Brazil Opens Up an Economy Long Shielded From Competition

quarta-feira, setembro 25, 2019

Wave of tariff cuts aimed at jump-starting one of the world’s largest closed economies

BRASÍLIA—President Jair Bolsonaro ’s administration is opening up one of the world’s most closed big economies, slashing import tariffs on more than 2,300 products and exposing local industries long accustomed to protectionism to the challenges of free trade.

With little fanfare, the conservative government has since taking office in January eased the entry of ultrasonic scalpels, cancer drugs, heavy machinery and more, in some cases with tariffs reduced to zero from as much as 20%.

The tariff cuts affect a relatively small number of imports and apply mostly to items Brazil doesn’t make. But they reflect a significant shift in the world’s eighth-largest economy, where duties were twice as high as in Mexico, China and the European Union last year.

The new opening is a central feature in Economy Minister Paulo Guedes ’s plans to make the country of 210 million more competitive, part of an effort to rekindle a moribund economy historically shielded from foreign competition and bogged down by bureaucracy. Since 2014, the country has been mired by recession and low growth, with the jobless rate hovering at 12% or more.

“Brazil’s model of protectionism has failed,” Deputy Economy Minister for Trade Marcos Troyjo, one of Brazil’s chief trade negotiators, said in an interview. “It’s been 40 years without sustainable economic growth.”

Slashing tariffs is an essential step in the implementation of a trade deal with the EU that was clinched in June after years of negotiations spanning the administration of four of Mr. Bolsonaro’s predecessors.

Although winning approval of the pact faces challenges, analysts who are tracking its implementation say legislators in the 32 countries covered are likely to approve the deal in about two years. It would create a $21 trillion trade bloc of 780 million people, the biggest in the world. But Brazil is also pursuing trade deals with South Korea, Canada, the U.S. and other countries.

“This administration is pushing for trade openings harder than its predecessors,” said Filipe Carvalho, a Washington-based analyst who tracks Brazil for the Eurasia Group, a political-risk consulting firm. “An increase in commerce can have a significant impact on the economy and also give Brazil a bigger role in global affairs, both key goals of the administration.”

Brazil has created a system where tariffs were sky high and the state inserted itself to jump start industries or protect them. Car makers are shielded with 35% tariffs on imported autos. Deep in the Amazon, hundreds of factories in the Manaus Free Economic Zone enjoy tax cuts—and tariffs leveled on foreign competitors—as they churn out electronics, motorcycles and other products sold to Brazilians at hefty prices.

Brazilian importers pay tariffs on everything from drugs to clothing, dairy products and more. The country is among the few in the digital age to charge foreign vessels a lighthouse-maintenance fee, a duty created two centuries ago, even though ships now use global positioning systems to navigate. The duty is set to die under the European agreement.

The problems created by protectionism are evident throughout Brazil’s economy.

When Mauá University outside São Paulo imported American equipment last year that it couldn’t find in Brazil to upgrade its physics lab, for example, import tariffs doubled the price tag to $70,000, said Francisco Olivieri, a business professor and head of Mauá’s technology department.

Protectionism hurts businesses that need to import supplies or parts and face high tariffs and bureaucracy to do so, which pushes them away from global supply chains.

Red tape related to tariffs at Brazilian ports mean imported supplies can take weeks to reach buyers, causing production delays.

Fifty-five percent of foreign products require the importing companies to obtain permits from as many as six different government agencies, according to a recent study by the National Confederation of Industry, or CNI, a trade group that represents Brazilian factories. Importers are subject to steep fines if they fail to request a permit, but it is often difficult to determine from which agencies they must seek approval.

So many years of protective policies have made some Brazilian businesses too fragile to compete in a free market, some analysts and executives say.

“We have always had a protectionist model,” said João Ebert, chief operating officer at Xalingo SA, a 600-employee toy maker in Brazil’s southern tip that would face challenges if Brazil keeps opening up to trade.

He said competing with imports would be hard if conditions in Brazil for businesses, from the quality of infrastructure to red tape, don’t improve before trade deals open the floodgates for cheaper, and often better, rivals. Make those improvements, Mr. Ebert said, and his company’s productivity would increase.

“We need to be more productive and efficient to deal with the new competition,” he said. “It’s a two-way street.”

It takes nearly 2,000 hours a year for a typical company to file corporate taxes in Brazil, the World Bank says, more than any of the 190 countries it tracks. In neighboring Argentina, also considered tough on companies, it takes 311.5 hours a year.

Worn-out roads and a lack of railways make freight prices in the huge nation twice as expensive as in the U.S., according to Pro-Logistic Movement, a Brazilian farming trade group. Brazilian businesses have long said that a trade opening should come only after bureaucracy and taxes were cut and roads, ports and railways expanded and improved.

Carlos Abijaodi, director of industrial development at CNI, the industry confederation, said that businesses now want both trade and reforms to take place at the same time. CNI, which supports trade deals, sees the two changes as central to improving Brazil’s business climate.

“Opening the economy brings great responsibilities upon the government,” Mr. Abijaodi said. “The government will have to remove costs stemming from bureaucracy, from our tax system, our logistics and infrastructure.”

Page: The Wall Street Journal

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