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Brazil's Trade Policies
Trade Policies
Brazil's economic history has been influenced remarkably by foreign
trade trends and policies. Successive cycles of export booms in
such commodities as sugar, gold and diamonds, rubber, and coffee
played major roles in Brazilian development before World War II.
In the 1930s, the collapse of coffee prices signaled a turn inward,
resulting in a nascent industrialization. In succeeding decades,
industrial development was fostered deliberately through restrictive
trade policies, making Brazil a relatively closed economy by the
mid-1960s. Only in the early 1990s did Brazil begin significant
liberalization of its trade policies, and even these reforms were
modest by comparison with those in a number of other Latin American
nations.
Government intervention in foreign trade has a long history in
Brazil, reaching back to the colonial period when Portugal forbade
Brazilian trade with other nations. Following independence in 1822,
Brazil opened its ports and expanded its trade with other nations,
particularly Britain. Extensive government regulation of trade continued,
however, with tariffs providing over half of the government's revenue
before World War I. Other forms of intervention in trade included
the 1906 coffee price support plan, which was a sophisticated attempt
to exploit Brazil's monopolistic position in the world coffee market.
Before World War II, trade policies were used mostly as a source
of revenue or as a response to specific groups such as the coffee
producers, rather than as a means of achieving national economic
goals. In the early 1950s, Brazil began to use trade policy in a
more deliberate way to promote industrialization. The forced reduction
in Brazilian imports after 1929 had resulted in the first major
industrial growth in Brazil, centered in São Paulo. Heeding
this apparent lesson, policy makers in the 1950s argued that measures
that deliberately reduced imports would stimulate domestic production,
thereby encouraging technological development and increasing employment
in activities that were regarded as more "modern" than
Brazil's traditional agricultural and extractive activities.
Between 1953 and 1957, Brazil attempted to use multiple exchange
rates to encourage some trade transactions and discourage others.
In 1957 the country instituted a broad ad valorem tariff system
under Law 3,244. The new system created not only a new tariff structure
but also the administrative machinery to impose or revise tariffs
in accord with national development objectives and requests by domestic
producers for protection. Implementation of the system heavily favored
domestic producers of manufactured consumer goods, while permitting
the import of capital and intermediate goods at much lower tariffs.
For some goods, protection was great enough to completely eliminate
competing imports from the Brazilian market.
Following the imposition of military
rule in 1964, Brazil once again modified its trade policies.
The new government moved quickly to eliminate some of the restrictions
on Brazilian exports,
and it provided special incentives for exports of manufactures.
In March 1967, it significantly cut tariffs, which fell to about
half their former level in a number of sectors. Brazilian imports
soon increased, but this was more the result of the acceleration
of economic growth after 1967 than of the tariff reforms. During
the "economic miracle" between 1967 and 1973, the GDP
grew at record rates. Throughout this period, trade policy continued
to be relatively open in comparison with Brazilian policies before
or after the economic miracle.
The steep rise in world oil prices that began in late 1973 soon
ended Brazil's move toward greater trade openness. The approximate
balance between imports and exports in the early 1970s became an
unprecedented US$4.7 billion deficit in 1974. Although record levels
of external capital flows financed this deficit, Brazilian policy
makers responded by restricting imports. In June 1974, import financing
for many products was suspended, while tariff rates on more than
900 items were doubled. Over the year, restrictions were increased
further, and in 1975 the government required that imports be paid
for in advance with deposits that did not earn interest or any correction
for inflation. On the export side, further measures were taken to
promote exports, especially for manufactures. Despite these measures,
Brazil's trade balance remained in deficit for most of the 1970s.
The worsening of Brazil's external payments position in the early
1980s forced policy makers to turn to other measures to attempt
to restore external balance, among them adjustment in the exchange
rate, which was devalued sharply early in 1983. Controls on trade
were not relaxed, however, and the cessation of voluntary lending
to Brazil following the Mexican debt crisis in 1982 had significant
effects on trade policy. Import controls that had been introduced
in response to the worsening trade balance in 1980 were strengthened
by centralization of all foreign-exchange transactions in the Central
Bank. A negative list, which enumerated items whose import was suspended,
was expanded considerably, and financing for imports was further
restricted.
The combination of tightened import controls, real depreciation,
and the fall in domestic demand induced by the restrictive macroeconomic
policies of the early 1980s resulted in a sharp adjustment in Brazil's
external accounts. The magnitude of the adjustment appears to have
surprised even many of its proponents, both in the Brazilian government
and among creditors. After 1983 the massive trade surpluses averaged
more than 3 percent of GDP, compared with negative or negligible
levels through most of the 1968-82 period. In 1984, as the full
effects of the adjustment program were felt, exports were about
double imports, and Brazil's trade surplus reached an unprecedented
6.1 percent of GDP, far exceeding the comparable shares in other
important economies such as Japan (3.5 percent of GDP) and West
Germany (3.8 percent).
Most of the import controls that were used after 1982 were in place
well before the cessation of voluntary external lending. One of
these measures, introduced in 1980 following the worsening of the
current account, was the financing requirement for specific imports.
Another form of import control, much used after 1982, was the establishment
of formal import programs, which were negotiated agreements between
importing firms and the Department of Foreign Trade (Carteira de
Comércio Exterior--Cacex). These agreements in effect turned
the import decision into a process that depended more on administrative
and political considerations than on economic merit. The high degree
of administrative control that these agreements gave to Cacex created
problems, because middle-level trade officials acquired extensive
control over the fortunes of an enterprise through their ability
to approve particular trade transactions.
By 1984 it was clear that the successful external adjustment had
a domestic price, as inflation accelerated to more than 200 percent
at annual rates. Trade policy consequently began to be viewed as
a potential instrument for internal stabilization, with some import
liberalization viewed as a potential contributor to reduced inflation.
In late 1984, a number of the direct controls on imports were cut
back, and the number of products on the negative list was reduced
substantially. Import financing requirements were also relaxed through
exemptions, and tariff surcharges were replaced by smaller additions
to the legal tariff. On the administrative side, the Cacex policy
of import restrictions for balance of payments purposes was reduced.
In February 1986, following several months in which the prices
accelerated at an average of more than 500 percent, the Sarney government
decreed the now infamous Cruzado Plan. Although the plan was presented
as a definitive program to de-index the economy and wipe out inflation,
its main thrust was to freeze prices. Wages were not frozen and
in fact were increased by 8 percent when the plan was announced.
Foreign economic policy in the plan consisted primarily of fixing
the exchange rate, and no trade policy changes were included in
the plan.
The combination of increased domestic real income, a fixed nominal
exchange rate, and a fall in nominal interest rates soon produced
a sharp increase in excess demand. In sectors less affected by price
controls, such as clothing or used automobiles, prices rose sharply.
The effects on the trade balance were apparent within several months
after the plan was decreed. The value of monthly exports fell by
about 40 percent between March and November 1986, and imports rose
rapidly beginning in May. For the year, exports fell by 12.7 percent
from 1985 levels, and imports increased by 5.7 percent. Brazil's
external payments problems, which had appeared to be largely resolved
by the record trade balances after 1983, emerged once again, as
the trade balance fell from US$12.5 billion in 1985 to US$8.3 billion
in 1986.
The policy response to the worsening trade balance consisted of
a small 1.8 percent devaluation in October 1986, accompanied by
administrative tightening of import controls. In early 1987, the
negative list was once again increased, and some of the loss in
exchange-rate competitiveness was regained with nominal devaluations
of the cruzado (for value of the cruzado--see Glossary) of 7.8 percent
and 8.7 percent in May and June of 1987.
Brazil's second price-stabilization attempt, popularly known as
the Bresser Plan, was announced by the new minister of finance,
Luiz Carlos Bresser Pereira, in June 1987. In contrast to the ill-fated
Cruzado Plan, the Bresser Plan did not attempt to use external economic
policy as an instrument for internal stabilization. Brazil returned
to its earlier and generally successful "crawling-peg"
policy, which consisted of frequent small devaluations roughly in
line with domestic inflation. The trade balance improved with the
fall in domestic demand resulting from the Bresser Plan, and a current-account
balance was attained by the end of 1987.
The improving external payments situation permitted some modest
liberalization, beginning with a reduction of the negative list
in September 1987. Import financing requirements were once again
relaxed, and in late 1988 Cacex announced an expansion of import
program levels for 1989. The 1988 reforms also simplified the existing
tariff system. Average rates were lowered from over 50 percent to
about 40 percent. Moreover, the dispersion or variability of rates
was reduced; the highest tariffs were brought down from 105 to 85
percent, and the number of different rates was reduced from twenty-nine
to eighteen. The reforms further simplified the tariff system by
consolidating the rules covering import transactions, reducing the
number of agencies directly involved in the approval of trade transactions,
and establishing greater automaticity in the approval process.
The contrast between the favorable external payments situation
and Brazil's internal deficit became even more marked in 1988, as
export value increased to record levels. The favorable external
situation permitted a continuation of import liberalization. In
August 1988, Cacex permitted firms to exceed considerably their
programmed imports of capital and intermediate goods. Despite this
modest relaxation of import policy, there was no noticeable increase
in total imports, which actually fell slightly in 1988 from their
1987 level.
In January 1989, the government announced the Summer Plan, which
temporarily froze wages and the exchange rate. Despite the announcement
of further fiscal tightening, expenditures declined little and the
budget deficit worsened as a result of freezing prices for public-sector
services. By mid-1989 most other prices were rising at more than
30 percent per month, ending the year with a monthly rate of about
50 percent. Imports began to increase significantly in mid-1989,
and Brazil's 1989 trade surplus was US$16.1 billion, well below
the record US$19.2 billion of the preceding year. Although some
of the increase in the level of imports may be attributable to the
modest loosening of some import controls in the preceding year,
major factors behind the worsening trade balance were the recovery
of industrial activity and increasing overvaluation of the new cruzado
(cruzado novo). In late 1989, the Customs Policy Council (Conselho
para Política Aduaneira--CPA) issued Resolution 1,666, which
further cut tariffs. The effect of this change was to reduce the
average legal tariff from 41 to 35.5 percent. Many of the changes
occurred in sectors that had formerly enjoyed high levels of protection,
among them electrical equipment, some capital goods, and chemicals
(see table 16, Appendix).
At the end of the Sarney government, inflation rates were at the
threshold of hyperinflation, with the monthly rates in the first
two months of 1990 at over 70 percent. Although the trade balance
had fallen to about a third of the levels of the preceding year,
Brazilian policy makers were clearly focused on internal stabilization;
trade policy reform was a recognized but secondary goal.
Collor de Mello succeeded Sarney in March 1990. During the election
campaign, Collor de Mello had successfully portrayed himself as
an opponent of an intrusive, interventionist bureaucracy. His rhetoric,
which included attacks on corruption and highly paid officials (marajás
), emphasized deregulation and greater openness to world markets.
The consequences of this political and ideological change for Brazilian
trade policy were not long in coming. One of Collor de Mello's early
moves was to abolish Cacex, by that time the subject of widespread
criticism and frequent allegations of corruption by the business
community. The Technical Coordinating Office for Trade (Coordenadoria
Técnica de Intercâmbio Comercial--CTIC), a slimmer
and less powerful agency under the Ministry of Economy, Finance,
and Planning, took over the Cacex's functions.
Although import licenses were not abolished, their approval became
a relatively routine operation, and by 1991 most licenses were being
issued within five working days. The CTIC became primarily a reporting
and registration agency, which had little of the discretionary power
formerly exercised by Cacex. The former CPA, which had been far
overshadowed by Cacex, was replaced by an agency coequal with the
CTIC, the Technical Coordinating Office for Tariffs (Coordenadoria
Técnica de Tarifas--CTT). With the shift in emphasis in trade
policy from discretionary administrative control to the automaticity
of published tariffs, many of them limited by Brazil's treaty commitments,
the CTT's role in formulating import policy became significantly
greater than the CPA's had been.
Early in 1991, the Collor de Mello government announced a series
of tariff reductions to be phased in over the 1991-94 period. These
were among the most far-reaching and significant reductions in Brazilian
trade protection in several decades. Earlier tariff reductions often
had been largely cosmetic, only reducing rates that were prohibitive
to high levels that still barred many imports. The 1991 reforms
went much further, and in many sectors reduced rates to about a
third of their level in the early 1980s. Equally important, the
reforms reduced the wide variability or dispersion of tariff rates
that were once characteristic of Brazilian trade policy. The overall
trend in Brazilian trade policy is clear. By the mid-1990s, Brazil
had become a much more open economy than it had been a decade earlier.
Data as of April 1997
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