Brazil WT/TPR/S/75
Page 77
IV. TRADE POLICIES BY SECTOR
(1) INTRODUCTION
1. Tariff protection for domestic activities has increased since Brazil's last Review in 1996
(Chapter III(iii)), but a fall in tariff dispersion suggests a reduction in distortions to inter-sectoral
incentives;  these, however, are still significant as indicated by strong tariff escalation.  Distortion has
also been lessened through the progressive adoption of more neutral sectoral policies, for example thecut back or ending of long-standing special programmes for motor vehicles, alcohol production, and
informatics.  However, some current policies echo earlier import substitution strategies, with
incentives favoring some activities while implicitly taxing others.  Thus, well above average tariffs
apply to beverages, tobacco, furniture, clothing and footwear, while tariff dispersion is particularly
high for transport equipment and electronics (Chart IV.1).
2. Brazil's sectoral policies have seen the creation of a large and highly diversified
manufacturing sector mainly oriented towards the domestic market.  This is largely explained by the
inherent attractiveness of its sizeable and relatively protected domestic market, now expanded through
MERCOSUR, and by the anti-export bias inherent  in Brazil's import regime, which pushes up
exporters' costs through competition from the protected import-competing sectors.  Led by aircraft,manufactured exports have been particularly dynamic during the period under review;  in some cases
growth partly reflects efforts made to offset the anti-export bias through preferential regimes.  Two
cases, one involving local-content and export-balancing requirements and another involving export
subsidies, have been the subject of WTO disputes.  The authorities see a need to maintain the regimes
because of disparities within the manufacturing sector and its uneven adjustment to macroeconomic
stabilization and liberalization
3. Brazil is one of the world's major producers and exporters of agricultural products.
Agriculture also remains a key sector in Brazil because of its sizeable contribution to overall value
added, importance in disadvantaged areas, and as a source of foreign revenue.  It is government policy
to reduce state intervention in agriculture.  Currently, production and exports in the sector are assisted,
besides through border measures, by minimum-price supports and rural credit at preferential rates.
This support appears modest in the context of market distortions introduced by the assistanceprovided to agriculture in other countries, a problem that remains of major concern to the Brazilian
authorities.
4. Progress appears to have been made in raising the competitiveness of domestic producers,
through the liberalization of a number of service ac tivities, including financial, telecommunications,
and energy.  Private participation has been introduced in recent years, either as a substitute for or tocompete with state-owned firms.  As the role of the State as a services operator has fallen, its role as a
regulator has grown considerably.  The benefits from liberalization and privatization have been
limited in several activities, notably transportation and ports.  Greater efficiency in the provision of
credit, including through greater liberalization and competition in the financial industry, is paramount
to support faster growth in a sectorally neutral manner.WT/TPR/S/75 Trade Policy Review
Page 78
05101520253035
111 122 210 230 311 313 321 323 331 341 351 353 355 361 369 372 382 384 390
Source: WTO Secretariat estimates,  based  on data  provided by the Brazilian authorities.Chart IV.1
Average and range of applied tariff by 3-digit ISIC code, 2000
%
121 130 220 290 312 314 322 324 332 342 352 354 356 362 371 381 383 385 400
                     Description
Agricultural and livestock production
ForestryLogging
Fishing
Coal miningCrude petroleum and natural gas production
Metal ore mining
Other miningFood products
Other food products and animal feeds
BeveragesTobacco manufacturing
Textiles
Manufacture of wearing apparel, except footwearLeather products, except footwear and wearing apparel
Footwear, except vulcanized rubber or plastic footwear
Wood and wood products, except furnitureManuf.of furniture & fixtures, except primarily of metalPaper productsISIC
342
351352
353
354355
356
361362
369
371372
381
382383
384
385390400ISIC
111
121122
130
210220
230
290311
312
313314
321
322323
324
331332341                    Description
Printing and publishing and allied industries
Industrial chemicalsOther chemicals, incl. pharm.
Petroleum refineries
Manuf. of miscellaneous petroleum & coal productsRubber products
Manufacture of plastic products n.e.s.
Pottery and chinaManufacture of glass and glass products
Other non-metallic mineral products
Iron and steel basic industriesNon-ferrous metal basic industries
Fabricated metal products, except machinery & eqpt
Non-electrical machinery incl. computersElectrical machinery apparatus, appliances & supplies
Transport equipment
Professional and scientific equipmentOther manufacturing industriesElectricityBrazil WT/TPR/S/75
Page 79
(2) AGRICULTURE
(i) Market developments
5. During 1996-99 Brazilian agriculture accounted for just under 10% of the country's GDP.
The share of agriculture in GDP has been declining;  for instance, in 1994 the sector's contribution
amounted to 13% compared with 9% in 1999.  Howe ver, if upstream and downstream industries are
included, the sector could have accounted for 35% of GDP in 1999.1  The sector is well diversified,
and employs about one quarter of Brazil's labour force.  During 1997-98 the agriculture performed
poorly:  the 1998 downturn could be attributed to the overall negative performance of the
economy, but also to climatic conditions (El Niño brought excessive rains to the south and drought to
the north-east) and Asian crisis.2  The sector recuperated in 1999, when it grew at a rate of 9%.  The
outstanding performance of 1999 was due to a bumper crop;  growth estimates for 2000 are lower.3
6. Brazil is a net exporter of agricultural and food products, which accounted for about 33% of
the country's exports in 1999, totalling US$16 billion;   exports of coffee, orange juice, sugar, and
soybeans account for 13% of total exports (Table AI.1).  Brazil remains the world's largest exporter of
coffee, sugar, and orange juice, and is a large exporter of cocoa, soybeans, tobacco, and other tropical
fruits and nuts.4  In contrast, agricultural imports account for some 10% of total imports, with wheat
being the single most important commodity (Table AI.2).  The major destinations for Brazil'sagricultural exports are Japan, the European Union, and the United States.
5
7. Chart IV.2 shows the trend in export volumes since 1996.  Exports of both coffee and sugar
have shown an upward trend, especially sugar exports, which have increased substantially since 1997reflecting in part the reduction of export taxes to 0%.  Livestock production, which makes up nearly
40% of the agricultural GDP and employs some 25% of  the agricultural labour force, is also important
in terms of exports.  Brazil exported 292,000 tonnes of beef in 1999;  beef exports are concentrated infrozen, boneless and refrigerated boneless meat.
6
8. In value terms, agricultural exports have shown a decline, especially since 1998, because of
the sharp reduction in the price of commodities exported  by Brazil, especially of cocoa, coffee, sugar,
and soybeans;  commodity prices were expected to start to recover in 2000.7  In general, export
performance has been good during 1996-99, despite the decline in commodity prices.
9. Several of Brazil's main agricultural exports compete in world markets distorted by subsidies
and significant trade barriers, notwithstanding the progress made in those areas following the
conclusion of the Uruguay Round.  Distortions disadvantage Brazil more than most countries because
of its comparative advantage in agriculture and potential to expand further its production frontier.
Brazil is amongst the world's lowest cost producers of coffee, orange juice, pork, poultry, soya, sugar,and tobacco, and has considerable potential as a producer of meat and cotton.  Cost advantages exist
despite the domestic constraints often imposed by poor infrastructure, particularly transport and ports
(section (5)(v) below) and, until the float of the real in early 1999, an overvalued exchange rate
(Chapter I).  The authorities noted that expect significant investment in transportation will improve
these services.
                                                     
1 OECD (2000).
2 Central Bank (1998).
3 Ministry of Finance (2000a).
4 FAO, FAOSTAT database [Online].  Available at:  http://apps.fao.org [28 June 2000].
5 Ministry of Agriculture, http://www.agricultura.gov.br/html/Estatisticas/estatistica.htm, 26 June 2000.
6 Ministry of Agriculture, http://www.agricultura.gov.br/html/Estatisticas/estatistica.htm, 26 June 2000.
7 IPEA Cojuntura (2000a).WT/TPR/S/75 Trade Policy Review
Page 80
-1501530456075
1996 1997 1998 1999Chart IV.2
Growth in production and export volumes of major agricultural products, 1996-99
-1501530456075
1996 1997 1998 1999-1501530456075
1996 1997 1998 1999Per cent
Source:   Ministr y of A griculture and Su pply.-1501530456075
1996 1997 1998 1999CoffeePer cent
Per cent Per centSoya
Sugar Oranges and orange juiceProduction ExportsBrazil WT/TPR/S/75
Page 81
(ii) Policy objectives and instruments
10. The Government's main objectives regarding agricultural policy are, inter alia , to increase
employment in rural areas; boost value added and competitiveness in the sector; facilitate access to
credit;  and revise customs procedures to expedite loading and unloading to promote exports.  This is
to be achieved through an increase of resources devoted to the National System of Rural Credit
(SNCR) which derives resources from both public and private sources.  Outlays in rural credit for the
2000/2001 harvest were projected to reach R$11.3 billion, which represents a nominal increase of36% over the previous year.  Of that amount, close to  60% was expected to take the form of credit at
fixed interest rates, about 28% to be channelled through investment programmes (e.g. FINAME
Agricola, PROSOLO, PROLECHE, see below), several of  which also involve fixed interest rates, and
some 12% to be lent at market rates.  An add itional R$360 million was to be allocated in the year
2000 to finance specific activities, inter alia,  fruit, wineries, honey, and cashew nuts, at preferential
interest rates of 8.75%.
8  New support programmes are being  implemented to promote the
mechanization and renewal of agricultural machiner y (see below), a rural promissory note (CPR) for
agricultural exports is envisaged;  foreign participation in the Brazilian commodities futures andoption markets is to be promoted as is private participation in the sector.
9
11. The Government's stated intention is to w ithdraw from the marketing and financing of
agriculture production leaving room for the private sector to undertake these activities.10  T h e
Government would expect the private sector to increase its participation in the provision of insurance;
at present the private sector does not offer insurance for agriculture.  Storage facilities operated by theNational Food Supply Company (CONAB), a state trading company created in 1990 to support the
Government's formulation and execution of agricultural and supply policies, assure the basic
necessities of society, and preserve and stimulate market mechanisms, are being offered for sale to the
private sector.
11  There are no plans to privatize CONAB itself, which does not import or export.
However, it may import, under exceptional circumstances, by decision of the Ministry of Agriculture.
(a) Tariffs and other taxes
12. The average nominal MFN tariff for agriculture (WTO definition) was 12.6% in 1999
compared with an overall average of 13.7%.  As s hown in Table AIII.1 some agricultural subsectors,
such as dairy products, sugar and sugar confectionery, beverages, spirits and vinegar, and tobacco andmanufactured tobacco products, benefit from high er than average protection, at 18.5%, 19.7%, 23%
and 18.3%.  These subsectors bear the highest percentage of tariffs above 20%, which the authorities
considered justify by the high subsidies granted to those subsectors by certain countries.
13. In the Uruguay Round, Brazil bound all its tariff lines.  Bindings for agricultural goods vary
from 0% to 55%, with the highest rates applying to goods included in Chapters 02, 04, 10, 16, 19, 20,
and 22-24 (Table AIII.1).  For some 167 agricultural items the base rate was lower than the finalbound rate.
14. MFN tariff quotas of 10,000 tonnes apply to pears and apples but these were not opened
during 1996-98 because the MFN tariff (10% in 1995-96, and 13% in 1997-98) was lower than the in-quota tariff rate of 15%.
12  The authorities noted that since 1998 these tariff quotas have not been
opened.  In 1996, under the provisions of GATT 1994 Article XXVIII, Brazil notified WTO Members
of its intention to withdraw its tariff quota for wheat (HS1001.1000.00).  This tariff quota, negotiated
                                                     
8 Ministry of Agriculture, Press Release "Recursos para Safra 2000/2001 terão acréscimo de 36%"
[Online].  Available at:  http://www. agricultura.gov.br/html [27 June 2000].
9 Ministry of Agriculture and Supply (undated (a)).
10 Ministry of Agriculture and Supply (undated (b)).
11 WTO document G/STR/N/1/BRA, 21 March 1996.
12 WTO documents G/AG/N/BRA/3, 4, 8, 11, and 16.WT/TPR/S/75 Trade Policy Review
Page 82
in 1970, has never been open.13  Two Members notified their interest in negotiating with Brazil;  the
Brazilian authorities noted that these negotiations had been concluded.
15. Exports of agricultural goods are subject to a tax of 30%, which can be reduced (to zero) or
increased (up to 150%) if deemed necessary by the Executive14.  The authorities noted that these taxes
are seldom applied (Chapter III(3)(ii)), with only  cured leather subject to an export tax (of 9%).
16. The sector has also been subject to indirect taxation mainly through the overvalued exchange
rate that prevailed until January 1999.  The fiscal burden on the sector has been somewhat reduced;the Ministry of Agriculture and Supply estimated that exempting exports from ICMS translated into
an increase in profits of 13% for basic products and of 6% for semi-manufactured agricultural
goods.
15  The fiscal burden was expected to be further reduced;  in 2000 import duties on fertilizers
were to be reduced from 9% to 3% and the IPI was to  be maintained at a rate of 5% for agricultural
machines and equipment.16
(b) Internal support measures17
17. Brazil has notified WTO Members that during 1995-98 it did not grant export subsidies to
agricultural products.18  It also notified that for the 1996/97 harvest product-specific domestic support
was " de minimis ".19
18. Domestic support in Brazil through the provision of rural credit continues to be important.
Since 1996, there have been no major modification in rural credit; nevertheless, preferential interest
rates were reduced, credit limits increased, and the use of more modern marketing instruments, forinstance futures and options, has become more frequent.  This is in line with the fundamental
principle that has shaped Brazilian agricultural incentive policy since 1998, which is to limit the
Government's intervention through the use of market mechanisms.
20  The authorities noted that the
provision of rural credit was important because of the high interest rates that still prevail in the
Brazilian market.
19. The Government continues to offer several support programmes to the agriculture sector in
the form of preferential credit lines to finance expenditure, investment, and marketing.  Interest rates
are fixed at preferential rate. The Central Bank regulates the SNCR rural credit, for each harvest year:the National Monetary Council and the Central Bank issue Resolutions and Regulations stipulating,
inter alia , the interest rates for each line of credit, the limits, and maturity periods.  Credit volumes are
limited;  limits vary according to product and may also vary by region, this is the case for soyabeans.
21
Beneficiaries can obtain financing for more than one product or end use, and use several schemes at
the same time;  however, the benefits cannot be cumulative.
                                                     
13 WTO document G/SECRET/7, 10 April 1996.
14 Law No. 9.716, 26 November 1998.
15 Ministry of Agriculture and Supply (1997).
16 Ministry of Agriculture and Supply (1999).
17 This section is based on:  Ministry of Agriculture (1996);  Ministry of Agriculture (1997);  Ministry
of Agriculture (1998);  and Ministry of Agriculture (1999).
18 WTO documents G/AG/N/BRA/5, 23 August 1996;  G/AG/N/BRA/9, 1 August 1997;
G/AG/N/BRA/12, 3 August 1998;  and G/AG/N/BRA/15, 19 October 1999.
19 WTO document G/AG/N/BRA/13, 24 March 1999.
20 Central Bank (1998).
21 The rules to allocate credit for the 1996/97 harvest were stipulated in Resolution No. 2.295,
28 June 1996.  For the 1997/98 harvest credit to finance expenditure was regulated by Central Bank RegulationNo. 2.402, 25 June 1997, which sets interest rates and credit limits according to product and region.  In the
1998/99 harvest, credit was regulated by CMN/BACEN No. 2.506, 17 June 1998.Brazil WT/TPR/S/75
Page 83
Programme to Strengthen Family Farming
20. The Programme to Strengthen Family Farming (PRONAF) was launched for the 1995/96
harvest year to support "family farming";  its objective was to diminish the rural exodus through the
provision of loans at preferential rates to finance expenditure and investment in infrastructure and
machinery.  The Treasury repays financial institutions the difference between market and PRONAF
interest rates.22  Farmers may pay back their loans by delivering an equivalent amount of the produce
(i.e. the equivalence concept).  The value of the produce is calculated on the basis of the governmentminimum price.  PRONAF also includes technical assistance, so that "family farming" can adoptsadequate technology and thus reduce costs and risk.
21. PRONAF, which was designed originally to support only farming, has been expanded.
Since 1997, the programme covers artisanal fisheries, aquaculture, livestock, and extraction of rubber
in the Amazon region.  In addition, new credit lines have been opened within the PRONAF
framework.  In 1998, the Credit Line to Suppleme nt Income in Rural Activities (AGREGAR), was
opened to finance infrastructure to be used in the processing and commercialization of agricultural
products, and in tourism projects in the rural areas.  Interest rates vary according to the end-use of the
loan, i.e. expenditure or investment, but in both instances they are fixed.  Interest rates on loans for
expenditure have declined to 5.75% (1999/00 harvest) from 9% for the 1996/97 harvest.  Interest rates
on investment credit have declined only for certain beneficiaries;  in 1996 they were fixed at 6% plusthe long-term interest (TLJP), while in 1999 they ranged from 1% to 6% plus the TLJP.  The interest
rates for loans under AGREGAR have been set at 6% plus TLJP.
22. There has been systematic under-utilization of  PRONAF's funds, which appears to be linked
to the administrative complexity of the programme (Table IV.1).  The investment credit line within
PRONAF was created in the second half of 1996, but became operational only in 1997.  More funds
have been channelled through credit to finance expenditure than to finance investment becauseapplication procedures for the former have been streamlined and interest rates reduced.
23
Table IV.1
PRONAF main indicators
Expenditure Investment
YearAvailable funds
(R$ million )Disbursed funds
(R$ million)No. of
contractsAvailable funds
(R$ million)Disbursed funds
(R$ million) No. of contracts
1995 200 30a.. .. .. ..
1996 650 547 299,900 350 10 4,400
1997 1,000 888 387,500 700 736 101,700
1998 1,500 1,115 532,500 1,000 628 116,500
1999 .. .. .. .. .. ..
Total 3,350 2,575 1,220,200 2,050 1,376 226,600
a Estimated value.
.. Not available.
Source: Ministry of Agriculture (1999), Programa Nacional de Fortalecimento da Agricultura Familiar – Relatório
Técnico das Ações Desenvolvidas no Período 1995/1998, Brasilia, August.
23. Between 1995, when the PRONAF was initiated, and 1999, the number of beneficiaries
increased from 26,000 to 718,000 families.24  During 1996-98 southern Brazil benefited the most from
PRONAF;  in terms of products, tobacco, maize, and soybeans absorbed 65% of the credit supplied.
There is a close correlation between the distribution of credit by region and by product, as PRONAFtargets the agroindustry, which is located mainly in southern Brazil where "family agriculture" is
more integrated into the productive chains.  In contrast, there has been a change in the regional
                                                     
22 Andrade da Silva (1999).
23 Andrade da Silva (1999).
24 OECD (2000).WT/TPR/S/75 Trade Policy Review
Page 84
distribution of investment credit.  In this case of the total number of contracts issued in 1997, the
south absorbed 63% of contracts and 62% of total resources available, while in 1998 the north-east
absorbed 82% of all contracts and 77% of total resources.25  This was as a result of the drought in this
region;  thus more resources were allocated for the north-east.
Domestic pricing arrangements24. The Policy of Guaranteed Minimum Prices (PGPM) for agricultural products is still in force
but in 1996 it ceased to be automatic and generalized.  The most important mechanisms to implement
the PGPM continue to be two schemes to provide ru ral credit for marketing:  the Federal Government
Acquisition Programme (AGF), and the Federal Government Loans Programme (EGF).  The AGF
programme allows farmers to sell their products to the Federal Government through CONAB at aminimum price.  In 1994/95, volumes for major crops covered by the AGF and EGF were, in
thousand tonnes:  beans, 100 and 330;  corn, 1,500 and 4,000;  cotton, 64 and 130;  rice, 1,530 and
4,851;  soyabeans, nil and 1,899;  and wheat, 500 and 900
26;  more recent information on production
covered by the AGF or EGF was not available.  For the 1999/00 harvest, R$718 million were
budgeted for the AGF.  There are no data on budgetary allocations for either programme.
25. The AGF is programmed and applied only for specific products and regions where the
Federal Government deems it necessary to support prices, or when it is deemed necessary to form
stocks.  The EGF farm programme facilitates access to credit for farmers and co-operatives.  Farm
products stored in an accredited warehouse function as collateral for these loans.  The maximum
credit is limited to 70% of the value of the products offered, calculated at the relevant minimum price.
The annual interest rate for EGF farm loans was fixed at 8.75% for 1998/99-1999/00.  The EGF withthe sale option to the Government (EGF/COV) was eliminated in 1996.
26. The EGF-industry programme initiated in the 1997/98 harvest is similar to the EGF farm
programme but access is limited to processors of agricultural commodities who buy inputs directlyfrom the rural producer.  Financing is limited to 50% of the industrial/transformation capacity of the
processors when the operation is related to:  cotton, garlic, peanuts, cashew nut, Brazilian wax,
cassava flour, fecula of cassava, sunflower, jute, castor oil plant, maize, and sisal;  operations
involving barley and grapes have no limits.  Processors are obliged to meet at least the minimum
commodity price set by the Government.  Credits are available at 8.75%.
27. Minimum prices for the AGF and EGF programmes are based on several parameters,
inter alia , present and expected
 conditions of domestic and international markets;  costs of production;
national stocks;  and the profitability of the previous crop.  Products benefiting from minimum pricesin 1996-99 included beans, Brazilian wax, cassava, cassava flour, cassava starch, cashew nut, castor
oil plant, cotton, garlic, grapes, natural starch, jute, maize, peanut, rice, sunflower, sisal, soybeans,
and sorghum.
27
28. According to the Central Bank, minimum prices have been defined so as to stimulate
agricultural production for both the internal and external markets28;  in some instances this was
expected to reduce reliance on imports (e.g. garlic, peanuts, and jute) or to reverse production falls(e.g. sisal).
29  The authorities also noted that minimum prices have been increased to ensure supplies
to downstream users (e.g. maize for cattle raising or cotton for textiles) or to achieve surpluses for
export (e.g. soybeans).  However, in practice mini mum prices appear to be set well below world
levels:  for example, in January 2000, as a proportion of import parity prices, they were about 65% for
                                                     
25 Andrade da Silva (1999).
26 WTO (1997a).
27 Central Bank Resolution No. 2.277, 3 July 1996, regulated EGF/SOV for the 1996/97 harvest.
28 Central Bank (1998).
29 Ministry of Agriculture and Supply (1997), p. 26.Brazil WT/TPR/S/75
Page 85
cotton, 40% for maize, and 60% for wheat, while the minimum price for soybeans was about 55% of
export parity.30  Although possibly explained by high internal transport costs, the wide gap between
minimum domestic and world market prices suggests that the role of the former is mostly as a safety
net and have a limited or no impact on production and trade patterns.
29. As of 1996, the Federal Government started using another marketing scheme, the Premium
for Product Outflow (PEP).  The objective of this programme is to guarantee a reference price for
producers and co-operatives and to ensure the supply of basic necessities of society, without theGovernment having to store the products.  Based on several variables, the Federal Government
determines the reference price, which may be similar to the minimum price.  The Federal
Government, through CONAB, offers a bonus or premium, in public bids, to buyers interested in
acquiring products directly from the producer or co-operative at the reference price.  To receive the
bonus the buyer must deposit a sum equivalent to the reference price in a bank, which will pass it to
the seller.  The premium will be, on average, equivalent to the difference between the reference price
and the market price.  All the products included in the AGF can participate in the PEP.  The productschosen for the PEP and the time of the bid depend upon the product’s marketing conditions and the
need to guarantee its price.  Since 1996 cotton, maize, wheat, and rubber have been marketed through
the PEP.
31
30. The Federal Government also offers option contracts as price stabilization mechanism,
especially when market prices are lower than the minimum prices (usually during the harvest).
Through CONAB, a price is offered for the next harvesting season, at which eligible products (rice,maize, wheat, and cotton) may be sold to the Government.  CONAB sells these options through an
auction in which only rural producers and co-operatives are allowed to participate.  The contracts are
launched at the beginning of a harvest and are due at the beginning of the next harvest.  The price is
equivalent to the product’s minimum price plus the storage and the financial cost; the latter is
calculated according to the SELIC interest rate.
32  Option contracts may be combined with EGF, in
which case the option contract will be given as collateral to the bank to obtain credit.
31. Another important rural credit scheme is the Rural Promissory Note (CPR), an instrument
used for financing production;  it has a clause of future delivery by farmer/co-operative.  As in the
case of the EGF for the agro-industry and co-operatives, it is limited to 50% of the production
capacity of the processors.  It is only available for cotton, maize, rice, and wheat.  In addition,
processors must prove that they have paid at least the minimum price to the producer.  Like for the
EGF, credits are available at an annual rate of 8.75%.
Other internal support
32. The Brazilian Bank for Economic and Social Development (BNDES), through its Special
Agency for Industrial Financing (FINAME), offers a specific programme (FINAME Agricola) to
provide long-term loans to encourage investment in agriculture.  These loans are used to finance the
acquisition of agricultural machinery for up to a 100% of the value of the machine.  Beneficiaries of
FINAME Agricola are rural producers or owners of storing facilities, including those that obtain
credit through other programmes.  Interest rates for this line of credit have increased since the 1997/98
harvest from 9.5% to 11.95% (1999/00 harvest).33
                                                     
30 Estimates by the WTO Secretariat, based on minimum and parity prices obtained from CONAB
online information.  Available at:  http://www.conab.gov.br/.  The parity import price corresponds to the c.i.f.
price in Sao Paulo;  the export parity price is the f.o.b. price at the Paranaguá port.
31 Instituto de Economia Agrícola (1998).
32 The SELIC (Taxa Referencial do Sistema Especial de Liquidação e Custodia para Titulos Federais)
monthly rates are available online at:  http://www.escgospar.com.sr/selic.htm [13 July 2000].
33 Central Bank Regulation No. 2.402, 25 June 1997.WT/TPR/S/75 Trade Policy Review
Page 86
33. Another programme (MODERFROTA) to promote the mechanization of the sector and the
renovation of agricultural machinery is implem ented through BNDES.  Funds are available for
producers with an income of less than R$250.000 (i .e. small-scale farmers) who are entitled to 100%
financing, and producers with an income equa l to or above R$250.000 (i.e. medium-scale farmers)
who may enjoy 90% of financing.  Credit to purchase tractors and harvesting machines is available at
preferential rates of 8.75% for small-scale farmers and 10.75% for medium-scale farmers.  The loansare for six years for tractors and eight years for harvesting machines;  previously, these rates had beenfixed at 11.95%.
34
34. BNDES administers the Support Programme for Marketing of Brazilian Cotton
(Pró-Algodão), the Incentive Programme for Soil Improvement (PROSOLO) and the Incentive
Programme for the Mechanization, Refrigeration and Transport of Milk (PROLEITE).  Pró-Algodão
offers credit lines to finance the purchase of Brazilian cotton by the textile industry;  in 1999,
R$127 million were disbursed under this programme.  PROSOLO seeks to increase productivity by
funding the purchase, transport and appropriate use of soil "correctives";  in 1999, R$99 million weredisbursed under this programme.  PROLEITE was created in July 1999 to help modernize milkproduction through the financing of equipment purchases;  some R$2 million were disbursed in 1999.
35. BNDES also provides export credit lines through BNDES-Exim (Chapter III(3)(viii)).  In
1999, out of total disbursements of R$6.8 billion under that programme, agro-industrial exports
received R$408 million;  of this, R$394 concerned food products and beverages.
(c) Other measures
36. Brazil, as a member of the Association of Coffee Producer Countries, started to apply a
Coffee Retention Plan as of 1 June 2000, for two years.
35  The plan involves retaining a percentage of
the coffee to be exported.  Participating countries will begin by retaining 20%.  On 3 July 2000, the
retention was to be adjusted according to the following parameters:  if the price was below
US$0.95/lb., countries were to retain 20% of their exports;  if the price ranged from US$0.95/lb. to
US$1.05/lb., no retention was to take place;  and if the price increased above US$1.05/lb. theaccumulated stocks would be released.
37. All coffee exports from participating countries must be covered by a valid Certificate of
Origin of the International Coffee Associations, issued only upon presentation of the Retention
Certificate.  There is a committee to manage the retention scheme.
36  As a result of this Plan, Brazil
was to retain 3 million sacks (60 kg. each) of coffee.  Banco do Brasil has allocated R$100 million to
acquire coffee from producers at up to 70% of the market value of a sack of coffee.37  After 180 days
the producer may recover the coffee, sell it, and repay Banco do Brasil;  contracts are renewable.38  In
addition, the Central Bank approved a credit line to finance the storage of coffee and CONAB has setaside 13 of its storage facilities for coffee.
39
                                                     
34 Resolution No. 2.699, 24 February 2000.
35 The retention plan is regulated by Portaria No. 197 and Normative Instruction No. 4/200, Diario
Oficial , 16 June 2000.
36 Association of Coffee Producer Countries online information, Coffee Retention Plan .  Available at:
http://www.acpc.org/coffee-retention-plan-2000.pdf [4 July 2000].
37 Banco do Brasil is the principal executor of banking services for the Federal Government, which
holds a controlling stake in it.
38 Ministry of Agriculture, Press Release "Ministério da Agricultura Libera Recursos pare Retenção do
Café" (4 July 2000) [Online].  Available at:  http://www.agricultura.gov.br/html/release.htm [4 July 2000].
39 Ministry of Agriculture, Press Release "Pratini de Moraes Anuncia Regras de Programa de
Ordenamento da Oferta do Café" (15 June 2000) [Online].  Available at:  http://www.agricultura.gov.br/html/release.htm [4 July 2000].Brazil WT/TPR/S/75
Page 87
(3) MANUFACTURING
(i) Main features
38. The contribution of the manufacturing sector to GDP has shown a slight decline since 1995,
to reach some 20.4% in 1998.  This could be attributed to manufacturers sub-contracting certain
services, which were previously accounted for in manufacturing GDP.  There has also been acorresponding decline in the share of labour employed in this sector, from 13.5% in 1995 to 12.4%
in 1998.  As a result of domestic financial difficulties and external shocks, and the measures taken to
overcome these, the manufacturing sector as a whole stagnated in 1998-99, as did most individual
manufacturing activities (Table IV.2).  Structural factors such as the tax structure, the shortage of
long-term capital, the high cost of transport services, the lack of predictability and inter-sectorialdiscrimination of trade policies, also co ntributed to the slowdown in the sector.
40
Table IV.2
Profile of the manufacturing sector, 1995-99
1995 1996 1997 1998 1999
  Sectoral share in total GDP (%) 23.91 21.49 21.29 20.40 ..
  Employment (% of total employment) 13.5 13.4 13.1 12.4 ..
  Labor productivity (% change) 12.6 12.6 2.0 1.4 ..
  Production index (% change)a2.0 2.1 4.5 -3.7 1.3
    Non-metallic mining 3.2 5.5 6.3 -1.4 ..
    Metallurgy (ferrous metals) -4.9 4.0 2.9 -5.5 ..
    Non-ferrous metals 1.8 6.3 -4.1 0.1 ..
    Other metallurgical products -0.7 4.2 5.9 -5.6 ..
    Machinery and tractors -2.1 0.5 7.6 -4.3 ..
    Automobiles, trucks and buses 3.9 0.7 14.3 -21.3 ..
    Other vehicles, parts and accessories 1.1 0.7 7.4 -11.0 ..
    Electrical appliances and parts 9.0 -1.5 6.4 -0.8 ..
    Electronic and communication apparatus 15.1 7.1 -8.3 -22.7 ..
    Wood & furniture 1.5 3.7 4.5 -5.0 ..
    Paper 1.3 1.9 2.4 -0.4 ..
    Rubber -1.4 0.8 4.5 9.7 ..
    Chemicals elements (excl petro-chemicals) 0.0 5.8 9.7 -7.9 ..
    Petrochemicals -2.5 1.4 7.4 2.1 ..
    Other chemical products 0.1 5.2 2.8 -1.5 ..
    Pharmaceuticals and perfumery 11.9 -2.0 8.1 2.1 ..
    Plastics 8.9 9.7 3.0 -6.4 ..
    Textiles -5.8 -5.6 -4.6 -10.0 ..
    Clothing and other wearing apparels 1.5 -1.7 -6.1 0.2 ..
    Footwear, leather and hides -6.2 2.3 -4.1 -10.2 ..
    Coffee processing -7.9 0.5 -8.7 43.6 ..
  Other vegetable products including tobacco 3.6 3.3 17.3 -4.8 ..
    Meat processing 14.5 1.3 0.0 -0.6 ..
    Dairy processing 22.6 6.1 -2.3 1.5 ..
    Sugar processing 11.5 -0.7 8.9 -1.5 ..
    Vegetable oils processing 8.0 -1.6 11.4 3.1 ..
    Other food and drinks 10.5 1.6 2.2 5.3 ..
    Other miscellaneous manufactures 0.1 -0.6 3.1 1.6 ..
  Total value of output (% change)a1.8 0.4 3.9 -3.2 -1.7
  Exports of manufactured goods/total exports (%)b52.9 52.8 52.8 53.8 53.1
  Imports of manufactured goods/total imports (%)b71.0 70.0 74.0 76.4 75.8
.. Not available.
a Previous year = 100.
b SITC classification.
Source: Ministry of Development, Industry and Trade online info rmation.  Available at:  http://www.mdic.gov.br/publica/
sdp/pag/bolestat.html;  and for trade statistics, UNSD, Comtrade database.
                                                     
40 CNI (1998a).WT/TPR/S/75 Trade Policy Review
Page 88
39. Brazil’s industrial sector is highly diversified.  The most important manufacturing subsectors
are the food and beverages industry and transport equipment (including aircraft, motor vehicles, and
automotive parts);  other important industries include metallurgy, chemicals, and petrochemicals.
Textiles, clothing, and footwear as a traditional industry, has lost some importance because of its
inability to compete as the Brazilian economy has opened up.41  There has been little change in the
GDP shares of main industry groups, except for a significant fall in transport equipment (Table IV.3).
Table IV.3
Manufacturing, sectoral contribution to GDP, 1995-98
1995 1996 1997 1998
  Manufacturing GDP (%) 100.0 100.0 100.0 100.0
    Non-metallic mining 4.6 4.7 5.2 5.4
    Metallurgy 11.7 11.2 10.8 10.8
    Transport & locomotives 17.6 18.1 17.8 15.7
    Electrical and electronic apparatus 7.1 7.0 6.6 5.9
    Wood & furniture 3.8 3.7 3.8 3.4
    Paper 4.6 4.7 4.2 3.9
    Rubber 1.7 1.4 1.4 1.5
    Petrochemicals 11.3 10.2 11.3 14.7
    Chemicals elements and other chem prods (exc. petro-chemicals) 6.7 7.0 8.0 7.8
    Pharmaceuticals and perfumery 3.3 3.3 3.8 4.4
    Plastics 2.5 2.8 2.8 2.5
    Textiles, clothing and other wearing apparels (inc. footwear) 7.1 7.4 6.6 5.4
    Food and beverages 14.6 16.3 16.4 16.7
    Other miscellaneous manufactures 2.5 2.3 1.9 2.0
Source: Ministry of Development, Industry and Trade online information.  Available at:   http://www.mdic.gov.br/publica/
sdp/pag/ bolestat.html.
40. In 1999, exports of manufactured goods accounted for some 53% of total exports while
imports of manufactured goods amounted to some 76% of total imports (Table AI.1 and AI.2).  The
share of imported inputs and intermediate goods has increased since 1996, to reach 49% of total
imports in 1999, while imports of final goods amounted to 15%.42
41. Brazil’s most important manufactured exports since 1995 have been machinery and transport
equipment, which accounted for 45% of total manuf actured exports, followed by chemicals, semi-
manufactured products made of steel , and other consumer goods such as footwear.  The most dynamic
export sector has been aircraft, which has gr own six-fold during the period (Table IV.4).
Other manufactured exports declined in 1998 a nd 1999.  The major markets for manufactured goods
are Argentina (passenger vehicles and automotive parts and accessories); Chinese Taipei
(semi-manufactured steel products); Mexico (passeng er vehicles); and the United States (airplanes,
automotive parts and accessories, footwear , and semi-manufactured steel products).43
                                                     
41 Bonelli et al. (1998).
42 Ministry of Development, Industry and Trade (undated (a)).
43 SECEX (1999).Brazil WT/TPR/S/75
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Table IV.4
Selected manufactured export and import products, 1996-99
(US$ million)
1996 1997 1998 1999
Exports, f.o.b.
Airplanes 283.8 681.0 1,159.0 1,771.8
Footwear 1,650.1 1,594.4 1,386.7 1,342.3
Parts of automobile and other vehicles 1,305.5 1,399.5 1,429.0 1,229.1
Automobiles and other passenger vehicles 618.6 1,463.2 1,618.7 1,138.5
Semi-manufactured products made of steel 1,294.3 1,358.8 1,255.2 1,095.9
Piston engines, parts and accessories 1,028.1 1,137.4 1,134.6 937.3
Imports, f.o.b
Transmitters, receptors and parts 2,006.0 2,486.0 2,034.5 1,757.6
Parts of automobile and other vehicles 1,596.3 1,667.4 1,558.2 1,423.3
Medicines for human and animals 710.6 888.8 1,060.8 1,310.8
Automobiles and other passenger vehicles 1,564.3 2,465.3 2,676.7 1,213.8
Integrated circuits and electronic microconjuntos 809.8 944.5 866.5 1,059.4
Heterocyclic compounds, its salts and sulphonamides 897.1 1,053.0 1,111.5 1,002.8
Motors, generators, transformers and parts 505.2 739.7 809.7 952.6
Piston engines, parts and accessories 821.2 1,189.6 1,134.6 937.3
Electrical apparatus, telephones, telegraphs, and parts 480.8 804.0 828.7 864.4
Computers and automatic data processing machines 996.8 1,056.8 974.3 825.8
Measuring instruments 773.9 878.9 889.9 764.2
Turbo engines and turbo propellers 165.8 256.4 467.8 595.2
Source: Ministry of Development, Industry and Trade, Balança Comercial Brasileira , various issues.
(ii) Policy objectives and instruments
42. Industrial policy in Brazil is aimed at increasing specialization within the manufacturing
sector;  attaining more balanced inter-sectoral growth;  diversifying exports of manufactured goods;
improving efficiency and quality;  and reducing structural deficiencies related to infrastructure, human
capital development, tax structure, and credit.  The authorities see a need to maintain existing
horizontal and industry-specific support measures;  in their view, specific sectoral measures are
required because of the wide disparity within the manufacturing sector and the uneven adjustment to
macroeconomic stabilization and liberalization.44
43. In 2000, the average applied MFN tariff was 14% for the manufacturing sector as a whole,
with tariffs ranging from 0% to 35%.  Some of the most important industries, including large exportactivities – vehicles (HS87), textiles, clothing accessories, and footwear (HS 57, 61, 62, 63 and 64),
and toys (HS95) – benefit from above average levels of protection of around 23% (Table AIII.1).
44. Tariff escalation is pronounced, with an average protection of 15.8% for fully processed
goods, 11.9% for semi-processed and 9.3% for primary goods.  Thus, the protection structure applied
under the import-substitution industrialization regime of the late 1970s seems to have remainedlargely in place.  Tariff escalation exists in most sectors but is more significant in traditional activities,
inter alia , food processing;  textiles, clothing and leather;  and wood and wood products
(Table AIV.1).  Important export-oriented activities, such as iron and steel basic products and some
chemicals, also show significant escalation.
                                                     
44 Ministry of Development, Industry and Trade (undated (b)).WT/TPR/S/75 Trade Policy Review
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45. In the Uruguay Round, Brazil bound all tariffs on manufactured goods at rates ranging from
0% to 35%.  Among the industries with the highest bound rates (i.e. ranging from 20%-35%) are
textiles (HS 56 and 59), iron and steel products (HS 72 and 73), and  transport equipment (HS 86
and 87).
46. As described in Chapter III, tariff protection is supplemented with additional instruments,
such as duty and tax exemptions for capital goods not produced in Brazil,  a temporary entry regimeand, free-trade zones granting exemption from all domestic taxes and customs duties mostly to
manufacturing, a drawback scheme providing for the reimbursement of tariffs on inputs conditional
on export performance, and import prohibitions on most used goods, including automobiles and
textiles.  Anti-dumping duties protect several manufactured goods,  inter alia , tyres, chemicals,
metals, and textiles.  Toys are still subject to a safeguard measure, and a transitional safeguardon certain textile imports is in place.  Tariff quotas on automotive goods were used until 31 December
1999.
47. Preferential lines of credit available through th e BNDES play a significant support role in the
manufacturing sector.  In 1999, the sector absorbed 45% of all resources supplied by BNDES.
45  A
specific programme, FINAMEX, is in place to finance exports of machines, equipment, and othermanufactured goods.  BNDES also provides credit at subsidized rates, through PROEX, to support the
promotion of manufactured exports.
48. Specific measures seem to benefit mainly the automotive and aircraft industries, shipbuilding,
steel, and informatics.  Developments in these activities are reviewed in the following sections.
(iii) Automotive
49. Production of automotive products has decreased since 1997 (Table IV.5).  The authorities
expected to overcome the difficulties brought about by the 1997 financial crisis, to attain a level ofproduction of 2.5 million units in 2000, to rank fifth among world producers.
46  Imports decreased
substantially in 1996 as a result of the implementation of the automotive regime.
Table IV.5
Automobile Industry, 1995-99
(Units)
Sales
Year Production Domestic Exports Total Imports
1995 1,629,008 1,359,879 270,187 1,630,066 409,933
1996 1,804,328 1,506,782 295,359 1,802,141 199,530
1997 2,069,703 1,640,243 416,872 2,057,115 327,604
1998 1,585,630 1,187,050 399,597 1,586,647 347,943
1999 1,345,515 1,074,132 258,710 1,332,842 178,172
Source: Central Bank of Brazil.
50. In 1999, the production of auto parts amounted  to US$10.4 billion (1.8% of GDP), down by
40% from 1997, when production was valued at US$17.5 billion (2.2% of GDP). 47  Auto parts were
used mainly by the assembling plants (56%), after-parts market (19%), exports (18%), and other
manufacturers (7%).  In 1999, the auto parts industry included 469 companies with investments ofUS$1 billion, and a total payroll of 167,000 people (down from 285,000 in 1990).
                                                     
45 Ministry of Development, Industry and Trade (undated (a)).
46 Ministry of Development, Industry and Trade online information.  Available at: http://www.mdic.
gov.br/progacoes/sdp/pag/regime.html [29 June 2000].
47 Sindipeças online information.  Available at:  http://www.sindipecas.org.br [29 June 2000].Brazil WT/TPR/S/75
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51. Since 1995, the automotive sector has been granted a series of incentives with the stated
objective of attracting foreign investment, creating jobs, and reducing the sectoral trade deficit.48  In
addition to the incentives granted through the automotive regime in 1996, domestic manufacturers
benefit from high tariff protection and import prohibitions on used vehicles.
52. Brazil's automotive regime was first adopted through Provisional Measure No. 1.024 of
13 May 1995, and after several revisions was established under Law No. 9.449 of 14 March 1997.49
This regime was regulated by Decree No. 2,072 of 14 November 199650, and Interministerial Portaria
No. 1 of 5 January 1996.  In accordance with the law, the benefits ceased on 31 December 1999.
53. Under the automotive regime, manufacturers already established in Brazil, as well as
"newcomers", could benefit from tariff reductions on their imports of vehicles, capital goods, partsand components, and other inputs, subject to local-content and export-performance requirements.  Thetariff reductions were aimed at increasing the effective protection of the assembly plants.
54. Tariff reductions were granted as follows:
- For capital goods, a reduction of 90% until the end of 1999, with a minimum import duty of
2%.
- For parts, components and other inputs, a reduction of 70% in 1996, 55% in 1997, 40% in
1998 and 1999, with a minimum import duty of 2%.
- For finished vehicles, a reduction of 50% of the applied tariff or the MERCOSUR Common
External Tariff, whichever the lower, until the end of 1999.
51
These percentages were reduced by half for projects approved after 14 November 1997, except forauto parts companies that export 100% of their production, for which the reduction will be in force
from 31 December 2002.
52
55. The automotive regime involved the fo llowing local-content requirements:
- In general, a minimum local-content requirement of 60%, reduced to 50% during the first
three years for "newcomers" producing automotive products, except parts, and for one year
for "newcomers" producing auto parts.53
- For capital goods there was a 1-to-1 minimum ratio between domestic products acquisitions
and imports until the end of 1997, when it was raised to a 1.5-to-1 proportion.
- For raw materials there was a 1-to-1 proportion between domestic products and imports.54
56. The automotive regime also imposed the following export-performance requirements:
- Until 1997, a 1-to-1 proportion between exports and imports of vehicles and auto parts.
- From July 1998 to June 1999, for each US$ exported, companies could import US$1.02 in
vehicles and auto parts at reduced tariffs.
- From July 1999 until the end of 1999, the proportion was set at US$1 to US$1.03.55
                                                     
48 IPEA (1998a).
49 Law No. 9.449, 1997 has been modified by Law No. 9.532, 12 December 1997, and by Provisional
Measure No. 1.994-40, 8 June 2000.
50 Modified by Decree No. 2.638, 29 June 1998.
51 Article 4 of Decree No. 2.072, 14 November 1996.
52 Articles 55 and 76 of Law No. 9.532, 1997, as modified by Article 7 of Provisional Measure
No. 1.994-40, 8 June 2000.  Autoparts companies may be charged a fine equivalent to 70% of the f.o.b. value of
their imports if they do not export 100% of their production.
53 Articles 11 of Decree No. 2.072, 14 November 1996.
54 Articles 6 and 7 of Decree No. 2.072, 14 November 1996.
55 Article 8 of Decree No. 2.072, 1996, as modified by Article 1 of Decree No. 2.638, 1998.WT/TPR/S/75 Trade Policy Review
Page 92
57. During 1996/97, 165 companies became beneficiaries of the regime, with investment
programmes amounting to US$19.3 billion for the 1996/97 period;  of those 165 companies, 15 were
assembly industries.56  It has been estimated that the price of automobiles in Brazil has increased by
25% since 1995 as a result of the automotive regime.  Thus, there has been a loss in consumer surplus
of R$35.6 billion, which has been transferred to the producers (R$24.5 billion) and to the Government
(R$3.7 billion).57
58. Following the introduction of the automotive regime, Brazil imposed in 1996 tariff quotas of
50,000 vehicles on imports from Japan, Republic of Korea and the European Union.  In August 1996,
the tariff quota rate was set at 35%58;  this rate was reduced by 50% a year later.  The quota was
allocated as follows:  Japan (22,025 units, 44%), Republic of Korea (14,467 units, 29%) and the
European Union (13,508 units, 26%).59  Similar quotas were adopted in September 1998 and extended
until the end of 1999.60  These tariff quotas were imposed as a result of consultations regarding the
automotive regime held between the aforementioned Members and Brazil (see below).
59. Another incentive programme was introduced in 1997 for automotive producers established in
the north, north-east and mid-west states.61  In addition to import tariff reductions of up to 100% for
capital goods, this regime included fiscal incentives that may be extended until 2010 by the Executive.Only assembly plants installed before 31 May 1997, or 31 March 1998 for auto parts manufacturers,
are eligible to obtain the benefits offered.  The Brazilian authorities expected investments under this
regime to reach US$2.4 billion in 1999.
62
60. Additional incentives to the automotive industry have been provided through Law No. 9.826
of 23 August 1999, which stipulates that up to 31 December 2010 manufacturers of products included
in HS headings 8702 and 8704 and installed in the north, north-east and mid-west regions (except the
Federal District) may request a reduction of 32% on the Industrial Product Tax (IPI).  The onlybeneficiary was Ford Motor Company.
63  According to the authorities, the fiscal benefits could
amount to R$180 million annually, or R$36,000 per job created (Ford estimated creation of
5,000 direct and indirect jobs).64
61. In March 2000, Brazil and Argentina agreed on a transitional automotive regime to apply
from 1 July 2000 to 2005.  The bilateral agreement st ipulates that the intra-MERCOSUR tariffs for
automotive products  would be reduced to 0%, subject to compliance with rules of origin (regional
content and nationalization index) and trade-balancing requirements.  Trade above the trade-balancing
requirements will be subject to the Common External Tariff (CET).  The CET for vehicles was set at
35%, while auto parts produced in MERCOSUR would bear a tariff of 14%, 16%, or 18%;  a 2% rate
applies to auto parts not produced within MERCOSUR.  The minimum regional content was set at a60%, except for new models, which require a regional content of 40% for the first year, and 50% for
the second year.  Trade-balancing requirements between Brazil and Argentina will be gradually
                                                     
56 IPEA (1998a).
57 IPEA (1998a).
58 Decree No. 1.987, 20 August 1996.
59 Decree No. 2.307, 20 August 1997.
60 Decree No. 2.770, 3 September 1998, as modified by Decree No. 3.164 of 2 September 1999.
61 Provisional Measure No. 1.532, 18 December 1996, converted into Law No. 9.440 on
14 March 1997, amended by Law No. 9.532, 10 December 1997,  and regulated by Decree No. 2.179, 18 March
1997 and Interministerial Portaria No. 3, 31 March 1997.
62 IPEA (1998a).
63 IPEA (1999).
64 IPEA (2000b).Brazil WT/TPR/S/75
Page 93
phased out.65  Under the new bilateral agreement Brazil is allowed to export 6.2% more than
Argentina in 2000, 10.5% more in 2001, 16.2% more in 2002, and 22.2% in 2003.  The disparity
allowed in 2004 and 2005 was yet to be determined in March 2000.66
62. Brazil's automotive regime was the subject of several consultations at the WTO.  In  1996,
Japan and the United States requested consultations;  the Republic of Korea, the European Union, and
Canada joined the consultations.67  Consultations ended up with the establishment of the
aforementioned tariff quotas.68
63. On 17 January 1997, the United States submitted a new request for consultations, which
included the automotive regime and the tariff quota system69, followed by a request from the
European Union in May of the same year.70  As a result of the consultations, in June 1998 Brazil and
the United States signed a Memorandum of Understanding by which the Brazilian Government
committed to eliminate the automotive regime by 31 December 1999 and to move forward the
deadlines for new applications under the regime;  the new deadline for auto assemblers became
30 June 1998 instead of 31 December 1999, and for manufacturers of parts 31 December 1998 insteadof 31 December 1999.
71  In addition, from July 1998 until June 1999 the ratio of net exports to
imports, required to recieve a reduction of 50% of the import tariff, was changed to US$1 to US$1.02,
and to US$1 to US$1.03 until 1999.72  These modifications were introduced by means of
Decree No. 2.638 of 1998.73
(iv) Aircraft
64. The Brazilian aircraft industry includes about 500 companies employing approximately
50,000 people.  The annual average compound growth rate of Brazilian exports of aircraft, spacecraft
and parts was some 62% between 1995 and 1999, from US$276.9 million to US$1,899.4 million;
imports amounted to US$933 million in 1999 (i .e. growth of 36.2% a year since 1995).74  Imports and
exports of aircraft and aircraft parts are subject to approval by the Department of Civil Aviation
(DAC), which submits all applications to the Civil Air Transportation Coordination Commission
(COTAC).
65. EMBRAER (Empresa Brasileira de Aeronáutica S.A.) is by far Brazil's largest aircraft
manufacturer.  It was founded as a government company in 1969 and privatized in December 1994.The Government holds only a small share of the capital, but plays a strategic role in the company.
75
The controlling group holds 60% of the voting shares and is formed by an investment conglomerate(Bozano, Simonsen Group) and Brazil's two larges t pension funds (Sistel and Previ).  In 1999, a
strategic alliance was formed with the main French aerospace companies (Aerospatiale-Matra,
Dassault Aviation, Snecma, and Thomson-CSF), which jointly acquired 20% of EMBRAER's votingshares.  EMBRAER has also developed partnerships with other foreign firms.
                                                     
65 IPEA (2000c).
66 Dow Jones Newswire , 24 March 2000.
67 WTO documents WT/DS51/1 to 7 and WT/DS/52/1 to 6.
68 Decree No. 1.987, 20 August 1996.
69 WTO documents WT/DS65/1 & 2.
70 WTO document WT/DS81/1, 20 May 1997.
71 "Memorandum of Understanding between the Government of the United States and the Government
of Brazil Concerning Trade Measures in the Automotive Sector", 16 March 1998 [Online].  Available at:http://199.88.185.106/tcc/ data/commerce_html/TCC_Doc…/BrazilAgreementAutos.htm [29 June 2000].
72 Article 8 of Decree No. 2.072, 1996, as modified by Article 1 of Decree No. 2.638, 1998.
73 IPEA (1998a & b).
74 UNSD, Comtrade database.
75 EMBRAER (undated), "EMBRAER at a Glance" [On line].  Available at:  http://www.embraer.com/
ing/mar16. htm [5 July 2000].WT/TPR/S/75 Trade Policy Review
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66. EMBRAER designs, develops, manufactures, and markets a range of aircraft for regional
commercial aviation and military use, as well as aviation-related mechanical and hydraulic systems.
It ranks among the four largest commercial aircraft manufacturers in the world, holding 45% of the
world's regional jet market (20 to 90 seats) and 24% of the world market in the 20 to 40-seat
segment.76  The company has produced over 50% of the Brazilian Air Force fleet;  other foreign air
forces also operate with EMBRAER products.  In 1999, EMBRAER delivered a total of 124 aircraft;sales amounted to US$1.9 billion, up 44.4% from 1998, with US$230.4 million in net profits, up
111% over 1998.
77
67. In 1999, EMBRAER became Brazil largest exporter;  exports reached US$1.7 billion,
representing 95% of the company's revenue (up from 63.1% in 1994), and a participation of 3.5% in
Brazil's exports.  In the same year, the company's net foreign exchange contribution (i.e. deductingexpenditures in imports and PROEX)  was US$647 million
78  By June 2000, EMBRAER had an order
book amounting to US$21 billion, of which US$8.6 billion were firm orders.
68. EMBRAER's success is partly explained by the export financing through PROEX
(Chapter III(3)(viii)).  It was estimated that in 1998, EMBRAER would absorb 45% of total export
subsidies (PROEX).79  More recent data provided by the authorities indicate that in 1998 EMBRAER
absorbed 39% of PROEX's resources.
69. This measure has been the subject of a dispute at the WTO.  On 19 June 1996, Canada
requested consultations on export financing provided through PROEX to foreign purchasers of
EMBRAER aircraft (Table AII.3).  A panel found that the PROEX interest rate equalization system
for regional aircraft constituted a prohibited export subsidy.  The WTO Appellate Body upheld this
finding.  The Government of Brazil states that PROEX has been modified and brought into
conformity with WTO rules, but Canada has challenged this position.80  On 28 August 2000 the
Decision of the Arbitrators was circulated.  The Arbitrators decided that an appropriate
countermeasure constituted the suspension by Canada of the application to Brazil of tariff concessions
or other obligations under GATT 1994, the Agreem ent on Textiles and Clothing and the Agreement
on Import Licensing Procedures covering trade in  a maximum amount of C$344.2 million per year.81
(v) Shipbuilding
70. Brazil's shipbuilding industry benefits from a series of support measures implemented in the
face of pressures in recent years from the opening of Brazil's maritime transport services, structural
changes in the world maritime market, and long-standing subsidization of shipbuilding in several
countries.  The support provided in Brazil does not seem to have been translated into an increase inthe local construction of vessels; since 1997, no new construction contracts have been initiated.
82  The
current limited competitiveness of domestic shipbuilding reflects an industry first established to
support a previously highly protected Brazilian maritime sector, and thus for years insulated from
                                                     
76 EMBRAER (undated), "EMBRAER at a Glance" [On line].  Available at:  http://www.embraer.com/
ing/mar16. htm [5 July 2000].
77 EMBRAER (2000), "EMBRAER has exceptional performance in 1999", 29 March [Online].
Available at:  http://www.embraer.com/ing/mar00a.htm [5 July 2000].
78 EMBRAER (2000), "EMBRAER has exceptional performance in 1999", 29 March [Online].
Available at:  http://www.embraer.com/ing/mar00a.htm [5 July 2000].
79 WTO document WT/DS46/R, 14 April 1999, Table 3.
80 WTO document WT/DS46/13, 26 November 1999.
81 WTO document WT/DS46/ARB, 28 August 2000.
82 Ministry of Transport (undated).Brazil WT/TPR/S/75
Page 95
foreign competition and the incentives this provides for productivity improvements and costs
reductions.83
71. Brazilian shipping enterprises may use resources from the Merchant Marine Fund for
Shipbuilding to finance the construction of vessels in Brazilian shipyards for export, and as of 1997
also for domestic use.84  Brazilian shipping companies registered at the Special Brazilian Registry
(REB) are eligible for fiscal incentives.  They may obtain financing for construction, conversion,modernization, and repair of vessels under the same conditions as companies producing ships for
export.  Financing is available for up to 85% of the value of the vessel, with 15 years for repayment, a
four-year grace period, and interest rates of 4% for vessels for internal navigation and 6% for other
vessels.
85  The Merchant Marine Fund for Shipbuilding, financed with the Freight Surcharge of the
Merchant Marine (AFRMM), is used to make up th e difference between the market interest rates and
these preferential rates.  The Fund is administered by the Directorate Commission in charge of the
Merchant Marine Fund (CDFMM), and financing is provided through BNDES.
72. In addition, parts and components acquired by Brazilian shipyards for the modernization,
conversion or repair of vessels registered in the REB are exempt from import duties and the Industrial
Products Tax (IPI).86
(vi) Other activities
73. The Brazilian steel industry has undergone major changes over the last decade, driven by the
comprehensive privatization of the early 1990s and a wide-ranging restructuring of operators in more
recent years.  The Government still considers steel-making a key sector, and thus specific incentives
to the industry remain in place.  These allow 95% of the Industrial Products Tax (IPI) to be refunded
to firms that undertake investment projects to increase production, improvement of product quality
and the environment; and increase in productivity.87  Brazilian steel shipments to the United States are
subject to export restraints (Chapter III(3)).
74. In the informatics sector (software and hardware ), fiscal incentives conditional on local value
added requirements seem to have been eliminated.88  Some incentives remained in effect until 1997:
the deduction of all research and development expenditures up to a limit of 50% of the income tax
owed by the company; and the deduction of up to  1% of the income tax owed by legal entities
investing in domestic informatics companies.  The exemption from the IPI was in place until
October 1999 with regard to products manufactured following certain criteria of substantial
transformation.
75. Companies established in Brazil that did not qualify as domestic companies were eligible for
the same benefits, provided they demonstrated every year, to the Brazilian Informatics andAutomation Council (CONIN), that they were carryi ng out training programmes, and had a research
and development plan, and an export programme.
89  Certain incentives applied exclusively to
                                                     
83 Marques de Velasco and Teixeira Lima (1997).
84 Law No. 9.432, 8 January 1997.
85 Ministry of Transport (undated).
86 Law No. 9.493, 10 September 1997 .
87 WTO document G/SCM/N/3, 18 March 1996.
88 Ministry of Development, Industry and Trade (undated (b)).
89 Brazilian company with domestic capital is defined as a legal entity incorporated and headquartered
in Brazil, controlled – directly or indirectly – by individuals domiciled and resident in Brazil, or by a state-owned company.  Actual control has been defined as the di rect or indirect holding of  at least 51% of the voting
capital (Law No. 8.248, 23 October 1991).WT/TPR/S/75 Trade Policy Review
Page 96
domestic companies:  preferential treatment for the purchase of goods and services by government
agencies; and financing priority from official institutions.
76. Brazil did not participate in the WTO negotiations on Information Technology Products.
(4) ENERGY
77. Important changes have affected Brazil's energy sector since 1996, many related to the
progressive liberalization of, and increased competition in, the electricity and petroleum industries.
The process of privatization of power utilities begun in 1995 has attracted sizable private investment,
which has been supported by the creation of a market-oriented regulatory framework in 1998.
Following the elimination of the state monopoly in petroleum exploration in 1995, and the adoption of
a new petroleum law in 1997, Brazil has become a commercially attractive exploration target.  Plansare also under way to increase private particip ation in the national oil company, PETROBRAS.
Brazil's large alcohol programme now emphasises environmental rather than self-sufficiency
objectives.  Nevertheless, state involvement in the energy sector remains important and limitations on
foreign capital participation and procurement remain, as do prices controls.  The National Council for
Energy Policy (CNPE), created in 1997, formulates policy for the energy sector, which is
implemented by the Ministry of Mines and Energy.90
(i) Petroleum
78. During 1996-99, Brazil's production of crude oil increased and imports decreased
(Table IV.6).  In 1999, imports of oil derivatives reached 304,000 barrels per day (b/d), and exportsstood at 123,000 b/d.  Domestic production accounted for 63% of apparent consumption in 1999, up
from 51% in 1996. The authorities expect the country to become self-sufficient in crude oil over the
next five years.91
Table IV.6
Petroleum production, trade and apparent consumption, 1995-99
('000 barrels per day)
1995 1996 1997 1998 Jan-Nov 1999
1. Crude oil
A. Domestic productiona 713 806 866 1,001 1,120
B. Imports 450 494 495 449 354
C. Exports - - - - -
2. Oil derivatesb
D. Imports 318 352 396 417 409
E. Exports 72 67 72 108 97
F. Apparent consumption (A+B-C+D-E) 1,409 1,585 1,685 1,759 1,786
Production/apparent consumption (%) 51 51 51 57 63
Production/import (%) 158 163 175 223 316
a LNG (liquid natural gas) included.
b Non-energetic derivates excluded.
Source :Boletim do Banco Central do Brasil , May 2000.
79. The role of the State in the oil sector remains important despite Constitutional Amendment
No. 9 of 1995, which allowed for competition in the sector.  Under Law No. 9.478 of 6 August 1997
(the Petroleum Law), the Federal Government ow ns all hydrocarbon deposits in Brazil.  The
                                                     
90 Law No. 9.478, 6 August 1997.
91 Latin American Economy & Business , "Energy Brazil: Planning to become self-sufficient",
May 2000.Brazil WT/TPR/S/75
Page 97
Government has the monopoly for prospecting and extraction, refining, importation, and exportation
of oil products, as well as for the sea-borne or pipeline transportation of crude oil, refined products,
and natural gas.  These exclusive rights accrue to the National Oil Agency (ANP) but companies
incorporated under Brazilian law may undertake related activities through a concession or
authorization.
80. As a result of the deregulation of the sector in 1997, ANP was created as the regulatory and
supervisory body for the oil and natural gas industries.   ANP is a federal agency linked to the Ministry
of Mines and Energy and operating under the guidelines set by the National Council for Energy
Policy (CNPE).92  The CNPE was created in 1997 to formulate policies for the energy sector, which
are implemented by the Ministry of Mines and Energy.93
81. PETROBRÁS is Brazil's dominant oil co mpany; under Law No. 9.478, the Federal
Government must own the majority (51%) of its  common shares with voting rights.  In 1999, the
Federal Government owned 84% of PETROBRÁS' common shares with voting rights, whereas
foreign investors held 1.4% of these shares, and 28% of preferential shares with no-voting rights.94
On 22 February 2000, the National Privatization Council (CND) approved the sale of 31.7% of the
shares with voting rights, and 18.5% of the total capital of the company, to reduce federal government
participation in PETROBRÁS to the minimum legal requirement.  The sale was expected to raise
R$8 billion.95
82. PETROBRÁS explores, extracts, refines, retails,  and transports petroleum, natural gas, and
related products.  Its operations include refineries, production and exploration areas, pipelines,terminals, and deep-water technology for oil production.  A PETROBRÁS subsidiary, PETROBRÁS
Distribuidora S.A. (BR Distribuidora), is the only company that produces and commercializes
lubricants and fuels throughout Brazil, however it competes with regional private companies
operating under ANP regulations.
83. Law No. 9.478 requires concessions and authorizations for the exploration, development and
production of oil and natural gas to be granted to national and foreign investors through a bidding
process.  In case of a tie, the bidding process is decided in favour of PETROBRÁS but only if
PETROBRAS does not bid through a consortium with other companies.  In addition to complying
with the requirements imposed on PETROBRÁS, to  participate in bids foreign companies must:
(i) provide proof of the company's technical capacity, and of sound fiscal and legal standing as
provided under ANP regulations;  (ii) give proof that the company has been established and is
functioning legally in accordance with the laws of its country;  (iii) appoint a legal representativeregistered at the ANP with special powers to undert ake acts and assume responsibilities related to the
bidding process and the bid submitted;  and (iv) make a commitment to establish a company under
Brazilian law with head offices and management in Brazil, should it be declared the winner.
84. On 16 June 1999, the ANP ran its first round of bids, on 27 exploration areas;  12 were
assigned (mainly off-shore exploitations);  no offers were received for the other 15 projects.PETROBRÁS was granted seven of the 12 concessions.  The process generated revenues of
                                                     
92 Decree No. 2.455, 14 January 1998.
93 Law No. 9.478, 6 August 1997.
94 PETROBRÁS (2000a).
95 IPEA (2000c).WT/TPR/S/75 Trade Policy Review
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R$321.6 million, and brought ten new companies to the Brazilian oil market.96  The ANP was to run
its second round of bids on 7 June 2000, on 23 exploration areas.
Pricing policy
85. Law No. 9.478 of 1997 established a transition period of no more than 36 months, ending in
August 2000, to adjust and revise the price of basic oil products and natural gas charged by refineries
and processing plants.  In 1997, the producer prices of various oil derivatives, including propane and
butane gas, solvents, and paraffin were liberalized.97  The price of crude oil, and consumer prices of
oil derivatives were also liberalized in the same year.  In mid 2000, the price of gasoline and other oil
derivatives were still controlled.
86. A new price structure for oil derivatives was established in 1998, initially to be in force until
August 2000.98  The policy was aimed at ensuring a stable revenue for PETROBRÁS while shielding
domestic consumers from high prices and excessive price volatility.  Two administrative prices have
been established, an Invoice Price (PF), and the Pr ice Effectively Received (PR).  The Invoice Price is
the price to be paid to the refineries by distributors;  this price is modified through a  Portaria  when
there are significant variations in international prices, except for aviation fuel and petrochemical
naphtha, which vary according to a predetermined formula.  The Price Effectively Received is the unit
revenue that refineries are allowed to earn when selling oil derivatives to distributors;  this price
varies by product and can be higher or lower than the respective Invoice Price.  The Price Effectively
Received is updated through a Portaria  on a monthly basis in accordance with the fluctuation of the
international market price.99
87. The difference between the Invoice and the Price Effectively Received is the so-called
Specific Price Portion (PPE).  When the PPE is po sitive, the surplus revenue is placed into the
Petroleum and Alcohol Account;  when the PPE is negative, the shortfall is paid out from that
account.  Any overall surplus or deficit in the account accrues to or is paid by the Treasury.100  This
mechanism prevents minor variations in the intern ational oil prices being transferred immediately to
the domestic prices.  Significant variations in the international prices are dampened through changes
in the Invoice Price.  During the first trimester of 2000, the account reached R$2.7 billion.101  When
the account is settled in August 2000, the Government expects it to show a R$3.5 billion surplus.102
88. The current price structure may entail substantial subsidization through prices per se, and
through freight compensation, which applies to basic oil derivatives such as petrochemical
naphtha, diesel, gasoline, and LPG throughout the country.103  The arrangement may also entail some
cross-subsidies, with products such as cooking gas, naphtha, and aviation fuel being subsidized with
net revenues obtained from other oil derivatives, such as diesel and gasoline.
                                                     
96 IPEA (2000b).
97 Article 4, paragraph III of Portaria MF No. 463, 6 June 1991, and Interministerial Portaria No. 269,
13 October 1997 (IPEA, 1997, No. 3, December).
98 Interministerial Portarias MF/MME No. 3, 4 and 5, 27 July 1998.
99 Interministerial Portaria No. 3, July 1998.
100 Article 74 of the Petroleum Law No. 9.478, 1997.
101 PETROBRÁS (2000b).
102 Ministry of Finance (2000c).
103 Ministry of Finance online information, "Relat orio de Atividades de 1998:  RE-regulamentação".
Available at:  http://www. fazenda.gove.br/portugu es/orgao/seae/relatorio/Relatorio98c.html (in Port uguese
only) [13 June 2000].Brazil WT/TPR/S/75
Page 99
(ii) Alcohol
89. At the time of the oil crisis in 1973, Brazil adopted the National Alcohol Programme,
PROALCOOL.104  Its main objective was to increase the production of fuel alcohol to reduce Brazil's
dependence on imported fuels in the face of the increase in international oil prices.  In recent years the
programme has been justified on the basis of the benefits derived from the production and use of a
fuel that is clean and renewable, and the importance of preserving jobs in the alcohol industry.
90. In August 1997, the Alcohol Interministerial Commission (CINAL) was replaced by the
Sugar and Alcohol Interministerial Council (CIM A), now under the Ministry of Agriculture and
Supply.  CIMA is responsible for policy formulation in the sugar-alcohol industry.  The Sugar and
Alcohol Department (DAA) in the Ministry of Agriculture and Supply is responsible for
implementing, supervising, and evaluating sugar-alcohol policy.  The DAA also elaborates annualplans to guarantee the domestic supply of suga r and alcohol, and monitors their implementation.
91. Fuel-alcohol production expanded from practically nil in 1975 to 3 million cubic meters of
anhydrous alcohol (anhydrous fuel ethanol, used as a gasoline additive) and 9.6 million cubic meters
of hydrous alcohol (hydrous fuel ethanol, used  unmixed as a fuel) in 1995/96.  In 1997/98, Brazil
produced 5.7 million cubic meters of anhydrous alcohol and 9.7 million cubic meters of hydrousalcohol.  Since 1997, anhydrous alcohol production has increased by 90% because of the requirement
that gasoline is mixed with a minimum of 24% of  this alcohol.  In 1985, 96% of the automobiles sold
in Brazil consumed fuel alcohol, but sales had declined to virtually zero (0.07%) by 1997.  In 1997, of
a total of 15.8 million vehicles, 24% used hydrous alcohol, and 76% gasoline mixed with anhydrous
alcohol.
105
92. The discovery and exploitation of large oil deposits in Brazil, and the fall in international oil
prices reduced the value of fuel alcohol as a substitute for gasoline.  Thus, PROALCOOL lost someimportance and the alcohol industry was largely liberalized.  The decree establishing PROALCOOL
and related regulation was revoked in 1991.
93. To support the programme, the mandatory content of anhydrous alcohol in gasoline was
increased to 24% effective 15 June 1998.
106  Also, the Green Fleet Law of 1998 provides for the
substitution, over five years, of gasoline powered  vehicles owned by the public sector by vehicles
fuelled by hydrous alcohol.107  The law also stipulates that vehicles bought under the benefit of a
fiscal incentive, such as taxis, must be equipped with engines run on renewable fuels.
The Government estimated that this measure would result in an increase in the production of
alcohol-powered vehicles to 120,000 units per year, up from 600 units a year produced when the
measure was adopted.108
94. The alcohol market consists of six large distribution companies (Agip, Esso,
Shell, and TEXACO, and the local companies PETROBRÁS and Ipiranga), which buy alcohol
                                                     
104 PROALCOOL was instituted by Decree No. 76.593, 1975, and was regulated by Decree
No. 80.762, 1977 (consolidated text).  These Decrees were revoked by Decree No. 83.700, 1979, which revisedPROALCOOL, and created the Alcohol National Council CNAL, and the Alcohol National ExecutiveCommission CENAL under the Ministry of Mines and Energy.  Decree No. 93.269, 1986 (still in force),modified Article 6 of Decree No. 83.700, 1979, to allow a representative of the Ministry of Agriculture to be
included in the CENAL.
105 Mancini Scheleder (1998).
106 Decree No. 2.607, 28 May 1998.
107 Law No. 9.660, 16 June 1998 modified by Provisional Measure No. 1.640-4, 26 June 1998.
108 IPEA (1998a).WT/TPR/S/75 Trade Policy Review
Page 100
from about 400 domestic production plants.  Those plants, in turn, purchase sugar cane from some
70,000 producers.109
95. The price of anhydrous alcohol was to be libe ralized in May 1997 and that of hydrous alcohol
by May 1998.110  However, the liberalization was postponed to 1 February 1999.111  Provisional
Measure No. 1.670 of 24 June 1998 granted the National Oil Agency (ANP) the authority to
"fix prices and establish quotas or volumes of production and commercialization of alcohol and its
raw material" during a transition period (1997-98).112  In May 1999, 181 alcohol producers (in
Brazil's mid-south) responsible for 88% of the national alcohol production, created the Brazilian
Alcohol Exchange seeking to reduce the market power  of distributors, and establish their own prices.
(iii) Electricity
96. In 1999, Brazil had installed capacity to produce 55.7 GW of hydraulic energy and 5.3 GW
thermal energy, for a total of 61 GW.113  In the same year, there were 61,000 km of transmission lines
operating at voltages above 230 kV.  National electric energy consumption amounted to 274.1 TWH,
for a total of 41.4 million consumers.114
97. Brazil's capacity to generate electricity is expected to grow by 68% (40.3 GW) by 2008115, of
which 23.1 GW would be produced with hydroe lectric energy, and 17.2 GW with thermal energy
(including 13 GW generated by natural gas).116   In order to attain this goal, an annual investment of
R$8.5 billion will be required in the next five years.  The Government expects that by year 2005 the
sector will generate revenues of some R$30 billion, of which 30% to 50% will be produced by the
private sector.  The Thermoelectric Priority  Programme 2000/2003 was launched on February 2000,
aimed at increasing electricity generation by 14.9 GW through the construction of 39 plants byyear 2003.
98. ELETROBRÁS, a state-owned enterprise, contributes to 60% of the electricity generation, of
which ITAIPU generates 12.6 GW.117  ELETROBRÁS operates directly or through subsidiaries or
associated companies.118  In partnership with the state governments and the National Bank of
Economic and Social Development (BNDES), ELETR OBRÁS participates in the administration of
concessionaires, and is preparing them for future privatization.  Until 2002, concessionaires will have
to pay 2.5% of their revenue to ELETROBRÁS, the so-called Reverse General Reserve (RGR).119
99. The National Department of Water and Elec tric Energy (DNAEE), under the Ministry of
Mines and Energy, is responsible for supervising and controlling private sector participation in the
electricity sector;  private investors may not control more than 20% of the shares of a company
                                                     
109 Senate speech by Sr. Edison Lobão, 31 March 1998 [Online]. Available at:  http://www.senado.gov.
br/web/senador/elobao/Alcool.htm (in Portuguese only) [26 June 2000].
110 Portaria No. 294 of 1997.
111 Portarias MF No. 102 of 28 April 1998, and No. 275, 16 October 1998.
112 IPEA (1998a).
113 IPEA (2000c).
114 Eletrobras online information.  Available at:  http://www.eletrobras.gov.br/english/empresa/
principais.htm [15 June 2000].
115 This is in accordance with the Ten-Year Expansion Plan 1999/2008 of the Electric Sector, stipulated
in Portaria No. 151, 10 May 1999
116 Information in this paragraph is based on IPEA, Boletim de Política Industrial , various issues.
117 IPEA (2000c).
118 Law No. 9.848, 27 May 1998.
119 IPEA (1998b).Brazil WT/TPR/S/75
Page 101
involved in distribution and generation activities, or 25% if the company is involved in both
activities.120
100. In 1996, the Brazilian Electricity Regulatory Agency (ANEEL) was established as the
independent regulatory agency for the electricity industry.121  ANEEL functions are to regulate and
supervise the generation, transmission, distribution, and marketing of electrical energy, according to
the policies and directives established by the Federal Government.  In addition, ANEEL issues
regulatory acts, carries out concession bids, determines the criteria for tariff calculation and serves as
an arbitrator in the case of disputes amongst agents.  ANEEL is responsible for regulating electricity
rates and establishing conditions for access to and use of the power transmission and distribution
systems.  However, on 4 March 2000, the Federal Government sent a draft law to Congress aimed at
eliminating ANEEL's autonomy to fix the tariffs of public utility services.122
101. The electricity sector was earmarked for privatization within the framework of the
Brazilian Privatization Programme (PND) launched in 1990.  In 1998, the further restructuring ofELETROBRÁS and its subsidiaries was approved.
123  The objective is to privatize ELETROBRÁS
and its subsidiaries through corporate splits, mergers, take-overs, or capital reductions.124  Any type of
restructuring must be authorized in advance by the National Privatization Council (CND).  Between
1996 and 1999, privatization of the electric sector accounted for 39% of assets privatized in Brazil
during the period.  As of March 2000, total proceeds amounted to US$5.6 billion, of which
US$3.9 billion were sale proceeds, and US$1.7 billion debt transfers.125
102. The purchase and sale of electricity may be freely negotiated among concessionaires but the
amounts of energy that may be contracted during 1998-02 have been administratively determined.
Volume restrictions will be released progressively for most generators, 25% per year, to be sold in the
free-market.  The law also opens the possibility for consumers to purchase electricity from any
supplier after July 2003.
103. ANEEL regulates electricity tariffs applied to "regulated consumers" (i.e. consumers that are
not free to choose their supplier and consume less than 3MW);  other tariffs are freely negotiated.Tariffs are defined for a given project and for the term of the contract with an annual adjustment
based on the variation in the price of natural gas, the exchange rate, and inflation.126  The purchase
and sale of electricity in the interconnected electricity systems is undertaken in the Wholesale Energy
Market (WEM), to be established through market agreements ratified by ANEEL.  This agency is also
responsible for defining the rules for participation in the WEM.
104. The Concessions Laws No. 8.987 and No. 9.074 of 1995 set the framework for competition
among power generators; freedom of access to networks;  and choice of supply for consumers of
3 MW or more (starting in 2000).127  Concessions are assigned for the period required for the
                                                     
120 IPEA (1997).
121 Law No. 9.427, 26 December 1996.
122 IPEA (2000c).
123 Law No. 9.648, 27 May 1998.
124 ELETROBRÁS subsidiaries are:  Centrais Elétricas do Sul do Brasil S/A. (ELETROSUL), Centrais
Elétricas do Norte do Brasil S/A. (ELETRONORTE), Companhia Hidro-Elétrica do São Francisco (CHESF),
and Furnas Centrais Elétricas S/A.
125 BNDES online information.  Available at:  http://www.bndes.gov.br/english/sectori.htm [15 June
2000].
126 ANEEL online information, "Explanatory Note on the Valor Normativo" (Reference prices),
26 October 1999.
127 Ministry of Mines and Energy, Secretariat of Energy (1998).WT/TPR/S/75 Trade Policy Review
Page 102
amortization of the investments but limited to 35 years for generation and to 30 years for distribution
and transmission, and may be extended for no more than a term of the same length;  concessions are
generally awarded through a competitive bidding process for power plants intended for public
service128;  other projects usually require a permit or authorization.  The criteria to be taken into
consideration when adjudicating the bid process include the lowest rate, the highest offer or the best
technical bid.  Under identical conditions, preference is given to a bid submitted by Brazilian
corporations.129
(5) SERVICES
105. The services sector plays a major role in the Brazilian economy.  In 1998, services including
those provided by the Government accounted for 62% of GDP;  this contribution was stable during
the 1990s.  The most important subsectors during th at period were public administration and housing
rents, which together accounted for some 50% of GDP in 1998.  The services sector, including
government services, absorbs 64% of the labour force.  The contribution of the different subsectors toGDP varied during 1995-98 period;  the share of hou sing increased while the contribution of public
administration, financial services, transportation and commerce declined (Chart IV.3).
Telecommunications was by far the most dynamic service activity in the second half of the 1990s.
Per centChart IV.3
Shares of services GDP, 1995 and 1998
Services GDP:  R$ 392,367 million
Sourc e: Instituto Brasileiro de Geografia e Estatistica. Commerce
14.7%1998 1995
Services GDP:  R$ 634,323 millionTransportation
5.6%
Communication
2.5%
Finance
13.2%
Public Administration
26.9%Other services
19.9%Commerce
11.5%
Transportation
4.7%
Communication
4.2%
Finance
10.4%
Public Administration
24.6%Other services
20.0%
Housing
17.2%Housing
24.4%
106. Overall, the role of the State in the services sector has diminished since 1996 as a result of the
privatization process, which also explains the decline in the contribution of public administration to
GDP.  Privatization has been most important in  telecommunications and finance services, and is
currently in progress in port and airport servic es.  The contribution of the financial subsector,
especially banking, has fallen because of privatization and other purchases, and the decline in
                                                     
128 Articles 4 and 5 of Law No. 9.074, 7 July 1995.
129 Paragraph 4 of Article 15 of Law No. 8.987, 1995, as modified by Article 2 of Law No. 9.648, 1998.Brazil WT/TPR/S/75
Page 103
inflation rates (section (ii) below).  However, there is considerable scope for expansion, as the
economy grows and interest rates decline.  In contrast, as a result of the process of privatization and
restructuring, the communication subsector has become more efficient and hence able to provide more
services.  Nevertheless, the waiting list for a telephone in some regions remains long, and the costs of
infrastructure and of services are still high.130  Despite the importance of transportation in supporting
economic growth and development, performance has not been satisfactory;  services are poor andcostly due mainly to the deterioration of infrastructure.
131
107. Brazil is a net importer of services, having run a deficit in the services account since 1995
(Chart IV.4).  The most important contributor to this deficit is commercial services followed by
insurance, profits and dividends. Profits and dividends should continue to increase because of the
surge in foreign investment into Brazil (Chapter I(3)).  Purchases of travel services decreased in 1999because of the devaluation of the real at the beginning of that year.
-45-30-15015
1995 1996 1997 1998 1999Chart IV.4                                            
Services trade balance , 1995-99
US$ billion
a              Including reinvested earnings.
Source : Banco Central do Brasil, Monthly Bulletin , May 2000.ImportsExports
Commercial 
services
Travel
GovernmentTrans portation
Insurance, profits 
and dividends a
Other services
(i) GATS and other international commitments
108. Brazil's horizontal commitments under the General Agreement on Trade in Services (GATS)
include provisions regarding the movement of natural persons, investment, commercial presence, and
subsidies.  Under those commitments, market access is guaranteed only to specialized technicians,
highly qualified professionals, managers and directors working under temporary contracts;  special
conditions also apply to the appointment of managers to affiliates of foreign companies.  Brazil has
                                                     
130 ITU (1999).
131 CNI (1998b).WT/TPR/S/75 Trade Policy Review
Page 104
also retained the right to require foreigner companies wishing to supply a service to be organized as a
legal entity as foreseen by the Brazilian law.132
109. Brazil's specific commitments under the GATS cover the following areas:  business services,
communication services, construction and related engineering services, distribution services, financial
services, tourism and travel related services, and transport services (Table AIV.2).  Brazil participated
in the WTO Negotiations on Financial Services and in the Negotiations on BasicTelecommunications;  its offers represented improvements on its Uruguay Round commitments in
those sectors.  However, as at June 2000, Brazil had ratified neither the Fourth Protocol on Basic
Telecommunications nor the Fifth Protocol on Financial Services.
133  On 14 July 2000, Brazil
informed the Council on Trade in Services of its decision not to ratify the Fourth Protocol on Basic
Telecommunications, due to the incompatibilities between Brazil's specific commitments listedtherein and the Brazilian legal and regulatory fr amework enacted in July 1997.  At the same time,
Brazil submitted a new schedule of commitments, which as at August 2000, was still awaiting
consideration by WTO Members.  The Fifth Protocol on Financial Services was being discussed in
the Brazilian Congress in mid-2000;  the authorities noted that no obstacles were expected to interfere
with Congressional approval.
110. In its offer in the extended Negotiations on Financial Services under the GATS, Brazil
included a new provision to allow the incorporation in Brazil of all insurance and insurance-related
services and financial institutions subject to the enactment of a presidential decree.
134  Restrictions
regarding the provision of auxiliary insurance se rvices by foreigners have been liberalized.
Limitations on national treatment for the installation of automatic teller machines, and the minimum
requirements for paid-up capital were eliminated.  Brazil also made commitments regarding provision
of services by non-financial institutions (Table AIV.2).135
111. Brazil's participation in the Telecommunication Negotiation resulted in an offer of improved
commitments, including on public domestic and international services, non-public domestic and
international services, and value-added services.  However, Brazil's recent liberalization of the
telecommunications sector (section (iv) below) was not reflected in actual GATS commitments.  In its
proposed Schedule of Specific Commitments, Brazil stated that within one year of the enactment ofthe General Telecommunications Law it would introduce into its schedule additional commitments on
regulatory principles including:  competitive safeguards, interconnection, universal service, public
availability of licensing criteria, and an independent regulator.
136  The General Telecommunications
Law was enacted on 16 July 1997.  On 11 July 2000, Brazil submitted a Revised Schedule of Specific
Commitments regarding Communication Services.  In this new offer Brazil made specificcommitments regarding local, long distance and international services, for public and non-public use,
provided through any network technology (cable, sa tellite, etc.), mobile services, and other value-
added services.
137
112. Brazil’s original list of exemptions to the principle of MFN treatment covers audio-visual/
motion picture and video tape production, la nd transport, and maritime transport138;  since Brazil's
previous Trade Policy Review, exemptions have been added affecting telecommunication services
                                                     
132 For further details see WTO document GATS/SC/13, 15 April 1994;  and WTO (1997a).
133 WTO documents GATS/SC/13/Suppl.3, 26 February 1998, and  S/FIN/M/23, 4 June 1999.
134 Financial institutions include multiple banks, commercial banks, investment banks, consumer
finance companies, real estate finance companies, leasing companies, brokers, and dealers.
135 WTO documents GATS/SC/13, 15 April 1994 and GATS/SC/13/Suppl.3, 26 February 1998.
136 WTO document, GATS/SC/13/Suppl.2, 11 April 1997.
137 WTO document S/C/W/160, 13 July 2000.
138 For details see WTO document GATS/EL/13, 15 April 1997 and WTO (1997a).Brazil WT/TPR/S/75
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supplied for distribution of radio or television prog ramming for direct reception by service consumers.
To ensure market access for Brazilian suppliers in foreign markets, these exemptions provide for
reciprocity or differential treatment;  they apply to all countries and are of indefinite duration.139
113. Brazil listed exemptions to (MFN) treatment unde r the Annex on Article II Exemptions to the
GATS Agreement, regarding the signature of mari time transport agreements on cargo sharing and
cargo reservations, and measures providing for access to cargo on a reciprocity basis.140  Brazil has
signed such agreements with Algeria, Argentina, Chile, and Uruguay.
114. As a member of MERCOSUR, Brazil participates in the ongoing services negotiations within
the regional grouping, which originally envisaged free trade in services in 1995.141  The MERCOSUR
Council approved the Montevideo Protocol on Tr ade in Services within MERCOSUR at the end
of 1997.  Brazil has not ratified this Protocol.  The Protocol is aimed at liberalizing the circulation ofservices within MERCOSUR.  The Protocol affects all forms of supply in trade in services within
member States:  cross-border supply, consumpti on abroad, commercial presence, and presence of
natural persons, as well as respect for the principle of MFN treatment.  Brazil does not participate in
any other preferential agreements on trade in services , although it is currently negotiating this issue
under the auspices of the Free Trade Agreement of the Americas (FTAA).
(ii) Banking
(a) Legal framework
115. Since Brazil's last Review in 1996 there have been no major changes in the regulatory
framework in the banking sector.  The sector continues to be regulated by Article 192 of the Federal
Constitution;  Article 52 of the Temporary Constitutional Provisions Act;  Law No. 4.595 of 31 of
December of 1964;  Law No. 4.728 of 14 of July of 1965;  Resolution No. 2.099 of the CMN of
17 August 1994;  and the Manual of Norms and Instructions of the Brazilian Central Bank (BCB).There have been some changes regarding the structure of the sector, banking supervision, and
prudential regulations.
116. The Constitution stipulates that participation of foreign capital in financial institutions is
subject to conditions of national interest, international agreements and reciprocity.  If these conditions
are not fulfilled the establishment of new branches of  financial institutions or an increase in foreign
participation in an established company is not allowed.
142  Foreign firms require approval through a
presidential decree to supply services in the Brazilian market, to expand an operation, or to increase
foreign shareholding participation in national financial institutions.143  Foreigners may participate in
the privatization programme of public sector financial institutions, with commercial presence granted
by a presidential decree.144  Financial institutions, unless otherwise specified, must be established as a
“sociedade anónima” when incorporated under Brazilian law.145
117. The number of branches that a foreign bank is allowed to open in Brazil is restricted.  For
banks established in Brazil before 5 October 1988, the aggregate number of branches is limited to that
                                                     
139 WTO document GATS/EL/13/Suppl.1, 11 April 1997.
140 WTO document GATS/EL/13, 14 April 1997.
141 Treaty of Asunción, Chapter I, Article 1.
142 Art. 192 of the Federal Constitution, and Art. 52 of the Temporary Constitutional Provisions Act.
143 Art. 18 of Law No. 4.595, 31 December 1964.
144 WTO document GATS/SC/13/Suppl.3, 26 February 1998.
145 WTO document GATS/SC/13/Suppl.3, 26 February 1998.WT/TPR/S/75 Trade Policy Review
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existing on that date.  For banks authorized to operate in Brazil after that date, the number of branches
is subject to the conditions set out in each case at the time authorization is granted.
118. Foreign banks established in Brazil may engage in the same activities, and are subject to the
same prudential requirements as domestic banks.  However, a foreign bank must be established as a
subsidiary or branch to be able to take deposits or to lend.  Banks incorporated in Brazil may be 100%
owned by foreign capital.  These banks are known as a private national financial institution controlledby foreigners or as foreign financial institution (when the head office is not located in Brazil).
119. The procedures for application to operate in the Brazilian market and the approval criteria for
new entrants are consolidated in “Roteiro de Procedimentos - Acesso ao Sistema Financeiro
Nacional”.
146  The criteria to obtain a licence are established by the National Monetary Council
(CMN) and include minimum capital requirements, and prudential regulations, as well asspecifications regarding the qualifications of th e administrators of the institution.  The same
requirements apply both to nationals and foreigners. Representatives and directors of financial
institutions have to be approved by the Central Bank  and must be residents of the country, but they do
not need to have Brazilian nationality.
147
120. In Brazil there are no significant legal distinctions between head offices and
agencies/subsidiaries, but there are distinctions between agencies/subsidiaries and representations:
agencies/subsidiaries may undertake all the functions and operations authorized to the institution
(head office), while representations are not allowed to receive deposits or to undertake othercommercial transactions.  This restriction applies to banks of national and foreign capital (i.e. themajority of voting capital is foreign).
121. Since 1999, an authorization from BCB is required for the representative offices of financial
and like institutions headquartered abroad to operate in Brazil.
148  The BCB's decision must take due
account of national interests and international agreements.  Representation is reserved to individuals
or legal entities domiciled in Brazil that have the task of making commercial contacts and transmitting
information of interest to their home offices or branches abroad;  they are prohibited from performing
operations reserved to financial institutions.
122. In 1994, CMN established the minimum capital required to set up a bank, and additional
limits, depending on the degree of structural risk of the bank's activities, designed to serve both as
permanent funding for the bank's activities, and as a reserve against the risks and losses.149  Th e s e
requirements have been modified in several instances.150  During the period under review, Brazil
adopted new prudential regulations aimed at strengthening the entire financial system.  Minimum
capital requirements were increased.  In 1997, Brazil adopted the principles recommended by theBasel Committee on Banking Supervision.  In 1998, the CMN gave financial institutions until
31 December 1999 to adopt internal control systems to comply with the Basel Principles.
151  Many
banks are implementing advanced risk analysis models, and in 1997 the BCB created a Credit RiskCenter to help the BCB assess large debtors' capacity to pay.
152
                                                     
146 Central Bank (1999c).
147 Other requirements to exercise these positions are regulated by CMN Resolution No. 2.645,
22 September 1999, and by Central Bank Circular No. 2.932, 30 September 1999.
148 CMN Resolution No. 2.592, 25 February 1999; and Central Bank Circular No. 2.943, 20 October
1999.
149 Resolution No. 2.099, 17 August 1994.
150 Resolution No. 2.399, 25 June 1997;  Circular  No. 2.784, 27 November 1997; and Resolution
No. 2.607, 27 May 1999.
151 Resolution No. 2.554, 24 September 1998.
152 Resolution No. 2.390, 22 May 22 1997.Brazil WT/TPR/S/75
Page 107
(b) Market developments
123. With assets of R$720 billion and about 200 banks at end March 1999, Brazil's banking system
is one of the largest among emerging market countries (Table IV.7).  The banking system is
dominated by large publicly owned (both federal and state governments) and privately owned banks,
and is concentrated;  the 50 largest banks hold more than 90% of the banking system's assets.  In
June 1999, the 20 largest banks accounted for 89% of total branches.153  Foreign-owned banks now
have a sizeable share of the market for both retail and wholesale financial services.  At endMarch 1999, foreign banks represented 26% of banking system assets, up from 14% in 1997.
154
Table IV.7
Brazil's banking system
(R$ billion, as of March 1999)
Number of BI Total assets Total deposits
Type of banking institution (BI) NumberPer cent
of total AmountPer cent of
total AmountPer cent of
total
Federal banks 5 3 276.7 38.5 173.2 52.6
State banks 14 7 31.7 4.4 20.9 6.3
Domestic private banks 102 51 207.9 28.9 75.8 23.0
Foreign private banks 60 30 142.2 19.8 38.7 11.7
Private banks w/minority foreign share 18 9 60.8 8.5 20.7 6.3
All banking institutions 199 100 719.3 100.0 329.2 100.0
Source: Central Bank of Brazil.
124. There has been a decline in the number of institutions participating in the system as a
consequence of the reorganization of the banking sector;  the public sector has been gradually pulling
out while the bigger financial institutions have acquired other banks.155  The contribution of the
financial sector to GDP, which stood at 15.9% in 1994, declined to 10.4% in 1998.156  The Central
Bank attributed this in large part to the fall in inflation rates.  Inflationary receipts, which in 1993
represented more than one third of the banking institutions' turnover, fell to one fifth in 1994, and in
mid 2000, with inflation in the single digits, was insign ificant in value terms.  It is expected that the
number of institutions participating in the system will continue to decrease, but the sector will grow as
the economy expands and the demand for banking services increases.
125. There has been a substantial transfer of public control to private entities, assisted by the
Programme of Incentives to the Restructuring and Strengthening of the National Financial System
(PROER).157  Under PROER, the Federal Government committed itself to financing 100% of the costs
of restructuring provided that the state-owned banks were either privatized, converted into
developmental agencies, or liquidated.  In the event that none of these three alternatives was chosen,
the Federal Government would provide only 50% of the restructuring costs, with the remainder to
come from the States.  Under the terms and conditions of the programme, the Federal Governmentprovided a low-cost 30-year loan, pa yable monthly at an interest rate equivalent to the variation in the
general price index (IGP-DI) plus 6% per year.
                                                     
153 Central Bank (1999d).
154 Central Bank (1999d).
155 Central Bank (1999d).
156 IBGE online information, "Producto Interno Bruto Trimestral".  Available at:  http:www.ibge.gov.
br/statistica/indicadores/pib/pibpe soslt00.shtm [13 June 2000].
157 Resolution No. 2.208, 3 November 1995.WT/TPR/S/75 Trade Policy Review
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126. Since mid 1996, the entry of foreign banks into the Brazilian market has increased.158
In 1997, eight foreign institutions were authorized to operate in Brazil, three by direct purchase of
existing banks, three by opening new banks, one by an increase in shareholding, and one by
replacement of the previous foreign partner.159  In the first half of 1999, six presidential decrees were
issued authorizing increased foreign participation in the financial sector.  In June 1999, foreign capital
controlled about 26% of the equity of the banking segment of the National Financial System,compared with some 22% in December 1998.  The authorities noted that as a result of the growing
presence of foreign capital in the sector, competition has increased, compelling other banks to become
more efficient, and the financial sector has grown sounder through the purchase of financial assets of
banks in liquidation.
127. The banking system appears to have weathered well the difficult economic environment of
the second half of 1998 and the first quarter of 1999, mainly because of the regulatory measures
adopted.  However, non-performing loan ratios remain high.  Since 1997, there has been a rapid
growth of loans in arrears or in liquidation, this ha s contributed to the high interest rates.  Moreover,
despite recent reform, some inefficiency remains and is  reflected in the large spreads of interest rates.
The persistence of these spreads is caused mainly by the risk of default, administrative costs, indirectand direct taxes, and the bank profits.
160
(iii) Insurance
128. In 1999, the national insurance system underwent restructuring.  The system is composed of
the National Council of Private Insu rance (CNSP), the main regulator,  the Superintendence of Private
Insurance (SUSEP), and the Brazilian Reinsurance Institute (IRB, now IRB BRASIL Reseguros
S.A.), and private insurance companies.  Up to  1999, SUSEP was responsible for the control and
supervision of insurance, open private pension funds, and capitalization operations, while IRBsupervised the reinsurance and retrocession operations.  As of 1999, SUSEP also assumed the
supervision of reinsurance and retrocession operations.
161
129. The most important laws ruling the insurance and reinsurance system are Decree Law No. 73
of 21 November 1966 amended by Law No. 9.93 2 of 20 December 1999, regulated by Decree
No. 60.459 of 31 March 1967.  In general, there are no barriers to internal trade of insurance servicesas long as the company complies with the minimum capital requirements of the different regions.
130. Insurance companies have to be specialized, they cannot have any other activity but
underwriting risks;  for instance, an insurance comp any is not allowed to provide banking services.
However, companies do not need to specialize in a specific line of insurance, they may be universal
(life and non-life) with the only exceptions ap plying to the Export Credit Insurance Company
162, and
the Reinsurance Company.163
131. Foreign companies providing any type of insurance must be incorporated under Brazilian law,
in the form of a sociedade anónima  (corporation).164  The enactment of a presidential decree is
required for a foreign company to be allowed to pr ovide life insurance, insurance on freight, property
insurance, medical care insurance, liability insuran ce, and hull, machinery and civil liability insurance
                                                     
158 Mendonça de Barros et al. (1998).
159 Mendonça de Barros et al. (1998).
160 Central Bank (1999a).
161 Law No. 9.932, 20 December 1999.
162 Law No. 6.704, 26 October 1979 regulated by Decree No. 2.369, 10 November 1997.
163 Law No. 9.932, 20 December 1999, and Resolution CNSP No. 01 of 14 January 2000.
164 WTO document GATS/SC/13 /Suppl.3, 26 February 1998.Brazil WT/TPR/S/75
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for vessels in the Brazilian market.  The National  Social Security Institute (INSS) is the sole
authorized supplier of work accident insurance.  The only activity monopolized by law is worker's
compensation insurance, which is provided by the INSS, administered by the Government.
132. Decree Law No. 73 lays down the reciprocity pr inciple regarding insurance operations.  Thus
the authorization of a foreign company to operate  in Brazil is conditional on the possibility of
Brazilian companies to operate in that country.
133. Once a foreign company is authorized to operate  in the Brazilian market an authorization is
not required to open new branches;  companies must inform SUSEP and have the minimum capital
requirement to operate in a specific region of Brazil.  In general, there are no barriers to internal trade
of insurance services as long as the company co mplies with the minimum capital requirements of the
different regions.  Minimum capital to operate in Brazil is established in two parts, a fixed minimumamount and a variable amount, according to the region(s) where the company will operate.  The range
of activities that the head office and a branch may undertake differs.  The head office may have all the
attributions, while branches/agencies may only underwrite, issue polices, and deal with claims.
134. Foreign-based insurance companies cannot advertise and sell their services in the country
directly, because cross-border operations are not allowed.  There are however two exceptions.SUSEP may authorize insurance to be bought outside the country if coverage is not available in the
country or if the insurance is for vessels, with special registry (i.e. Special Brazilian Registry, REB),
provided the price is lower outside the countr y (civil liability, hull and machinery insurance).
135. Insurance companies may sell directly or through brokers.  Brokers have to be registered at
SUSEP.  Brokers wishing to sell non-life insurance have to be pre-approved and undergo an
examination conducted by FUNENSEG (a specific pr ivate non-profit insurance education institute).
No exam is required to sell life insurance.
136. Since 1992, pre-approval is not required for new insurance products, but new products have
to be analysed by SUSEP;  as a result of this analysis a company may be obliged to modify the
product.  SUSEP may also forbid the commercializati on of any product, if considered inadequate.  A
product is considered inadequate if it does not fit the main aspects of the regulation, if it is nottechnically feasible or if it is badly structured leading to a misunderstanding of its coverage.Insurance that states an indemnity for kidnapping is prohibited.
137. In 1996, the monopoly on reinsurance operations was eliminated through Amendment No. 13
to the Brazilian Constitution.  The regulation establishing conditions of operation for new  reinsurers
in Brazil was enacted on 14 January 2000.
165  A resolution of 14 January 2000, allowing foreign-
based reinsurance companies to sell reinsurance services in the country, directly or through brokers,will become effective upon privatization of the IRB.  Suppliers have to register at SUSEP to be able to
sell in Brazil (admitted reinsurers); alien reinsurers not registered at SUSEP may underwrite risks of
Brazilian insurance companies only at the request of a Brazilian company (occasional reinsurers).
138. There are three different types of reinsurance:  local, admitted, and occasional.
166  Local
reinsurers are companies with head offices in Braz il.  They have to follow the same rules as the
insurance companies, and the SUSEP must author ize their installation.  They may not undertake
activities other than reinsurance, and to start activities must have a minimum capital requirement of at
least R$50 million, which should remain in the country throughout the time of the operation.  The
local reinsurers must meet requirements on solvency margin, retention, and technical provisions and
assets investment.
                                                     
165 Resolution CNSP No. 01, 14 January 2000.
166 Resolution CNSP No. 01, 14 January 2000.WT/TPR/S/75 Trade Policy Review
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139. An admitted reinsurer is a foreign operator registered at SUSEP to subscribe only reinsurance
in Brazil.  It must keep a bank account with a minimum of US$5 million as a collateral for its
operations in the country.  The level of the collatera l increases according to the level of the operation.
In addition, the reinsurance entity must have a net worth of at least US$85 million, three years of
operations, and a rating level stated by SUSEP, whic h is, in general, the minimum for the company to
be considered safe.  The admitted reinsurer may establish a representative office in the country, but itmay not subscribe risks directly, without head office approval.
140. In the case of the occasional reinsurer, the insurance company or the brokers are responsible
for certifying that the reinsurer meets the minimum requirements.  The occasional reinsurer should
have a minimum net worth of US$100 million, meet the minimum rating stated by SUSEP (similar to
the admitted reinsurers), and have five years of operation.
141. In general no incentives are granted to the insurance sector.  However, the tax on financial
services (IOF) has been reduced to 0% for insurance operations in the agricultural sector, on
mortgages (obligatory insurance), on export credit, and for satellites BRASILSAT I and II (launching
and operations risks).
167  This tax break is granted regardless of the origin of the capital of the
company.
142. Brazil has no preferences under bilateral agreements regarding insurance.
(iv) Telecommunications
143. Since Brazil's last Review in 1996, the telecommunications sector has undergone major
restructuring.  The most important change stems from Constitutional Amendment No. 8 of 1995,
which abolished the telecommunications monopoly.  Since then private companies have been allowed
to provide public telecommunications services and the Government became the regulator of such
services.  The principles of universal service obligations and competition are essential elements of thenew framework.
144. Two main laws regulate the telecommunication sector:  Law No. 9.295 (known as the
Minimum Law or Specific Law) established the base for competition in the provision of cellular
mobile service, limited service satellite telecommunications, and signal transportation service;  and
Law No. 9.472, the General Telecommunications Law (LGT), established the outline for theorganization of telecommunications services and the creation and operation of a regulatory agency.
168
Other legislation ruling the sector are:  Decree No. 2.534 of 1998 (General Licensing Plan);Resolution No. 30, 29 June 1998 (General Quality Plan);  and Decree No. 2.592 of 1998 (General
Plan of Universalization Goals for the Fixed Switched Telephone Service Provided Under the Public
Regime).
145. On 5 November 1997, the National Telecommunications Agency (ANATEL) was created as a
regulatory and supervisory body, independent of but reporting to the Ministry of Communications.
ANATEL's principal mandates are to ensure and maintain universalization;  promote competition
among service providers;  and protect consumers.  ANATEL also proposes telecommunications
policies to the Government, regulates and audits telecommunication services, licences and authorizesservices, determines and controls rates for public services, manages the radio-frequency spectrum, and
represents Brazil in international telecommunications organizations.
169  ANATEL is financed through
licence, spectrum, and inspection fees.  Licence fees are established according to, inter alia ,
                                                     
167 Decree No. 2.888, 21 December 1998.
168 Law No. 9.295 was enacted on 19 July 1996 and Law No. 9.472 was enacted on 16 July 1997.
169 Neto (1999).Brazil WT/TPR/S/75
Page 111
percentage of annual revenue (turnover), frequency bandwidth, services provided, percentage of
investment, and cost recovery.
146. As part of the reform of the sector, the TELEBRAS System, a group of public companies that
provided telecommunications services as a monopoly, was divided into four large holdings and
privatized on 29 July 1998;  privatization was through auction and brought in US$18.9 billion.
EMBRATEL, which was the sole provider of international telecommunication services, wasprivatized in 1998;  its stocks were bought by MCI-WORLDCOM.  With in the newly privatized
telecommunications system, EMBRATEL and INTELIG are the only companies allowed to provide
long-distance international and national service throughout the whole country.  The other fixed
telephony companies (TELEMAR, VESPER, TELE CENTRO SUL, TELESP, MEGATEL), and the
independent operators (CRT, CTBC TELECOM, SERC OMTEL and CETERP) are allowed to operate
only within specific regions as defined in the General Licensing Plan (PGO).
170  However, there is
competition within the regions as consumers can choose among different providers.  Brazil has also
been divided into ten regions for cellular telephony (Telecommunications General Norm 20/96,
4 November 1996).  The authorities noted that as of January 2000 there are no longer geographical
limitations for these telecommunication services in the Brazilian territory.
147. Foreign capital participation is allowed in telecommunications but the President may impose
limits on participation of foreign capital in service-providing entities (Article 18 of LGT).  However,
in its 1997 GATS Schedule, Brazil committed to provide market access in telecommunications.  For
instance, in the case of non-public domestic and international services for closed users groups, Brazil
committed to set no limitations on market access to commercial presence; while in the case of
analog/digital cellular mobile services on facilities basis, as of 20 July 1999 no restriction would
apply to foreign ownership.171  In its new (July 2000) telecommunication schedule, Brazil stipulated
that the Executive may consider the establishment of limits regarding foreign participation in the
capital composition of telecommunication service providers.172  Suppliers must be constituted
according to the Brazilian legislation, which requires head office and management located in the
Brazilian territory.  In addition, natural persons resident in Brazil or companies duly constituted
according to the Brazilian legislation must own the majority voting shares.173
148. Under the LGT, national and foreign providers require a licence (concession or
authorization), which is valid for 15-20 years, to supply services.  The exploitation of services under
the public system depends upon the prior granting of a concession by the ANEP.  The provider has the
right to use the necessary radio frequencies by means of a concession.  Concessions are granted
through a tendering process.  If a concessionary is unable to provide a service, ANEP may grant a
permit to another supplier to render telecommunication services in the public system on a temporary
basis, until the exceptional situation that has brought about the permit status is back to normal.  The
exploitation of services under the private system depends upon previous authorization from ANEP toallow the provider to use the necessary radio frequencies.  However, some service providers do not
require an authorization, including for example fo r the provision of value-added services and for
telecommunication activities restricted to the some  building or fixed and mobile property (except
when such activities involve the use of radio frequencies).  For authorization to be granted, the service
                                                     
170 The PGO divides the country in three regions:  Region I covers Rio de Janeiro, Minas Gerais,
Espirito Santo, Bahia, Sergipe, Alagoas, Pernambuco, Paraiba, Rio Grande do Norte, Ceara, Piau, Maranhão,Pará, Amapá, Amanzonas and Roraima;  Region II embr aces Acre, Rondônia, Mato Grosso, Mato Gross do Sul,
Tocantins, Goiás, Federal District, Paraná, Santa Caterina and Rio Grande do Sul;  and Region III is the State of
São Paulo.
171 WTO document GATS/SC/13/Suppl.2, 11 April 1997.
172 WTO document S/C/W/160, 13 July 2000.
173 Decree No. 2.617, 5 June 1998.WT/TPR/S/75 Trade Policy Review
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provider must be established pursuant to the Brazilian laws, with headquarters and administration in
the country;  be eligible to participate in public bids;  have the necessary technical qualifications to
properly render the service;  and  not be in charge of rendering the same mode of service in the same
region, location or area.
149. ANATEL is responsible for setting the rates for public telecommunication services according
to specific variables as stipulated in the legal instruments (Table IV.8 ).  At the time of signing the
concession contracts, ANATEL, as the supervisory body, establishes tariff ceilings for theconcessionary companies.  Services have to be  offered within the maximum tariff limit, but the
concessionary is allowed to give discounts.  In addition to the establishment of price caps, profits are
required to be transferred to the users through a compulsory tariff reduction.  The authorities noted
that by 2005 tariffs for local service should decrease by 5%, long-distance service by 25%, and
international calls by 65%.
Table IV.8
Variables for establishing maximum tariffs
Type of service Variables Legal instrument
Long distance international Distance (international call, international-regional, and
international-border), type of call (basic or special), the form
of dialling (digital or manual), time of day, and the length of
the callNorm No. 007/93, approved by Directive
No. 906 of the Ministry of Communications,
23 July 1993
Long distance national Distance, length of call, type of call (digital, semi-digital, or
manual), and the time of day.Norm No. 003/81 – "Setting of Tariffs for
Public Telephone Service – Intra and Inter
Tariffs Areas", approved by Directive
No. 219 of the Ministry of Communications,3 April 1997
Local calls For local calls the provider may use any of the following
methods to establish the tariff:  a flat tariff independent of thenumber or length of calls;  a fee by unit per call independent o
f
the length of the call;  or a flat fee per call plus an additionalfee per 240 seconds (Karlsson method).Directive No. 216 of the National Secretariat
of Communications, 18 September 1991
Source: Estrutura e Valores Tarifários 1999 - STFC  ANATEL online information.  Available at:  http://www.anatel.gov.
br/servicos/stfc/tarifas99.htm, 14 June 2000.
150. Under the LGT, purchasing and contracting policies are based on the principles of
competition, and preferences are no longer given for Brazilian equipment.  The authorities stated that
they encourage the expansion of the local industry, while respecting the principle of free competition.
The acquisition of goods or services is through public bids.  The bid may be restricted, in which case
only parties previously registered in ANATEL's registry may take part, or open, in which case any
interested party may participate.  The determining f actor in selecting suppliers is the lowest price and
best quality, regardless of origin.
151. The authorities noted that no incentives are granted to the telecommunication sector.
(v) Transport
(a) Air transport
152. Domestic air transport in Brazil has undergone major changes in recent years.  The process of
liberalization of air services, which began in the mid 1980s, has seen the relaxation of entryrestrictions for new operators, and the substitution of officially set airfares by more flexible
price bands, which were completely liberalized as of end 1998.  In parallel, the domestic market has
expanded rapidly;  between 1991 and 1998 the number of transport service providers increased from
17 to 41, and the number of charter firms from 6 to 20.  However, having over-estimated demand,
operators, have engaged in a costly price war that has forced a radical process of restructuring,consolidation, and retrenchment.  Thus, in 1998 only 8 of the 20 authorized charter firms were stillBrazil WT/TPR/S/75
Page 113
operating.  The economic downturn in 1999 compounded this situation, and the losses and
indebtedness of several of the main domestic carriers have mounted.  The Brazilian authorities
reportedly believe that the industry has too many seats on domestic routes.174
153. The Department of Civil Aviation (DAC) of the Ministry of Defence is responsible for the
planning and operation of Brazil's civil aviation.  The operation of public air services is subject to
DAC authorization.  Authorization is granted only to companies with headquarters in Brazil, and in
which four fifths of voting rights are in Brazilian hands and under Brazilian management.  Foreign
equity participation is restricted in the three firms operating as national flag carriers (Varig, Vasp and
Transbrasil);  according to the auth orities, these three firms receive no special benefits.  All Brazilian
airline companies are private enterprises.
154. Responsibility for granting authorization to construct and operate airports and auxiliary
services lies with the DAC and other agencies, including the Aeronautics Engineering Direction
(DIRENG), the Brazilian Enterprise for Airport Infrastructure (INFRAERO), and the Flight
Protection and Electronic Direct ion (DEPV).  The operation and administration of public airports
comes under the control of INFRAERO;  DEPV ha s responsibility for navigation and air traffic
services.  Foreign enterprises may not administer or operate airports nor provide navigation and airtraffic services;  however, they may operate ot her auxiliary services for their own benefit.
155. The principle of reciprocity is the basis of Brazil's international bilateral agreements;  no
preferences are granted to carriers from other countries, including those from MERCOSUR.
Cabotage services are reserved for national companies.
(b) Maritime transport and ports
156. In 1999, Brazil's merchant fleet stood at 7.1 million dead-weight tons (dwt);  some 60% of the
fleet was in cabotage operations;  oil tankers,  all owned by PETROBRÁ S and most involved in
cabotage, accounted also for close to 60% of total tonnage.
175  Reflecting Brazil's expanding
merchandise trade, there has been a continuous grow th in international maritime transport:  between
1986 and 1996, volume increased from just under 193 million tonnes to slightly over 204 million
tonnes, while freight payments grew from US$3.6 bil lion to US$5.5 billion.  Of the latter, foreign
firms collected about 70%.176  Port activity has intensified in parallel;  the volume of cargo moved
through Brazilian ports rose from 350 million tonnes in 1991 to 443 million tonnes in 1998.
157. The liberalization of maritime transport in the early 1990s was followed by substantial
reduction in the cost of maritime freight, but also by shrinkage of the Brazilian merchant fleet.  A
study by Brazil's development bank has identified the main factors responsible for this, including
rapid deregulation of the sector, which led to unchecked competition including through the creation of"paper companies" allowing foreign shipowners to fl y the Brazilian flag;  the irregular flow of funds
from the AFRMM (see below);  and the compulsory acquisition of more expensive vessels made in
Brazilian shipyards.
177  Cabotage transport, in turn, has been affected by competition from other
modes of domestic transport, particularly road transport, which benefits from implicit subsidies and
incentives such as toll-free road access and cross-subsidies for diesel fuel;  moreover, port costs arehigh, as are auxiliary services, which are often controlled by monopolistic service providers (e.g. for
towing and stowage).
                                                     
174 Financial Times , 18 June 2000.
175 Ministry of Transport online information.  Available at:  http://www.transportes.gov.br/bit/portos/
obport/mmV.htm, [3 July 2000].
176 BNDES (1997).
177 BNDES (1997).WT/TPR/S/75 Trade Policy Review
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158. In that regard, Law No. 8.630 of 1992, which provided for a decentralized system of ports
administration, with ports under federal, state, m unicipal and private administration operating side by
side, has helped to improve productivity and service, and to lower costs.  Nevertheless, key
stakeholders consider that the results have fallen short of potential gains and that ports still represent a
major bottleneck for Brazilian exports.178  Inadequate infrastructure and excessive bureaucracy in the
port-transport complex have been estimated to lengthen average export times from 60 to 120 days,with resulting increases in financial and operational costs of some US$2.5 billion per year and annualforgone exports for Brazil of some US$10 billion.
179
159. The Government introduced a draft law in 1999 (Projeto de Lei No. 1.615) proposing the
creation of the National Transport Agency (ANT) to regulate transport activities, ensure the
availability of adequate services, and reconcile the objectives of interested parties;  the law would also
create the National Infrastructure Department (DINFRA) to operate and manage transport
infrastructure, oversee related projects, and supervise and audit the operation of subordinate entities.
Congress was debating the bill in mid 2000.
Maritime transport
160. Law No. 9.432 of 8 January 1997 regulates water borne transportation and sets forth the
conditions in which the transportation of goods in coastal and internal navigation is allowed to foreign
vessels.   Under the law, Brazilian flag vessels must be registered in the Registry of Maritime Property,
must be owned by natural persons resident and domiciled in Brazil, or be owned by a Brazilian
company.  Vessel hired by Brazilian shipping companies may also carry the Brazilian flag,conditional on the provisory suspension of flag of the country of origin.  In Brazilian flag vessels, the
captain, the chief engineer and two thirds of the crew must be Brazilian nationals.  Long-distance
maritime transportation is opened to foreign shipowners, shipping companies, and vessels if there is
an international agreement in force and the principl e of reciprocity holds;  under the same conditions,
fluvial navigation for international passage is also opened to foreign shipping companies and vessels.
161. In general, foreign boats carrying merchandise are only allowed to engage in cabotage,
interior navigation for national passage, and navigation within the ports, when chartered by Brazilian
shipping companies.  However, if the Brazilian Go vernment signs an international bilateral agreement
to allow foreign participation in the aforementione d activities, chartering by Brazilian companies is
not required.  Brazilian companies require an authorization from the competent agency to charter
foreign boats. Authorization is granted if a Brazilian flag vessel of the required type does not exist;  if
there is public interest;  or if the foreign vessel substitutes for one that is under construction in Brazil.
162. Imports and exports of crude oil must be transported by national flag vessels.  Certain cargoes
are reserved to Brazilian flag vessels operated by national companies, including equipment and parts
for Brazilian military organizations.  The maritime transport of cargoes of public entities and goods
benefiting from official fiscal or credit programmes must also be transported in Brazilian flag vessels.
When no such vessels are available or rates are not considered reasonable, a waiver may be given for
the use of foreign vessels;  in such cases, preference is given to vessels registered in countries withwhich Brazil has agreements.
163. The revenue from transportation of merchandise is exempt from the Social Integration
Programme (PIS) and the Contribution for Social Security (COFINS).
180  The cost of freight for
                                                     
178 See Associação Brasileira dos Terminais Portuários (ABTP), Informativo , January 2000;  Manteli
(undated).
179 Statement by ABTP President, Mr. Wilen Manteli, before the Special Commission of the Chamber
of Deputies, 12 January 2000, citing a study by Fundação Getúlio Vargas.
180 Law No. 9.432, 8 January 1997.Brazil WT/TPR/S/75
Page 115
Brazilian exports and import is not taken into account in the calculation of import duties and export
taxes if goods are transported in vessels register ed in the Special Brazilian Registry (REB). In
addition, if ships are registered in the REB, only the commander and chief engineer are required to be
Brazilian.
Ports
164. Since 1996, the Ministry of Transport authorized municipalities or companies controlled by
municipalities to exploit federal ports;  concessions are for a 25-year period, renewable for another
25 years.181  Concessions appear to be granted through public bids and there are no restrictions to
foreign participation.
165. Firms supplying auxiliary port services must be established as legal entities under Brazilian
law.  The authorities noted that no discrimination exists against the participation of foreign capital in
the provision of auxiliary services (including container and depot services, maritime agencies,
forwarding services, cargo handling, storage and warehousing, customs clearance, and vessel
maintenance).
166. Port services are available on a non-discriminatory basis.  There is no discrimination against
foreign firms regarding access to or use of sea ports, and no country receives preferences.  However,
the lighthouse fee, which applies only to foreign flag vessels, is still in force (Decree-Law No. 1.023
of October 1969).  Preferential treatment is also granted to Brazilian shipping enterprises in the form
of the Merchant Marine Fund for Shipbuilding;  this fund is also used to finance the construction ofvessels in Brazilian shipyards for export, and, as of 1997, for domestic use.
182
                                                     
181 Arts. 1 and 2 of Law No. 9.277, 10 May 1996.
182 Law No. 9.432, 8 January 1997.Brazil WT/TPR/S/75
Page 117
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