10:38 AM Aug 13, 1996

JAPAN, BRAZIL CONSULT OVER AUTOMOBILE POLICY

Geneva 13 Aug (Chakravarthi Raghavan) -- Japan and Brazil are holding consultations at the World Trade Organization Tuesday under the WTO dispute settlement procedures over Brazil's automobile tariffs and the benefits it has given to local manufacturers on the basis of local content and exports.

Japan formally lodged a complaint at the WTO on 30 July and asked for the consultations to be held on 13 August. Earlier, Brazil and Japan had held talks, outside the WTO in June and July, but these did not resolve their differences.

The European Union, South Korea and the United States have joined themselves to the Japanese complaint so as to be able to participate in the consultations.

Independently, the United States has announced that it is starting its own dispute settlement process against Brazil on the same issues.

According to the Japanese press reports, the 'facts' on which the dispute is being raised relates to Brazil's slapping tariffs of upto 70% on imported motor vehicles and parts to stem its trade haemorrhage and overcome its balance-of-payments.

Subsequently, in December 1995, it instituted two measures under which those manufacturers within Brazil whose local content is more than 80 percent and which export assembled vehicles from their Brazilian plants have been exempt.

This in the Japanese view violates Brazil's obligations under the GATT/WTO agreements.

Brazil's automobile policy that is the subject of the dispute has created some foreign 'stake-holders' -- foreign manufacturers who have set up operations inside Brazil and benefit by it -- and has pitted them against others who have been trying to supply the Brazilian market through exports.

It is not merely that Europe, Japan and the United States have some different mercantalist interests in this area, but also firms within each of these countries and trading blocs: there are some automobile TNCs which benefit and others which lose, and even those likely to benefit are looking at the implications in other markets.

The entire dispute has thus created quite a tangled web.

The Brazilian policy and measures being challenged have arisen from the difficulties of Brazil is facing over its balance-of-payments, and its attempts to stem them through some trade policy measures.

Some of these problems are the result of the MERCOSUR and the differing regimes of its partners (that have a transition period before harmonization) as also the result of reactions to the Mexican Peso crisis and the measures that Argentina (linked to Brazil within Mercosur) took to ensure that its own monetary and neo-liberal economic policies are not blown off course by the Mexican crisis.

Brazil's motor vehicle industry was set up in 1950, with heavy protection (that was also prevalent in Europe and Japan at that time). Gradually over a period, Brazil has emerged as among the world's leading producers, ranking ninth in the world motor-vehicles league.

There are nine producers in the Brazilian market, with four TNCs -- Volkswagen, Fiat, General Motors and Ford -- producing passenger cars while others producers vehicles. There are some 1600 firms producing parts and components for the industry. Some European firms have also set up new production units.

Imports of passenger vehicles have been coming in from Japan, Argentina, USA, Italy and Germany, while Brazilian exports go to Argentina, Italy, Chile, Mexico and Uruguay.

The tariff rates for this sector were reduced from a previous high of 105% to an average of 20% by 1994.

But the rates were raised to 32% in February last year and to 70% in March. These rates, according to Brazil's tariff schedules in the WTO (Uruguay Round), will be consolidated at 35% by year 2000.

The sector also receives export incentives, but many of these subsidies would have to be gradually phased out by Brazil by 2003.

When the WTO came into force, and with it the Agreement on Trade-Related Investment Measures (TRIMs), a number of measures in countries like local content requirements and trade-balancing requirements (balancing imports by equivalent value of exports) etc were made illegal.

But the TRIMs gives developing countries who have such measures, and have notified them, five years to phase them out. Also, TRIms requirements do not apply to those maintaining measures for balance-of-payments reasons.

However, during the regime of President Collor, Brazil undertook whole-sale, some would say pell-mell, liberalisation policies. It also disinvoked in 1991 its balance-of-payments rights under Art. XVIII, and did away with a large number of "investment measures", specifying use of local content or materials or value added, as also export requirements.

And when the WTO's Trims agreement came into force, having no TRIMs in place, Brazil did not notify any such measures and can't institute new measures.

Argentina, its Mercosur partner, while it also disinvoked its Art. XVIII BOP rights, despite its neo-liberal orthodoxy, on the other hand, had a number of TRIMs in place and has notified them, and thus can maintain them till 2000. These include local content and export performance requirements adopted in 1991.

As a result, Argentina (which had a peso-dollar equivalence and free convertibility) attracted outside investments in its automobile sector, and was able to export to Brazil where its domestic manufacturers of motor vehicles and parts raised an outcry, forcing the government to act to safeguard the domestic producers.

Under Mercosur, there is to be harmonisation of trade regimes of partners by 2000 or so, with a common regime to be agreed and set in a document to be finalised by 31 December 1997.

Under the transition regime, Argentina and Uruguay benefit, and are entitled to main their special regimes, including investment measures. The two notified the WTO of their existing TRIMs and thus can maintain them till 31 December 1999.

Until the harmonised Mercosur regime comes into force, bilateral agreements among partners would regulate the automotive sector.

The Brazilian Plano Real (a stabilization programme that Brazil undertook, but without IMF funds) and its effects in licking Brazilian inflation (bringing it down from a monthly 50% to a two percent) provided in Brazil, created a situation where Brazil attracted a large amount of short-term capital flows, and Brazilian consumption was being financed by such flows.

After the Mexican crisis, and learning from it, Brazil acted to deal with the problem. It first imposed quotas on automobile imports, reinvoking the BOP provisions and using its cover.

But in the BOP consultations, the IMF in its assessment included both the normal long-term reserves as also the short-term flows, and said that Brazil had a reserve of 12 months imports, though potentially volatile short-term capital formed a high proportion.

While Brazil insisted that this showed that it needed import quotas to forestall a BOP threat (that could come by a quick exit of short-term funds), several of the countries exporting to Brazil took a hard-line view that there was no threat of a serious decline in BOP reserves.

The BOP Committee finally concluded that the circumstances of Brazil did not justify the import quotas.

Brazil withdrew the quotas, but took the investment measures, and in March 1996 sought a WTO waiver for it, noting in the waiver request the Mercosur integration accord and the plans to achieve a common trade regime for automobile sector by year 2000.

Brazil justified its own measures as trying to bring them in line with those of its Mercosur partners.

In March 1996, at the WTO's Goods Council, Korea and Japan strongly criticised the Brazilian move and the measures in force and expressed their concerns, viewing them as a violation of TRIMs and a bad precedent for the WTO system. Subsequently, Brazil withdrew its waiver request, but provided no formal explanation.

The consultations (an essential preliminary step towards establishing a dispute settlement panel) started Tuesday, but all sides kept mum. The consultations are expected to go on this week.

Given the periods laid down in the WTO from the raising of a dispute through establishing panels, appeals to the appellate body and a minimum further two years for countries to comply with any ruling (before WTO sanction for retaliatory actions can be sought and applied), by the time this dispute runs its course, the MERCOSUR common regime and policy on automobile sector and investment regime could be in place.