Following the Brazilian government’s decision to impose a 30% tax increase on vehicle imports to the country, Japan and South Korea have complained about the treatment at a committee meeting on market access at the World Trade Organisation.
The complaint is being perceived as a warning shot and could escalate into a full dispute if the two Asian nations are not placated by a Brazilian concession to the protectionist move. Other countries affected by the tax rise could now follow suit.
Japan and South Korea allege that Brazil’s treatment of foreign vehicle brands contravenes WTO rules on trade-related investment measures and Article 3 of the GATT agreement, which says that WTO members must treat foreign and domestic producers equally.
Last month Brazil raised the industrial production tax (IPI) leading to a rise in taxes between 37% and 55% for carmakers that have less than 65% local content. The tax hike includes those vehicles built from imported parts or which are built outside the South American Mercosur trade region or Mexico. The new rate, which will remain in effect until December 2012, is expected to affect as many as 300,000 vehicles each year and could slow overall growth in the car market, potentially adding to inflation as imported cars rise by as much as 28% in price according to analyst IHS Automotive.
The Brazilian government has said the move is necessary to defend its car manufacturing base which is suffering from the effects of a 30% surge in the real against the US dollar, something that has hit the competitiveness of Brazil’s exports and is encouraging imports, especially from Asian countries.
Exports from the country have dropped by nearly 30% so far this year, compared to a 35% jump in imports, including a 43% rise for passenger vehicles and a near 50% rise in the import of light and heavy commercial vehicles for the first eight months.
Figures from Sindipecas, Brazil’s association for automotive parts makers, show that exports from Brazilian parts makers were up 14% on the previous year but that imports have risen much faster, by 22% to July. As a result, the industry has accumulated a trade deficit of $2.7 billion in the first seven months of the year.
At the recent Automotive Logistics South America Summit held in Sao Paolo, Brazil, Alexandre Bernardes, the vice president of the national carmaker’s association, Anfavea, said that the local sector was at risk if the industry couldn’t shift to more local manufacturing and sourcing. “The market has a lot to grow on its way to 6m units [by 2020] and we have to make sure that it is not absorbed by imported products.”
Brazil has now suggested that WTO ministers could debate the IPI tax issue at a biennial meeting in December but it is likely to sit at the top of a list of priorities at the organisation and be dealt with by its working group on trade, debt and finance.