Brazil Points the Way Out of Inflation. Yes, You Read That Right & More News Here

It’s a remarkable turnaround for anyone familiar with Brazil’s history. In the years after World War II, the country was a cradle of import-substituting industrialization, a development policy popular in Latin America that choked imports to encourage domestic manufacturing. That lost out to the export-oriented model followed by Asia’s tiger economies and has since been abandoned. Still, Brazil’s tariffs on a trade-weighted basis remain the highest among Group of 20 economies after Argentina.

That’s starting to change. With inflation at 12.1%, its highest level since 2003, the country is rushing to lower the cost of imported goods. Duties on some 6,195 products would be temporarily cut by 10%, the government announced last month. That follows a similar round of reductions late last year. 

More dramatic were the cuts on a range of high-profile essentials. Tariffs on ethanol, margarine, coffee, cheese, sugar and soybean oil were eliminated altogether in March, followed in May by those on chicken, beef, wheat, corn and baked goods. Sulfuric acid, an essential ingredient in making fertilizer, would also be zero-rated.

Those reforms aren’t going to represent a revolution on their own. Permanent reductions would run up against the rules of the Mercosur trading bloc, so the moves have been billed as temporary humanitarian expedients to ease the cost of inflation in the wake of Brazil’s punishing Covid epidemic. After decades of trade isolationism, it’s not clear whether either President Jair Bolsonaro or former leader Luiz Inacio Lula da Silva, his likely challenger in this year’s elections, would back a wholesale switch away from protection. 

The shift probably doesn’t even have much of a constituency. Cutting the cost of farm produce from other countries will annoy Brazil’s powerful agribusiness interests. Meanwhile, the purchasing power of households has declined so dramatically in recent years that most couldn’t afford imported foodstuffs at any tariff rate.

Still, it’s a welcome shift in the wind for a world economy that’s been drifting in an increasingly protectionist direction in recent years.

Take the US. Four years after the start of President Donald Trump’s trade war with China, some $300 billion of goods imports — roughly three-fifths of the total — continue to labor under tariffs of as much as 25%. Beijing has matching import taxes on almost every cent of the $150 billion trade in the other direction.

While Trump-era trade wars with the European Union, Japan and the UK have been formally ended, they’ve left a legacy of quotas, meaning that additional imports above historical levels are taxed at Trump-style rates. As a result, there’s little scope for input costs to be reined in by allowing the most efficient producers to take market share across borders.

The Indo-Pacific Economic Framework, the centerpiece of President Joe Biden’s attempts to reinvigorate America’s economic relations in Asia, has a similarly protectionist flavor. Its most pointed contrast to the Trans-Pacific Partnership, its failed Obama-era ancestor, is the absence of tariff reduction and market access guarantees. 

Meanwhile, poor harvests, the war in Ukraine, and China’s hoarding of vast grain stockpiles have kicked off tit-for-tat food protectionism across emerging economies, affecting everything from palm oil and wheat to sugar and chicken.

Even in the UK, which has loudly proclaimed its commitment to zero duties after leaving the EU, customs barriers and divergence on rules with its largest trading partner have shrunk international commerce. One report in April argued that food prices were 6% higher than they’d otherwise have been as a result of Brexit.

There are some signs the thaw on trade might finally be breaking. It “may make sense” to reduce tariffs on some goods, and the Biden administration was looking at the issue, Commerce Secretary Gina Raimondo told CNN Sunday. Treasury Secretary Janet Yellen was pushing the government to cut the duties, she said last month. The Peterson Institute for International Economics in March argued plausible tariff reductions could lower inflation by 1.3 percentage points. Even India, no model of open commerce, last month allowed limited imports of duty-free cooking oil to ease pressure on households.

A swing of the pendulum back toward loosening rather than tightening restrictions would be welcome. We should hope that few other nations end up plumbing the depths of economic misery that have caused Brazil to re-examine its long-standing commitment to import duties. Still, necessity has always been the mother of invention. Let’s hope the current inflationary pressures induce governments to start dismantling the trade barriers that have done so much to pump them up.

More From Bloomberg Opinion:

India Can’t Afford to Lose the World’s Trust on Trade: Mihir Sharma

• Joe Biden’s Big Asian Trade Deal Is Only a Baby Step: Editorial

The U.S. and China Must Consign Trump’s Trade Deal to History: David Fickling

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.

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