Government cuts import taxes by 10% and Guedes defends a supply shock to contain inflation

The government decided to anticipate an eventual consensus among the members of Mercosur (Common Market of the South) and published on Friday (5) a measure that reduces by 10% the import tariffs of almost 90% of the products and services used by the parents. For Minister Paulo Guedes (Economy), facilitating the entry of foreign goods will help to moderate inflation.

“The current moment, when we have strong inflationary pressure on the Brazilian economy and we would like to give a supply shock [ao] facilitating the entry of imports to moderate price readjustments, is ideal for opening the economy, albeit timid, “said Guedes at an event organized by the CNC (National Confederation of Commerce) this Friday.

The minister stated that the pandemic has raised the price of food and energy around the world and says that this reinforces the country’s need to integrate itself into the global trade chain. “We need to buy cheaper food from each other and from other regions of the world,” he said.

The cut in tariffs was published in an extra edition of the Diário Oficial da União and reduces Import Tax rates by 87% of the tariff universe, covering more than 8,000 products — including food.

Rice, beans, oils, pasta and biscuits are on the list, as well as food preparation ingredients such as flours and starches. Different types of meat and fish, including salmon and dogfish, also appear.

There is also an extensive list of fruits such as apples, papayas and strawberries. The list of inputs used by the industry is also large.

“The reason we have taken this measure now, before we have a consensus among the four Mercosur members, is the need and urgency to act on inflation. It is not illegal in what we have done,” said Roberto Fendt, Special Secretary for Foreign Trade of the Ministry of Economy.

Despite the inflation justification, technicians recognize that the measure will not be enough to resolve the escalation of values. The ministry’s expectation is that the initiative will reduce the price level in the Brazilian economy by only 0.3% over a period of at least ten years.

“The impact of this measure is limited. It will not be with it that, overnight, we will eliminate inflation,” stated Fendt. “Inflation is a structural phenomenon arising from the breakdown of supply chains around the world,” he said.

Welber Barral, former secretary of Foreign Trade, explains that, traditionally, roughly half of what Brazil imports corresponds to inputs for the industry (chemicals, parts, among others).

According to him, the 10% cut will generate a more noticeable impact for these goods, as they are purchased in larger quantities and some have higher rates.

For the end consumer, the impact tends to be more limited, says Barral, who is a founding partner of BMJ Consultores Associados.

“It is a measure of liberalization, a positive sign for the consumer, but the cut tends to be small for him. It may have a greater effect in some specific situations, but it will not change Brazilian foreign trade.”

The tariff reduction is actually a campaign proposal by the Bolsonaro government. Guedes defends a greater commercial opening and tries to advance with the theme since the beginning of the administration. His team claims that measures of this type increase the flow of trade, investment and GDP (Gross Domestic Product).

He has already tried to carry out a 50% cut in tariffs, but backed off after reactions from the Brazilian industry – which advocates a more gradual transition and accompanied by measures to help domestic companies face foreign competition (by reducing the country cost , for example).

The cut this Friday takes effect next week and is valid until the end of 2022, covering only Brazil, at a cost of R$ 3 billion for the public coffers. The Brazilian government’s intention is to make the measure permanent and make it apply to the entire bloc.

Guedes claims that the cut made by Brazil received the understanding of other Mercosur members (Argentina, Uruguay and Paraguay), but his own team claims that the country anticipated a consensus among the bloc’s partners.

According to Fendt, Brazil, Argentina and Paraguay are in agreement with the definitive reduction in tariffs. “We are now negotiating so that Uruguay can adhere to this reduction on a permanent basis,” he said.

The measure taken by Brazil was based on a 1980 agreement between the Mercosur countries that allows a temporary cut in cases of protection of people’s lives and health. According to the Ministry of Economy, the appeal is justified by the urgent situation brought about by the Covid-19 pandemic.

The issue advanced after the governments of Jair Bolsonaro and Argentine Alberto Fernández reached an agreement on the issue in October, after months of disagreement. Both countries announced an understanding for a 10% cut in the common tariff.

At Argentina’s request, some products will be left out. Among them, products from the automotive industry with tariffs above 14%, as well as textiles, shoes, toys and dairy products.

The government has been working in Mercosur to promote the revision of the TEC (Common External Tariff) and states that, in more than 25 years of existence, the TEC has never undergone a process of comprehensive reform.

Another point defended by Brazil in Mercosur is the proposal for members of the bloc to be freed to negotiate trade agreements independently. This agenda is defended by Uruguay and has the support of the Brazilian government, mainly in Guedes’ team. Argentina is against it.

Caged

During the event, Guedes called “noise” the adjustment in the data that cut in half the balance of jobs in 2020 compared to what was initially reported by the government.

According to data released in January by the Ministry of Economy in Caged (General Register of Employed and Unemployment), the indicator had been positive at 142,690 vacancies last year. After the registration of new information, the balance dropped 46.8%, to 75,883 vacancies created (due mainly to the increase in the records of dismissals).

“There was a lot of noise about a 50,000 error [na verdade, a diferença é de 67 mil], which is quite a lot. There are a lot of unemployment that were apparently wrongly reported in Caged,” he said.

For him, however, the underreporting was not the government’s fault and the review does not change the scenario of job creation in the period. “There may have been an error in Caged, this is not the government’s fault. This comes from the private sector, it is aggregated information,” he said.

In addition to the usual delay and the situation aggravated by the pandemic, experts point out that the impact on the numbers is due to the adaptation to the new Caged methodology, which came into force in 2020.

With the change made by the government, the research started to be fed not only by companies, but also by government technicians — through information such as that from eSocial, a bookkeeping system that unified various obligations of employers.

Guedes also defended during the event that the country explore oil before the commodity is no longer used as a result of the global effort to avoid the use of fossil fuels and contain global warming.

“It is important to explore this wealth,” he stated. “[Estamos] at the risk of these resources becoming obsolete and we are left sitting on what was once wealth,” he said.

The declaration is given amidst COP 26 (United Nations Conference on Climate Change 2021) and global initiatives, even announced by Brazil, to cut greenhouse gas emissions.