Brazil - Trade Policies

The policy response to the worsening trade balance consisted of a small 1.8 percent devaluation in October 1986, accompanied by administrative tightening of import controls. In early 1987, the negative list was once again increased, and some of the loss in exchange-rate competitiveness was regained with nominal devaluations of the cruzado (for value of the cruzado--see Glossary) of 7.8 percent and 8.7 percent in May and June of 1987.

By 1984 it was clear that the successful external adjustment had a domestic price, as inflation accelerated to more than 200 percent at annual rates. Trade policy consequently began to be viewed as a potential instrument for internal stabilization, with some import liberalization viewed as a potential contributor to reduced inflation.

Most of the import controls that were used after 1982 were in place well before the cessation of voluntary external lending. One of these measures, introduced in 1980 following the worsening of the current account, was the financing requirement for specific imports. Another form of import control, much used after 1982, was the establishment of formal import programs, which were negotiated agreements between importing firms and the Department of Foreign Trade (Carteira de Com�rcio Exterior--Cacex). These agreements in effect turned the import decision into a process that depended more on administrative and political considerations than on economic merit. The high degree of administrative control that these agreements gave to Cacex created problems, because middle-level trade officials acquired extensive control over the fortunes of an enterprise through their ability to approve particular trade transactions.

The improving external payments situation permitted some modest liberalization, beginning with a reduction of the negative list in September 1987. Import financing requirements were once again relaxed, and in late 1988 Cacex announced an expansion of import program levels for 1989. The 1988 reforms also simplified the existing tariff system. Average rates were lowered from over 50 percent to about 40 percent. Moreover, the dispersion or variability of rates was reduced; the highest tariffs were brought down from 105 to 85 percent, and the number of different rates was reduced from twenty-nine to eighteen. The reforms further simplified the tariff system by consolidating the rules covering import transactions, reducing the number of agencies directly involved in the approval of trade transactions, and establishing greater automaticity in the approval process.

At the end of the Sarney government, inflation rates were at the threshold of hyperinflation, with the monthly rates in the first two months of 1990 at over 70 percent. Although the trade balance had fallen to about a third of the levels of the preceding year, Brazilian policy makers were clearly focused on internal stabilization; trade policy reform was a recognized but secondary goal.

Between 1953 and 1957, Brazil attempted to use multiple exchange rates to encourage some trade transactions and discourage others. In 1957 the country instituted a broad ad valorem tariff system under Law 3,244. The new system created not only a new tariff structure but also the administrative machinery to impose or revise tariffs in accord with national development objectives and requests by domestic producers for protection. Implementation of the system heavily favored domestic producers of manufactured consumer goods, while permitting the import of capital and intermediate goods at much lower tariffs. For some goods, protection was great enough to completely eliminate competing imports from the Brazilian market.

Collor de Mello succeeded Sarney in March 1990. During the election campaign, Collor de Mello had successfully portrayed himself as an opponent of an intrusive, interventionist bureaucracy. His rhetoric, which included attacks on corruption and highly paid officials (maraj�s ), emphasized deregulation and greater openness to world markets. The consequences of this political and ideological change for Brazilian trade policy were not long in coming. One of Collor de Mello's early moves was to abolish Cacex, by that time the subject of widespread criticism and frequent allegations of corruption by the business community. The Technical Coordinating Office for Trade (Coordenadoria T�cnica de Interc�mbio Comercial--CTIC), a slimmer and less powerful agency under the Ministry of Economy, Finance, and Planning, took over the Cacex's functions.

Early in 1991, the Collor de Mello government announced a series of tariff reductions to be phased in over the 1991-94 period. These were among the most far-reaching and significant reductions in Brazilian trade protection in several decades. Earlier tariff reductions often had been largely cosmetic, only reducing rates that were prohibitive to high levels that still barred many imports. The 1991 reforms went much further, and in many sectors reduced rates to about a third of their level in the early 1980s. Equally important, the reforms reduced the wide variability or dispersion of tariff rates that were once characteristic of Brazilian trade policy. The overall trend in Brazilian trade policy is clear. By the mid-1990s, Brazil had become a much more open economy than it had been a decade earlier.

The combination of increased domestic real income, a fixed nominal exchange rate, and a fall in nominal interest rates soon produced a sharp increase in excess demand. In sectors less affected by price controls, such as clothing or used automobiles, prices rose sharply. The effects on the trade balance were apparent within several months after the plan was decreed. The value of monthly exports fell by about 40 percent between March and November 1986, and imports rose rapidly beginning in May. For the year, exports fell by 12.7 percent from 1985 levels, and imports increased by 5.7 percent. Brazil's external payments problems, which had appeared to be largely resolved by the record trade balances after 1983, emerged once again, as the trade balance fell from US$12.5 billion in 1985 to US$8.3 billion in 1986.

Before World War II, trade policies were used mostly as a source of revenue or as a response to specific groups such as the coffee producers, rather than as a means of achieving national economic goals. In the early 1950s, Brazil began to use trade policy in a more deliberate way to promote industrialization. The forced reduction in Brazilian imports after 1929 had resulted in the first major industrial growth in Brazil, centered in S�o Paulo. Heeding this apparent lesson, policy makers in the 1950s argued that measures that deliberately reduced imports would stimulate domestic production, thereby encouraging technological development and increasing employment in activities that were regarded as more "modern" than Brazil's traditional agricultural and extractive activities.

In late 1984, a number of the direct controls on imports were cut back, and the number of products on the negative list was reduced substantially. Import financing requirements were also relaxed through exemptions, and tariff surcharges were replaced by smaller additions to the legal tariff. On the administrative side, the Cacex policy of import restrictions for balance of payments purposes was reduced.

Although import licenses were not abolished, their approval became a relatively routine operation, and by 1991 most licenses were being issued within five working days. The CTIC became primarily a reporting and registration agency, which had little of the discretionary power formerly exercised by Cacex. The former CPA, which had been far overshadowed by Cacex, was replaced by an agency coequal with the CTIC, the Technical Coordinating Office for Tariffs (Coordenadoria T�cnica de Tarifas--CTT). With the shift in emphasis in trade policy from discretionary administrative control to the automaticity of published tariffs, many of them limited by Brazil's treaty commitments, the CTT's role in formulating import policy became significantly greater than the CPA's had been.

The contrast between the favorable external payments situation and Brazil's internal deficit became even more marked in 1988, as export value increased to record levels. The favorable external situation permitted a continuation of import liberalization. In August 1988, Cacex permitted firms to exceed considerably their programmed imports of capital and intermediate goods. Despite this modest relaxation of import policy, there was no noticeable increase in total imports, which actually fell slightly in 1988 from their 1987 level.

In February 1986, following several months in which the prices accelerated at an average of more than 500 percent, the Sarney government decreed the now infamous Cruzado Plan. Although the plan was presented as a definitive program to de-index the economy and wipe out inflation, its main thrust was to freeze prices. Wages were not frozen and in fact were increased by 8 percent when the plan was announced. Foreign economic policy in the plan consisted primarily of fixing the exchange rate, and no trade policy changes were included in the plan.

The worsening of Brazil's external payments position in the early 1980s forced policy makers to turn to other measures to attempt to restore external balance, among them adjustment in the exchange rate, which was devalued sharply early in 1983. Controls on trade were not relaxed, however, and the cessation of voluntary lending to Brazil following the Mexican debt crisis in 1982 had significant effects on trade policy. Import controls that had been introduced in response to the worsening trade balance in 1980 were strengthened by centralization of all foreign-exchange transactions in the Central Bank. A negative list, which enumerated items whose import was suspended, was expanded considerably, and financing for imports was further restricted.

Brazil's second price-stabilization attempt, popularly known as the Bresser Plan, was announced by the new minister of finance, Luiz Carlos Bresser Pereira, in June 1987. In contrast to the ill-fated Cruzado Plan, the Bresser Plan did not attempt to use external economic policy as an instrument for internal stabilization. Brazil returned to its earlier and generally successful "crawling-peg" policy, which consisted of frequent small devaluations roughly in line with domestic inflation. The trade balance improved with the fall in domestic demand resulting from the Bresser Plan, and a current-account balance was attained by the end of 1987.

In January 1989, the government announced the Summer Plan, which temporarily froze wages and the exchange rate. Despite the announcement of further fiscal tightening, expenditures declined little and the budget deficit worsened as a result of freezing prices for public-sector services. By mid-1989 most other prices were rising at more than 30 percent per month, ending the year with a monthly rate of about 50 percent. Imports began to increase significantly in mid-1989, and Brazil's 1989 trade surplus was US$16.1 billion, well below the record US$19.2 billion of the preceding year. Although some of the increase in the level of imports may be attributable to the modest loosening of some import controls in the preceding year, major factors behind the worsening trade balance were the recovery of industrial activity and increasing overvaluation of the new cruzado (cruzado novo). In late 1989, the Customs Policy Council (Conselho para Pol�tica Aduaneira--CPA) issued Resolution 1,666, which further cut tariffs. The effect of this change was to reduce the average legal tariff from 41 to 35.5 percent. Many of the changes occurred in sectors that had formerly enjoyed high levels of protection, among them electrical equipment, some capital goods, and chemicals (see table 16, Appendix).

Government intervention in foreign trade has a long history in Brazil, reaching back to the colonial period when Portugal forbade Brazilian trade with other nations. Following independence in 1822, Brazil opened its ports and expanded its trade with other nations, particularly Britain. Extensive government regulation of trade continued, however, with tariffs providing over half of the government's revenue before World War I. Other forms of intervention in trade included the 1906 coffee price support plan, which was a sophisticated attempt to exploit Brazil's monopolistic position in the world coffee market.

The steep rise in world oil prices that began in late 1973 soon ended Brazil's move toward greater trade openness. The approximate balance between imports and exports in the early 1970s became an unprecedented US$4.7 billion deficit in 1974. Although record levels of external capital flows financed this deficit, Brazilian policy makers responded by restricting imports. In June 1974, import financing for many products was suspended, while tariff rates on more than 900 items were doubled. Over the year, restrictions were increased further, and in 1975 the government required that imports be paid for in advance with deposits that did not earn interest or any correction for inflation. On the export side, further measures were taken to promote exports, especially for manufactures. Despite these measures, Brazil's trade balance remained in deficit for most of the 1970s.

The combination of tightened import controls, real depreciation, and the fall in domestic demand induced by the restrictive macroeconomic policies of the early 1980s resulted in a sharp adjustment in Brazil's external accounts. The magnitude of the adjustment appears to have surprised even many of its proponents, both in the Brazilian government and among creditors. After 1983 the massive trade surpluses averaged more than 3 percent of GDP, compared with negative or negligible levels through most of the 1968-82 period. In 1984, as the full effects of the adjustment program were felt, exports were about double imports, and Brazil's trade surplus reached an unprecedented 6.1 percent of GDP, far exceeding the comparable shares in other important economies such as Japan (3.5 percent of GDP) and West Germany (3.8 percent).

Trade policies

Brazil's economic history has been influenced remarkably by foreign trade trends and policies. Successive cycles of export booms in such commodities as sugar, gold and diamonds, rubber, and coffee played major roles in Brazilian development before World War II. In the 1930s, the collapse of coffee prices signaled a turn inward, resulting in a nascent industrialization. In succeeding decades, industrial development was fostered deliberately through restrictive trade policies, making Brazil a relatively closed economy by the mid-1960s. Only in the early 1990s did Brazil begin significant liberalization of its trade policies, and even these reforms were modest by comparison with those in a number of other Latin American nations.

Following the imposition of military rule in 1964, Brazil once again modified its trade policies. The new government moved quickly to eliminate some of the restrictions on Brazilian exports, and it provided special incentives for exports of manufactures. In March 1967, it significantly cut tariffs, which fell to about half their former level in a number of sectors. Brazilian imports soon increased, but this was more the result of the acceleration of economic growth after 1967 than of the tariff reforms. During the "economic miracle" between 1967 and 1973, the GDP grew at record rates. Throughout this period, trade policy continued to be relatively open in comparison with Brazilian policies before or after the economic miracle.

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