Brazil’s plan to slash import tariffs

. Oct 23, 2019
Brazil's plan to slash import tariffs mercosur

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Good morning! We’re covering Brazil’s plan to lower import tariffs, and how it could implode Mercosur. Poor-quality roads make producers lose a lot of money. The deal to allow U.S. rockets to launch from Brazil. (This newsletter is for platinum subscribers only. Become one now!)

Brazil’s plan to slash import tariffs

Since before taking office, Economy Minister Paulo Guedes

has talked about dramatically slashing import tariffs in Brazil within four years. We talked about this plan in one of our <a href="">Weekly Reports</a> in November last year. Now, details of this strategy have been published, with the government presenting its proposal to other members of Mercosur—the South American trade bloc that includes Argentina, Uruguay, and Paraguay.</p> <p>The plan to open up Brazil&#8217;s economy would slash average tariffs on industrial goods from 13.6 to 6.4 percent. Brazil would have lower tariffs than Canada on textiles, than Japan on shoes, and than the EU in fertilizers and pesticides.&nbsp;</p> <div class="flourish-embed" data-src="visualisation/810694"></div><script src=""></script> <p><strong>Why it matters.</strong> Brazil is one of the most insular economies in the Western hemisphere. Mr. Guedes wants to increase competition in a country where market reserves are the norm. The question, however, is whether Brazilian players can keep up with potentially more competitive newcomers.</p> <p><strong>Braz-exit?</strong> Mr. Guedes defends a voluntary and unilateral reduction in tariffs—that is, without receiving anything in return. But that&#8217;s not permitted by Mercosur rules, which establishes common import duties. Argentina—where protectionism has also been a trademark—is seen as being a potential obstacle to Brazil&#8217;s plans. If Buenos Aires votes against the move, government sources say Brazil could leave Mercosur. Diplomats are already investigating whether the trade deal recently signed with the EU could still be valid for the country in the case of a &#8220;Braz-exit.&#8221;</p> <p><strong>Reading the small print.</strong> The National Confederation of Industry has criticized the move to reduce tariffs, saying it would reduce earnings for at least ten of Brazil&#8217;s 23 industrial sectors. During the campaign, industrialists praised Mr. Guedes for championing a hands-off approach to the economy. Perhaps they missed the fact that the libertarian cabinet minister has always wanted to gut the privileges and protectionist measures local industries have enjoyed for decades.</p> <hr class="wp-block-separator"/> <h2>Brazilian roads: quality down, costs up</h2> <p>A new survey on the quality of Brazilian roads shows that only 41 percent of them are considered as being either &#8220;great&#8221; or &#8220;good.&#8221; According to the National Confederation of Transport, it would take BRL 39 billion to recuperate Brazil&#8217;s roads.</p> <div class="flourish-embed" data-src="visualisation/810934"></div><script src=""></script> <p><strong>Why it matters.</strong> Over 60 percent of all cargo in Brazil is transported by trucks. If we exclude crude oil and iron ore, which are not transported by road, that rate jumps to 90 percent. The study shows that structural problems of roadways elevate transportation costs by 28.5 percent.</p> <p><strong>Private v. publicly-owned.</strong> The top 10 Brazilian roads in terms of quality are all privately-run. Even so, privatization remains taboo in Brazil, as drivers fear it will come with expensive toll fares.</p> <p><strong>Solution.</strong> The best solution for Brazil would be to invest in more railroads and waterways. One example: six naval convoys can take up to 10,000 tons to ports, whereas it would take 2,000 trucks to transport that same weight.</p> <hr class="wp-block-separator"/> <h2>House greenlights space base accord with the U.S.</h2> <p>In a 329-86 vote, the lower house approved a technology safeguards agreement (TSA) between Brazil and the U.S., which seeks to facilitate the launching of American satellites on Brazilian soil—in particular, from the Alcântara Launch Center in northeastern Brazil.</p> <p><strong>Why it matters.</strong> The deal protects U.S. intellectual property, finally allowing American technology to be used in launches from Brazil. Without the deal, Brazil&#8217;s rocket launch program was unfeasible, as nearly every satellite launch uses some form of equipment or process belonging to the U.S.</p> <p><strong>Long time coming. </strong>This deal has been in the making since the turn of the millennium. Former President Fernando Henrique Cardoso (1995–2002) had negotiated to grant the U.S. areas of laissez-passer in the Alcântara Launch Center, surrendering Brazil’s authority over these zones. After Mr. Cardoso left office, his successor Luiz Inácio Lula da Silva tore up the deal, saying that it harmed the country’s sovereignty. Now, these areas are back on the table.</p> <p><strong>Prime location.</strong> Sitting just over 200 kilometers south of the Equator, Alcântara is an optimal location to launch satellites into orbit, as it requires less fuel. When setting off from latitudes in the U.S., satellites must change course during their flight, meaning the engines need to be activated multiple times.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <p><strong>Podcast.</strong> Every Wednesday, our <em>Explaining Brazil </em>podcast releases a new episode. And <a href="">you can listen to it before everyone else</a>. This week&#8217;s theme: Brazil&#8217;s nuclear submarine program. We talked to Anne Bianchi, project director at French defense company Naval Group—which is responsible for the undertaking along with the Brazilian Navy. <a href="">Listen now 🎧</a></p> <p><strong>Pension reform.</strong> The pension reform has (almost) been approved by the Senate. While the core text of the bill passed in a landslide vote, senators still must analyze two amendment requests today—which could reduce savings by over BRL 70 billion. That shouldn&#8217;t prevent the stock market from having a third consecutive bullish day.</p> <p><strong>Oil spill.</strong> Admiral Ilques Barbosa Jr., the commander of Brazil&#8217;s Navy, said that the investigation into the origin of the <a href="">massive oil spill hitting the Northeastern coast</a> has zeroed in on 30 vessels from 10 different countries. But it is more likely that the spill came from a so-called &#8220;dark ship,&#8221; which is a vessel that turns off its transponder (an automatic identification system)—often because it is carrying illegal cargo. The spilled oil comes from Venezuela, which means it could have been on a ship violating economic sanctions on the country. So far, 900 tons of crude oil have been removed from over 200 coastal locations.</p> <p><strong>Supreme Court.</strong> The <a href="">trial about whether or not prison sentences may be carried out before all appeal routes are exhausted</a> resumes today. Brazil&#8217;s highest court begins today&#8217;s session at 9:30 am, but justices will only start voting on the matter this afternoon. First, the court will hear arguments from the Federal Prosecution Office, the Solicitor General&#8217;s Office, and from social organizations. The justices are expected to deliver long-winded votes, meaning the trial is unlikely to see a decision today.</p> <p><strong>BNDES. </strong>The congressional investigation committee scrutinizing contracts signed by Brazil&#8217;s National Development Bank during the Workers&#8217; Party governments of 2003–2016 has approved its final report—requesting the indictment of 52 people (of which six are former cabinet members). They are suspected of engaging in quid pro quo to greenlight loans with low interest rates. The report&#8217;s first version included former Presidents Lula and Dilma Rousseff on that list—but their names were dropped in order to gather consensus around the report.</p> <p><strong>Oil and gas.</strong> Two trade unions representing oil and gas workers have notified Petrobras that they will go on strike at midnight on October 26. The workers complain that the company has been uncooperative in negotiations around a new collective bargaining agreement—which have been ongoing since May. The unions said production will stop, but they will continue providing &#8220;essential services at a reduced capacity.&#8221;

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