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2014 Media Kit
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Industry pain stirs protectionist moves by Brazil

By: | at 08:00 PM | International Trade  

Brazil’s old protectionist instincts have been reawakened by cries of pain from manufacturers hurt by imports, swelled by the country’s strong currency.

A hefty rise in car import taxes announced this month was the latest sign of Brazil’s increasingly defensive stance in what its Finance Minister Guido Mantega has called a global “currency war.”

In recent months, the government has barred foreigners from buying farmland and approved a series of financing and fiscal incentives aimed at beefing up domestic production and shielding its suffering manufacturing industries.

Industry leaders insist Brazil is not returning to the dark ages of protectionism before the 1990s when the country had a tightly closed economy based on import substitution.

But the policy steps this year show that Brazil’s center-left government is willing to push its interpretation of world trade rules to the limit—and perhaps beyond—as it struggles to cope with its muscular currency and stiff competition from Chinese imports.

“It is very hard to imagine Brazil falling back into a very protectionist equilibrium,” said Christopher Garman, an analyst with Eurasia Group risk consultancy firm in Washington.

“But I would not be surprised if the Brazilian authorities continue to try to enact measures to protect local industry within the parameters of the WTO framework and even potentially push the limits of what is legal. This (car) tax could be an example,” he said.

The real strengthened 35 percent against the dollar in 2009, another 5 percent in 2010 and year-to-date it has erased about 10 percent of its value against the U.S. currency.

So overall the real is still fairly strong, making imports in domestic currency terms still cheaper than they were a few years ago.

As a result Brazilians are increasingly lapping up foreign manufactured goods.

Imports of manufactured goods rose to $119.1 billion in the first eight months of the year, up 26.2 percent above the year-earlier period, led by automobiles, refined fuel, autoparts and medicine, the trade ministry says.

That far outpaced manufactured exports, which rose 20 percent to $60.1 billion in the first eight months of 2011.

PRICIER FOREIGN CARS

The government hiked car a tax on imported cars by 30 percent this month, aiming to encourage local sourcing of components and protect its large domestic auto-industry from a deluge of cheap imports.

“We had to stop the hemorrhage immediately. Otherwise the patient would have died,” said Roberto Giannetti, head of international relations at FIESP, Brazil’s most influential business lobby.

“The protectionist tag is a little stigmatized—I don’t think temporary measures to protect the industry could be described as ideological protectionism. It’s just a reaction to the circumstances,” he told Reuters.

The share of the country’s auto market taken up by imports rose to 22.5 percent in the first eight months of this year, according to the car industry association.

That hit international heavy-weights such as Volkswagen , Fiat , General Motors and Ford that manufacture cars in Brazil and are anxious to preserve their dominant share in a market that could reach record sales of 3.7 million units this year.

Relative newcomers who import their cars, such as China’s Chery Automobile, have been grabbing market share and will be hardest hit by the new steps.

Chery took its case to the Brazilian courts and was able to delay the tax increase by 90 days.

In a possible sign of the adverse investment effects of protectionist moves, fellow Chinese automaker Jianghuai Automobile Co. (JAC) announced last week it was freezing plans to build a $600-million factory in the country.

At the beginning of September, Brazil also announced it was jacking up tariffs on some Chinese steel products.

Currency Misalignments

Underlying much of Brazil’s currency strength are high domestic interest rates.

Brazil’s benchmark interest rate of 12 percent is the highest of any major world economy and is a mag