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.