Bank Services Trade Restrictiveness Index (STRI),<sup>12</sup> with the most restrictive scores in financial and professional services, which are critical inputs across all industries for productivity growth and competitiveness (Figure 7).<sup>13</sup> In addition to restrictive policies and regulations, there is also a distortive tax system for trading services in Brazil: the tax burden on service imports in Brazil compares unfavorably to other countries, which contributes to hamper the absorption of imported technology (Figure 8).<sup>14</sup> <!-- Start of picture text --> Figure 8. Tax burden on service imports: Figure 9. Logistic Performance Index (2016)<br>Brazil vs selected peer countries (%) [very low” (1) to very high” (5)]<br>60.0 5.0<br>50.0<br>4.0<br>40.0<br>3.0<br>30.0<br>2.0<br>20.0<br>10.0 1.0<br>0.0<br>0.0<br>Source: CNI (2017) Source: W orld Bank staff elaboration using World Bank LPI<br>dataset<br>Saudi Arabia South Africa China Germany UK Netherlands South Korea Italia Japan EUA India Mexico Brazil Spain Argentina France<br><!-- End of picture text --> Brazil also faces challenges in trade logistics and trade facilitation. To compete in the global economy, traders require seamless supply chains, including efficient border management and clearance processes, as well as the development of efficient logistics services and improvements in both the hard and soft international logistics infrastructure. The score of overall logistics competence (and quality) in Brazil – as captured by the Logistics Performance Index (LPI) in 2016 – is below Mexico, Turkey, India, China and South Africa (Figure 9). Brazil’s overall integration in GVCs is low compared to international peers in part because of relatively lengthy and costly procedures to import and export.<sup>15</sup> Indeed, firms’ integration to GVCs critically depends on their

> 12 The World Bank STRI data set focuses on policies and regulations that discriminate against foreign services or foreign service providers, as well as certain key aspects of the overall regulatory environment that have a significant impact on trade in services.

13 These results are also valid when using OECD STRI; the latest numbers from 2017 show that Brazil scores worse than Mexico, Chile and Colombia for accounting, architecture, engineering and legal services and for commercial banking and insurance. For telecoms and retail, the value of the Brazil STRI index is zero.

14 The overall tax burden on services is heavier than in other sectors: while the average tax burden on the production and consumption of goods and services is 19.4 percent, it is much higher in the services segments most critical to other sectors of the economy: the tax toll exceeds 23 percent in transport and business services, 27 percent in IT services and over 30 percent in utilities (OECD, 2016). This tends to be particularly burdensome for firms that operate in supply chain organizations as they are not allowed to claim full credit for indirect taxes paid on services inputs in lieu of the "physical credit" principle in ICMS and they cannot claim credit for inputs in ISS.

> 15 This forces firms to adopt costly hedging strategies and complicates their ability to engage in just-in-time production or react quickly to demand shifts. Evidence suggests that inventory-holding costs can vary from 15 percent of the cost of goods per year to as much as 50 percent (Clark et al., 2016). Similarly, each day in transit is equivalent to an advalorem tariff ranging between 0.6 percent and 2.3 percent; and trade in components is extremely time-sensitive

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