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A new 10% cut in Mercosur’s Common External Tariff (CET) this year depends mainly on two measures being prepared by the federal government and linked to maritime transport. The Economy Ministry believes that the approval of these measures would help to reduce the cost of production in Brazil and pave the way for a further cut in the tariff later this year.
“Considering overhauls put in place and others that will come this year, we see room for another 10% cut in the CET,” said Lucas Ferraz, Foreign Trade Secretary of the Economy Ministry.
The CET is a kind of unified rate among Mercosur countries and is charged on imports of products from outside the bloc, although several goods are exempt.
According to the secretary, after cutting the Tax on Industrialized Products (IPI) at the end of February, the federal government will announce a reduction in the rate of the Additional Freight for the Renovation of the Merchant Marine (AFRMM) – a tax levied on maritime freight. For long-distance transportation, the rate is 25%. In addition, the Economy Ministry plans to exclude taxes from the terminal handling charge. According to calculations by the Secretariat of Foreign Trade (Secex), importing companies can save between R$600 million and R$1 billion a year with the change.
In addition to these measures, there have been reforms in recent years that have helped to lower, even as indirectly, production costs in Brazil and improve the business environment, Mr. Ferraz said. He cites as examples the new regulatory frameworks, the independence of the Central Bank and the pension reform. The Economy Ministry has even hired think tank Fundação Getulio Vargas (FGV) to develop an indicator to measure the variations of the cost of production in Brazil. The first measurement is currently being carried out.
In November 2021, the federal government had already cut the tariff by 10%. The reduction was temporary, lasting until the end of this year. This is because Mercosur rules state that any permanent cut must be consensual. To approve this cut, Uruguay wants to be allowed to negotiate free trade agreements with countries outside the bloc, regardless of whether the other members agree. Thereafter, Brazil used a clause that allows the cut on a temporary basis.
“As soon as Uruguay makes the CET move official – and it is not against it, but insists on flexibility – the cut made by Brazil will be followed by the other partners and will become permanent,” Mr. Ferraz said. “For the second cut, we will negotiate again, and we intend it to be permanent.”
Even though Argentina is “the biggest challenge,” the secretary believes that it is possible to reach an agreement on the new round with the other bloc countries, considering that since 2019 Paraguay and Uruguay “have signaled that they are in favor of even more ambitious CET cuts.” But even without Argentine support, “there is always the possibility” that countries “make the tariff reductions at times that are not necessarily coincidental.”
According to him, Brazil can use “some exception clause that gives legal grounds” for a second temporary cut, even if the first has not become permanent. “But we will always seek the negotiation route.”
Economy Minister Paulo Guedes has said more than once that the federal government may reduce the CET again by the end of the year, without elaborating. “We are starting to open the economy,” he said in February at an event sponsored by BTG Pactual. “We have lowered the CET and we can lower it again before the end of our term in office.”
Source: Valor International