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International Trade in Brazil

Editor’s note: Demarest Advogados’ José Setti Diaz is a prominent figure in Brazil’s corporate law landscape. He has featured in Band 1 in Chambers’ International Trade/WTO rankings for over a decade. During his 24-year career, Diaz has acted in more than 50 trade remedy cases. He also represented the Brazilian government before the WTO in landmark disputes and assisted the Brazilian steel industry with dumping investigations against China and Russia. Diaz is also widely respected for his M&A practice, being highly ranked in Chambers’ Corporate/M&A: The Elite table. Diaz is also known for his leadership role and has been a central figure to his firm’s recent success. In addition to being Band 1 in International Trade/WTO, full-service titan Demarest Advogados ranks highly in a number of tables, displaying high-profile expertise in transactional and non-transactional areas. Brazil is a key importer and exporter, and its goods are strategic to many markets around the world. In the following article, Diaz explains some of the key developments impacting tariffs, trade negotiations, trade remedies and WTO affairs.

International Trade Outlook - Brazil 

Forecasts for international trade were severely impacted by the Covid-19 pandemic. At the beginning of 2020, tax and administrative reforms were at the forefront of the Brazilian government agenda, while in the trade arena, Brazil’s Federal Government promised to deliver a “gradual reduction” of tariffs across the board, aimed at reducing the cost of production in the country, coupled with free trade agreement negotiations to further the insertion of Brazil in global value chains.

Subsequently, lockdowns, the threat of unprecedented unemployment and the disruption of supply chains required a huge effort which resulted in more public spending to support the unemployed population as well as to finance companies in general with respect to their liabilities vis-à-vis taxes and other social obligations. Increased government spending brought the public debt to around 90% of GDP by the end of 2020. In 2020, Brazilian GDP decreased by 4.1%. A positive repercussion is that Brazil reached interest rates at historical lows favouring public savings, where the Brazilian government had historically high expenditures.

As a result of this scenario, the liberal plans developed during 2019 for the trade front had to be postponed in 2020, except for measures seeking to improve Brazil’s competitiveness and to reduce bureaucracy. Below, we highlight a few noteworthy developments in 2020 and some expected trends for 2021:

Tariffs 

Due to the Covid-19 pandemic, the Brazilian government temporarily reduced import duties applied to several products used to combat the virus and prohibited the export of these products in order to avoid shortages in the Brazilian market. Apart from this, expected horizontal tariff reductions have not been implemented yet.

Some signs were recently given by the government, indicating that potential horizontal tariff reductions would be more likely in 2021. On the other hand, internal reforms (especially the tax reform) are likely to be postponed once more as a result of continued demands on government spending and, therefore, the domestic industry is likely to push hard against any (unilateral) liberalisation before the industry recovers from the significant losses of local demand.

Non-tariff Barriers to Trade 

Normally, Brazilian imports are not subject to any licensing requirements. However, some tariff codes are subject to either: (i) automatic licensing, whereby the licence is automatically granted upon request; or (ii) non-automatic licensing, whereby the licence depends on the analysis and approval of a government agency. Non-tariff barriers have been subject to progressive reduction in the last two years, and we should expect this to continue in the coming years.

Improved application of trade facilitation measures, which are extremely important to reducing the cost of trading in Brazil, is likely to recur in 2021. Unlike other countries, Brazil does not apply significant export controls.

Trade Negotiations 

In 2019, Brazil concluded negotiations with the EU and EFTA. Both agreements are still under legal review to be submitted for parliamentary ratification. These agreements are more comprehensive than the agreements signed in the past as they cover tariff reductions and regulatory provisions on goods and services. 2020 was not favourable for Brazil’s image abroad on sustainability issues, making the process of ratification in Europe and EFTA countries even more challenging.

In 2021, in the political arena, we should expect more heated debates around the ratification of these landmark agreements, while in the private sector, we should expect many more initiatives in the Brazilian market in connection with ESG (environmental, social and governance) standards being applied in investments and financing. These initiatives tend to set new standards that will back up a better positioning of Brazil in the process of ratification of these agreements.

Brazil is focused on starting new free trade and preferential trade negotiations, as well as concluding those in progress. The United States, Canada, South Korea, Singapore, Mexico and India are the priority targets for collaboration with Brazil. Negotiations with Canada, Singapore and South Korea are in a more advanced stage. New negotiations have started for Vietnam and Indonesia.

Brazil will continue to make a strong effort to become a member of the OECD. This largely depends on internal reforms as well as international support that is unlikely to be available to the current government in the near future.

Trade Remedies 

In 2020, 15 trade remedy investigations were initiated, most of them consisting of sunset reviews. Conversely, in the same year, Brazilian exports were targeted by 27 trade remedy investigations. These statistics reflect that Brazil continues to be a leading user and target of trade remedies.

The use of trade remedies has taken a different shape since the beginning of the current administration in view of “public interest” investigations, which became mandatory for all new trade remedy cases and a possibility in administrative reviews. “Public interest” investigations and regulations evolved significantly during 2020 and have dramatically modified Brazil’s practice of trade remedies, imposing suspensions or reductions in anti-dumping duties or countervailing duties applied to certain products and origins. This is likely to be a continuing trend for 2021 in the form of relaxing some of the protections that were implemented in the last 15 years.

WTO 

In 2020, multilateral negotiations continued to be locked in a state of inertia on key topics affecting the multilateral trading system. This inactivity is the result of lack of interest as well as a series of battles between its key players (US, EU and China), claiming that reforms to the multilateral trading system are necessary. From the Brazilian perspective, on 18 May 2020, Brazil started the process of accession to the Government Procurement Agreement (GPA) of the WTO. Brazil presented a checklist of issues about its government procurement in October 2020 and its initial market access offer in February 2021.

Despite such inertia, countries continue to make use of the WTO dispute resolution system. We note that Brazil is either a complainant or a respondent in the following WTO cases:

DS568: Brazil is in consultations with China over:

• a safeguard measure imposed by China on imported sugar.

• China's administration of its tariff-rate quota for sugar.

• China's import licensing system for out-of-quota sugar.

DS579: The WTO panel established, in accordance with Brazil’s request, to question domestic support allegedly provided by India in favour of agricultural producers of sugarcane and sugar (domestic support measures), as well as all export subsidies that India allegedly provides for sugar and sugarcane (export subsidy measures).

DS596: Peru requested consultations with Brazil regarding certain measures that concern the importation to and commercialisation in Brazil of biaxially-oriented polyethylene terephthalate (PET) film from Peru. Peru referred to the following measures: (a) definitive anti-dumping duties imposed by Brazil's investigative authority on PET film; (b) an alleged practice by Brazil's investigating authority that includes not requiring the domestic industry to provide evidence relating to internal sales in the country of origin or export, and accepting unverified and unrepresentative information on normal value; and (c) tax treatment allegedly received by imported products through the imposition of the Tax on Industrialised Products (IPI Tax).

WTO cases are likely to increase in the coming years due to growing use of protectionist measures arising from governmental policies to counter the pandemic.

In summary, companies are likely to increase demand from the international trade practice area to strategically position their businesses to face an extremely volatile and complex trade environment.