Understand the impacts of a 10% reduction in import tariffs

Temporary 10% cut in tax Import, announced by the Brazilian government last Friday (5), should have a limited effect on lowering prices for the population, according to experts. The main causes for this are the inflation that affects several countries, including large suppliers from Brazil, and the devalued exchange rate.

The high prices of commodities —including for oil— and strong demand as economies reopen have driven up production costs and driven shortage of some products as chips for electronics.

The reduction applies to 87% of products imported from outside the Mercosur, anticipating a block agreement. According to the government, the tax cut seeks to “facilitate the fight against the effects of the coronavirus/Covid-19 pandemic on the national economy.” Understand the impacts of the measure:

Consumer impact

Ulisses Ruiz de Gamboa, a professor at Mackenzie Presbyterian University, says that the effect of the reduction is positive, but it ends up being limited by its short duration. The government said the cut will only last until December 31, 2022.

“In a normal situation, if foreign production is cheaper, there is more competition between imported and domestic products, and prices fall, reducing inflation. At the moment, I don’t see this gain because prices abroad are also rising,” he says.

For him, the news is positive because the Brazilian economy is “very closed”, something that helps to protect national products, but may increase prices due to the large import of inputs.

Juliana Inhasz, a professor at Insper, claims that the cut should have little effect on product prices because today what weighs most on imports is the exchange rate. “For some products, this cut may have more weight. But it itself won’t make people consume more or less.”

How products are imported into dollar, and then converted to reais, the teacher considers that further increases in the exchange rate would reverse any price drop. “Helping the industry even helps, because it’s a lower cost [com insumos e maquinário], but it is a small impact and, again, what influences the most is the exchange rate. If it goes up, it eats this gain”.

According to Gamboa, surveys show that reduced import taxes help in productivity, as industries national companies are able to import cheaper inputs and new technologies.

As a result, production costs fall and productivity rises, which helps to lower prices and help with inflation. This would happen, however, in the medium term, and not in just one year.

“Unfortunately it is a short period, this productivity effect would demand a permanent measure. I think that in the short term it will make the import of inputs cheaper at some level, which is positive and may help a little with inflation, but the rise abroad limits that”, he says.

The professor says that the tax cut should have some impact on the federal government’s revenue, in a context of difficulty in closing the accounts and paying for a new social program.

For Inhasz, the government’s action to give up this collection could generate a problem. “The government did not understand that it has to take the problem at its root, the causes of the high exchange rate. This measure is a palliative, which can worsen the fiscal side, bring more risks. It could end up being a shot in the foot.” Fiscal risk is also one of the factors that contribute to the rise of the dollar.

In interview with CNN Brazil, former Foreign Trade secretary Welber Barral said that the price variation with the 10% cut should occur in products that have high rates and are imported in large quantities, such as pharmaceuticals, chemicals and steel, which can reduce a little values.

For those with low rates, a significant variation is not expected.

liberal signage

still at CNN Brasil, Barral stated that the measure was a “sign of liberalization”, part of the government’s attempts to reduce import tariffs on products outside Mercosur. The initial proposal, of a 50% reduction, faces resistance, mainly from the Argentina, but member countries agreed to the 10% cut.

For Barral, the measure serves as a sign of Brazil’s willingness to continue the debate on cutting tariffs, which should continue after 2022.

Gamboa claims that the announcement is part of a “long-awaited reform for the economy, to open up more and insert Brazil into global supply chains.” However, the temporary nature and the low value end up making this objective difficult, considering how closed the Brazilian economy is.

“Anyway, especially for the industry, it is a certain relief and help for the recovery, as it is a sector with difficulties in recovering its growth trajectory. But I regret that it is not permanent, it would modernize the Brazilian economy”, he says.

Inhasz claims that the cut is an important measure considering trade liberalization and how closed the Brazilian economy is. “But she is not genuine. The real cause is to reduce pressure on the productive sector, not on opening up trade”, says the professor.