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In this week’s issue: The most important facts of the week. Jair Bolsonaro on a collision course with industry. How isolated is Brazil’s economy?


The week in review

  • Fiscal bombs. With just 10 bills that passed in 2018, Congress has set up a BRL 259bm “fiscal bomb” for the future Bolsonaro administration. The bills include tax breaks for automobile manufacturers, debt pardons for rural producers, and the controversial pay rise for Supreme Court justices. Taking the federal spending cap into account, this means Jair Bolsonaro’s administration will have to cut expenses elsewhere – which could compromise the quality of public services and damage his approval ratings early on.
  • Car Wash. Anti-corruption investigation Operation Car Wash is back. On Thursday, ten Rio state lawmakers were arrested for operating a bribery scheme, and on Friday beef baron Joesley Batista, owner of the JBS meatpacking firm, was once again put behind bars, for violating terms of his plea deal with authorities and hiding information from prosecutors. 
    </li> <li><strong>Petrobras.</strong><strong> </strong>Brazil&#8217;s oil and gas company posted disappointing quarterly profits (BRL 6.6bn against BRL 9-10bn forecasts), due to settlements with the U.S. Department of Justice. Also this week, a report by anti-corruption NGOs highlighted &#8220;opaque relations&#8221; between the world&#8217;s top commodity traders and Petrobras, saying the traders used corrupt middle-men in Brazil. This week, Petrobras stock crashed by 8%.</li> <li><strong>WhatsApp scandal.</strong><strong> </strong>Supreme Court Justice Luís Roberto Barroso gave three days for Internet giants WhatsApp, Facebook, Twitter, Instagram, and Google to inform whether or not their sponsored campaigns to increase the reach of pro-Jair Bolsonaro content were hired. The companies will have to list all fiscal information of the companies or individuals responsible for those campaigns. If Mr. Bolsonaro benefited from illegal financing, his election could ultimately (but unlikely) be canceled.</li> <li><strong>Diplomacy.</strong><strong> </strong>After saying that Brazil would relocate its embassy in Israel to the city of Jerusalem, President-elect Jair Bolsonaro received enormous backlash from the international community. Egypt canceled a visit from Brazil&#8217;s Foreign Affairs Minister, and several other Islamic-majority countries threatened similar moves. Brazil is the world&#8217;s largest exporter of halal meat (which follows Islamic law as established by the Quran).</li> </ul> <hr /> <h2>How isolated is Brazil&#8217;s economy?</h2> <p>Bureaucracy and regulatory barriers scare away foreign investors and limit the exchange of knowledge between Brazilians and the rest of the world. Compared to developed countries, Brazil doesn’t have that many foreigners in the workplace, which limits the flow of know-how and technology.</p> <p><img class="alignnone size-full wp-image-6097" src="https://brazilian.report/wp-content/uploads/2018/07/export-C0qJA.png" alt="where global tariffs are higher Brazil's economy" width="1200" height="800" srcset="https://brazilian.report/wp-content/uploads/2018/07/export-C0qJA.png 1200w, https://brazilian.report/wp-content/uploads/2018/07/export-C0qJA-300x200.png 300w, https://brazilian.report/wp-content/uploads/2018/07/export-C0qJA-768x512.png 768w, https://brazilian.report/wp-content/uploads/2018/07/export-C0qJA-1024x683.png 1024w, https://brazilian.report/wp-content/uploads/2018/07/export-C0qJA-610x407.png 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <h2>Jair Bolsonaro on a collision course with industry</h2> <p>Big business was on board with Jair Bolsonaro early on, thanks to his pro-market economic advisor, Paulo Guedes. What industry leaders may have missed, however, is that a libertarian approach to the economy would mean slashing the privileges and protectionist measures they have enjoyed for decades. Right after the election was called, Mr. Guedes said the government would &#8220;save Brazilian <a href="https://www.investing.com/equities/vale-on-n1-historical-data">industry</a>, <em>despite</em> our industrialists.&#8221; He meant increasing competition in a country where market reserves are the norm.</p> <p>Mr. Bolsonaro announced the future Ministry of the Economy will swallow up the Ministry of Industry and Foreign Trade (a gateway for industrialists to lobby the government). Now, sources say that Mr. Guedes wants to promote a radical opening up of the Brazilian economy, which is one of the most insular in the Western hemisphere. Three proposals are on the table, and all include the voluntary and unilateral (that is, without anything in return) reduction of import <a href="https://brazilian.report/power/2019/07/17/jair-bolsonaro-true-super-infrastructure-minister-tarcisio-freitas/">tariffs</a>—which is not permitted by Mercosur&#8217;s rules:</p> <ol> <li>Tariffs on all imported goods would be reduced within four years. Products currently taxed at 20-35%, such as appliances, automobiles, and fabrics would be taxed at 15%. Those currently at 15-20%, such as some capital goods, would be taxed at 10%. Products taxed between 5-15%, such as steel, would be at 5%. Finally, products currently taxed at 5% would be tariff-free.</li> <li>Tariff cuts would start with computing and capital goods (which is allowed according to Mercosur&#8217;s rules), as well as steel products. Tariffs on these products, today varying from 8-35% (capital goods), 6-25% (computing) or 8-14% (steel) would reach 4% by 2021, in line with the global average.</li> <li>The third proposal was elaborated by the Secretariat of Strategic Issues (SAE) of the Michel Temer administration. It brings tariffs over capital goods, computing, and telecommunications (but excluding steel goods) to 4% by 2021. Brazil would also propose reducing Mercosur&#8217;s Common Tariff and slashing tariffs between the bloc and the Pacific Alliance (Chile, Colombia, Mexico, and Peru).</li> </ol> <p>Data from the Finance Ministry show that tax benefits for industries jumped from BRL 23.1bn in 2006 to BRL 51.6bn in 2016. &#8220;Those figures are unreal in a country with a primary fiscal deficit of BRL 129bn/year,&#8221; says a document of the ministry. Despite all the help, industries invest too little in innovation, which helps to explain why Brazil fares so poorly in global competitiveness rankings.

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BY Gustavo Ribeiro

An award-winning journalist with experience covering Brazilian politics and international affairs. His work has been featured across Brazilian and French media outlets.