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VI. TRADE POLICIES AND PRACTICES INNON-SERVICE INDUSTRIES
(1) Overview
1. TheSecretariat report fortheprevious Trade Policy Review ofBrazil concluded that,even
following extensive elimination ofnon-tariff measures, tariff reductions andtherationalization ofthe
structure ofprotection, theescalating tariff structure provided highlevels ofeffective protection for
industries suchasmotor vehicles andelectronics andcommunication equipment, while implicitly taxing
activitiessuchasagriculture,minerals,chemicalsandpulp,andpaperandpaperproducts.Theevolution
ofnominal tariffs suggests that,ingeneral, thesituation should nothavechanged significantly thelast
fouryears; asBrazil 'scurrent tariff structure, based onMERCOSUL 'sCommon External Tariff
(CET),isgenerallycomparabletotheformerappliedtariffintermsofratesanddispersion,andcontinues
toshow escalation bystage ofprocessing (Chapter III(1)).
2. Recent estimates oftheeffective rates ofprotection afterBrazil 'sadoption oftheCET in
January 1995 indicate thataverage effective protection forallindustries fellbetween July1993 and
December 1994, increased aftertheadoption oftheCET, andshould decrease tonearpre-MERCOSUL
levels aftercurrent exceptions totheCETarephased outby2006 (Table VI.1). Thispattern follows
themovements innominal tariffs during thesame period (Chapter III(2)).
3. Thecurrent pattern ofeffective protection across activities isalsocomparable withthatdescribed
intheprevious Secretariat report. Thenewestimates again show thatthehighest effective protection
isaccorded topassenger cars,trucks andbuses. They alsoindicate animportant increase inthelevel
ofprotection tothisindustry bothinabsolute andrelative terms, reflecting higher nominal tariffs on
motor vehicles andtherelatively lowvalue added intheindustry.1Other activities continuing tobenefit
fromlevels ofeffective protection significantly above theoverall average included electrical material,
electronic equipment, thedairy industry, beverages andfoodproducts, textiles andplastic products.
Incontrast, activities witheffective ratesconsiderably below theaverage, notably non-fuel mining,
agricultureandchemicals,tendtoberelativelydisadvantagedbytheexistingtariffstructure;thenegative
effective protection estimated forpetroleum andcoalmining indicates thatthese activities areeven
more disadvantaged bytheexisting tariff structure.
4. Theestimates inTable VI.1thusconfirm thepersistence ofanuneven structure ofinterventions
across activities. Thedispersion ofeffective ratesshown inthetableisindicative ofanallocation of
resources across activities thatdeparts significantly fromaneconomically optimal distribution andruns
counter toBrazil 'sefforts tocreate amore neutral andefficient setofeconomic incentives.
1Estimated protection would beeven higher ifthetariff reductions oninputs announced inlate1995 were
included. Theindustry isfurther assisted bynon-tariff measures, e.g.,export subsidies andinvestment incentives,
asdiscussed later.WT/TPR/S/21
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Table VI.1
Effective rates ofprotection byactivity
(Percent)
July1993 December 1994 December 1995 CET 2006
Agriculture 3.9 3.8 4.4 4.4
Non-fuel mining 0.7 0.9 2.5 2.7
Petroleum andcoalmining -2.0 -1.9 -1.9 -1.7
Metallic mineral products 13.0 11.3 14.3 14.5
Ironandsteel 10.7 10.2 12.9 13.8
Non-ferrous metallurgy 6.2 7.6 10.4 10.4
Other metal products 22.7 19.4 21.3 21.2
Machinery andtractors 22.6 23.2 20.8 14.3
Electrical material 26.1 26.3 31.3 20.4
Electronic equipment 23.1 21.3 24.9 13.0
Passenger cars, trucks, buses 129.8 44.6 270.9 53.1
Other vehicles andparts 21.3 21.6 21.0 14.4
Wood andfurniture 9.7 9.4 12.3 12.4
Cellulose, paper, graphics 8.5 8.0 10.5 12.6
Rubber products 17.3 15.3 14.6 14.7
Chemicals 12.8 9.0 5.2 16.1
Petroleum refining 10.5 5.2 8.0 8.8
Various chemical products 9.0 5.0 5.8 6.0
Pharmaceuticals andperfumery 13.9 2.3 9.8 9.9
Plastic products 21.5 24.4 23.3 22.3
Textiles 20.6 20.2 23.6 21.5
Clothing 23.9 24.5 21.0 22.6
Footwear andleather 15.1 15.6 21.3 15.8
Coffee industry 12.7 10.1 11.8 11.8
Vegetable products processing 18.0 17.1 23.2 20.7
Animal slaughter 10.0 7.1 9.7 9.8
Dairy industry 21.6 25.7 24.2 16.5
Sugar 21.2 9.5 16.5 16.8
Vegetable oils 7.6 8.0 8.8 9.3
Beverages andfoodproducts 29.7 22.2 23.9 25.1
Other products 23.6 21.0 20.6 19.9
Simple average 18.9 14.4 23.4 15.3
Weighted averagea14.5 12.3 12.9 15.4
Median 15.1 11.3 14.6 14.4
Minimum -2.0 -1.9 -1.9 -1.7
Maximum 129.8 44.6 270.9 53.1
Standard deviation 21.7 9.7 45.9 9.2
a Using free-trade value added asweights.
Source: H.Kume (1996), APolitica deImporta çãonoPlano RealeaEstructura deProteçãoEfectiva, Texto paraDiscuss ãoNo.118,
Funda çãCentro deEstudos doComércio Exterior ,February.
(2) Agriculture andRelated Processing Industries
(i) Main features
5. Agriculture accounts forabout 13percentofBrazil 'sgross domestic product and27percent
oftotalemployment. Brazil istheworld 'slargest producer ofcoffee andsugar (from sugar cane) andBrazil WT/TPR/S/21
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isamongst thelargest producers ofsoybean products, orange juice, cocoa, beef, tobacco andcotton.
Agriculturalproductsaccountforaround30percentofBrazil'stotalexportrevenue,makingthecountry
oneoftheworld 'sleading exporters ofsuchproducts (Table I.7). In1994, main exports were, in
decreasing order ofvalue, coffee, oil-cake, soybeans, orange juice, soybean oil,wood pulpandsugar.
Brazil isaprice taker formostofitsagricultural exports, butitsimportance inworld production of
cocoa, coffee, orange juice, soybean products, andsugar, means thatithasadegree ofinfluence over
price formation ininternational markets forsuchproducts.
6. Brazil isclosetobeing self-sufficient inmostbasicfoodproducts except wheat. In1994, cereals
accounted for2.4percentoftotalimports (Table I.6); other significant agricultural imports were,
indecreasing order ofvalue, cotton, riceandcorn. While imports ofvarious agricultural products
havebeenreplaced through thedevelopment ofdomestic production, there isnospecific policy, at
leastsince theearly 1990s, toencourage self-sufficiency insuchproducts.
(ii) Policy objectives andinstruments
7. Inthepast,agricultural production wasdistorted byofficial support prices, import andexport
quotas andprohibitions, pricecontrols andcertain elements ofthetaxsystem; subsidized preferential
credit provided strong support foragricultural development, including forthepurchase ofagricultural
machinery. Inspiteofsuchsupport, theoverall impact oftradeandindustrial policies wasnet,implicit
taxation ofagricultural production andabiasagainst agricultural exports.2Although suchimplicit
taxation andanti-export biasstillseem toaffect agricultural production, theauthorities expected this
tochange asaresult ofthefiscal reforms under consideration bytheNational Congress inmid-1996.
8. Inrecent years, agriculture hasbeenstrongly influenced bythemove towards more sectorally
neutral trade andindustrial policies; attimes, serious problems havearisen inadapting tothenew
policy environment. Adaptation hasbeenmade particularly difficult bythesector 'shistorically high
indebtedness levels and,more recently, bytheimpact ofstringent monetary policies onprofitability.
Intheauthorities 'view, themajor tasknowistobridge thegapbetween arrangements adopted under
previous development models andcurrent economic objectives. Policies inplace toaccomplish this
include:
- reducing theburden ofolddebts tobring themtolevels compatible withastabilized economy;
- adopting more flexible rules toobtain external funds forthesector;
- establishing fixed nominal interest ratesfornewcredit toreduce theuncertainty created by
variable rates;
- offering better conditions andenlarging thelimits forinvestment financing offered through
theSpecial Credit Programme forAgrarian Reform (PROCERA);
- creating anational programme toimprove family farming (PRONAF); and
- easingcredittermsforloansofuptoR$200,000,includingextendedrepaymentperiods,reduced
interest ratesandprovisions forrepayment inkind.
9. Avariety ofpolicy instruments apply totheagricultural sector ortospecific sub-sectors or
regions. Besides border measures, themost important instruments affecting theentire sector are
minimum-price supports andsubsidized rural credit.
2Krueger, Schiff andValdez (1991).WT/TPR/S/21
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(a) Border measures
10. Import duties onmany agricultural goods arebelow average, buthigher tariffs areimposed
oncertain products, particularly powder milk, wines andpeaches insyrup. InlinewiththeAgreement
onAgriculture, Brazil bound itstariffs onallagricultural products, finalbindings ranging between
zeroand55percent(Chapter III(2)). Apples andpears aresubject totariff quotas, buttheapplied
tariff islower thanthein-quota rate; thequota onwheat hasbeenwithdrawn (Chapter III(2)). No
radical changes tocurrent polices appear toberequired forBrazil tomeetitsengagements under the
WTO Agreement onAgriculture.
11. Theauthorities noted thatnominal tariff protection foragricultural products fellsignificantly
between 1990andmid-1993. Withfewexceptions, theadoption ofMERCOSUL 'sCommon External
Tariff (CET) inJanuary 1995hadlittleeffect ontariffprotection foragriculture. Among theexceptions,
theGovernment estimates thateffective rates ofprotection forcorn, cotton, riceandsoybeans fell
between 1990andmid-1993: from18.2to9.2percentforcorn, 9.4to-2.1percentforcotton, 23.2
to11.4percentforriceunder irrigation, and10.0to8.7percentforsoybeans. Such fallsreflect
deeper reductions onthetariffs applied toagricultural outputs thanonthose oninputs (e.g., fertilizers,
machinery). Reductions oninput tariffs resulted inincreased effective rates ofprotection forthe
production ofsome ofthese products in1995 to:10.3percentforcorn, 6.6percentforcotton,
12.0percentforrice,and9.8percentforsoybeans.
12. Anagricultural agreement within MERCOSUL hasnotbeenformalized andnegotiations to
harmonize andcoordinate agricultural policies weretemporarily suspended toensure theconsistency
ofpolicies withWTO engagements. Nevertheless, MERCOSUL 'sWorking Group No.8continues
tomake progress intheharmonization ofphytosanitary rulesandother rules concerning theregistry
ofchemicals usedinagriculture (i.e., fertilizers), wines andanimal feeds. Theimplementation of
aso-called agricultural umbrella mechanism (guarda-chuva agrícola )wasgiven consideration in1995
within theMERCOSUL framework, including theuseofa"price band" system.3However,
MERCOSUL members decided instead tostrengthen andharmonize theirtrade defence instruments,
which arenowunder discussion.
(b) Minimum prices
13. Minimum price policies areimplemented through theGovernment Acquisition Programme
(AGF) andtheFederal Government LoanProgramme (EGF) (Chapter V(1)). TheAGFaimstoreduce
price uncertainty andencourage domestic production byoffering farmers amanaged outlet fortheir
production, alternative tothefreemarket. TheEGFprovides aGovernment storage loanfacility to
encourage theuseofbuffer stocks tosmooth outprice fluctuations. Themaincrops covered byboth
theAGF andtheEGFduring thelastfouryears havebeencorn, riceandwheat.
14. Theauthorities consider itnecessary tomake adjustments tominimum price policies totake
intoaccount thehigher transport costs forcertain relatively remote regions (e.g., theCentral-West
region). Thismaybeachieved through the"regionalization" ofminimum prices todecrease the
importance offreight costsrelative tothelocalvalue ofcommodities, thusmaking itviable totransport
suchproducts toconsumption centres orports.
3Henz (1995).Brazil WT/TPR/S/21
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15. In1996, theauthorities weregiving priority todefining alternative sources tofundtheEGF
andtointerest rateequalization programmes, asbudgeted resources wereconsidered insufficient. Work
wasalsoinprogress tofinetunetheadvance purchase programme through Rural Product Notes (CPR)
introduced in1995. Theprogramme aimstofinance cropsowing andsupport cropmarketing; itwas
initially restricted tosoybean production incentral Brazil where traditional credit mechanisms were
considered nottobeworking properly.
(c) Rural credit
16. Official credit programmes have played amajor roleinagriculture since themid-1960s,
particularly through thecompulsory application system (Chapter V(2)). Loans financed directly by
theGovernment accounted forthelargest portion ofruralcredit operations buttheyhavefallen sharply
since 1990. Rural credit supports relatively fewproducts, thelargest recipients ofoperational credits
during the1994/95 summer harvest having been(share oftotaloperational credits inparentheses):
soybeans (29.2 percent), sugar cane(15.3 percent), corn(14.6 percent), rice(9.2percent), and
cotton (6.5percent); marketing credits benefited mainly corn(27.0 percent), cotton (14.8 percent),
sugar cane(10.0 percent), rice(4.4percent) andsoybeans (4.0percent).
17. Funds ofsome R$5.1 billion were made available tofinance the1995/96 summer harvest.
Themain sources forthose funds were (contribution inparentheses): ruralsavings (32.3 percent),
compulsory resources (16.2 percent), Workers 'Protection Fund, FAT(13.6 percent), Extra-Market
Fund(13.6percent),"free"resources(10.1percent),externalresources(6.0percent)andtheNational
Treasury (4.9percent).
18. Rural indebtedness hascontinued togrow inrecent years. Overthe15-months period between
July1994 andOctober 1995, outstanding rural credit rosefrom about R$14.5 billion tojustover
R$25 billion (Chart VI.1). During thesame period, non-performing loans doubled, reaching the
equivalent ofabout 20percentofallcredit, withdelinquencies relatively more prevalent inrelation
tothefinancing ofcurrent expenditures (about halfofallcredit goesintofunding current expenditures,
investment accounting forafurther 30percent). Inaneffort torestore stability totherural credit
system, theGovernment hasintroduced aprogramme ofsecuritization andconsolidation ofdebts of
uptoR$200,000.Theprogrammeincludesgovernmentguarantees,extendedrepaymentperiods,reduced
interest ratesandtheconversion ofdebts toproduct equivalents.
19. Theauthorities acknowledge thatgreater efficiency intheprovision ofrural credit requires
ageneral liberalization ofthefinancial sector andreducing theextreme segmentation ofcredit markets.
They believe thatcredit should playamore complementary rôletoprogrammes insupport ofincreased
productivity andproduct quality, aswellastothose aimed atimproving infrastructure andpreserving
theenvironment.WT/TPR/S/21
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(d) Taxconcessions
20. Reforms totheincome taxsystem foragricultural producers, including higher taxratesand
theremoval ofvarious deductions andexemptions, havemade theincidence oftaxation comparable
tothatapplied inother sectors. However, agricultural producers maystillbenefit from certain tax
advantages. Forexample, thetaxburden onagricultural landremains verylowandthetaxcollected
foragricultural social security isfarbelow thebenefits paidtoworkers inthesector. Ontheother
hand, provisions sheltering agriculture income fromincome taxation continue toputfarmers withlow
incomes atacompetitive disadvantage inthemarket forlandrelative tolarge-farm owners whobenefit
fromthetaxshelter.4Moreover, theServices andMerchandise Circulation Tax(ICMS) isnotrefunded
onexports ofrawandsemi-processed agricultural commodities, which would seemtoplace agriculture
atadisadvantage relative toother industries; abillwasbefore Congress inmid-1996 toaddress this
situation.
21. Itisapriority fortheauthorities tointroduce further reforms ofthetaxsystem sothatthe
agricultural sector canremain viable inamore openeconomic environment. They believe thatthe
sector 'scompetitiveness hasbeeneroded bythehighincidence oftaxation onrural exports aswell
asbylowdutiesonimportedagriculturalproductswhosepricesmaybeartificiallydepressedbysubsidies
inexporting countries. According totheauthorities, Brazil cannot afford tocontinue asoneofthe
rarecountries which "exports taxesandimports subsidies". Inthisregard, theGovernment isproposing
4World Bank (1994), p.104.Brazil WT/TPR/S/21
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toexempt fromtheICMS exports ofprimary andsemi-manufactured products, aswellasagricultural
inputs. Itwasalsostudying means toreduce thecumulative effect oftaxes onproducts characterized
byfragmented production chains, suchastextiles, meatproducts ("industrialized meat") andbeverages.
(e) Other instruments
22. Agricultural research hashadanimportant impact onrural development. Research and
development hasbeengiven astrong impetus since theearly1970s through theBrazilian Agricultural
Research Corporation (Chapter V(2)). Government funded research helped todevelop soybean, rice
andmaize production.
23. Theauthorities consider ittobeamedium-term priority torevise thelegislation oncropstorage
todefine more clearly theresponsibilities ofstorehouse owners incaseoffraud orother irregularities,
andtogivemore rights tousers concerning theoversight ofstored products. Therevisions would
alsoaimtoliberalize current restrictions onthemarketing ofproducts bystorage companies, which
haveoften beenbreached, thecaseespecially inthecentral-western region.
24. Similar priority isbeing given torevising thelegislation ontheclassification ofagricultural
products. Themain objective would betheelimination ofthemonopoly onclassification services
currently granted topublic organizations. Although suchrights maybedelegated tothirdparties, the
authorities consider thatthisoccurs toorarely andthatStateagricultural ministries haveattimes placed
toomuch emphasis ontheclassification services asrevenue-rising devices.
25. Theauthorities noted thatthepriceofservices andother inputs toagricultural production were
market driven, withnosubsidies granted totheconsumption ofsuchinputs. Noincome support
programmes were inplace.
(iii) Quantification ofgovernment intervention
26. Measuring Government expenditure onagricultural programmes isdifficult because ofthewide
dispersion offunding. Available indicators ofassistance suggest thatpolicies haveimplicitly taxed
theproduction ofcertain products while providing netbenefits toothers (Box VI.1).
27. InitsUruguay Round commitments, Brazil undertook tocutfinancial support foragricultural
producers, asdefined forthepurposes ofthenegotiations, from US$1,039 million, thelevelofthe
Aggregate Measurement ofSupport (AMS) inthebaseperiod 1986-88, toUS$912 million in2004.
Preliminary estimates indicate thatthelevelofinternal support foragriculture in1995wasintheorder
ofR$1billion.
28. Abroader concept ofdirect andindirect government support thanthatoftheAMS shows public
expenditures reaching closetoUS$9,400 million in1991(Table VI.2).5Suchestimate includes several
programmes notcovered byWTO engagements onagriculture. According totheWorld Bank, several
suchprogrammes make apositive contribution togrowth (andpoverty reduction), andtheirexpansion
5Theuseofagross value forthecredit item(asopposed tothenetpayment through thelowinterest rates)
inTableVI.2overstatesactualexpendituresonruralcredit;however,theuseofthegrossvaluemaybeappropriate
tothedegree thatsubstantial debtforgiveness wasprovided in1989 and1990, andnotalllosses incurred by
thecropinsurance programme werecharged tothebudget. (World Bank (1994), p.114) Theauthorities indicated
thatamore realistic estimate ofcredit assistance would beUS$300 million in1995.WT/TPR/S/21
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maybedesirable.6Thisseems tobeparticularly thecaseforextension andresearch programmes.
Ontheother hand, market intervention schemes wereassessed ashindering growth. Thisappeared
tobeespecially trueforruralcredit, which hasbeendescribed asBrazil 'smaininstrument ofagricultural
policy.7
BoxVI.1: Agricultural protection indicators
Producer subsidy equivalent (PSE) estimates forthe1982-87 period were positive forrice, wheat and
cotton, butnegative forsoybeans, cornandbeef, indicating aproducer taxinstead ofaproducer subsidy
forthelatter products (GATT, 1992).
More recent estimates ofassistance, shown below, have been computed bytheWorld Bank. These
estimates include thenominal andeffective rates ofprotection (NRPs andERPs) andtheeffective rateof
assistance (ERAs). NRPs arecomputed asthetariff equivalent oftariff andnon-tariff barriers.
Effective rates takeaccount ofprotection toinputs, while theERA isamore comprehensive measure of
industry assistance (including vis-à-vis thePSE). Negative results imply implicit taxation ofanactivity
resulting from thecombined structure of: tariffs andnon-tariff barriers onoutput (NRP), border
protection toinputs andoutput (ERP), orassistance toinputs andoutput (ERA).
1990 1991 1992
NRP ERP ERA NRP ERP ERA NRP
Exportables
Cocoa -9.9 -11.1 316.6 -8.5 -10.7 275.3 -20.8
Cotton 26.3 20.3 120.9 29.5 16.1 49.0 8.5
Soybeans -5.3 -23.6 16.0 3.9 -25.4 -25.2 -8.9
Sugar -46.5 -56.2 -47.4 -32.7 -54.8 -51.3 -31.6
Importables
Edible bean 3.2 -2.6 69.8 3.7 -9.5 45.4 -3.5
Corn -23.9 -31.8 25.3 -33.0 -46.6 -15.4 -47.1
Rice 17.5 -2.5 85.6 30.0 2.8 19.9 -1.2
Wheat 32.1 59.3 106.0 -16.7 -78.9 n.a. -17.9
World Bank (1994) notes thatthedomestic price ofagricultural inputs isgenerally higher thantheborder
price, withasubsidy inthecaseoffertilizers. This make ERPs lower thanNRPs foralltheproducts
shown above, although theeffect varies according totheimportance oftradeable inputs intheproduction
ofeach crop. Forproducts such assoybeans, sugar andwheat thetaxeffect onfarmers through more
expensive inputs appears tobesubstantial.
Theimpact ofnon-price transfers isreflected intheERAs. Formost ofthecommodities shown above
theERAs arehigher thantheprice-based ERPs, reflecting significant non-price transfers. Such transfers
take mostly theform ofcredit subsidies anddirect transfers from theFederal, State andMunicipal
Governments.
6World Bank (1994), table IV.4.
7Bertrand (1994).Brazil WT/TPR/S/21
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Table VI.2
Public expenditure onagriculture andnatural resources, 1991
(US$ million andpercent)
Market interventions US$million Percent
Pricing andmarketing 835 8.9
Marketing boards 392 4.2
Credita3,398 36.2
Sub-total 4,626 49.3
Public goods
Crop production 42 0.4
Animal products 15 0.2
Extension 81 0.9
Natural resources 257 2.7
Research 546 5.8
Education 169 1.8
Infrastructure 794 8.5
Sub-total 1,904 20.3
Targeted programmes
Land reform 1,411 15.0
Water supply/health 311 3.3
Regional development 179 1.9
Sub-total 1,901 20.3
Administration 951 10.1
Total 9,386 100.0
a Gross value ofcredit programmes. (seemain textfordiscussion).
Source: World Bank (1994) Brazil -TheManagement ofAgricultural, Rural Development andNatural Resources, Volume II,p.121.
(iv) Developments inselected activities
29. Theoutput mixofBrazilian agriculture haschanged considerably since themid-1960s. Until
1988, sugar caneforenergy production, andexport crops, particularly soybeans andorange production
butexcluding cotton, experienced rapid growth. Certain important domestic staple foods experienced
slowexpansion orperiods ofdecline, withwheat becoming anotable exception asaresult ofGovernment
supporttoproductionandmarketingandbecauseofthepracticeofdouble-croppingwheatwithsoybeans.
After 1988, thisgrowth pattern wasaltered byeconomic liberalization, theendoftheStatemonopoly
onwheat acquisition andmarketing, andrevisions tothealcohol programme. Besides soybeans, orange
juiceandsugar cane, rapid growth hasalsocharacterized corn, riceandbeans. Incontrast, sugar cane
forenergy production, andwheat havelostdynamism during the1990s.
30. In1993, themaincrops byvalue ofproduction were, indescending order ofimportance, sugar
cane, soybeans, coffee, corn, orange juice, rice,manioc, beans, cotton andwheat withthevalue of
othercrops substantially lower. Ingeneral, agricultural production forthe1995/96 season wasexpected
toberoughly inlinewiththatoftheprevious years, anotably exception being coffee which hada
particularly poor1995/96 season.
31. Thefollowing sub-sections cover developments intheareasofsugar andalcohol, coffee, cocoa,
soybeans, wheat, oranges, livestock, meatanddairy, rubber andfishing.
(a) Sugar andalcohol
Sugar
32. Brazil istheworld 'slargest sugar caneproducer, output having reached arecord highofabout
240million tonnes in1994/95 mostly duetofavourable growing conditions. Sugar production hasWT/TPR/S/21
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alsoincreased during thepastthree decades, at11.7million tonnes in1994/95 placing Brazil among
theworld 'smajor sugar producers. Brazil 'scaneproduction isalsounique inthatitisnotprimarily
processed intosugar; closeto70percentofsugar canewasusedfortheproduction ofalcohol. Annual
domestic consumption amounts toabout 8.3million tonnes ofsugar and14.5million cubic metres
ofalcohol.
33. Thesugar industry hasbeendecisively shaped bygovernment policies, inparticular those
favouring theuseofalcohol-based overother transport fuels. Annual production quotas allocated to
firms anddistilleries haveregulated thelocation, sizeandspatial distribution ofthesugar canecrop.
Theexpansion ofsugar cane, mainly intheStateofSaoPaulo, contributed todisplace grain production
toother areas, increasing transport costs forgrains.8
34. TheGovernment initiated areview ofthesugar-alcohol regime inearly 1995, asaresponse
tobothBrazil sengagements during theUruguay Round andthedesire toreduce official intervention
inthesugar market. TheGovernment hasceased itsparticipation indomestic marketing andmost
price controls affecting theindustry havebeenremoved, withprices paidtosugar caneproducers and
those onstandard sugar andalcohol forfuelexpected tobeliberalized inJanuary 1997. However,
sugar andalcohol exports arestilllimited byexport taxes withproduction exceeding domestic needs
being granted partial ortotalexemptions from thetax(Chapter IV(2)).
35. Brazil sugar exports haveincreased dramatically inrecent years, despite thesystem ofexport
taxes. Thesame system wastoapply tosugar exports in1995/96, butchanges arelikely afterthe
expected de-control ofsugar andalcohol prices inJanuary 1997. Further liberalization ofthesugar-
alcohol complex could potentially result inlargeexport increases, because Brazil hasaclearcomparative
advantage intheproduction ofbothsugar caneandrefined sugar, ofwhich itistheworld 'slowest
costproducer.9Ithasbeenestimated thatBrazilian sugar exports areprofitable atprices aslowas
US$0.09 perpound, compared withinternational prices inearly 1996ofsome US$0.12 perpound.10
36. Brazil isamember oftheGroup ofLatin-American andCaribbean Countries Exporters of
Sugar(GEPLACEA)andoftheInternationalSugarOrganization.GEPLACEAsactivitiesfocusmainly
onthedissemination ofinformation andcoordination ofdevelopment projects infavour oftheregional
sugar industry, while theInternational Sugar Organization provide aforum forproducer andconsumers
todiscuss sugar policies. Bothorganizations haveundergone considerable changes inrecent times
tostreamline theiradministration andtrytoplayamore effective roleinaliberalized environment
where theprivate sector isincreasingly important.
Alcohol
37. Brazil 'sNational Alcohol Programme (PROALCOOL) wasinstituted in1975 following the
major oilpriceshock andamidst concerns about dependence onexpensive foreign oil.Theprogramme
began withtheexpansion oftraditional sugar areas anddistillation ofanhydrous alcohol forblending
withgasoline, inplants annexed toexisting mills. Thiswasfollowed byproduction ofhydrous alcohol,
foruseinalcohol-only engines, inautonomous distilleries located nearnewsugar caneregions and
8Thebudgetary andsocial costs associated withsuchpolicies havebeendescribed ashigh(Brand ão,1994).
9World Bank (1994), p.58.Seealsofollowing alcohol section.
10Gazeta Mercantil ,24April 1996.Brazil WT/TPR/S/21
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thenbycapacity expansions. Alcohol production expanded from practically nilin1975 toabout
12.7million cubic metres in1994/95.
38. International anddomestic circumstances havechanged dramatically fromwhen PROALCOOL
wasintroduced. Relatively largeoildeposits havebeendiscovered inBrazil andinternational oilprices
havefallen. A1994World Bankreport notes thatthesedevelopments havemarkedly reduced thevalue
ofethanol asagasoline substitute andthatBrazil nolonger hascomparative advantage asaproducer
ofasubstitute fuelforgasoline.11
39. These developments haveovershadowed theadjustments made toPROALCOOL. TheWorld
Bank's1994report estimates thatalthough production costshavebeenfalling ethanol production costs
stillreachsomeUS$32perbarrelinthecentre-southandaround18percentmoreinthenorth-northeast;
adjusting these costs forethanol 'slesser efficiency asafuelcompared withgasoline, ethanol 'scost
risetoabout US$40 perbarrel, orsome 40percentmore thanthecostofthegasoline itdisplaces.
TheauthoritiesindicatedthatmorerecentestimatesofalcoholpricesareapproximatelyUS$60perbarrel
forSaoPaulo andUS$75 perbarrel forthenorth-northeast (notincluding theServices andMerchandise
Circulation tax-ICMS); while adirect costpricecomparison wasnotavailable, itappears fromthese
dataanddiscussions withtheauthorities thatthecostdifferential between gasoline andethanol has
increased. Despite extensive Government intervention (seeGATT 1992), theindustry hasincurred
large debts withBanco doBrazil, estimated atsome R$4.6 billion inearly 1996; theGovernment
hasapparently committed itself tohelptorenegotiate those debts.
40. TheWorld Bank's1994report hasalsoestimated thatelimination ofPROALCOOL could result
inanincrease inannual sugar exports ofbetween 3million and20million tonnes. Thiswould make
Brazil thedominant exporter ontheworld market, butitwould alsodepress world sugar prices.
Depending onthemagnitude ofthisprice response, Brazil could nevertheless attain welfare gains of
between US$660 million andUS$2,500 million ayear. TheWorld Bank report suggests thatBrazil 's
change inpolicies would result inlarge benefits toBrazilian sugar producers andconsumers, aswell
astoworld sugar consumers.12Theauthorities noted thatifallthesugar canecurrently converted
intoalcohol wereinstead usedforsugar production, some additional 15million tonnes ofsugar could
beproduced; however, thecountry doesnotpresently havetheproduction capacity required torefine
suchadditional volumes.
41. Theexistence ofPROALCOOL hasalsocomplicated theliberalization ofthemonopoly in
thepetroleum market, asthenational oilcompany (PETROBRAS) alsohasresponsibility forthealcohol
programme. Alcohol iscross-subsidized bytheconsumers ofgasoline andlubricants whose prices
aresetathighlevels tomaintain thecompetitiveness ofalcohol. Suchcross-subsidization isestimated
atsomeR$160 million permonth. Thisarrangement hasallowed PETROBRAS toargue thatthemarket
cannot beopened toforeign competition before analternative source offunds forPROALCOOL is
found.13
11World Bank (1994), p.58.
12Eliminating thedistortions associated withcurrent policies could alsocarry major implications toother
sugarproducingcountriesfacingincreasedcompetitioninworldmarkets,theirannuallosseshavingbeenestimated
atbetween US$3 billion toUS$10 billion.
13Gazeta Mercantil ,19March 1996.WT/TPR/S/21
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42. Theindustry wasinatransition period inearly 1996, pending theliberalization ofsugar and
alcohol prices inJanuary 1997andagovernment decision onfuture policies towards PROALCOOL.
Alternatives under consideration included an"environmental" taxongasoline tofundPROALCOOL
andtheestablishment ofagreen fleet. Theenvironmental taxwould permit pricing alcohol -arelatively
clean fuel-atalevelhighenough tocover costs, while making gasoline users payapremium forthe
useofapolluting fuel. Another option under consideration wasanincrease intheServices and
Merchandise Circulation Tax(ICMS) onpolluting fuels. TheGovernment 'scurrent emphasis onthe
environmentaladvantagesofalcoholreflectstherecognitionthattheoriginalrationaleforPROALCOOL
nolonger exists. Besides theenvironment, current priority objectives relate totechnological know-how,
particularly fortheuseofarenewable resource, andpreserving thejobscreated bytheprogramme.
(b) Coffee
43. Coffee oncedominated Brazilian exports, butitsshare intotalexports felltosome 6percent
in1994(coffee ingrain accounting for5.1percentandinstant coffee for0.8percent). Nevertheless,
Brazil remains theworld 'slargest coffee producer andexercises considerable influence overtheworld
market; anydecline inBrazil 'sexport volumes tends tobepartially compensated byhigher world
prices. Coffee production andexports tendtofluctuate widely; inearly 1996 coffee production had
yettorecover from thefrosts thatreduced the1995-96 harvest to12.5million (bags of(60kg.), or
lessthanhalfitsexpected volume. Theshare ofprocessed coffee intotalcoffee exports hasincreased
from around 2percentinthemid-1960s toover20percentinrecent years involume terms.
44. Brazil istheonlycoffee producing country thatisalsoamajor consumer: demand inBrazil,
thesecond biggest market intheworld aftertheUnited States, isaround 10million bagsayear.
Domestic stocks weresolowinearly 1996 thatcoffee roasters werepreparing theirfirsteverimport
ofcoffee fordomestic consumption. Theexpected volume wasverysmall, butitwasconsidered only
atestthatcould befollowed byadditional imports.14
45. Brazil isamember oftheAssociation ofCoffee Producing Countries (ACPC -BoxIV.3).
Thecoffee market inBrazil hasbeenderegulated andsupport measures eliminated. Until itsdissolution
in1990, theBrazilian Coffee Institute (IBC) wascharged withtheadministration ofdomestic minimum
prices forcoffee, coffee stocks andcoffee exports, thelatter being usedtomeetthequota restrictions
oftheInternational Coffee Agreement, aswellasthecollection ofanexport tax.
(c) Cocoa
46. Brazilian cocoa production hasdeclined considerably sincethe1980s, when production varied
between 300,000 to400,000 tonnes; 1994/95 output wasexpec toamount toonly220,000 tonnes.
Nevertheless, Brazil remains theworld 'sfourth major exporter ofcocoa products (past/liquor, butter
andpowder);themainexportmarketsaretheNetherlandsandtheUnitedStates.Domesticconsumption
isbyfarthehighest among producing countries; alarge domestic processing industry absorbs over
40percentofthecountry 'sproduction.
47. ThereasonsforthedeclineoftheBraziliancocoaindustryaremostlyrelatedtounder-investment
andafungus (witches 'broom) ravaging plantations. Theeffect oflowinvestment onBrazil 's
international competitiveness hasbeenmagnified byheavy investment byother cocoa producers (i.e.,
Malaysia andIndonesia).
14Financial Times, 20March 1996.Brazil WT/TPR/S/21
Page 133
48. Cocoaproductionismarketedwithoutdirectgovernmentintervention.Brazilisanactivemember
oftheInternational Cocoa Organization (ICO -BoxIV.3). Theauthorities indicated thatBrazil would
continue toseek,within theWTO framework, theremoval oftariffs imposed onBrazilian cooca exports
bytheEuropean Union.
(d) Soybeans
49. SoybeanproductsareamongBrazil'smostimportantagriculturalproducts.Thesoybeancomplex
ismade upofthree inter-related commodities: soyaingrain, soyaoilandsoyameal(oilandmeal
areco-products). Brazil 'ssoybean production expanded rapidly from1960, reaching some24.5million
tonnes in1995/96 withavalue ofabout US$5.6 billion. Brazil istheworld 'ssecond largest exporter
ofsoybeans, aftertheUnited States; themain export markets areGermany, Japan, theNetherlands
andSpain. Imports ofoilseeds andtheirproducts arelow.
50. Productionincreaseswerealsoaccompaniedbyrapidgrowthindomesticconsumption,soybeans
becominganimportantdomesticstaple,primarilyassoybeanoil(whichhasdisplacedimportedvegetable
oils)andsecondarily asfeedmeal forBrazil 'simportant poultry industry. Other factors thathave
favoured theexpansion ofsoybean production include growth oftheworld market andthefactthat
Brazil'ssoybeancropcomestomarketduringwinterintheUnitedStates.Moreover,Braziliansoyameal
hasbenefited from bothacompetitive price andahighprotein content, animportant factor inthe
European market. Although official support hasbeenprovided tosoybean production, mainly through
subsidized credit andresearch activities, thisseems tohavebeenmore thanoffset bytheburden of
domestic andexport taxes.
(e) Wheat
51. Wheat cultivation began inthemid-1960s, increased to1.7million tonnes in1970andreached
2.7million in1995/96. However, theinitial, official goalofself-sufficiency wasnotattained and
hasnowbeenabandoned. Strong prices areamong thefactors thathavestimulated wheat production,
which wasexpected toincrease substantially in1996. Consumption isestimated atsome 8.6million
tonnes, most ofwhich issupplied byimports. Thismakes Brazil theworld 'ssecond largest wheat
importer (after China): between August 1995andJuly1996, Brazil imported justover6million tonnes,
atacostofsome US$1.8 billion.
52. Thegovernment monopoly onwheat imports anddomestic wheat saleswasdismantled in1991;
domestic wheat processing, formerly tightly controlled through quotas tomillers, wasalsoliberalized.
Theauthorities indicated thatBanco doBrasil nolonger participates inthebuying orselling ofwheat
asthisactivity wasprivatized in1990. Wheat imports havebeencarried outexclusively byprivate
firms since 1992.
53. Brazil maintained until1994aspecial arrangement withArgentina fortheimportation ofwheat
covering 2million tonnes ayear; since theestablishment ofMERCOSUL inJanuary 1995thistrade
isdutyfree. Thezero-rated quota onwheat hasalsobeenwithdrawn (Chapter III(2)).
(f) Oranges
54. Brazil istheworld 'slargest producer andexporter offrozen concentrated orange juice, such
saleshaving started onlyin1962. Foreign investors financed asignificant partoftherequired processing
capacity. More thantwothirds oftotalproduction isexported, orange juiceexports reaching avalue
ofsome US$1.1 billion in1995; themain export markets fororange juiceareBelgium, Japan, theWT/TPR/S/21
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Netherlands andtheUnited States. Theauthorities noted thattheimportance oftheU.S.market has
declined duetothehightariffs applied inthatmarket. Inthepast,thegovernment supported theindustry
through thesetting ofminimum prices forexports ororanges onthetree,orbyproviding softcredit
tocitrus producers. Anumber oftrade measures inforeign markets affect Brazilian products
(Chapter IV(3)).
(g) Livestock, meatanddairy
55. Livestock production makes upnearly 40percentofagriculture 'scontribution toGDP, but
employs onlyalittlemore than25percentoftheagricultural labour force.15Beefanddairy account
forabout three fourths ofalllivestock output. TheBrazilian cattle herd, some 169million headin
1996,isoneoftheworld'slargest.Brazilianlivestockproductionisextensive,usingsomethree-quarters
ofthetotalagricultural landarea. Ascattle areraised predominantly inpastures, theindustry is
independent ofthegrains sector forinputs.
56. Poultry production isalsoimportant, having grown considerably during thepastthreedecades
andplacing Brazil among theworld 'sfivelargest poultry exporters.
57. Domestic beefneeds aremetbyinternal production andimports, mostly fromMERCOSUL
countries, withnogovernment participation. TheGovernment guarantees minimum levels ofdomestic
supply byreducing import tariffs onmeat when supply from MERCOSUL falls. Ingeneral, there
isnogovernment intervention withrespect toprices, although therehavebeenshort phases ofofficial
controls inthecontext ofmacro economic stabilization programmes. Brazil holds anexport quota
forhighquality beef(known asHilton beef) totheEuropean Union (Chapter IV(3)).
58. Brazil isanetimporter ofdairyproducts, mostly intheformofpowder milk, cheese andbutter.
59. BrazilparticipatedintheMTNArrangementRegardingBovineMeatandtheInternationalDairy
Arrangement under theGATT; Brazil isaparty totheWTO International Bovine Meat Agreement
andhassigned, butnotyetratified, theInternational Diary Agreement. According totheauthorities,
thedateforsuchratification isuncertain duetothebusyagenda oftheNational Congress.
(h) Rubber andother forestry
60. Thelegalframework forpolicy concerning rubber isestablished byLawNo.5,227 of1967.
TheNational Rubber Council ischarged withestablishing regulations fortherubber industry through
resolutionsanddirectives.TheBankofAmazoniaandBancodoBrazilarethetwoorganizationscharged
with collecting theTaxfortheOrganization andRegulation oftheRubber Market (TORMB -
ChapterIII(3))onbehalfoftheBrazilianInstitutefortheEnvironmentandNationalResources(IBAMA).
Regulations fortheindustry were recently modified through Normative Directive No.111of
29December 1995, Directive No.116of29December 199andProvisional Measure No.1264 of
12January 1996.
61. Law No.5227 provides fortheuseofgovernment support prices, butrubber producers are
freetoselltoprocessors atmarket prices ortoexport. Thelawestablishes areserve stock equivalent
toatleasteight months ofimports ofnatural rubber, intended tohelptoregulate therubber market.
Thelawalsomakes provisions toensure supplies tosmall firms (with yearly consumption ofupto
15World Bank (1994), p.18.Brazil WT/TPR/S/21
Page 135
100tonnes), andforloans inkindtoindustries inemergency situations. Thestock programme is
managed byIBAMA. Inpractice thereserve stock isminimal, theauthorities considering thatthe
stability oftherubber market doesnotwarrant thecostofalarger stock, especially inviewofcurrent
fiscal limitations. Reference prices areusedtoensure anadequate revenue toproducers. Suchprices
havebeensetbyaseries ofpublic agencies; currently theyareproposed byIBAMA andapproved
bytheMinistry ofFinance, which publishes therequired regulations.
62. Aquota system isusedtoensure thatindustry acquires thedomestic rubber production, as
established inLawNo.5227 andDirective IBAMA No.110of29December 1995. Currently, the
system requires consumers touse44percentofdomestic rubber.
63. Brazil isamajor producer ofseveral other forestry products, including large quantities of
charcoal andfirewood. Brazil isanetexporter ofwood; other major exported items included shaped
lumber andplywood. Sawn wood exports ofcertain species aresubject toquotas established byIBAMA
(Chapter IV(3)).
(j) Fishing
64. Thefishing sector contributes onlyabout 0.4percenttoBrazil 'sGDP. Itsmain importance
relates tosocial andenvironmental factors, fishing being animportant source offoodinrural areas
andgenerating some600,000 jobs. Themajor export markets aretheUnited States, Japan andEuropean
countries, mainly forfrozen lobster andshrimp.
65. There isnospecific, systematic policy forthefishing sector, although efforts arebeing made
tostructure thesector sactivities within asustainable development framework. AnExecutive Group
fortheFishing Sector (GESPE) wascreated inlate1995 topromote suchdevelopment; theNational
Information System forFishing andAquaculture (SINPESQ) wasestablished alsoatthattimetoreverse
thedeterioration ofavailable dataonthesector. Brazil maintains nosystem offishing quotas, although
theBrazilian Institute fortheEnvironment (IBAMA) controls fishing ofcertain species during the
breeding season. Theauthorities indicated thatnomeasures wereusedtosupport orregulate theprice
offishproducts, although measures toregulate fishprices were being studied byGESPE.
(3) Mining
(i) Main features
66. Themining sector contributes almost 2percentofGDP, while theprocessing ofminerals by
themanufacturing sector (e.g., metallurgy, cement andpetrochemicals) contributes afurther
10percentagepoints.Miningalonegeneratesdirectlyabout90,000jobsintheformaleconomy;mineral
processing creates anadditional 800,000 suchjobs. Itisestimated thattheinformal mining sector
employs approximately 500,000 workers. Thevalue ofmineral production hasincreased slightly over
recent years, reaching some US$11.6 billion in1994.
67. Brazilhashugeironorereserves,estimatedatsome18billiontonnes;italsohasprovendeposits
of208million tonnes ofmanganese, 2billion tonnes ofbauxite and53million tonnes ofnickel (to
which recent discoveries could add400million tonnes). Inrecent years, theexistence oflarge, high-
grade uranium reserves hasbeenconfirmed. Brazil isalarge producer ofbauxite, gold, ironore,
kaolin, manganese, tinandmany industrial minerals. Thecountry produced 90percentoftheworld 's
supply ofgems, suchasaquamarine, topaze, amethysts, tourmalines andemeralds.WT/TPR/S/21
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68. Brazil 'smineral resources remain under-exploited. Thisisinparttheresult ofpastpolicies
thatdiscouraged investment inthesector. Inparticular, the1988 Constitution limited foreign
participationinminingoperationsto49percent.Inthewakeofthatrestrictioninvestmentinexploration
dropped from US$159 million ayearintheperiod 1980-88 toaround US$50 million intheperiod
1989-96.16Theremoval in1995oftheconstitutional prohibition onforeign control ofmining operations
isexpected topromote renewed interest inthesector.
(ii) Policy objectives andinstruments
69. Mining activity ingeneral isregulated bytheMining Code of1967; specific regulations cover
environmental protection, mining royalties, small-scale andartisanal mining, quarrying andlandowner
rights. The1988Constitution grants theFederal Government ownership ofallmineral resources, over
which concessions maybegranted forexploration andextraction. Onthisbasis, theState monitors
andcontrolsthetechnical,fiscalandenvironmentalaspectsofminingproduction.Nospecialdispositions
affect thecommercial aspects ofmineral production andtrade. However, special rulesaffect radioactive
minerals forsecurity concerns, withtheirproduction andtrade being afederal monopoly.
70. Current government policies towards themining industry aresetoutintheMulti-Annual Plan
fortheDevelopment oftheBrazilian Mining Sector (PPDSM) of1994. These policies aimtorestructure
andconsolidate thesector sfederal administration, update andstreamline itslegal framework and
foster development through measures suchasgreater productivity, integration inregional development
programmes,reductionofenvironmentalimpacts,andamoredetailedknowledgeofthemineralresources
base.
71. Mining policies arepursued within theguiding principles ofsustainable development, regional
development, economic competitiveness, andsovereignty. Regional development objectives seekto
usemining concessions tohelpimprove economic activity andjobcreation inthehinterlands while
avoiding thecreation ofenclaves. Theprinciple ofeconomic competitiveness callsfortheState to
create andmaintain aninternationally competitive business climate formining ventures, especially in
relation totaxation andtheprovision ofinfrastructure. Theprinciple ofsovereignty requires the
production andtrade ofminerals nottoundermine national sovereignty, including thestrict respect
ofconstitutional andlegaldispositions.
72. According tothePPDSM, meeting rapidly growing domestic demand forminerals willrequire
investment inthemining industry ofsome US$35 billion. Theauthorities estimate thatgiven the
country 'sgeology, thepotential fordevelopment ofthegold, basemetals, diamond, gemstones and
industrial minerals sectors isenormous. Inviewofthis,theGovernment iscurrently developing a
programme toimprove theinvestment environment fordomestic andforeign private capital asattract
therequired investment.
73. Inthepetroleum sector, Constitutional Amendment No.9ofNovember 1995, modifying
Article No.177oftheConstitution, hasopened upthesector toincreased private participation. The
AmendmentmakesitpossiblefortheFederalGovernmenttoengageprivatecompaniesintheexploration
andextraction ofpetroleum andnatural gas,petroleum refining, import andexport ofrefined petroleum
products, andthemaritime transport ofhydrocarbons. Therequired regulations weresenttoCongress
inJuly1996.
16Financial Times, 22April 1996.Brazil WT/TPR/S/21
Page 137
(iii) Developments inselected mining activities
(a) Non-fuel minerals
74. Brazil isoneoftheworld 'slargest producers andexporters ofironore.Production reached
close to168million tonnes in1994; ironoreproduction isdominated bytheGovernment-owned
Companhia ValedoRioDoce (CVRD -BoxVI.2), which isbeing considered forprivatization. Brazil 's
ironoreexports reached arecord levelof131million tonnes in1995, anincrease of6million tonnes
relative to1994. Asvolume increases were accompanied bystronger prices, revenues grew from
US$2.3 billion in1994tosome US$2.5 billion in1995. Main export destinations areBelgium, China,
France, Germany, Italy, Japan, theRepublic ofSouth Korea, Spain andtheUnited States.
75. Gold production hascontinued toincrease, amounting toatotalofabout 70tonnes in1993.
Thearrival ofnewfirms ishastening themodernization ofgoldmining, much ofwhich wascarried
outbyinformal-sector miners, "garimpeiros ",working surface deposits; fromapeakofabout 300,000
in1989, thenumber ofgarimpeiros hasdwindled assurface mines havebeenexhausted. Alarge but
variable share ofthedomestic production isexported; mainexports destinations areGermany, Japan,
Switzerland andtheUnited States.
76. Brazil isoneoftheworld 'slargest tinmetal exporters, despite fallshaving brought production
toslightly lessthan17,000 tonnes ofprimary metal in1994. Most oftheproduction isexported;
themain export destinations are,indecreasing importance, theUnited States, theUnited Kingdom
andArgentina. Tinissubject toexport quotas established inaccordance withtheAssociation ofTin
Producing Countries, where Brazil hasobserver status (Chapter IV,BoxIV.2). Brazil hasalsobecome
asignificant producer andexporter ofbauxite andaluminium. In1995, themain export markets for
aluminium wereJapan, theUnited States, theNetherlands andtheRepublic ofKorea; main markets
forbauxite weretheUnited States, Canada andUkraine. Thecountry 'scopper output hasincreased
significantly sinceitstarted in1982, withmostproduction aimed atthedomestic market; thedomestic
copper market wasliberalized in1989.WT/TPR/S/21
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BoxVI.2: Companhia Vale doRioDoce (CVRD)
CVRD isoneoftheworld 'sbiggest natural resource groups andBrazil 'slargest exporting company.
Founded during theSecond World Wartoprovide ironoretotheU.S. steel industry, thecompany isthe
world 'slargest iron oreproducer andexporter. Itowns mining andexploration rights worth an
estimated US$40 billion. CVRD 'sironorereserves amount tosome 41billion tonnes, mostly located in
theCarajás mountain range intheeastern partoftheAmazon; identified deposits aresufficient tosupply
ironoredemand forhundreds ofyears. In1994, thecompany 'snetprofit amounted toR$546 million
andoperational revenues toR$2,429 million.
Thecompany produced 67.1 million tonnes ofiron orein1992, 72.6 million tonnes in1993 and
79.4 million tonnes in1994. CVRD 'smain export market isJapan, where ithastoface strong
competition from Australian ironoreproducers. CVRD hasdiversified tobecome Latin America 's
biggest gold producer. Gold production amounted to11.3 tonnes in1992, 12tonnes in1993 and
13.5 tonnes in1994.
CVRD isoneofBrazil 'slargest aluminium smelters andhassignificant stakes inBrazil 'sbiggest steel
companies. Thegroup isalsoinvolved inforestry, mainly growing trees forpaper pulp. CVRD has
interests inrail,portandshipping facilities, which itbuilt foritself butwhich now carry third-party
traffic. In1994 thegroup 'srailsystem handled more cargo thantherestofBrazil 'srailways combined.
The company 'sshareholdings inthealuminium industry include Alunorte, 54percent; Albrás,
51percent; MRN, 40percent; Valesul, 50percent. Inforestry, CVRD hasholdings inBahia Sul,
22percent; Celmar, 43percent; andCenibra; while insteel such holdings include Usiminas steel,
8percent; CSN steel, 9.4percent; CSTsteel, 22percent; CSI, 50percent; Açominas, 5percent;
Siderar, 5.3percent; Nova EraSilicon, 49percent; andSEAS, 35percent. CVRD 'sparticipation in
mining covers ironore,bauxite, manganese, gold, copper, kaolin, andpotash. Other activities include
fertilizers; bulkcarriers (Docenave); andports (Tubar ão).
CVRD hasbeen valued atjustoverUS$10 billion, distributed asfollows (estimated value inUS$billion
between parentheses): ironore(4.8), steel (1.0), bauxite andaluminium (1.4), railroads (1.2), shipping
(0.5), paper andcellulose (1.2), gold (1.9). Other assets arevalue atsome US$530 million while the
company 'sdebtamounts toUS$2.2 billion.
Thecompany isconsidered efficient byworld standards. Theimplementation ofvoluntary redundancy
programmes hasreduced thelabour force byonethird, from 23,415 in1989 to15,452 in1995.
However, additional jobsmight have tobeshed tomaintain competitiveness.
TheGovernment hasreduced itsstake inthecompany overtheyears. The49percentoftheshares not
owned bytheState aresplitbetween local pension funds, Brazilian private investors andforeigners. The
planned privatization ofCVRD isexpected tobeLatin America 'sbiggest privatization. Themain
argument forprivatization hinges ontheGovernment 'sdifficulties insupplying theadditional capital
required toexpand thecompany 'sactivities. Moreover, asaprivate company, CVRD would have more
freedom toinvest innewprojects, setupjoint ventures ormove intonewareas.
TheGovernment istrying tostrike abalance between obtaining agood price forthesaleandmeeting
other, mainly social objectives. Forexample, thecompany 'sstatues stipulate thatitshould transfer upto
8percent ofitsnetprofits intohealth, environmental andinfrastructure projects inareas where it
operates. These arepartdonation, partloan, and,in1994, totalled US$22 million.
Source: Financial Times, 15November 1995 and Gazeta Mercantil ,8and28December 1995 and
Brazilian authorities.Brazil WT/TPR/S/21
Page 139
(b) Hydrocarbons
77. Brazil 'soilproduction hascontinued toincrease inrecent years, reaching some 730,000 barrels
perdayin1994, andjustover780,000 barrels perdayinMarch 1996. Most production takes place
intheAtlantic Campos Basin offRiodeJaneiro, where thedepth ofwells canapproach 1,000 metres.
Thecountry hasproven reserves of5.8billion barrels ofoilequivalent, enough for20years production
atcurrent levels (onPETROBAS 'scriteria).
78. The1988Constitution established amonopoly fortheFederal Government intheprospecting
andexploitation ofdeposits ofpetroleum, natural gasandother fluidhydrocarbons. Themonopoly
extended totherefining ofbothdomestic andimported petroleum, theimport andexport ofpetroleum
products andderivatives, andthemaritime transportation ofdomestic crude oilorderivatives aswell
asthepipeline transportation ofcrude oil,itsderivatives andnatural gasofwhatever origin. TheState
monopoly isexercised through Petroleo Brasileiro, S.A.(PETROBRAS) ofwhich theGovernment
mustholdatleast51percentofthevoting shares. PETROBRAS hassalesofabout US$18 billion
andisaworld leader indeep seadrilling. Thecompany isalsoregarded asover-staffed and
under-capitalized;17however,thestaffisbeingreducedthroughaprogrammeofvoluntaryredundancies.
79. Brazil 'sdependence onimported petroleum andrefined oilproducts hasbeensharply reduced
through theethanol fuelprogramme (section (2)(iv)). Asthepetroleum refining capacity inBrazil
hasbecome sufficient tomeetthecountry 'srequirements, imports ofrefined petroleum products have
become concentrated onliquified petroleum gasanddiesel. There arethreepetrochemical complexes,
located inthestates ofBahia, RioGrand doSulandSaoPaulo, withanoverall totalethylene production
capacity of1.4million tonnes peryear. Both local andforeign private companies areallowed to
participate indistribution activities.
80. Brazil exports some 20percentofitsgasoline production. Exports reached US$250 million
in1993 andUS$300 million in1994, butfellbysome US$40 million in1995. TheDirector of
PETROBRAS Commercial Activities attributed thisfalltonewstandards intheUnited States market
curtailing Brazilian salesinthatmarket; PETROBRAS redirected some production toother markets
butthese sales tookplace atlower prices.18Attherequest ofVenezuela andBrazil, theDispute
Settlement Body oftheWTO established apanel inApril 1995 ontheUnited States standards for
reformulated andconventional gasoline. ThePanel found thattheU.S.regulations werenotconsistent
withGATT Article III:4(equal treatment ofimported anddomestic products) andcould notbejustified
under paragraphs (b),(d)and(g)ofArtilce XX(general exceptions necessary toprotect lifeorhealth,
comply withregulations notinconsistent withtheGATT, orrelating totheconservation ofexhaustible
natural resources). InFebruary 1996, theUnited States filedanappeal totheAppellate Body, whose
report modified thepanel report ontheinterpretation ofArticle XX(g) butleftintact thePanel's
conclusions. TheAppellate Body recommended thattheUnited States berequested tobring its
regulations intoconformity withtheGeneral Agreement.
81. Inview oftheConstitutional amendments of1995, theGovernment hasproposed creating
anautonomous regulatory agency, theNational Petroleum Agency (ANP), replacing theexisting Fuels
National Department (under theMinistry ofMines andEnergy). TheANP would beresponsible for
preparing anational energy plan, foroverseeing petroleum exploration andextraction, aswellasfor
17Latin American Weekly Report, 9November 1995.
18Gazeta Mercantil ,26February 1996.WT/TPR/S/21
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regulating allactivities linked totherefining, transport, import andexport offuels. TheNational
Petroleum Policy Council would beestablished toformulate policies forthesector.
82. Theproposed regulations would openallareasnotcurrently under exploration byPETROBRAS
tobidding byprivate companies andPETROBRAS itself. Where PETROBRAS makes adiscovery
ofaviable field, itwillhavethree years todevelop it,afterwhich itwould beopentotender. The
national oilcompany would alsoretain control ofexisting refineries andgasprocessing plants, but
private involvement innewrefineries would beallowed subject totheapproval oftheANP. Refineries
anddistributors could import andexport petroleum andgassubject toANP authorization. According
tosome estimates, thenewlawcould double thelevelofannual investment inthepetroleum sector,
currently US$2 to3billion.
83. Restrictions ontheuseofnatural gasasfuelforengines were eliminated inJanuary 1996.
Theimmediate aimwastoprovide analternative fuelwhich wasbothlessexpensive andlesspolluting.
Longer termobjectives included attracting foreign firms interested inexploring forgasreserves in
Brazil. Previously, natural gascould onlybeusedfortaxis, omnibus andcompany fleets, covering
atotalofsome 14,000 units; expectations were thattheliberalization would result ingas-powered
vehicles reaching some 150,000 units bytheyear2002.
(4) Manufacturing
(i) Main features
84. Themanufacturing sector, including mineral processing, accounts forsome 25percentof
Brazil sGDP. Thesector generates about 5.8million jobs. Interms oftheircontribution tototal
manufacturing GDP, chemicals, pharmaceuticals, cosmetics andplastics asagroup areofparticular
importance accounting for18.6percent, ofwhich chemicals contributed twothirds (Table VI.3).
Other important groups included foodproducts andbeverages (where foodproducts accounted forsome
85percentofvalue added), metallurgical andmechanical engineering activities. Ingeneral, there
hasbeenlittlechange intheGDP shares ofmain industry groups since 1990.
85. Interms ofemployment, textiles, clothing andfootwear asagroup arebyfarthemostimportant
activities,closelyfollowedbyfoodproductsandbeverages(TableVI.3).Textilesandclothinggenerated
about three quarters ofemployment within thefirstgroup, where jobnumbers tended tofallbetween
1990and1994.Jobnumberstendedalsotofallinmostothermanufacturingindustries,totalemployment
inmanufacturing falling from anaverage ofsome 6.4million in1990 toslightly under 5.8million
in1995 (January-October).
86. Incontrast withemployment, manufacturing output hastended toincrease strongly since1992,
especially forproducts suchasmotor vehicles, tyres, fertilizers anddomestic electrical goods. However,
inafewactivities output hasstagnated orfallen, suchasintextiles andfootwear (Table VI.4). Strong
domesticdemandhasresultedinrisingimportsformanyimportantmanufacturedgoods,withparticularly
sharp increased formotor vehicles, textiles andclothing. Export performance appears more uneven,
withthevalue offoreign salesofproducts suchasmotor vehicles tending tofallwhile thatofpaper
hasrisen markedly.Brazil WT/TPR/S/21
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Table VI.3
Value added, employment andestablishments inmanufacturing
(Percent)
Value added
(1994)Employment
(1994)Establishments
(1991)
Non-metallic mineral 4.5 5.5 8.3
Metallurgy 11.4 10.1 10.3
Mechanical engineering 14.2 6.6 5.4
Electrical equipment 8.2 4.6 3.2
Transport equipment 8.9 5.7 1.8
Wood products andfurniture 2.4 7.8 14.7
Paper, paper products 6.4 6 6.9
Rubber, tobacco andleather 3 7.1 1.9
Chemicals, pharmaceutic 18.6 9.2 6
Textiles andclothing 7.6 19.8 27.4
Food products andbeverages 14.7 17.4 14.1
Source: Ministry ofLabour; andBrazilian Insitute ofGeography andStatistics.
Table VI.4
Production, imports andexports inselected manufacturing industries
Domestic Production
(Thousand tonnes)
1992 1993 1994 1995
Motor vehiclesa1,073,861 1,391,435 1,581,389 1,635,389
Tyresa30,304,708 31,795,672 33,820,299 35,614,857
Footwearb485,000 525,110 590,439 480,000
Clothingc5,488,333 5,554,064 6,555,470 7,358,802
Textiles 950 1,003 1,043 ...
Fertilizers 5,544 6,337 7,146 6,473
Cellulose 5,302 5,471 5,829 5,902
Paper 4,901 5,301 5,654 5,856
Cement 23,902 24,815 25,230 28,225
Refrigeratorsa... 1,643,246 2,423,396 3,031,247
Video cassette recordersa... 808,829 1,234,150 1,923,745
Colour televisionsa2,354,000 3,293,824 4,984,883 6,065,972
Imports
(Tonnes andUS$thousand)
1992 1993 1994 1995
Value Volume Value Volume Value Volume Value Volume
Motor vehiclesa338,906 36,739 879,278 81,990 1,840,633 193,101 3,861,111 411,576
Tyresd21,322 ... 48,508 ... 103,264 ... 222,393 ...
Footwearb18,937 1,382 41,166 3,339 89,014 8,972 210,872 25,444
Textiles 496,323 231,092 1,131,467 616,739 1,222,814 530,191 1,934,754 2,006,785
Clothing 43,524 6,712 52,710 7,001 115,941 17,172 384,602 101,258
Fertilizers 441,052 5,398,156 510,534 4,942,155 633,897 5,459,258 659,536 4,642,798
Cement 7,596 115,416 7,486 113,717 15,671 245,831 24,344 436,822
Paper 221,756 236,615 275,638 318,707 381,229 479,785 920,752 805,579
Cellulose 48,344 102,730 65,017 172,879 74,570 151,519 172,800 235,758
Refrigeratorsa1,735 2,268 3,566 6,901 8,475 34,825 52,030 150,217
Colour televisionsa7,730 30,410 12,150 50,453 36,913 129,541 91,638 445,109
Video cassette
recordersa22,55 73,946 13,798 97,956 24,866 55,600 25,906 103,863
Table VI.4 cont'dWT/TPR/S/21
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Exports
(Tonnes andUS$thousand)
1992 1993 1994 1995
Value Volume Value Volume Value Volume Value Volume
Motor vehiclesa1,630,949 341,920 1,431,989 336,005 1,413,780 382,655 1,075,145 280,631
Tyresd356,779 14,396 399,567 13,413 442,774 13,799 461,812 13,986
Footwearb1,473,450 158,162 1,931,795 198,280 1,624,087 165,440 1,498,811 137,974
Textiles 892,245 347,948 713,022 282,618 795,462 299,069 914,532 321,064
Clothing 577,127 55,512 677,577 72,128 161,001 54,655 532,215 43,337
Fertilizers 39,142 291,742 46,023 343,250 36,553 224,784 63,169 312,752
Cement 6,792 58,283 8,386 124,145 6,197 122,377 7,422 135,196
Paper 709,146 1,240,017 797,413 1,423,672 942,329 1,529,728 1,229,536 1,222,862
Cellulose 741,081 1,677,648 718,439 2,410,183 851,333 2,074,513 1,475,408 1,983,775
Refrigeratorsa91,004 586,127 131,043 719,674 86,005 466,605 85,636 410,492
Colour televisionsa222 1,261 399 2,132 357 1,906 1,835 4,290
Video cassette
recordersa21 ... 173 ... 280 ... 65 261
... Notavailable
a Units
b Thousand pairs
c Thousand pieces
d Thousand units
Source: SECEX.
(ii) General policy objectives andinstruments
87. TheGovernment 'scurrent industrial policy aimstoconsolidate anewscheme ofindustrial
expansion, creating theconditions forfirms tomove from a"defensive" restructuring position toa
forward-looking strategy based onrising production capacity, technological innovation andgreater
participation inworld markets. Thestrategy seeks to:
- create afavourable investment environment;
- increase firms'competitiveness andtechnological progress;
- expand foreign trade andconsolidate MERCOSUL;
- restructure industries withcompetitiveness problems;
- strengthen small enterprises;
- emphasize regional industrialization; and
- boost environmental awareness.
88. TheGovernment'spolicytargetstheautomotiveandinformaticsindustriesforspecialtreatment.
Activities considered ashaving thegreatest competitive capacity forproduction andexport arethe
agro-industrial complex (soya oil,coffee andorange juice), themining-metallurgical industry (iron
ore,steelandaluminium), andthecellulose andpaper industry.
(iii) Developments inselected industries
(a) Ironandsteel
89. Brazil isamong theworld 'stenlargest steelproducers. Theindustry 'sgrowth wassupported
bysuccessive Brazilian Governments, initially through public investment inlargeintegrated steelmills
andlaterthrough fiscal incentives. Suchincentives included reductions ofimport taxes onimported
equipment, accelerated depreciation, andIPItaxreductions (Chapter IV,IV.4). According tothe
authorities, theState hadinvested some US$26 billion inthesteelindustry since themid-1950s; inBrazil WT/TPR/S/21
Page 143
return, ithadreceived dividends ofonlyUS$600 million. Theindustry 'sunder-performance hasbeen
attributed totheGovernment 'spastintervention intheeconomy andinthesteelfirms'administration,
compounded bygrowing technological obsolescence.
90. Closer co-ordination oftheStatesteelfirms wasachieved through thecreation in1973 ofthe
SiderurgiaBrasileiraS.A.-SIDERBRAS,astheStateholdingcompanyforthesteelindustry.However,
faced withperiodic needs forinjections ofcapital andfiscal deficits atthefederal level, theGovernment
beganaprogrammeofprivatizationin1989,andSIDERBRAShasbeeninliquidationsinceMarch1990.
Theprivatization programme received amajor boost withtheprivatization in1991 ofUSIMINAS,
oneofBrazil 'smore efficient andlarger steelproducers. Between 1991 and1993, eight steelfirms
wereprivatized. Total benefits fromsuchsaleshavebeenestimated atsome US$10.6 billion, including
closetoUS$4.7billionraisedthroughauctions,US$2.6billionindebtstransferredfromtheGovernment
tothenewowners, US$2.5 billion innewprivate investment, andUS$750 million insales bythe
Government ofminority holdings aftertheinitial privatization.19Close to2,500 newjobswerecreated,
equivalent toabout 30percentofthepositions initially made redundant during privatization.
91. Theprivatization programme hasbeenaccompanied byaturnaround inperformance: while
in1990, under public ownership, steelfirms lostsome US$1.3 billion, in1994 theymade aprofit
ofabout US$880 million. Theprivatized firms haveconsiderably improved theoperational results
through costreductions from productivity increases, staff training and, more importantly, the
renegotiation ofsupply contracts. Costreductions varyconsiderably across firms, withthose having
thehighest costsachieving thelargest reductions.20Thesteelindustry hasplans toinvest US$7 billion
through theyear2000tomodernize andincrease capacity, which should increase by4.5million tonnes
bytheyear2002, when annual capacity isexpected toreach 32.7million tonnes ofrawsteel.
92. In1992Brazilian andArgentinian firms signed aproduction-sharing arrangement forthesteel
industry to"co-ordinate theprocess ofintegration oftheregion 'ssteelindustry, foster processes of
production sharing among steelcompanies oftheregion, andassure realtariff preferences". The
arrangement wasinforceuntil31December 1994. Under MERCOSUL 'sRégime ofFinalAdjustment,
inforcesinceJanuary 1995, Brazil hasestablished duty-free quotas forsteelimports fromMERCOSUL
members; Brazil 'sexports donotyetbenefit fromsimilar treatment when exported within theregion.
(b) Motor vehicles
93. Brazil 'svehicle fleetamounted toabout 13.2million units in1992. Thecountry wastenth
among world producers with output close to1.4million unitsin1993. Thevehicle industry plays
asignificant rôleintheBrazilian economy, accounting foraround 2percentofGDP. Assemblers
hadaturnover ofabout US$11 billion in1992, US$13 billion in1993 andUS$15 billion in1994.
Assemblers employ some 125,000 workers; theentire industry ofassemblers andauto-parts producers
together creates atotalofabout 5.2million jobs,directly andindirectly. Vehicle manufacturing was
divided among nineproducers inearly 1996; passenger cars, which account fornearly 80percent
ofallmotor vehicles produced in1993, wereproduced byFiat,Ford, General Motors andVolkswagen.
94. Investmentintheautomotiveindustryhasbeenhighduringthe1990s,annualinvestmentreaching
nolessthanUS$930 million between 1990 and1993. Firms thathadannounced theirintention to
begin production inBrazil before the1995 régime (seebelow) wasestablished included Hyundai,
19Gandara andKaufman (1994), p.18.
20Gandara andKaufman (1994), p.11.WT/TPR/S/21
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Honda, Mercedes-Benz, Mitsubishi andRenault. Earlier, Fiat,Ford, General Motors andVolkswagen
hadannounced plans involving US$10 billion ofinvestment toincrease capacity andproductivity and
upgrade factories.21
95. Brazil wasanetexporter ofmotor vehicles eachyearbetween 1976 and1993; during that
period theindustry accumulated anettrade surplus ofsome US$21 billion. Brazil earned some
US$1.5 billion in1994fromexports ofpassenger motor vehicles, trucks, buses andtractors. In1994,
main export destinations formotor vehicles were Argentina (32percent), Italy(15percent), Chile
(9percent), Mexico (9percent) andUruguay (7percent).
96. Imports ofmotor vehicles in1993amounted toUS$920 million (US$707 million forpassenger
transport vehicles). Thatyear,mainsources ofimports ofpassenger vehicles wereJapan (29percent),
Argentina (22percent), United States (17percent), Italy(12percent)andGermany (11percent).
97. Untiltheearly1990s,theimportationofcarswasstrictlycontrolled.Specialimportauthorization
isstillrequired formotor vehicle imports andtheimportation ofusedcarsisprohibited (Chapter III(4)).
Moreover, theaverage nominal tariff protection forthemotor vehicles sector hasbeentraditionally
thehighest intheeconomy. However, under thetariffreduction programme implemented since 1991,
therateapplied onimports inthissector wassuccessively reduced from 105percentto20percent
by1994. Theratewassubsequently raised to32percentinFebruary 1995 andto70percentin
March1995.UnderitsUruguayRoundcommitments,Brazilbounditstariffinthissectorat35percent,
tobefullyimplemented by2000.
98. Domestic demand andproduction havebeensubject tostrong variations. Inrecent years,
significant increases invehicle output occurred in1988 (16percent), 1993 (30percent) and1994,
when output roseby14percenttoover1.5million vehicles. Exports havesupported production in
years ofsluggish domestic demand: attheonset ofthedebtcrisis inthe1980s, domestic salesdropped
bymore than40percentin1981, while exports increased by35percent. Over theyears, demand
fluctuationshaveresultedinexternalmarketsgainingsignificance:theshareofexportsofmotorvehicles
indomestic production grew steadily from 8percentin1975 to38percentin1987, declining to
24percentin1993.
99. Imports ofmotor vehicles increased dramatically inthefirstmonths of1995, prompting the
GovernmenttointroduceinJune1995regulationsproviding,interalia,forquantitativeimportlimitations
onvehicles which Brazil sought tojustify intheWTO onbalance-of-payments grounds (Chapter III(6)).
Following thewithdrawal ofthequota provisions innOctober 1995, anincentives régime wasintroduced
maintaining tariff reductions onequipment, parts andother inputs usedintheassembly ofvehicles
(Chapter III(2)); suchconcessions areconditional onlocal-content andexport-performance requirements
(Chapter IV(4)). Brazil requested aWTO waiver fortherégime inmarch 1996, subsequently
withdrawing itinMay1996. InJuly1996, Japan submitted toBrazil andtheWTO Dispute Settlement
Body arequest forconsultations regarding Brazil 'sinvestment measures; thiswasfollowed byrequests
forjointconsultations and/or consultations fromCanada, theEuropean Union, Korea andtheUnited
States (Chapter II(1)). Discussions about apossible tariff quota system forJapan andanumber of
other suppliers wereunderstood tobetaking place atthetimeofcompletion ofthisreport (mid-August
1996).
21Financial Times, 11August 1995.Brazil WT/TPR/S/21
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100. Despite thegrowth ofimports, Brazil 'smotor industry achieved anunprecedented production
level of1.64million vehicles in1995, up3.4percentfrom 1994, withdomestic sales reaching
1.36million units, up13percentfromtheprevious year. January-April 1996 proved tobeanother
record period, production reaching some 538,100 units, anincrease ofabout 7.6percentrelative to
thesame period in1995; domestic salesamounted to455,000 units, compared with401,000 during
thesame period in1995.
101. Incontrast, during January-March 1996imports ofpassenger vehicles decreased by86percent
relative tothesameperiod in1995, falling toUS$160 million. During thesamequarter of1996, imports
ofallmotor vehicles amounted toUS$609 million, afallfromUS$1,760 million inthesame period
oftheprevious year. Ontheother hand, during January-March 1996Brazilian imports fromArgentina
andUruguay increased to11,650 vehicles withavalue ofsome US$100 million, from 8,760 units
worth US$77.5 million inthesame period oftheprevious year. Asaresult, MERCOSUL 'sshare
invehicles imported byBrazil grewfromjustover6percentto34percentinvolume terms, orfrom
10to60percentinvalue. Thisstrong growth hasbeenattributed tothetransfer oftheproduction
ofcertainvehiclesfromBraziltoArgentinaandtothemorefavourablearrangementsunderMERCOSUL
thanforimportsfromothersources.MERCOSULarrangementsincludeduty-freetreatmentforvehicles
andpartsimports subject totrade-balancing andlocalcontent requirements aswellastheuseofquotas
forduty-free imports ofother vehicles (Box VI.3).WT/TPR/S/21
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BoxVI.3: MERCOSUL arrangements onmotor vehicles
InJanuary 1996 Brazil andArgentina signed abilateral agreement fortheautomotive sector, revising the
textsigned between thetwocountries inOuro Preto inDecember 1994. Under theOuro Preto
Agreement motor vehicles were granted special treatment, while establishment ofacommon policy on
intra-trade inthissector waspostponed until 1999. Inthemeantime, Argentina wasgranted freer access
totheBrazilian market thanitwasrequired togrant Brazilian exports.
Under theagreement signed inJanuary 1996, bothvehicles andparts maybeimported dutyfreeaslong
astheimporter balances itsforeign purchases with exports toanydestination (except forreplacement
parts). Thesituation offirms established inonlyonecountry hadnotbeen defined inearly 1996. The
agreement provides foranaverage local content ofatleast50percentcomputed overathree-year period
(MERCOSUL local content-level isgenerally 60percent).
Each partner engages torecognize thevalidity oftheautomotive regime oftheother country until
31December 1999. Ineffect, thisformalizes Argentina 'sacceptance ofthechanges made toBrazil 's
domestic regulations in1995. Under theagreement ofJanuary 1996, Brazil andArgentina willmeet
twice ayeartoevaluate developments under theagreement andtodecide onanynecessary adjustments.
From 1January 2000, bilateral trade willbeduty-free.
The Agreement contains a"side letter" allowing Argentina tocompensate thesectoral deficit of
US$850 million accumulated withBrazil between 1992 and1994. Such compensation istotakeplace
through theduty-free importation byBrazil ofclose to85,000 Argentinean carsbetween 1996 and1998.
Under thesideletter, thetwoGovernments were tonegotiate thequantities andtheuseofmotor vehicles
made bycompanies installed inother oneofthetwocountries. Negotiations were stillinprogress in
1996.
Under theAgreement imports from third-countries aretreated lessfavourably thanintra-regional trade.
Moreover, theprovisions oftheAgreement make itadvantageous forforeign vehicle makers tosetup
local plants tosatisfy thelocal market. TheAgreement alsoseems tofavour location ofassembly
operations inBrazil, asmanufacturers arelesslikely toconsider producing vehicles inArgentina for
export toBrazil unless theycanexport thesame quantity ofBrazilian-made vehicles.
Brazil andUruguay granted each other anincrease of15percentintheimport quotas forcars, under
which assemblers installed inUruguay (Peugeot andCitröen) were tobeallowed toexport 11,500 units
in1996. Brazilian exports toUruguay were toincrease from 3,000 to4,500 cars. In1995 Uruguay did
notfillitsquota of10,000 units, which wasextended until March 1996.
(c) Auto-parts
102. Theauto-parts industry isofmajor importance, andhasbeengrowing asvehicle assemblers
haveincreasingly tended tocontract outwork theypreviously undertook in-house. Theauto-parts
industry employs about 235,000 workers, down from about 300,000 in1989. Turnover wasabout
US$10 billion in1992, US$13 billion in1993 andclose toUS$15 billion in1994.
103. In1994, Brazil exported someUS$1.4 billion worth ofauto-parts; themainexport destinations
wereArgentina (31percent)andtheUnited States (23percent). Partsimports haveincreased sharply,
fromabout US$1.3 billion in1992toUS$3.3 billion in1995. Main suppliers havebeen: Argentina
(20percentin1995), Germany (16percent), theUnited States (15percent), Japan (9percent)and
Italy(9percent).Brazil WT/TPR/S/21
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104. Exports areconcentrated inafewproducts. In1991, engines, engine parts andcar-radios
accounted forsome 55percentofauto-parts exports.22Engines represent thelargest single item,
accounting forbetween 20and25percentofthetotal. Asmall number offirms areresponsible for
thelion'sshare oftotalexports; forexample, in1989 over90percentofexports weremade by10
firms, eight foreign andtwoBrazilian.
105. Theindustry ismainly composed ofalargenumber ofsmall andmedium-size units. In1991,
close to73percentofthefirms intheindustry wereofBrazilian capital. About 90percentofthose
firms were located intheState ofSaoPaulo, placing them inclose proximity tothemain assembly
firms. Thelevels oflocalcontent arehigh, over90percent, aconsequence inpartofgovernment
policy.
106. Theindustry islikely tobeanetbeneficiary oftheautomotive régime introduced in1995.
Under theprogramme, duties onimport partshavebeenreduced toaconcessional rateof2percent.
Theprogramme limits assemblers topurchasing amaximum oftwothirds oftheirimports intheform
ofparts. Theauto-parts industry isalsoallowed toimport inputs andrawmaterials atconcessional
rates. However, inconverging totheMERCOSUL finalrégime in1999, tariff protection forparts
willincrease while tariffs onassembled vehicles aretofallprogressively.
107. While significant restructuring hastaken place inrecent years, MERCOSUL should havea
further, major impact ontheindustry 'sstructure. Regional integration andthegeneral globalization
oftheindustry isdriving theconsolidation oftheindustry, withparts suppliers being replaced by
providers ofcomplete systems. Local suppliers arehaving tomatch thequality, delivery times and,
especially, prices offoreign firms. Independent foreign companies areincreasingly centralizing their
operations, mostly inBrazil, andastream ofacquisition ofBrazilian auto-parts manufacturers byforeign
companies hasoccurred. Vehicles assemblers areplaying animportant rôleintherestructuring,
identifying foreign partners orbuyers forlocalmanufacturers ofauto-parts.23
(d) Non-electrical machinery
108. Tradeofnon-electricalcapitalgoodsissubstantialanddiversified;theyconstituteoneofBrazil's
largest import groups andarealsoanimportant export category (Tables I.6andI.7). Production and
export growth wasrapid inthe1970s butslowed down considerably during the1980s. Growth in
theindustry stagnated during theearly 1990s, aspublic investment atalllevels ofGovernment has
tended tofall.However, thevalue ofproduction ofcapital goods reached US$17.5 billion in1995,
anincrease ofsome 6.9percentrelative to1994. Suchresults wereobtained despite imports growing
62percent, from US$4.1 billion in1994 toUS$6.6 billion in1995. According totheBrazilian
AssociationoftheMachineryIndustry(ABIMAQ),apparentconsumptionincreasedfromUS$17.4billion
in1994 toUS$20.9 billion in1995.24
109. Auto-parts manufacturers arethelargest single customer-group forthenon-electrical machinery
industry. Recovery inthisindustry istaking place inthewake ofarrangements introduced toassist
theautomotive industry in1995 (seeprevious sections). Under those arrangements, theproportion
22This andthefollowing paragraph arebased onTauile (1995).
23Ithasbeen predicted thatnomore thanonefifthoftheclose to500firms currently intheindustry will
survive (Gazeta Mercantil ,21December 1995).
24Gazeta Mercantil ,11January 1996.WT/TPR/S/21
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between acquisitions ofcapital goods produced inBrazil andthose imported atconcessional tariffrates
hasbeensettoatleast1:1until31December 1997 andto1.5:1 thereafter. Thearrangements were
expected tohaveanetbeneficial effect overthenextseveral years, despite thefactthattheimport
ofmachinery andequipment willalsobeallowed atconcessional tariff rates.
(e) Textiles andclothing
110. Thetextile andclothing industry wasoneofthepioneers ofindustrialization inBrazil. The
industry isoneofthelargest employers inthecountry, accounting forclose to820,000 jobsin1994,
despite employment having fallen by53percentbetween 1989and1994. Value added intheindustry
reached some US$23 billion in1995. Themoststriking characteristic ofthetextile-clothing complex
inBrazil isitsheterogeneity: although theindustry hasasmall number oflarge, highly competitive
enterprises, itisalsocharacterized bynumerous, relatively inefficient small andmedium-size firms,
many operating intheinformal sector, whose production isgeared tothelocalmarket. Asthemain
consideration inthedomestic market appears tobeprice, thepressures formodernization andquality
improvement appear tohavebeenrelatively low.25
111. Brazil isnotamajor participant ininternational textiles andclothing markets, which are
considered relatively unimportant forthedomestic industry. Asaresult, Brazil isspecialized ina
narrow range ofexport items. Thebulkofclothing exports gototheUnited States, about 45percent
in1994,andtheEuropeanUnion-Germanyaccountingfor14percentandItalyforjustover2percent.
Argentina hasbecome asignificant destination since1990, andtooksome 9percentofBrazil 'sclothing
exports in1994.The markets fortextile exports aremore diversified, themajor destinations being the
United States, which accounted for24percentin1994, Argentina, with14percent, Germany,
8percent,andParaguay, 6percent. Brazil isinternationally competitive intheproduction ofcotton
textiles.
112. Asindicated inChapter IV(3), Brazil maintained export restraint arrangements under the
Multifibre Arrangement (MFA) withtheEuropean Union, theUnited States andCanada; these have
beenreplaced withnewarrangements reflecting therequirements oftheWTO Agreement onTextiles
andClothing (ATC). Forcertain product categories, Brazil hasnotalways utilized available quotas;
quota utilization isverymuch product-specific andtheauthorities havepointed outthat,forsome
products, quotas haveindeed limited Brazilian export growth.26Aswasalsonoted inChapter IV(3),
Brazil wasconcerned about thequotas levels inthemarkets ofnewEUmembers (Austria, Finland
andSweden), about cotton yarnexports totheEUbeing bothrestricted byquotas andsubject to
anti-dumping duties, andabout theimpact ontextiles trade ofthecustoms union between Turkey and
theEU.
113. Inthepast,theBrazilianmarketfortextilesandclothingwasrelativelyclosed,butimportbarriers
havecome down andimports havetended toincrease. Textile imports accounted for1.8percentof
Brazil 'stotalimports in1994, while clothing imports amounted tojust0.3percentofthattotal. For
textiles themainsources wereArgentina, theRepublic ofKorea andtheUnited States, eachcontributing
in1994between 14and17percentoftextile imports. Forclothing, themainsuppliers in1994included
Uruguay andtheUnited States, eachcontributing some 18percent; Panama hadanunusually high
share thatyearofalmost 20percent.
25Scherer andCampos (1993).
26Apoint alsomade byScherer andCampos (1993).Brazil WT/TPR/S/21
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114. A1996studybytheNationalDevelopmentBank(BNDES)notesthatthetradebalanceintextiles
wentfromasurplus ofUS$900 million in1992toadeficit ofUS$845 million in1995; between 1991
and1995, overall textiles andclothing imports expanded from US$557 million toUS$2.2 billion.
Import growth hadbeenparticularly strong since1994, especially forsynthetic woven fabrics andready-
made articles from China andother Asian countries aswellastheUnited States andIreland.
115. Largetextileenterprisestendtobetechnologicallyup-to-dateandabletofaceforeigncompetition;
moreover, theytendtooccupy niches, suchascotton-based articles, where foreign competition isless
strong. According totheBNDES study, however, technological obsolescence isamajor problem in
otherfirms: theaverage machinery ageissome16years, oralmost twice thatforlargetextile producers.
Asaresult, import competition hasledtotheclosing ofsome 300firms intheindustrial development
zoneAmericana ,inSaoPaulo State, withalossofsome 30,000 jobs; firms inthatzonespecialize
intheproduction ofman-made fibres, which isparticularly vulnerable toimports.
116. TheBNDES study suggested thataninvestment ofUS$8 billion overfiveyears wasrequired
toovercome thetechnological gapandrestore competitiveness intheindustry. Inthisregard, BNDES
approved modernization andrestructuring projects foralmost US$650 million during 1994and1995,
ofwhich justoverUS$350 havebeendirectly lentbytheBank. BNDES made available US$92 million
in1995 forrestructuring intheindustry.
117. In1995 theindustry began calling fortaxreductions, import quotas andthestrict application
ofanti-dumping law;italsowanted imports tobepaidforincash, notcredit, aspayment terms offered
byforeign manufacturers disadvantaged Brazilian firms faced withhighdomestic interest rates.27It
wasalsoargued thathighinterest ratesandtheexchange rateaffected thetextile industry atleastas
much asforeign competition as,given thehighcostofcredit, onlythelargest firms appeared able
toinvest intechnological modernization andcould adopt anexport strategy towiden markets.28Industry
leaders alsoasked forchanges tothemethod usedforcalculating duties toprevent under-invoicing,
basing duties oninternational benchmark prices rather thantheinvoice value.
118. Measures have been taken torestrict credit terms fortextile imports (import licensing -
Chapter III(1)). Additional tariff protection ofupto70percentwasgranted totextiles under the
"additional" exemptions list(Chapter III(2)). Following theending ofsuchprotection, import quotas
oncertain textiles wereintroduced aspartofasafeguard action (Chapter III(6)); thequotas targeted
synthetic products, largely produced inBrazil bythesmall andmedium-size firms thathaveexperienced
greater difficulty incompeting withforeign products. Special credit programmes were alsobeing
implemented tohelpfirms adjust toincreased foreign competition (Chapter V(2)).
(f) Footwear andleather products
119. Brazil isanetexporter offootwear andtravel goods, which asagroup accounted in1994for
3.7percentoftotalexports. Footwear isthelargest export sub-sector; themain export market for
footwear istheUnited States, which absorbs some 70percentofexports, followed farbehind bythe
United Kingdom, Germany, andCanada. Imports offootwear andtravel goods aremodest atabout
27Latin American Regional Reports -Brazil, 26October 1995.
28TheVice-President oftheConteminas textiles group noted thatthekeytocompetitiveness wasinvestment,
adding that"Brazil offers tremendous advantages tothetextiles industry, wehavecheap cotton, cheap electricity,
askilled andproductive work force andanenormous domestic market. Companies withmodern equipment have
every change ofsuccess." (Financial Times, 26September 1995).WT/TPR/S/21
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0.3percentoftotalimports. Nevertheless, competition fromAsian countries inthefootwear industry,
particularly China, isamajor concern toBrazilian producers.
120. Rawhides andskins aresubject toanexport taxof9percent(Chapters IV(1) andIV(2)).29
(g) Informatics
121. Government policies adopted fromthemid-1970s andaimed atreserving themarket fornational
production (the"reserved market" policies) radically affected thestructure ofthecomputer industry.
Minimum domestic-content requirements andthesimilarity lawswere strictly applied.
122. TheNational Informatics andAutomation Council (CONIN) wasrestructured byLaw
No.8741/93, buttheCouncil didnotresume operations afteritsrestructuring. TheInformatics and
Automation Policy Secretariat (SEPIN) isnowcharged withco-ordination andimplementation and
measures related topolicy intheinformatics area,aswellashelping withtheformulation ofscientific
andtechnology policies.
123. Asestablished inLawNo.8248 ofOctober 1991, themarket reserve policy wasterminated
inOctober 1992. Asaresult, import controls andtherequirement forprior authorization forthe
domestic production ofinformatics products wereeliminated forallfirms. Theauthorities emphasized
thatnodistinction isnowmade inthegranting offiscal incentives between firms onthebasisofcapital
origin. Theoperation ofmaximum prices andperformance differentials werealsoterminated inOctober
1992.
124. UndertheNationalPlanforInformaticsandAutomation(IIPLANIN)adoptedin1991,Brazilian
firms of"national capital" continued tobenefit after1992 from anumber ofincentives (e.g., special
credit lines tofinance informatics products byBrazilian firms). However, thePlan ended in
October 1994. (Theconcept offirms of"national capital" hasalsobeeneliminated -Chapter II(2)).
125. Between 1990 and1996, tariffs oninformatics goods were reduced from 55percentto
32percent; inthecontext ofMERCOSUL 'sprogramme oftariff convergence, suchtariffs should
fallto16percentbytheyear2006. According totheauthorities, thetariffreduction programme has
resulted inlower domestic prices andagreater variety ofinformatics goods, bothduetoincreased
import competition andtheestablishment offoreign producers inBrazil. They estimate thatBrazilian
hardware andsoftware exports amounted tosome US$200 million between 1991 and1994, which
represented about 3percentoftheindustry 'sgross sales.
29Leather users have been requesting increases tothetaxonhides andskins, andtheintroduction ofatax
on"wet blue" leather (asemi-elaborated product).