Brazil wants a new import tax cut without Mercosur’s approval

RIO DE JANEIRO, BRAZIL – The Brazilian government is studying a new reduction in import taxes levied by the country without the approval of Mercosur. According to Estadão/Broadcast, the idea is to cut by 10% the import tax rates of most products traded with countries outside the bloc.

In November last year, the ministries of Economy and Foreign Affairs announced a 10% reduction in the rates of 87% of the trade agenda, leaving out goods such as automobiles and sugar and ethanol, which already receive differentiated treatment by the bloc. A new cut of the same amount and with the same exceptions is under study.

By Mercosur rules, the Common External Tariff (TEC) charged on purchasing products from outside the bloc can only be changed by common agreement by the four countries in the bloc – Brazil, Argentina, Paraguay, and Uruguay. Like last year, however, the Brazilian government must resort to a device that allows the adoption of measures aimed at “protecting people’s lives and health”.

In November, the Brazilian government stated that, with the coronavirus pandemic, there was a price increase that could be minimized with an “import shock”. With prices rising even more, especially amid the conflict in Eastern Europe, a new temporary reduction in tariffs claiming the need to fight inflation is on the radar. The reduction announced last year is valid until the end of this year.

By reaching almost all the country’s imports, the cut is wider than the one already announced by the Ministry of Economy in March on the import tax on ethanol and six products with a weight in inflation: coffee, margarine, cheese, pasta, sugar, and soy oil.

Last week, Minister Paulo Guedes said that a reduction in the rate of 12 products with an impact on inflation could be announced. These specific reductions are made within the Mercosur rules, allowing Brazil to reduce taxes on imports of up to 100 items without negotiating with other countries. The most comprehensive cut in the bloc’s common external tariff, on the other hand, can only be made with the approval of the other partners or by resorting to alternatives provided by law, such as the one adopted by Brazil to justify the November reduction.

For former Foreign Trade Secretary and BMJ consultant Welber Barral, the measure will have little impact on trade since it is a small reduction. Still, it widens the difference between Brazil’s tariff and Mercosur’s, which can even lead to legal challenges about the validity of the reduction. “It ends up distorting the common external tariff. There may be controversy in the Mercosur court, and even the Brazilian industry may feel affected by the norm, which was not agreed upon within the block,” he said.

Sought, the National Confederation of Industry (CNI) and the Federation of Industries of the State of São Paulo (Fiesp) did not comment.

CHANGE OF FOCUS

Since President Jair Bolsonaro took office, the Minister of Economy, Paulo Guedes, has made clear his intention to cut the Mercosur common tariff permanently. In early 2021, he even told business people that he would like to reduce the TEC by 20% that year.

The minister’s attempt faced strong resistance from the Argentinians – who proposed a 10% cut – despite initial support from Uruguay. But, in the course of the year, the situation was reversed. The Brazilians managed to reach an agreement with the Argentines after reducing the size of the desired cut and the number of products affected.

But the Uruguayans began to condition their support to a relaxation of another Mercosur rule: the one that prohibits the negotiation of bilateral agreements, i.e., without the participation of all countries in the bloc. Brazil is in favor, while Argentina is against the rule’s flexibilization.

TARIFF

As member countries of Mercosur, Brazil, Argentina, Paraguay, and Uruguay must charge the same tariff on imports of products from outside the bloc – the so-called Common External Tariff (TEC). The common rate is applied to most imports, with some exceptions agreed upon with the bloc, such as purchases in the automotive sector, toys, and computer and capital goods. The TEC applied varies according to the imported product and averages around 10%.

NEGOTIATIONS

Since he took office in 2019, Guedes has advocated a reduction in the TEC to open the Brazilian market and integrate domestic production with other production chains. This reduction, however, can only be made permanent with the agreement of the other Mercosur members. The idea, however, faces resistance from Argentina and Uruguay.
Reduction

Without reaching an agreement, Brazil has reduced import tariffs on its own until the end of this year. A first cut was announced at the end of last year, of 10%, for practically all rates. For this, the country resorted to a device that allows the adoption of unilateral measures aimed at “protecting the life and health of people.

SECOND CUT

A new 10% linear cut is under study and should also be announced to take effect by the end of the year.

With information from Estadão