Brazil facing further U.S. trade setbacks

. Jan 05, 2021
tax reform brazil trump The Bolsonaro administration has continued to tie its global positioning strategy to lame-duck President Donald Trump. Photo: Marcos Corrêa/PR

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Today, we cover the continuing bumps in Brazil-U.S. relations. Reactions to São Paulo’s tax reform. And more uncertainty surrounding coronavirus vaccines.

Brazil, U.S. set for complicated relations ahead

2020 ended with the U.S. Congress focused on passing a USD 900-billion pandemic relief plan that would send money to households and businesses grappling with the economic toll of the coronavirus crisis.

For Brazil, this effort meant there was not enough time for U.S. lawmakers to prevent the expiration of the <a href="">Generalized System of Preferences</a> (GSP) — which provides thousands of products from developing countries duty-free access to the U.S. market — at the end of last year.</p> <p><strong>Why it matters.</strong> According to the Economy Ministry, 7 percent of Brazil&#8217;s <a href="">USD 19 billion worth of exports to the U.S.</a> were benefited by the GSP system — especially chemicals, rubber, plastics, and machinery.</p> <ul><li>Brazilian exporters hope that the program will be renewed as early as February, with retroactive effects, as was the case in 10 of the 14 past renewals.</li></ul> <div class="flourish-embed flourish-chart" data-src="visualisation/4026074"><script src=""></script></div> <p><strong>What next?</strong> Brazilian trade with the U.S. faces other possible hurdles, especially regarding relations between the Jair Bolsonaro administration and the incoming Joe Biden White House. After being the last G20 leader to congratulate Mr. Biden for his win — and doing so in a highly perfunctory manner — the Bolsonaro administration has continued to tie its global positioning strategy to lame-duck President Donald Trump.&nbsp;</p> <ul><li>Congressman Eduardo Bolsonaro, the president&#8217;s son, <a href="">visited the White House on Monday</a> after an invitation from Ivanka Trump, the U.S. president&#8217;s daughter and advisor.</li><li>Hours before, U.S. Secretary of State Mike Pompeo and Brazil&#8217;s Foreign Minister Ernesto Araújo exchanged pleasantries on social media. &#8220;There is no more freedom-loving FM than you, [Ernesto Araújo]. You, me, liberty. Game on,&#8221; said Mr. Pompeo. &#8220;American and Brazilian patriots will stand side by side, come what may,&#8221; replied Mr. Araújo.</li></ul> <blockquote class="twitter-tweet tw-align-center"><p lang="en" dir="ltr">There is no more freedom-loving FM than you <a href="">@ernestofaraujo</a>. You, me, liberty. Game on. <a href=""></a></p>&mdash; Secretary Pompeo (@SecPompeo) <a href="">January 4, 2021</a></blockquote> <script async src="" charset="utf-8"></script> <p><strong>Environment.</strong> Experts agree that Brazil&#8217;s lax environmental policies under Mr. Bolsonaro are likely to become the <a href="">main point of contention with the U.S.</a>, as Mr. Biden intends to show he takes climate change seriously.</p> <hr class="wp-block-separator"/> <h2>São Paulo tax reform sparks protests from rural producers</h2> <p>At the end of last year, Governor João Doria of São Paulo announced he would increase rates of the <a href="">state tax on goods and services</a> (ICMS), as part of a wider <a href="">austerity program</a>. Any sector paying less than 18 percent will now see a 20-percent hike in ICMS. The state is also cutting tax benefits given to specific sectors.</p> <ul><li>The move has allied both industrialists and rural producers, who fear their margins will be significantly cut during a moment of crisis. The latter group plans to hold a series of tractor motorcade protests in multiple agricultural cities on Thursday. Organizers say over 150 unions have joined the demonstration.</li></ul> <p><strong>Why it matters.</strong> A report by the National Council of Finance Policy shows that ICMS made up a staggering 85 percent of the revenue collected by Brazilian states in 2019.</p> <p><strong>Yes, but … </strong>According to estimates by think tank Fundação Getulio Vargas, the tax bumps could result in losses of up to BRL 21.4 billion (USD 4 billion) in goods and services consumption, and a decrease of BRL 4 billion in the state&#8217;s GDP.</p> <ul><li>Experts claim agribusiness will be the worst-affected sector, set to suffer a 2.7-percent reduction in its production value. &#8220;Raising the ICMS tax will jeopardize the state economy, as well as the compounded growth of all links in the agricultural production chain: inputs, production, industry, and services,&#8221; reads a study signed by three Fundação Getulio Vargas economists.</li></ul> <p><strong>Inflation ahead?</strong> Important items in Brazilians&#8217; basic basket of necessities — such as milk and eggs — will go from being exempt to having 4.14 percent-tax tacked on to their prices. &#8220;We&#8217;re facing a pandemic and now will have to endure tax raises. And then people end up <a href="">blaming producers for higher prices</a>,&#8221; one union leader told reporters.</p> <ul><li>Food inflation has been a <a href="">major source of concern for the government</a>, as it punishes poorer populations the hardest — fueling disgruntlement and pessimism about the economy.</li></ul> <hr class="wp-block-separator"/> <h2>India blocks vaccine exports to Brazil</h2> <p>The federal government&#8217;s strategy to kickstart its vaccination program by importing 2 million ready-for-use doses of the AstraZeneca vaccine has suffered a setback. The head of India&#8217;s Serum Institute said authorization for emergency use was only granted by the government on the condition that the institute would not export vaccines for several months, in order to protect the supply of the Indian population.</p> <p><strong>Why it matters.</strong> The AstraZeneca vaccine is the Brazilian government&#8217;s only wager in the race to inoculate its population, after shunning the Chinese-made CoronaVac and citing logistical hurdles for the Pfizer vaccine.</p> <ul><li>Brazilian diplomacy is trying to convince New Delhi that its order of 2 million doses is a small volume compared to Serum Institute&#8217;s production capacity.</li></ul> <p><strong>Meanwhile … </strong>Without clarity on how the federal government will pull off a nationwide immunization plan, states have engaged in direct negotiations with manufacturers. And private clinics are trying to come up with their own plan — something federal regulators are against, at the moment.</p> <p><strong>Not organized. </strong>Despite having an Army logistics expert at the helm, the Health Ministry has encountered a number of logistical blunders, such as letting Covid-19 tests exceed their expiration dates in warehouses and not foreseeing a possible lack of syringes and needles ahead of what is arguably the biggest vaccination effort in a century.</p> <ul><li>The government has moved to block exports of syringes and needles, but failed to control sales during the peak of the pandemic. Between May and July 2020, such exports rose 200 percent in volume —&nbsp;going mostly to Chile, the first South American nation to start inoculating its population.</li></ul> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>House.</strong> Opposition parties declared their support for Congressman Baleia Rossi in February 1&#8217;s <a href="">House Speaker election</a>. Despite Mr. Rossi being the <a href="">only competitive candidate to oppose Arthur Lira</a> — who is backed by President Jair Bolsonaro — the decision to support him was far from consensual. In the Workers&#8217; Party, the 52-seat bench decided to align with Mr. Rossi by a margin just two votes. While disgruntled lawmakers say they will not vote for the pro-Bolsonaro Mr. Lira, they complain that the process lacked proper negotiations.</li><li><strong>Energy. </strong>Last year, Brazil saw its lowest level of implementation of new hydroelectric power stations in at least two decades, relying more on fossil fuel-based plants for energy production. The latter group saw new plants operating with the potential for producing 1.9 gigawatts, the highest growth since 2013 according to federal regulators. Experts say the move is related to the hurdles of making new hydroelectric plants viable, especially for <a href="">environmental reasons</a>. The data, however, also shows a sizable increase in wind and solar power stations.</li><li><strong>Central Bank. </strong>As predicted, the Brazilian Central Bank has begun pulling <a href="">stimulus measures related to loans</a>, especially those catering to small businesses, such as a BRL 51.7-billion credit line brought in during the pandemic. These measures led to a 15.6-percent growth in issued banking credit in the 12 months preceding November. Now, without the stimulus, the growth rate in 2021 should be cut in half. These credit lines could be revived if economists&#8217; predictions of a <a href="">second recessive dip</a> are confirmed, following the end of the coronavirus emergency salary program.</li><li><strong>Labor.</strong> A <a href="">new report</a> by NGO Repórter Brasil identifies over a dozen instances in which JBS and Minerva — two of Brazil&#8217;s leading meat producers — are supplied by farms relying on labor analogous to slavery. While these cases are a tiny fraction of the thousands of suppliers these companies have, the report illustrates the growing pressure on the meat industry to pursue more sustainable practices. The <a href="">fragmentation of supply chains</a> works to help transgressors, as it becomes harder to trace links between major companies and small suppliers utilizing illegal labor and/or deforestation.</li><li><strong>Freedom of the press.</strong> At least <a href="">13 journalists were murdered in Mexico</a> last year, making the country the most dangerous place in the world for reporters in four of the last five years. A total 42 journalists were killed worldwide as a consequence of their work, per the International Federal of Journalists (IFJ).

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