Trade Policy of Brazil - Case Study Example

Running Head: Trade Policy of Brazil Trade Policy of Brazil of Trade Policy of Brazil Brazil initiated economic reforms in 1990. This has been beneficial for the country since trade and investment has increased. State monopolies and prices have been deregulated. The economy has been able to recover from external shocks and a financial crisis. Its main policy objectives have been the reduction of inflation. It has used primary fiscal balance and inflation targeting as it main monetary policy instruments. Interest rates have been stable and inflation rates have been lowered due to inflation targeting. The country’s economic growth has been modest and it is expected to exceed 3% in 2008 (Parkin 2005, 34). A market exchange rate can be beneficial for Brazil in reducing imports and supporting exports. This is a positive strategy to achieve high and sustainable economic growth. There is a fiscal deficit due to the country’s large public debt. The government has kept primary surpluses to offset interest payments and decrease the debt/GDP ration. It has constrained policy choices and contributed to high interest rates. Brazil is vulnerable to increase in international interest rates. The public debts form 55% of GDP. This causes a hindrance to the government’s ability to invest. Brazil’s exports have performed strongly because of trading with partners like China. The share of goods and services in the GDP has risen from 22.9% in 2004 to 30% in 2007. Brazil’s sectoral economy has been stable despite small readjustments. Traditional export oriented industries have seen growth. There has been a fall in the GDP shares of domestic activities like real estate and construction. The services industry, financial services and telecommunications have benefited from modernization. Manufacturing remained a contributor to the GDP. Brazil has a robust and modern manufacturing sector which is capable of competing in world markets. The country also made progress against poverty despite fluctuations in the economy. Barriers to foreign trade and investment had been lowered. Infant mortality has also decreased while basic education enrollment has increased. Income equality and poverty remain major problems for the economy. Brazil’s north east suffers from poverty and illiteracy. Urban violence is a major problem in the cities. Economic reform has been continuing in Brazil which includes fiscal discipline and inflation targeting. Trade liberalization has played a positive impact on productivity and investment by lowering prices of capital goods. Brazil has streamlined its import procedures and import regulations in order to simplify the trade regime. All goods do not require import licensing (Payne 2004, 64). Tariff is the main trade policy instrument of Brazil. Tariffs on agricultural products are lower than on non agricultural products. Brazil also has low tariff dispersion. It has also implemented several tariff concession schemes. They are granted by using customs regimes. These allow temporary importation and warehousing of imports with paying custom duties. Imports with tax reductions are subject to comparability tests with domestic products of Brazil. Anti dumping measures are also widely implemented in Brazil. There have been 52 anti dumping investigations in 2007. Duties have been applied to cement and steel products. It has also conducted safeguard investigations after the establishment of the WTO (Jank 2005, 74). A key element of Brazil’s trade policy is export promotion. It is used to offset expensive financial intermediation and domestic inefficiencies. Brazil has modified its export financing program according to the requirements of the WTO. The government has also implemented preferential credit schemes for exporters. There are incentives and assistance schemes for the promotion of research and certain sectors. The competition policy legislation has been extended to bring important cases under the law. Privatization has also been pursued to increase efficiency and production. Foreign trade policies and programs are proposed by The Secretariat of Foreign Trade. The Register of Importers and Exporters is used to register individuals and organizations engaged in foreign trade. The Integrated Foreign Trade System is used to manage foreign traders. Operations can be registered online or by authorized agents. The structure of Brazil’s tariff consists of 9,730 tariff lines. They are levied on the c.i.f value of the import (DNPM 2004, 54). There are no seasonal and variable import levies. The average applied MFN tariff was 10 % in 2007. Brazil’s agricultural tariffs are lower than non agricultural tariffs. Brazil has a higher tariff average on processed items as compared with raw materials. A special regime looks after goods which are imported through mail and the internet. At least 60 % import duties is applied for imports of up to US$3,000. Medicines, books, journals and newspapers are exempted from import duties. During the Uruguay Round, Brazil bound its entire tariff. The binding rate for agricultural products is from 0% to 55%. Brazil has the “Ex Tarifario” mechanism to allow companies to obtain tariff concessions. This mechanism has the ability to temporarily remove import duties of capital goods and telecommunication goods. These rates can be used for two years. The temporary admission regime allows goods imported to have tariff exemptions. Finally there are a number of customs regimes that allow tariff exemptions on a temporary basis. Tariff quotas have been temporarily established by the Brazilian government for certain quantity of imports. Currently only one tariff heading is subject to a tariff quota. Pears and apples are subject to an MFN tariff quota. Garlic, wheat and chemical products are subject to some preferential tariff quotas. Several imports from Latin American countries are subject to tariff preferences by Brazil. Customs union and free trade agreements have facilitated the process of tariff preferences by Brazil. Trade liberalization has helped in application of tariff reductions. Brazil has now allowed imports from several Latin American countries to be exempted from duty (Central Bank of Brazil 2007, 24). Brazil has placed import prohibitions to protect its population and environment. Goods which pose a threat to the population are prohibited under Brazilian import laws. Rare species of plants and animals cannot be imported in Brazil. It also does not allow the import of toxic and hazardous substances. Ozone depleting substances, used tyres and toy firearms are prohibited under Brazilian law. Pesticides also cannot be imported in bulk quantity in Brazil. Consumer goods and used machinery are subject to non automatic licensing. There are 48 anti dumping measures as of June 2007 in Brazil. Steel products, chemicals and cement are subject to duties. The WTO Agreement on Safeguards regulates safeguard measures in Brazil. They can be applied for a period of two years. There have been two safeguard investigations since the establishment of the WTO. The Consolidation of Ministerial Acts codifies export procedures of Brazil. Exporters are automatically registered after the first export operation. Exports less than US$10,000 are not subject to registration procedures. SICOMEX is an export documentation system that processes export documentation before the loading of the merchandize (Jank 2003, 74). Goods like coffee, lobster, soy, sugar, cigars, marble, granite, paper and silk are subject to export taxes, licensing and restrictions. Currently Brazil levies export taxes on eight products. These are to ensure a steady domestic market supply. Export tax revenue was US$32.2 million in 2007 for exports of US$58.2 billion. Export taxes are zero rated and are assessed on the f.o.b value of the goods in the international market. Some destinations are exempt from this export tax. Some organic chemicals are subject to export restrictions. Exports of wood have been also prohibited under Brazilian law. Military equipment and weapons also cannot be exported to certain countries in compliance with United Nations sanctions. Certain Brazilian woods are subject to quotas. Textile and clothing products exported to Canada and the European Union require export licenses. They are issued by the Banco do Brasil. Some exports have to be authorized by agencies because of health and environmental reasons. Import taxes can be suspended, exempted and restituted under the Brazilian drawback system. Industries and commercial organizations engaged in foreign trade can avail of this facility. To receive those benefits the value of exports must be 40% higher than the imported inputs. Goods which are imported for industrialization can have their import taxes suspended by the Special System of Industrial Depots. Organizations have a capital equal or above to some US$700,000. Further they must export a minimum of US$10 million worth of goods for the first three years of use of the regime (Clark 2006, 94). There are zero rates for income tax on remittances used abroad for the promotion of exports. Tax credit can be obtained by exporters for social contributions for material used in export. Small and medium sized companies involved in international trading can be funded by The Export Financing Programme in Brazil. It finances Brazilian exports and goods at international markets. In 2002 The Export Financing Programme supported exports of US$7.5 billion in 2007. Goods, services, software and cinematographic works can be used to export under The Export Financing Programme. Direct financing and interest rate equalization payments are the two modalities of The Export Financing Programme. Financing is granted by the treasury directly to the exporter or the importer. The equalization program provides the financial cost of export credit provided by Brazilian banks. It makes the financial costs equivalent to the international market by paying part of costs. Brazil has The Export Credit Insurance scheme to cover losses suffered by exporters from non receipt of foreign payments for their exports. Since 2000 there have been no new price controls by the Brazilian government. Market movements are the main factors by which prices are determined. All acts and contracts that damage competition or create a monopoly of relevant markets are monitored by Brazilian legislation. The government has privatized the telecommunications and electricity sectors. Foreign direct investment has played an important part in privatization. The government controls several industries which are involved in the production of goods and services. There are federal and state programs aimed at promoting research and targeting specific sectors. Several parts of the country which are less developed are subject to regional programs which offer tax benefits for foreign investors (Clark 2006, 94). Brazil is a major exporter of agricultural products. They account for around 40 percent of the country’s exports in 2007. Sugar and coffee are the main agricultural products which are exported. Credit for the agriculture sector is financed by the financial system or the treasury. Support programs have been implemented for agriculture by providing preferential credit lines to finance production and investment. The intensive and extensive margins of production have enabled Brazil to grow its output. Brazil possesses mineral and forestry resources. It is a major exporter of minerals. The government has ensured that supply of electricity is not disrupted. It has promoted affordable tariffs and universal service programs. Brazil has a well diversified manufacturing sector. The industrial policy is based on expanding the volume of exports. Government support programs have benefited the automobile and ship building industries. Tariffs are higher for beverages, transport equipment, clothing and footwear activities. Electronics, machinery, automobiles and aircraft industries have become world class manufacturers of products in Brazil. The liberalization of Brazil’s services sector has promoted efficiency gains. Banking and insurance services are supplied by the government. Foreign investment in telecommunications and financial services remain limited due to state legislation (Mesquita 2004, 74). Brazil is expecting an economic turnaround during the year with a GDP growth of 3 percent in 2008. The overall government deficit is expected to decline to 1% of GDP by 2008. A market exchange rate can be beneficial for Brazil in reducing imports and supporting exports. This is a positive strategy to achieve high and sustainable economic growth. There is a fiscal deficit due to the country’s large public debt. The government has kept primary surpluses to offset interest payments and decrease the debt/GDP ration. It has constrained policy choices and contributed to high interest rates. References: Parkin, Vincent. Chronic Inflation in an Industrialising Economy: the Brazilian Experience. New York: Cambridge University Press, 2005. Payne, Leigh A. Brazilian Industrialists and Democratic Change. Baltimore: Johns Hopkins University Press, 2004. Jank, Marcos S, (2005) Agricultural Liberalization in Multilateral and Regional Trade Negotiations, Inter-American Development Bank, October 2005 DNPM (2004), Taxation of Mining Activities in Brazil. Central Bank of Brazil (2006), Annual Report 2007. Jank, Marcos S., (2003) Agricultural Trade Liberalization in Multilateral and Regional Trade Negotiations, Pacific Economic Co-operation Council, PECC Trade Forum, Washington D.C., 22-23 April 2003. John W. Clark, Competition Law and Policy Developments in Brazil, OECD Journal of Competition Law and Policy , October 2006, vol. 2, No. 3. Mesquita Moreira, Mauricio (2004), Brazils Trade Liberalization and Growth: Has it Failed? Inter-American Development Bank, INTAL-ITD Occasional Paper 24, Buenos Aires, March 2004. . Read More