Dix-Carneiro and Kovak Trade Reform and Regional Dynamics

# **2 Trade Liberalization in Brazil**

Brazil’s trade liberalization in the early 1990s provides an excellent setting in which to study the labor market effects of changes in trade policy. The unilateral trade liberalization involved very large declines in average trade barriers and featured substantial variation in tariff cuts across industries. Many papers have examined the labor market effects of trade liberalization in the Brazilian context to take advantage of this variation.<sup>4</sup> In the late 1980s and early 1990s, Brazil ended nearly one hundred years with extremely high trade barriers imposed as part of an import substituting industrialization policy.<sup>5</sup> In 1987, nominal tariffs were very high, but the degree of protection actually experienced by a given industry often deviated substantially from the nominal tariff rate due to i) a variety of non-tariff barriers such as suspended import licenses for many goods and ii) a system of “special customs regimes” that lowered or removed tariffs for many transactions (Kume, Piani and de Souza 2003).<sup>6</sup> In 1988 and 1989, in an effort to increase transparency in trade policy, the government reduced tariff redundancy by cutting nominal tariffs and eliminating certain special regimes and trade-related taxes, but there was no effect on the level of protection faced by Brazilian producers (Kume 1990).

Liberalization began in March 1990, when the newly elected administration of President Collor suddenly and unexpectedly abolished the list of suspended import licenses and removed nearly all of the remaining special customs regimes (Kume et al. 2003). These policies were replaced by a set of import tariffs providing the same protective structure, as measured by the gap between prices internal and external to Brazil, in a process known as tariffication ( _tarifica ̧c ̃ao_ ) (de Carvalho, Jr. 1992). In some industries, this process required modest tariff increases to account for the lost protection from abolishing import bans.<sup>7</sup> Although these changes did not substantially affect the protective structure, they left tariffs as the main instrument of trade policy, such that tariff levels in 1990 and later provide an accurate measure of protection.

The main phase of trade liberalization occurred between 1990 and 1995, with a gradual reduction in import tariffs culminating with the introduction of Mercosur. Tariffs fell from an average of 30.5 percent to 12.8 percent, and remained relatively stable thereafter.<sup>8</sup> Along with this large average

> 4Examples include Arbache, Dickerson and Green (2004), Goldberg and Pavcnik (2003), Gonzaga, Filho and Terra (2006), Kovak (2013), Krishna et al. (2014), Menezes-Filho and Muendler (2011), Pavcnik, Blom, Goldberg and Schady (2004), Paz (2014), Schor (2004), and Soares and Hirata (2014) among many others.

> 5Although Brazil was a founding signatory of the General Agreement on Tariffs and Trade (GATT) in 1947, it maintained high trade barriers through an exemption in Article XVIII Section B, granted to developing countries facing balance of payments problems (Abreu 2004). Hence trade policy changes during the period under study were unilateral.

> 6These policies were imposed quite extensively. In January 1987, 38 percent of individual tariff lines were subject to suspended import licenses, which effectively banned imports of the goods in question (Authors’ calculations from _Bulletin International des Douanes_ no 6 v11 supplement 2). In 1987, 74 percent of imports were subject to a special customs regime (de Carvalho, Jr. 1992).

> 7Figure A1 in Appendix A shows the time series of tariffs. Note the tariff increases in 1990 for the auto and electronic equipment industries.

> 8Simple averages of tariff rates across _Nivel 50_ industries, as reported in (Kume et al. 2003).

6