Brazilian Companies Face Challenges with Arrival of Free Trade

Matty-Sways

President Jair Bolsonaro ’s administration is opening up Brazil one of the world’s most closed big economies.

President Jair Bolsonaro ’s administration is opening up Brazil by slashing import tariffs on more than 2,300 products and exposing local industries to free trade. The products include ultrasonic scalpels, cancer drugs, heavy machinery and more, in some cases with tariffs reduced to zero from as much as 20%. The tariff cuts apply mostly to items Brazil doesn’t make.

The new opening is a central feature in Economy Minister Paulo Guedes ’s plans to make the country of 210 million more competitive. Since 2014, the country has been mired by recession and low growth, with the jobless rate hovering at 12% or more.

“Brazil’s model of protectionism has failed,” Deputy Economy Minister for Trade Marcos Troyjo, one of Brazil’s chief trade negotiators, said in an interview. “It’s been 40 years without sustainable economic growth.”

“This administration is pushing for trade openings harder than its predecessors,” said Filipe Carvalho, an analyst for the Eurasia Group, a political-risk consulting firm. “An increase in commerce can have a significant impact on the economy and also give Brazil a bigger role in global affairs, both key goals of the administration.”

“Opening the economy brings great responsibilities upon the government,” Mr. Abijaodi said. “The government will have to remove costs stemming from bureaucracy, from our tax system, our logistics and infrastructure.”

The previous administration created a system in Brazil that used high tariffs and inserted itself in a way that could jump start industries or protect them. One example is the 35% tariffs on imported autos. Brazilian importers pay tariffs on everything from drugs to clothing, dairy products and more. Additionally, the country uses outdated fees like a lighthouse-maintenance fee, a duty created two centuries ago, even though ships now use global positioning systems to navigate.

The problems created by protectionism are evident throughout Brazil’s economy. Red tape related to tariffs at Brazilian ports mean imported supplies can take weeks to reach buyers, causing production delays. 55% of foreign products require the importing companies to obtain permits from up to 6 different agencies and if not completed correctly and filed with all the proper agencies importers are subject to steep fines. Companies commonly have a difficult time even determining which agencies they must seek approval.

“We have always had a protectionist model,” said João Ebert, chief operating officer at Xalingo SA, a 600-employee toy maker in Brazil’s southern tip that would face challenges if Brazil keeps opening up to trade.

“We need to be more productive and efficient to deal with the new competition,” he said. “It’s a two-way street.”

Despite saying this, Brazil does not make it cheap for its companies to operate. The World Bank says a typical Brazilian companies has to pay for 2,000 hours of tax services to file in Brazil, the most of the 190 countries it tracks. In fact that's over 3 time more than neighboring Argentina (also tough on companies) where it takes 311.5 hours a year. Additionally, Freight prices in Brazil are twice that of the U.S. Brazilian businesses have long said that a trade opening should come only after bureaucracy and taxes were cut and roads, ports and railways expanded and improved.

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