BRAZIL TRADE DIRECTORY ON DISK TITLE : Brazil Economic Policy and Trade Practices Brazil Key Economic Indicators 1989 1990 1991 Income, Production, Employment GDP (Bil.dol) 370.0 355.0 358.0 13/ Real GDP Growth (percent) 3.6 -4.0 0.8 1/ Real GDP Sectoral Growth (percent) Agriculture 2.2 1.0 3.0 1/ Industry 3.9 -8.0 -0.8 1/ Service 3.7 1.5 1.6 1/ GDP Per Capita (dollars) 2,593.0 2,489.0 N/A Unemployment rate (Yr.end pct.) 2.4 4.8 4.04 2/ Money and Prices M-1 (Bil.cruz. yr.end) 103.1 1,651.0 6,139 3/ Comm. Interest Rate 62.2 28.5 24.0 4/ (Ave. Monthly Rate) Gross Savings Rate 22.5 21.0 N/A (Pct. GDP) Gross Domestic Investment 22.4 20.5 N/A (Pct. GDP) Consumer Price Increase 1,764.9 1,650 382 5/ (Pct.) Wholesale Price Increase 1,748.8 1,509 359 6/ (Pct.) Official Exch. Rate (Cruzeiro/US$) (annual pct. incr.) 1,401.3 1,091 505 7/ Parallel exch rate 2,039.9 470 617 8/ (annual pct. incr.) Balance of Payments and Trade Total Exports (Bil.dol) 34.4 31.3 21.9 9/ Total Imports (Bil.dol) 18.3 20.1 13.4 9/ Total Exports to U.S. 8.0 7.2 N/A Total Imports from U.S. (Bil. dol.) 4.8 5.1 N/A U.S. Aid (Mil. dol) 8.9 9.4 N/A Total Aid N/A N/A N/A Total U.S. Investment (Bil. dol.) 11.4 11.6 N/A Total Foreign Debt ll5.1 124.0 118.4 10/ (Yr.-end bil. dol.) Ann. Debt Serv.(bil dol) 15.5 9.2 N/A For. Exchange Less Gold 7.3 8.7 8.1 11/ (Bil. dol.) Gold (Bil dol) N/A N/A N/A Current Account (Bil. dol.) 1.6 2.2 1.8 12/ 1/ Forecast by the IPEA/Ministry of Economy. 2/ As of September 1991. 3/ As of September 1991. 4/ Cost of money for working capital for 30 days average for October 1991. 5/ National consumer price index (INPC-FIBGE) last twelve months ending in September 1991. 6/ Wholesale price index (IPA-FGV) last twelve months ending in Sept 1991. 7/ Commercial dollar rate, last twelve months ending in October 1991. 8/ Parallel dollar (Sao Paulo market), last twelve months ending in October 1991. 9/ January-August 1991. 10/ As of March 1991. 11/ As of August 1991. 12/ January-June 1991. 13/ Estimate. 1. General Policy Framework Brazil has a population of 155 million on a landmass which constitutes 48 percent of South America. Upon assuming office in March 1990, President Collor immediately announced his intention to implement sweeping economic reforms designed to stop inflation and integrate Brazil into the developed world economy. Although Collor's first two economic programs have significantly reduced trade barriers, the failure to reduce substantially Brazil's large fiscal deficit has resulted in the continual resurgence of inflation and a lack of confidence in the government's economic policy. With inflation running at a monthly rate near 25 percent in October 1991 and accelerating, the government is hoping to implement a tax reform program prior to the end of 1991 which would substantially reduce the fiscal deficit, enable Brazil to obtain an IMF program, reschedule its external debts owed to commercial banks and Paris Club creditors, and regain private-sector confidence in the ability of the government to maintain a stable economic environment. Given Brazil's history and the current lack of support for President Collor in the Congress, the domestic and external financial markets are highly skeptical that the government will be able to achieve all of these objectives and that structural inflation can be reduced from the monthly double-digit range. Monetary Policy: Brazil has made many attempts during the 1980s to tighten monetary policy in an effort to reduce inflation. However, these attempts were compromised by the failure of the government to correct a large fiscal deficit, forcing the Central Bank to soften its policies. In March 1990, the Collor government introduced a stabilization program (Collor I) which included price controls and the blocking of about two thirds of the financial assets in the economy for a period of 18 months. These measures initially stopped inflation (then approximately 90 percent per month) and substantially slowed economic activity. Concerns about negative growth led the government to prematurely release a large portion of the blocked assets. By mid-1990 the monthly inflation rate was around 10 percent and by the end of the year it was in the 20 percent range. On January 31, 1991 the Collor government introduced another package of measures designed to reduce inflation (Collor II). The package included wage and price controls. It also eliminated the generalized "overnight" market, which was complicating monetary policy, through the imposition of a graduated tax on early withdrawals. The program initially brought monthly inflation below 10 percent. However, the failure to reduce the structural fiscal deficit, intermittent tightening and loosening of monetary policy, the unfreezing of prices and wages by the third quarter, and the unfreezing of remaining blocked accounts resulted in monthly inflation rising above 20 percent by the fourth quarter. Large fiscal deficits and uneven monetary policy are the underlying factors causing inflation in Brazil. During the first Collor plan, the government managed to reduce the operational fiscal deficit from nearly 7 percent of GDP in 1989 to a surplus of 1.3 percent of GDP. However, the bulk of the improvement was made through a series of one-time measures that did not address the structural deficit. Among such measures were the payment of negative real interest rates on the blocked financial assets and government securities, the payment of low real wages to public-sector employees, and a one-time financial assets tax. The operational deficit in 1991 is expected to be on the order of 3 percent of GDP and is on a rising trend. The government has presented a series of tax reform proposals designed to simplify and increase revenues in an effort to improve its fiscal position. This program passed the Congress at the end of 1991. 2. Exchange Rate Policies Brazil has three exchange rates: a commercial rate, the tourist rate and the underground, but officially tolerated, parallel rate. Import-export transactions utilize the commercial rate, while the tourist and parallel rates are generally for individual transactions. During 1991 the Central Bank intervened in the commercial market on a daily basis to allow the cruzeiro to depreciate against the dollar in small, uneven increments. The Central Bank also strived to maintain the spread between the parallel and commercial rates at about 12 percent. Private arbitrage generally keeps the tourist rate slightly below the parallel rate. Increases in the spread between the parallel and commercial rates had generally been seen as an indicator of future expectations of inflation and depreciation of the commercial rate, but the parallel rate is heavily influenced by short-term speculative movements. During most of 1991, depreciation of the various rates was not enough to offset increasing inflation; throughout most of the year the Brazilian currency was viewed by many economists to be at least 20 percent overvalued in relation to the the U.S. dollar. However, in the last quarter of 1991, the commercial rate was devalued by 15 percent in real terms, so that, as of November, the exchange rate became more closely aligned with international purchasing power parities. However, the spread between the parallel and commercial rates has widened, reaching a peak of 42 percent in late October, indicating future volatility in the exchange markets. 3. Structural Policies In August 1991 the government began to return the remaining blocked financial assets, and, in the third quarter, reduced price controls decreed under the two Collor plans. Although the government has spoken of the possibility of selectively reimposing some price controls, prices are now largely determined by market demand. Tax policies were undergoing a major review at the time of writing. The Collor Administration has proposed a four-tier personal income tax that would raise the marginal rate to 35 percent and eliminate many exemptions. At the same time, other bills in Congress could establish a unitary personal income tax and a comprehensive value-added tax. While Brazilian tariffs remain relatively high, rates were substantially reduced in March 1991, especially for machinery and raw materials. The current trade-weighted average tariff rate is approximately 32 percent, with a maximum rate of 85 percent, down from 105 percent in 1990. At present, only 600 items of traded goods enjoy bound Most-Favored-Nation status in Brazil, about 5 percent of the total, compared to an average of 90 percent among GATT members. 4. Debt Management Policies Brazil's external debt totalled about $120 billion at the end of 1990. About half of this amount represents commercial bank medium and long-term loans. In July 1989, Brazil stopped servicing payments on medium and long-term debts owed to commercial banks. By the end of 1990, interest arrears owed to banks totalled nearly USD 9 billion. In January 1991, Brazil resumed paying 30 percent of interest payments falling due to banks. In April 1991 Brazil and its commercial bank creditors agreed on a program that involved payment in cash of 25 percent of the arrears outstanding as of December 1990 and the issuance of 10-year bonds for the remainder. Brazil is currently negotiating with its creditor banks on a Brady Plan package that would reschedule medium and long-term debts and eliminate remaining arrears. Brazil also wants to renegotiate its bilateral official debt under a Paris Club accord. Both, however, are contingent on an agreement with the IMF on a stabilization program which was approved in January 1992. A major condition for IMF approval was the passage by the Brazilian Congress of a tax package to help close the fiscal deficit. As of November, Brazil's debt service ratio (total external debt service payments to exports) was approximately 45 percent, while the ratio of interest payments to exports of goods and services was about 24 percent; Brazil's debt ratio (total external debt to GNP) was about 30 percent. 5. Significant Barriers to U.S. Exports Import Licenses: Although Brazil requires licenses for virtually all imports, the Collor Administration has generally abandoned the country's long-standing practice of using them as a non-tariff barrier to protect domestic industry except in the case of computer and digital electronics equipment which will be subject to restrictive licensing until October 29, 1992. At that time, licensing is expected to become automatic. Licenses are now used for statistical and exchange-control purposes and are issued automatically within five days by the Banco do Brasil. Plans call for all private banks to be authorized to issue import licenses by March 1992; a pilot program already allows five private bank branches to do so. Services Barriers: Restrictive investment laws, lack of administrative transparency, legal and administrative restrictions on remittances and the occasionally arbitrary application of regulations and laws limit U.S. service exports to Brazil. Service trade possibilities are also affected by limitations on foreign capital participation in many service sectors. Foreign companies are prevented from providing technical services unless Brazilian firms are unable to perform them. Brazilian cargo reserve laws restrict maritime competition. Financial services, in particular, are severely restricted under the 1988 Constitution, though the full extent of those restrictions will remain unclear until implementing legislation is passed, probably during 1992. As of November 1991, no new foreign banking investments are allowed, and existing foreign banks are prevented from doing business with parastatal companies or from acting as depositories for federal tax receipts. Foreign participation in the insurance industry is impeded by limitations on foreign investment, market reserves for Brazilian firms in areas such as import insurance, and the requirement that parastatals purchase insurance only from Brazilian-owned firms. Further, the lucrative reinsurance market is reserved for the state monopoly, the Reinsurance Institute of Brazil (IRB). Investment Barriers: In addition to the restrictions on insurance and financial services investments mentioned above, foreign investment is prohibited in other sectors, including petroleum production and refining, public utilities, media, real estate, shipping and various "strategic industries." In still other sectors, Brazil limits foreign equity participation (such as in computer and digital electronics equipment), imposes local content requirements and links incentives to export performance. In September 1991, the Collor Administration proposed several amendments to the national constitution, two of which, if passed by Congress, would rescind state monopolies in the petroleum sector and remove the limit on foreign equity participation in mining. In November it was still uncertain whether the amendments would eventually be passed by Congress. Brazil restricts dividend and profit remittances in an effort to spur domestic reinvestment. Annual remittances by foreign firms exceeding 12 percent of registered capital are taxed at steeply graduated rates to a maximum of 60 percent. As of November 1991, the Brazilian Congress was considering a major revision of the law governing foreign remittances which would considerably reduce the overall tax rate. As with the proposed amendments on state monopolies, the situation was inconclusive, but with indications that the revision would eventually be approved. As part of the Collor I economic stabilization plan, almost all Brazilian financial accounts were frozen in March 1990. The government also blocked an estimated $1.5 billion in deposits awaiting foreign remittance for a period of six weeks, then allowed their release over the following six months. The government has stated its intention not to impose another remittance block despite increasing inflationary pressures. Brazilian governments in the past have not hesitated to apply price controls on a wide range of industrial products in attempts to fight inflation. Established foreign investors in Brazil, notably in the auto and pharmaceutical industries, have complained that formerly inflexible price controls forced them into unprofitable production and resulted in lower investment levels. Although the Collor Administration has abolished controls on most items, it has threatened to impose selective price controls on those products having increases out of proportion to production costs. Informatics: In 1984 Brazil approved a law codifying and extending policies followed since the 1970's to promote a national computer industry. The informatics sector is broadly defined to include not only computers and parts, but all other devices incorporating digital technology. The law granted Brazil's executive branch the authority to restrict imports and foreign investment in this sector through October 1992. U.S. export and investment losses resulting from Brazil's restrictive informatics policies have been substantial, although no reliable quantitative estimates are available. The restrictive Brazilian informatics law was the subject of a U.S. initiated Section 301 investigation between 1985 and 1989. Upon assuming office, the Collor Administration undertook to revise the informatics policy with the aim of lowering domestic acquisition costs and improving user access to imported or locally-manufactured foreign technology. The administration proposed a new law which was passed by Congress in September 1991 and signed by President Collor in October. The law upholds the October 1992 date for ending the restriction on imported informatics products and allows foreign firms to enter the market (although full foreign ownership is still limited by the new law) without being compelled to set up Brazilian majority-owned joint ventures, as required under the previous informatics law. Data Processing and Telecommunications: In July 1991 Brazil partially opened up the market for telecommunications, allowing private sector use of public telephone lines for domestic and international data communications, and the installation of private satellite receivers. Other changes during 1991 include the expiration of the market reserve for telephone switching equipment, and the new informatics law, which will make it easier to import telecommunications- related computing equipment both immediately and after 1992. Common Market of the South (MERCOSUL): In August 1990, Brazil, Argentina, Paraguay and Uruguay jointly signed a treaty establishing a timetable for creation of the Mercosul common market. The target date for complete economic integration is 1995, by which time the four countries aim to harmonize tariffs, industrial and transportation standards, intellectual property and consumer protection codes, and institute similar tax regimes. The Brazilian Congress ratified the treaty in October 1991. The United States has encouraged the creation of Mercosul and, in June 1991, embraced it as part of the Enterprise of the Americas Initiative under the "Four plus One" agreement, whereby the U.S. and the four countries in Mercosul will consult closely on trade and investment relations. However, the effects that Mercosul might have on U.S. exporters and investors are still unclear. Manufacturers with local operations may find advantages in rationalizing production facilities among the four countries and welcome harmonization of tariffs, consumer codes and other laws to the extent that it simplifies access to the larger market. Others, particularly exporters to the Mercosul countries, fear that possible "upward" harmonization of non-tariff barriers could restrict their access to existing markets. Government Procurement: Federal, state and municipal governments in Brazil, as well as related agencies and companies, follow a "buy national" policy. Brazil rescinded a law prohibiting foreign-owned firms from bidding on public sector contracts financed by international financial institutions. However, some state-controlled firms still specify contracts as open only to "national" firms. Although Brazil now applies "buy national" policies informally, the Brazilian constitution mandates government discrimination in favor of "Brazilian companies with national capital." However, these Constitutional provisions have not been implemented. The Collor Administration has proposed a constitutional amendment which would substantially alter the definition of "national capital," which might reduce or eliminate the the threat of discrimination against subsidiaries of foreign companies in government procurement contracts. While federal agencies and parastatals have been given additional leeway under the Collor Administration to import foreign manufactured goods, there is still evidence of the tendency to exclude non-Brazilian suppliers whenever possible. One example is the new informatics law, which calls for government procurement from non-Brazilian companies only if nationally made equipment/services are not competitive. Brazil is not a signatory to the GATT Code on Government Procurement. 6. Export Subsidies Policies While Brazil had a broad range of export subsidy programs for manufactured goods and processed agricultural products, all were abolished in mid-1990 with the advent of the Collor Administration. In 1991 the government established PROEX, an export-import financing fund. In October 1991, interest rates for export credits were 8 and 8.5 percent for, respectively, developing and developed countries. These rates, and other rules affecting export incentives, are considered to broadly conform to the Organization for Economic Cooperation and Developement guidelines. 7. Protection of U.S. Intellectual Property The Collor Administration has made a commitment to modernize Brazil's intellectual property code to bring it more into line with developed country standards. In March 1991 the government submitted a draft bill to Brazil's Congress for a law that would address some, although not all, of the concerns expressed by foreign governments and companies, as well as by an increasing number of Brazilians who recognize the need for effective protection of intellectual property rights. As of November 1991, Congress was considering the bill; a date for possible approval of the law remained uncertain. Patents: Brazil currently does not provide either product or process patent protection for metal alloys, chemical compounds, food and chemical/pharma- ceutical substances, or biotechnological inventions. The government bill would recognize all but the latter category, for which another bill is being drafted. However, the bill includes onerous compulsory licensing provisions, does not contain transition protection for previously non-patentable subject matter which has not yet been placed on the Brazilian market, allows for parallel importation of patented products and includes a "working requirement." Trademarks: All licensing and technical assistance agreements (including franchising), as well as trademark licenses, must be registered with the National Institute for Industrial Property (INPI). Without such registration, a trademark or patent may be cancelled for non-use. As a signatory of the Paris Convention, Brazil theoretically respects well-known, internationally recognized trademarks. In practice, bogus trademark registrations have regularly occurred, often resulting in protracted legal actions by the legitimate trademark owners. A recent reorganization of INPI's trademark office may help to reduce this problem. The government bill also attempts to rectify this by providing a more ample definition of "well-known trademarks." Copyrights: While Brazil's copyright law, including specific legislation on computer software, generally conforms to world standards, it is often vitiated by weak enforcement. An estimated 50 percent of the Brazilian home video market, for example, is lost to pirated tapes -- sold or rented publicly by retail shops and street vendors. As of November, a government bill amending the penal code and establishing stronger penalties for copyright violations is pending congressional approval. American film industry representatives believe that the law, if passed, will facilitate the seizure and destruction of pirated material. Impact on U.S. Trade: A Section 301 investigation was initiated following the submission of a petition by the Pharmaceutical Manufacturers Association (PMA). The investigation focused on the lack of patent protection for pharmaceuticals. In 1988, 100 percent ad valorem tariffs were imposed on $39 million worth of U.S. imports from Brazil. Those sanctions were ended in June 1990 after the current Brazilian administration announced its commitment to revise the industrial property code to extend patent protection to pharmaceuticals. The PMA has claimed that its member companies' losses exceeding $100 million in Brazil due to inadequate protection of intellectual property rights. The U.S. motion picture industry estimates its annual losses from piracy in Brazil to be on the order of $50 to $80 million per year. Software distributors for both imported and domestic products estimate that their losses due to piracy amount to 250 percent of the $80 million sales in 1990. 8. Worker Rights a. The Right of Association Brazil's Constitution and Labor Code provide for union representation for all Brazilian workers. The right to strike is protected by the constitution and is vigorously exercised. However, essential services must remain in operation during a strike. Workers must notify employers at least 48 hours before a walkout. Abuse of the right to strike is punishable under the law. Although a court declared one strike abusive in 1991, the courts have been applying this law with more discretion. Brazil has three central labor orgainizations with international affiliations. b. The Right to Organize and Bargain Collectively The right to organize is guaranteed by the constitution and trade unions are legally mandated to represent workers. The government encourages labor and management to resolve differences through collective bargaining. Nevertheless, a system of special labor courts continues to exercise normative powers over the settlement of labor disputes, thereby discouraging direct negotiation. c. Prohibition of Forced or Compulsory Labor Although the constitution prohibits forced labor, enforcement of labor laws is often lax. There have been cases of forced labor involving migrant workers in jungle areas. d. Minimum Age for Employment of Children The minimum working age under the constitution is 14, except for apprentices. For youths under 18, laws regulate night work, prohibit employment in unhealthy, dangerous, or morally harmful occupations, and require primary school attendance. However, enforcement is lax. It is estimated that 34 percent of all children between the ages of 10 and 14 are economically active, many in violation of the law. e. Acceptable Conditions of Work The Constitution and labor laws establish minimum salaries and maximum workweeks and regulate worksite conditions. However, enforcement leaves much to be desired. Some 40 percent of the economically active population, including minors, earns no more than the minimum monthly salary. Worker health and safety laws are poorly enforced and, according to the latest available statistics, Brazil ranks first worldwide in the rate of workplace accidents. f. Rights in Sectors with U. S. Investment Conditions in sectors with U.S. investment do not differ from those in the rest of the economy. Extent of U.S. Investment in Goods Producing Sectors U.S. Direct Investment Position Abroad on a Historical-Cost Basis - 1990 (Millions of U.S. dollars) Category Amount Petroleum 650 Total Manufacturing 11,286 Food & Kindred Products 870 Chemicals & Allied Products 2,172 Metals, Primary & Fabricated 1,232 Machinery, except Electrical 2,169 Electric & Electronic Equipment 742 Transportation Equipment 1,520 Other Manufacturing 2,581 Wholesale Trade 302 TOTAL PETROLEUM/MANUFACTURING/WHOLESALE TRADE 12,238 Source: U.S. Department of Commerce, Survey of Current Business August 1991, Vol. 71, No. 8, Table 11.3