resuming growth in the world economy,
especially in Europe and USA, high unemployment rates in several major
economies, falling commodity prices and slowing growth in China.
1.3 Analysis of the economic performance and the main

macroeconomic measures adopted in Brazil from 1980 until 2016
The 80’s were very difficult years marked by endless economic problems,
stagnation of economic activity, deep macroeconomic imbalances, and
particularly, hyperinflation (Pinheiro et al, 1999). The "lost decade" - as this period
is commonly known - was in fact a very turbulent period for the Brazilian economy.
Due to the changes in the international scene from the end of the 70’s, the second
shock of oil, and the rise of the American interest rate, Brazil was directly affected
by the beginning of currency crisis. Inflationary pressures rose sharply mainly due
to the idealization of the economy, the country plunged into a serious economic
crisis and there was a deterioration of its debt situation. Consequently, in the early
80’s, the government requested support to International Monetary Fund (IMF)
and had to adopt restrictive adjustment measures aimed to ensure the payment
of external debt as mentioned by Gremaud et al. (2012).
5
Concerning the subprime international financial crisis, their respective developments and the
main economic measures adopted worldwide, see Ramos (2015) section 2.1.
28
Also, Ometto et al. (1995) reported that external debt crisis expressed in Brazilian
economy in the 80’s resulted in internal imbalances that adversely impacted the
economic situation of the population. The effects were mainly concentrated at the
beginning of the decade through the fall in employment level, a growing
proportion of workers without formal ties, and finally inflation acceleration, clearly
noticed through high rates at the end of the decade.
Inflation acceleration, tending to hyperinflation at the end of the decade,

worsening economic performance, problems in the public accounts and the
growth of internal and external indebtedness were the main points faced in that
decade. However, there was a significant improvement in trade balance, mainly
due to the measures of large real devaluations of domestic currency, stimulus
and public incentives for exports, maturing of investments of the II National
Development Plan6 (II PND), which resulted in a process of import substitution,
and the recession that diminished imports. Lacerda et al. (2010) added up that
this serious crisis increased political pressure, resulting in the end of the military
regime and a new civilian government in 1985 with indirect elections.
The period from 1985 to 1994 can be characterized by several plans which aimed
to combat and stabilize inflation. Some combat plans were adopted7, such as the
Cruzado in 1986, the Bresser in 1987, the “Summer” in 1989, the Collor I in 1990,
the Collor II in 1991 and, finally the Real in 1994. The diagnosis is that virtually
all plans were based on inertial inflation, but the set of measures of each plan
was different and did not succeed in fighting against inflation rising. The annual
inflation rate reached 1.973% in 1989, 1.621% in 1990 and 2.477% in 1993
according to the Consumer Price Index - IPCA-IBGE. In the 12-month period,
IPCA reached 6,821% in April 1990 and 4,922% in June 1994. (Figure 2). The
fight against inflation was effective and there was finally the stabilization of prices
only with the Real Plan. (Castro, 2005).
6
Concerning II PND, see Lacerda et al (2010; p. 132-140).
7Concerning these plans, see Gremaud, Vasconcello, Toneto Jr. (2012; p.416-445) and see
Baer (2009; p. 171-2016).
29
Figure 2- Brazil: Evolution of the National Broad Consumer Price
Index - (IPCA), in percentage - in 12 months - from Dec / 1980 to Dec / 2000
7000.000 6.821 %
6000.000
5000.000 4.922 %
4000.000
3000.000
2000.000
1.149 %
1000.000 422,8 %
99,2% 256,1% 91,8% 3,1% 5,9%
.000
Dec-92
Dec-93
Dec-80
Dec-81
Dec-82
Dec-83
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
IPCA
Source: IBGE
The beginning of the 90’s was marked by the economic crisis, the concern about
the fight against inflation, and the economic plans Collor I, Collor II and Real.
Among the economic measures adopted were the liquidity confiscation 8, the
privatization program9, the commercial opening, and the Real Plan. The change
in trade policy was based upon a process of liberalization of foreign trade, which
was known as trade liberalization.
In a period of four years, there was a reduction in import tariffs from an average
of 40% to 20%. Thus, trade liberalization had a reduction in tariffs, the elimination
of incentives to exports, and the adoption of a floating exchange rate system. At
first, as emphasized by Gremaud et al. (2012), there was a real appreciation of
the real exchange rate and, as a consequence of the adopted measures, a
deterioration of the trade balance occurred.
8 As for the confiscation of liquidity, see Gremaud, Vasconcellos, and Toneto Jr. (2012, pp. 438-
441).
9 The privatization program of state-owned enterprises, under the so-called fiscal and patrimonial
adjustment of the public sector, was much criticized and had a relevant performance of the
National Bank for Economic and Social Development (BNDES). (Gremaud, Vasconcellos, Toneto
Jr., 2012, p.441).
30
It should be noted that high applied interest rates combined to a financial opening
promoted a large inflow of external capital due to the interest differential.
According to Mendes and Pizza (1997), some measures implemented in the early
90’s were not popular, such as blocking financial assets (about 80% of the total)
to reduce liquidity in the economy. Moreover, the positive expected results were
not achieved leading to a hyperinflation trend.
Only the Real Plan10 succeeded in reducing inflation and keeping it under control
from 1994 on. This plan was implemented in three stages: the first stage, started
in 1993, consisted in a fiscal adjustment, aiming at balancing the government
accounts. The second stage consisted on indexing the prices of the economy to
a stable standard value, so called “URV”11, aiming to restore the account unit of
the currency, and gradually leading to the introduction of a new currency. The
third stage consisted in the introduction and issuance of a new currency, the Real,
whose unit was equivalent to the URV. (Baer, 2009).
After the introduction of this plan, inflation was effectively combated and finally
controlled. After extremely high levels of inflation in the previous months, which
rose to 6.821% in the 12-month period in April 1990 and to 4.923% in June 1994,
inflation was reduced rapidly and continuously, reaching 33% in June 1995 and
one digit, 9.6%, in December 1996. (Figure 2).
However, the Real Plan adopted a very restrictive monetary policy in the credit
market with high interest rates, and a highly-valued exchange rate. The Brazilian
Real (currency) was pegged to the dollar, in which initially there was a maximum
exchange rate ceiling - one dollar was equivalent to one Real. Thus, the
exchange rate was considered the main instrument of economic policy to combat
and maintain price stability. In addition, as explained in the article of Lacerda et
al. (2010) the appreciated exchange rate led to the deterioration of the trade
balance - strong growth of imports and deceleration in exports - bringing a deficit
at the beginning of 1995.
10 See Baer (2009, pp. 223-243) and Gremaud, Varconcello, and Toneto Jr (2012, pp. 447-485)
for a more detailed description and approach of the Real Plan
11 The Real Unit of Value (URV) was created and it was tied to the US dollar.
31
Due to the high emphasis on the exchange rate anchor, the maintenance of a
very high interest rates was necessary for the attraction of foreign capital looking
forward to sustaining stability of the currency and to reduce the relevant deficit of
public sector. As highlighted by Baer (2009), it should be noted that, as a
consequence, there was a huge deterioration of the fiscal situation that impacted
on investors’ confidence and increased Brazilian external vulnerability.
The Real Plan was significantly successful in combating inflation, stabilizing the
Brazilian economy and reducing the degree of future uncertainty. However,
concerning the performance of the economic activity, the post-1994 years were
marked by lower growth than expected, significant rise in unemployment, change
in business environment, deterioration in the trade balance, privatization,
production restructuring with substitution of local production to importation, the
entry of competitors into the Brazilian market, an increase in external
vulnerability, an increase in the public taxation and insufficient levels of
investment performance, prior to the worsening of public accounts with a
continuous increase in public debt. In conclusion, it was a very difficult landscape,
even with inflation under control.
Thus, after stabilization there was no resumption of a stable trajectory of

economic growth as notice by Lacerda et al.,(2010) and Gremaud et. al.(2012).
However, Pinheiro et al (1999) emphasize that in the 90’s the changes that
occurred in Brazilian economy resulted in strong incentives for national and
international capital investments, resulting in restructuring processes of the
industries.
Due to the deterioration of Brazilian economic situation and the worsening of the
international economy, with events such as the Russian crisis, creditors’ distrust
increased concerning Brazil and made it difficult to raise external credits. The
situation worsened and the government had to resort to IMF. At the beginning of
1999, there was a significant devaluation of the Real, negatively impacting
Brazilian economy.
Lacerda et al (2010) described the worsening of the deficit in public accounts, the
effect of the devaluation, and the increase in interest rates aggravated the
prospect of a recession in the year and a deterioration of socioeconomic
32
indicators and escalation of unemployment. It should be noted that although the
performance of the manufacturing industry deteriorated in the late 90’s, in that
decade there were significant technological improvements and increases in the
rate of growth of labour productivity (Baer, 2009). Several of current existing
industries in Brazil, started their operation during this period, such as some
examples in the automotive business: OEM (Original Equipment Manufacturer):
Renault-Nissan, Audi, Peugeot-Citroën and some suppliers: BENTELER,
Faurecia, Lear, Antolin, Pelzer.
Nishijima (2002) pointed out the political reforms introduced during the 90’s
helped this disinflation process by liberalizing trade and capital markets, which
significantly increased market competition and capital inflows. On the other hand,
a stabilization policy based on a fixed US Dollar led inevitably to overvaluation of
real exchange rates, which in turn led to external imbalances and a greater
dependence on foreign capital.
Thus, after the devaluation in exchange rate, the band system was initially
maintained. However, it was soon replaced by the floating exchange rate system,
which registered a devaluation of about 70% in the nominal exchange rate in the
first months. To avoid a large outflow of resources and to reduce speculation
about the exchange rate, an extremely high interest rate target was initially
stipulated (Figure 3). This measure maintained a relative inflationary control and
contained the tendency of exchange rate devaluation.
The inflation targeting system was adopted from 1999. This system defined the
monetary policy and Central Bank must reach the target inflation rate and, for
this, the basic interest rate – Selic - was the main instrument. In terms of fiscal
policy, a search for primary surpluses was initiated, mainly through measures to
increase revenues. Therefore, as the basis of economic policy from 1999-2000,
the macroeconomic tripod consisting of the floating exchange rate, inflation
targets and primary surplus was established. (Gremaud et al., 2012 )
33
Figure 3 - Brazil: Evolution of the real interest rate (Selic) in
percentage - in 12 months - from 1999 to 2016
*IPCA referring to February 1999 (accumulated in 12 months) and interest rate referring to the
beginning of March 1999.
** Nominal interest rate discounted inflation.
Source: BCB; IBGE
It can be verified that after 1999 the basic interest rate showed a significant
decrease, from 45% p.a. in early 1999 to rates closer to 10% p.a. from 2007.
Inflation remained controlled below 6,5% per year in most of the years. However,
it should be noted that the real interest rate, due mainly to high nominal interest
rate, was very high compared to international economy during this period.
Therefore, Brazil was among the world's economies with the highest interest
rates12, both nominal and real, which increases the attraction of short-term capital
and, consequently, pushes for exchange appreciation and reduces
competitiveness of domestic production in domestic and international market. In
addition, high real interest rates tend to discourage productive investments and
increase the credit and financing of public debt, affecting not only investment and
productive activities, but also consumption.
12According to the World Bank database, in 1999 Brazilian Interest rate was the highest among
217 countries. Second was Ecuador followed by Zimbabwe, Uruguay, Armenia, Bolivia, Chad,
Peru, Bosnia and Herzegovina. Remaining countries were below 30% interest rate
34
Therefore, levels of activity, investment, credit, income, employment and trade
balance are directly negatively impacted. Thus, concerning the current period and
the high Selic rate, Lacerda (2016) described that Brazil, in contrast to developed
and even developing countries, has maintained high short-term interest rates.
From the end of 2014 until the end of 2015 the basic interest rate was raised from
11,75% to 14,25%.
The electoral dispute for the Presidency of the Republic, with the victory of Luiz
Ignacio Lula da Silva, marked the year of 2002. Lula assumed the presidency
after 8 years of Fernando Henrique Cardoso's term. The new President's victory
generated great speculation in the financial market, uncertainties and instability,
especially in the stock market and the exchange rate which registered a strong
devaluation.
Doubts about the set of macroeconomic measures that would be adopted in the
new government were the basis of such speculations. Nonetheless, Lula
reaffirmed the commitment and maintained the foundations of previous economic
policy, agreements and contracts. According to Baer (2009) the two main goals
of President Lula, when he took on the government, were to adopt an orthodox
macroeconomic policy that would be approved by the international financial
sector and to achieve greater socio-economic equity.
In the period of 2003-2005, the main feature of the reassessment of the fiscal
equilibrium commitment was the increase in primary surplus, which exceeded the
one agreed with IMF. This was based on a large control of increased spending
and a rise in revenue generation13. The interest rate was kept very high (Figure
3) and inflation target defined at the beginning of 1999 was maintained. The Real
resumed a valuation trajectory in relation to the US Dollar. Thus, the basis of the
economic policy established in the previous government was maintained. In
addition, measures were adopted that aimed at the fight against extreme poverty,
hunger and guaranteed the minimum income14. However, due to the continuation
13 According to Baer (2009: 248), "the tax burden increased in the first two years of the
government's mandate, reaching 36% of GDP in 2004. By comparison, the tax burden in Chile,
Mexico, and Argentina was 17.3%, 18.3% and 17.4%, respectively in the same year".
14 The Fome Zero program and the income transfer program called Bolsa Família (created at the
end of 2003) stand out. (Baer, 2009, p.256). These programs aimed at combating extreme poverty
and hunger and income redistribution.
35
of the set of measures that had priority to fight against inflation, a concern was
raised about the negative impacts on growth - mainly due to the over valuated
exchange rate and Brazilian competitiveness - and other political objectives with
emphasis on social ones. In addition, the unsatisfying performance of the
industrial sector and income and employment levels over the period can be also
highlighted.
Until 2005, the macroeconomic set of measures remained restrictive, which

contained economic performance in terms of activity level and limited Lula
government's ability to develop a program of greater results in terms of improving
the country's socio-economic conditions. (Baer,2009). However, there was a
good external performance, with continuous growth in exports and an increase in
trade surplus. This performance was the result of a favourable international
environment, marked by high commodity prices, world economic growth, weak
Brazilian economic growth and positive impact of a more depreciated real
exchange rate. (Gremaud et al., 2012). Another important point is that inflation
remained stable and controlled (see Figure 3).
From 2006, the Brazilian government adopted measures seeking to foster

economic growth in a more favourable international environment. To meet such
target, the Selic rate was reduced to a level of 11% in 2007, there was a
significant growth in the balance of credit operations and BNDES disbursements,
the launch of the Growth Acceleration Program (PAC) in 2007, which aimed to
increase investment in the economy, especially in infrastructure, and salary policy
of raising the real minimum wage.
It should be emphasized that the improvement in the distribution of income and

the increase in income were important factors for expansion of consumption. The
exchange rate followed the upward trend. (Ramos, 2015). As a result, economic
performance improved due to an increase in GDP growth, reaching 6.1% in 2007,
and a continuous decline in unemployment.
Carneiro (2010) pointed out that in the period from 2004 to 2008, Brazil
demonstrated that it had overcame the long period of low economic dynamism,
which began in the 80´s. In addition to an acceleration of economic growth,
another characteristic of this period was the investment rate growth, around 8.5%
36
a.a, equivalent to almost double of the GDP. Between 2002 and 2003, the
dynamism of Brazilian economy was more closely linked to growth of external
demand due to favourable international scenario. However, the contribution of
external demand declined and domestic demand became the main dynamism
until 2008.
With the outbreak of the subprime crisis in 2008, Brazilian economy was directly
negative affected15. There was a large outflow of resources that resulted in rapid
and strong exchange rate devaluation. Thus, at first there was a significant
worsening both in financial side and Brazilian economic performance in terms of
activity level. However, the Brazilian government adopted a set of counter-
cyclical16 measures that managed to mitigate and reverse the effects of the crisis.
This set of measures consisted mainly of public banks’ performance, with

emphasis on the National Bank for Economic and Social Development (BNDES),
a tax policy with tax exemptions and maintenance of investments programs 17, a
wage policy with a real increase in minimum wage, income transfer programs and
reduction of Selic rate. In terms of foreign exchange policy, mitigating greater
volatility and devaluating strongly the currency guided the performance of Central
Bank of Brazil. However, in the first half of 2009 the exchange rate resumed the
appreciation trend. (Ramos, 2015).
Due to the anticyclical performance, the Brazilian economy was able to quickly
reverse the negative impacts of the crisis, registering a drop in unemployment
rate and a very reasonable improvement in economic growth (+7,5% ) at the end
of 2010. Meanwhile, the main economies in the world continued to be impacted
by the unfolding of the crisis. Thus, in the period from 2003 to 2010, Brazilian
economy presented an annual average growth of 4.0%, higher than the period
from 1994 to 1998, 3.2%, and from 1999 to 2002, 2.3%. (Figure 4).
In 2011 Dilma Roussef assumed as new Brazilian President, being the first
woman in the higher position of the Republic. The situation in the international
15 As for the impacts of the subprime crisis on the Brazilian economy and the performance of the
economy from 2007 to 2010, see Ramos (2015, pp. 54-73)
16 As for the countercyclical set of measures, see Ramos (2015, pp. 74-111)
17The role of Petrobrás, PAC and the Minha Casa, Minha Vida - MCMV program (housing
program launched at the beginning of 2009) stands out. (RAMOS, 2015, p.91-92).
37
economy remained adverse due to subprime crisis unfolding, negatively
impacting Brazil. Between 2011 and 2014, the economic performance showed a
significant slowdown, registering an annual growth of 2.3% and a low growth of
0.5% in 2014.
Based on the document Austerity and Retrocession (2016, page 8), the economic
measures adopted in this period were based on a significant increase in subsidies
and disbursements to the private sector to the detriment of the increase of public
investment, containment of the government-administered price adjustment in
order to combat inflation, an attempt to reduce the basic interest rate, a measure
that was reversed - at the end of 2012 the Selic rate reached 7.25% p.a. in 2013
and closed at 10% p.a. (See figure 3) - and the exchange rate (R$ / US$) showed
a devaluation trend, ranging from 1.70 at the end of 2010 to 2.7 at the end of
2014.
Figure 4 - Brazil: GDP Evolution – Real variation rate in the year - Var. %
Yearly
Source: IBGE; BCB
38
Still based on this document, due to the deceleration of the activity level and
deterioration of fiscal framework, especially after a fierce electoral contest in
2014, with the re-election of President Dilma, a strong fiscal adjustment was
initiated, monetary tightening with increases in Selic rate and the relevant
readjustment of the administered prices that were contained, aiming at the
resumption of confidence and investments in the private sector. This fiscal
adjustment focused on cutting public expenditures and investment. In addition,
the international economy also presented an adverse scenario, with falling
commodity prices, low international growth and slowing in China, impacting not
only the sectors related to commodities, but also the Brazilian trade balance and
the economy as a whole. This situation represented exactly the contrary that
President Lula had during most of his two turns.
Another important factor in this period was the political crisis that accentuated the
uncertainties. This crisis was fuelled by the fierce presidential election dispute
and the developments in Lava-Jato investigation, which initially focused on
fighting corruption at Petrobrás. Although this operation is essential to improve
the combat against corruption in the country, it temporarily paralysed two
important Brazilian production chains, such as oil and gas and heavy civil
construction, negatively impacting the level of activity and investments. In
addition, it affected both large companies and the political class, including key
politicians and rulers.
As a consequence of this situation, there was a fall in the level of activities,

deterioration in fiscal indicators, deterioration of expectations, strong exchange
rate devaluation – the exchange rate (R$/US$) reached 3,9 in 2015 with high
volatility -, rising inflation and high unemployment. On the political side, the
worsening economic and political crisis led to the impeachment of the elected
president Dilma Roussef in the first half of 2016 and then Michel Temer assumed
the Presidency. President Temer made further progress in cutting public
spending and restrictive monetary policy.
Lacerda (2016) compared the performance of 2003-2010 with the current period.
In this recent period, the favourable international scenario, with emphasis on
Chinese growth of around 10% a year provided a strong increase in commodity
prices and was essential for the Brazilian good performance. This factor favoured
39
the GDP, income and employment growth in Brazil. However, the current
situation and the domestic scenario is unfavourable, mainly due to the negative
impacts of the "Lava-Jato Operation", the worsening political crisis, the
deterioration of expectations and restrictive fiscal and monetary policies.
Finally, the combination of an adverse international environment, restrictive fiscal

and monetary policy, rising inflation, worsening political crisis, the Lava-Jato
operation unfolding, fiscal deterioration, lower expectations, rising
unemployment, fall in consumption, industrial production and investment,
increasing idle capacity and increasingly expensive and restricted credit were
determining factors for the uncertainties and the strong economic contraction in
2015 and 2016.
1.4 Exchange rate, Competitiveness and the Brazilian trade balance
After the end of Bretton Woods regime, projecting the exchange rate became
increasingly difficult due to the characteristics of financial globalization. The
exchange rate is an important variable for economic activities and there is
considerable discussion about the effects of its appreciation or depreciation on
the performance of these activities, decisions on consumption of goods (between
imported and domestic products) and services, investments, pricing and
competitiveness degree in economies.
Therefore, the exchange rate fluctuation and the actual exchange rate level do
not have a neutral effect as they directly impact the competitiveness 18 of the
productive sectors in the economy. Concerning the competitiveness aspects, an
exchange rate devaluation generates an effect of increase in the competitiveness
of domestic production in internal and external market. On the other hand, the
exchange rate appreciation has the opposite effects and, consequently, it
18The combination of macro, meso and microeconomic factors determines competitiveness.

Macroeconomic factors focus on the combination of monetary, fiscal and exchange rate policies.
The meso factors are, for example, industrial, commercial, technological and regulatory policies
and infrastructures. Microeconomic factors, more closely related to the companies' performance,
comprise investments in innovation, productivity, training and management.
40
reduces competitiveness of domestic goods production tradable not only in
international market, but also in domestic market. (Prates, 2015).
By increasing the competitiveness of domestic production and thus stimulating

domestic firms, a devaluated exchange rate relative to other currencies can foster
economic growth, employment and income generation in a given country,
especially in the industrial sector.
However, it is worth highlighting that: i) in the short term: depending on the rigidity
of the productive structure, such as infrastructure, contract flexibility, imported
penetration level and supplier networks, an exchange rate devaluation can cause
cost increase in a company and thus neutralize or bring losses of
competitiveness to domestic companies and generate inflationary pressure; ii) in
the long term: the rigidity of the productive structure is mitigated or does not exist
and new networks of domestic suppliers arise with the exchange rate devaluation.
However, in specific cases such as, for example, unavailable expertise and
technologies, currency devaluation can negatively impact production chains
(Rossi, 2016).
A long period of appreciation can result in the breakdown of productive chains

and de-industrialization. However, an exchange rate devaluation doesn´t
necessarily result in a reconstruction of the productive chains links and it leads to
a process of industrialization. In order to diversify the productive structure, it is
necessary to articulate the exchange rate policy with other policies in the macro,
credit and industrial areas. In Latin America, this statement can be compared to
the vivid situation of currency appreciation in Argentina and its deindustrialization
during the 90´s, especially in the automotive production sector.
After the implementation of the Real Plan, the exchange rate policy was mainly
used as a measure to combat inflation. Therefore, the exchange rate was kept
appreciated for most of the period after 1994. When checking the real exchange
rate indices, deflated by Extended Producer Price Index (IPA-DI), the Brazilian
Real has been valued for a long period in relation to both US dollar and a basket
with the main currencies (Figure 5).
41
There were only three periods in which there was a trend of devaluation in real
terms between 1998 and 2002, in 2008 and between 2011 and 2015, especially
in the latter year. In other years, the appreciation trend was predominant.
However, it is worth mentioning a greater tendency to increase volatility in the
most recent periods, which has increased uncertainties and made decisions
difficult.
In Brazil, the trend of exchange rate19 high volatility and appreciation in the last
two decades occur mainly due to the strong attraction of short-term capital related
to the high Selic rate and the large volume of commodity exports.
Figure 5 - Brazil: Annual real exchange rate index (IPA-DI),

from 1994 to 2016
*25 countries’ currency basket;

**Data referring to December.
*** Base: June 1994 = 100.
Source: BCB; Lacerda (2016)
19Lacerda (2013, p.8) points out that "Brazil has incurred the error of currency overvaluation.
Unlike most of the economies with which it competes directly, such as Russia, India and mainly
China, the Brazilian currency was one of the most appreciated in the period 2005-2010."
42
The Brazilian exchange rate is directly influenced by speculative operations20,
arbitrage21 and carry trade in the financial market, especially in the futures market
and by variations in international commodity prices. Thus, Rossi (2016) described
4 factors that together affect the exchange rate, both in terms of volatility and
level, and which must be the reasons for an active exchange rate policy. The first
reason is the commodity price cycle, whose sector tends to adjust to these prices
and whose Brazilian export tariff is very based on these products. The second
reason is the so-called "Dutch disease22”, which is a chronic tendency to
exchange rate appreciation due to the competitive advantages and the great
influx of foreign exchange rate from the commodity export sector and the leading
role of this sector in the Brazilian economy. A depreciated exchange rate level is
more important for the industrial sector to be competitive than for the commodity
export sector.
Bresser-Pereira and Gala (2010) described that the Dutch disease or curse of
natural resources is a market failure that leads to a permanent overvaluation of
the exchange rate in a country. This is due to the fact a country has a high income
resulting from abundant and cheap resources, such as commodities, whose
commercial production is feasible with an equilibrium exchange rate more
appreciated than the industrial equilibrium exchange rate. In this way, the Dutch
20 According to Rossi (2015, pp. 151-152), a "peculiarity of the Brazilian economy refers to the
institutionalist of the Brazilian exchange rate market that is permeable to financial speculation,
given the financial openness and liquidity in the derivatives market."
21 Concerning arbitrage and carry trade, Rossi (2016) describes: "Carry trade is often defined as
a leveraged operation where a loan is borrowed in the funding currency, associated with low
interest rates, and it is applied to an asset denominated in a target currency at high interest rates
[...] However, this is a partial and limited definition, since the carry trade can be a banking
phenomenon, associated with a financial flow, but also a bet with derivatives. That said, carry
trade is defined as a financial strategy that seeks to benefit from the interest differential between
two currencies, where it assumes a liability or a position sold in the low interest rate currency and
simultaneously an asset or a position bought in the high interest rate currency... In these terms,
the carry trade is motivated by interest differentials, but the final gain depends on the behaviour
of the exchange rate between the two currencies of the strategy. It is not, therefore, an arbitrage
operation, but rather a speculative operation, since the exchange variation is not known ex-ante.
[...] In other words, the investor may choose to carry an asset and a foreign currency that yields
interest, with currency hedging, or leave its position uncovered and therefore exposed to
exchange rate variation. In the first case, it is an arbitrage with interest rates and, in the second
case, the carry trade. [...] In the case of international interest arbitrage, the strategy is to neutralize
the exchange rate risk between currencies through currency hedge contracts" (ROSSI, 2016,
p.48-50).
22 According to Lacerda (2013, page 7), "the increase in international demand for commodities
causes their prices to rise, generating a trade surplus for the countries. With greater influx of
international capital, stemming from export revenues, the exchange rate appreciates, causing the
loss of industrialized goods competitiveness".
43
disease makes economic sectors of more technologically sophisticated tradable
goods not economically feasible, preventing structural change with the industrial
diversification in a country.
The third reason is the inefficiency of the financial markets for the foreign
exchange market mainly due to the behaviour of the economic agents based on
the graphical strategy used by the operators in exchange rate market to the
detriment of models based on economy fundamentals to form bets in the
exchange rate market. Therefore, the financial market tends, among other
characteristics, to herd behaviour and information asymmetries.
The fourth reason is related to high yields on financial investments and, thus, high
interest rates in Brazil. The Brazilian economy is very sensitive to the effects of
the international liquidity cycle, which may lead to a reversal of the exchange rate
trend, being directly related to carry trade operations. Prates (2015) points out
that in financial globalization context there is a more direct relationship between
interest and foreign exchange rates and decisions of global investors´ portfolio
allocation in countries that issue non-convertible currencies, such as Brazil.
Figure 6 – Main reasons for an active exchange policy
Source: Rossi (2016)
44
The observation of the Brazilian trade balance23 behaviour reinforces the concept
that there is a strong correlation to the exchange rate policy and the factors that
generate exchange rate volatility. Analysing the evolution, the trade balance in
US Dollars, it appears shortly after the implementation of the Real Plan the
balance was deficient and imports increased significantly. Between 2001 and
2008 trade surplus balances increased sharply. Thus, in a period of continuous
appreciation of the nominal exchange rate, there was a great growth of both
imports and exports. (Figure 7)
23 Three important and frequently used approaches to analyse the exchange rate impact on the
trade balance can be highlighted. The first one would be the Bickerdike-Robinson-Metzler (BRM)
model, which describes how the mechanism in which exchange rate variations affect the payment
balance or how the effects of currency depreciation impact business performance. Based on such
equilibrium, the model indicates that with currency depreciation there is no change in the domestic
demand for imports or exports by domestic supply, since they depend on the prices expressed in
national currency. There will continue to be variations in external supply and demand curves,
causing prices expressed in national currency to increase in proportion to the increase in the
exchange rate. The new equilibrium would occur with higher prices, leading to a decrease in
imports and an increase in exports, which would indicate a substitution between domestic and
foreign goods. The second approach is based on the logic of BRM, known as absorption
approach. According to this model, the effects of a devaluation of the exchange rate lead to an
improvement in the trade balance, since there is a reduction in the demand for imports and an
increase in the demand for domestic goods. However, assuming that the economy is not
operating at full employment, the effects of this depreciation will lead to an increase in GDP and
national income levels, which would result in an increase in imports and a decrease in exports,
consequently causing deterioration of the trade balance.
In addition to these two approaches, the third approach suggests that the effect of depreciation
on the trade balance may change over time, worsening in the short term and improving in the
medium / long term. The logic of this model, called J curve, was based on the argument that a
considerable part of international trade transactions occurs through long-term contracts. In case
of devaluation, given that existing contracts would still be traded at the previous exchange rate,
there would be a deterioration of the trade balance, since exports did not change, but imports
would become more expensive. Only later, with new contracts and other arrangements, would
the trade balance improve.
45
Figure 7 - Evolution of Exchange rate (R$ / USD) and Trade Balance
(USD bi) in the period of 1994 to 2016
Source: BCB; MDIC; Pizzon (2011).
Due to the crisis in 2008, imports and exports declined, but soon thereafter
increased sharply until 2011. In the period between 2008 and 2010, the exchange
rate initially depreciated because of the impacts of the subprime crisis, but then
it was appreciated. It should be noted that in 2011 exports reached US$ 256
billion, the highest result in the period from 1994 to 2016.
After 2011, a trend of exchange devaluation and a drop in imports and exports
began. In this way, after 2006 a trend of decreasing surpluses started until it
registered a negative result of US $ 4,1 billion in 2014. In 201524 and 2016, the
economic recession and the more devalued exchange rate were decisive for a
larger decrease in imports than in exports, which resulted in a high trade surplus
of US$ 47,7 billion in 2016. After 1994, the trade balance in 2016 was the highest
recorded. (Figure 7).
Although the trade balance has presented a surplus over most of the last two
decades, when analysing the balance by aggregated factor, there is a significant
24 It is noteworthy that the fall in international commodity prices, the crisis in Argentina, the
deceleration in China and a more devalued exchange rate were determining factors for the results
presented from 2014 on the trade balance.
46
increase in deficits in the trade balance of manufactured goods, especially from
2007 on. In 2014, manufactured goods had a large deficit, reaching US$ 110
billion. On the other hand, the trade balance of basic products showed significant
surpluses and, thus, they are the main responsible for the positive balances of
the trade balance in this period.
At this point, the increase in the international prices of commodities in the decade
of 2000 stand out, which positively impacted the commercial balances of
commodities. After 2010, commodities posted positive results in excess of US$
60 billion each year as it could be seen in the Figure 8 below.
Figure 8 - Brazil: Annual evolution of the exchange rate (R$/US$)

and the balance trade by aggregate factor (US$ bi. FOB p.a.)
* The aggregate factor export values called "shipboard consumption", "re-export" and
"special transactions” were not considered
Source: MDIC; BCB
Analysing the trade balance by technological intensity, it should be pointed out

that the products of high and medium-high technology transformation industry
have historically been deficient. After 2006, its negative balances increased,
reaching the deficit of US$ 90 billion in 2013. From 2014 on, due to a more
47
depreciated exchange rate, there was a downward trend in these negative
results.
Low-tech manufactured products remained with a surplus in all the years after
1997, recording their largest balance in 2008 - US$ 46 billion. Basic and non-
manufacturing commodities also showed positive results in all the years, reaching
the highest balance of US$ 74 billion in 2011. (Figure 9)
Figure 9- Brazil: Annual balance of the total trade balance and by

technological intensity, in US $ billion FOB - from 1997 to 2016
* Agriculture, livestock, forestry, fishing and aquaculture; Extractive Industries; Electricity and
Gas; Products of other activities, waste and not allocated.
Source: MDIC; BCB; Lacerda (2013)
Sonaglio et al (2010) investigated the short-term effects and the long-term

exchange rate depreciation of the trade balance, taking into account the
aggregate data of the commercial relationship between Brazil and the rest of the
world. The study analysed 21 sectors of Brazilian manufacturing industry
between the periods of 1994 and 2007, seeking to investigate the effects of the J
curve in these sectors.
48
J Curve takes into account the assumption that trade balance will worsen in the
short term but it will improve later, as suggested by Marshall-Lerner's condition.
This is due to existing exchange contracts and the margin required for the
adjustment of production capacity. It was observed that only 10 of the 21 sectors
analysed presented the characteristics of the first curve of J curve, which means
worsening the results of the trade balance after having depreciated the exchange
rate in the short term. In addition, two sectors had the worst results in the medium
term, not meeting the expectations of J curve.
Keeping the Brazilian Real overvalued for several years is one of the main factors
for the difficulties faced by Brazilian industrial sector and, consequently, also one
of the main factors for the constant deterioration of manufactured products´ trade
balance, especially those with greater technological intensity. In other words, the
competitiveness of Brazilian industrial sector in relation to international
competitors is affected, leading to a loss of export capacity, an increase in imports
of manufactured products and an increase in the import coefficient in the
domestic industry.
Prates (2015) defended that when economic policy goals neglect the exchange
rate level, competitiveness in Brazilian industry in both internal and external
markets is not defended, which resulted in the trade balance deterioration of
manufactured products and in an increasing search for hedge and/or speculative
gains to mitigate losses by exporting companies. After the subprime the financial
crisis, there was an increase of international market competition of manufactured
products, which highlighted the competitiveness loss in the Brazilian industry.
Additionally, Lacerda (2016) described the long real appreciation period was
decisive to dismantle local productive chains, which were replaced by imports.
On the other hand, the trade balance is increasingly dependent on exports of

basic and semi-manufactured products - products with less technological
intensity - to achieve positive results. There was a participation loss of domestic
products in the international market and consequently, this disarticulation link in
the production chain stimulated an increase in imported contents in domestic
production. Carneiro (2010) had already pointed out that, after the Real Plan,
trade liberalization and exchange appreciation resulted in a regressive
specialization of Brazilian economy, especially for industry.
49
Facing an overvalued exchange rate, companies changed their strategic actions
and adapted it to the microeconomics. Therefore, a low-cost dollar leaded
companies to increase the import of parts and components in order to reduce
costs and, consequently, maintain their competitiveness. That was an unique way
out of the exchange rate trap and in fact a survival mode strategy for several
companies. However, from a macroeconomic point of view, there is a process of
replacing local production by imported ones, discouraging the generation of local
added value and impacting the productive structure in the country. Lacerda
(2013) stated that exchange appreciation process has resulted in a "leak" of a
relevant portion of Brazilian's GDP.
Moreover, once the Brazilian export agenda is very dependent on primary

products, it is directly affected by changes in international commodity prices. This
vulnerability was evident from the end of 2014, when there was a sharp fall in
international market prices that impacted Brazil's trade balance. This fact
demonstrates that dependence on production and exports of these basic
products generate vulnerability. Diversification of export tariff is an important
feature for economic performance and to counteract the effects of the "Dutch
disease".
In this context, it is important to foster the competitiveness of other economic

sectors, such as the industrial sector to improve productivity, technology and
competitiveness worldwide. In order to contain the pressure for exchange rate
appreciation, to maintain further depreciated and competitive exchange rate with
lower interest rates and better regulation measures25 in the foreign exchange
market, it is essential to stimulate domestic production to compete both in
domestic market with those imported goods and international market for export.
Although the most devalued Real is an important measure for economic

development in medium and long term, this measure by itself may not achieve
the results of improving domestic production, exports and trade balance. A
change in the exchange rate does not have immediate results in the production
structure, the production volume and the investments whereas they depend on a
25
As for the exchange rate policy in Brazil, exchange rate policy instruments and regulatory
measures in the foreign exchange market, see Rossi (2016, p.151-164).
50
set of factors. On top of it, due to common risk aversion behaviour, decision
making process in the industry has a slower timing than financial sector.
Consequently, to foster diversification of the productive structure, domestic
production and exports must be linked to a set of economic measures. In addition,
Rossi (2016) stated that uncertainties and volatility should be mitigated so the
exchange rate is more stable and the exchange rate trend is clear, so production
and investment decisions are made.
In an adverse international scenario with strong competition, especially due to the

performance of China, a set of economic measures should be articulated to
ensure the competitiveness of domestic production in different Brazilian sectors.
In this case, it is extremely important to stimulate the industrial sector
competitiveness, especially the most technological intensive ones, which are
increasingly focused on importing final products, parts and components. The links
of the productive chain have been broken and there has been a great loss of
export capacity. This sector is extremely important for economic development as
it has a significant multiplier effect, by generating high-quality jobs and it fosters
technological improvements. Therefore, a competitive and more stable exchange
rate is also an essential condition for the economic sectors to have greater
competitiveness and thus to improve the performance of productive structure,
investments and trade balance.
1.5 Conclusion
After the 80’s, mainly due to the end of the Bretton Woods system, the following
characteristics of the international economy stood out: i) predominance of finance
and the US dollar as the main currency; ii) international financial integration not
only in the commercial part, but also in the financial system; iii) intensification of
capital movements, due mainly to free capital mobility, deregulation of financial
market and speculative operations; iv) higher exchange rate fluctuations; (v)
regime of floating exchange rates; (vi) instant exchanges of information and
capital flows; vii) development of financial innovations; (viii) increase in the role
of institutional and investment funds; ix) increase in economic agents’ leverage
51
and indebtedness; x) total volume of financial assets much higher than the total
of real assets; (xi) increase in currency crises in several economies; (xii) the rise
of China as the main exporting country of manufactured goods; xiii) unfolding of
subprime crisis, adverse current context in the world economy with difficulties to
boost economic activity; xiv) high volatility of commodities, whose current prices
are at a low level compared to the recent past.
In view of the main characteristics of the international economy, Brazil adopted

the Real Plan in 1994 in order to contain its endless high inflation rate. However,
for most of the period since 1994 the real exchange rate has remained over
valuated. It should be noted the high interest rates in international terms, the
fluctuations in commodity prices and the dependence on basic export products
were the main factors that contributed to maintain the appreciated exchange rate.
Thus, Brazil began to attract a large flow of short-term financial capital due to the
interest differential, which maintained the pressure for the exchange appreciation
and generated significant volatility because of speculative operations.
The appreciated exchange rate, high interest rates and high volatility had a direct
impact on the competitiveness of Brazilian economy and consequently on trade
balance and productive structure. There was a loss of competitiveness, which led
the trade balance of manufacturers, especially the most technology-intensive
ones, to show significant and growing deficits over the years. In this way, Brazilian
manufactured products have lost capacity to compete with the imported ones
both in the domestic and international markets. As a result, links of several
production chains were broken and there was an increase in the import coefficient
in domestic production. Commodities remained competitive, even though a
valued exchange rate, being the main responsible ones for keeping positive
balances in the trade balance over the last two decades.
Given the main characteristics of the international economy and fierce

competitiveness, it is imperative the exchange rate policy aims to stimulate
competitiveness of domestic products, containing the pressures of currency
appreciation and mitigating volatility. However, the most devalued exchange rate
should be articulated with a set of economic measures to foster the
competitiveness of domestic production in different Brazilian sectors.
52
It should be stressed it is extremely important to stimulate the competitiveness of
industrial sector, especially the most technologically intensive ones, in order to
compete internationally and to recompose the links in the production chain.
Therefore, a competitive exchange rate is an essential condition to improve trade
balance performance, the economic activity level, investments, employment and
income generation, technological levels and productivity and to diversify the
Brazilian productive structure.
SECOND CHAPTER - The relevance of Economic

Complementation Agreement #55 in the performance of the
Brazilian automobile trade balance with Mexico
2.1 Introduction
The globalization process and the formation of global value chains, especially
from the 80´s on, were decisive for production and commercial strategies of
transnational corporations, mainly in the automobile sector. There was a massive
increase in the investments of these companies in several countries, driving
decentralization and production outsourcing aimed at optimizing costs, increase
capacity to serve the consumer market in a country and/or a region and indeed
to boost new consumer markets. OEM’s (Original Equipment Manufacturer)
looking forward to increase their sales and consequently profitability, began to
develop global strategies taking into consideration production costs, logistics
infrastructure, macroeconomic policies, trade agreements between countries,
regional trade agreements and access to their consumer market.
Facing this new business environment and opportunities, governments have

brought high attention to increase its participation in these major global value
chains. In order to reach such objective, trade agreements between countries
and formation of regional blocs with local development strategies were
implemented to stimulate trade between countries taking part in these
agreements.
53
However, these agreements´ terms and their potential consequences whether to
participate or not of a particular international trade agreement have become major
concerns for the involved countries.
The automotive industry has one of the most important and competitive value
chains and presents decentralization at global level by implementing regional
production and sales platforms. At this point, the increase in the investment level
in research and products development, the installation of new production plants
and finally the expansion of sales dealership net in Latin America, especially in
Brazil and Mexico, was an important business strategy that should be highlighted.
It led subsidiaries and companies in this production chain, both automakers

(OEM) and auto parts suppliers, to modernize and increase their investments in
technology and innovation. In addition, when defining their strategy at a global
level, companies adopted production diversification between countries and
between companies according to each targeted niche market or based on intra-
firm trade.
In the global economic context26, where other agreements have been fostered
(e.g.: NAFTA and European Union), the Economic Complementation Agreement
#55 (ECA#55) was implemented between Brazil, Argentina, Paraguay, Uruguay
(Mercosur) and Mexico in September 2002. This specific Automotive Industry
agreement initially aimed to establish a free-trade bloc in the upcoming future (+5
years) by strengthening trade relations between the involved countries.
Also, under ECA#55 terms and conditions, the bilateral agreement between
Brazil and Mexico defined annual quotas and tariffs until free-trade would be fully
established. There were significant changes in this bilateral agreement over the
years and definitively it generated endless negotiations and brought uncertainties
to the industry. Although initially planned for 2006, the last revision published in
2016 determined that free-trade adoption is currently forecasted to initiate in
2019.
26
Recent discussions emphasize the relevance of trade agreements – Propositions and effective
revisions of agreements´ terms and tariffs imposed by Mr. Trump´s from USA government have
led to several international economic impacts and reactions.
54
Based upon this market / business reality, a recurrent sector´s discussion about
the effects of a free-trade area was therefore unfolded by Brazilian automotive
entities, industries and government.
Although no specific study related to automotive market trade agreement has

been conducted, the regional trade agreements were considered to be factors
that have a positive and relevant commercial impact on the involved partners. For
instance, Hernández-Rodríguez (2011) pointed out that regional integration in
South America (Mercosur and Andean Community - CAN) increased trade
volume and trade flow regionally. Magee´s (2008) study emphasized that regional
trade agreements tend to increase long-term trade flows. In general terms, Baier
and Bergstrand (2005) also confirmed that free trade agreements strengthen
international trade between the involved countries. However, these studies have
limitations regarding measurements and analyses of the relations among regional
trade agreements, exchange rate and the sectorial performance.
Therefore, targeting to decipher the reasons for the volatility of Brazilian trade
balance and to enhance automotive sector´s knowledge, this chapter objective is
to identify and analyze the relevance of ECA#55 impacts for the historical
performance of Brazilian automobile trade balance in relation to Mexico. For this
purpose, this study analyzes the monthly performance of Brazilian automobile
trade balance within the period of 20 years (1997 and 2017), combined to the
evolution of Brazilian and Mexican exchange rate, GDP, and finally to the terms
agreed within the ECA#55. The study contributes to the existing literature on
several levels by extending the existing studies with new insights regarding the
effects of bilateral trade agreements on economic performance, especially on
automobile trade balances.
Secondly, the results show that in different periods the Brazilian vehicles trade
balance in relation to Mexico presented changes such as surplus or deficit. The
Brazilian commercial performance was strongly affected by the combination of
ECA#55 to economic variables, especially exchange rates and both countries´
GDP performance. The changes in these economic variables and in the terms of
ECA#55 strongly influenced automotive production and marketing strategies in
the last two decades.
55
Consequently, this study confirms that, although the trade agreement is
significantly relevant, it was the combination of mentioned economic variables
that affected the business development and the volume of vehicles trade between
the analyzed countries.
The remainder of the chapter proceeds as follows. The second section deals with
the literature review concerning bilateral trade agreements, exchange rate, and
the general characteristics of the automotive industry. The third section explains
the methodology used for this research. The fourth section presents the bilateral
trade agreement between Brazil and Mexico within the framework of ECA #55
and its changes over the years. Finally, the fifth section analyzes the performance
of Brazilian´s trade balance in relation to Mexico, emphasizing the impact of
implemented quotas, exchange rate fluctuations and Brazilian GDP performance.
2.2 Theoretical methodological framework
2.2.1 Bilateral trade agreements
There are several regional trade agreements studies and generally the existing
literature highlights these agreements brought a positive and relevant impact to
the involved partners, despite their varied impacts on both countries` trade
performance.
Hernández-Rodríguez (2011) addressed the impact of regional integration in

South America (Mercosur and Andean Community - CAN) by means of the
Augmented Gravity Model approach based on data of 36 commercial pairs in the
period from 1987 to 2000.
This econometric method is an analogy to Newton’s law gravity, where trade

between any two countries is, other things equal, proportional to the product of
their GDPs and diminishes with distance (Krugman, Obstfeld, 2009). The
econometric results confirm the theory that factors that most influence trade flows
are the geographical ones, followed by income size.
56
Moreover, the results indicate that integration increases volume trade and trade
flow regionally. However, even though this study shows a combination of factors
has an impact on commercial performance, the relationship between regional
integration and exchange rate variations is not analyzed.
Magee (2008) also uses gravity model and estimated the effects of regional
agreements on trade flows after the control of fixed effects in country pairs. He
includes these fixed effects to capture any aggregate shocks in countries' trade
flows in a given year, and his model allowed regional agreements to have
heterogeneous impacts on trade flows over time. The received estimates indicate
that there are anticipatory effects of regional trade agreements, leading to an
increase in the four years prior to the start of an agreement. Over the first 11
years of a regional agreement, trade also continues to show significant increases,
i.e. there were long-term impacts resulting in increased trade flows. The study
also notes there are significant differences in the effects of customs unions, free
trade agreements and preferential trade agreements. In the long-term customs
unions, on average, generate the largest increase in intra bloc trade and free
trade agreements have smaller effects. Moreover, the dynamic models estimated
in this paper points out that in general the long-term impacts of regional
agreements are more positive than short-term impacts and trade agreements
may have different impacts between involved countries. Although the study
examines the differences between different types of agreements and agreement
terms, other relevant variables that may affect trade performance, such as the
exchange rate between countries and GDP, are not incorporated into the model.
Baier and Bergstrand (2005) aimed to estimate through empirical analysis

whether free trade agreements increased international trade between the
involved countries. The authors concluded that there was an effective increase
and they also emphasized the fact that the trade between two members was
probably influenced by their economic size, their per capita income and even the
distance between both countries. Whalley (1998) pointed out in his study that it
was important to bear in mind that countries may have varied objectives to
participate in regional trade agreements in order to be able to assess the impacts
and thus to identify quantitative results in relation to the countries´ possible
targets in the agreements.
57
Nevertheless, as already pointed out in the other studies, they also did not
highlight the combination of exchange rate to trade agreements as factors that
significantly affect the commercial performance between two countries.
Therefore, the existing studies have a number of limitations concerning

measurements and analyses of the relations among regional trade agreements,
exchange rate and sectorial performance.
2.2.2 Characteristics of the automotive industry
The automotive sector is one of the leading global industries where globalization
characteristics and global value chains are verified. Its production chain is
decentralized, aiming at improving competitiveness, reducing costs, increasing
sales and consequently increasing financial results. As this industry is very
intensive in capital and technology, the main companies, both automakers and
auto-parts suppliers, are usually large transnational companies tending to
present oligopolistic characteristics in some segments/commodities. Therefore,
the automotive industry aims at operational optimization to boost its results and,
consequently, increase its sales, revenues, and its ability to meet consumer
market (or potential consumer market) demand in several countries.
From the 90´s on, the main automotive companies strategies were characterized
by investments targeted at regional production and sales platforms. Thus, many
automakers set up and modernized their branches in several countries, including
those in Latin America, such as Brazil and Mexico. Due to the modernization
process there was a decrease in the technological gap in vehicle production
between countries and, consequently, an increase in productivity and
consumption. (Costa and Henkin, 2016).
In addition, the productive decentralization strategy increased over the years in

the automotive sector´s value chain at global level. Thus, the global auto-parts
suppliers – such as Bosch, Denso, ZF, Faurecia, BENTELER -, and also services
suppliers (DHL, Siemens, Voith) were encouraged to develop production lines
and technical services in the same locations as the automakers. Within the
specific industry requirements imposed by the technical norms and laws of a
58
specific country or a trade agreement, there are performance and safety
characteristics in vehicles and/or components as well as a certain degree of local
content. These requirements lead automakers and their suppliers to implement
changes in their products to adapt them to the consumer market of a particular
country and / or region. (Torres, 2011).
Another feature of the global automotive sector is the industrial and product
diversification between countries and between companies. There are companies
that are specialized in developing and producing a more technological, luxurious
and powerful vehicles niches such as BMW, Mercedes-Benz, Jaguar Land-Rover
and Porsche (Navarro, 2013). Other companies, such as Volkswagen, General
Motors, Ford, Fiat-Chrysler, Toyota, Honda, Peugeot-Citroën and Renault-
Nissan, operate in more than one market niche. In this case, these companies
produce at same time specific powerful and luxurious vehicles as well as regular
popular, more economic and small cars / light commercial vehicles. Many of these
companies also manufacture trucks and buses. In addition, the differentiation of
the launched vehicles and the introduction of innovations and new technologies
became frequent due to the continuous search for competitiveness, higher profit
margins and mostly because of the consumer market. (Costa and Henkin, 2016)
Every automaker elaborates their own global operation strategy and their
respective investment, focusing on manufacturing plants, machinery and
equipment, research and production, according to the niche in which they
operate. So, their production plants are often specialized to produce vehicles´
models and products for a specific market niche at a global or regional level with
scale27 and scope28 gains. Therefore, the production of a given plant intends to
meet a particular region and its consumer market due to cost structure, local
incentives, trade agreements, customs tariffs, logistics and commercial
characteristics. In this regard, the automotive companies began to define
strategies by implementing branches, manufacturing plants and commercial
platforms according to their target market niche in different countries, aiming at
27 The companies in the automotive sector also aim to operate in the most efficient and lean
way to meet their demand and at a lower cost, based on the just in time concept.
28 Assembly of different models on the same production platform.
59
boosting intra-firm trade and at reaching market demand in that country or region.
(Costa and Henkin, 2016)
The companies strategies of this sector in Latin America follow the logic of global
value chains. Brazil, Argentina and Mexico stand out in this bloc of countries,
whose automotive industry is very present and consolidated. At this point, two
factors should be noted: Firstly, reaching from 10 to 15% of global sales and
production volume, Latin America is very relevant in the companies´ strategies
and in their overall results and second, the automotive sector has a great
importance for the countries´ activity level and for the formulation of government
economic policies.
The development of the automotive industry in Mexico was driven by the

evolution of the sector’s globalization, domestic industrial policies and
international trade agreements. In 1994, due to North America Free Trade
Agreement (Nafta), the automotive sector had a decisive stimulus to develop
itself, mainly due to the local installation of the most important automobile
manufacturers, increasing production, integration and technologic
advancements. It is noteworthy this agreement aimed to promote and attend the
USA market and meet its demand by reducing tariffs and ending protectionist
policies (Lacerda, 2004). In addition, production costs in Mexico are considered
competitive and throughout the years 2000 the government adopted measures
to boost the automotive sector. These measures are based on encouraging
investment, reducing taxes and motivating the internal market and local auto-
parts suppliers to increase productivity and competitiveness, as well as
participation in the global market. (Miranda, 2007)
The automotive sector has great relevance in Mexican economy as it generates

a massive quantity of job (approx. 1,0 million employees), has an increasing and
important participation in Mexican GDP, especially concerning exports strategy
and presents considerable growth throughout the years 2000. According to car
production data published by OICA (Organization Internationale des
Constructeurs d'Automobiles) 846 thousand cars were produced in Mexico in
2005, 1,657 million in 2011 and 1,993 million cars in 2016. It is therefore
remarkable the vehicles production increase in Mexico.
60
The automotive industry installation occurred in Brazil in the 50´s. Over the years,
the main transnational corporations in the automotive sector – both automakers
(e.g.: Ford, Volkswagen, Toyota, Fiat and General Motors) and auto-parts
suppliers were installed. According to Anfavea database in 2018, there is already
installed 27 automakers have currently 65 manufacturing plants distributed in 10
states and 42 municipalities. There are 5.545 official dealers and 446 suppliers
of auto-parts directly to OEMs. (ANFAVEA, 2018, page 7)
The Brazilian vehicle production was 2,2 million in 2006 and it mounted up to 3,0
million in 2013. Due to the strong recession that Brazil faced after 2014,
production have fallen to 2 million in 2015 and 1,8 million in 2016. Brazilian
vehicle exports are mainly destined to Latin America and currently Argentina and
Mexico stand out as the main export destinations. In 2006 the total number of
vehicles exported was 692 thousand units, falling to 266 thousand in 2014 and
413 thousand in 2016. (SINDIPEÇAS; ABIPEÇAS, 2017).
The automobile sector performance in Brazil aims to meet not only the domestic
consumer but also Latin American market demand. Its production is more
focused on market niches of less powerful, more economic and less luxurious
cars. Within the industry, it is commonly described that Brazil is mainly
concentrated on “B” platforms vehicles (e.g.: VW Gol/Polo; Fiat Argo/Palio; Ford
Ka/Fiesta or GM Onix/Celta). Due to the sector relevance and its productive chain
to the economy, several measures to boost its performance were adopted by the
Brazilian government over the decades. One example is the recent finished
Inovar-auto program (2013-2017), which implemented tax exemptions for local
produced vehicles and increased by 30% the local tariffs for OEM´s which were
not manufactured in the country and did not invest locally in
Research&Development.
2.2.3 Methodology
The study is based on the analysis of the monthly Brazilian automobile trade
balance performance in relation to Mexico from 1997 to 2017, cross-checked with
61
the evolution of Brazilian exchange rate, GDP and finally the terms agreed within
the ECA#55 and its amendments over the years.
By relating a trade agreement with trade performance statistics, industry

characteristics and other variables, such as the exchange rate and GDP, this
article presents a prominent approach for the advancement of research on issues
concerning bilateral trade. Based on the results of this study, it can be noticed
that just the analysis of ECA#55 does not offer enough information to explain the
performance of the trade balance in this period. Only by combining the terms of
ECA#55 and its changes over the years, the characteristics of the automotive
industry, the exchange rate and GDP growth, it was possible to analyse and
understand the performance of the trade balance on period 1997 -2017.
2.3 Analyses
2.3.1 - The evolution of the bilateral trade agreement between Brazil and
Mexico under the ECA – Economic Complementation Agreement #55
Brazil and Mexico are two of the leading countries in the global automotive
market. Therefore, their economic performance, the economic measures
implemented by each government, other competitiveness aspects such as
foreign exchange and logistics infrastructure, GDP growth and international trade
agreements are relevant to determine the strategies and actions adopted by
transnational corporations in both countries. Given the commented general
characteristics of the automotive industry (high investment, products portfolio)
and to preserve the trade flow among countries, there was a clear necessity of
formalizing this bilateral trade. Governments realized that indeed it was
necessary an agreement to rule, protect, and develop trade relations until the
establishment of a free-trade zone of automobiles between both countries.
In this context, the Economic Complementation Agreement #55 (ECA#55)

between Brazil, Argentina, Paraguay, Uruguay and Mexico was signed in
September 27th, 2002 in Montevideo and it was promulgated in Brazil by Decree
nr. 458 dated of November 5th, 2002.
62
The main objective of this agreement was to strengthen the Latin American
integration process fostering trade relation development between the parties
concerning the automotive sector.
The following segments of the automotive industry were included in ECA#55 for
new vehicles: (a) cars; (b) cargo vehicles; c) buses; d) body-in-white; (e) trailers
and semi-trailers; (f) agricultural tractors, harvesters, self-propelled agricultural
and road machinery. In addition to these vehicles, the auto-parts segment was
also included in the agreement in order to produce not only the types of vehicles
listed above but also to produce other auto-parts and components for the
aftermarket sector.
The agreement considered setting a gradual and bilateral transition period for
free trade between Mexico and each Mercosur state members in terms of market
access, tariff preferences and technical regulations. The transition period was
initially forecast to run until June 30th, 2011.
The application of the Origin Regime was one of the bases for this agreement in
order to obtain and produce a particular product in a determined country territory.
Goods were considered products whose production process was whole carried
out within a country territory using all originating materials or part of non-
originating materials. 29
Regarding the bilateral agreement between Brazil and Mexico in ECA #55
(Decree nr. 4458 in Brazil), the following automotive products30 were included:
a) automobiles; (b) vehicles with a maximum laden weight of not more than 8,845
kilograms, such as light commercial vehicles; (c) agricultural tractors, harvesters,
self-propelled agriculture and road machinery; and d) auto parts for the products
listed above and for the aftermarket.
In the bilateral trade the import taxes reduction was defined by the parties for new
automotive that comply with the Origin Regime regulation. This tax reduction
29 Regarding the Origin qualification, the determination of the Regional Content Index (RCI) of an
automotive product and the valuation of the non-originating and originating materials, the product
value and other values in the ECA#55, see Decree nr. 4,458 of November 2002, Annex II, pages
12 to 15.
30 This article based its analysis only on motor vehicles and vehicles of a maximum laden
weight not exceeding 8,845 kg.
63
should be applied over the years until the free trade policy would be implemented.
In this regard, annual quotas and tariffs have been established.
It should be noted that there was a forecast of a yearly increase in quotas and a
reduction in tariff down to 0% from the second year of the Agreement
enforcement. In addition, the end of the distinction between installed and non-
installed companies for quantitative limits was also defined from January 1st,
2004. Therefore, free trade was initially foreseen in the fifth year after the start of
the Agreement. It could be seen in the Table 1 below.
Table 1 - ECA #55 Decree nr. 4.458 Quotas and tariffs in bilateral
automotive trade between Brazil and Mexico31
Source: Brazil, Decree nr. 4458 (2002; p. 24-25) / Author´s elaboration.
In December 2008, a Protocol was signed amending the bilateral agreement

between Brazil and Mexico under the ECA#5532. It was promulgated in Brazil
through Decree nr. 6.782 dated February 18th, 2009 33, which the incorporation
of other automotive products, especially auto-parts, was highlighted.
31 According to Decree nr.4458 (2002, p.25), units of vehicles of a maximum laden weight not
exceeding 8845 kg that are not marketed at the end of the sixth month are integrated into the
quota of motor vehicles for the periods corresponding to twelve months. In addition, the quotas
for these two types of automotive products are determined by the importing party.
32 In August 2007, by means of Decree nr. 6,196, a new deadline was established, (July 1st, 2020),
to enforce the free trade of buses and vehicles with a maximum load weight of more than 8845
kg. Deadlines were set to define the terms of the agreement for such products over the transitional
period. In addition, the auto parts segment also had the terms changed.
33 In 2009 there was a Rectification Act on March 30 th, internalized in Brazil by Decree nr. 6.879
of June 18th, 2009. This rectification states that the automotive products incorporated in the
64
There was a new modification protocol in the ECA#55 in March 2012, which was
internalized in Brazil by Decree nr. 7.706 dated of March 29th, 201234. Zero tariffs
were determined only for annual import quotas over a period of three years for
motor vehicles and vehicles with a maximum laden weight not exceeding 8,845
kg. The established annual quotas would be increased yearly, from US$ 1,45
billion between 2012 and 2013 to free trade from March 2015. (Table 2).
Table 2 – ECA #55 Decrees nr. 7.706 and 8.419:

Quotas* in the bilateral automotive trade between Brazil and Mexico
Annual quotas - US$

Decree Period
(FOB value)
March 19, 2012 to March 18, 2013 1.450.000.000
March 19, 2013 to March 18, 2014 1.560.000.000
7.706
March 19, 2014 to March 18, 2015 1.640.000.000
From March 19, 2015 on Free trade
March 19, 2015 to March 18, 2016 1.560.000.000
March 19, 2016 to March 18, 2017 1.606.800.000
8.419 March 19, 2017 to March 18, 2018 1.655.004.000
March 19, 2018 to March 18, 2019 1.704.654.000
From March 19, 2019 on Free trade
* In Decree nr. 7.706 specified quotas would be distributed by the exporting party and verified by
the importing party. In Decree nr. 8.419, 70% of quotas were distributed by the exporting party
and 30% by the importing party. No limiting restrictions to the use of quotas could be imposed in
either amendment protocol.
Source: Brazil, Decree nr. 7.706 (2012, p.2); Brazil, Decree nr. 8,419 (2015,p2).
The most recent change35 in ECA#55 occurred in March 2015 and it focused on
the annual quotas of motor vehicles and vehicles of maximum weight in load not
exceeding 8.845 kg. This update was promulgated through Decree nr. 8.419 in
modification of the bilateral agreement in December 2008 also can be destined for the
aftermarket.
34 Among the Protocols of amendments to the Agreement internalized in Brazil by Decrees 7.706
and 8.419, there were determinations about the Regional Content Index (RCI) and its
measurement formula.
35The last amendment to the bilateral agreement between Brazil and Mexico under the ECA#55
was on December 19th, 2016 with Decree nr. 8.937. This decree amended the ICR for auto parts
and automotive components and other terms referring to the ICR of vehicles and auto parts.
65
Brazil and it determined zero tariffs only for annual import quotas for a period of
four years for these types of vehicles. The established annual quotas were
increased each year, starting from US$ 1.56 billion between 2015 and 2016 up
to free trade from March 2019. (Table 2)
The bilateral agreement between Brazil and Mexico under ECA#55 has
undergone significant changes over the years. The changes in quotas and
postponements for the potential establishment of free-trade between the two
countries stand out and are summarized in the Figure 10 below.
Figure 10 - Summary of ECA#55 and the modification decrees in

bilateral automotive trade between Brazil and Mexico
Decree Date Description
ECA#55 September 27, 2002 Economic Complementation Agreement #55 between Brazil, Mexico, Argentina, Paraguay and Uruguay
ECA#55 translation to be valid in Brasil since publication and definition of quotas by vehicles units per year (5
4.458 November 5, 2002 years) - Installed companies: 112.000 units and not installed: 7.000 units in year 1(2002) up to 174.300 in year
4 ( 2005 ). Free trade implemention date in year 5 (2006) with Brazil and until June 30th, 2011 with Mercosul.
6.196 August 22, 2007 Confirms the vehicles free trade agreement implementation date as of June 30th, 2011
6.782 February 18, 2009 No change on Vehicle trade terms but inclusion of auto-parts in the agreement with Zero import taxes.
6.879 June 18, 2009 Rectification including auto-parts for spare parts.
Quotas established in values USD (03.2012 a 03.2013 = 1,45 Bi USD / 03.2013 - 03.2014 - 1.56 Bi USD /
7.706 March 29, 2012
03.2014 - 03.2015 - 1.64 Bi USD and free trade : March 19th, 2015).
Defines quotas in values USD (03.2015 - 03.2016 = 1.56 Bi USD / 03.2016 - 03.2017 = 1.6 Bi USD / 03.2017 -
8.419 March 18, 2015
03.2018 = 1.66 Bi USD / 03.2018 - 03.2019 = 1.7 Bi USD and Free trade from March 19th, 2019).
8.937 December 19, 2016 Describes ICR ( Regional content Index ) for auto-parts and components.
Source: Brazil, Decree nr. 4458 (2002); Brazil, Decree nr. 6196 (2017); Brazil, Decree nr. 6782
(2009); Brazil, Decree nr. 6879 (2009); Brazil, Decree nr. 7706 (2012); Brazil, Decree nr. 8419
(2015); Brazil, Decree nr. 8937 (2016) and Economic Complementation Agreement #55 (2002)
66
In addition, taking into consideration the importance of both markets for the global
automotive sector, the changes that occurred over the years were relevant not
only for the performance of both countries´ sectoral trade balance and their
decision-making process, but also for the expectations of the companies in global
production chain.
Such changes demonstrated that both countries were not mature and fully
prepared for the establishment of free-trade and that protectionist rates and
quotas were important elements used to limit or encourage bilateral trade.
2.3.2 - The effects of changes to the bilateral agreement on performance

of Brazilian trade balance
The bilateral trade performance of automotive vehicles between Brazil and

Mexico showed a significant increase after signing ECA#55 in September, 2002.
The trade current registered a quarterly average of US$ 45 million between
January, 1997 and December, 1999 while reached US$ 153 million between
January 2000 and September, 2002.
Right after the agreement, the quarterly average between October 2002 and
December 2004 increased up to US$ 304 million (+99% versus Jan.00 – Sept.
02). It was noteworthy the trade current showed a growth trend up to its peak in
the quarter of October to December 2011 reaching out an average of US$ 943
million. After the end of 2011, a progressive downwards trend began, registering
US$ 245 million in the first quarter of 2017.
It is verified there was a decree nr. 7.706 at the end of March 2012 that defined
annual quotas in value for bilateral trade and in March of 2015 the decree 8.419
was published and it extended the quotas to new annual periods until March of
2019 and defined new quotas in value for each of these periods (Figure 11).
67
Figure 11 - Brazil and Mexico: vehicles trade current (in US$ million)
Source: MDIC / Author's elaboration
The performance of the sectoral trade balance of Brazil in relation to Mexico

between 1997 and 2017 can be divided into three distinct periods. The first
period, between 1997 and 2005, when the trade balance went from a deficit of
US$ 83 million in 1997 to a surplus of US$ 1,291 billion in 2005. That was a very
positive exportation moment to Brazil, when more than 200.000 vehicles were
exported in 2004. The second period, from 2006 to 2012, there was a complete
reversion in the trade balance, worsening its balances up its records deficit of
US$ 2,244 billion in the last year of this period. The third period was between
2013 and 2017, when there was a trend to decrease the trade deficit, reaching a
deficit of US$ 172 million in 2017. (Table 3).
Concerning the exported volume, it can be seen that after 2002, when ECA#55
was signed, there was a significant increase in the exported units until 2004,
moving from 80 thousand in 2001 to 201 thousand in 2003, exceeding the quota
established in the agreement (see table 1). After 2003 there was a decrease in
the exported number of vehicles and an increase in the imported quantity.
Importation increased from 938 units in 2004 to 143.000 units in 2013. After 2013,
the imported volume began to decrease.
68
In terms of type of vehicles produced and commercialized another relevant topic
referred to the fact that Brazilian vehicles exported were regularly cheaper than
the vehicles imported from Mexico. Between 1997 and 2006, the average value
of exports was between US$ 5.000 and US$ 8.000 per unit, while importation
was between US$ 8.000 and US$ 15.000. While Brazil was exporting “B”
segment vehicles – such as VW Gol and Ford Fiesta, Mexico was exporting
Chevrolet, Nissan and Ford C segment vehicles (bigger and more expensive than
B cars).
Again, in the period from 2007 to 2017, the Brazilian average value of exports
increased lightly, moving to another level - US$ 8.000 and US$ 10.000 and
imports increase even more reaching an average range from US$ 13.000 to US$
18.000. In average, Brazil exports vehicles of lower added value (e.g.: popular
vehicles) and imports vehicles of higher values (mid-range vehicles such as Ford
Fusion and Chevrolet Captiva) (Table 3).
Table 3 - Vehicles trade balance, exchange rate and GDP (1997 to 2017)
* IMF projections released in January 2018 for the 2017 GDP (except for Brazil).
Source: MDIC; BCB; FMI; IBGE. / Author’s elaboration.
69
As previously described, Brazilian production and value chain is concentrated
mostly in the economic vehicles segment and therefore targeting low cost solution
for the Latin American consumption. On the contrary, Mexico targeted its
vehicles ‘production to high value chain, concentrating local high production with
low consumption, but with massive exportation to USA and Canada, being
therefore able to extend exportation to other markets such high-end niche
consumers in Brazil.
As it could be seen in the Figure 12 below, after the implementation of ECA#55

there was a significant increase in automobiles exports from Brazil to Mexico,
moving from US$ 521 million in 2001 to US$ 779 million (+ 50%) in 2002 and
US$ 1,119 billion (+ 115%) in 2003. This export growth remained until 2005, when
it reached US$ 1,318 billion. In 2006, exports remained stable at US$ 1,317
billion. From 2007 onwards, exports tend to fall and imports to increase. It is worth
mentioning that from 2001 to 2004 Brazilian annual imports fell from US$ 83
million to an insignificant US$ 11 million. (Figure 12)
Figure 12 - Brazil: vehicles exportation and importation from Mexico

(in US$ million) and exchange rate (R$/US$)
Source: MDIC / Author's elaboration
70
There was an inflection in the trend of Brazilian vehicle exports and imports in
2005-2006. Although the bilateral trade agreement ECA#55 promoted the vehicle
trade current between Brazil and Mexico and consequently Brazilian exports
increased significantly in the first years of the agreement, other competitiveness
factors impacted the commercial performance and the companies´ decisions in
the automotive sector.
Once there was no change in the commercial trade agreement, the main factor
was the relevant exchange rate appreciation, which the exchange rate (R$ / US$)
at the end of the year increased from 3,53 in 2002 to 1,77 in 2007. Therefore,
due to an overvalued exchange rate there was strong incentive to importation
and disincentive to exportation. (Figure 12). It is a fact that after the Real plan
implementation, there was a trend to maintain the exchange rate at higher levels,
especially focusing to combat inflation, however as a side effect, it boosted the
increase of importation, especially in the industrial sector, discouraging domestic
production. (Baer, 2009; Carneiro, 2010)
Brazilian exports to Mexico declined successively over the years 2006 to 2014,
when they registered only US$ 228 million, almost comparable to the
performance of 1999 (US$ 217 million). After 2014, exports did not increase,
reaching US$ 288 million in 2016. On the other hand, Brazilian automobile
imports from Mexico showed a constant and significant increase, from US$ 27
million in 2005 to US$ 2,584 billion in 2012. After that year, imports had a
downward trend, reaching US$ 594 million in 2016. (Figure 12)
This downward trend in Brazilian vehicles imports from Mexico in terms of both
quantity and value was the result of a combination of factors, among which three
may be highlighted. The first one refers to the new quotas (in US$) defined in
2012 through the Decree nr. 7.706 and in 2015 through Decree nr. 8.419 (see
Table 2). It should be noted that imports in 2012 and 2013 were slightly above
the quotas established for that period, which demonstrated the quotas limited the
trade up to this limit. The second factor concerns the exchange devaluation that
occurred after 2010, when the exchange rate (R$ / US$) went from 1,67 at the
end of 2010 to 3,90 at the end of 2015 and 3,26 at the end of 2016. This clearly
71
discouraged vehicles importation. The third factor is the strong recession that
Brazil faced after 2014, registering a 7% drop in GDP in the period 2015-2016.
Due to such economic downturn, the domestic vehicles sales decreased
significantly in Brazilian market.
It is also noticed that Mexico's GDP performance presented a growth rate over
2% in virtually every year after 1997. However, in 2009 it fell sharply, -4.7%, due
to the impacts of the subprime world crisis in 2008 and diminished importation
from Brazil and encouraged exports. (Figure 12 and Table 3).
To sum up, after analysing these statistics, it is clear ECA#55 had a significant
impact on performance of bilateral vehicles trade between Brazil and Mexico.
This agreement definitively boosted the trade current between both countries,
nevertheless the performance of Brazilian exportation and importation were
determined by the relation of several factors such as the agreed ECA#55 quotas
and their changes over the years in combination to the level of the exchange rate
devaluation or appreciation and finally with the performance of the activity level
(GDP).
It is expected therefore the combination of these factors should have being the
main drivers for strategies adopted by the automotive companies in order to
define investments allocation concerning production and sales in Brazil and
Mexico. Future vehicles projects and new investments scenarios are
recommended to be cross-checked through sensitiveness analysis concerning
market potentials economic development and last trade agreement revision of
ECA#55.
2.4 Conclusion
The strategies of transnational OEM corporations in the automotive sector follow

the characteristics of the global productive chains where they act to continuously
improve operating performance and maximize financial results. Therefore, even
having an established global production and commercial decentralized
organization, before any new investment or product development, they take into
consideration countries´ key characteristics such as cost reduction possibilities
72
(raw material availability and infrastructure), access to consumer markets,
regional economic performance, macroeconomic policies and trade agreements.
The ECA#55 signed in 2002 aimed to strengthen the commercial relationship in

the automotive sector between Mexico and Brazil, Argentina, Paraguay and
Uruguay over the year up to a moment where a free-trade agreement would be
established. Specific to bilateral agreement between Brazil and Mexico, the unit
quotas traded between both countries were defined and had import tariffs
reduced. In addition, six protocols were signed over the years to amend the initial
agreement. Noteworthy are decrees nr. 7.706 from 2012 and nr. 8.419 from 2015,
which defined annual value quotas and a period to implement free-trade.
The study shows ECA#55 was of great relevance to foster and boost bilateral
trade between Brazil and Mexico, by significantly increasing the trade current in
automotive sector. With regards to the Brazilian sectoral trade balance, it is
verified that up to 2005 there was an increase in the annual surplus balances and
in the annual volume of exported vehicles. However, in 2006 there was a trend
inflection and the quantity of vehicles and exported amount decreased and since
2008 the Brazilian trade balance performance reports deficit.
The Brazilian commercial performance in relation to Mexico was affected by a

combination of several competitiveness factors that influenced the strategies for
production and commercialization. The ECA#55 and its changes over the years,
particularly the annual quotas, associated with the level of exchange rate and
performance of the activity level in both countries were determining factors for
Brazilian commercial performance in relation to Mexico. Thus, the result of this
study confirms together with the exchange rate variation and the countries' GDP,
the ECA #55 was relevant for performance of vehicle exports from Brazil to
Mexico between 1997 and 2017. Concerning the literature review, the other
studies do not take into consideration the variable exchange rate, they may have
had simplified results to explain the commercial performance between countries.
Even though ECA #55 played a relevant role, it was the combination of the factors
in this agreement with conjuncture, economy and competitiveness aspects,
highlighting the level of exchange rate and the economic performance of both
countries which impacted the definition of performance strategies of
73
transnational companies and, consequently, the performance of Brazil´s
automobile trade balance in relation to Mexico between 1997 and 2017.
THIRD CHAPTER: The relevance of exchange rate fluctuations

in the performance of vehicles exports from Brazil to Mexico
3.1 Introduction
Apart from Mercosur countries, Mexico is the main destination of Brazilian

automotive sector exportation and it is expected that will remain important in the
next years after the free-trade agreement signed in 2015 to be fully implemented
in 2019. However, from 1997 to April 2017, there were significant variations in
the performance of these exports. Among the aspects of competitiveness and
factors that have a direct impact in this sector and companies’ strategies,
particularly on transnational companies, the level of exchange rate is considered
a significant variable.
Looking forward to identify potential business opportunities within automotive

sector, this chapter aims to analyze the relevance degree of exchange rate level
in the performance of Brazilian vehicle exports to Mexico using Autoregressive
Distributed Lag (ARDL) cointegration method. This method works with non-
stationary time series, identifying vectors of cointegration between the variables
and presenting short and long-term impacts. Since trade between countries
depends on multiple variables that have different impacts at different time
periods, the selected ARDL methodology is set as adequate for the purpose of
this study.
Latin America has not been part of any specific research on vehicles production
and due to the fast pace growth forecasted for the region, it was verified the
importance of analyzing the exchange rate variation of bilateral trade
performance in automotive sector between two of the main economies of the
74
region: Brazil and Mexico. It should be noted that this sector integrates a relevant
global production chain with capacity to produce about 10 million vehicles per
year, which represents today approximately 10% of global production. The
objective is to identify the relevance of exchange rate fluctuations to the
performance of vehicle exports from Brazil to Mexico from 1997 to the beginning
of 2017 and at final, to support decision making process on investment allocation
in these countries.
In general, although some contradictory results can be identified within the

literature, most of academic theory shows that a devalued exchange rate tends
to boost exports and discourage imports. An appreciated exchange rate tends to
the opposite result. According to Bresser-Pereira and Gala (2010), countries with
high commodity exports, such as Brazil, have a tendency to overvalue the
exchange rate, so it negatively impacts the competitiveness of the industrial
sector, particularly the more technologically-sophisticated goods where
automotive industry is one of the main contributors.
Bahmani-Oskooee, Halicioglu and Hegerty (2016) examining Mexico's bilateral

trade with other countries on the basis of the Autoregressive Distributed Lag
(ARDL) and error correction (ECM) models, identified that for six partners, while
the depreciation of the Peso (MXN) improves the trade balance in the long term,
the overvaluation of the Peso harms it. Thus, statistical tests did indeed indicate
that the effects of the Peso appreciation were significantly different from its
depreciation.
Nicita (2013) analyzed the importance of exchange rates in international trade

with regard to the impact of exchange rate volatility on trade. From this analysis,
it addressed exchange rate misalignments and government decisions on trade
policies. The econometric model was composed of about 100 countries over 10
years period, from 2000-2009. A set of bilateral data on trade flows, exchange
rates and trade policy were used. The results of the study reinforce the
importance that exchange rate misalignments have on international trade flows,
as in the case of an undervalued currency that promotes exports and restricts
imports. It has also been identified that short-term exchange rate volatility is of
concern only to developing countries, not generally. In addition, the adoption of
trade policies is usually made to offset the consequences of currency
75
overvaluation, especially in cases of antidumping interventions. Thus, persistent
exchange rate misalignments may encourage protectionist policies.
According to Baek (2013), in the case of South Korea, econometric studies have
shown different and contradictories results. The analysis of the Korean exchange
rate devaluation in the commercial relationship with United States and Japan,
shows an increase in exports to USA and a lack of significant changes to Japan.
Analyzing the effects of the real exchange rate on the share of India's exports
from 2000 to 2010, Cheung and Sengupta (2013) found that, on average,
currency appreciation and volatility had a negative impact on the exports of Indian
companies, although companies responded asymmetrically to exchange rates.
Thus, a review of the literature confirms a direct impact of the exchange rate on
performance of the countries´ trade balance and their exporting companies,
despite the significant particular characteristics of each case.
Therefore, this study analyzes a set of variables, such as inflation, GDP,

exchange rate and foreign trade statistics, which are relevant for Brazilian
vehicles exports to Mexico. The study contributes to existing literature on several
levels. The main contribution is that, differently from a set of existing articles
(Tunaer Vural, 2015; Baek, 2013; Nicita, 2013, Cheung and Sengupta, 2013), J-
curve expected effects (Bahmani-Oskooee et. al, 2016) and automotive industry
beliefs, although the exchange rate variations are extremely important for
competitiveness and performance aspects of automotive industry, both for the
short-term and long-term analysis, the exchange rate variations had a lower
influence on the performance of vehicle exports from Brazil to Mexico. Also, the
study identifies that bilateral trade agreements (ECA #55) may have had
significant results in sector performance and may have been more relevant than
other macroeconomic variables.
For the analysis, in addition to this introduction, the chapter is divided into four
other sections. The second section deals with the theoretical background and
literature review while the third section briefly describes the methodology. The
fourth section presents the econometric model and its results and the fifth and
last section is the conclusion.
76
3.2 Theoretical Background and Literature Review
The level of exchange rate is considered one of the main variables that directly
impacts the performance of the countries’ trade balance. It is not different in
Brazil, where the fluctuations and level of the exchange rate directly influence the
competitiveness of the national products, both in the domestic and in the
international market.
After the Real plan implementation in 1994, which managed to reduce and control
a scenario with high inflation, the exchange rate remained highly appreciated. In
January 1999, Brazil adopted the managed floating exchange rate that remains
until today and still relies on the Central Bank's (BCB) direct intervention in the
exchange market that ideally can influence the short-run volatility but not the long-
run trend (Wu, 2012). Nevertheless, after the implementation of floating
mechanism, exchange rate remained at a high level, maintaining itself the main
instrument of economic policy to combat inflation (Baer, 2009).
However, the maintenance of the appreciated exchange rate after

implementation of the Real Plan has been recurrently considered one of the main
factors that negatively impacted the Brazilian trade balance. According to
Carneiro (2010), after the Real Plan, which combined trade liberalization and
exchange rate appreciation, there was a regressive productive specialization of
Brazilian economy. There has been a large increase in imports to the detriment
of Brazilian domestic production, especially in industry. In this context, the
Brazilian trade balance became increasingly dependent on commodity exports
and international commodity price changes (Lacerda, 2016).
Based on data retrieved from the Ministry of Development, Industry and Foreign
Trade (MDIC) from 1997 to 2016, the trade balance of manufactured goods
registered a surplus from 2003 to 2006 and from 2007, it started to show
significant deficits, reaching a negative result of US$ 110 billion in 2014, the
largest deficit recorded in the studied period.
When analyzing the auto industry, passenger car exports recorded a significant
increase in the period, from US$ 1.5 billion in 1997 to US$ 4.9 billion in 2008.
77
Mainly due to the effects of the international subprime crisis, exports dropped to
US$ 3.2 billion in 2009. In 2013, exports reached US$ 5.5 billion and in the
following years they had a lower result, registering US$ 3.2 billion in 2014, US$
3.4 billion in 2015 and $ 4.7 billion in 2016. Until May 2017, vehicle exports
reached US$ 2.7 billion, which shows again a positive trend benefiting from a
reasonable stable exchange rate and concentration of OEM’s to find
opportunities abroad while the internal consumption still in low level.
Mexico is one of the main export destinations of Brazilian auto industry and is
also considered one of the leading Latin American countries in this industry.
Considering the average of the period from 2011 to 2016, Mexico is the tenth
largest Brazilian export destination and in recent years, it was the second
destination of Brazilian vehicles exports, being only overtaken by Argentina that
belongs to Mercosur. It should be noted that Mexico has also adopted the floating
exchange rate regime since 1995, after a strong crisis of payment balance. In
addition, from December 2015 to December 2016, the Mexican Peso (MXN)
depreciated approximately 32% against the US dollar.
According to the retrieved data from MDIC related to passenger cars, exports
from Brazil to Mexico increased from US$ 112 million in 1998 to US$ 1.32 billion
in 2005. After 2005 there was a decrease in the number of exports, reaching US$
372 million in 2011 and US$ 228 million in 2014. In 2015 and 2016, passenger
vehicle exports totaled US$ 281 million and US$ 288 million, respectively. Until
April 2017, exports cumulated US$ 345 million in the previous twelve months. On
the other hand, Brazil´s imports of passenger vehicles from Mexico increased
between 1999 and 2012, from US$ 3 million to US$ 2.6 billion, and decreased
between 2013 and 2016, from US$ 1.9 billion to US$ 594 million. So, there is an
increase in Brazil´s vehicle imports from Mexico and a decrease in vehicle
exports from Brazil to Mexico, especially after 2005.
After 1997, out of the total of Brazilian passenger vehicles exports, Mexico, which
represented 7% in 1998, increased its share to 42% in 2003. After 2003 there
was a continuous decline in the share of exports to Mexico, reaching back 6% of
the total in 2016. During the studied period, a tremendous volatility in the trade
between Brazil and Mexico was registered and specialists in the market believe
that exchange rate influenced the competitiveness of these countries.
78
3.3 Methodology
The bilateral trade model adopted in this study allows identifying the relevance of
exchange rate variations in the performance of vehicle exports from Brazil to
Mexico, both in terms of short-term and long-term impacts. The ARDL method is
adequate to evaluate the cointegration of long-term series than other tests that
analyze the averages of variances. The ARDL method is chosen because the
variables of the model were integrated of different orders, as described in
Pesaran and Shin (1999). Although the use of the technique practically excludes
the need for unit root tests, it was done in order not to apply the technique
erroneously (Nkoro, 2016).
The ordinary least squares (OLS) method is used to estimate the parameters
from the sample, using lags of the dependent and independent variables as
regressors, so the residuals or errors are reduced. The use of the technique,
therefore helps in the study of time series that are not stationary, as it is the case
study of the exchange impact on the commercial relationship between a country
and a partner or the rest of the world. In addition, trade between countries
depends fundamentally on multiple variables whose ARDL regression model
identifies co-integration vectors (Nkoro, 2016).
This method meets the need of the short- and long-run impact analyses in
regressions, and being considered one of the standard techniques to evaluate
co-integration between variables (Baek, 2013). In this regard, ARDL is an
appropriate method to evaluate the commercial relationship, since it suggests
treating different behaviors depending on the time, exchange rate between
countries, the initial impact of strong exchange rate devaluation and the type of
relationship that was established between two partners.
The variables included in the model are often considered of great relevance for
sectoral economic performance and are among the main macroeconomic
variables. Also these variables should represent the transmission channel
between exchange rate and exports/imports. Thus, the following variables are
included: Brazilian and Mexican real gross domestic product (GDP), in addition
to consumer prices in Mexico and Brazilian producers’ prices indexes to capture
79
elasticities and market dynamics, exchange rates of both countries, exports of
vehicles from Brazil to Mexico and imports of Mexican vehicles to Brazil.
Considering all these variables, short and long-term impact analyses is
performed utilizing the following equations:
∆𝐿𝑋 = 𝛼 + ∑𝑛=1 𝑛=1 𝑛=1

𝐿𝑋=1 𝛽 ∆ 𝐿𝐺𝐷𝑃 𝐵 + ∑𝐿𝑋=1 𝛾 ∆ 𝐿𝑃𝑃𝐼 + ∑𝐿𝑋=1 𝛿 ∆ 𝐵𝑅𝐿 𝑅𝐴𝑇𝐸 +
𝜃1𝐿𝐺𝐷𝑃 𝐵 + 𝜃2𝐿𝑃𝑃𝐼 + 𝜃3 𝐵𝑅𝐿 𝑅𝐴𝑇𝐸 + Ԑ𝑡 (1)
∆𝐿𝑀 = 𝛼 + ∑𝑛=1 𝑛=1 𝑛=1

𝐿𝑀=1 𝛽 ∆ 𝐿𝐺𝐷𝑃 𝑀 + ∑𝐿𝑀=1 𝛾 ∆ 𝐿𝐶𝑃𝐼 + ∑𝐿𝑀=1 𝛿 ∆ 𝑀𝑋𝑁 𝑅𝐴𝑇𝐸 +
𝜃1𝐿𝐺𝐷𝑃 𝑀 + 𝜃2𝐿𝐶𝑃𝐼 + 𝜃3 𝑀𝑋𝑁 𝑅𝐴𝑇𝐸 + Ԑ𝑡 (2)
where: Lgdp_B=log(GDP Brazil), Lgdp_M=log(GDP Mexico), Lppi=log(producer’s

prices Brazil), Lcpi=log(consumer prices in Mexico); Lx=log(exports of vehicles from
Brazil to Mexico), Lm=log(imports of Mexican vehicles to Brazil), BRL RATE=
exchange rate MXN/BRL, MXN_Rate = exchange rate BRL/MXN and Ԑt = an error
term.
To test stationary, we apply the Augmented Dickey and Fuller test that allows
identifying whether the studied series has a unit root or not, that is, if the
explanatory variables are correlated with the dependent variable or, on the
contrary, the results are stochastic.
The use of other tests, such as the Phillips-Perron unit root test, which could
demonstrate through the use of dummy variables that the series are stationary,
are not used for two reasons. The first reason is the series used in this study does
not present significant structural breaks, that means, there is no need to use the
test to correct them that could indicate the presence of a unit root. The second
motive is derived from the first one, whereas the series used in this study is
smaller than those commonly require different long-term tests of Augmented
Dickey-Fuller (ADF). In this case, the longer the period, the greater the possibility
of break that could compromise the unit root test.
80
3.4 Analysis of the model results
MDIC monthly aggregate data of 20 years (Jan. 1997 to Apr. 2017) of passenger
vehicles trade among Brazil and Mexico was combined to exchange rate and
economic indexes (GDP, Mexican consumer price index and Brazilian producer
price index) utilizing the Autoregressive Distributed Lag (ARDL) method. The
trade relationship between countries should be evaluated carefully, since the
variations in commercial results derived from exchange rate changes in the short-
term are compromised by several factors, among which the J-curve effect
highlighted by several authors, such as Tunaer Vural (2015) and Bahmani-
Oskooee (2016). Although the variables of this study have changed considerably
over the analyzed period, the Augmented Dickey-Fuller test shows the series is
stationary.
In order to verify the stationarity of the time series, the Augmented Dickey-Fuller
test was performed. The presence of an asterisk (*) below indicates the
hypothesis of presence of unit root is rejected or, in other words, the series are
stationary. In the case of the series that presented unit root, tests with the series
in first difference were realized. The rejection of the unit root hypothesis in the
series in first difference indicates that they are integrated of order 1 or I (1).
81
Table 4 - Stationarity test: ADF test results
Level First difference

Trend Trend Integration
Variable
and Intercept None and Intercept None order
intercept intercept
BRL_rate 1.30 1.76 -0.80 1.00 -0.37 -10.31* I(1)
Lgdp_B 5.30* 5.45* -5.40* - - - I(0)
3.54*
Lppi 0.97 2.27 3.32 -1.65 - I(1)
(-6.95*)
5.15*
Lx -0.95 - - - - I(0)
(-5.06*)
MXN_rate -1.24 1.78 -0.26 -0.79 0.20 -11.67* I(1)
Lgdp_M 3.88* 3.95* -3.95* - - - I(0)
Lcpi 4.83* 4.90* -4.89* - - - I(0)
5.48*
Lm -0.50 - - - - I(0)
(-5.40*)
Note: Lgdp_B=log(gdp_brazil) ; Lppi=log(ppi) ; Lx=log(exports), Lgdp_M=log(gdp_mexico) ;

Lcpi=log(cpi) ; Lm=log(imports). The asterisk indicates that the value calculated in module is
greater than the value of the test statistic at the 5% level of significance, indicating the rejection
of the null hypothesis (unit root presence).
For the Brazilian producer price index and for the BRL/MXN exchange rate the
variables are integrated of order 1, I(1). However, the GDPs of Brazil and Mexico,
as well as the Mexican consumer price index and the imports of Brazilian vehicles
by Mexico are stationary.
Furthermore, as described by Nkoro (2016), it is explicitly preferable ARDL

cointegration technique utilization when dealing with variables that are integrated
of different order I(0) and I(1), or combination of both. The major advantages lies
in its identification of cointegrating vectors where there are multiple cointegrating
vectors. The technique would not be recommended if there would be the
presence of integrated stochastic trend of I(2), which is not the case above.
The F-statistics shows there is cointegration between the variables, therefore the
calculated F-value is greater than the tabulated, rejecting the null hypothesis.
82
Table 5 - F-Test results
Model F-statistic Critical values Outcome

I(0) I(1)
Brazil ARDL 20.46 3.219 4.378 Cointegration
(5,5,5,5)
Mexico ARDL 9.98 3.219 4.378 Cointegration
(5,5,5,5)
*the results are significant at the 5% level.
The statistical analysis shows that in the first long-term estimate the results were
significant for all variables. The p-value shows that all coefficients are statistically
significant at the 5% confidence level. In the long-run regression, the Brazilian
GDP coefficient presents a negative relation to the exports of passenger cars to
Mexico.
Another variable whose relationship with the number of Brazilian exports is

negative is exchange rate. The negative relationship would be the same as to say
that an appreciation of the Real against the Mexican Peso increases the exports
of Brazilian vehicles to Mexico.
Still in the long-term regression, the variable Lppi (Brazilian producer price index)
presented a positive relationship to the Brazilian exports. Consequently,
according to the model, an increase in producer prices has a positive impact on
vehicles exported to Mexico. The price variation to the Brazilian producer is
important to measure the effect of production inflation costs on exports.
Table 6 - Long-term regression
Dependent Variable: LX
Variable Coefficient Std. Error t-Statistic Prob.
C 7.948777 1.190667 6.675902 0.0000

LGDP -3.307313 0.463859 -7.129993 0.0000
LPPI 5.184205 0.569461 9.103703 0.0000
BRL_RATE -0.443444 0.054122 -8.193437 0.0000
83
In the short-term regression, only three variables presented significant results: (1)
the difference in Brazilian exports lagged in one period; (2) the difference of
Brazilian GDP lagged in one period and (3) the residuals of the regression. This
shows that there is a divergence in the long-term trend for these variables. The
deviations from long-term trend were significant in some variables, with the
majority responding in a similar way to long-term equation.
Table 7 - Short-term regression
Dependent Variable: D(LX)
C 0.031833 0.045735 0.696017 0.4872

D(LX(-1)) -0.147056 0.064537 -2.278634 0.0237
D(LX(-2)) 0.052760 0.065747 0.802480 0.4232
D(LX(-3)) 0.004967 0.062131 0.079936 0.9364
D(LX(-4)) 0.046774 0.061441 0.761286 0.4474
D(LX(-5)) -0.063167 0.059276 -1.065653 0.2878
D(LGDP) 0.835306 0.614611 1.359082 0.1756
D(LGDP(-1)) 1.255004 0.633615 1.980703 0.0490
D(LGDP(-2)) 0.815789 0.616055 1.324214 0.1869
D(LGDP(-3)) 1.029792 0.618793 1.664196 0.0976
D(LGDP(-4)) 1.188871 0.619373 1.919474 0.0563
D(LGDP(-5)) 0.670134 0.619142 1.082360 0.2804
D(LPPI) 0.003130 4.360628 0.000718 0.9994
D(LPPI(-1)) 7.542210 5.485261 1.374996 0.1706
D(LPPI(-2)) -4.945312 5.616330 -0.880524 0.3796
D(LPPI(-3)) -4.995419 5.607406 -0.890861 0.3740
D(LPPI(-4)) -2.763400 5.511024 -0.501431 0.6166
D(LPPI(-5)) 2.242804 4.262358 0.526188 0.5993
D(BRL_RATE) -0.170997 0.229875 -0.743871 0.4578
D(BRL_RATE(-1)) 0.030038 0.240410 0.124946 0.9007
D(BRL_RATE(-2)) 0.064522 0.236977 0.272270 0.7857
D(BRL_RATE(-3)) 0.228577 0.246231 0.928302 0.3543
D(BRL_RATE(-4)) 0.090380 0.270296 0.334374 0.7384
D(BRL_RATE(-5)) 0.010596 0.263233 0.040254 0.9679
RESID01(-1) -0.339340 0.047496 -7.144652 0.0000
84
There should be a highlight for the fixed exchange rate in Brazil between 1997
and 1998 and for the process of Brazilian exchange devaluation from 2002,
processes by which the exchange rate itself could bring spurious results to the
conclusion of this study.
For the statistical analysis of the long-term regression on Mexican data, the three
explanatory variables presented significance in relation to the dependent
variable, the imports of Brazilian passenger vehicles by Mexico. In the long-run
equation, the GDP coefficient is negative, indicating that during the periods of
decline of Mexican GDP, exports increase.
The Mexican consumer price index presents a positive relationship with Mexican
imports. In this aspect, it is important to emphasize the level of Mexican inflation
before the year 2000. Despite a downward trend in inflation between 1997 and
2000, Mexican inflation accumulated in twelve months only reached a single digit
in April 2000. Since then, in most years Mexican inflation has been lower than
Brazilian inflation, it could be seen below (Table 8). Analyzing the inflationary
question alone, over the years there must be a loss of competitiveness of the
country that presents a higher rate of accumulated inflation.
Table 8 - Annual variation of inflation in Brazil and Mexico (CPI)
Year Mexico Brazil Year Mexico Brazil

1997 15,70% 5,20% 2007 3,80% 4,50%
1998 18,60% 1,70% 2008 6,50% 5,90%
1999 12,30% 8,90% 2009 3,60% 4,30%
2000 9,00% 6,00% 2010 4,40% 5,90%
2001 4,40% 7,70% 2011 3,80% 6,50%
2002 5,70% 12,50% 2012 3,60% 5,80%
2003 4,00% 9,30% 2013 4,00% 5,90%
2004 5,20% 7,60% 2014 4,10% 6,40%
2005 3,30% 5,70% 2015 2,10% 10,70%
2006 4,10% 3,10% 2016 3,40% 6,30%
Source: BCB; INEGI
The Mexican exchange rate (BRL/MXN) shows a positive relationship with

imports of Brazilian vehicles, meaning that a devaluation of Mexican Peso
85
increases volume of passenger cars imports from Brazil. This shows a contrary
relationship since a devaluation of the exchange rate in Mexico increased imports
of passenger cars from Brazil. That is, with devaluation of the Mexican exchange,
Brazilian products were relatively more expensive and nevertheless the imports
presented growth.
Table 9 - Long-term regression
Dependent Variable: LM
C 194.0506 26.59995 7.295148 0.0000

LGDP -13.29911 1.872981 -7.100506 0.0000
LCPI 9.219761 0.939083 9.817837 0.0000
MXN_RATE 6.552424 1.383454 4.736280 0.0000
Table 10 - Short-term regression
Dependent Variable: D(LM)
C -0.189214 0.058688 -3.224046 0.0015

D(LM(-1)) -0.198834 0.063566 -3.127991 0.0020
D(LM(-2)) -0.065753 0.065734 -1.000286 0.3184
D(LM(-3)) -0.076333 0.062377 -1.223733 0.2225
D(LM(-4)) -0.040814 0.063429 -0.643465 0.5206
D(LM(-5)) -0.150462 0.058923 -2.553548 0.0114
D(LGDP) 7.478838 19.19384 0.389648 0.6972
D(LGDP(-1)) -8.955026 25.70490 -0.348378 0.7279
D(LGDP(-2)) 10.06984 25.89225 0.388913 0.6977
D(LGDP(-3)) -13.76121 25.67902 -0.535893 0.5926
D(LGDP(-4)) 35.89367 25.33556 1.416731 0.1581
D(LGDP(-5)) 6.486388 18.91534 0.342917 0.7320
D(LCPI) 11.26798 17.78366 0.633614 0.5270
D(LCPI(-1)) 23.60467 20.46397 1.153475 0.2501
D(LCPI(-2)) -29.23672 20.54520 -1.423044 0.1562
D(LCPI(-3)) 35.33183 20.70724 1.706255 0.0895
D(LCPI(-4)) -51.49246 21.47286 -2.398025 0.0174
D(LCPI(-5)) 52.61407 17.77376 2.960210 0.0034
D(MXN_RATE) 2.429387 4.283859 0.567103 0.5713
D(MXN_RATE(-1)) 2.833627 4.376785 0.647422 0.5181
D(MXN_RATE(-2)) -1.289577 4.401875 -0.292961 0.7698
D(MXN_RATE(-3)) -1.802247 4.365900 -0.412801 0.6802
D(MXN_RATE(-4)) -3.427359 4.397974 -0.779304 0.4367
D(MXN_RATE(-5)) -0.861811 4.273910 -0.201645 0.8404
RESID01(-1) -0.244394 0.044788 -5.456728 0.0000
86
In the short-run regression, four variables of deviations from long-run trend were
significant within 5% confidence interval: the difference between Mexican imports
lagged at one and five periods and the differences lagged at four and five periods
of the index prices, in addition to the regression residuals, which were also
significant.
In Mexico's long-run regression model, the most relevant explanatory variable is

the Mexican GDP variation, followed by the consumer price index, as the former
has an inverse relation and the second has a positive relation with the dependent
variable - the Mexican imports.
Among the explanatory variables in the long-term regression for Brazil´s data, the
exchange rate has a supporting effect on determining the volume of exports to
Mexico. Even so, the exchange rate relationship with exports is negative, an
appreciation of the Real in relation to the Peso results an increase in the volume
of passenger vehicles exports. Concerning Mexico´s data the import responds
positively to a devaluation of the Peso against the Real. Therefore, it is verified
that the level of the exchange rate did not present a consistent and significant
result for the performance of Brazilian vehicles exports to Mexico.
Comparing the results of the cointegration with existing literature framework, it

could be demonstrated that a set of researches utilizing ARDL as cointegration
technique and exchange rate as independent variable, indeed presented whether
a positive or a negative influence to trade balance, but not a supporting function.
The table 11 below summarizes the finding of different authors, countries and
periods.
87
Table 11 – List of the empirical studies on the relationship between
exchange rate and trade balance
88
Finally, it is important to emphasize this paper concentrates on empirical study of
economic variables to analyze the fluctuation on vehicles bilateral trade between
Brazil and Mexico. Therefore, one element of international political aspect is not
included in this study but eventually would be one explanatory factor for the
presented volatility. This is the Agreement on Economic Completeness (ECA)
#55 that was concluded between Mercosur and Mexico and its subsequent
amendments36 and was intensively examined in the second chapter of this paper.
Once this agreement determines quotas, regional content requirements and

consequently tariffs, it has been of important relevance for regional trade in the
automotive sector since 2002, although original objective remains to strengthen
the process of integration in Latin America in the legal framework and to foster
the development of trade relationship between the parties for future
establishment of free trade in the automotive sector, promoting the integration
and productive complementation of this sector. The agreement deals, on the
basis of the respective descriptions and specifics of automotive products, with
new goods such as light passenger vehicles, light commercial vehicles, trucks,
buses, coaches, trailers and semi-trailers, tractors, agricultural and road
machinery, and auto parts for original vehicle production and after-market.
Specific regarding the bilateral trade of the automotive sector between Brazil and
Mexico, ECA #55 does not include all the categories listed above but only light
passenger vehicles, light commercial vehicles and auto parts for vehicle
production and after-market. It should be emphasized this agreement defines, in
a reciprocal manner, important business levers such as the reduction of import
taxes, minimum regional content requirements, structure of companies’
operation, reductions in the rates for annual quotas for companies established in
the countries, and final target date of the distinction between installed and non-
installed companies.
New quotas were defined in 2012 for annual vehicles importation values with zero
tariff over three years and, in the fourth year a fully free trade implementation.
36For more details on the agreement and related decrees see the following documents: Economic
Complementation Agreement #55 of November 5th, 2002; Decree Nr. 4,458, of November 5th,
2002; Decree nr. 6.782, of February 18th, 2009; Decree Nr. 6,879, of June 18th, 2009; Decree
Nr. 7,706, of March 29th, 2012; and Decree Nr. 8,419 of March 18th, 2015.
89
However, due to the level of discrepancies in the business and negative trade
balance to Brazil, in 2015 the deadlines and annual import value using quotas for
zero tariff were changed and new parameters for the regional content index were
presented. This last change in the bilateral agreement resulted in an annual
increase in the value of quotas, from US$ 1,560 billion from March 2015 to March
2016 and 2017 to US$ 1,705 billion from March 2018 to March 2019. Starting in
March 2019 the implementation of free trade was defined. Therefore, it can be
also considered the revisions of bilateral agreement terms could have influenced
the commercial performance of automotive sector between Brazil and Mexico
recently.
3.5 Conclusion
Academic and automotive market environment suggests that exchange rate

determines the businesses’ profitability and therefore represents the main
economic variable that foster or discourage the trade among countries, especially
concerning Latin American countries like Brazil and Mexico that have over 10
million annual vehicles production capacity and an internal consumption about
40% up to 50% of this volume. Exportation indeed represents a vital necessity to
compensate the investments made during the last decades.
Also, it is a concrete fact that exchange rate level and its fluctuations have
remained as relevant variables for economic and financial results and
consequently for definitions of operation strategies of the companies.
Nonetheless, after analyzing 20 years of monthly vehicles trade and utilizing the
ARDL methodology, it is verified that the exchange rate did not have a significant
effect on both the short and long-term to explain the performance of the Brazilian
vehicle exports from Brazil to Mexico. We identified that other variables included
in the model, such as Brazilian and Mexican GDP’s growth rates and inflation
indexes, presented higher impacts on vehicles trade.
These exchange rate variation results presented in the ARDL model did not have
the relevance presented in theory and in the academic literature possibly due to
particularities of the sector, specially knowing that negative trade balance alerted
90
the governments to design and introduce special agreements in the terms of
trade. It should be noted that although the model worked with a reasonable set
of variables, the bilateral trade agreements within automotive sector among Brazil
and Mexico and its quota and taxes barriers were not tested.
These agreements possibly dissipated J-curve effects and most likely these
political amendments determined the volatility on the performance of total vehicle
exports from Brazil to Mexico over the analyzed period and may have distorted
the effective influence of each economic variable analyzed in the model. This
shall not be the future situation after full trade agreement planned to be
implemented in 2019.
CONCLUSION
Since the 80´s, a new configuration in the world economy has been delimited.
The US dollar as the main currency, the predominance of finance, the
deregulation of the financial market and the intensification of capital flows have
become important economic aspects. Combined with these characteristics, the
floating exchange rate regime was adopted by major economies. As a
consequence, especially for the emerging countries, there was an increase in
exchange rate fluctuations and changes in these rate levels mainly due to
speculative financial movements.
In the first half of the 90´s, Brazil adopted the Real Plan, a monetary reform
targeting to combat a strong inflationary process, using the combination of a
highly valued exchange rate and high basic interest rates. In this process, there
was a great attraction of short-term financial capital flows, mainly due to the
differential of domestic interest in relation to international and other speculative
operations. In the productive sphere, the Brazilian macroeconomic context has
generated a loss of competitiveness of domestic companies, increases in imports
of manufactured products and disincentives, and difficulties in the realization of
new investments by the private sector.
91
The Real Plan was considerably successful in combating inflation, but due to the
loss of competitiveness, it resulted in a change in the Brazilian productive
structure and trade balance. There was a significant decline in the industrial
sector over the years in relation to the GDP. Moreover, the trade balances of
manufactured goods, especially the most technologically intensive ones, are
constantly registering growing deficits over the years. Thus, the trade balance
became increasingly dependent on the commodity export sector.
In the global economic context, transnational corporations in the automotive

sector act basing on the characteristics of the global production chains in order
to maximize their operational performance and consequently their profits.
Productive and commercial decentralization in several countries became a
standard strategy for this industry to access a larger market for its products and
to reduce its costs. Given the characteristics of the global economy and the global
objectives of transnational corporations in the automotive sector, particularly
automakers, several factors have an impact on the companies´ decision-making
process such as where their production plants will be installed and what
strategies will be adopted in a certain country or region.
In the context of the global and Brazilian economy, this thesis focuses on the
analysis of how relevant the exchange rate fluctuations were for the performance
of the Brazilian vehicle exports to Mexico in the period 1997-2017. It also
assessed the impacts of the GDP performance and the bilateral agreement
between these two countries under ECA #55 and its changes over the years. It
is noteworthy that this trade agreement was signed in 2002 aiming to strengthen
the commercial relationship between Mexico and Brazil, Argentina, Paraguay and
Uruguay over the years by adopting commercialization quotas and tariffs
targeting at future free commerce.
According to the analyses carried out and their findings, the devaluation of the
Brazilian currency is an important aspect which positively impacted Brazilian
exports to Mexico. However, despite the significant impact of the exchange rate
on the commercial performance in this sector, only this variable does not explain
the changes in the performance of Brazilian vehicle exports.
92
The implementation of ECA #55 was a factor that positively affected the increase
in the trade flow between Brazil and Mexico in the automotive sector. However,
the combination of the changes in the terms of the agreement over the years with
the changes in the exchange rate levels were decisive to explain the performance
of Brazilian vehicle exports and imports throughout the period.
From 1997 to 2005, especially after 2002, Brazilian exports to Mexico increased
and, as a consequence, there was a raise in surplus balances. It should be noted
that in such a period the exchange rate (R$ / US$) presented a more devalued
level.
After 2006 until 2012, with the Brazilian currency more valued in relation to the
US dollar and with changes in the terms of ECA #55 regarding the bilateral
agreement, there were changes in trends as imports increased and Brazilian
vehicle exports to Mexico decreased. Thus, from 2008 onwards, the Brazilian
sector trade balance became deficient, showing that the current terms of ECA
#55 negatively influenced the Brazilian vehicle exports to Mexico in the medium
and long terms. After 2013, as Brazilian GDP worsened and the Brazilian
currency was more depreciated in relation to the US dollar, Brazilian vehicle
imports fell significantly while there was no considerable improvement in exports.
Based on these results, the ARDL econometric methodology was used to

determine the impact of the Brazilian currency exchange rate in relation to the
Mexican exchange rate and to other variables, such as GDP and inflation in both
countries on the performance of Brazil´s vehicle exports to Mexico. It is verified
that the exchange rate did not have a significant effect in the short and long term
to explain the performance of Brazilian exports. Yet the Brazilian and Mexican
GDP growth rate and the inflation indexes had greater impact on the commercial
vehicle performance between Brazil and Mexico.
It can be pointed out that Brazilian commercial performance in the automotive

sector in relation to Mexico is not associated to only one variable, such as
changes in the exchange rate level. A combination of several competitiveness
factors influenced the production and commercialization strategies of the
transnational companies of this sector.
93
Finally, it can be concluded that, in the commercial relationship between Brazil
and Mexico in the vehicle sector, the GDP performance and the exchange rate
level combined with the current terms of ECA #55 were determining factors for
the registered performance. So the productive and commercial strategies of
transnational corporations in the automotive sector depend on a set of variables
and competitiveness aspects. In addition, the analyzed variables present levels
and term periods (short and long terms) of different impacts on the performance
of the Brazilian vehicle trade balance in relation to Mexico from 1997 to 2017.
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ATTACHMENTS
Monthly statistics from Brazil and Mexico ( jan/97 to apr/17)
BRAZIL MEXICO
Month Export in BRL X-rate Brazilian BR BROAD PPI Import in X-rate Mexican MX CPI
1BRL= GDP in - DOMESTIC MXN 1MXN= GDP in MXN CORE
MXN BRL SUPPLY (IPA- BRL ( million ) NADJ
(million) EP-DI) NADJ
jan/97 796,168 7.51 72.075 125.100 5,975,457 0.13 8,706,797 40.467
feb/97 299,135 7.44 71.044 125.530 2,226,830 0.13 8,769,308 41.170
mar/97 1,202,811 7.53 75.273 127.520 9,058,066 0.13 8,831,819 41.697
apr/97 37,496 7.45 75.970 128.200 279,469 0.13 8,894,331 42.226
may/97 101,533 7.40 78.347 128.370 751,227 0.14 8,956,842 42.770
jun/97 16,527 7.39 78.952 128.680 122,208 0.14 9,008,600 43.223
jul/97 160,451 7.28 81.370 128.560 1,168,277 0.14 9,060,359 43.578
aug/97 292,219 7.16 83.347 128.370 2,091,195 0.14 9,112,117 43.927
sep/97 4,111,608 7.11 84.531 129.550 29,239,769 0.14 9,176,366 44.556
oct/97 5,223,735 7.17 88.469 130.090 37,458,929 0.14 9,240,616 44.967
nov/97 10,233,834 7.48 84.667 131.490 76,527,262 0.13 9,304,865 45.413
dec/97 12,003,686 7.29 78.847 132.630 87,527,778 0.14 9,331,016 45.981
jan/98 3,002,438 7.35 75.506 133.630 22,054,514 0.14 9,357,167 46.858
feb/98 16,938,244 7.55 74.255 133.430 127,810,851 0.13 9,383,318 47.765
mar/98 10,309,218 7.55 80.973 133.600 77,873,686 0.13 9,406,036 48.296
apr/98 5,853,119 7.45 80.920 133.220 43,598,298 0.13 9,428,754 48.848
may/98 4,975,860 7.49 84.004 133.400 37,275,608 0.13 9,451,472 49.373
jun/98 8,427,913 7.72 83.267 133.620 65,044,513 0.13 9,470,315 49.956
jul/98 10,440,128 7.66 86.626 132.810 79,936,164 0.13 9,489,159 50.341
aug/98 14,592,978 8.00 88.043 132.770 116,706,466 0.13 9,508,002 50.860
sep/98 13,337,058 8.66 88.096 132.850 115,516,312 0.12 9,511,425 51.839
oct/98 17,167,141 8.54 89.959 132.600 146,657,668 0.12 9,514,848 52.566
nov/98 6,012,820 8.35 88.098 132.330 50,232,733 0.12 9,518,271 53.167
dec/98 20,309,691 8.22 83.392 134.640 167,011,389 0.12 9,565,977 53.998
jan/99 0 6.75 69.423 136.770 0 0.15 9,613,683 55.297
feb/99 0 5.23 86.820 146.330 0 0.19 9,661,389 56.308
mar/99 12,838,013 5.13 94.948 150.490 65,889,613 0.19 9,657,089 57.196
apr/99 14,226,489 5.56 83.236 149.980 79,098,606 0.18 9,652,788 57.881
may/99 15,950,627 5.58 83.415 148.750 89,060,039 0.18 9,648,488 58.442
jun/99 10,514,943 5.39 87.920 150.760 56,649,630 0.19 9,688,522 58.897
jul/99 11,065,853 5.20 90.720 153.820 57,579,321 0.19 9,728,556 59.285
aug/99 46,642,954 4.99 97.482 157.130 232,917,050 0.20 9,768,590 59.734
sep/99 58,557,239 4.92 98.384 160.740 288,186,813 0.20 9,809,233 60.462
oct/99 55,515,585 4.85 103.723 164.890 269,345,039 0.21 9,849,877 60.896
nov/99 88,090,229 4.87 100.671 170.810 429,171,577 0.21 9,890,520 61.283
dec/99 92,925,960 5.11 92.199 173.550 474,820,378 0.20 9,956,862 61.778
jan/00 36,968,858 5.26 89.009 175.320 194,542,721 0.19 10,023,203 62.578
feb/00 59,840,387 5.31 90.951 175.610 317,855,675 0.19 10,089,545 63.266
103
BRAZIL MEXICO
mar/00 88,199,913 5.33 94.508 175.520 470,534,631 0.19 10,145,163 63.676
apr/00 52,888,754 5.31 92.059 175.490 280,935,961 0.19 10,200,782 64.010
may/00 75,595,273 5.20 99.698 176.700 392,913,362 0.19 10,256,400 64.290
jun/00 57,340,888 5.43 99.628 179.270 311,251,923 0.18 10,270,529 64.506
jul/00 62,489,045 5.25 100.368 184.270 328,267,438 0.19 10,284,657 64.720
aug/00 82,565,099 5.13 103.522 188.990 423,191,798 0.20 10,298,786 64.991
sep/00 111,549,468 5.08 102.831 191.050 567,215,086 0.20 10,283,138 65.492
oct/00 118,343,447 5.07 109.345 192.110 599,841,930 0.20 10,267,490 65.834
nov/00 77,389,152 4.88 111.261 192.830 377,605,003 0.20 10,251,842 66.252
dec/00 104,628,878 4.82 107.219 194.470 504,489,214 0.21 10,228,105 66.626
jan/01 44,318,324 4.99 85.988 195.250 221,342,132 0.20 10,204,369 67.121
feb/01 62,396,685 4.84 88.498 195.850 302,285,588 0.21 10,180,632 67.627
mar/01 82,194,391 4.59 99.145 197.830 377,472,232 0.22 10,168,714 68.032
apr/01 79,736,446 4.26 102.377 200.580 339,571,043 0.23 10,156,795 68.360
may/01 100,617,041 4.01 110.906 200.940 403,037,859 0.25 10,144,877 68.606
jun/01 130,847,504 3.83 106.932 204.890 501,628,011 0.26 10,153,487 68.826
jul/01 98,016,971 3.71 116.493 208.840 364,034,632 0.27 10,162,098 68.933
aug/01 106,516,398 3.66 121.499 211.190 389,357,750 0.27 10,170,708 69.162
sep/01 171,450,347 3.52 125.863 212.200 602,804,271 0.28 10,164,605 69.686
oct/01 194,843,112 3.42 132.754 216.190 665,482,771 0.29 10,158,501 69.862
nov/01 100,312,808 3.63 121.482 217.760 363,762,182 0.28 10,152,398 70.029
dec/01 84,358,877 3.88 105.740 217.560 327,113,868 0.26 10,122,318 70.196
jan/02 56,921,251 3.85 92.539 217.270 219,399,455 0.26 10,092,237 70.546
feb/02 90,948,062 3.76 94.230 217.570 342,098,561 0.27 10,062,157 71.045
mar/02 106,864,577 3.86 98.119 217.330 412,881,724 0.26 10,097,487 71.335
apr/02 127,508,072 3.95 97.616 218.970 503,546,965 0.25 10,132,817 71.589
may/02 187,399,395 3.83 105.216 221.750 718,389,534 0.26 10,168,147 71.721
jun/02 163,364,166 3.60 112.207 227.300 587,882,179 0.28 10,195,609 71.812
jul/02 230,569,784 3.33 126.787 233.700 768,094,433 0.30 10,223,070 71.909
aug/02 179,242,673 3.17 137.250 241.460 567,303,926 0.32 10,250,532 72.151
sep/02 260,038,249 3.01 145.885 250.730 783,461,542 0.33 10,262,226 72.626
oct/02 377,400,177 2.65 172.199 265.830 1,000,284,043 0.38 10,273,921 72.795
nov/02 267,993,747 2.85 158.463 285.640 763,662,271 0.35 10,285,615 72.936
dec/02 337,311,608 2.82 152.029 294.600 950,334,745 0.35 10,300,515 73.088
jan/03 191,055,333 3.09 148.673 301.100 590,059,780 0.32 10,315,415 73.413
feb/03 241,130,593 3.05 160.186 306.250 734,608,716 0.33 10,330,315 73.777
mar/03 309,383,138 3.17 161.411 312.160 980,760,707 0.32 10,344,713 74.077
apr/03 233,654,355 3.40 145.851 312.380 793,285,760 0.29 10,359,112 74.328
may/03 238,300,931 3.47 135.448 307.130 827,480,829 0.29 10,373,510 74.525
jun/03 292,489,338 3.64 129.978 303.560 1,065,830,337 0.27 10,372,531 74.606
jul/03 283,404,940 3.63 137.890 301.760 1,028,979,449 0.28 10,371,551 74.707
aug/03 328,495,954 3.59 142.193 303.880 1,179,718,482 0.28 10,370,572 74.975
sep/03 400,272,718 3.74 140.767 307.800 1,496,296,680 0.27 10,412,710 75.334
oct/03 339,761,391 3.90 140.549 309.330 1,325,675,081 0.26 10,454,849 75.496
nov/03 321,308,369 3.82 138.941 310.740 1,228,759,089 0.26 10,496,987 75.694
dec/03 219,796,551 3.85 136.811 313.030 845,510,124 0.26 10,551,286 75.913
104
BRAZIL MEXICO
jan/04 201,512,860 3.83 141.986 315.400 772,124,335 0.26 10,605,585 76.205
feb/04 182,893,120 3.76 147.511 319.880 688,127,561 0.27 10,659,884 76.549
mar/04 303,290,221 3.79 165.030 323.360 1,149,579,561 0.26 10,705,193 76.830
apr/04 250,962,230 3.88 160.716 328.420 972,834,997 0.26 10,750,503 77.083
may/04 252,056,018 3.71 170.103 334.020 935,209,136 0.27 10,795,812 77.260
jun/04 374,525,174 3.64 173.854 339.270 1,362,323,348 0.27 10,801,622 77.466
jul/04 385,619,823 3.78 176.337 343.850 1,456,235,597 0.26 10,807,433 77.601
aug/04 409,992,581 3.79 173.170 349.300 1,555,431,548 0.26 10,813,243 77.817
sep/04 350,712,759 3.97 165.062 351.570 1,393,992,203 0.25 10,867,779 78.262
oct/04 390,929,521 4.00 164.957 353.730 1,562,073,219 0.25 10,922,314 78.487
nov/04 364,599,999 4.08 162.881 357.260 1,488,117,841 0.25 10,976,850 78.673
dec/04 319,606,215 4.12 155.961 358.970 1,317,008,163 0.24 11,000,379 78.893
jan/05 267,138,520 4.18 180.905 359.240 1,116,583,443 0.24 11,023,909 79.188
feb/05 273,022,833 4.29 176.061 360.640 1,170,518,378 0.23 11,047,438 79.496
mar/05 300,308,584 4.11 204.184 364.750 1,234,885,780 0.24 11,048,221 79.722
apr/05 278,495,302 4.31 192.747 365.960 1,200,943,474 0.23 11,049,004 79.874
may/05 267,778,668 4.47 180.803 362.360 1,198,233,095 0.22 11,049,787 80.028
jun/05 265,289,925 4.49 179.047 359.530 1,189,901,725 0.22 11,094,964 80.223
jul/05 216,833,549 4.50 179.667 357.060 976,344,910 0.22 11,140,142 80.388
aug/05 287,067,143 4.53 182.959 353.330 1,299,222,100 0.22 11,185,319 80.499
sep/05 278,800,930 4.70 173.715 352.350 1,309,294,864 0.21 11,246,498 80.886
oct/05 228,684,160 4.80 173.268 355.130 1,097,704,239 0.21 11,307,677 81.079
nov/05 264,507,472 4.82 169.489 355.990 1,276,098,945 0.21 11,368,856 81.246
dec/05 273,814,358 4.65 174.489 355.500 1,273,686,133 0.21 11,435,205 81.475
jan/06 291,431,097 4.64 193.460 358.370 1,352,917,262 0.22 11,501,554 81.653
feb/06 229,127,247 4.85 182.747 357.930 1,111,813,194 0.21 11,567,903 81.919
mar/06 226,596,919 5.00 201.256 355.010 1,132,984,593 0.20 11,620,913 82.244
apr/06 236,950,357 5.19 190.177 354.460 1,229,938,185 0.19 11,673,923 82.523
may/06 196,201,080 5.09 202.979 356.090 999,300,678 0.20 11,726,933 82.635
jun/06 255,963,352 5.07 205.117 359.850 1,297,351,615 0.20 11,743,731 82.885
jul/06 245,094,609 5.02 209.312 360.450 1,230,175,639 0.20 11,760,530 83.099
aug/06 222,398,123 5.05 209.835 362.370 1,122,310,712 0.20 11,777,328 83.244
sep/06 255,254,308 5.07 201.648 363.380 1,292,990,227 0.20 11,787,943 83.699
oct/06 248,486,996 5.07 205.085 367.610 1,260,597,204 0.20 11,798,557 83.892
nov/06 218,349,253 5.06 204.906 370.370 1,105,007,162 0.20 11,809,172 84.112
dec/06 241,436,258 5.05 201.157 370.760 1,219,651,940 0.20 11,851,099 84.445
jan/07 197,379,309 5.12 226.855 371.960 1,010,807,322 0.20 11,893,025 84.837
feb/07 140,730,976 5.25 220.422 372.680 738,166,195 0.19 11,934,952 85.160
mar/07 100,431,211 5.32 243.665 373.080 534,671,141 0.19 11,977,355 85.411
apr/07 79,882,134 5.41 229.944 373.150 431,898,433 0.18 12,019,758 85.576
may/07 105,244,940 5.46 231.969 373.020 574,995,447 0.18 12,062,161 85.745
jun/07 181,744,289 5.61 223.857 373.370 1,020,158,648 0.18 12,084,695 85.990
jul/07 175,468,850 5.74 226.406 374.940 1,007,873,679 0.17 12,107,228 86.252
aug/07 135,286,173 5.62 238.685 382.270 760,563,027 0.18 12,129,762 86.485
sep/07 161,545,683 5.81 221.216 388.530 938,394,120 0.17 12,160,990 86.899
oct/07 181,810,004 6.01 223.042 392.490 1,093,486,171 0.17 12,192,217 87.183
105
BRAZIL MEXICO
nov/07 146,310,162 6.15 215.296 398.200 899,943,964 0.16 12,223,445 87.381
dec/07 87,611,058 6.08 211.901 405.770 532,341,474 0.16 12,230,035 87.715
jan/08 164,086,446 6.15 232.891 410.160 1,009,122,392 0.16 12,236,626 88.096
feb/08 49,576,725 6.24 227.361 412.270 309,144,035 0.16 12,243,216 88.474
mar/08 71,869,126 6.29 238.630 415.580 451,929,233 0.16 12,264,669 88.906
apr/08 96,196,625 6.23 237.929 420.970 599,234,309 0.16 12,286,122 89.255
may/08 56,444,203 6.29 234.349 430.320 354,986,434 0.16 12,307,575 89.681
jun/08 77,273,725 6.38 233.803 440.180 493,252,804 0.16 12,304,974 90.102
jul/08 97,541,671 6.42 241.721 445.830 626,387,964 0.16 12,302,373 90.464
aug/08 53,674,722 6.27 239.782 442.270 336,599,110 0.16 12,299,772 90.837
sep/08 121,812,357 5.92 265.286 444.220 720,920,603 0.17 12,222,663 91.368
oct/08 93,528,277 5.82 323.150 450.260 544,462,032 0.17 12,145,553 91.629
nov/08 152,878,153 5.78 310.666 449.490 884,345,468 0.17 12,068,444 92.046
dec/08 220,355,802 5.60 310.672 445.550 1,234,968,168 0.18 11,911,655 92.572
jan/09 89,410,053 6.03 288.133 444.090 539,134,480 0.17 11,754,866 92.979
feb/09 82,282,647 6.32 289.962 442.720 519,925,252 0.16 11,598,077 93.411
mar/09 68,453,995 6.28 323.716 436.270 430,143,751 0.16 11,560,352 93.893
apr/09 83,889,055 6.08 297.247 435.830 510,144,373 0.16 11,522,628 94.290
may/09 49,709,711 6.36 282.865 435.400 316,242,965 0.16 11,484,903 94.477
jun/09 69,889,776 6.81 271.990 432.620 475,878,701 0.15 11,564,499 94.716
jul/09 45,850,156 6.90 279.996 427.580 316,451,337 0.14 11,644,095 95.006
aug/09 45,685,207 7.05 266.076 427.900 322,273,954 0.14 11,723,691 95.152
sep/09 74,863,209 7.36 261.472 429.120 551,093,531 0.14 11,789,524 95.528
oct/09 101,178,173 7.61 258.533 428.780 770,049,189 0.13 11,855,358 95.836
nov/09 56,940,353 7.60 251.901 428.620 432,964,668 0.13 11,921,191 95.974
dec/09 91,437,608 7.36 254.625 427.400 672,984,981 0.14 11,972,880 96.421
jan/10 86,029,868 7.23 295.681 431.490 622,308,606 0.14 12,024,570 97.145
feb/10 90,493,019 7.00 312.307 437.430 633,451,132 0.14 12,076,259 97.547
mar/10 99,081,150 7.04 339.569 439.720 697,395,936 0.14 12,131,428 97.889
apr/10 68,536,762 6.97 322.018 442.720 477,574,139 0.14 12,186,598 97.994
may/10 92,339,868 7.06 329.246 451.830 652,371,180 0.14 12,241,767 98.223
jun/10 101,767,677 7.03 328.980 453.790 715,807,273 0.14 12,279,646 98.358
jul/10 92,567,271 7.24 335.309 455.340 670,132,682 0.14 12,317,526 98.563
aug/10 48,311,334 7.26 333.311 463.100 350,703,484 0.14 12,355,405 98.659
sep/10 83,508,878 7.44 321.815 469.920 621,245,884 0.13 12,386,880 99.016
oct/10 106,413,634 7.42 319.489 476.140 789,631,046 0.13 12,418,354 99.205
nov/10 130,989,515 7.21 327.805 485.580 943,782,514 0.14 12,449,829 99.440
dec/10 75,997,827 7.30 319.253 486.590 554,824,442 0.14 12,492,599 99.869
jan/11 7,480,676 7.25 333.210 491.270 54,211,423 0.14 12,535,368 100.326
feb/11 77,999,008 7.23 342.125 497.310 564,183,470 0.14 12,578,138 100.730
mar/11 64,274,509 7.23 364.016 500.300 464,837,590 0.14 12,615,304 101.030
apr/11 66,257,333 7.35 341.987 501.530 486,983,077 0.14 12,652,469 101.106
may/11 24,697,808 7.23 355.680 498.380 178,538,188 0.14 12,689,635 101.286
jun/11 58,260,776 7.44 346.545 497.420 433,339,760 0.13 12,750,685 101.482
jul/11 32,137,799 7.46 348.914 496.750 239,780,038 0.13 12,811,736 101.710
aug/11 48,190,266 7.66 362.884 500.560 369,307,731 0.13 12,872,786 101.832
106
BRAZIL MEXICO
sep/11 43,494,574 7.51 382.042 505.280 326,684,796 0.13 12,905,454 102.103
oct/11 54,171,003 7.55 397.793 507.690 408,960,643 0.13 12,938,123 102.368
nov/11 74,257,025 7.72 396.764 509.430 573,336,231 0.13 12,970,791 102.698
dec/11 74,033,275 7.52 401.989 506.620 556,765,811 0.13 13,001,285 103.218
jan/12 66,331,246 7.48 339.412 506.680 496,114,779 0.13 13,031,779 103.680
feb/12 43,664,851 7.43 331.392 506.520 324,338,448 0.13 13,062,273 104.121
mar/12 40,066,904 7.12 373.688 509.310 285,236,063 0.14 13,130,500 104.376
apr/12 29,024,071 7.06 370.113 515.660 204,831,497 0.14 13,198,726 104.533
may/12 74,451,304 6.90 407.583 520.320 513,657,455 0.14 13,266,953 104.811
jun/12 48,828,416 6.79 415.638 524.980 331,737,588 0.15 13,276,990 105.037
jul/12 65,284,238 6.58 428.914 536.160 429,769,129 0.15 13,287,027 105.364
aug/12 44,529,221 6.49 438.791 545.630 289,067,034 0.15 13,297,064 105.600
sep/12 71,874,516 6.38 416.034 551.660 458,394,968 0.16 13,337,102 105.787
oct/12 53,727,091 6.35 439.076 547.910 340,959,368 0.16 13,377,139 106.028
nov/12 47,770,084 6.34 433.883 548.810 302,969,001 0.16 13,417,177 106.083
dec/12 77,763,722 6.17 424.584 552.860 480,171,387 0.16 13,436,293 106.211
jan/13 104,890,856 6.25 394.733 552.870 655,142,199 0.16 13,455,409 106.662
feb/13 54,398,282 6.44 376.750 553.340 350,419,733 0.16 13,474,525 107.205
mar/13 37,347,389 6.31 410.046 554.030 235,503,363 0.16 13,435,373 107.528
apr/13 78,141,356 6.10 418.186 551.840 476,455,510 0.16 13,396,220 107.614
may/13 37,075,783 6.07 416.026 551.890 225,012,909 0.16 13,357,068 107.826
jun/13 60,391,767 5.98 438.455 556.590 361,263,213 0.17 13,407,303 107.964
jul/13 47,252,145 5.68 478.331 557.690 268,491,487 0.18 13,457,538 108.001
aug/13 76,873,155 5.53 497.802 560.950 425,103,943 0.18 13,507,773 108.099
sep/13 21,355,876 5.75 470.111 571.610 122,836,218 0.17 13,524,186 108.449
oct/13 63,822,224 5.92 468.819 575.690 377,903,163 0.17 13,540,598 108.657
nov/13 55,638,844 5.71 476.487 576.380 317,790,411 0.18 13,557,011 108.804
dec/13 37,404,659 5.54 482.917 580.900 207,367,859 0.18 13,579,676 109.161
jan/14 15,029,236 5.55 472.205 581.560 83,367,463 0.18 13,602,342 110.091
feb/14 16,122,561 5.56 476.662 587.370 89,653,049 0.18 13,625,007 110.401
mar/14 13,458,992 5.67 483.118 598.600 76,331,217 0.18 13,669,332 110.639
apr/14 25,441,090 5.84 461.505 600.190 148,685,242 0.17 13,713,658 110.961
may/14 60,782,428 5.82 457.398 592.920 354,016,573 0.17 13,757,983 111.065
jun/14 46,971,996 5.81 441.263 585.780 273,068,073 0.17 13,778,827 111.301
jul/14 49,874,559 5.84 464.914 579.840 291,054,637 0.17 13,799,670 111.510
aug/14 70,740,681 5.79 469.408 580.070 409,790,882 0.17 13,820,514 111.747
sep/14 65,328,417 5.69 481.386 579.010 371,644,856 0.18 13,852,829 112.074
oct/14 40,334,156 5.50 514.948 583.230 221,920,175 0.18 13,885,143 112.261
nov/14 81,579,602 5.35 517.194 591.650 436,479,707 0.19 13,917,458 112.442
dec/14 51,059,744 5.52 535.060 593.410 281,866,078 0.18 13,945,902 112.703
jan/15 35,635,154 5.58 387.435 594.740 198,834,420 0.18 13,974,345 112.666
feb/15 44,890,265 5.32 406.759 597.170 238,827,737 0.19 14,002,789 113.049
mar/15 60,844,289 4.86 500.266 604.560 295,460,175 0.21 14,041,399 113.345
apr/15 72,561,832 5.00 462.007 611.290 363,119,152 0.20 14,080,008 113.522
may/15 56,537,518 4.99 457.632 612.430 281,985,719 0.20 14,118,618 113.653
jun/15 64,973,835 4.98 462.515 615.080 323,824,917 0.20 14,146,462 113.891
107
BRAZIL MEXICO
jul/15 113,606,657 4.95 495.278 618.840 561,900,005 0.20 14,174,305 114.087
aug/15 69,572,287 4.71 530.558 621.560 327,548,071 0.21 14,202,149 114.316
sep/15 53,790,557 4.31 578.244 634.110 232,059,570 0.23 14,221,452 114.740
oct/15 160,002,458 4.27 584.693 649.180 683,680,608 0.23 14,240,754 115.029
nov/15 123,025,569 4.41 552.421 658.330 542,081,414 0.23 14,260,057 115.069
dec/15 100,535,708 4.41 566.525 660.530 443,707,981 0.23 14,281,302 115.421
jan/16 100,423,771 4.45 576.636 671.260 447,321,976 0.22 14,302,548 115.644
feb/16 153,960,889 4.65 574.702 676.900 715,435,676 0.22 14,323,793 116.059
mar/16 85,936,174 4.78 573.952 679.430 410,395,613 0.21 14,326,737 116.474
apr/16 86,249,806 4.90 536.508 681.390 422,611,953 0.20 14,329,680 116.731
may/16 91,687,156 5.11 525.322 691.540 468,487,945 0.20 14,332,624 116.981
jun/16 81,370,097 5.42 515.887 706.060 441,309,198 0.18 14,384,075 117.278
jul/16 74,625,368 5.66 498.141 700.360 422,071,969 0.18 14,435,525 117.478
aug/16 23,269,271 5.74 494.276 703.860 133,560,829 0.17 14,486,976 117.701
sep/16 13,169,345 5.85 487.739 703.650 77,046,328 0.17 14,522,133 118.262
oct/16 31,915,350 5.91 477.559 703.940 188,666,313 0.17 14,557,289 118.592
nov/16 82,647,533 5.99 501.504 703.890 494,673,068 0.17 14,592,446 118.858
dec/16 197,401,891 6.10 507.382 711.610 1,204,728,666 0.16 14,624,842 119.389
jan/17 107,773,770 6.66 521.274 714.020 717,322,791 0.15 14,657,238 120.080
feb/17 104,910,392 6.51 509.525 713.140 683,370,881 0.15 14,689,634 120.997
mar/17 146,393,904 6.15 549.702 707.550 900,179,721 0.16 14,722,030 121.690
apr/17 168,029,459 5.97 537.679 693.690 1,003,040,870 0.17 14,754,426 122.238
Source: MDIC – AliceWeb, BCB, FMI. IBGE
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PERFORMANCE OF VEHICLES EXPORTS FROM BRAZIL TO MEXICO

THE RELEVANCE OF EXCHANGE RATE FLUCTUATIONS IN

Emerson Luís Galina

THE RELEVANCE OF EXCHANGE RATE FLUCTUATIONS IN

THE RELEVANCE OF EXCHANGE RATE FLUCTUATIONS IN

Defended in February 25th, 2019

Board Room - Building 1 – Rennes School of Business

Thesis submitted in fulfilment of the requirements for the degree of

Doctor in Business Administration

Rennes School of Business - Rennes, France

Advisor: Dr. Roman Matkovskyy – Associate Professor – Finance and Accounting

Examiners: Dr. Saqib Aziz – Assistant Professor – Finance and Accounting

degree or diploma at any university or other institution of tertiary education.

acknowledged in the text, and a list of references is given.

print thesis submitted.

Grant Rennes School of Business a permanent non-exclusive licence to store,

Rennes, March 12th, 2019

Emerson Luís Galina

First, I would like to express my sincere gratitude to my advisors Dr. Roman

My sincere thanks to Professor André Paiva Ramos, who also supported me

My thanks to the classmates for the learning opportunity. In particular, Jorge

or institution for any degree, diploma, or other qualification.

Emerson Luís Galina

Date: March 12th, 2019

Keywords: Exchange rate; Trade balance; Export; Automotive industry; Trade

Figure 1 – Exchange rates regimes 1880-current………………………………. 22

Figure 3 - Brazil: Evolution of the real interest rate (Selic) in percentage - in 12

Figure 6 – Main reasons for an active exchange policy………………………… 44

Figure 10 - Summary of ECA #55 and the modification decrees in bilateral

Table 4 - Stationarity test ADF test results…………………………………….……82

Table 5 - F-Test results…………………………………………………………..…. 83

Table 6 - Long-term regression……………………………………………………. 83

Table 7 - Short-term regression………………………………………………….….84

Table 8 - Annual variation of inflation in Brazil and Mexico (CPI)…………….…85

Table 9 - Long-term regression..........................................................................86

Table 10 - Short-term regression........................................................................86

Table 11 – List of the empirical studies on the relationship between exchange

At the same time, transnational companies began to deploy their strategic

Automobiles companies increased their investments in several countries,

Taking the new globalization characteristics into consideration, governments aim

Mohsen Bahmani-Oskooee et al. (2007) quantitatively analysed the influence of

Although not measuring exchange rate fluctuation influence as an independent

This thesis is based on a vast bibliographical review, considering historical,

The conclusions of this study confirms that Brazilian commercial performance in

❑ Exchange rate – presented a support function in the econometric but it

❑ Bilateral trade agreement was the key to increase business opportunities

❑ Inflation is relevant – During the studied period, Mexico and Brazil

This research presents an innovative approach to evaluate the performance of

This study is also relevant to the industry and institutions as it transfers

Besides this introduction, this thesis is divided into three complementary

This paper aims to present a literature review concerning the impacts of

The international monetary standard, the characteristics of the international

1.2 Brief Summary on The International Monetary System

The application of these principles allowed vigorous expansion of international

Figure 1 – Exchange rates regimes 1880-current

Specie: Gold Standard (bimetallism, silver); currency unions; currency boards;

Gold exchange Standard; floats; managed floats; currency unions (arrangements);

These oscillations are usually related to large movements of short-term capital

In addition to currency crises and the already addressed instability of exchange

Although several economic measures to combat the subprime crisis were

1.3 Analysis of the economic performance and the main

Inflation acceleration, tending to hyperinflation at the end of the decade,

Thus, after stabilization there was no resumption of a stable trajectory of