According to the WTO, Brazil’s industrial programs are inconsistent with the international agreements signed by the country, in addition to providing prohibited subsidies.
Brazil’s industrial policy in check
The European Union’s (DS472) and Japan’s (DS497) disputes against Brazil’s industrial policy benefits are close to a conclusion. After almost four years since the beginning of the processes, the World Trade Organization (WTO) Dispute Settlement Body released the Panel’s report of the cases this past August, and argued that seven Brazilian programs that sought to promote technological innovation and boost exports do not comply with the Organization’s rules.
One of the main complaints was against the tax exemption granted to automotive companies that produced a percentage of their products locally. This would represent a disguised subsidy and distort international competition.
The Panel concluded that Brazil should withdraw all illegal subsidies within 90 days of the final text’s approval. On September 29th, the Brazilian government appealed to the WTO report on both cases. If the panel’s report is confirmed and Brazilian government does not comply with the WTO’s recommendation, parties could retaliate against the country. This could have direct impacts on companies doing business in Brazil.
The future of Brazilian industrial policy
The Brazilian government must now reassess its industrial policy during one of the country’s worst political and economic crises. For two years in a row, Brazil’s GDP has contracted by more than 3%. This in turn has helped drive the unemployment rate of to 13.7%. This economic contraction complicates Brazil’s ability to comply with the WTO’s requirements.
On the one hand, industrial policies have the objective of promoting innovation and productivity. On the other, policies aimed at alleviating the economic crisis should reduce government spending and increase public revenues.
The government will have to think of alternatives to tax breaks to spur industrial development, all with minimum intervention. The new policy will have to follow a more functional development policy, simplifying taxes and reducing the cost of doing business in Brazil, while supporting innovation and creating a proper environment for companies to invest in this kind of activity.
This is no easy task, especially given Brazil’s unstable economy and political scene. This task is further complicated by the lack of attention that the private sector has paid the WTO ruling thus far – even though it will need to be a major partner in drafting legislation, the public sector has largely remained uninterested in the rulings.
The Brazilian government’s ability to carry out these policy changes is further hampered by its entanglement in several ongoing corruption scandals. The government has spent the last 5 months focusing on defending President Michel Temer against two charges on corruption presented by the Attorney’s General Office. Temer’s refusal to resign has had a high cost for the country, and postponed the approval of highly important proposals for a faster economic recovery.
Now, for the next following months, the government will have to articulate to approve several unpopular measures, such as the pension reform, the postponement of salary readjustment for civil servants, and the end of benefits for several sectors. Additionally, the constant corruption scandals revealed by several plea bargains under negotiation by top politicians arrested and the upcoming 2018 presidential elections. Temer’s cabinet will continue to be affected by scandals, and changes might affect the continuity of the undergoing policies.
Starting in around April 2018, the runup to the October 2018 general elections, will further complicate the government’s agenda and make difficult to approve any proposal. It is important to note that any ministers that intend to run for the elections will have to leave their positions.
If the Minister of Development, Industry, and Trade, decides to run for instance, the ministry might be left without a clear leadership until 2019. Something that would reduce political influence in the draft of the new policy, however, without someone ahead of the ministry, the final decision over the policy would be postponed.
A new policy might take longer than expected
Brazil’s appeal of the WTO’s ruling will postpone the final decision against the programs at least 2018. Brazil might also benefit from the number of processes currently under analysis at the WTO and their constant delays – the WTO already broke all deadlines for the final report on the Brazilian cases.
The Trump administration’s recent attempt to block the appointment of new member to the Appellate Body exacerbates the likelihood of further delays. The Appellate Body is already operating with five members instead the normal seven, and will be down to four in December.
If the block continues and no new members are appointed, the delays might increase even more. This delay would allow Brazil to maintain the current policies while the appeal is processed, and would provide the government with more time to work on a long-term and sustainable industrial policy.
Amid major reforms, corruption scandals, and elections, the industrial policy reformulation might not have the attention it needs to comply with the demands of the WTO. There is a high chance that any changes will have to be postponed to the next administration.
This exposes Brazil to a medium term risk of retaliatory sanctions from other countries. It is important to note, however, that this retaliation is not an immediate action and it has to be submitted to the WTO and takes a while to be settled. Without the possibility of counting on the government to focus on the discussion, the private sector and the civil society will have to participate actively in the draft of the new programs to promote innovation and productivity in the country.
Juliano Griebeler is an analyst at Global Risk Insights. As originally appears at: https://globalriskinsights.com/2017/12/wto-condemns-brazil-industrial-policy-brazilian-government-discusses-new-subsidies-rules-amidst-worst-economic-political-crises/