Analysis: The miraculous opening of the Brazilian economy amid growing protectionism

RIO DE JANEIRO, BRAZIL – This is a remarkable development for anyone familiar with Brazil’s history. After World War II, the country was a cradle of import-substituting industrialization, a development policy widely adopted in Latin America that restricted imports to boost domestic production.

This policy eventually lost out to the export-oriented model of Asia’s fast-growing economies and has since been abandoned. Nevertheless, Brazilian tariffs remain the highest among the G-20 countries after Argentina on a trade-weighted basis.

That is now beginning to change. With inflation at 12.1 percent, the highest level since 2003, the country is looking to reduce the cost of imported goods. Last month, the government announced that tariffs on some 6,195 products would be temporarily reduced by 10 percent. This follows a similar round of cuts late last year.

DRASTIC CUTS

More drastic cuts were made to several high-profile items. In March, tariffs on ethanol, margarine, coffee, cheese, sugar, and soybean oil were eliminated, followed in May by tariffs on chicken, beef, wheat, corn, and baked goods. Sulfuric acid, an essential ingredient in fertilizer production, is also to be taxed at a zero rate.

These reforms alone will not constitute a revolution. Permanent cuts would violate Mercosur trade bloc rules, so the measures have been described as temporary humanitarian measures to alleviate the cost of inflation in the wake of Brazil’s cattle epidemic.

After decades of trade isolationism, it is unclear whether President Jair Bolsonaro or former head of state Luiz Inácio Lula da Silva, his likely opponent in this year’s elections, would support a complete shift away from protectionism.

BOLSONARO’S PLAN TO LOWER FUEL PRICES

Too powerful a change would also likely face resistance. Lowering the cost of agricultural products from other countries would anger the powerful interests of Brazil’s agribusiness industry. At the same time, household purchasing power has declined so much that most cannot afford to buy imported food at any tariff.

Still, this is a welcome turnaround in a global economy that has increasingly trended toward protectionism.

Let’s talk about the United States. Four years into President Donald Trump’s trade war with China, goods imports worth about US$300 billion (about three-fifths of the total) remain subject to tariffs of up to 25%. Beijing imposes corresponding import taxes on nearly every penny of the US$150 billion in trade in the other direction.

The Trump-era trade wars with the E.U., Japan, E.U.d the U.K. have forU.K.lly ended, but they have left a legacy of quotas, meaning that additional imports above historical levels are taxed at Trump-style rates. As a result, there is little room to control input costs by allowing the most efficient producers to gain market share across borders.

ECONOMIC TIES

The Indo-Pacific Economic Framework, the centerpiece of President Joe Biden’s efforts to revitalize U.S. economic relations in Asia, is similarly protectionist. The starkest difference from the Trans-Pacific Partnership, the failed Obama-era version, is the absence of tariff reductions and market access guarantees.

Meanwhile, poor harvests, the war in Ukraine, and China’s hoarding of large grain reserves in emerging markets have triggered food protectionism that affects everything from palm oil and wheat to sugar and chicken.

Even in the United Kingdom, which committed to a zero-tariff model after leaving the E.U., tariff E.U.rriers and divergent rules with its largest trading partner have affected international trade. An April report said food prices were 6% higher due to Brexit than they otherwise would have been.

There are some signs that trade easing may finally be within reach. Lowering tariffs on some products “could make sense,” The Biden administration is studying the issue, Commerce Secretary Gina Raimondo told CNN on Sunday.

Treasury Secretary Janet Yellen urged the administration to lower tariffs, as she said last month. In March, the Peterson Institute for International Economics argued that plausible tariff cuts could reduce inflation by 1.3 percentage points.

Even India, which is not exactly a model of open trade, last month allowed limited duty-free cooking oil imports to ease the burden on households.

It would be welcome if restrictions were eased rather than tightened. Hopefully, few other countries will fall into the economic malaise that has caused Brazil to reconsider its longstanding adherence to import tariffs.

But necessity has always been the source of invention. Hopefully, the current inflationary pressures will prompt governments to begin reducing trade barriers.

With information from Bloomberg