BRAZIL-TRADE: How to Achieve a Surplus?

By Mario Osava Reprint | | Print |

Analysis - Mario Osava

RIO DE JANEIRO, Feb 2 1996 (IPS) - Brazil, ravaged by decades of high inflation and a 3.15 billion dollar trade deficit in 1995 , is having trouble deciding on a stable foreign trade policy that fits between protectionism and and liberalization.

The government has targeted a 2.5 billion dollar trade surplus this year while insisting that it will retain its currency policy of mini-devaluations set below the rate of inflation. It also has promised to take additional steps to increase exports, including reducing export costs and providing more financing for exporters.

The critical factor for bringing the trade balance into the black is reducing imports, economists agreed.

Political Economy Secretary Jose Roberto Mendoza de Barros predicted that import purchases this year would fall 8.3 per cent below the 43.6 billion dollars of last year. This target, however, raised suggestions that the government would add new protective measures to those given to the automotive sector last June, which saw an increase in from 20 percent and 32 percent to 70 percent.

The auto sector was a good example of the juggling act Brazilian authorities are obliged to perform to reconcile their conflicting needs to balance the trade account, secure enough domestic supply to avoid inflationary outbursts, and attract foreign investment, economists said.

The 70 per cent import tariff is cut in half for Brazilian auto assemblers who export at least the equivalent value of their imports. They are also permitted to buy foreign capital goods and inputs at tariff discounts of 90 per cent and 85 per cent.

The government acknowledged that it had violated the rules of the World Trade Organization (WTO) by offering such tariff advantages to its assemblers with the goal of stimulating domestic investment. Brasilia sought a waiver from the WTO this week to allow it to maintain its provisional automotive regime until 1999.

Japan and South Korea have already condemned the Brazilian move, and other countries with insignificant or nonexistent assembly operations in Brazil, like France, are expected to react negatively.

But President Henrique Cardoso likes to point out that since 1990 Brazil has pursued one of the most rapid policies of opening up the economy in the world.

Brazil previously had rigidly protected its market – particularly certain industrial sectors – flatly prohibiting imports of some 3,000 products and imposing tariffs exceeding 100 percent on others.

In just four years, average tariffs fell by more than 40 percent to reach 14 percent, and Brazil freed trade in almost all sectors with its partners in the Common Market of the South (MERCOSUR).But beginning early last year when an import boom put the trade balance in the red, this liberalizing tendency was reversed. Brazil again adopted some sectoral protection measures.

The toughest regulations sought to contain growing vehicle imports, which rose by a whopping 75.9 percent to 5.567 billion dollars last year, with most of this growth concentrated in the first semester. But Brazil also raised tariffs on electronic products.

Earlier this year, the government broadened restrictions on imports arriving by mail, eliminating the exemption for purchases up to 50 dollars, prohibiting mailed imports worth over 1,000 dollars, and raising tariffs on other import values. Brazil now seeks to keep a minimum 62 per cent tariff on electric appliances and electronic goods, imports of which also grew explosively last year.

To meet this protectionist demand of local industry, Brazil will have to negotiate with Mercosur, but trade policy is reversed when it comes to products that are widely consumed and fuel inflation when they are scarce.

The government is keeping tariffs on these goods at zero or below Mercosur’s common tariff to allow imports to contain domestic prices. To this end, Brazil negotiated an agreement with Mercosur last April allowing it an emergency exemption of 150 products (now reduced to 112) from the common external tariff.

The agreement is valid for one year, but government sources say Brazil will seek to extend it “for a longer time” for some products.

Rio de Janeiro State University Professor Joao Paulo Magalhaes attributes this dithering over opposing defensive policy measures – directed against the trade deficit and against inflation – to “the passive integration into the world market,” a model whose weaknesses have been revealed by the Mexican economic crisis.

According to the economist, this model features a unilateral opening to imports, a minimal economic role for the state, and an over-valuation of the currency, but he says it does not assure international competitiveness.

Magalhaes concludes that active integration with an export promotion strategy modeled on the East Asian countries is the better approach.