Is Brazil turning "protectionist"?

A series of measures to increase import tariff on selected products by Brazil to promote domestic industry were taken last month. Reported here, here, here and here. While this may not in itself violate WTO obligations (WTO allows tariff increases within the bound rates), one measure caught my eye - a tax reduction of 95 per cent on production of iPads in Brazil until December 2014."

Essentially "Tablets" produced in Brazil, subject to certain conditions, will be subject to a 95% tax reduction compared to "Tablets" produced outside the country.

"The company has a 95% reduction of the Tax on Industrialized Products (IPI) for the manufacture of the product until 2014 and will have to meet the specifications of the Basic Productive Process (PPB) established by Ministerial Decree No. 126 of May 31, 2011. On the other hand, will invest 4% of net sales (gross sales minus taxes) in research and development (R & D).

The PPB is the minimal set of steps that characterize the local industrialization of a given product, which must be met for the company be entitled to tax benefits granted to companies in the Manaus Free Trade Zone and producing information technology and automation goods with tax incentives the Information Technology Law (Law No. 8.248/91), installed anywhere in the country. It is also a compensation to be met for the exemption of PIS / Cofins as Provisional Measure No. 534/2011, which included the tablets in the Good Law (Law No. 11.196/05)."

It seems that Brazil is surprisingly exercising its "domestic policy" space when its exports to the Arab world grew by 20% in 2011.





As reported here,

"Exports from Brazil to the Arab world generated revenues of $15.13bn in 2011, a 20.3 percent increase on the previous year.

Imports grew even faster, by 43.36 percent, and reached $9.98bn, according to figures issued by the Arab Brazilian Chamber of Commerce.

“We are running a surplus in trade with the Arabs,” said Salim Taufic Schahin, president of the Arab Brazilian Chamber in comments published by the Arab Brazil News Agency, adding that he expected further growth in trade this year.

For 2012, trade between Brazil and Arab countries is expected to grow by 10-15 percent, Schahin said."

Are Brazil's tax incentives violative of the "national treatment" principle? Is this not treating a domestic product more favourably than an imported like product? Further, the tax benefit is given subject to local industrialisation. Isn't this subsidy "dependent on domestic content" requirement violative of the TRIMS and SCM Agreements? While I could not find the English translations of these tax rules (here and here), the implications in the reports seem that the tax concession is for "domestically produced" Tablets as well as domestic content requirement. While import tariff increases for certain products may not be violative of international trade rules, the domestic content requirement and violation of the national treatment principle need closer scrutiny.