Brazil opens up to trade in historic turnaround

Looking for hints on how to pull the world out of its current inflationary state? You could do worse than turn to a country whose currency is worth less than a trillionth of its value in the early 1980s.
At a time when most of the world is compounding the problems of broken supply chains and rising energy prices by slapping tariffs on imports, Brazil — of all countries — is opening itself up to trade.
It’s a remarkable turnaround for anyone familiar with Brazil’s history. In the years after World War II, the country was a cradle of import-substituting industrialisation, a development policy popular in Latin America that choked imports to encourage domestic manufacturing. That lost out to the export-oriented model followed by Asia’s tiger economies and has since been abandoned. Still, Brazil’s tariffs on a trade-weighted basis remain the highest among Group of 20 economies after Argentina.
That’s starting to change. With inflation at 12.1%, its highest level since 2003, the country is rushing to lower the cost of imported goods. Duties on some 6,195 products would be temporarily cut by 10%, the government announced last month. That follows a similar round of reductions late last year.
More dramatic were the cuts on a range of high-profile essentials. Tariffs on ethanol, margarine, coffee, cheese, sugar and soybean oil were eliminated altogether in March, followed in May by those on chicken, beef, wheat, corn and baked goods. Sulfuric acid would also be zero-rated. Those reforms aren’t going to represent a revolution on their own. Permanent reductions would run up against the rules of the Mercosur trading bloc, so the moves have been billed as temporary humanitarian expedients to ease the cost of inflation in the wake of Brazil’s punishing Covid epidemic.
After decades of trade isolationism, it’s not clear whether either President Jair Bolsonaro or former leader Luiz Inacio Lula da Silva, his likely challenger in this year’s elections, would back a wholesale switch away from protection.
The shift probably doesn’t even have much of a constituency. Cutting the cost of farm produce from other countries will annoy Brazil’s powerful agribusiness interests. Meanwhile, the purchasing power of households has declined so dramatically in recent years that most couldn’t afford imported foodstuffs at any tariff rate. Still, it’s a welcome shift in the wind for a world economy that’s been drifting in a protectionist direction in recent years.
Take the US. Four years after the start of President Donald Trump’s trade war with China, some $300 billion of goods imports — three-fifths of the total — continue to labor under tariffs of as much as 25%. Beijing has matching import taxes on almost every cent of the $150 billion trade in the other direction. While Trump-era trade wars with the European Union, Japan and the UK have been formally ended, they’ve left a legacy of quotas, meaning that additional imports above historical levels are taxed at Trump-style rates. As a result, there’s little scope for input costs to be reined in by allowing the most efficient producers to take market share across borders.
The Indo-Pacific Economic Framework, the centerpiece of President Joe Biden’s attempts to reinvigorate America’s economic relations in Asia, has a similarly protectionist flavour.

—Bloomberg