International Trade/WTO

International Trade/WTO in Brazil 

For the first time following the end of the cold war, the year 2022 marks a point at which globalization is truly being challenged. The trade war between the U.S. and China initiated during the Trump administration was certainly a significant challenge to globalization, but the combination of the post-pandemic era and the imposition of unprecedented sanctions on Russia as a result of the war with Ukraine are heavily impacting integrated economies all over the world in a manner that is bringing to bear the consequences at a global scale more than ever before.

Brazil’s gross domestic product (GDP) closed out 2021 up 4.6 percent - the surge was enough to cover the losses of 2020, when the Brazilian economy shrank 3.9 percent as a result of the pandemic. But the increase of inflation forced the country to exit historically low interest rates and put it back again on the list of highest world interest rates. Not much took place in 2020 on the promised tax and administrative reforms, nor has there been much progress on the expected “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.

What can we expect for Brazil’s international trade outlook given all these internal and external developments?

Local perspectives: It is an election year. Historically, election years are not characterized by significant changes that could potentially result in deeper tax and administrative reforms. Specifically on the trade front, we can expect the following:

Tariffs: The high ambition of lowering tariffs at the beginning of the current administration proved to be extremely challenging due to the pandemic and the inability to deliver other structural reforms that could create the means to allow tariffs to be reduced. Modest development was made with a temporary 10% import tariff reduction on 87% of the tariff codes. Not many developments are expected that could result in additional horizontal tariff reductions in 2022.

Trade remedies: New legislation has recently been put forward for subsidies and countervailing measures. Regardless of the “liberal” positioning of the current Federal Government, the country continues to be a strong user of trade remedies in general. “Public Interest” investigations, which became mandatory for all new trade remedy cases and a possibility in administrative reviews, have increased significantly and impacted the application of historical trade remedies (mainly aimed at lowering or suspending duties).

Trade facilitation: New actions have been put forward to improve transparency and simplification of import and export controls. This is an area of continued action by the Brazilian Government, where we expect more to come during 2022 with a view to reducing bureaucracy, cost and time on export and import transactions.

Export controls: All sanctions imposed by the United Nations Security Council (UNSC) are enforced in Brazil immediately. In addition, there are export controls for “sensitive goods” in compliance with international treaties signed by Brazil, such as the Treaty on the Non-Proliferation of Nuclear Weapons, the Chemical Weapons Convention (CWC) and the Biological Weapons Convention (BWC). The law referring to such controls defines “sensitive goods” as: dual-use goods and goods used in the nuclear, chemical or biological areas. Brazilian export controls might become more restrictive depending on the developments of the war between Russia and Ukraine.

Trade negotiations: Brazil continues to make a strong effort to become a member of the OECD, but there are still high hurdles to be overcome in terms of internal reforms as well as international support that is unlikely to be available to the current government in the near future. Although many initiatives were carried out to negotiate new free trade or preferential trade agreements (with, for example, Singapore, Canada, South Korea, Vietnam and Indonesia), it is not clear if any of these negotiations could effectively become an agreement in the near future.

WTO: In 2021, 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 May 18, 2020, Brazil initiated the process of accession to the Government Procurement Agreement (GPA) of the WTO. Brazil presented a checklist of issues pertaining to its government procurement in October 2020 and its initial market access offer in February 2021. In November 2021 Brazil submitted its revised market access offer for joining the GPA. In April 2021, the Brazilian government approved a mandate to negotiate its accession to the Agreement on Trade in Civil Aircraft.

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:

DS579: The WTO Panel Report established that: (a) Regarding India's alleged domestic support to sugarcane producers, the Panel found that India provided non-exempt product-specific domestic support to sugarcane producers in excess of the permitted level of 10% of the total value of sugarcane production, and that India is acting inconsistently with its obligations under Article 7.2(b) of the Agreement on Agriculture; (b) Regarding India's alleged export subsidies for sugar, the Panel found that such export subsidies are inconsistent with Articles 3.3 and 8 of the Agreement on Agriculture.

India notified the DSB of its decision to appeal the Panel Report.

DS596: Peru requested consultations with Brazil regarding certain measures that concern the importation to and commercialization 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 instead 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).

DS607: Brazil requested consultations with the European Union with respect to EU measures regarding the importation of certain poultry meat preparations from Brazil. The request concerned the application by the EU of salmonella food safety criteria on fresh poultry meat and certain poultry meat preparations, and the appropriate level of sanitary protection necessary to address risks to human health from the contamination with salmonella in products under these food categories.

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

Global perspectives: Although Russia is not a prominent trading partner of Brazil (given that it does not even appear among the 25 largest Brazilian trading partners), Brazil is not going to go unaffected by all the recent world developments. The application of sanctions by the United States and by Europe impose restrictions extraterritorially and therefore have an impact on Brazilian companies operating in foreign trade.

It is also important to note that the pandemic and the war in Ukraine are likely to result in a swift change to the European energy model and that may, in turn, push for an ESG agenda. The combination of these factors may offer an opportunity for Brazil with biofuels and other green initiatives, provided, of course, that the Brazilian Government adequately presents itself in the international arena as an ESG compliant player.

In conclusion, in terms of international trade practice work, we expect to see a sharp increase in work dedicated to clients navigating international trade sanctions and we continue to support companies operating in an extremely volatile and complex trade environment brought on by the war in Ukraine and Brazil’s elections.

Editor’s note: Demarest’s 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 70 trade remedy cases. He also represented the Brazilian government before the WTO in landmark disputes and assisted the Brazilian steel industry with dumping and subsidies investigations against China and dumping investigation against 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.