Brazil: Industrial Action Risks Amid Trucking Negotiations and Privatization Plans

Brazil: Industrial Action Risks Amid Trucking Negotiations and Privatization Plans

Executive Summary

  • The January 1 inauguration of Jair Bolsonaro is anticipated to bring about a measured departure from business as usual in Brazil. The most immediate of these changes is how the incoming administration addresses the impending expiration of the freight table measure on December 31.
  • The new president will enter office with a unique challenge, exacerbated by the declared intent of a dissident trucker union to strike on January 10.
  • The truckers have gained Bolsonaro’s support, as reflected in Congressional votes by Bolsonaro in legislative approval of deals designed to allay the strikes earlier this year.
  • While the incoming President will have a unique opportunity to address the concerns of truckers and their employers, his administration will face a notable negotiation challenge.
  • Should the Bolsonaro administration elect privatization as a macroeconomic policy, the risk of supply chain interrupting industrial actions can be anticipated to increase.
  • While Bolsonaro’s approach to privatization appears to avoid the excesses of wholesale privatization, the proposed auctioning of individual assets within state-owned enterprises still bears the potential for strikes.
  • Given Brazil’s long held propensity to protect its national interest in the industrial arena, those conducting business in manufacturing, commodities, and logistics in the country can anticipate some changes to the status quo, with the labor-related roadblocks that ordinarily accompany such measures.

Background

Since the recession of 2015-16, Brazil has suffered formidable economic challenges. The crisis began amid an economic downturn in China in 2014, Brazil’s largest trading partner (in 50% of its exports). The Chinese dip reduced demand for oil, soy beans, and iron ore – all critical sources of revenue for the commodity-driven Brazilian economy, as well as its manufacturing base consisting of Embraer, the aeronautic manufacturer, and foreign automotive manufacturers, oriented toward the South American market. Moreover, a Southeastern drought forced electricity prices to spike, due to 69 percent of the market’s dependence on hydroelectricity, thus hiking prices of products for dependent customers. Finally, for oil and gas, the Operation Car Wash scandal swept up Petrobras, the state oil company, in a large graft and bribery scandal, and in its wake, resulted in the ousting of several politicians, President Dilma Rousseff (2011-2016) included. While a variety of factors contributed to the state of affairs, many Brazilians began to identify the crisis with the actions of incumbent politicians involved in the scandal. One such Brazilian included a then-member of the Chamber of Deputies from Rio de Janeiro named Jair Bolsonaro.

During the Presidential campaign, then-candidate Bolsonaro formulated an economic platform comprised of electricity and gas price reductions, privatization of state-run assets, such as those belonging to Petrobras, and rebalancing national trade policy. While competing philosophies in Brasilia have debated trade favorability, many, including Bolsonaro, have sought to preserve advantages for the Brazilian domestic industry to the greatest extent possible. The privatization of Petrobras, however, has called into question the future ability of the government, through Petrobras, to distribute fuel subsidies in support of domestic industries. Without this ability, the Brazilian transportation industry could be thrown into disarray.

A game-changing factor that few anticipated, one which theorists expect will change Brazilian supply chains for years to come, was the May 2018 nationwide truckers’ strike. Arising from a dispute over a minimum freight price schedule and fuel subsidies, the strike brought all logistics in the country to a near halt, requiring federal intervention, and a series of stop-gap measures to restore the country’s supply chains to normalcy.

The truckers gained Bolsonaro’s support, as reflected in Congressional votes by Bolsonaro in legislative approval of deals designed to allay the strike, including measures to approve a temporary minimum freight table as well as fuel subsidies. The deal penned by President Michel Temer, however, is due to expire on December 31, which marks the end of Temer’s term and the beginning of Bolsonaro’s. The new president will enter office with a unique challenge, exacerbated by the declared intent of a dissident trucker union to strike on January 10. While Bolsonaro has declared his support for the truckers, yet articulated his wish for a solution dominated by the private sector, a definitive resolution will be more difficult to attain. In October and November, the states of Goias and Sao Paulo, respectively, saw wildcat strikes that indicate that the discontent felt by truckers is not likely to dissipate without a definitive resolution.

What characterizes the incoming Bolsonaro administration is a considerable reorganization of the macroeconomic landscape that will result in logistics implications. The potential for strike activity during renegotiation of trucking rates and subsidies will be one example of this. A notable objective of the administration, with respect to the public budget as a component of economic health, will be, in lieu of the austerity of the Temer administration, privatization of state-owned assets to cut spending. As such, assets like Petrobras and mining prospecting firms, Eletrobras, Infraero, and Codesp, among others, are up for consideration. As these firms are well entrenched in the Brazilian economy and supply chains, as well as employers of many, events this past year are indicative of the potential for such moves to create industry-disrupting industrial action.

2018 has been replete with instances of industrial action, from the trucker’s strike to a debilitating long- term slow-down by fiscal analysts of the Receita Federal, Brazil’s Treasury. The planned approach by the incoming administration to the questions raised by potential instigators of industrial action may give rise to further unrest. Long-term industrial campaigns may be focused on Brasilia and manifestations of industry-disrupting activity will most likely be at the local level, thus necessitating persistent attention to labor issues as a result of the privatization measures.

Impact of the Trucker’s Strike and Renegotiation of the Freight Table

The truckers’ strike that broke out on May 21, 2018 across Brazil proved to be the most disruptive supply chain event in the nation’s recent history. While similar demonstrations were conducted in 2013 and 2015, this industrial action proved to be the longest lasting and most debilitating. After 10 days of the strike which impeded fuel, food, medicine, and even air freight shipments, a combination of sticks (i.e. military intervention and fines) and carrots (i.e. gas price reductions and an agreed minimum freight table) brought the strike to a close by June 1.

The minimum freight table, ensuring a minimum wage that truckers could receive for the distance and time driven, was supported by the ANTT, Brazil’s ground transportation regulatory body, until President Temer signed the table into law on August 9. The Agriculture and Fishery Confederation of Brazil (CNA) has challenged the freight table on constitutionality grounds in the Supreme Federal Tribunal, the highest court of review in Brazil, and the table continues to face legal challenges by businesses employing truckers. These challenges are especially elevated in light of recent court rulings eliminating the ability of distributors to pay below the table’s minimum rate. Exacerbating the challenge is the table’s expiry on December 31, the last day of President Temer’s term, leaving the future of the truckers’ issue in Bolsonaro’s hands.

During the strike, then-candidate Bolsonaro articulated his support for the truckers, albeit differing on their means of addressing grievances. In statements given before the Supreme Military Court, Bolsonaro articulated his ideal of minimal federal involvement in the development of a freight table, yet acknowledged realities on the ground, and sought to attain a compromise that minimized detriment to distributors. Further complicating matters was a wildcat strike called by truckers unions on October 29, the day after Bolsonaro’s election, in the State of Goias, which dissipated after 24 hours when union leaders stated their desire to speak with Bolsonaro to resolve the issue rather than resort to a strike. The wildcat strike was organized by figures representing political opposition to Bolsonaro, and the majority of truckers unions were not willing to entertain a national strike. Moreover, conventional truckers unions were more willing to fault federal bureaucracy for grievances related to freight table implementation. Ground cargo transportation in Brazil is prone to the occasional wildcat strike, which is typically organized around a single business or collection of businesses at the municipal to regional level. While Bolsonaro and whoever he appoints to head transportation in his cabinet will have a unique opportunity to address the concerns of truckers and their employers, his administration will face a notable negotiation challenge similar to, if not more challenging that than of, the Temer administration.

The challenge facing truckers is to see that businesses employing trucking services are compliant with the ANTT’s mandate to pay the minimum rates. On the flipside, the challenge facing businesses is to see that the rates set by the table are not overly prohibitive to ground transportation, and if so, developing appropriate contingency measures to minimize disruptions.

Tereza Cristina, Bolsonaro’s nominee for the Ministry of Agriculture, has emphasized a need to resolve the issue before the inauguration in January. This comes in tandem with petitions by the CNA, together with the National Industry Confederation (CNI) and the Highway Cargo Transportation Association (ATR), for relief from freight table non-compliance fees as the measure is challenged in court. If the overture by truckers in October is any indication, it is that they are willing to negotiate. In addition, Vice President- elect Antonio Hamilton Mourao has been tasked with a logistics portfolio. Details of his infrastructure plans that address future potential impacts of ground transportation industrial action may become clearer in the coming days. For businesses, the challenge is an ever growing propensity of truckers, dissatisfied with the lack of compliance by businesses to the minimum freight table, to conduct wildcat industrial action, aimed to shock and paralyze employers involved in industries as diverse as agriculture and resource extraction.

Changes to Trade Policies and the New Administration’s Privatization Plans

A highly anticipated change in trade policy is due with the incoming Bolsonaro’s administration, stemming from his planned realignment of Brazil’s foreign policy. Brazil’s current top three import and export partners are China, the European Union, and the US. Analysts anticipate that changes to the Brazilian trade policy under Bolsonaro will resemble those expressed by the President of the United States Donald Trump, including preferences for bilateral agreements, and agreements favoring an articulated national interest.

With similar alignments in the past having produced overtures across South America, whether in the form of the Mercosul or the UNASUR/UNASUL continental union, trends underway since the beginning of the Temer administration indicate that such trade arrangements will not be unexpected. The November 21 signing of the Brazil-Chile free trade agreement, superceding measures already in place between Chile and Mercosul, demonstrates this. It is reasonable to expect this trend to continue under the Bolsonaro administration, based on his articulated preference to have bilateral agreements succeed blocs like Mercosul.

As for Brazil’s continued membership in the bloc, the incoming administration’s intentions are yet to be articulated. Mercosul prohibits superseding bilateral agreements due to protection concerns and sensitive IP protection. While the prohibition is mutable, it requires unanimity to revoke, requiring assent from Argentina, Paraguay, Uruguay, and possibly suspended member Venezuela. Furthermore, the future of Brazilian-Argentine trade remains in question with planned closures of Brazilian automotive plants in Argentina. What can be predicted is that, should the new administration elect to pursue its intended trade path, it may create supply chain contentions short of a trade war, but one that would be disruptive to intra-continental trade.

On the campaign trail, Bolsonaro articulated a desire to change the incumbent policy in order to alter the current trade balance with China. With the European Union, there are negotiations underway to close an agreement between the Union and Mercosul before Bolsonaro’s inauguration. This is reflective of preferences voiced by Bolsonaro to prioritize bilateral agreements over those of the Atlantic South American trade bloc. Bolsonaro has also expressed a desire to expand commercial relations with the United States.

While Brazil’s economy is still predominantly commodities-based, its manufacturing component remains considerable in size. As such, while policies to facilitate trade with the top three export destinations may yield growth in opportunities in the extractive industries, such policies may be to the detriment of Brazilian domestic manufacturers, who have benefited from import-substitution industrialization policies since the 1930s.

It is anticipated that some changes will arise in the Brazilian automotive market. Brazil, along with Mexico, dominates the Latin American automotive production market, with most of its exports destined for Argentina. The majority of the market, however, is aimed at the domestic market. A desire, as expressed by the Bolsonaro team, is the elimination of domestic and regional obstacles that ordinarily serve as impediments to a greater export market. Oriented toward the Mercosul market since the signing of the Treaty of Asuncion and combined with a protectionist orientation, the incoming administration appears willing to negotiate the terms of the South American agreement to maximize the ability of Brazilian producers to export. Such efforts by the new administration to maximize export facility, however, may come at the cost of long-held existing attitudes towards state involvement in the economy.

For the Brazilian economy, the succession of Bolsonaro to the Presidency will bring mixed results between market openness and protection. On the campaign trail, Bolsonaro articulated a desire to privatize several state-owned assets, including Petrobras and Eletrobras, albeit moderated out of the belief that their privatization may invite Chinese investment. Therefore, the middle ground that Bolsonaro appears to seek is a privatization of assets within the critical state enterprises, short of a wholesale privatization.

Such developments may create long-term supply chain issues. The course of the truckers’ strike also saw a parallel strike by Petrobras employees, related to a combination of labor grievances pertinent to economic challenges faced by wage workers as well as the nation as a whole. Further aggravating factors for this strike were the impact of the truckers’ strike on oil distribution as well as planned privatizations considered by the Temer administration as a means to implement austerity solutions to Brazil’smacroeconomic challenges stemming from the 2015-16 recession.

While the strike was terminated within days after injunctions from the Supreme Labor Court, the privatization issue is an omnipresent trigger for strikes, as exhibited by a series of industrial actions by Eletrobras employees in June 2018. As auctions of state-owned assets are considered, the risk of strikes increases. For logistics-sensitive assets, this is especially enhanced with the prospect of compounded strikes. Planned auctions of port assets in the country’s Southeast, combined with a low-intensity labor dispute underway at air and seaports in the state of Sao Paulo including Guarulhos and Santos, can result in congestions at key transportation hubs. As such, should the Bolsonaro administration elect privatization as a macroeconomic policy, the risk of supply chain interrupting industrial actions can be anticipated to increase.

Outlook

The January 1 inauguration of Jair Bolsonaro is anticipated to bring about a measured departure from business as usual in Brazil. Perhaps the most immediate of these changes is how the incoming administration addresses the impending expiration of the freight table measure on December 31. As the expiration date approaches, and should no agreement be reached during negotiations, there is a high possibility of wildcat or larger strikes being organized with the upcoming holiday season, thus creating considerable supply chain disruptions. Should the new administration be malleable in their positions relative to those of the truckers’ unions, this eventuality may be avoided. Nevertheless, the history of truckers’ labor disputes and the vision of federal involvement in transportation affairs that Bolsonaro and Mourao hold may serve as points of greater divergence than convergence, and those shipping by truck in Brazil should stay abreast of developments and plan alternatives, if necessary.

As for productive capacity, there are planned long-term scenarios that can, like in the transportation sector, result in short-term supply chain interruptions. While Bolsonaro’s approach to privatization appears to avoid the excesses of wholesale privatization, the proposed auctioning of individual assets within state-owned enterprises still bears the potential for strikes, as seen in the June 2018 incidents at Eletrobras. Given precedent, however, a majority of these are anticipated to be short-term interruptions without debilitating effects. As for trade agreements, Bolsonaro’s wariness towards China and favor of the US will indelibly guide trade facilitation talks, but without any radical alterations that can be perceived as drastically changing the long-term trade balance. Were the new administration to seek changes to the Mercosul agreement, there may be production halts and industrial actions resulting from opposition to such an agreement should a renegotiation of the trade deal neglect national-level competitiveness.

In summation, it is reasonable to anticipate labor and trade challenges similar to those faced in the administrations of newly elected populist leaders seeking to change the status quo. Given Brazil’s long held propensity to protect its national interest in the industrial arena, those conducting business in manufacturing, commodities, and logistics in the country can anticipate some changes to the status quo, with the labor-related roadblocks that ordinarily accompany. Those conducting business in Brazil should anticipate short term labor-related supply chain interruptions with the potential promise of long-run trade facilitation and should plan accordingly, with a degree of malleability.

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