THE US AND BRAZIL: anatomy of a trade dispute

Twelve years ago, two young engineering professors pooled their personal savings and started tinkering around with a pile of electronics gear in a small house in Sao Paulo. They pored over computer manuals, pulled apart microcomputers, and then made one on their own. Edson Fregni and Josef Manasterski decided that, in a country virtually 100 percent dependent on foreign high technology, they were going to build microcomputers.

Out of that modest house and a $10,000 investment, Scopus Tecnologia was born.

Call it the Apple Computer company of the Southern Hemisphere. Like the bullish enterprise Steve Jobs started up in a San Jose, Calif., garage, Scopus now ranks among the leading companies in a booming national computer industry.

Much of the firm's success is surely due to the duo's technical mastery and entrepreneurship. But this is not simply a Horatio Alger fable gone high-tech. Scopus thrives, as do other Brazilian computer firms, thanks to a virtual Vulcan shield that stands between it and the world's titans of technology.

Brazilians call it the ``informatics law.'' But the United States government calls it ``unfair trade practice.''

(``Informatics'' refers to data processing and computer manufacturing. The law passed in 1984 restricts trade and investment in both hardware and software.)

In the name of national sovereignty and technological independence, the law reserves the burgeoning market in small computers - micros, minis, and superminis - for Brazilian-owned companies.

This policy, US officials say, is one of the most protectionist economic policies anywhere. Even traditional joint ventures with foreign companies have been discarded, on grounds that the local firm is rendered an eternal junior partner.

Proponents boast that since the policy was first announced in 1976, it has spawned some 300 manufacturers. They sell products worth about $1.5 billion a year, including some 600,000 microcomputers. Since the end of the recession in 1984, informatics has become one of the most lucrative sectors of the economy. In 1986, it grew by 35 percent.

Scopus now produces 1,000 IBM-compatible microcomputers and hundreds of computer parts a month. The little house in Sao Paulo has given way to an eight-story office building with 1,500 employees. And last year, the two professors' brain child earned revenues of about $70 million.

Today Brazilians control more than half of the country's $2.7 billion computer market. Ten years ago, multinationals controlled it all. Power of the giants

Brazilian entrepreneurs contend that without the strong arm of the informatics law, most of these gains could be wiped out almost overnight. With vast economies of scale, bounteous research-and-development budgets, and aggressive marketing, the world's informatics giants could easily crush the fledgling Brazilian firms. ``The market would not exist if we opened up the industry to the multinationals,'' Mr. Fregni says.

Companies such as International Business Machines Corporation (IBM) and Burroughs Corporation still dominate the manufacturing and sale of medium and large computers in Brazil. IBM's Brazilian operation is the company's largest branch overseas and ranks as the fifth-largest exporter of manufactured goods in Brazil.

Why the fuss over a third-world country trying to build a few computers for its own use?

The American Chamber of Commerce and some Brazilians, such as former planning minister Roberto Campos, argue that the policy punishes both foreign and domestic businesses. The latter are forced to buy locally made copies of foreign hardware sometimes for two to three times the price. They say the nationalist policy will doom Brazil to economic piracy and backwardness.

As for the world's multinationals, what's at stake is an enviable overseas market. Brazil currently has high economic growth rates, a burgeoning consumer class, and cheap labor costs. It is a prize for a foreign company that wants to combine sales to a big domestic market with a base for making cheap exports, which could then be marketed abroad.

The stakes are probably highest for the United States, with its very competitive high-tech sector and a struggling manufacturing industry.

US private enterprise has made its voice heard in Washington. In the fall of 1985, the Reagan administration initiated an investigation into the Brazilian informatics policy. Last October, it announced that the law did indeed constitute an ``unfair trade practice,'' as defined by Section 301 of the US Trade Act of 1974.

Brazilian policies were said to severely restrict US trade and investment in the informatics sector and to fail to provide copyright protection for computer software.

A US Department of Commerce study says the informatics barriers cost multinational companies an estimated $1.5 billion between 1980 and 1984, and that the losses could climb to $8.1 billion in the next six years.

President Reagan instructed US officials to draw up a list of retaliatory measures to tax or restrict sale of Brazilian goods to the US. Such potential sanctions, viewed here as a political ``sword of Damocles,'' include tariffs or quotas on Brazilian shoes, textiles, airplanes, or coffee.

Washington has threatened action if Brazil fails to modify the law to the satisfaction of the US by the end of June.

Yet many Brazilians, such as Renato Archer, minister of science and technology, defend their policy as no different from America's rules to protect infant industries a century ago.

What's more, advocates say, this is a matter of ``national sovereignty,'' and even one of national security. The 1976 decision of the military government to pursue independence in the small-computer field was based on military needs.

``Now,'' Scopus cofounder Fregni says, ``informatics is the nerve center of the entire productive process. We need Brazilians trained and employed in this market.'' More important than the sprouting of a national industry, he says, ``the country now has 6,000 engineers trained in computer technology.''

The dispute has stoked a latent nationalism in Brazil. The leading financial paper, the normally moderate Gazeta Mercantil, fired off an editorial calling the apparent threat to Brazilian exports ``Rambonomics.''

One Brazilian senator hastily filed a bill that would curtail business activities of multinationals in Brazil in retaliation for any move by foreign governments to bar or tariff Brazilian exports.

Adding fuel to the blaze, Brazil's commerce and industry minister, Jos'e Hugo Castello Branco, announced he wished to extend the protection provided to the informatics industry to the fine chemical and biotechnology industries - stirring concern among foreign chemical and pharmaceutical manufacturers.

Antonio Mesquita, president of the Brazilian Computer and Business Equipment Manufacturers Association, says, ``If the [US] sanctions go through, it would be a disaster. For the United States to apply this trade act against an ally, it would have the effect of an atom bomb on political relations.''

``I don't doubt the US probably can succeed someday in getting the law changed,'' says Fregni. ``But they won't do this with impunity.'' He says that even students at the University of Sao Paulo have begun organizing a movement to counter US pressures. Nationalistic folly

Not all Brazilians are sandbagging the ramparts, however. Some critics have branded the domestic informatics lobbyists ``Shiites'' because of their zealous defense of the market controls. A leading daily, Folha de Sao Paulo, lashed out at the ``pseudo-nationalistic folly'' and ``cheap xenophobia'' of the informatics policy.

But foreign companies in Brazil seem somewhat taken aback by the backlash the debate has stirred here. ``There is a lot of room for dialogue,'' says a spokesman for IBM. ``We lament that this issue is being discussed in such an emotional manner, and only hope that we can return to a more serene atmosphere.''

IBM and other multinationals appear to have a great deal to be serene about.

The American giant retains almost 70 percent of the medium and large computer market. It also exported $175 million in computers and components from Brazil last year, and will probably equal that this year. Despite resistance from the informatics purists, IBM also managed to win a kind of government dispensation to form a joint venture - labeled an ``association'' - for data-processing services with the Brazilian firm Gerdau.

``While the law is restrictive, there is room to operate,'' says Henry Eicher, president of Burroughs do Brasil. Over the last few years, Burroughs has had to eliminate half its jobs, scrap a microcomputer project, and live with selling only 10 percent of the types of products it sells elsewhere in the world. However, Burroughs - which like IBM has its biggest non-US operation in Brazil - retains between 25 and 30 percent of the larger end of the computer market. Compromise

Although the rhetoric has been surly at times on both sides of the dispute, level-headed compromise has prevailed thus far. Recently, the Brazilians have offered some concessions.

The first includes a promise to clarify the rules on sale and manufacture of computer goods and to permit the import of some previously restricted products. The second involves new legislation to provide intellectual property protection for computer software. Although the bill offers some protection from piracy through copyright guarantees, it still falls short of international standards.

On the other side, Washington has three times postponed the deadline it had set for Bras'ilia to relax the informatics law. On Dec. 31, it moved the date forward another six months. Like a game of brinkmanship, as each deadline has approached, 11th-hour diplomacy has prevailed.

Government officials on both sides have been busy shuttling back and forth between Washington and Bras'ilia, and to neutral venues like Geneva, to hash out their differences.

There are compelling reasons to keep up the diplomacy. Bras'ilia estimates the threatened surtaxes on Brazilian exports could cost the country $400 million a year. That loss would only hurt efforts to pay back this nation's back-buckling foreign debt.

The Brazilian economy is already in crisis, and the political situation somewhat shaky as a result. The brand-new Brazilian Congress reflects a nationalistic mood, and strong US action could bring an equally vehement response.

The US Congress, clearly unsatisfied with Reagan administration efforts to reduce the huge US trade deficit, is calling for more forceful steps to bring key trade partners around. It is considering an omnibus trade bill.

Still, the aim on both sides of the equator appears to be the same: keep on negotiating and avoid at all costs an ugly final showdown.