For Debbie Lamb, senior vice president for international issues at the Distilled Spirits Council of the United States, an industry organization, the collapse of the World Trade Organization talks in Cancun this fall was a disaster. Lamb represents spirits companies investing in and selling to India, one of the large developing countries, which negotiators at Cancun had hoped to convince to reduce trade restrictions. "What we were hoping for from Cancun was a [deal] that would allow us to tackle high tariffs in India," Lamb says. But, just the opposite happened--instead of further agreeing to reduce tariffs, the session dissolved in an impasse that some observers fear could cripple the WTO and its approach to multilateral trade negotiations.

At Cancun, a group of 22 developing countries led by India and others united to demand that the U.S. and Europe reduce their agricultural subsidies. When Europe and America refused to budge, and when the developing nations refused to consider freeing barriers to investment, the talks fell through.

What does the breakdown at Cancun mean to global traders like those whom Ms. Lamb represents? Dispirited, many "big companies are now just going to say India is too hard" and will pull out, she says.

On the other hand, for Robert Kushner, president of Pacific China Industries, a toy manufacturer based in Hong Kong and California, Cancun means nothing more than a resort destination. For traders focused on China, like himself, the requisite freedom to do business already existed-especially since Beijing joined the WTO two years ago. "The cost of labor, the lack of legal restrictions, the good infrastructure ... the speed at which things happen-it's so easy in China," Kushner says. He contrasts such commercial friendliness to the situation in other large developing nations: "I have a half-dozen friends who made trips [to India,] came back, and didn't do anything there."

Kushner and Lamb's diverging perceptions and experiences show that, though the Cancun collapse was cited by many as a disaster, the truth is, its impact on global traders will be mixed. Cancun will probably decrease investment in a few major developing countries where manufacturers had anticipated the next surge of growth-notably, India and Brazil. But the talks' collapse will have almost no impact on the tidal wave of American businesses moving to China, which had already slashed its trade barriers. "Business is growing at such a fast pace in China [that] the impact [of the Cancun breakdown] will not be that significant," says Ming-jer Chen, an expert on Chinese business at the University of Virginia.

Hopes for Brazil and India

Since the early 1990s, as developed markets like Europe and Japan became saturated, many American businesses have looked to Brazil and India as potentially huge markets for U.S. goods and as places to outsource production. "Brazil is our largest neighbor-there's a huge amount of room [for growth] there," says Edward Gresser, director of the Project on Trade and Global Markets at the Progressive Policy Institute, a Washington-based think-tank. In particular, computer manufacturers, pharmaceutical companies, airplane producers, and automobile and truck makers saw Brazil as an opportunity. Between 2000 and 2002, for example, airplanes, aircraft parts, computer parts, and transport equipment were among America's largest exports to Brazil.

India, another huge market with a population in excess of a billion people, similarly embarked on a set of economic reforms in the 1990s designed to liberalize its economy and boost growth. The Indian economy grew by over 6 percent throughout the 1990s and early 2000s, and the Indian government reduced tariffs on certain telecommunications and information technology equipment. As in Brazil, a generation of Indian middle-class consumers was born: The number of high-income households in India is projected to grow 60 percent over the next three years. American companies-in particular IT firms, car-makers, and producers of manufacturing equipment-started salivating over an Indian market of over one billion consumers and, more deliciously, over the two million highly-educated workers who graduate from Indian universities each year.

Though India and Brazil have entered American companies' radar screens, however, they remain difficult countries in which to do business.

"There is still a 'Brazil cost of doing business'-poor infrastructure, corruption, high tariffs, uncertain protection of patents and copyrights, and cumbersome regulatory regimes," says Scott Otteman, director of international trade policy at the National Association of Manufacturers. Brazil has "a lot of dinosaurs in its industrial base, trying to limp along, and these companies are powerful politically."

India, too, extracts extra demands on foreign manufacturers. Despite reducing tariffs on some goods, India never codified its reductions, so it remains free to raise tariffs at any time, says Susan Esserman, a former deputy U.S. trade representative with considerable India experience. Debbie Lamb has first hand experience with Indian restrictions-additional duties on spirits have been levied in the past two years, on top of base tariffs of roughly 160 percent. (America's industrial tariffs, by comparison, average around 3 percent).

In addition, India also has become one of the world's biggest users of anti-dumping actions to keep out foreign goods, says the International Monetary Fund. What's more, many Indian politicians remain willing to whip up rhetoric against foreign businesses. In recent months, nationalist politicians in several Indian states have led demonstrations against Coca-Cola and Pepsi after an Indian non-governmental organization charged that the soda manufacturers put pesticides in drinks.

Overall, India "has one of the most restrictive trade regimes in the world," says Gresser. Not surprisingly, in 2001 India received $4 billion in foreign direct investment, compared to over $45 billion in investment to China.

China has earned much of that money. In contrast to India, Brazil, and many other developing nations, upon entering the WTO in 2001, China offered huge concessions to foreign companies, cutting tariffs and codifying its tariff cuts. One year after China entered the WTO, the U.S.-China Business Council, a trade organization, reported that China was complying with the concessions it promised-the average tariff rate had fallen to 12 percent, vastly less than India's.

"China has just gone much farther in terms of access" to foreign companies, says Arvind Panagariya, a professor of economics at the University of Maryland.

Hedging global bets

Because India and Brazil remained tough markets to penetrate, American companies had hoped to gain much greater access after the Cancun talks. Now, American companies are reassessing their India and Brazil strategies. Esserman says that large firms that had already established a beachhead in big developing nations-major companies like Caterpillar, for example-will remain engaged with India and Brazil. But, these companies are unlikely to make major new commitments to export to India or Brazil. Instead, they will invest in factories in India and Brazil or buy up existing Indian and Brazilian companies, and sell the items they produce in-country. In this way, they can protect themselves from tariff barriers.

Indeed, in India, Hyundai has become of the most popular car brands by manufacturing a majority of its cars in-country, and in Brazil, Hewlett-Packard and Sun Microsystems already have large in-country operations to supply domestic demand. Nonetheless, this strategy is not fool-proof: producing and selling in-country can be more expensive than doing business elsewhere, as it requires relying on Indian and Brazilian joint-venture partners.

Businesses that continue to operate in India and Brazil also probably will try to use their leverage to gain slight improvements in trade access. With the prospects for major tariff reductions coming out of the negotiations appearing dim, manufacturers will continue looking for opportunities to make small improvements. "The Brazilians have in the past adjusted their external tariffs-moving them by a few points here and there-in response to local requests for foreign equipment," says John Meakem, the international trade issues manager at the National Electrical Manufacturers Association. "We're working with some of our members' local subsidiaries to seek lower duties on industrial automation and other electrical equipment that would, on the whole, make Brazilian industry itself more competitive."

Small companies, as well as businesses outside industries that have historically prospered in India and Brazil, may pull out of these countries altogether. "It's only the big companies that are going to dare to do business in India," says Lamb. Indeed, foreign direct investment into Brazil in 2003 has already plummeted by 50 percent year-on-year.

The politics of trade is also likely to work against the interests of smaller enterprises. In the wake of Cancun, Brazilian leaders say they will continue promoting a developing country-focused trade agenda rather than the hemisphere-wide free trade agreement championed by Washington. In fact, Brazil's agriculture minister, Roberto Rodrigues, warns that lack of progress at Cancun could "contaminate" the hemisphere-wide negotiations. Such agreements between Brazil and neighboring developing countries could make it even harder for smaller American companies, which don't have the resources either to saturate the Brazil market or to compete with Latin peers. In fact, Mark Smith, executive vice president of the Brazil-U.S. Business Council, a trade group, says smaller and medium-sized manufacturers often don't have factories in-country because they can't afford to pay to locate there.

Add to this Brazil's inability to deliver intellectual patent protection, which had been slated to be part of the Cancun talks. This is likely to push American pharmaceutical manufacturers to abandon Brazil. "The U.S. pharmaceutical industry doesn't want Brazilian generics flying all over the world," a potential scenario if they invest in Brazil without IP protection, says Gary Hufbauer, a Brazil expert at the Institute for International Economics, a think-tank.

The China card

Many companies pulling out of India and Brazil will focus instead on China. China has already become the world's leading destination for foreign investment, topping the U.S., and in the first quarter of 2003, its economy grew by more than 9 percent. In reaction to the growing perception that Brazil is reluctant to engage in serious global free-trade talks, U.S.-based manufacturers are "talking about how they will now source things from China that they would have sourced from Brazil," says Otteman. In a move designed to accelerate the process, this fall China signed a free trade deal with Hong Kong, making it easier for foreign companies to move goods through Hong Kong's sophisticated port and into the mainland, tariff-free.

The range of American companies likely to increase exports to and production in China is broad-U.S. exports to China rose from $18 billion in 2001 to $20.6 billion in 2002-but several industries dominate the migration to the People's Republic. Toy manufacturers like Pacific China, Robert Kushner says, will increasingly abandon their production lines in other countries and locate operations in Guangdong, the province abutting Hong Kong, and Zhejiang, the province next to Shanghai. "Light industry [like toy-makers] are where China has opened up the most," Chen agrees. Meanwhile, Chinese business experts say, by 2005, when the U.S. will lift all remaining quotas on Chinese textile exports, nearly all textile manufacturing will migrate to China. Logistics firms, express delivery companies, and truck and car parts makers also expect to dramatically expand their exports to China as Beijing liberalizes its domestic delivery market.

Of course, if the World Trade Organization round gets back on track, predictions for such seismic changes may well prove unfounded. But, a quick restoration of talks looks highly unlikely. Most trade experts think any movement towards a new round of tariff cuts has been delayed by at least two years. Brazil, India, and other large developing countries don't seem willing to budge from their position, and the U.S. and Europe don't seem likely to make major concessions on agriculture. Additionally, 2004 is an election year in America, a time when protectionist rhetoric typically becomes more heated. Already, Democratic presidential candidates have launched a series of protectionist claims.

Not surprisingly, shortly after the Cancun meeting, European Union trade commissioner Pascal Lamy announced that the WTO negotiations are "certainly in need of intensive care."

Sidebar: Penske Hunkers Down in Brazil

Penske Logistics, operating in Brazil with its local partner Brazil Cotia Trading, does a "very nice business" with annual revenues approximating $25 million from a dozen customers like Ford and the European department store Carrefour, according to Joe Gallick, senior vice president of sales. "It's fine, but certainly not as good as we had hoped it would be" when they entered the country in the late 90's. The culprit? Trade policy problems.

"Our best case scenario was that the Brazil trade could become like what we've seen in Mexico and China," says Gallick. With surplus capacity in much of its industrial plant, extensive manufacturing capability and a vigorous agribusiness sector, considerable export potential exists. In light of Cancun, though, Penske figures any near-term growth is going to come from expanding trade within Brazil itself.

That's the good news. The bad news is that internal logistics in Brazil look a lot like logistics did in the U.S. a decade ago, with different governmental jurisdictions imposing so many different taxes that route optimization often has less to do with kilometers and cost than tax minimization. Sometimes the short way is not the cheap way.

Still, Gallick and Felipe Figliolini, president, Cotia Penske Logistics, remain hopeful that better times lie ahead. They expect the tax picture to improve and become uniform. When that occurs, "there will be a great opportunity to really streamline the transportation of inventory carried in a company's supply chain."

Sidebar: Information Sourcing in Brazil and India

Cancun impasse or not, there's business to be done in India and Brazil. But being smart is more important than ever. These are ideal sources for intelligence gathering.

INDIA

• Confederation of Indian Industry. The most important trade group of Indian businesses. Representative in the US: Ms. Kiran Pasricha (703 841 3209).

• Embassy of India in United States. Trade officer rotates, (202) 939-9809.

• U.S. Commercial Service New Delhi. John Peters, Minister-Counselor for Commercial Affairs (91-11-2331 6841; Fax: 91-11-2331 5172)

• US Embassy New Delhi Economic Section (Lee Anthony Brudvig, Minister Counselor, 91-11-2419 8000; Fax: 91-11-2419 0067)

• US-India Business Council. Leading trade group based in Washington DC; Dr. Michael Clark (202) 463-5323

• Indo-American Chamber of Commerce. Organization of Indian and American companies with close links to India; Mr Vinod Chandiok, (Walker Chandiok & Co., 41-L, Connaught Circus, New Delhi 110001 Ph: 9911 3329716) or Mr R. Veeramani (Chairman, Gem Granites, 78 & 76, Cathedral Road Chennai 600 086, veramani@md3.vsnl.net.in).

BRAZIL

• US Embassy Brazil, Commercial Section (U.S. Commercial Center, Rua Estados Unidos, 1812, 01427-002 - S‹o Paulo - SP Brazil), Officer rotates

• Brazil US Business Council, Contact Mark Smith, Executive Vice President (202) 463-5485

• Chamber of Commerce, Contact John Murphy, Vice President, Office of the Western Hemisphere (202-659-6000);

• Brazil Embassy in US. Michael Rinelli, Investment Officer, Commercial Section, (202) 238-2700.