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PRESS/TPRB/45
24October 1996
BRAZIL 'SREFORMS PROMOTE ECONOMIC GAINS
BUT IMPLEMENTATION OFTRADE POLICY REMAINS COMPLEX
Brazil 'stradereforms havebeenakeyelement behind itseconomic gains since1992. Emphasis
onautonomous tradeliberalization, evenbefore theconclusion oftheUruguay Round, allowed Brazil
tomake deepcutsintariff rates, toeliminate most ofitsnon-tariff measures andtomake specific
commitments intheareaoffinancial services. However, since1994, Brazil 'stradepolicy choices have
become more complex andtrade practices appear lesstransparent.
According toanewWTO report onBrazil 'stradepolicies andpractices, amajor achievement
hasbeenthereduction ofinflation from anannual rateofnearly 2,500 percentin1993 tosome 20
percentinearly 1996. Thiswasachieved inlarge partthrough theimplementation ofBrazil 'snew
stabilization programme, thePlano Real, introduced inmid-1994. TheWTO report andoneprepared
bythegovernment ofBrazil, willbethesubject oftwodaysofdiscussion attheTrade Policy Review
Body oftheWTO on30and31October 1996.
Although economic activity hasrecovered, growth remains constrained byhigh, albeit falling,
realinterest rateslinked totightmonetary policies. Improved economic performance, greater price
stability andhighinterest rateshaveresulted inastrong inflow offoreign capital andaconsiderable
accumulation ofinternational reserves. However, concurrent current account andmerchandise trade
deficitsraisethepossibilityofanovervaluedexchangerate.Thereportnotesthatthiswouldbeconsistent
withthesharp increase inimports since1994andalossofexport dynamism, which formthebackdrop
forrecent moves torestrict selected imports andsupport exports. Thereport states thatthesemeasures
suggest alapse inimplementation rather thanapolicy reversal.
Under itstariffreform programme, Brazil 'saverage applied tariffdropped from21.2percent
inJanuary 1992 to14percentinJuly1993 andnowstands at12.5percent. Although theadoption
ofMERCOSUL 's1Common External Tariff (CET) on1January 1995wasadecisive stepintheprocess
ofregional integration, theCETdidnotbring about improvements inBrazil 'snational tariffstructure.
96-4479
MERCOSUL 'SMembers include: Argentina, Brazil, Paraguay andUruguay
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Page2/3
According tothereport, thestructure isrelatively complex, withseveral variable exemptions from
theCET, subject toaprocess ofconvergence through totheyear2006. Furthermore, frequent tariff
adjustments giveanappearance ofuncertainty toBrazil 'strade andinvestment regime.
Economic reforms havebeenaccompanied byliberalizing changes inBrazilian laws, including
theelimination oftheconcept of"Brazilian company ofnational capital" andtheopening ofanumber
ofstrategic areas toprivate andforeign participation. Under Brazil 'sprivatization programme, the
number ofstateenterprises hasbeenreduced to147. Thegovernment haswithdrawn fromthesteel,
fertilizer, petrochemicals andaircraft industries, andin1995itextended theprivatization programme
totheelectrical, supply, financial, railways andmining sectors. Nevertheless, theGovernment isstill
animportant supplier ofservices, including banking, insurance, transport, telecommunications and
electricity. Although foreign participation inkeyservice sectors hashistorically beenrestricted, efforts
areunderway toliberalize foreign investment inseveral suchactivities.
According tothereport, Brazil 'suseoftrade remedy measures increased during the1992 to
1995 period, when 66anti-dumping cases (mainly onchemical andmineral products) and13
countervailing investigations (onagricultural goods) were initiated. Inmid-1996, 25anti-dumping
andseven countervailing actions were inforce, andinJune1996 Brazil useditsnewsafeguards
legislation toprovide protection toitstoyindustry. Since 1992, Brazil hasbeeninvolved inanumber
ofconsultations andpanel reviews within theGATT/WTO framework regarding theapplication of
itsanti-dumping andcountervailing regulations. However, newlegislation inthese areas should help
Brazil adapt tothemore stringent conditions foranti-dumping andcountervailing measures contained
intheWTO Agreements.
Exports ofsugar andethyl alcohol arelimited bytaxes toensure theinternal market supply.
Export taxes alsoapply torawhides andskins. Taxexemptions areusedtooffset costs imposed on
exporters bythecomplex system ofFederal andState taxes. Thereport states thattaxandduty
exemptions andreductions forinputs toexport industries (tobephased-out by1999) haveprovided
major benefits toexporters, particularly intheautomotive sector. Other efforts topromote exports
haveinvolved export finance programmes aimed atoffsetting inefficiencies intheBrazilian financial
system, andtheuseofexport performance requirements.
TheautomotiveindustryisthemosthighlyassistedmanufacturingactivityinBrazil,witheffective
protection estimated atover250percent. According tothereport, Brazil isalarge netexporter of
vehicles, itsmotor industry achieving record production levels in1995. Investment plans forthe
automotive industry in1995amounted tosome $10billion. Tariffs onmotor vehicles wereincreased
from 20percentin1994 to70percentinMarch 1995. Under theautomotive régime introduced
inmid-1995, theindustry benefits from tariff exemptions, combined withlocal-content andexport
balancing requirements. Following theintroduction ofsucharégime, imports fromcountries other
thanMERCOSUL partners fellsharply. In1996, acertificate ofcompliance withBrazilian standards
became mandatory toobtain animport licence formotor vehicles. Required modifications must be
made inthecountry ofmanufacture.
Although thetextiles andclothing industry hasinternationally competitive enterprises, import
competition hasledtotheclosing ofnumerous small andmedium-size producers. Asimport barriers
havecome down, imports oftextiles andclothing haveincreased, growing fourfold between 1991and
1995. Asaresult, credit terms became aconsideration inthegranting oflicences fortextile imports.
InMay1996, under theprovisions oftheWTO Agreement onTextiles andClothing, transitional
safeguard quotas were introduced oncertain textiles.
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Thereport states thatinthepast,Brazil 'sregulations onintellectual property were asource
offrictionwithcertaintradingpartnersbutthatundertheTRIPSAgreementBrazil'sintellectualproperty
regulationsarebeingreformulated.AnewIndustrialPropertyLawwasapprovedinMay1996covering,
among other areas, pipeline protection, thegranting ofpatents ofinvention andofutility models,
registration ofindustrial designs andtrademarks andrepression offalsegeographical indications.
Initsconclusions thereport states thatgreater co-ordination, transparency andamoremeasured
responsetorequestsforassistancefromspecificsectorswouldhelpBraziltranslateitsstatedcommitment
tofreetrade intoactions more clearly consistent withitsdevelopment needs andwithastronger
multilateral trade system. Thereport identifies Brazil 'scurrent challenges asensuring thecontinuity
ofthemore open, lower-inflation environment while preserving external balances, achieving therapid
economic growth required toabsorb anexpanding labour force, andresisting pressure toreverse the
reform process.
Notes toEditors:
TheWTO Secretariat 'sreport, together withareport prepared byBrazil, willbediscussed
bytheWTO Trade Policy Review Body (TPRB) on30and31October 1996.
TheWTO 'sTPRB conducts acollective evaluation ofthefullrange oftradepolicies practices
ofeachWTO member atregular periodic intervals andmonitors significant trends anddevelopments
which mayhaveanimpact ontheglobal trading system.
Thetworeports, together withareport oftheTPRB 'sdiscussion andoftheChairperson 's
summing up,willbepublished induecourse asthecomplete Trade Policy Review ofBrazil andwill
beavailablefromtheWTOSecretariat,CentreWilliamRappard,154ruedeLausanne,1211Geneva21.
Thereports cover thedevelopment ofallaspects ofBrazil 'stradepolicies, including domestic
lawsandregulations, theinstitutional framework, trade policies bymeasure andbysector. Since the
WTO cameintoforce, the"new areas" ofservices tradeandtrade-related aspects ofintellectual property
rights arealsocovered. Attached arethesummary observations fromtheSecretariat andgovernment
reports. Fullreports willbeavailable forjournalists from theWTO Secretariat onrequest.
Since December 1989, thefollowing reports havebeencompleted: 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), Côted'Ivoire
(1995), Czech Republic (1996), Dominican Republic (1996), Egypt (1992), theEuropean Communities
(1991, 1993 &1995), Finland (1992), Ghana (1992), Hong Kong (1990 &1994), Hungary (1991),
Iceland (1994), India (1993), Indonesia (1991 and1994), Israel (1994), Japan (1990, 1992and1995),
Kenya(1993),Korea,Rep.of(1992&1996),Macau(1994),Malaysia(1993),Mauritius(1995),Mexico
(1993), Morocco (1989 &1996), NewZealand (1990 &1996), Nigeria (1991), Norway (1991 &1996),
Pakistan (1995), Peru(1994), thePhilippines (1993), Poland (1993), Romania (1992), Senegal (1994),
Singapore (1992 &1996), Slovak Republic (1995), South Africa (1993), SriLanka (1995), Sweden
(1990 &1994), Switzerland (1991 &1996), Thailand (1991 &1995), Tunisia (1994), Turkey (1994),
theUnited States (1989, 1992 &1994), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia
(1996) andZimbabwe (1994).
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TRADE POLICY REVIEW BODY
BRAZIL
Report bytheSecretariat -Summary Observations
Introduction
Brazil hasmade considerable progress indealing withsome oftheeconomic constraints itfaced
intheearly 1990s: principally, inrestoring growth andconfidence intheeconomy andlowering
inflation. Since economic growth resumed in1993, theeconomy hasproved resilient toexternal shocks
andforeign capital hasflowed copiously intothecountry. Trade liberalization, privatization, thegradual
opening ofkeyactivities toforeign investment, andgeneral deregulation arecreating anincreasingly
competitive economy. Theprocess should befurther aided bycontinuing microeconomic andfiscal
reforms. Today 'schallenge istoensure thecontinuity ofthemore open, lower-inflation environment
andpreserve external balances, while achieving therapid economic growth required toabsorb an
expanding labour force, andtoresist pressure toreverse thereform process.
Economic environment
Brazil 'smajor macroeconomic achievement inrecent years hasbeenthereduction ofinflation
from anannual rateofnearly 2,500 percentin1993 tosome 20percentinearly 1996. Thiswas
achieved inlargepartthrough theimplementation ofanewstabilization programme, thePlano Real,
introduced inmid-1994. RealGDPgrowth recovered to5.8percentin1994, although therehassince
beenaslowdown. Economic growth remains constrained byhigh, albeit falling, realinterest rates
linkedtotightmonetarypolicies.Fiscaldeficitsrequireattentionbothontherevenueandtheexpenditure
side.
Highinterest rates, combined withimproved economic performance, intensified privatization
efforts, andgreater pricestability haveresulted inastrong inflow offoreign capital andaconsiderable
accumulation ofinternational reserves, whose composition hasalsovaried. Concurrent current account
andmerchandise tradedeficits haveledsome observers tosuggest thattherealeffective exchange rate
(REER) isovervalued. Certainly, therewasasharp appreciation oftheREER in1994, when thenew
currency, thereal,wasintroduced, butthere hasbeenaprogressive depreciation since then. The
possibility thattheREER hasbeenovervalued would beconsistent withthesharp increase inimports
since1994andalossofexport dynamism, which formthebackdrop forrecent moves torestrict selected
imports andsupport exports.
Trade andInvestment Policy Framework
Since thelastreview, thestructure oftrade policy formulation inBrazil hasundergone major
changes. Inlate1992, theMinistry ofEconomy, Finance andPlanning wasdivided intothree
Ministries: (i)Planning andBudget, (ii)Finance, and(iii)Industry, Trade andTourism. In1995,
theChamber ofForeign Trade, consisting ofthemaineconomic ministries andagencies, wascreated
toformulate andevaluate policies, co-ordinate activities related toforeign tradeandserve asadiscussion
forum forthepublic andprivate sectors.
ThegradualprocessofreformingBrazil'slegalframeworkhascontinued.In1995,constitutional
amendments approved byCongress eliminated theconcept of"Brazilian company ofnational capital"
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andopened anumber ofstrategic areas toprivate andforeign participation. Adoption ofimplementing
regulations isnowinprogress.
Brazil 'semphasis onautonomous trade liberalization before theconclusion oftheUruguay
Round allowed ittoofferdeepcutsinitsbound tariff rates, aswellaselimination ofmostnon-tariff
barriers totrade. Brazil alsomade specific commitments intheareaoffinancial services andisactively
participating inthebasic telecommunications negotiations. Newregulations havebeenintroduced to
facilitate theimplementation ofWTO commitments, including intheareas ofsafeguards andindustrial
property. Theauthorities consider thatBrazil 'sconcessions inthisRound werenotfullymatched by
certain major trading partners.
While theWTO provides themainframework forBrazil 'sgeneral traderelations, efforts have
alsobeenfocused onthecompletion ofMERCOSUL, which isbecoming thecornerstone ofBrazil 's
trade agreements withother countries andgroups within Latin America andbeyond. Brazil isalso
actively participating innegotiations toestablish aFreeTrade Area fortheAmericas.
Trade Measures Directly Affecting Imports
Under thetariffreform programme, Brazil 'saverage applied tariffdropped from21.2percent
inJanuary 1992 to14percentinJuly1993 andnowstands at12.5percent. Tariff dispersion and
escalation werealsoreduced. TheshifttotheCommon External Tariff (CET) ofMERCOSUL did
notleadtoanymajor changes: Brazil 'snational tariffstructure remains relatively complex, withseveral,
variable exemptions fromtheCET, subject toaprocess ofconvergence through totheyear2006; such
exemptions haveallowed frequent adhoctariff changes toprotect particular products ortocontrol
domestic prices.
While thebinding ofBrazil 'sentire tariff schedule intheUruguay Round negotiations will,
overtime, provide greater security ofaccess, thestability ofcommitments hasbeenreduced bythe
factthatthevastmajority ofbindings arehigher thanapplied rates; bindings aregenerally ataceiling
rateof35percentformanufactures and55percentforagriculture. Theauthorities arecommitted
nottoapply theCETinthose caseswhere thecommon ratemight exceed Brazil 'sbinding commitments.
Ontheotherhand, tariffexemptions arestillactively usedtoallow duty-free import ofinputs andcapital
goods; particularly important aretheexemptions granted totheautomotive industry.
Many technical changes haveoccurred intrade regulations;
- stepshavebeentaken tosimplify tradeprocedures andfurther improvements areexpected with
theimminent implementation ofanewcomputerized import system.
- minimum import prices forcustoms valuation purposes.
- Criteriaestablishedin1994formotorvehiclesrequiretheuseoffactorylistorpublishedsecond-
hand prices, although Brazil doesnotapply minimum import prices forcustoms valuation
purposes.
- Changes affecting thelicensing régime since1992, including reducing licence validity periods
from 90to60daysandeliminating licence extensions, suggest departures from thegeneral
rulethatimports aresubject toautomatic licences, mainly forstatistical purposes. Limits on
credit terms havealsobecome aconsideration inthegranting oflicences fortextile imports.
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- Many changes havealsobeenmade tothedevelopment andadministration ofstandards, testing
andcertification since 1992. Although regulations require ISOmethodology forcertification
tobeadopted, theyalsoprescribe thepriority useofBrazilian norms; compulsory certification
isrestricted toproducts orservices thatmayaffect health, safety ortheenvironment.
- Modificationstohealth-relatedlegislationoverthelastfouryearsaimedtoestablishanup-to-date
product safety system andpre-empt possible difficulties forBrazilian animal products inforeign
markets. Newphytosanitary rules, covering some 100agricultural products, wereexpected
tocome intoforceinearly1996. Work wasalsoinprogress tobroaden thenumber oftechnical
rulestoprevent contaminating substances inimported foodproducts, inparticular wheat. Brazil
hassigned orisnegotiating bilateral phytosanitary agreements withanumber ofcountries.
Brazil 'suseofcontingency measures hasincreased, with66anti-dumping cases (mainly on
chemical andmineral products) and13countervailing investigations (onagricultural goods) initiated
between 1992and1995. Inmid-1996, 25anti-dumping andseven countervailing actions wereinforce.
Since 1992, Brazil hasbeeninvolved inseveral consultations andpanel reviews within theGATT/WTO
framework regarding theapplication ofitsanti-dumping andcountervailing regulations. However,
theintroduction ofnewanti-dumping, countervailing andsafeguard legislation together withthe
restructuring ofrelated administrative arrangements, should helpBrazil adapt tothemore stringent
conditions foranti-dumping andcountervailing measures contained intheWTO Agreements.
UptoJune1996, Brazil hadnever usedArticle XIXoftheGATT relating toemergency action
onimports ofparticular goods. Inthatmonth, provisional safeguard measures, intheform ofa
supplement totheCET increasing import taxes from 20to70percent, were adopted toprotect the
toyindustry. InMay1996, under theprovisions oftheWTO Agreement onTextiles andClothing,
transitional safeguard quotas were introduced oncertain textiles.
Trade Measures Directly Affecting Exports
Export procedures andtheprocessing ofexport documentation hasbeenimproved since the
lastreview, withtheintroduction ofthecomputerized information system, SISCOMEX, in1993.
Taxexemptions areusedtooffset costsimposed onexporters bythecomplex system ofFederal
andStatetaxes. Theneedforacomprehensive overhaul oftheinternal taxation system isrecognized
buthasfaced political andconstitutional obstacles. Under theBEFIEX programmes, taxandduty
exemptions andreductions forinputs toexport industries haveprovided major benefits toexporters,
particularly intheautomotive sector. Newbenefits under these programmes weresuspended in1990
andthephase-out ofexisting concessions should becompleted by1999. There havebeennomajor
changes tothedutydrawback system.
Other efforts tofacilitate exports haveinvolved export finance programmes aimed atoffsetting
inefficiencies intheBrazilian financial system. Support forexports ofmerchandise andservices is
available through theExport Financing Programme (PROEX). Although interest ratesarepegged to
LIBOR, therateequalization mechanism provides asubsidy toBrazilian exports astheGovernment
paysthedifferencebetweentheinterestchargedandthecostofraisingfunds.TheNationalDevelopment
Bank(BNDES)operatestheFinanceProgrammeforExportsofMachineryandEquipment(FINAMEX),
offering financing facilities forexports ofcapital goods andequipment.
ExportperformancerequirementsareusedintheBEFIEXprogrammes,whilecompanymergers
havesometimes beenmade conditional oncommitments todirect production toexport markets. Export
performance requirements arealsousedinconnection withthetariffreductions granted totheautomotive
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industry. Fiscal incentives fornon-Brazilian firms intheinformatics industry arelinked tobothexport
andtrade-balancing programmes.
Exports ofsugar andethylalcohol arelimited bytaxes toensure theinternal market supply.
Export taxes alsoapply torawhides andskins. Export quotas apply tosawnwood fromspecies under
environmental control. Brazil maintains export restraint arrangements under theWTO Agreement
onTextiles andClothing (ATC) withCanada, theEuropean Union andtheUnited States. Export
controls alsoapply insupport ofUnited Nations resolutions andtheCITES.
Measures Affecting Production andTrade
Theopening oftheeconomy andgreater reliance onmarket mechanisms ismaking competition
laws increasingly important andplacing greater demands ontheagencies responsible forthe
administration ofsuchlaws. Recent steps apparently strengthening suchagencies andstreamlining
merger procedures should helpincrease competition inthedomestic market.
Stateenterprises came toplayacentral rôleinBrazil 'seconomic lifeunder theformer import
substitution strategy; reducing suchinvolvement faced anumber ofpolitical, legalandconstitutional
obstacles, butconsiderable progress hasbeenmade. Under theBrazilian Privatization Programme
(PND) thenumber ofStateenterprises hasbeenreduced to147andtheStatehaswithdrawn fromthe
steel, fertilizer, petrochemicals andaircraft industries. In1995, thePND wasextended toinclude
theelectrical supply, financial, railways andmining sectors.
Pricecontrols stillaffect certain public tariffs andfares(e.g.forelectricity, water andtelephone
services), aswellasvarious fuels. Price controls related tothesugar-alcohol programme involve an
estimated R$1.9 billion inannual transfers.
Themain pillars oftheminimum price policies foragricultural products remain theFederal
Government Acquisition Programme (AGF), which gives farmers theoption ofselling theirproducts
totheGovernment atafixed minimum price, andtheFederal Government Loans Programme (EGF),
under which farmers receive financing tostockpile theirproducts. Suchpolicies haveundergone no
major modifications during thepastfouryears, although operational changes haveresulted fromfalling
public funding. These changes include raising realinterest ratesfortheprogramme topositive levels,
making useoffinancial markets forfunding, aswellastheimplementation ofanoptions system to
supplement minimum prices.
Pending theintroduction ofnewlocal-content regulations, theBasic Productive Process (PPB)
concept isoneofthecriteria usedtodetermine whether aproduct maybeconsidered Brazilian. The
PPBrequires firms toundertake locally, agreed manufacturing stepsforspecific products; itismostly
usedinrelation toproduction ofelectronic products intheManaus Free-Trade Zone. Inother cases,
a60percentbenchmark isused, alone orincombination withthePPB,when local-content requirements
areinvolved (e.g., forexport finance andspecial credit programmes). Rubber consumers mustuse
44percentofdomestic rubber, while certain fiscal incentives intheinformatics industry arelinked
tominimum local-value-added requirements; local-content requirements alsoapply intheautomotive
sector.
Brazil wasnotasignatory totheGATT Government Procurement Code andhasnotsigned
thePlurilateral Agreement onGovernment Procurement. Public works, purchases andservices must
begenerally contracted through apublic tendering process inwhich themain criterion forawarding
contracts islowest price; localpreferences previously applied appear tohavelostmostoftheirpractical
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significance. Government policy istopromote thepurchase ofdomestically produced informatics
andtelecommunications goods.
Fiscal incentives arewidespread. AttheFederal level, incentives include exemptions and
reductions inincome, production, salesandimport taxesinthenorthern andAmazon areas. Machinery
andequipment benefit from taxexemptions andaccelerated depreciation schemes. Fiscal incentives
atthestateandmunicipal levels include sales, property andother taxes andfees.
TheNational Development Bank (BNDES) continues tobeoneofthefewdomestic sources
oflong-term funds; itplaces emphasis oncommercial criteria forlending. BNDES operates theSpecial
Agency forIndustrial Financing (FINAME) tofinance thepurchase ofBrazilian-made capital goods,
including byforeign buyers; italsooffers sector-specific credit programmes, including tothesteel,
footwear andtextile industries. Interest rates, defined foreachprogramme, appear tobesetatlevels
comparable tomarket rates. Credit programmes arealsooffered byregional andStatedevelopment
banks; development financing isalsogranted bycommercial State banks. Theruralsector benefits
fromnumerous credit schemes, including acompulsory system whereby commercial banks mustmake
available toruralborrowers acertain proportion oftheirdailybalances. Many suchprogrammes appear
toinvolve subsidized interest rates.
Regional development ispromoted through federal andBNDES programmes aswellasby
theuseoffree-trade zones. Byfarthemostimportant ofthese zones istheManaus Free-trade Zone,
from which practically alltheproduction isdestined fortheBrazilian domestic market.
Inthepast,Brazil 'sregulations onintellectual property wereasource offriction withcertain
trading partners. Under theTRIPS Agreement, Brazil 'sintellectual property regulations arebeing
reformulated. AnewIndustrial Property Lawwasapproved inMay1996covering, among otherareas,
thegrantingofpatentsofinventionandofutilitymodels,registrationofindustrialdesignsandtrademarks
andrepression offalsegeographical indications. Provisions concerning pipeline protection entered
intoforce from May1996, while other sections willcome intoforce inMay1997.
Trade Policies andPractices inNon-Service Industries
Theadaptation ofagriculture toBrazil 'strade liberalization andmacroeconomic adjustment
programmes wasmade particularly difficult bythesector 'shistorically highindebtedness, compounded
bytheimpact ofrecent highinterest rates. TheGovernment considers oneofitsmajor taskstobridge
thegapbetween arrangements adopted under previous development models andcurrent economic
realities.
Nomajor changes appear toberequired forBrazil tomeetitsengagements under theWTO
Agreement onAgriculture. Applied import duties onmostagricultural goods arebelow average; such
dutiesarealsosubstantiallybelowboundlevels,butpeaktariffsareimposedonafewproducts,including
garlic andcanned peaches. There isconcern inBrazil about imports ofagricultural products whose
prices aredepressed bysubsidies inexporting countries; Brazil hasstated thatitwillnotimport
subsidized wheat forexample. Steps arebeing taken tolower thehightaxincidence onruralexports.
Negotiations areinprogress toharmonize andco-ordinate agricultural policies andtrade defence
instruments within MERCOSUL.
Besidesbordermeasures,theprincipalinstrumentsaffectingtheagriculturalsectorareminimum-
price supports andsubsidized rural credit. Official credit programmes haveplayed amajor rôlein
agriculturesincethemid-1960s,particularlythroughthecompulsoryapplicationsystem.Loansfinanced
directly bytheGovernment account forthelargest share ofruralcredit operations buthavefallen in
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recent years. Rural credit supports relatively fewproducts, mainly soybeans, sugar cane, corn, rice
andcotton. Theauthorities agree thatgreater efficiency intheprovision ofruralcredit requires general
liberalization ofthefinancial sector andreducing thesegmentation ofcredit markets.
Close to70percentofBrazil 'ssugar-cane production isnowusedfortheproduction ofalcohol
under theNational Alcohol Programme (PROALCOOL). However, market conditions havechanged
dramatically sincePROALCOOL wasinitiated inthemid-1970s andtheprogramme iscurrently highly
subsidized. Theindustry wasintransition inearly1996, awaiting theliberalization ofsugar andalcohol
pricesinJanuary1997andtheimpendingGovernmentdecisiononfuturepoliciestowardsPROALCOOL;
indications werethattheprogramme would bemaintained, perhaps inmodified form, forenvironmental
reasons.
Brazil istheworld 'ssecond largest wheat importer, theGovernment having abandoned the
previous goalofself-sufficiency. Buying andselling ofwheat wasprivatized in1990 andBanco do
Brazil nolonger participates inthisactivity. Until 1994, Brazil maintained aspecial arrangement with
Argentina fortheimportation ofwheat, covering twomillion tonnes ayear. Brazil haseliminated
atariffquota under which thetariffforwheat wasreduced tozeroonanannual quota of750,000 tonnes.
Brazil isalarge producer ofgemstones andseveral major industrial minerals. Nevertheless,
mineral resources remain under-exploited. Thisisinparttheresult ofpastpolicies, inparticular
provisions inthe1988Constitution restricting foreign participation inmining operations. Theremoval
in1995ofsuchrestrictions isexpected topromote renewed interest inthesector. Constitutional changes
havealsomade itpossible fortheFederal Government toengage private companies intheexploration
andextraction ofpetroleum andnatural gas,petroleum refining, import andexport ofrefined petroleum
products, andthemaritime transport ofhydrocarbons. Therequired regulations weresenttoCongress
inJuly1996.
Manufacturing wasthemain beneficiary ofgovernment support under theearlier import-
substitution strategy; theoverall average applied tariff is12.9percentbutthere isstillconsiderable
disparity, withdownstream industries continuing tobenefit fromsubstantial tariffescalation. Thesector
hascome under particular pressure inrecent years, linked tothetrade liberalization in1992-94 and
therealappreciation ofthecurrency in1994; export performance hasbeenuneven, while strong
domestic demand hasresulted inrising imports formany manufactures particularly motor vehicles,
textiles andclothing.
TheautomotiveindustryisthemosthighlyassistedmanufacturingactivityinBrazil,witheffective
protection estimated atover250percent. Atthesame time, Brazil isalargenetexporter ofvehicles.
Brazil 'smotor industry achieved record production levels in1995, evenwhile imports weregrowing
strongly, andinthefirstmonths of1996. Following theintroduction oftrademeasures inmid-1995,
importsfromcountriesotherthanMERCOSULpartnersfellsharply.Investmenttheautomotiveindustry
hasbeenhighduring the1990s; investment plans announced in1995amounted tosome US$10 billion.
Tariffsonmotorvehicleswereincreasedfrom20percentin1994to70percentinMarch1995.
Under theautomotive régime introduced in1995, theindustry alsobenefits from tariff exemptions,
combined withlocal-content andexport balancing requirements. In1996, acertificate ofcompliance
withBrazilian standards became mandatory toobtain animport licence formotor vehicles; anyrequired
modifications must bemade inthecountry ofmanufacture.
Quantitative limitations onimports ofpassenger carswere inforce between June and
October 1995. Brazil initially sought tojustify theseimport restrictions under thebalance-of-payments
provisionsoftheGATT.ConsultationswithBrazilinOctober1995ledtheWTOCommitteeonBalance-
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of-PaymentsRestrictionstoconcludethatsuchmeasureswerenotjustified;themeasureswerewithdrawn
witheffect from 27October 1995. InMarch 1996, Brazil requested awaiver from theprovisions
oftheTRIMs Agreement inrespect ofitsautomotive régime. Therequest waswithdrawn inMay
1996. Japan andtheUnited States have requested consultations under WTO dispute settlement
procedures, supported byCanada, theEuropean Union andKorea.
Theauto-parts industry islikely tobeamajor beneficiary oftheautomotive régime introduced
in1995. Thenon-electrical machinery industry wasalsolikely tobesupported bytherégime, as
automotive parts manufacturers comprise itslargest single customer group.
Theprivatizationprogrammeforironandsteel,initiatedinearly1990,isnowlargelycompleted.
Profits andinvestment haveincreased substantially. Between 1992and1994, Brazilian andArgentinian
steelmakers maintained aproduction-sharing arrangement.
Thetextiles andclothing industry hasanumber oflarge, technologically up-to-date,
internationally competitive enterprises producing mainly cotton textiles andgarments. However, as
import barriers havecome down, imports oftextiles andclothing haveincreased, growing fourfold
between 1991and1995. Import competition hasledtotheclosing ofnumerous small andmedium-size
producers ofman-made fibrefabrics, where technological obsolescence appears tobeamajor problem.
InMay1996, safeguard quotas wereintroduced covering synthetic textiles andshirts imported from
China, Hong Kong, Korea, Chinese Taipei andPanama.
Competition from Asian countries, particularly China, inthefootwear industry isofmajor
concern toBrazilian producers, although Brazil remains anetexporter offootwear andtravel goods.
Rawhides andskins aresubject toanexport taxof9percent.
Services
Inefficiencies intheservices sector, particularly financial services, porthandling and
telecommunications haveimposed severe constraints onother areas oftheeconomy. Restructuring
during the1990s hasproduced considerable gains insome areas, andfurther progress isexpected with
thecompletion ofthelegalreforms begun earlier inthedecade.
TheState isstillanimportant supplier ofservices, including banking, insurance, transport,
telecommunications andelectricity, although thecurrent privatization programme isreducing such
involvement. Foreign participation inkeyservice activities hashistorically beenrestricted, butefforts
areunder waytoliberalize foreign investment inactivities such asbanking, insurance and
telecommunications.
Under theConstitution, allpublic telecommunications services fallunder thecontrol ofState
enterprises. Partial liberalization ofsuchservices isseenasawaytoprovide forthesector 'slarge
investment requirements andtoenhance competition. Aconstitutional amendment hasopened the
possibility ofgreater private participation inthesector; newregulatory andpricing structures are
under study toprepare forthepossible privatization oftheState-controlled telecommunications system;
theNational Congress isconsidering abilltorelax restrictions onforeign participation incellular
telephone, andsatellite andvalue-added services. Brazil isafullparticipant inthenegotiations on
basic telecommunications; byandlarge, Brazil 'soffers inthese negotiations reflect changes already
made orproposed totheregulatory framework.
Brazil hasalargeanddiversified banking system butforeign participation ismodest, andlimited
under theConstitution. Except inconnection withtheprivatization programme, there isnomarket
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access guarantee fortheestablishment ofnewbranches andsubsidiaries offoreign banks, orforincreases
inforeignparticipationinestablishedfirms.ForeignbranchesinBrazilarelimitedtothenumberexisting
on5October 1988. Foreign banks areonlyallowed toacquire branches ofother foreign banks and
toopenanewbranch, must close anexisting one.
Brazilian banks benefited formany years from highinflation: theywere abletoearnhigh
yields onnon-interest-bearing deposits suchasdemand deposits andresources intransit, which tended
tocompensate foradministrative inefficiencies. Adjustment tothenewenvironment oflower inflation
andpositive realinterest rateshasputbanks under pressure tocutcostsanddiversify intonewactivities.
Despite serious problems, mostanalysts agree thatBrazil 'sprivate banksector remains solidandthat
thestability ofthelargest institutions forms abuffer against asystemic crisis.
Theinsurance market hasexpanded rapidly since 1994 andtheachievement ofamore stable
economic environment. TheBrazilian insurance market isserved bysome 122companies anda
government-controlledmonopolyre-insurer.SeveralforeigninsurershaveownershipinterestinBrazilian
insurance companies butforeign-controlled firms account foronlysome 10percentoftotalpremiums.
Under theConstitution, foreign access toBrazil 'sinsurance market isrelatively restricted. The
incorporation ofnewbranches andsubsidiaries offoreign insurance companies, aswellasincreases
inthepercentage oftheparticipation offoreign persons andfirms inthecapital stock ofBrazilian
insurance institutions withheadquarters inBrazil isnotpermitted. Imports mayonlybeinsured with
companies established inBrazil; exports mustbeinsured inBrazil when thesaleincludes theinsurance
cost.
Newforeign capital wasauthorized inhealth insurance in1996. Insurance regulations under
consideration bytheNational Congress would extend foreign participation inthesector, change
authorization andoperational rules aswellascapitalization andprivate pension schemes, andcould
establish anindemnification fundtoprotect insured parties against theliquidations ofinsurers.
Foreign enterprises maynotadminister oroperate airports orprovide navigation andairtraffic
services; however, theymayoperate other auxiliary services fortheirownbenefit. Authorization
tooperate airservices isgranted onlytolegalpersons withheadquarters inBrazil, fourth-fifths ofvoting
rights inBrazilian hands andunder Brazilian management. Cabotage services arereserved tonational
companies. Theprinciple ofreciprocity isthebasis ofBrazil 'sinternational bilateral agreements in
theairtransport sector.
The1988Constitution gaveBrazilian shipowners priority formaritime transport services and
imposed constraints onforeign nationals employed inthesector. A1995 constitutional amendment
eliminated restrictions andreduced previous requirements inthetransport sector, inparticular maritime
navigation; therequired implementing regulations isunder consideration byCongress. Brazil isnot
aparty totheUnited Nations Convention onaCode ofConduct forLiner Conferences, butitmaintains
cargo-sharing agreements withseven countries. Themaritime transport ofcargoes ofpublic entities
andgoods benefiting from fiscal orcredit official programmes mustalsobetransported inBrazilian
flagvessels, although waivers maybegranted under certain circumstances. Petroleum andpetroleum
products must betransported bynational flagvessels.
Brazil andinternational trading partners
Thecompletion before schedule ofBrazil 'strade reform programme hasbeenakeyelement
initseconomic gains since 1992. However, thereform process hasfaced more complex challenges
since1994andpolicy directions havebecome lessclear. Thus, although theadoption ofMERCOSUL 's
Common External Tariff inJanuary 1995 wasadecisive stepintheprocess ofregional integration,
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theCET hasnotbrought about improvements inBrazil 'snational tariff structure; frequent tariff
adjustments giveanappearance ofuncertainty tothetradeandinvestment régime. Aseries ofpotentially
tradedistorting measures taken since 1995stand insharp contrast toBrazil 'sgeneral record ofreform,
butthecontext suggests lapses inimplementation rather thanapolicy reversal.
Greater co-ordination, transparency andamore measured response torequests forassistance
fromspecific sectors would helpBrazil translate itsstated commitment tofreetradeintoactions more
clearly consistent withitsdevelopment needs andwithastronger multilateral trade system. Brazil 's
economystandstobenefitfromthestrengthenedtraderulesandimportliberalizationmeasuresestablished
under theWTO provisions.
TRADE POLICY REVIEW BODY
BRAZIL
Report bytheGovernment -Summary Extracts
TheEconomic andTrade Environment
Since thefirstTPR(1992) theBrazilian economy haschanged significantly. Thischange has
beendriven inlarge measure byabroad economic stabilization program putintoforce inJuly1994 -
theRealPlan.
TheRealPlanisbuiltonaseries ofpreviously achieved reforms, including theopening of
theeconomy,thederegulationandliberalizationoftheexchangemarketandthenormalizationofrelations
withtheinternational financial community.
Asaresult, theRealPlanhasbrought inflation ratestothelowest levels inthelast35years.
Inthe12months prior totheRealPlan, theGeneral Price Index (GPI) increased by5,000 percent
(fivethousand percent); in1995, annual ratescame down to14.8percent, andthisyeartheGPI
isexpected toincrease by10percent. Itisimportant tostress thatthissharp andcontinuous drop
ininflation hasbeenachieved intheabsence ofpriceorwage freezes, breaches ofcontracts orrecession.
TheRealPlanhasbeenundertaken through threebasicelements, amonetary reform including
thecreation ofanewcurrency (the"Real"), theelimination ofindexation incontracts -including wages
andexchange rate-andagreater reliance onmarket mechanisms. Theincrease ininterest ratesand
thecontraction ofcredit experienced initially havemore recently beenreversed asthePlanevolves
andmatures.
TheBrazilian Government isfocusing itsattention ontheneedtoimprove itsfiscal situation
and,inthemedium run,onthereform oftheroleoftheState intheeconomy.
Concerning therestructuring oftheroleoftheState intheeconomy, in1995, theBrazilian
Congress approved aseries ofConstitutional Amendments. Firstofall,themore flexible rules for
theStatemonopoly ofthepetroleum sector willallow theGovernment tocontract private enterprises
fortheexploration andexploitation ofpetroleum andnatural gasdeposits andwillliftrestrictions on
theimportation ofoilanditsderivatives aswellasrefining andtransportation. Secondly, withthe
liberalizationofthetelecommunicationssector,theGovernmentwillbeable,throughpublicconcessions,
tocontractprivatecompaniestooperatetelephone,telegraphandothercommunicationservices.Finally,
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anothertwomajorchangeshavebeenapproved.Thefirstoneeliminatedthe"ergaomnes"discrimination
against foreign capital, bylifting theprevious distinction between Brazilian firms ofnational capital
andother Brazilian firms; and,thesecond eliminated market reserve fornational-flag ships inthe
coastal andinland cabotage.
Alongside Constitutional reforms, theGovernment isaccelerating theprivatization programme.
Thesteelandpetrochemical sectors havealready beenprivatized. Theprogramme hasnowentered
anewphase withthecreation ofappropriate conditions forprivate investment andexpansion inpublic
services, suchaselectrical energy, water, gasandtransportation.
Regarding thetradeenvironment, theGovernment hascomplied withitscommitment towards
anincreasing degree ofexposure oflocalproducers toforeign competition. Recent growth inimports
hasnoprecedent intheBrazilian economic history. Inthelastthree years, imports grew, asstated
before, by150percent, from US$20 billion toUS$50 billion.
Thestrong demand forimports resulting fromtheimplementation oftheRealPlangenerated
monthly trade deficits beginning inNovember 1994 andreaching atotalofUS$3.2 billion by1995.
Insummary, thetrade flowofgoods increased fromUS$56 billion in1992 toUS$96 billion
in1995, atanannual rateof20percent, ahigher ratethantheincrease inworld trade atthesame
period. Iftheflowofservices isadded totheflowofgoods, therelevant figure for1995 was
US$134 billion. Theopenness oftheeconomy, measured astherelation between tradeflows andGDP,
grew from 12.5percent, in1992, to17percentthisyear.
Theincreased demand forcapital goods andrawmaterials canbetranslated astheresumption
ofinvestment andtheimprovement inBrazil 'sproductive capacity. Theamount offoreign direct
investment (FDI) received; bytheBrazilian economy thisyearwillbeahistorical record, reaching
around US$8 billion.
Trade Policy Developments 1992-1996
Since thefirstTPR(1992) significant progress hasbeenmade inBrazil 'straderegime. Thus,
theautonomous trade liberalization programme which started in1990 wascompleted onschedule, in
July1993. Thetradeliberalization programme (1990-mid-1993) ledtothelifting ofimport prohibitions
andtotheelimination ofnon-tariff barriers. Likewise, import tariffs weresubstantially reduced with
theaverage import dutyfalling from32.2in1990to14.2percentin1993. Following theestablishment
oftheMercosul Customs Union, theaverage import tariff wasfurther reduced to12.6percent. The
maximum tariff came down from 105percent,in1990, to32percentbeginning on1January 1996
(excluding afewitems likeautomotive vehicles andhome appliances).
(i) TheUruguay Round
TheBrazilian Government hasconsistently implemented theresults oftheUruguay Round and
believes strongly inthenewandimproved structure ofthemultilateral trading regime, asembodied
intheprovisions thatcreated theWorld Trade Organization. Particular attention hasbeenpaidinBrazil
toimprovements, agreed during theUruguay Round, inareas asdiverse asdispute settlement,
anti-dumping andcountervailing duties andsafeguards.
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(ii) Regional integration
Alongside itscommitment tooverall economic liberalization, Brazil haspursued thedeepening
ofeconomic integration attheregional andsub-regional levels. From ageographic perspective and
taking advantage ofexisting economic complementarities withneighbouring countries, Brazil 'sgoal
hasbeentofoster convergence anddevelopment through further tradeliberalization within thecontinent.
Thisstrategy, however, should notbeinterpreted asasetback inBrazil 'straditional approach
totrade multilateralism. Asatrulyglobal trader, Brazil hasconsistently pursued openregionalism
andhasstrongly defended fullcompatibility withtheWTO agreements ofdisciplines negotiated under
anyregional framework.
(iii) Mercosul
TheBrazilian trade withother Mercosul countries grew from US$3.64 billion in1990, the
yearprior tothesigning oftheAsunción Treaty, toUS$12.97 billion in1995, thefirstyearofthe
Customs Union operations. Thisgrowth ofintra-zone trade ofover250percentbetween 1990 and
1995occurred, inthecaseofBrazil, intandem withasubstantial growth intotalforeign trade, which
grew by85percentduring thesame period, from US$52 billion in1990 toUS$96 billion in1995.
Mercosul hasbeencomplying withitsobligations under theWTO Agreements, withallrelevant
information having being properly notified.
(iv) Intellectual property
Inlinewithitscommitments under theTRIPS Agreement, Brazil approved newIndustrial
Property Legislation, on14May1996, covering thegranting ofpatents forinvention, forutility models,
registration ofindustrial designs andoftrade marks, repression offalsegeographical indications and
unfair competition.
(v) Foreign trade barriers
Although Brazil hascommitted itself toacomprehensive programme oftrade liberalization
thegrowth rateofitsexports isfarlower thanthatofitsimports. Toalargeextent, thesituation may
beexplained bytheexistence ofbarriers ofseveral sortstocountry 'sexports.
Theimpact ofthissituation canbeclearly shown through thefollowing figures which compare
Brazilian trade flows of1995 tothenumbers oftheprevious year, forthree major trading partners
(theEU,Japan andtheUnited States): comparing 1995 to1994, theincrease inBrazilian imports
fromthese partners wasashighas50percent,42percentand55percent,respectively. However,
theincrease inBrazilian exports tothesepartners amounted toonly6percentinthecaseoftheEuropean
Union, 20percentinthecaseofJapan andasfarastheUnited States areconcerned, there waseven
adecrease of2percent. Theoverall figure shows anincrease ofaround 50percentinimports, against
merely 7percentinexports, inthesame period.
(vi) Commitment totrade liberalization
With trade liberalization, Brazil isreducing theprevious anti-export biasthatcharacterized
theinward-looking model ofimport substitution.
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TheFederal Government isaddressing aseries ofpublic policy issues intheareaofforeign
tradewiththeobjective offurther reducing theanti-export biasandoffostering thegeneration ofincome
andemployment.
TheFederal Government isalsointheprocess ofimplementing aseries ofmeasures inthe
fields ofinfrastructure, taxes, deregulation, thefinancial sector andlabour relations.
Theliberalization process undertaken since1990isirreversible. Thedifficulties found insome
sectors toadjust themselves notonlytothemostsignificant market opening inBrazilian history but
alsotothemost encompassing andprofound stabilization planeverimplemented inthecountry, in
nowayaffect Brazil 'scommitment totrade liberalization andgreater interdependence, whathasbeen
evidenced bythecountry 'sactive participation intheWTO, during thesenearly twoyears ofexistence
oftheorganization.
END