RESTRICTED
WORLD TRADE WT/BOP/N/4
17July1995
ORGANIZATION(95-2042)
Original: English Committee onBalance-of-Payments Restrictions
NOTIFICATION UNDER PARAGRAPH 9OFTHE UNDERSTANDING ONTHE
BALANCE-OF-PAYMENTS PROVISIONS OFTHE GENERAL AGREEMENT
ONTARIFFS AND TRADE 1994
Thefollowingcommunication,dated13July1995,hasbeenreceivedfromthePermanentMission
ofBrazil.
_________________
On13June1993, theBrazilian Government enacted Provisional Measure 1024(published in
theOfficial Gazette in14June1995) thatestablishes asetofrulesapplicable totheimports ofinputs,
capital goods, intermediate andfinalproducts fortheautomotive sector. AnEnglish version ofthe
nextoftheProvisional Measure wascirculated asdocument WT/L/73.
Themeasures thatwillbeintroduced bytheabove mentioned legal textareincluded inthe
broader context oftheeconomic stabilization plan(Plan "Real"), whose implementation wasinitiated
inJune1994. Besides inflation control, thePlan'sobjectives contemplate privatization measures and
monetary, fiscal andstructural reforms. Suchreforms aimatproductivity increase andreduction of
production costs, thusallowing foragreater insertion oftheBrazilian economy ininternational economic
flows.
Brazil hasbeenconducting atradeliberalization process since1988. Thatprocess isanessential
component oftheeconomic stabilization programme. Thecontinuity ofthePlan'ssuccess requires
anequilibrium oftheexternal accounts. Ifacurrent account deficits occur, theGovernment should
finance itinasustainable longlasting way,preferably through medium andlongtermcapital inflows
suchasproductive investments. Recent events infinancial markets havealready demonstrated the
fragility ofattempts toreach balance ofpayments equilibrium through theinflow ofhighly volatile
short termcapital. Atitspresent stage, thestabilization programme requires anoptimum useofthe
financial sources available andstimuli tolongtermcapital inflows.
Brazil hasbeenreducing import tariffs ontheimport ofcapital goods, inputs andcurrent
consumptiongoods,withtheobjectiveofreducingproductioncostsandinflationarypressuresonessential
goods. Asaresult ofthetariff reduction programme initiated in1990, thehighest tariff wasreduced
from 105to32percent, themodal tariff from 40to20percentandtheaverage tariff from 32to
14percent. Inaddition, Brazil virtually eliminated non-tariff barriers. Itreduced tariffs within
MERCOSUL andincluded temporary import tariff reductions onessential goods initsexceptions to
theCommon External Tariff, withaviewtomeetoccasional price stabilization needs forthose goods
inthedomestic market.WT/BOP/N/4
Page2
After significant surpluses inthelastfiveyears, theBrazilian trade balance hasshown, from
January toMay1995, however, aUS$3.5 billion deficit. From November 1994 toMay1995, the
tradedeficit reached US$4.9 billion. Inthefirstfivemonths ofthisyear, while Brazilian exports grew
only5.9percentascompared tothesame period oflastyear, imports rose95.7percent. Inthe
12months from May1994 toMay1995, exports grew 11.8percent, while imports increased by
59.5percent.
Asadirect consequence ofthenegative evolution ofthetrade balance, from January to
May1995, foreign reserves decreased byUS$5.1 billion. Suchfigure would havebeenevenhigher
ifsignificant amount ofshort termcapital hadnotflown induring thatperiod.
These inflows, however, mislead theanalysis ofthecomposition ofthereserves, which cannot
beassessed onlybytaking asabasisitsabsolute value. Thisisespecially thecaseofBrazil thatneeds
anadequate levelofreserves fortheeconomic stabilization process.
Therepeated monthly deficits inthetradebalance ledtheGovernment totemporarily increase
upto70percentimport tariffs onsome durable consumer goods, asnotified indocument WT/L/66
andAddendum 1.TheBrazilian Government isconscious oftheneedtoadopt macroeconomic policies
compatible withthegeneral situation oftheBrazilian economy. Tothatend,italsotookfiscal, monetary
andcredit domestic measures, suchasapublic spending control andaflexible exchange rateband.
Itreduced thelevel ofeconomic activity through credit restrictions andanincrease ofrealinterest
rates.
Theimporters 'access toforeign financial sources, however, offset thetariff increase andits
effects ontheprice ofgoods. These foreign sources offerterms thataremore favourable thanthose
prevailing inthedomestic market. Inthespecific caseoftheautomotive sector, despite thetariff
increase, imports reached, inthefirstfivemonths ofthisyear, US$1.830 million. Thatamount
represents 8.8percentofthetotalBrazilian imports and89.9percentoftheimports ofautomotive
products in1994. From January toMay1995, Brazil imported about 300,000 vehicles, whereas during
thewhole yearof1994itimported 197,180. In1994, thenumber ofimported vehicles corresponded
to12.5percentofthedomestic production. Thatratioincreased to37percentfrom January to
May1995.
Ananalysis oftheevolution oftheBrazilian tradebalance clearly shows theimpact oftheimport
surgeintheautomotivesectoronBrazil'stotalimports.FromJanuarytoMay1995,automobileimports
increased 412.7 percentascompared tothesame period oflastyear, while totalimports grewbyonly
55.3percent.
Inorder toavoid ashorttermdeterioration ofthebalance ofpayments andtoensure equilibrium
ofthetrade balance inthemedium andlongterm, theBrazilian Government hasdecided toresort to
theprovisions ofParagraph 9ofArticle XVIII oftheGeneral Agreement onTariffs andTrade 1994.
Itallows developing countries toadopt import restrictive measures tosafeguard itsexternal financial
position andensure alevelofreserves adequate fortheimplementation ofitseconomic development
programme.
Incompliance withtheprovisions contained inletter (a)ofParagraph 9,therestrictions
introduced byProvisional Measure 1024 donotexceed those necessary tooffset thenegative effects
oftheimport surge --mainly vehicles --onthebalance ofpayments. Theintention ofthemeasures
isalsotoprevent anyerroneous interpretation thatBrazil willincur onacurrent account deficit that
cannot befinanced. Likewise, incompliance withParagraph 10ofArticle XVIII, restrictions were
designed notcurbtheimports ofgoods essential fortheimplementation oftheeconomic developmentWT/BOP/N/4
Page3
programme. Notwithstanding, theytakeintoaccount thesignificant expansion ofvehicles 'imports
inthelastmonths. Inthisconnection, thesumofactual imports inthefirstsemester ofthisyearplus
thequota established forthesecond semester willrepresent more than225percentofthetotalimported
in1994.
Tocomply withParagraph 11ofArticle XVIII, theBrazilian Government aimed atadequately
managing eventual current account deficits byfinancing them inalonglasting basis andbymaking
optimum useoftherestrictions toallow fortheir progressive elimination. Tothatpurpose, the
ProvisionalMeasurecreatedmechanismsthatwillenabletheExecutivePowertostimulatecostreduction,
investment andexport capacity increase. Since thisisoneofthemost internationalized industries,
competitiveness inthissector requires economies ofscale, lowcostinputs andoptimum useofthe
production processes. Thishasjustified theexistence ofspecial measures andrégimes inagreatnumber
ofdeveloped anddeveloping countries.
Theautomotive industry isresponsible for11percentoftheBrazil 'sGDP. Itemploys directly
about 700thousand people. Itisatthecenter ofacomplex industrial production network. Its
performance haswell-known chain effects onother sectors andontheeconomy asawhole. The
automotive sector is,therefore, vitalforthe"Real"Plan. ThePlanhashadundeniable success ininflation
control andeconomic stabilization andisafundamental element fortheresumption ofeconomic growth
andevenfortheconstitutional reforms aimed atmodernizing andliberalizing theBrazilian economy
withinasolidinstitutionalframeworkthatwillensureBrazil'sfullinsertionintheinternationaleconomy.