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Brazil: Piling on the Protectionism

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Reposted from The Financial Times blog

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Brazil: piling on the protectionism

Samantha Pearson | September 6, 2012 | FT blog

Brazil’s tax system these days increasingly resembles the country’s popular soap operas or ‘telenovelas’- convoluted, farcical and incredibly hard to follow.

After months of frequent tax breaks and hikes, the finale of Brazilian protectionism seemed to come on Tuesday night with the announcement of higher import taxes on no less than 100 products.

On the list was everything from potatoes to rubber tyres along with other products from the steel, chemical, and pharmaceutical industries.

The logic behind the decision was clear – fend off the foreigners and help boost domestic manufacturing, which has been one of the main drags on growth.

This from Reuters:

We live in a time when the world market is shrinking and exporters flood Brazil, which is one of the few growing markets, and our industry is being harmed by this,” (Finance Minister Guido) Mantega told reporters in Brasília.

The move certainly went down well with the country’s steelmakers on Wednesday. Preferential shares in Usiminas surged over 18 per cent, while CSN was up over 8 per cent.

And it seems there may even be a sequel to Tuesday’s move. According to local media, the government is busy preparing another list of 100 products for tax increases in October.

But if you’re worried that all this may create further inflationary pressures, just at a time when the central bank president Alexandre Tombini has been aggressively cutting interest rates, don’t be.

Mantega has got Tombini’s back. He said on Tuesday that if the protected industries raise domestic prices, the government would immediately lower the import tariffs.

While the move certainly went down well in the favoured industries, analysts were not so impressed.

This from Alberto Ramos at Goldman Sachs:

The increase in trade protectionism finds weak justification in a country that is still running a solid US$23bn trade surplus.

Furthermore, the increase in external tariffs may put added pressure on inflation and will likely lead to costly trade diversion.

Increasing the level of protection and trade isolationism tend to be associated with lower productivity growth as it softens competition in the domestic market (usually leads to lower levels of investment in R&D and reduces the incentive to innovate and move the technology frontier). Finally, trade protection is usually mostly a short-term palliative that distracts from the structural headwinds impacting the industrial sector in Brazil: namely, higher labor, energy, and logistical costs, a high and distortionary tax burden, lack of qualified labor, inadequate public infrastructure, etc., to name just a few.

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