7:36 AM Oct 10, 1995

BRAZIL TO REVIEW QRS ON AUTO IMPORTS

Geneva 10 Oct (Chakravarthi Raghavan) -- The Government of Brazil is expected to consider lifting its recently imposed quota restrictions on imports of automobiles, because of pressures from the World Trade Organization.

The Balance-of-Payments Committee of the WTO which considered last week, Brazil's invoking of its rights under Art. XVIII:B of the General Agreement to impose restrictions on account of Balance-of-Payments, appears to have requested the elimination of the quota restrictions.

The Brazilian foreign trade committee, consisting of ministers of all the key ministries involved in foreign trade (foreign affairs, finance, planning, industry and commerce and agriculture), are to meet and consider the recommendations of the WTO's BOP committee and decide on the course of actions.

The expectations here are that the quotas, which have been assailed by foreign suppliers (including the EU, Canada, Japan and South Korea to the Brazilian market) at the WTO/BOP consultations, with several of them reserving their right to raise a dispute and claim compensation may be modified.

But even the lifting of the quota restrictions now are not expected to change the situation very much.

But in Brasilia, the Trade and Industry Minister, Dorothea Werneck, said the government would study alternatives to the quotas, in consultation with industry and labour leaders.

Given the massive surge in imports, there have been suggestions that Brazil could have been better off by invoking the Art XIX 'safeguards' provisions of the WTO/GATT. While this GATT provision has some procedural and other disciplines and, generally, requires actions on imports irrespective of source, there are also loopholes that were put in (during the Uruguay Round) at the instance of the EU for 'selectivity'.

During the WTO/GATT BOP consultations, the International Monetary Fund, presented a report showing that Brazil's foreign reserves were equal to an year's import levels, and thus BOP action was not warranted.

It was Brazil's contention that two-thirds of its reserves included short-term capital flows which by their very nature were volatile and could not be relied upon to judge the BOP positions, and that if the short-term reserves are not taken into account, its reserves only account for about 3-4 months import levels.

The IMF in its recent annual report on capital flows (in August), in the light of the Mexican crisis, has in fact reversed its overall ideological stance and has conceded the volatility of such short-term capital flows and advisability of not too high a reliance on such flows, and has seen some merit in countries regulating such inflows, citing the examples of Chile and some Asian countries like Malaysia.

The contradiction between a view that future short-term inflows should be regulated and even brakes applied, while at the same time using the short-term inflows swelling the foreign reserves to deny the need for any BOP restrictions and for continued "liberalization" of imports is perhaps best explained in terms of the IMF's dogma which coincides with the interests of its major share-holders.

Brazil, in July 1994, put into effect the socalled Real Plan bringing down the monthly hyperinflation of 50% to a monthly 2-3 percent. The Real plan fixed the nominal exchange rate of the Brazilian currency on a par with the US dollar, and supporting this exchange with high interest rates.

It brought in large short-term investment flows from abroad -- to take advantage of the arbitrage gains in interest rates, resulting in a real appreciation of the Brazilian currency by a third in the second half of 1994, and generated a impressive expansion of demand -- allowing Brazilian firms top increase production and sales despite the surge in imports, which policy-makers viewed positively for its effect to lessen pressure on prices. While the trade balance began to show a deficit at end of 1994, reserves were still high.

As a result, Brazil's current account in 1994 was more or less in balance and in the second half of that year, its economy appeared to be on the same course as Mexico and Argentina.

An important difference was that Brazil put through its reforms without entering into an agreement with the International Monetary Fund. When the Real Plan was introduced, and even more when it showed much success, the IMF sought to inveigle Brazil into a stabilization agreement relationships -- holding out the prospect of placing IMF funds to back the reform -- which would have enabled the IMF to claim one more success for its policy thrusts in Latin America, apart from getting a major country into its grip through a programme.

Aware of this, the Brazilian policy-makers declined to negotiate any agreement, even when pursuing IMF reform policies. But the Mexican crisis at end of December 1994, and its effects on other markets, forced the Brazilian administration (under President Cordozo) to shift its policy -- paying full attention both to the appreciation of the currency and trade balance.

As some Brazilian officials explained, Brasilia was conscious of the unreliability of short-term investment flows and that unlike in the case of Mexico, there would be no massive US credit-line or an IMF credit line either without the kind of stabilization programmes pushed by the IMF (the standard reform package that increases domestic prices and shuts down local enterprises and creates massive unemployment).

As UNCTAD's Trade and Development Report, 1995 has described it, the new conditions in the international financial markets caught the Brazilian economy in a particularly vulnerable situation: external accounts became unsustainable, when the stabilization programmes was still in the early phase and required additional severe measures for consolidation.

The Brazilian government showed "greater realism" and reversed its policy of rapid trade liberalization, and started to use trade measures to curb imports: it increased tariffs on imported cars in February by more than a half (but still below Brazil's bound tariff rate under the WTO) and a month later increased by nearly 70% tariffs on extra-Mercosur imports of 100 items, largely cars and consumer durables. It also introduced import deposits of 20% and banned importers from importing goods on basis of borrowed dollars.

Still the trade deficit increased in May, and the government imposed in June quotas on car imports (a ceiling of 150,000 units for the second half of the year was set) -- and took other measures to slow down the domestic economy - both to check inflationary pressures and close the deteriorating trade balance. Interest rates were raised on consumer loans, tariffs lowered selectively on basic consumption items.

Brazil also invoked in GATT/WTO the Art XVIII:B balance-of-payments provisions -- a right that it had disinvoked in 1990-1991 under the Collor presidency, when it said that in future it would rely on tariffs.

At the WTO though, the US, EU etc challenged this and insisted on a quick consultation/review process.

While the major trading nations in the BOP committee took the IMF assessment and felt the Brazilian restrictions were unjustified, Brazil contended that the BOP assessment should not merely be based on the level of foreign reserves, but its composition which, in Brazil's case, showed a high percentage of short-term capital.

Brazil's argument was that in these considerations, not only was an assessment of the past and the present important, but also a look at the future which, in the light of the Mexican experience, showed the volatility and unreliability of the reserves based on short-term capital inflows and the sustainability of trade liberalisation based on such types of reserves. It argued that this is a view more widely shared since the Mexican crisis.

In this view, Brazil explained its restrictions, including the ceiling on car imports, and the framework it was putting into place relating to investments in terms of the WTO's Trade-related Investment Measures (TRIMs) Agreement whose Art. 4 enables developing countries to deviate from the TRIMs obligations on BOP grounds.

A BOP committee report to go before the Council on Trade in Goods is now expected to take note and recognize the Brazilian points about volatility of capital inflows after the Plan Real, the import surges that followed, but combine it with a request to Brazil to eliminate the quota restrictions.