Lula's early lead: Brasilia looks abroad. Brazil, Inc. is already there. (Investment Guide).

During the first meeting of Brazilian President Luiz Inacio Lula da Silva and U.S. President George Bush at the White House last year, then president-elect Lula looked his U.S. counterpart in the eye and warned him that negotiations for free trade throughout the Western Hemisphere--the so-called Free Trade Area of the Americas (FTAA)--would be tough. Bush responded tersely that he only hoped Brazil would be realistic.

Less than four months into his four-year term, the Brazilian president is proving to be far more "realistic" than anybody expected. Lula appears to have discarded the isolationist campaign rhetoric that compared the FTAA to a U.S. annexation of Brazil. Instead, the 57-year-old president is deftly defining a multilateral role for Brazil as an international leader in everything from political troubleshooting to increased trade.

The Lula government has led an international effort to restart the stalled dialog between opposition forces and President Hugo Chavez in Venezuela. The Brazilian president personally bridged the gap between the World Social Forum in Porto Alegre and World Economic Forum in Davos. He has rallied South America behind Brazil in the talks to create the Americas market and, at the same time, is accelerating free trade discussions between the Southern Common Market (Mercosur) and the European Union.

And, while only three lines of his 44-minute inaugural speech on Jan. 1 talked about the United States, Lula already has engaged U.S. Trade Representative Robert Zoellick on a possible common front toward agricultural issues within discussions in the World Trade Organization. For a historically inward-looking country, Brazil's new leader is busy reaching out, to the surprise of many.

All of this international activity--plus US$1 billion in direct foreign investment in Brazil--took place during the administration's first month in power. Lula's outreach reflects the growing pace of Brazil's economic integration with the world. Brazil posted a $13 billion trade surplus in 2002, its largest since 1993, but the record numbers reflect a large drop in imports. The real average increase in exports was only 3.3% in 2002, compared to the government's goal of 10% annual growth.

To achieve big growth, Brazil needs increased access to key markets. According to Brazilian government figures, U.S. protection of its orange juice, soybean, beef and steel industries lowers Brazil's exports by $2 billion a year. Europe's agricultural policies reduce Brazil's sales by a $1 billion a year.

Orange war. Knocking down U.S. barriers in key sectors like sugar will prove difficult, experts say, in negotiations leading to free trade throughout the hemisphere. Sixty percent of Brazilian exports to the United States face some sort of tariff or non-tariff barrier, according to the Brazilian Embassy in Washington DC. The average U.S. tariff on Brazil's top 20 exports is close to 39%. By comparison, the average Brazilian tariff on the top U.S. exports is only 12.9%.

"We oppose any FTAA that would include sugar and we'd say reserve sugar for negotiations in the WTO," says Jack Roney, director of economics and policy analysis at the American Sugar Alliance, the association that represents growers, processors and refiners of sugar cane in the United States. "We are working very closely with the [Bush] administration to make sure that they understand the consequences of including sugar in the FTAA or any bilateral regional trade agreement. We would essentially be abandoning American sugar farmers."

The Florida citrus industry, meanwhile, promises to lobby hard against any opening to Brazilian orange juice. "That would put a nail in the coffin and drive a lot of people out of business in Florida," says Bob Barber, director of economics at Florida Citrus Mutual, the state's largest citrus growers association. "Brazil is the dominant force in the global market and we won't be able to compete with them."

The battle has, in fact, already begun. Brazilian growers successfully invaded enemy territory through acquisitions of farms and plants in the Sunshine State. Brazil's Cutrale and Citrosuco, which control two-thirds of Brazil's citrus processing capacity, are among the top three processors in Florida and own almost half of the state's processing capacity. The "Brazilian invasion" is now focused more on expanding globally, and rapidly so, using the flexibility provided by operations in Florida. Product is shipped from the U.S. state or directly from Brazil, depending on its destination, allowing orange producers to avoid the bitter U.S. tariffs on Brazilian imports. Brazil, the world's largest producer of oranges, increased its global exports by an estimated 17% to 1.3 million tons of frozen and concentrated orange juice during the 2002-2003 season.

Brazilian producers fully understand the U.S. resistance to tariff reductions and are taking a long-term approach in citrus matters. "Who wants to lose protection? No one likes to lose it, be they Florida citrus growers or Brazilian producers of electronics," says Ademerval Garcia, president of citrus group Associacao Brasileira dos Exportadores de Citricos (Abecitrus). "Even if there were a reduction in tariffs, it would be distributed over time--within 10 years, for example--so that there would be time to reap profits and improve efficiency."

Heavy metal. In the steel industry, another highly sensitive sector, Brazilian producers are playing both-sides of the fence, too.

Brazil's No. 1 steel maker-Companhia Siderurgica Nacional (CSN)--has been renting space and investing millions in U.S. mills to process slab steel shipped from home to diversify markets. Another major producer, Gerdau Group, has also sought to diversify its markets by moving the entire process to the United States. With the $600 million purchase of Canada's Co-Steel at the end of 2002, Gerdau AmeriSteel, the U.S. division of Brazilian steel maker Gerdau, now has 10 steel mills and 44 scrap recycling plants in North America and is one of the top U.S. producers of reinforcing steel used in construction.

Brazil sends on average 2.5 million metric tons of slab to the country every year, making it the top exporter of slab steel to the United States. In March 2002, the Bush administration slapped a first-time-ever quota of 4.9 million tons on all imported steel slab, limiting the Brazilians to 2.5 million tons a year.

Despite U.S. barriers to trade, Brazilian exports to the United States have grown 10.5% during the last two years--a time when U.S. imports were falling overall. The South American country has achieved a $3.3 billion surplus with the United States since 2001. Even during its recession, the United States outpaced Europe to become the top buyer of Brazilian products, absorbing 25% of Brazilian exports in 2002.

Oranges and steel are just a few examples of Brazilian companies' increasingly sophisticated strategies to grow internationally through acquisitions and joint ventures.

In South America, Ambev, the No. 1 Brazilian soft drink and beer company, recently purchased a controlling interest in Quilmes Industrial, the leading brewer in Argentina with operations in Uruguay. Paraguay and Bolivia. State-run oil company Petrobras swallowed Argentina's Perez Companc and has plans to invest billions in Venezuela, Peru, Bolivia and Ecuador, as well as buy a U.S. refinery.

Following a $700 million purchase of the North American assets of France's Lafarge in 2001, Votorantim, Brazil's leading cement maker, recently formed a $100 million joint venture with construction firm Anderson Columbia to control Suwannee, a Florida cement company.

Brazilian exports, however, remain vulnerable to international market fluctuations. Manufactured goods represent five of the country's top 10 exports, but commodities are a major factor in growing global sales thanks to the recovery in international prices for soy, coffee, orange juice, beef and other agricultural products. The trend is expected to continue in 2003, adding an estimated $2 billion to the country's trade surplus.

Competitivity will be a key concern for Brazilian exports going forward, especially as the 50% undervaluation of the currency to the dollar erodes. State-run development bank Banco Nacional de Desenvolvimento Economico e Social will seek to ease the transition with increased financing for exports--42% of its estimated $10 billion loan portfolio is earmarked for export financing in 2003. That may help meet the goal of the recently named foreign trade, industry and development minister, businessman Luiz Furlan, of 10% export growth this year. Nevertheless, keeping pace in years to come will require economic reforms.

Aiming high. Under former President Fernando Henrique Cardoso, the government opened the economy with trade liberalization and $90 billion in privatizations. International companies gained an increased presence in Brazil and the country sought to comply with the mandates of multilateral lending institutions such as the International Monetary Fund (IMF).

However, rapid devaluation and election-year jitters in 2002 reawakened the specter of inflation, and price increases are now back in the low double-digits. Political, tax and social security reforms are pending. High public debt also makes the government vulnerable to swings in capital market sentiment. Unemployment remains widespread, corruption is still a concern and real interest rates are sky high.

In addition to these ongoing challenges, the Lula government has decided to focus on ending hunger in Brazil under the Fome Zero program. "If, at the end of my mandate, all Brazilians have access to breakfast, lunch and dinner, I will have achieved the mission of my life," the president has said. Lula will have to raise tax collections, however, to increase government spending without falling afoul of IMF-agreed goals.

Planning Minister Guido Mantega estimates economic growth of 3% in 2003, but the new government's goal is an ambitious average annual increase of 5% during the four-year term, compared to 2.3% during the eight years of the Cardoso administration.

To achieve that sort of growth and attract the necessary capital from abroad, Brazil will need to set its relations with the United States and Europe on more solid footing. So far Lula is off to a flying start with his ambitious multilateral approach.

Nonetheless, the new administration faces an uphill battle. It will need to support Argentina and its other neighbors through tough times; negotiations on the FTAA will be fierce; the global fight against protectionism against its agricultural products within the World Trade Organization also will be very hard. In the end, success for Lula, the leader of the nation of 175 million and a $450 billion economy may reside in balancing great dreams for his people against the realistic expectations of the rest of the world.

[GRAPH OMITTED]