1. Introduction
The purpose of the paper is to explore the various tools of protectionism Brazil has induced in order to support and to protect its automotive industry. The paper outlines and explains intended and unintended results of a focused protectionism towards one defined industry, by using information and data available through the Trade Policy Review by the Secretariat of the WTO among other sources. In addition, personal observation and knowledge gained from dealing indirectly with the Brazilian automotive industry (as a provider of intermediate chemicals that are used by automotive coating suppliers in Brazil) has been used during multiple visits in the country.
2. Background Information
While prior to the 1990s, Brazil was known as one of the world’s most closed economies, the country has continued to liberalize and to enhance the transparency of its trade, especially after the economic recession in 2003. The economic reform resulted in a significant decline of trade barriers, streamline of import procedures, consolidate regulations, and fostered foreign direct investment on a broad scale. Moreover, privatization and a leading role in South America’s free trade organization MERCOSUR (Common Market of the Southern Cone) that also includes Argentina, Paraguay, Uruguay, Chile and Peru, are signs that Brazil takes the opening of its market seriously. The country has continued to seek low inflation rates, by using inflation targeting as its main monetary policy instrument (WTO/TPR, 13). Also, fiscal targets are set and fixed at 4.25% of GDP. Brazilian exports increased by more than 50% (in USD-terms) between 1999 and 2003 (WTO/TPR, 13); and they are expected to grow at a similar rate during the next three to five years. A trade surplus is reported every year since 2003, with the exception of 2008. But even the last recession was reported much shorter (approximately four to six months, dependent on the industry sector) in comparison with the U.S. and European Union (more than 18 months). Besides countries like South Korea, Hong Kong, Singapore, Taiwan, and Chile, Brazil can be named one of the so-called Newly Developed or Newly Industrialized countries. It “[…] exports everything from alcohol to carbon steel. Brazilian orange juice, poultry, soy beans, aircrafts and weapons (Brazil is the world’s sixth largest weapon producer) compete with U.S. products for foreign markets” (Cateora et al, 248).
While Brazil becomes more and more popular for additional foreign direct investments, it cannot be overlooked that the country heavily protects and continues to favor domestic industries, such as cashew nuts, leather, steel products, chemicals, and cement. At the same time, it remains an active user of the WTO’s anti-dumping measures. Besides the 48 anti-dumping measures that were already in force, the country initiated another 26 new cases in 2004, along with six countervai-ling measures and several technical regulations (WTO/TPR, 16). Brazil’s automotive industry was also heavily protected between 1999 and 2008. However, recent development shows a tendency towards a more flexible import- and export policy, which obviously results in increasing economic success for this particular industry.
3. Results of Protectionism regarding Brazilian’s Automotive Industry
3.1 Foreign Direct Investment
Brazil had a very restricted import policy with regard to its automotive industry. Foreign carmakers had to pay up to 45% on import duties prior to 2007. However, the automotive industry seems to remain the primary recipient of foreign direct investment. In order to circumvent the high import tariffs, as well as tariff quotas (the country allowed 140,300 vehicles with a capacity up to, and 24,700 vehicles with a capacity over 8,845kgs in 2004. Hence, Volkswagen, Ford and GM in particular started to produce locally. Volkswagen has invested more than 500 million USD in a project to produce its Passat and Golf models. The company also announced a $500 million USD deal to ship auto parts to China out of Brazil. GM has invested 600 million USD in a so-called “industrial complex” to produce on the spot (Cateora et al, 248). “Ford Motor Company was ahead of the curve when it opened a $1.9 billion USD plant in the northeastern part of the country in 2002. Toady, the state-of-the-art facility ensures nearly constant production with six shifts six days a week (Beasely, 1). Thus the high tariffs implemented forced foreign automotive producers to either pay the enormously high tariffs, to abandon the market completely, or – as in the case of the above carmakers – to produce locally. The local production was beneficial to both companies, since wages in Brazil are lower compared to the U.S. and Europe. In addition, Brazil has an abundance of well-trained and high skilled engineers. The huge market with a population of 198 million (CIA World Factbook) and the additional 200 million people as part of the MERCOSUR free trade zone offers a potential market for the industry and growth rates due to increasing demand on cars that can hardly be compared with other markets. Therefore, the motives of foreign direct investments regarding the automotive industry are obvious: expansion of potential markets, profit expectations based on lower cost of productions, and the availability of cheaper but high skilled labor.
3.2 Infant Industry Approach
By implementing the high import tariffs on foreign cars the country tried to protect its four main car producers, Troller, Marcopolo, Random, and Agrale. The argument holds that the Brazilian automotive industry is an infant industry and in order to perform in a sustainable manner, that industry needed to be protected from foreign importers and cheaper vehicles that would jeopardize the young and fragile industry. Between 1999 and 2008, the number of local motor vehicles produced expanded at an annual average of 8% (WTO/TPR, 134). The Brazilian car industry grew by 14% since 2006, and Troller proved to be the most successful brand so far. Its cars, especially the three highly successful models, Pantanal, T4, and RF Esporte, are sold all over Latin America and proved to be competitive in Africa as well (CIA World Factbook). The major export markets, however, remain Argentina (15.5% of Brazilian’s car exports) and Mexico (24.8% of Brazilian’s car exports), followed by China (12.4% of Brazilian’s car exports (WTO/TPR, 134). Employment in the automotive sector grew from 1999 to 2008 (unfortunately a percentage ratio or real numbers are missing – WTO/TPR) significantly, and the increasing export demand, especially regarding China, seems to promise further growth rates. The Brazilian car industry might not have developed the way it did without protecting the domestic new developing car industry. For a period of time, domestic prices were indeed higher than in comparable other countries, such as Chile or Argentina. But the example of Brazil shows higher prices for locally produced products do not have to remain high for an infinite amount of time. Due to high import duties for foreign carmakers, Brazilian customers bought significantly fewer foreign cars, while the domestic industry – besides locally produced German and American cars – was able to gain ground in the domestic and international market place. Within the MERCOSUR region, tariffs on car imports have been reduced from 40% down to zero (WTO/TPR, 134). The tariff on foreign imported cars, even though reduced as well, still remains high in comparison with other developed and newly developed countries. Based on the size of the engine, import-tariffs between 8% and 25% remain in place for the time being (WTO/TPR, 134), but as per the government will be subject to review in a period of time.
3.3 Specificity – Ethanol
The production of motor vehicles that are able to run on hydrous ethanol has received and still is receiving significant support from the government. While the local production of ethanol-using cars was relatively small in 2002, domestic production and sales has increased since 2002. More than 80% of domestic car sales are represented in either 100 percent ethanol-fueled cars, or cars that are able to use a combination of ethanol and gasoline. The Brazilian government states that the introduction of cars that run either partially or totally on ethanol was done “to lower emission of polluting gases” (WTO/TPR, 141). While this argument holds true, two additional reasons need to be mentioned in order to explain this rather unusual move. First, Brazil has an abundant source of sugar cane. Refined sugar and alcohol (ethanol) are derived co-products from the sugar cane production. Even though Brazil has vast oilfields off shore, mainly in the Northern part near Rio de Janeiro, it still has to import oil from other countries, since many Brazilian oilfields are not yet explored. Moreover, it will take at least a decade to exploit the newly discovered oilfields (Roedder et al, BASF study). By using ethanol as a substitution alternative to gasoline, Brazil became less dependent on oil-imports. Second, in addition to tariffs and quotas upon carmakers from abroad, local auto producers had a clear competitive advantage, since hybrid engines, even though available, were not produced in large volumes in developed countries (EU and USA) - and in addition, where not foreseen to be exported in the mid 2000s. While the big car producers caught up fast with regard to hybrid engines, the Brazilian automotive industry had sufficient time to gain a significant market share through the production of flex fuel vehicles in 2003 (WTO/TPR, 141). Despite the current boom and the increasing usage of the so-called flex-engines, environmentalists are concerned with the increasing production of sugar cane. “Yet the ethanol boom has also brought the prospect of distortions that may not be as easy to resolve. The expansion of sugar production has come largely at the expense of pasture land, leading to worries that the grazing of cattle […] could be shifted to the Amazon, encouraging greater deforestation” (Rohter, 2). While the Interministerial Council for Sugar and Alcohol denies the potential danger regarding additional deforestation on behalf of sugar cane, the demand for the product has increased, and prices have gone up. The statement of the CEO of Ford do Brazil supports the assumption that ethanol, and therefore sugarcane will become even more attractive. "The rate at which this technology [of flex-engine] has been adopted is remarkable, the fastest I have ever seen in the motor sector, faster even than the airbag, automatic transmission or electric windows" (Rohter, 1).
4. Conclusion
The so-called industrialization argument seems to hold true. The Brazilian car industry might not have developed the way it did without protecting the domestic new developing car industry. For a period of time, domestic prices were indeed higher than in comparable other countries, such as Chile or Argentina. But the example of Brazil shows higher prices for locally produced products do not have to remain high for an infinite amount of time. Due to high import duties for foreign carmakers, Brazilian customers bought significantly fewer foreign cars and helped – most likely unwillingly – to support the local car industry. However, Brazil became a world player regarding the automotive industry, and exports more than 200,000 cars annually. The result is a significantly higher GDP compared to the 1990s, and the local automotive industry is a large contributor to the growth and increasing wealth of the country. At the same time, Brazilian consumers were deprived of imported cars for almost a decade. The two options were to either pay a tremendous import tariff – which was only possible for a wealthy minority – or to buy a locally produced automobile. Nevertheless, multinational carmakers adjusted quickly and instead of exporting cars to Brazil they produced locally – also to the benefit of the Brazilian population with regard to employment and higher remuneration. The factor endowment of sugar cane, skilled labor, trade liberalization and a government that is fostering democracy more than Brazil’s previous administrations in combination with - at the beginning - heavy protectionism made Brazil’s economic development possible during the last five years. It seems the country sees not only export opportunities for its automotive industries, but also slowly but surely reduces import quotas and import tariffs.
References:
• Beasely, Stephanie. May 23, 2008. Brazil’s auto industry cruises as economy booms. Reuters. http://www.reuters.com/asset/print?aid=USN23173283
• Cateora, Philip R., Marcy C. Gilly and John I. Graham. 2009. International Marketing, 14th ed. New York, New York: McGraw-Hill Irwin. Print.
• CIA World Factbook. Oct. 19, 2009. Brazil. http://www.cia.gov/library.com.
• Roedder, Ludger, Filipe Fuenfgeld, Nelson Borba. 2006. Ronaldinho Study – Oil Field Application in Brazil and MERCOSUR. BASF. Print
• Rohter, Larry. Apr. 10, 2006. With BIG Boost From Sugar Cane, Brazil Is Satisfying Its Fuel Needs. The New York Times. nytimes.com. http://www.nytimes.com/2006/04/10/world/americas/10brazil.html?_r=2&pagewanted=print
• World Trade Organization, Nov. 1, 2004. Trade Policy Review. Brazil. WT/TPR/S/140. Print.
