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A Trade War of Words between Brazil and the U.S.

October 17, 2012

by Lucy Jordan

Protectionism made news again in Brazil recently, when Finance Minister Guido Mantega announced that Brazilian firms could avoid a 30 percent tax increase on the auto industry by improving fuel efficiency, using Brazilian-made parts and investing in Brazilian research and development. Foreign automakers without a manufacturing plant in Brazil will be subject to the tax hike, Veja noted.

The program is designed to encourage innovation in technology and fuel efficiency, Mantega argued. Any negative effect on foreign imported cars, he said, was merely collateral damage.

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It’s no surprise he is feeling a little defensive.

Last month, Brazil and the United States had something of a war of words over trade issues.

First of all Mantega, in an interview with the Financial Times, called the United States’ latest round of quantitative easing (QE) “protectionist.” QE, which has been deployed liberally by the U.S. and other industrialized nations in response to the economic crisis, floods the market with dollars—which Brazil has complained drives up the value of the real, making Brazilian exports less competitive.

“Any country that manipulates its currency is practicing protectionism,” Mantega told the FT. “We don’t do that.”

The U.S. responded in kind, with a leaked letter criticizing Brazil’s announcement of plans to increase import tariffs on some 100 items, including potatoes, tires and x-ray equipment, with more tariff hikes expected to be announced this month.

In the letter, U.S. Trade Representative Ron Kirk hinted at the possibility of retaliation and expressed concern about the future of U.S.-Brazil trade cooperation. Estadão, in an editorial, said that both sides were guilty of protectionism to some extent, but noted there was “no justification” for the tone of the letter, calling it “awkward, and even truculent.”

In response, Brazilian President Dilma Rousseff came out fighting. During her opening speech to the United Nations General Assembly the following week, she made a robust defense of Brazil’s economic policies, saying: “We cannot accept that legitimate trade defense initiatives by developing countries be unfairly classified as protectionism.” She hit back at the monetary policy of developed nations, criticising their “commercial manipulation.”

Brazil has been dogged by accusations of protectionism for years, facing criticism for forcing foreign companies to partner with Petrobras to gain access to its oil fields, as well as reducing Brazil’s import quota for cars made in Mexico—where many auto firms had set up plants so as to take advantage of a Brazil-Mexico trade agreement.

This criticism extends to in-country media. In an editorial, Estadão said the recent tariff hikes implied Brazil’s “industry had returned to the minors and was hopelessly unable to compete.” Journalist Sérgio Malbergie wrote in a Folha column that the aggressive rhetoric against developed nations adopted by Mantega and Dilma was borne of an “anti-rich” feeling amongst the current leadership.

“Of course, in times of stunted growth, there is nothing better than to invent external culprits for the bad performance,” he wrote. “But it is possible (and desirable) to be non-aligned without being hostile.”

For Mantega and Dilma, currency manipulation is a sneakier form of protectionism with a more indiscriminate effect on the competitiveness of trading partners, unfairly practiced by developed countries that established their trading infrastructure years ago and have less need to protect nascent local industry.

While most economists today argue that protectionism is bad policy in a globalized market, Brazil has had recent success with such policies. Most significantly, last year it used a combination of carrot and stick—significant tax subsidies for domestic producers and high tariffs on foreign technology imports—to successfully lure technology giant and main Apple Inc. supplier Foxconn to build a manufacturing plant near São Paulo.

Brazil will likely be hoping to repeat that kind of success with the latest tax on automakers. Signs are positive: numerous firms, including General Motors, Toyota, Volkswagen and Honda have already hinted they will add new plants or expand existing ones in Brazil soon, Forbes reported. The world’s car manufacturers may have little choice; compared to Europe or the U.S., Brazil’s domestic market for autos is healthy, and it is huge. Incomes are rising—especially those of the lower and middle classes—and a car is the first purchase many families will want to make with their newly disposable income.

Despite its domestic bias in government intervention, Brazil is not always tolerant of perceived protectionism from other developing nations. The BBC reports that its BRICS partner, South Africa, has accused Brazil of dumping chickens on its market at low prices, forcing local producers to cut jobs. Brazil, apparently not seeing these tariffs as “legitimate trade defense initiatives,” has taken the issue to the World Trade Organization.

The apparent hypocrisy here should not come as a surprise. For all her ideology, Dilma has proven herself to be a consummate pragmatist in government. A former Marxist willing to adapt to the market. A socialist who has opened elements of government infrastructure to private-sector investment. A Workers’ Party leader planning to limit labor unions’ freedom to strike.

And while it is not unusual for a global giant to have protectionist policies, Dilma’s and Mantega’s combative discourse regarding such policies is atypical. Indeed, Bom Dia Brasil reported that according to Swiss NGO Global Trade Alert, in 2008 Brazil implemented 56 protectionist measures—more than the U.S. but less than China, Britain and Russia.

What remains to be seen is how successful the policies will be in the long term. Some analysts have expressed fears that protectionism will be a drag on growth, and when UK Prime Minster David Cameron visited Brazil recently he told Folha that Brazil's protectionism “will lead to expenses in the future.”

But if the policies succeed in fostering innovation at home while persuading foreign firms to expand their investment in Brazil, they will create manufacturing and assembly line jobs in the short term, and potentially higher-paying technology and development jobs long-term. Then Brazil will really be a global power to contend with.

*Lucy Jordan is a contributing blogger to AQ Online. She is a freelance writer based in Brasília, Brazil who covers politics and the environment. Her Twitter account is @lucyjord.

 

Tags: Brazil, tariffs, trade

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