BRAZIL-TRADE: Brazil on Collision Course with WTO

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Feb 4 1996 (IPS) - New trade regulations, designed to assist Brazilian motor vehicle assembly plants , has succeeded in attracting capital investment but may be struck down by the World Trade Organization (WTO).

The Brazilian government acknowledges it has violated the accords it signed as a WTO member but says it will ask the organization to allow it to keep its new policies for the auto industry in place until the year 2000. The new regulations took effect on Jan. 12.

Japan and South Korea have already said they will oppose the Brazilian request and Brazil must win approval from three-quarters of the 112-member organisation if it is to keep the new laws in place.

The Brazilian measures allow tariff advantages on imports for automobile assemblers already established in the country, such as the US firms General Motors and Ford and the European giants – Fiat, Mercedes-Benz and Scania.

Assemblers who offer an export plan are permited to import the same number of vehicles that they export and pay a tariff rate of only 35 per cent compared to the ordinary vehicle tariff of 70 per cent this year.

This latter rate will gradually fall until the year 2001 when it will be 20 percent – the common external tariff agreed on by the southern common market nations of MERCOSUR.

Since some large Japanese and Korean automotive firms do not have assembly operations in Brazil, local analysts found it unsurprising that they would think their interests harmed.

“Japan has no interest in this system because it has no factories here that could benefit – except for a small Toyota operation,” declared a Brazilian official cited in the daily Gazeta Mercantil.

But Brazilian policy offers even greater advantages to assemblers setting up new operations in this country. These firms will be able to import vehicles at a 50 per cent tariff reduction and make their compensating exports three years later.

Moeover, the vehicles they produce in Brazil will be given a phase-in period to meet the requirement that 60 percent of their components be of natural origin.

The assemblers will also enjoy tariff rates of two percent for imported capital goods and inputs. This concession provoked protests from the Brazilian and Argentine steel industries.

Emiliano Julianelli, president of the Brasilian Association of Motor Vehicle Importers (Abeiva), believes that the incentive package was decisive in convincing some assemblers to set up plants in Brazil.

Seven of the 31 manufacturers affiliated with Abeiva recently announced projects to make vehicles in Brazil. These include the Japanese Toyota and Honda firms and Hyundai of Korea. The German producer of Mercedes-Benz will add small car assembly to its existing Brazilian bus and truck operations.

The industry forecasts that the Brazilian market will reach three million vehicles per year by the year 2000, with at least 2.5 million of these manufactured domestically.

Investors are also targeting MERCOSUR, which links Brazil, Argentina, Paraguay and Uruguay.

The new Brazilian auto regime represents a severe blow for “independent” importers of non-domestically manufactured makes.

“History has changed completely,” said Julianelli, who recalled how a tariff reduction to 20 percent stimulated import euphoria during the latter half of 1994 and the first semester of 1995.

Despite the controversial measures imposed by the government in June 1995, which raised the tariff to 70 percent and set quotas, vehicle imports that year rose 75.9 per cent compared to 1994, reaching 5.567 billion dollars.

Imports of non-locally manufactured makes are now reduced to those serving “niche” markets, such as the luxury BMWs, Audis and Mercedes whose buyers will not be discouraged by high tariffs.

A significant number of cars produced in Argentina, such as Peugeot and Renault, will continue to arrive in Brazil under Mercosur’s free trade terms, as will some sport vehicles to satisfy a very small consumer market, Julianelli assessed.

The Argentine businessman Francisco Macri, owner of the Sevel firm that produces Peugeots, acknowledged the new Brazilian regualtions’ effectiveness in attracting investment to the country.

Macri objected to the automotive accord reached between the two countries and threatened to shift operations to Brazil, warning that Argentina would become a “Brazilian province” because it will lose investments to its Mercosur partner.