By on May 15, 2011

As you’ve read here many times, the drums against imports have been beating in Brasília for a long time. Now, the government is acting. It has opened up its little tragic bag of dirty tricks and is pulling the first, as it were, rabbit out. It also promises to dip into that bag again if this first rodent fails to bite. Moneyed (and not so moneyed Brazilian import buyers of Chinese cars) Brazilian consumers should run to the dealerships to get ‘em while they can. They should also put some money aside as the measure will also affect parts makers and consequently prices.

The measure (according to Brazilian car enthusiast site Quatro-Rodas) is legal within the scope of the WTO. Brazil will now not automatically license import orders. Rather, it will take up to 60 days of time analyzing said orders. In this way, the guv hopes to make importers life more difficult.

Welcome to the netherworld of non-tariff trade barriers. Brazil is not alone in this. The United States (and by extension Canada) have built a wall around their markets that can only be scaled by the most determined importers: FMVSS and EPA regulations are insidiously different from the rest of the world. Europe built its own wall called European Whole Vehicle Type Approval for cars and ECE for parts. China doesn’t let anything in that is not CCC approved – it’s pretty much like ECE, but with Chinese characteristics. And that’s just the obvious ones. There can be foot-dragging in customs, demands for additional documentation, it’s a game that everybody loves and no-one admits.

The Brazilian measure has been taken against a backdrop in which imports have risen 49.65 percent compared to the same time period as last year. As I reported earlier, last year was a record one. Both for import and so-called “national” cars. These records BTW have been piling up year after year for the last three years. “Brazil’s currency is near its strongest level in a decade, placing pressure on President Dilma Rousseff to shield local factories,” says Reuters.

In a nasty little twist (for the “local” makers) Brazil is rubbing its thumb against the car makers strategy of building only the more basic and lowly cars in Brazil. You see, the so-called national makers (the Big 4-Fiat, VW, GM and Ford- plus some of the newcomers, specially Renault-Nissan) have been following a line of producing their more sophisticated cars in Argentina and Mexico and then importing them into Brazil as both countries benefit from free trade agreements (in cars) with Brazil. Now the government hopes to nudge those companies into investing and producing these more upscale cars in Brazil. BTW, quite a few little birds have told me that the biggest lobbyists for this new scenario were some of the Big 4. However, they hadn’t bargained that the government would lash out against Argentine and Mexican cars. So, the whole “be careful of what you wish for”-thing applies here, triple-fold!

This policy has lead to a curious situation. Striking out against imports, the government has mainly landed a hit against the national makers. ABEIVA, which represents importers without factories in Brazil (some 30 makers from the likes of Ferrari and BMW to the likes of Mahindra and Hafei, yeah, never heard of them either) has issued a statement against this policy. In it, they stress that the government’s strategy is only legal against imports from Mexico and Argentina since these countries agreed to the possibility of this measure in their bi-lateral free trade agreements with Brazil. According to ABEIVA, the measure is illegal against imports from elsewhere (mainly Germany, South Korea, Japan, China and the US, among some other places). They also defend car importing by pointing out that the makers they represent employ Brazilians in over 700 dealerships nationwide. They further point out that they bring in more than 5 billion reais in taxes per year. Yet they only import 21.15 percent of the total of imported cars (the rest are imported by members of ANFAVEA – the association of those makers with Brazilian plants). ABEIVA members collectively hold a market share of just 4.92 percent of the whole market (all these numbers taken from another post at Quatro-Rodas).

Ironically, the whole thing supposedly is a little trade-war between Brazil and Argentina. Brazilian officials have privately accused Argentina of intentionally delaying imports by revoking automatic licenses for Brazilian farm equipment and other products. Some 2,500 Brazilian tractors are languishing at the border with Argentina, Brazilian media reports.

But where does Argentina come in with imports to Brazil? In a big way: Argentina is the source of roughly half the vehicles imported into Brazil. But the barriers, unless selectively applied, will affect auto producers from Japan, South, Korea, Mexico and the United States as well.

So what to expect? Against all the legalese and surely some lawsuits that will arise, the government has taken a stand. They are defending production in Brazil. They are blissfully (or don’t care) unaware of the consequence to Brazilian buyers. Yes, prices will go up as the competition lessens. They probably think this doesn’t matter and is a good thing as they have stated many times they think the economy is overheating. Inflation is back. Knocking some people out of the brand-new car market, they hope to attack this problem via the demand route. This as ever hides the fact that inflation is a consequence of the supply side. Namely, the government is the biggest taker of cash from the market as it struggles to scrap money enough to keep going. No word on government shoring up its excessive (and badly thought out) spending.

Anyway, this will save some jobs at local plants. Fiat is the big winner as they only import the 500 from Mexico in low numbers. Some imported cars which have found great success like the Ford Fusion, VW SpaceFox, Chevy Agile and all Korean models will suffer. The makers will resist a while, but will soon adopt a different strategy. After all, the market is expected to grow from 3.5 million to over 5 in the next couple of years. Will this measure (and possibly others like it) affect this target?

Time will tell. With this about face in policy Brazil will go on dreaming its delusional dreams. It will be less competitive, more isolated (in other words, more of the same old same old). Brazilians will continue having the privilege of paying through the nose for small, bare-bones transportation. Ah! The sleeping giant will slumber on in its warm, full of unrealized potential, precariously improvised, making it up as it goes along, and tropical crib.

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12 Comments on “Trade War Watch 19: Brazil Hits The Brakes Of Imports...”


  • avatar
    Magnusmaster

    These import restrictions are identical to those implemented in Argentina, with the difference that in Argentina they went one step further: if you want to keep importing cars from outside Mercosur and Mexico, you have to export as much as you import, and the goverment only gives you one year to do so. As a result, BMW and other small importers will have to stop selling cars in Argentina. Of course, that won’t happen in Brazil, it’s too large to be ignored.

    BTW, you are forgetting one very important fact: most cars manufactured in Argentina depend on Brazilian parts, particularly engines, since most manufacturers moved production of engines to Brazil. So Brazil can keep producing cars, but Argentina is screwed, unless manufacturers can substitute Brazilian parts with Argentinian ones.

    • 0 avatar

      Unfortunately Magnusmaster, that seems to be part of the idea. Warn makers that the Mexico-Argentina side making big cars and the Brazil side making small cars is not acceptable. The new Presidenta has been making it a point to show that she is more pro-business and pro-”Brazilian interests” than her predecessor (who was much more accomodating). The downside to this all is that taken to its extreme, this could be very dangerous to Mercosur, which has undeniably improved the region’s fortunes.

  • avatar
    Mr Carpenter

    I’m going to go out on a limb here and guess that Hyundai will give consideration to putting up a full factory for automobiles in Brazil eventually, in order to continue their worldwide success.

    I wonder how much of the car ‘value’ must be Brazilian? Is it worth Hyundai’s effort and money to build a CKD plant, for example? Or would a full blown 100% Brazilian manufacturing operation using Hyundai designs (and owned by Hyundai) be the way to go?

    • 0 avatar

      Hi Mr Carpenter,

      You’re absolutely right. Hyundai’s plant in the city of Piracicaba (IIRC), São Paulo state is supposed to come on-line in early 2012. Now, the first car slated to be started there would be smaller than any of Hyundai’s US offerings, and might well be specific for the Brazilian/South American market. In other words it’ll be different from the i30 or i20 already on sale in Europe. Some people in effect are calling it the i25.

      Now, how’s about all the other Hyundai/kia offers currently available in Brazil? Willl they start building some in Brazil? That’s what the government is nudging them to do.

      Anything with more than 60 percent local content is given sspecial treatment, i,e., is considered a “national” car. Treatment improves as content goes up, IIRC. above 80 percent it gets any and all breaks.

  • avatar
    L'avventura

    Excellent article, hits the right points.

    Brazil is currently in an unfortunate position of having a strong currency and simultaneously experiencing record inflation. Usually, strong currency means that inflationary pressures are kept under wraps as favorable exchange rates in goods, such as oil, keep CPI down.

    Obviously, discriminatory regulation is an easy way to force importers to build in Brazil, but it also has the negative effect of discouraging FDI to all but the largest automakers. Additionally, as mentioned in the article, it increases consumer prices.

    There really is no easy way out of this. The simplest solution would be to expand money supply by issuing more Brazilian Bonds, thus helping Brazilian exporters, but inflation is already at record levels making issuing BGBs not an attractive option. Closing the Brazilian market further to importers obviously is a method of protecting Brazilian manufacturers temporarily, but such moves can also backfire as the modern global market provides a lot of alternatives for companies to sink their money.

    Currently the trend seems to increasingly be to use Mexico as a manufacturing hub for the Americas, as Mexico has an FTA with US/Canada, Brazil, EU and Japan. Brazil has all the elements to compete with Mexico in becoming a global manufacturing center as Mexico for its part still under utilizes their manufacturing potential. But FTAs aren’t easy to negotiate.

  • avatar
    PeriSoft

    I can personally attest to Brazil’s draconian trade legislation. Brazilian interest in my company’s racing simulators is huge – we get inquiries constantly. Businessmen see opportunities open for them that wouldn’t be possible with ‘home grown’ drivings sims, which aren’t in the same class. But 100%+ import taxes make business use of our sims untenable.

    Without equivalent local product, the tariffs are not only unfair, but also pointless. I haven’t got enough fingers to count the lost opportunities -in Brazil- just from our tiny business.

    That said, from what I understand of Brazil’s labor laws, the entrepreneurs who would be -starting- those businesses might be better off not doing so anyway…

  • avatar
    vww12

    «quite a few little birds have told me that the biggest lobbyists for this new scenario were some of the Big 4. However, they hadn’t bargained that the government would lash out against Argentine and Mexican cars»

    Live by the sword, die by the sword. Live by pumping dirty politicians, die by having the damn politicians throw sand into the cogs of your industry.

  • avatar
    Bimmer

    Marcelo,

    do your politician that mandate such laws drive Brazilian made cars with 1-liter engines?

    Off topic. Just wanted to share with you that I watched last night a documentary Senna, made by Universal. I already knew that he was and to me still is the greatest F1 pilot, but it was interesting to see how he was supportive of Brazilian children and how his charity helped so many of them. And how Brazilian people were forgetting hard economic times (that I’ve read about in your Brazilian automotive history) and were cheering for him.

    • 0 avatar

      They don’t mandate, but they make it awfuuly hard not to do so. Taxes are lower for car under 1000cc. Then they rise from 1001 to 1600cc. Then they rise again if the car has an engine between 1601cc to 2000cc. Then from 2001cc on up taxes are higher yet again! BTW it used to be worse. Some years ago taxing was based on hp. At least now makers compeete on raising hp while keeping displacement low.

      Couple that with high taxes on owning, maintaining (parts are much more expenssive here), high gas pricesand very high csts to insure – everything conspires to (slowly) keep us in our puny cars.

      As to Senna yes he did goood by the kids. And the family keeps a foundation in his name to help kids. That of course is yet another side of this admirable man. He was also a very savvy businessman and took very good care of his image. I think he made more money with sponsorship than salay! BTW, it was he who brought Audi to Brazil.

      Thanks for reading Bimmer!

      • 0 avatar
        Bimmer

        I’m familiar with such taxation. For Italy and Portugal who had (still has?) taxes based on displacement was developed E30 BMW 320is that had S14 (read ///M3 engine) and gearbox but rest of the vehicle was 325i. More on it here: http://www.bmwmregistry.com/model_faq.php?id=10


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