Brazil, Argentina and trade policy - Trade wars ahead?

(Courtesy Wikipidea: The President of Brazil, Dilma Rousseff, and the President of Argentina, Cristina Kirchner, during Rousseff's state visit to Buenos Aires.)

Reports of the EU approaching the WTO against Argentina's import licensing rules are surfacing. I have blogged about Argentina's measures earlier here, here and here. Brazil, Argentina's largest trading partner, also showed signs of confrontation with Argentina. In 2010, as per the Observatory of Economic Complexity,  Argentina exported the most (21% of its exports) to Brazil followed by China. Brazil also topped its imports share being 42% in 2010. It is evident that the South American neighbour is Argentina's most active trade partner. Is the Brazilian measure a sign of a trade war hinged on protectionist tendencies?

The Argentinian response to the EU step was exemplified in Argentina's Secretary for International Economic Relations Cecilia Nahon reaction that Argentina was being made into an example to discourage developing countries from using legitimate economic policies. The question comes back to what is legitimate domestic policy choice in the context of WTO rules? Does it signify "protectionist" measures? Do developing countries have the leeway to exercise aggressive trade policies on the grounds that their national interest demand so? Do developed countries also pursue such policies during a crisis?

A detailed analysis of trade policy conduct of Argentina and Brazil is found in "Colliding paths Trade policy making in Brazil and Argentina during the global financial crisis" by Thomaz Favarro and makes interesting reading.

One will have to wait and watch as to the contours this dispute will take and its implications for South Amercian trade, WTO and multilateral rule making.

Brazil and WTO - Protectionist or within rules?

I had earlier blogged about trends showing that Argentina and Brazil may be adopting certain "protectionist" measures in the context of the WTO. This piece in the Reuters tends to suggest that Brazil is seeking higher tariffs to counter growing imports and competition.

I found this interesting piece on views of 8 Brazilian economists on Brazil's "protectionist" tilt whether it is increased import tariff, local content requirement or currency valuation here:

"1. Mailson da Nobrega, Brazil’s former finance minister

“Industry leaders should pressure the government to attack the structural causes for the lack of competitiveness. Instead, they decided to pressure for falling interest rates, currency devaluation and market reserves. But they will be disappointed with the effects of protectionism. In the short term, we will see the increase in the prices of products, increasing inflationary pressures and reducing the competitive environment. In the medium and long term, Brazil might regress to its past patterns, the time of General (Ernesto) Geisel, in which the state protectionism leads to accommodation and inhibits the pursuit of industry efficiency. In addition, it also limits the gain in productivity and conspires against the country’s growth.”

2. Gustavo Franco, Brazil’s former Central Bank president

“The resort to protectionism is unfortunate. It is not only unjustified but it is also inconsistent. The solution to a foreign exchange bonanza is to spend the surplus dollars in the most useful manner. This is the worst possible time for policies like substituting imports by increasing domestic content, for example. That would make sense, albeit with restrictions, on currency board restrictions. The situation we have today is exactly the opposite. There is no war, no currency crisis, or anything. The authorities do not seem to be familiar with the real issues. ”

3. Kenneth Rogoff, former IMF Chief Economist and Harvard professor

“In the next decade the world will witness a considerable increase in financial protectionism. The public and private debt in the developed economies are at record levels, and as soon as interest rates get back to normal (since they’ve been close to 1% for a while), countries will have difficulties to finance their debt. Thus, the flow of money from developed countries in search of higher returns in emerging markets will increase, and certainly the capital control measures will continue. And it’s important to clarify that none of this is result of the actions of the ECB or the Fed, but from the accumulated effects of years of unsustainable budget deficit and borrowing from the private sector. ”

4. Vera Thorstensen, FGV professor

“Brazil has every right to protect its currency. There is in the World Trade Organization (WTO) the Article 15 of GATT (General Agreement on Tariffs and Trade) which provides that a country can protect itself from currency mis-alignments. The problem is that this is a new theme and no country is still familiarized with it. The government is trying. But it is clear that the problem behind this situation is the exchange rate plus the “Custo Brazil”, high interest rates and the high tax burden. For now, the country is attacking only interest and exchange rates.”

5. Samuel Pessoa, a partner at Tendências Consultoria

“There are two things that can be done without messing the current macroeconomic architecture in Brazil. Government can save or not save the industry. If it does not save, the exchange rate remains as it is and will appreciate. With this, the country will specialize in primary goods (natural resources) and become a big Australia with a services-oriented economy. The other alternative is to save the industry through microeconomic measures. The country could then create new taxes to other sectors of the economy that would provide a huge subsidy to the industry. This subsidies could then be tied to export goals and performance. This is an alternative to develop the industry. And this is a political decision that will cost money. Will the society want to afford it? ”

6. Roberto Rigobon, a professor at MIT’s Sloan School of Management

“Brazil can not just use monetary policies to control the exchange rates, because if a country prints too much money, it will have a huge, immediate increase in inflation. If you withdraw money from the economy, interest rates go up and attract more foreign capital, which makes the Real appreciate. Both consequences are bad and that is why the country is using capital controls – and that is why the International Monetary Fund (IMF) agreed with this. However, capital controls create distortions and adds costs to the economy. So those who think that this policy will not have a negative effect, they must be drinking the wrong “caipirinha”. The way to handle this would be to follow the example of countries like Chile, Norway and Singapore, and make a huge fiscal surplus of 8 % to 9% of GDP. ”

7. Luiz Carlos Bresser Pereira, Brazil’s former Minister of Finance

“Rich countries, which are in great difficulty, are right to print money and seek to devalue their currencies. We [Brazilians] are the wrong ones to respond to these measures in such a shy manner, with only a small IOF (tax on foreign capital). We need a greater IOF and to establish a variable tax on the commodities that Brazil exports, which are the source of the “Dutch disease.”

8. Jose Marcio Camargo, a professor at PUC-Rio

“The economic history of Brazil shows that when we adopt protectionist measures, the long-term outcome tends to be very negative in terms of productivity gains, cost of goods produced and the well-being of the population. In the short term, there may be some relief because you lessen competition, create monopolies and provide incentives. Then the consumer has to bear with the higher prices. The solution to this issue is to have policies that generate productivity gains. And that requires a more open market, not a closed one like we are witnessing. We must invest in education of the workforce and change the labor laws in order to discourage turnover and informality. You need to direct efforts to create a more efficient educational system and create incentives for incorporating modern technology instead of blocking it like the government does by increasing protectionism.”

The views are more in the context of Brazil's currency valuation steps but covers the general trend of "protectionist" measures. How much of these measures are legitimate policy decisions within the WTO obligations? Are all inward looking measures per se protectionist? The WTO itself allows for certain measures like safeguards, antidumping as well as taking measures under the public exceptions Article XX of the GATT to protect one's domestic industry. Careful analysis must be made of a measure in the context of WTO obligations to term it protectionist. After all, all countries do take measures to further their domestic industry which is not in itself protectionist.

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.

The B and C of BRICS

Brazil and China are two crucial partners of the BRICS conglomeration (along with Russia, India and South Africa). I had earlier blogged about Brazil's moves to protect its domestic auto-industry. An interesting insight into Brazil-China trade tensions has been summarised by The Economist here. It states :

"OPPOSITE Rio de Janeiro’s best-known shopping mall, just before the tunnel that takes drivers to the beach resorts of Copacabana and Ipanema, stands a gleaming new showroom for JAC Motors, a state-owned Chinese car maker. The prominence of the location is appropriate: imported Chinese cars have suddenly become a visible presence on Brazil’s roads. This has alarmed Brazil’s car industry and President Dilma Rousseff’s government. Last month a 30-percentage-point tax increase on cars with less than 65% local content took effect, taking the tax on some imported models to a punitive 55%—on top of import tariffs. 

The tax increase is an unusually blatant act of protectionism. It almost certainly violates the rules of the World Trade Organisation, of which Brazil is normally an enthusiastic supporter. It shows how sensitive the government of President Dilma Rousseff is to claims that the country is suffering “de-industrialisation”.

 Although the latest figure shows industrial production increasing slightly, it has been broadly flat for more than a year. Economic growth has fallen sharply. But consumer demand remains robust, rising 4.1% last year, says the Central Bank. A bigger share of the market is going to importers—China in particular. Imports of Chinese cars rose almost fivefold last year; the new year has brought complaints of dumping of Chinese mobile phones and shoes.

With extraordinary speed, China has become Brazil’s most important economic partner: total trade between the two countries has risen 17-fold since 2002. But frictions are increasing almost as fast. Although Brazil enjoys a big overall trade surplus with China, most of its exports are of commodities (mainly iron ore, soya beans and crude oil). It has a big deficit in manufactures (see chart)."

The trading relationship between Brazil and China is captured in this graph:

Commentators have called the Brazil China relationship as a "difficult partnership". In this paper the future of the relationship is summarised.

"Despite some localized criticism, space for a strategic relationship between Brazil and China can still be perceived, especially if the Brazilian government pushes for greater diversification of Brazil’s export agenda to that country, encouraging the development of new productive partnerships beyond traditional sectors and using the minimum protection is necessary to guard national producers. 

In the political field, Brazilian-Chinese relationships could also surpass the realm of the UN and be consolidated in other multilateral forums, such as the WTO, the World Bank, and the IMF, despite both countries’ increasing divergence concerning foreign market entry."

This is one relationship that will be keenly watched in the world trading system.

Brazil goes protectionist

The WTO website stated that at the Council for Trade in Goods meeting, inter alia, the following issue was raised :


"Korea said that Brazil’s 30% tax on imported automobiles and requirements to use domestic components are against the WTO national treatment principle and the WTO Agreements on Subsidies and on Trade-Related Measures. Japan, EU, US, Canada, Colombia, Chinese Taipei, Australia and Hong Kong, China supported Korea’s statement. Japan added that Brazil’s action was contrary to the G-20 declaration against protectionism.  Brazil said that its rising currency had led to a substantial increase in imports of automobiles. It said that the measure in question was provisional in nature, and would expire next year. Instead of using trade remedies like anti-dumping  duties, Brazil said it had chosen to establish positive incentives to encourage investment and research."


Time would tell if this goes all the way to the Dispute Settlement panel. The argument of Brazil depicted here is interesting. It is justifying its action by saying that it could have imposed trade remedies like anti-dumping duties but preferred "positive incentives"!


“Brazilian consumption has been appropriated by imports,” said the Brazilian Finance Minister, according to the Economist,while imposing the tax. Issues of national treatment (treating imports the same as domestic products) vis a vis dumping due to currency devaluation could be the legal issues before the Settlement panel, if the dispute is not negotiated or Brazil withdraws its measures.


In the meantime, the Supreme Court of Brazil seems to have stayed the imposition of the  tax on "technical grounds" of not giving 90 days notice. The jury is still out on this!