Brazil: October 1996
Brazil's trade reforms have been a key element behind its economic gains since 1992. Emphasis on autonomous trade liberalization, even before the conclusion of the Uruguay Round, allowed Brazil to make deep cuts in tariff rates, to eliminate most of its non-tariff measures and to make specific commitments in the area of financial services.
Brazil's reforms promote economic gains but implementation of trade policy remains complex
Brazil's trade reforms have been a key element behind its economic gains since 1992. Emphasis on autonomous trade liberalization, even before the conclusion of the Uruguay Round, allowed Brazil to make deep cuts in tariff rates, to eliminate most of its non-tariff measures and to make specific commitments in the area of financial services. However, since 1994, Brazil's trade policy choices have become more complex and trade practices appear less transparent.
According to a new WTO report on Brazil's trade policies and practices, a major achievement has been the reduction of inflation from an annual rate of nearly 2,500 per cent in 1993 to some 20 per cent in early 1996. This was achieved in large part through the implementation of Brazil's new stabilization programme, the Plano Real, introduced in mid-1994. The WTO report and one prepared by the government of Brazil, will be the subject of two days of discussion at the Trade Policy Review Body of the WTO on 30 and 31 October 1996.
Although economic activity has recovered, growth remains constrained by high, albeit falling, real interest rates linked to tight monetary policies. Improved economic performance, greater price stability and high interest rates have resulted in a strong inflow of foreign capital and a considerable accumulation of international reserves. However, concurrent current account and merchandise trade deficits raise the possibility of an overvalued exchange rate. The report notes that this would be consistent with the sharp increase in imports since 1994 and a loss of export dynamism, which form the backdrop for recent moves to restrict selected imports and support exports. The report states that these measures suggest a lapse in implementation rather than a policy reversal.
Under its tariff reform programme, Brazil's average applied tariff dropped from 21.2 per cent in January 1992 to 14 per cent in July 1993 and now stands at 12.5 per cent. Although the adoption of MERCOSUL'sSee footnote 1 Common External Tariff (CET) on 1 January 1995 was a decisive step in the process of regional integration, the CET did not bring about improvements in Brazil's national tariff structure.
According to the report, the structure is relatively complex, with several variable exemptions from the CET, subject to a process of convergence through to the year 2006. Furthermore, frequent tariff adjustments give an appearance of uncertainty to Brazil's trade and investment regime.
Economic reforms have been accompanied by liberalizing changes in Brazilian laws, including the elimination of the concept of "Brazilian company of national capital" and the opening of a number of strategic areas to private and foreign participation. Under Brazil's privatization programme, the number of state enterprises has been reduced to 147. The government has withdrawn from the steel, fertilizer, petrochemicals and aircraft industries, and in 1995 it extended the privatization programme to the electrical, supply, financial, railways and mining sectors. Nevertheless, the Government is still an important supplier of services, including banking, insurance, transport, telecommunications and electricity. Although foreign participation in key service sectors has historically been restricted, efforts are underway to liberalize foreign investment in several such activities.
According to the report, Brazil's use of trade remedy measures increased during the 1992 to 1995 period, when 66 anti-dumping cases (mainly on chemical and mineral products) and 13 countervailing investigations (on agricultural goods) were initiated. In mid-1996, 25 anti-dumping and seven countervailing actions were in force, and in June 1996 Brazil used its new safeguards legislation to provide protection to its toy industry. Since 1992, Brazil has been involved in a number of consultations and panel reviews within the GATT/WTO framework regarding the application of its anti-dumping and countervailing regulations. However, new legislation in these areas should help Brazil adapt to the more stringent conditions for anti-dumping and countervailing measures contained in the WTO Agreements.
Exports of sugar and ethyl alcohol are limited by taxes to ensure the internal market supply. Export taxes also apply to raw hides and skins. Tax exemptions are used to offset costs imposed on exporters by the complex system of Federal and State taxes. The report states that tax and duty exemptions and reductions for inputs to export industries (to be phased-out by 1999) have provided major benefits to exporters, particularly in the automotive sector. Other efforts to promote exports have involved export finance programmes aimed at offsetting inefficiencies in the Brazilian financial system, and the use of export performance requirements.
The automotive industry is the most highly assisted manufacturing activity in Brazil, with effective protection estimated at over 250 per cent. According to the report, Brazil is a large net exporter of vehicles, its motor industry achieving record production levels in 1995. Investment plans for the automotive industry in 1995 amounted to some $10 billion. Tariffs on motor vehicles were increased from 20 per cent in 1994 to 70 per cent in March 1995. Under the automotive régime introduced in mid-1995, the industry benefits from tariff exemptions, combined with local-content and export balancing requirements. Following the introduction of such a régime, imports from countries other than MERCOSUL partners fell sharply. In 1996, a certificate of compliance with Brazilian standards became mandatory to obtain an import licence for motor vehicles. Required modifications must be made in the country of manufacture.
Although the textiles and clothing industry has internationally competitive enterprises, import competition has led to the closing of numerous small and medium-size producers. As import barriers have come down, imports of textiles and clothing have increased, growing fourfold between 1991 and 1995. As a result, credit terms became a consideration in the granting of licences for textile imports. In May 1996, under the provisions of the WTO Agreement on Textiles and Clothing, transitional safeguard quotas were introduced on certain textiles.
The report states that in the past, Brazil's regulations on intellectual property were a source of friction with certain trading partners but that under the TRIPS Agreement Brazil's intellectual property regulations are being reformulated. A new Industrial Property Law was approved in May 1996 covering, among other areas, pipeline protection, the granting of patents of invention and of utility models, registration of industrial designs and trademarks and repression of false geographical indications.
In its conclusions the report states that greater co-ordination, transparency and a more measured response to requests for assistance from specific sectors would help Brazil translate its stated commitment to free trade into actions more clearly consistent with its development needs and with a stronger multilateral trade system. The report identifies Brazil's current challenges as ensuring the continuity of the more open, lower-inflation environment while preserving external balances, achieving the rapid economic growth required to absorb an expanding labour force, and resisting pressure to reverse the reform process.
Notes to Editors:
The WTO Secretariat's report, together with a report prepared by Brazil, will be discussed by the WTO Trade Policy Review Body (TPRB) on 30 and 31 October 1996.
The WTO's TPRB conducts a collective evaluation of the full range of trade policies practices of each WTO member at regular periodic intervals and monitors significant trends and developments which may have an impact on the global trading system.
The two reports, together with a report of the TPRB's discussion and of the Chairperson's summing up, will be published in due course as the complete Trade Policy Review of Brazil and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
The reports cover the development of all aspects of Brazil's trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector. Since the WTO came into force, the "new areas" of services trade and trade-related aspects of intellectual property rights are also covered. Attached are the summary observations from the Secretariat and government reports. Full reports will be available for journalists from the WTO Secretariat on request.
Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992), Cameroon (1995), Canada (1990, 1992 & 1994), Chile (1991), Colombia (1990 & 1996), Costa Rica (1995), Côte d'Ivoire (1995), Czech Republic (1996), Dominican Republic (1996), Egypt (1992), the European Communities (1991, 1993 & 1995), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992 and 1995), Kenya (1993), Korea, Rep. of (1992 & 1996), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989 & 1996), New Zealand (1990 & 1996), Nigeria (1991), Norway (1991 & 1996), Pakistan (1995), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), South Africa (1993), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992 & 1994), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY: BRAZIL
Report by the Secretariat Summary Observations
Brazil has made considerable progress in dealing with some of the economic constraints it faced in the early 1990s: principally, in restoring growth and confidence in the economy and lowering inflation. Since economic growth resumed in 1993, the economy has proved resilient to external shocks and foreign capital has flowed copiously into the country. Trade liberalization, privatization, the gradual opening of key activities to foreign investment, and general deregulation are creating an increasingly competitive economy. The process should be further aided by continuing microeconomic and fiscal reforms. Today's challenge is to ensure the continuity of the more open, lower-inflation environment and preserve external balances, while achieving the rapid economic growth required to absorb an expanding labour force, and to resist pressure to reverse the reform process.
Brazil's major macroeconomic achievement in recent years has been the reduction of inflation from an annual rate of nearly 2,500 per cent in 1993 to some 20 per cent in early 1996. This was achieved in large part through the implementation of a new stabilization programme, the Plano Real, introduced in mid-1994. Real GDP growth recovered to 5.8 per cent in 1994, although there has since been a slowdown. Economic growth remains constrained by high, albeit falling, real interest rates linked to tight monetary policies. Fiscal deficits require attention both on the revenue and the expenditure side.
High interest rates, combined with improved economic performance, intensified privatization efforts, and greater price stability have resulted in a strong inflow of foreign capital and a considerable accumulation of international reserves, whose composition has also varied. Concurrent current account and merchandise trade deficits have led some observers to suggest that the real effective exchange rate (REER) is overvalued. Certainly, there was a sharp appreciation of the REER in 1994, when the new currency, the real, was introduced, but there has been a progressive depreciation since then. The possibility that the REER has been overvalued would be consistent with the sharp increase in imports since 1994 and a loss of export dynamism, which form the backdrop for recent moves to restrict selected imports and support exports.
Trade and Investment Policy Framework
Since the last review, the structure of trade policy formulation in Brazil has undergone major changes. In late 1992, the Ministry of Economy, Finance and Planning was divided into three Ministries: (i) Planning and Budget, (ii) Finance, and (iii) Industry, Trade and Tourism. In 1995, the Chamber of Foreign Trade, consisting of the main economic ministries and agencies, was created to formulate and evaluate policies, co-ordinate activities related to foreign trade and serve as a discussion forum for the public and private sectors.
The gradual process of reforming Brazil's legal framework has continued. In 1995, constitutional amendments approved by Congress eliminated the concept of "Brazilian company of national capital" and opened a number of strategic areas to private and foreign participation. Adoption of implementing regulations is now in progress.
Brazil's emphasis on autonomous trade liberalization before the conclusion of the Uruguay Round allowed it to offer deep cuts in its bound tariff rates, as well as elimination of most non-tariff barriers to trade. Brazil also made specific commitments in the area of financial services and is actively participating in the basic telecommunications negotiations. New regulations have been introduced to facilitate the implementation of WTO commitments, including in the areas of safeguards and industrial property. The authorities consider that Brazil's concessions in this Round were not fully matched by certain major trading partners.
While the WTO provides the main framework for Brazil's general trade relations, efforts have also been focused on the completion of MERCOSUL, which is becoming the cornerstone of Brazil's trade agreements with other countries and groups within Latin America and beyond. Brazil is also actively participating in negotiations to establish a Free Trade Area for the Americas.
Trade Measures Directly Affecting Imports
Under the tariff reform programme, Brazil's average applied tariff dropped from 21.2 per cent in January 1992 to 14 per cent in July 1993 and now stands at 12.5 per cent. Tariff dispersion and escalation were also reduced. The shift to the Common External Tariff (CET) of MERCOSUL did not lead to any major changes: Brazil's national tariff structure remains relatively complex, with several, variable exemptions from the CET, subject to a process of convergence through to the year 2006; such exemptions have allowed frequent ad hoc tariff changes to protect particular products or to control domestic prices.
While the binding of Brazil's entire tariff schedule in the Uruguay Round negotiations will, over time, provide greater security of access, the stability of commitments has been reduced by the fact that the vast majority of bindings are higher than applied rates; bindings are generally at a ceiling rate of 35 per cent for manufactures and 55 per cent for agriculture. The authorities are committed not to apply the CET in those cases where the common rate might exceed Brazil's binding commitments. On the other hand, tariff exemptions are still actively used to allow duty-free import of inputs and capital goods; particularly important are the exemptions granted to the automotive industry.
Many technical changes have occurred in trade regulations;
- steps have been taken to simplify trade procedures and further improvements are expected with the imminent implementation of a new computerized import system.
- minimum import prices for customs valuation purposes.
- Criteria established in 1994 for motor vehicles require the use of factory list or published second-hand prices, although Brazil does not apply minimum import prices for customs valuation purposes.
- Changes affecting the licensing régime since 1992, including reducing licence validity periods from 90 to 60 days and eliminating licence extensions, suggest departures from the general rule that imports are subject to automatic licences, mainly for statistical purposes. Limits on credit terms have also become a consideration in the granting of licences for textile imports.
- Many changes have also been made to the development and administration of standards, testing and certification since 1992. Although regulations require ISO methodology for certification to be adopted, they also prescribe the priority use of Brazilian norms; compulsory certification is restricted to products or services that may affect health, safety or the environment.
- Modifications to health-related legislation over the last four years aimed to establish an up-to-date product safety system and pre-empt possible difficulties for Brazilian animal products in foreign markets. New phytosanitary rules, covering some 100 agricultural products, were expected to come into force in early 1996. Work was also in progress to broaden the number of technical rules to prevent contaminating substances in imported food products, in particular wheat. Brazil has signed or is negotiating bilateral phytosanitary agreements with a number of countries.
Brazil's use of contingency measures has increased, with 66 anti-dumping cases (mainly on chemical and mineral products) and 13 countervailing investigations (on agricultural goods) initiated between 1992 and 1995. In mid-1996, 25 anti-dumping and seven countervailing actions were in force. Since 1992, Brazil has been involved in several consultations and panel reviews within the GATT/WTO framework regarding the application of its anti-dumping and countervailing regulations. However, the introduction of new anti-dumping, countervailing and safeguard legislation together with the restructuring of related administrative arrangements, should help Brazil adapt to the more stringent conditions for anti-dumping and countervailing measures contained in the WTO Agreements.
Up to June 1996, Brazil had never used Article XIX of the GATT relating to emergency action on imports of particular goods. In that month, provisional safeguard measures, in the form of a supplement to the CET increasing import taxes from 20 to 70 per cent, were adopted to protect the toy industry. In May 1996, under the provisions of the WTO Agreement on Textiles and Clothing, transitional safeguard quotas were introduced on certain textiles.
Trade Measures Directly Affecting Exports
Export procedures and the processing of export documentation has been improved since the last review, with the introduction of the computerized information system, SISCOMEX, in 1993.
Tax exemptions are used to offset costs imposed on exporters by the complex system of Federal and State taxes. The need for a comprehensive overhaul of the internal taxation system is recognized but has faced political and constitutional obstacles. Under the BEFIEX programmes, tax and duty exemptions and reductions for inputs to export industries have provided major benefits to exporters, particularly in the automotive sector. New benefits under these programmes were suspended in 1990 and the phase-out of existing concessions should be completed by 1999. There have been no major changes to the duty drawback system.
Other efforts to facilitate exports have involved export finance programmes aimed at offsetting inefficiencies in the Brazilian financial system. Support for exports of merchandise and services is available through the Export Financing Programme (PROEX). Although interest rates are pegged to LIBOR, the rate equalization mechanism provides a subsidy to Brazilian exports as the Government pays the difference between the interest charged and the cost of raising funds. The National Development Bank (BNDES) operates the Finance Programme for Exports of Machinery and Equipment (FINAMEX), offering financing facilities for exports of capital goods and equipment.
Export performance requirements are used in the BEFIEX programmes, while company mergers have sometimes been made conditional on commitments to direct production to export markets. Export performance requirements are also used in connection with the tariff reductions granted to the automotive industry. Fiscal incentives for non-Brazilian firms in the informatics industry are linked to both export and trade-balancing programmes.
Exports of sugar and ethyl alcohol are limited by taxes to ensure the internal market supply. Export taxes also apply to raw hides and skins. Export quotas apply to sawn wood from species under environmental control. Brazil maintains export restraint arrangements under the WTO Agreement on Textiles and Clothing (ATC) with Canada, the European Union and the United States. Export controls also apply in support of United Nations resolutions and the CITES.
Measures Affecting Production and Trade
The opening of the economy and greater reliance on market mechanisms is making competition laws increasingly important and placing greater demands on the agencies responsible for the administration of such laws. Recent steps apparently strengthening such agencies and streamlining merger procedures should help increase competition in the domestic market.
State enterprises came to play a central rôle in Brazil's economic life under the former import substitution strategy; reducing such involvement faced a number of political, legal and constitutional obstacles, but considerable progress has been made. Under the Brazilian Privatization Programme (PND) the number of State enterprises has been reduced to 147 and the State has withdrawn from the steel, fertilizer, petrochemicals and aircraft industries. In 1995, the PND was extended to include the electrical supply, financial, railways and mining sectors.
Price controls still affect certain public tariffs and fares (e.g. for electricity, water and telephone services), as well as various fuels. Price controls related to the sugar-alcohol programme involve an estimated R$1.9 billion in annual transfers.
The main pillars of the minimum price policies for agricultural products remain the Federal Government Acquisition Programme (AGF), which gives farmers the option of selling their products to the Government at a fixed minimum price, and the Federal Government Loans Programme (EGF), under which farmers receive financing to stockpile their products. Such policies have undergone no major modifications during the past four years, although operational changes have resulted from falling public funding. These changes include raising real interest rates for the programme to positive levels, making use of financial markets for funding, as well as the implementation of an options system to supplement minimum prices.
Pending the introduction of new local-content regulations, the Basic Productive Process (PPB) concept is one of the criteria used to determine whether a product may be considered Brazilian. The PPB requires firms to undertake locally, agreed manufacturing steps for specific products; it is mostly used in relation to production of electronic products in the Manaus Free-Trade Zone. In other cases, a 60 per cent benchmark is used, alone or in combination with the PPB, when local-content requirements are involved (e.g., for export finance and special credit programmes). Rubber consumers must use 44 per cent of domestic rubber, while certain fiscal incentives in the informatics industry are linked to minimum local-value-added requirements; local-content requirements also apply in the automotive sector.
Brazil was not a signatory to the GATT Government Procurement Code and has not signed the Plurilateral Agreement on Government Procurement. Public works, purchases and services must be generally contracted through a public tendering process in which the main criterion for awarding contracts is lowest price; local preferences previously applied appear to have lost most of their practical significance. Government policy is to promote the purchase of domestically produced informatics and telecommunications goods.
Fiscal incentives are widespread. At the Federal level, incentives include exemptions and reductions in income, production, sales and import taxes in the northern and Amazon areas. Machinery and equipment benefit from tax exemptions and accelerated depreciation schemes. Fiscal incentives at the state and municipal levels include sales, property and other taxes and fees.
The National Development Bank (BNDES) continues to be one of the few domestic sources of long-term funds; it places emphasis on commercial criteria for lending. BNDES operates the Special Agency for Industrial Financing (FINAME) to finance the purchase of Brazilian-made capital goods, including by foreign buyers; it also offers sector-specific credit programmes, including to the steel, footwear and textile industries. Interest rates, defined for each programme, appear to be set at levels comparable to market rates. Credit programmes are also offered by regional and State development banks; development financing is also granted by commercial State banks. The rural sector benefits from numerous credit schemes, including a compulsory system whereby commercial banks must make available to rural borrowers a certain proportion of their daily balances. Many such programmes appear to involve subsidized interest rates.
Regional development is promoted through federal and BNDES programmes as well as by the use of free-trade zones. By far the most important of these zones is the Manaus Free-trade Zone, from which practically all the production is destined for the Brazilian domestic market.
In the past, Brazil's regulations on intellectual property were a source of friction with certain trading partners. Under the TRIPS Agreement, Brazil's intellectual property regulations are being reformulated. A new Industrial Property Law was approved in May 1996 covering, among other areas, the granting of patents of invention and of utility models, registration of industrial designs and trademarks and repression of false geographical indications. Provisions concerning pipeline protection entered into force from May 1996, while other sections will come into force in May 1997.
Trade Policies and Practices in Non-Service Industries
The adaptation of agriculture to Brazil's trade liberalization and macroeconomic adjustment programmes was made particularly difficult by the sector's historically high indebtedness, compounded by the impact of recent high interest rates. The Government considers one of its major tasks to bridge the gap between arrangements adopted under previous development models and current economic realities.
No major changes appear to be required for Brazil to meet its engagements under the WTO Agreement on Agriculture. Applied import duties on most agricultural goods are below average; such duties are also substantially below bound levels, but peak tariffs are imposed on a few products, including garlic and canned peaches. There is concern in Brazil about imports of agricultural products whose prices are depressed by subsidies in exporting countries; Brazil has stated that it will not import subsidized wheat for example. Steps are being taken to lower the high tax incidence on rural exports. Negotiations are in progress to harmonize and co-ordinate agricultural policies and trade defence instruments within MERCOSUL.
Besides border measures, the principal instruments affecting the agricultural sector are minimum-price supports and subsidized rural credit. Official credit programmes have played a major rôle in agriculture since the mid-1960s, particularly through the compulsory application system. Loans financed directly by the Government account for the largest share of rural credit operations but have fallen in recent years. Rural credit supports relatively few products, mainly soybeans, sugar cane, corn, rice and cotton. The authorities agree that greater efficiency in the provision of rural credit requires general liberalization of the financial sector and reducing the segmentation of credit markets.
Close to 70 per cent of Brazil's sugar-cane production is now used for the production of alcohol under the National Alcohol Programme (PROALCOOL). However, market conditions have changed dramatically since PROALCOOL was initiated in the mid-1970s and the programme is currently highly subsidized. The industry was in transition in early 1996, awaiting the liberalization of sugar and alcohol prices in January 1997 and the impending Government decision on future policies towards PROALCOOL; indications were that the programme would be maintained, perhaps in modified form, for environmental reasons.
Brazil is the world's second largest wheat importer, the Government having abandoned the previous goal of self-sufficiency. Buying and selling of wheat was privatized in 1990 and Banco do Brazil no longer participates in this activity. Until 1994, Brazil maintained a special arrangement with Argentina for the importation of wheat, covering two million tonnes a year. Brazil has eliminated a tariff quota under which the tariff for wheat was reduced to zero on an annual quota of 750,000 tonnes.
Brazil is a large producer of gemstones and several major industrial minerals. Nevertheless, mineral resources remain under-exploited. This is in part the result of past policies, in particular provisions in the 1988 Constitution restricting foreign participation in mining operations. The removal in 1995 of such restrictions is expected to promote renewed interest in the sector. Constitutional changes have also made it possible for the Federal Government to engage private companies in the exploration and extraction of petroleum and natural gas, petroleum refining, import and export of refined petroleum products, and the maritime transport of hydrocarbons. The required regulations were sent to Congress in July 1996.
Manufacturing was the main beneficiary of government support under the earlier import-substitution strategy; the overall average applied tariff is 12.9 per cent but there is still considerable disparity, with downstream industries continuing to benefit from substantial tariff escalation. The sector has come under particular pressure in recent years, linked to the trade liberalization in 1992-94 and the real appreciation of the currency in 1994; export performance has been uneven, while strong domestic demand has resulted in rising imports for many manufactures particularly motor vehicles, textiles and clothing.
The automotive industry is the most highly assisted manufacturing activity in Brazil, with effective protection estimated at over 250 per cent. At the same time, Brazil is a large net exporter of vehicles. Brazil's motor industry achieved record production levels in 1995, even while imports were growing strongly, and in the first months of 1996. Following the introduction of trade measures in mid-1995, imports from countries other than MERCOSUL partners fell sharply. Investment the automotive industry has been high during the 1990s; investment plans announced in 1995 amounted to some US$10 billion.
Tariffs on motor vehicles were increased from 20 per cent in 1994 to 70 per cent in March 1995. Under the automotive régime introduced in 1995, the industry also benefits from tariff exemptions, combined with local-content and export balancing requirements. In 1996, a certificate of compliance with Brazilian standards became mandatory to obtain an import licence for motor vehicles; any required modifications must be made in the country of manufacture.
Quantitative limitations on imports of passenger cars were in force between June and October 1995. Brazil initially sought to justify these import restrictions under the balance-of-payments provisions of the GATT. Consultations with Brazil in October 1995 led the WTO Committee on Balance-of-Payments Restrictions to conclude that such measures were not justified; the measures were withdrawn with effect from 27 October 1995. In March 1996, Brazil requested a waiver from the provisions of the TRIMs Agreement in respect of its automotive régime. The request was withdrawn in May 1996. Japan and the United States have requested consultations under WTO dispute settlement procedures, supported by Canada, the European Union and Korea.
The auto-parts industry is likely to be a major beneficiary of the automotive régime introduced in 1995. The non-electrical machinery industry was also likely to be supported by the régime, as automotive parts manufacturers comprise its largest single customer group.
The privatization programme for iron and steel, initiated in early 1990, is now largely completed. Profits and investment have increased substantially. Between 1992 and 1994, Brazilian and Argentinian steel makers maintained a production-sharing arrangement.
The textiles and clothing industry has a number of large, technologically up-to-date, internationally competitive enterprises producing mainly cotton textiles and garments. However, as import barriers have come down, imports of textiles and clothing have increased, growing fourfold between 1991 and 1995. Import competition has led to the closing of numerous small and medium-size producers of man-made fibre fabrics, where technological obsolescence appears to be a major problem. In May 1996, safeguard quotas were introduced covering synthetic textiles and shirts imported from China, Hong Kong, Korea, Chinese Taipei and Panama.
Competition from Asian countries, particularly China, in the footwear industry is of major concern to Brazilian producers, although Brazil remains a net exporter of footwear and travel goods. Raw hides and skins are subject to an export tax of 9 per cent.
Inefficiencies in the services sector, particularly financial services, port handling and telecommunications have imposed severe constraints on other areas of the economy. Restructuring during the 1990s has produced considerable gains in some areas, and further progress is expected with the completion of the legal reforms begun earlier in the decade.
The State is still an important supplier of services, including banking, insurance, transport, telecommunications and electricity, although the current privatization programme is reducing such involvement. Foreign participation in key service activities has historically been restricted, but efforts are under way to liberalize foreign investment in activities such as banking, insurance and telecommunications.
Under the Constitution, all public telecommunications services fall under the control of State enterprises. Partial liberalization of such services is seen as a way to provide for the sector's large investment requirements and to enhance competition. A constitutional amendment has opened the possibility of greater private participation in the sector; new regulatory and pricing structures are under study to prepare for the possible privatization of the State-controlled telecommunications system; the National Congress is considering a bill to relax restrictions on foreign participation in cellular telephone, and satellite and value-added services. Brazil is a full participant in the negotiations on basic telecommunications; by and large, Brazil's offers in these negotiations reflect changes already made or proposed to the regulatory framework.
Brazil has a large and diversified banking system but foreign participation is modest, and limited under the Constitution. Except in connection with the privatization programme, there is no market access guarantee for the establishment of new branches and subsidiaries of foreign banks, or for increases in foreign participation in established firms. Foreign branches in Brazil are limited to the number existing on 5 October 1988. Foreign banks are only allowed to acquire branches of other foreign banks and to open a new branch, must close an existing one.
Brazilian banks benefited for many years from high inflation: they were able to earn high yields on non-interest-bearing deposits such as demand deposits and resources in transit, which tended to compensate for administrative inefficiencies. Adjustment to the new environment of lower inflation and positive real interest rates has put banks under pressure to cut costs and diversify into new activities. Despite serious problems, most analysts agree that Brazil's private bank sector remains solid and that the stability of the largest institutions forms a buffer against a systemic crisis.
The insurance market has expanded rapidly since 1994 and the achievement of a more stable economic environment. The Brazilian insurance market is served by some 122 companies and a government-controlled monopoly re-insurer. Several foreign insurers have ownership interest in Brazilian insurance companies but foreign-controlled firms account for only some 10 per cent of total premiums.
Under the Constitution, foreign access to Brazil's insurance market is relatively restricted. The incorporation of new branches and subsidiaries of foreign insurance companies, as well as increases in the percentage of the participation of foreign persons and firms in the capital stock of Brazilian insurance institutions with headquarters in Brazil is not permitted. Imports may only be insured with companies established in Brazil; exports must be insured in Brazil when the sale includes the insurance cost.
New foreign capital was authorized in health insurance in 1996. Insurance regulations under consideration by the National Congress would extend foreign participation in the sector, change authorization and operational rules as well as capitalization and private pension schemes, and could establish an indemnification fund to protect insured parties against the liquidations of insurers.
Foreign enterprises may not administer or operate airports or provide navigation and air traffic services; however, they may operate other auxiliary services for their own benefit. Authorization to operate air services is granted only to legal persons with headquarters in Brazil, fourth-fifths of voting rights in Brazilian hands and under Brazilian management. Cabotage services are reserved to national companies. The principle of reciprocity is the basis of Brazil's international bilateral agreements in the air transport sector.
The 1988 Constitution gave Brazilian shipowners priority for maritime transport services and imposed constraints on foreign nationals employed in the sector. A 1995 constitutional amendment eliminated restrictions and reduced previous requirements in the transport sector, in particular maritime navigation; the required implementing regulations is under consideration by Congress. Brazil is not a party to the United Nations Convention on a Code of Conduct for Liner Conferences, but it maintains cargo-sharing agreements with seven countries. The maritime transport of cargoes of public entities and goods benefiting from fiscal or credit official programmes must also be transported in Brazilian flag vessels, although waivers may be granted under certain circumstances. Petroleum and petroleum products must be transported by national flag vessels.
Brazil and international trading partners
The completion before schedule of Brazil's trade reform programme has been a key element in its economic gains since 1992. However, the reform process has faced more complex challenges since 1994 and policy directions have become less clear. Thus, although the adoption of MERCOSUL's Common External Tariff in January 1995 was a decisive step in the process of regional integration, the CET has not brought about improvements in Brazil's national tariff structure; frequent tariff adjustments give an appearance of uncertainty to the trade and investment régime. A series of potentially trade distorting measures taken since 1995 stand in sharp contrast to Brazil's general record of reform, but the context suggests lapses in implementation rather than a policy reversal.
Greater co-ordination, transparency and a more measured response to requests for assistance from specific sectors would help Brazil translate its stated commitment to free trade into actions more clearly consistent with its development needs and with a stronger multilateral trade system. Brazil's economy stands to benefit from the strengthened trade rules and import liberalization measures established under the WTO provisions.Back to top
TRADE POLICY REVIEW BODY: BRAZIL
Report by the Government
The Economic and Trade Environment
Since the first TPR (1992) the Brazilian economy has changed significantly. This change has been driven in large measure by a broad economic stabilization program put into force in July 1994 -the Real Plan.
The Real Plan is built on a series of previously achieved reforms, including the opening of the economy, the deregulation and liberalization of the exchange market and the normalization of relations with the international financial community.
As a result, the Real Plan has brought inflation rates to the lowest levels in the last 35 years. In the 12 months prior to the Real Plan, the General Price Index (GPI) increased by 5,000 per cent (five thousand per cent); in 1995, annual rates came down to 14.8 per cent, and this year the GPI is expected to increase by 10 per cent. It is important to stress that this sharp and continuous drop in inflation has been achieved in the absence of price or wage freezes, breaches of contracts or recession.
The Real Plan has been undertaken through three basic elements, a monetary reform including the creation of a new currency (the "Real"), the elimination of indexation in contracts - including wages and exchange rate - and a greater reliance on market mechanisms. The increase in interest rates and the contraction of credit experienced initially have more recently been reversed as the Plan evolves and matures.
The Brazilian Government is focusing its attention on the need to improve its fiscal situation and, in the medium run, on the reform of the role of the State in the economy.
Concerning the restructuring of the role of the State in the economy, in 1995, the Brazilian Congress approved a series of Constitutional Amendments. First of all, the more flexible rules for the State monopoly of the petroleum sector will allow the Government to contract private enterprises for the exploration and exploitation of petroleum and natural gas deposits and will lift restrictions on the importation of oil and its derivatives as well as refining and transportation. Secondly, with the liberalization of the telecommunications sector, the Government will be able, through public concessions, to contract private companies to operate telephone, telegraph and other communication services. Finally, another two major changes have been approved. The first one eliminated the "erga omnes" discrimination against foreign capital, by lifting the previous distinction between Brazilian firms of national capital and other Brazilian firms; and, the second eliminated market reserve for national-flag ships in the coastal and inland cabotage.
Alongside Constitutional reforms, the Government is accelerating the privatization programme. The steel and petrochemical sectors have already been privatized. The programme has now entered a new phase with the creation of appropriate conditions for private investment and expansion in public services, such as electrical energy, water, gas and transportation.
Regarding the trade environment, the Government has complied with its commitment towards an increasing degree of exposure of local producers to foreign competition. Recent growth in imports has no precedent in the Brazilian economic history. In the last three years, imports grew, as stated before, by 150 per cent, from US$20 billion to US$50 billion.
The strong demand for imports resulting from the implementation of the Real Plan generated monthly trade deficits beginning in November 1994 and reaching a total of US$3.2 billion by 1995.
In summary, the trade flow of goods increased from US$56 billion in 1992 to US$96 billion in 1995, at an annual rate of 20 per cent, a higher rate than the increase in world trade at the same period. If the flow of services is added to the flow of goods, the relevant figure for 1995 was US$134 billion. The openness of the economy, measured as the relation between trade flows and GDP, grew from 12.5 per cent, in 1992, to 17 per cent this year.
The increased demand for capital goods and raw materials can be translated as the resumption of investment and the improvement in Brazil's productive capacity. The amount of foreign direct investment (FDI) received; by the Brazilian economy this year will be a historical record, reaching around US$8 billion.
Trade Policy Developments 1992-1996
Since the first TPR (1992) significant progress has been made in Brazil's trade regime. Thus, the autonomous trade liberalization programme which started in 1990 was completed on schedule, in July 1993. The trade liberalization programme (1990-mid-1993) led to the lifting of import prohibitions and to the elimination of non-tariff barriers. Likewise, import tariffs were substantially reduced with the average import duty falling from 32.2 in 1990 to 14.2 per cent in 1993. Following the establishment of the Mercosul Customs Union, the average import tariff was further reduced to 12.6 per cent. The maximum tariff came down from 105 per cent, in 1990, to 32 per cent beginning on 1 January 1996 (excluding a few items like automotive vehicles and home appliances).
(i) The Uruguay Round
The Brazilian Government has consistently implemented the results of the Uruguay Round and believes strongly in the new and improved structure of the multilateral trading regime, as embodied in the provisions that created the World Trade Organization. Particular attention has been paid in Brazil to improvements, agreed during the Uruguay Round, in areas as diverse as dispute settlement, anti-dumping and countervailing duties and safeguards.
(ii) Regional integration
Alongside its commitment to overall economic liberalization, Brazil has pursued the deepening of economic integration at the regional and sub-regional levels. From a geographic perspective and taking advantage of existing economic complementarities with neighbouring countries, Brazil's goal has been to foster convergence and development through further trade liberalization within the continent.
This strategy, however, should not be interpreted as a setback in Brazil's traditional approach to trade multilateralism. As a truly global trader, Brazil has consistently pursued open regionalism and has strongly defended full compatibility with the WTO agreements of disciplines negotiated under any regional framework.
The Brazilian trade with other Mercosul countries grew from US$3.64 billion in 1990, the year prior to the signing of the Asunción Treaty, to US$12.97 billion in 1995, the first year of the Customs Union operations. This growth of intra-zone trade of over 250 per cent between 1990 and 1995 occurred, in the case of Brazil, in tandem with a substantial growth in total foreign trade, which grew by 85 per cent during the same period, from US$52 billion in 1990 to US$96 billion in 1995.
Mercosul has been complying with its obligations under the WTO Agreements, with all relevant information having being properly notified.
(iv) Intellectual property
In line with its commitments under the TRIPS Agreement, Brazil approved new Industrial Property Legislation, on 14 May 1996, covering the granting of patents for invention, for utility models, registration of industrial designs and of trade marks, repression of false geographical indications and unfair competition.
(v) Foreign trade barriers
Although Brazil has committed itself to a comprehensive programme of trade liberalization the growth rate of its exports is far lower than that of its imports. To a large extent, the situation may be explained by the existence of barriers of several sorts to country's exports.
The impact of this situation can be clearly shown through the following figures which compare Brazilian trade flows of 1995 to the numbers of the previous year, for three major trading partners (the EU, Japan and the United States): comparing 1995 to 1994, the increase in Brazilian imports from these partners was as high as 50 per cent, 42 per cent and 55 per cent, respectively. However, the increase in Brazilian exports to these partners amounted to only 6 per cent in the case of the European Union, 20 per cent in the case of Japan and as far as the United States are concerned, there was even a decrease of 2 per cent. The overall figure shows an increase of around 50 per cent in imports, against merely 7 per cent in exports, in the same period.
(vi) Commitment to trade liberalization
With trade liberalization, Brazil is reducing the previous anti-export bias that characterized the inward-looking model of import substitution.
The Federal Government is addressing a series of public policy issues in the area of foreign trade with the objective of further reducing the anti-export bias and of fostering the generation of income and employment.
The Federal Government is also in the process of implementing a series of measures in the fields of infrastructure, taxes, deregulation, the financial sector and labour relations.
The liberalization process undertaken since 1990 is irreversible. The difficulties found in some sectors to adjust themselves not only to the most significant market opening in Brazilian history but also to the most encompassing and profound stabilization plan ever implemented in the country, in no way affect Brazil's commitment to trade liberalization and greater interdependence, what has been evidenced by the country's active participation in the WTO, during these nearly two years of existence of the organization. Back to top
Footnote: 1MERCOSUL'S Members include: Argentina, Brazil, Paraguay and Uruguay