WTO to Referee Car-Import Dispute Between EU, Brazil

LONDON – A long-running dispute between the European Union and Brazil over taxes on cars imported into the South American country enters a critical final stage as the World Trade Organization sets up a panel to consider the dispute.

The row is not as straightforward, however, as an argument about allegedly punitive and illegal taxes.

Certainly, Brazil levies a steep 30% tax on imported cars. But the country has been taxing European auto imports for so long that some automakers, in particular larger ones such as BMW, Volkswagen and Jaguar Land Rover, have set up manufacturing plants in Brazil to get around them. Thus, a verdict by the WTO’s dispute-settlement body demanding an end to the tax regime might not be wholly to the liking of everybody in the EU.

This particular dispute began in September 2011 when the tax on motor vehicles was introduced, along with an exemption for domestically produced cars and trucks.

In 2012, Brazil added a new tax regime to provide incentives for technological innovation in the automotive supply chain called Inovar-Auto, designed to run until 2017. The EU complained the higher taxes on imported goods, together with other tax breaks to encourage the use of locally made components, ran counter to WTO rules for free and fair trade.

After more than a year of negotiations, the WTO agreed to establish an adjudicative panel late last year. It is expected to report later this year, although its findings are subject to appeal. If it finds in favor of the EU and Brazil does not back down, Europe would be empowered to impose sanctions such as increased customs duties on Brazilian products, and to force reform.

Daniel Rosario, trade spokesman for the European Commission which handles trade matters for all 28 EU member countries, tells WardsAuto some multinational corporations may not be excessively concerned for the time being, “as they may have the option to transfer certain activities from Europe to Brazil, or to replace European inputs with Brazilian inputs.”

But, he adds, the Brazilian practices run counter to the interests of midsize European

companies exporting to Brazil and of European workers.

“It’s these that the EU seeks to defend,” he says. “This is about problematic practices affecting several industrial sectors in the EU, including manufacturers and exporters, a number of which have expressed their concerns.”

The EU decided to act “given that WTO rules are breached and that trade disruption issues are significant,” Rosario says.

Tax Dispute Latest Bump in Brazilian Car Industry’s Road

Brazil was the world’s seventh-largest car producer in 2013, with an output of more than 3.7 million vehicles. This was 9.9% greater than in the previous year and more than the output of any EU country except Germany. But in 2014, Brazil auto sales were expected to fall to 3.6 million units due to worsening economic conditions and political uncertainty. Sales are forecast to fall further in 2015 before recovering next year.

The EU is Brazil’s biggest trading partner, accounting for 20.8% of its total trade in 2012. In the same year the EU’s overall exports to Brazil were worth more than €39 billion ($43.6 billion), of which nearly €18 billion ($20 billion) consisted of machinery and transport equipment, including motor vehicles and parts.

A spokesperson for Brazil’s automaker association, Anfavea, tells WardsAuto the Inovar-Auto policies are promoted “to stimulate innovation, new engineering and energy efficiency” in their industry. But another senior Brazilian auto industry executive, asking not to be named, says a resolution of this dispute depends on how interested Brazil is in pursuing a free-trade agreement with the EU.

Prospects for a deal looked grim last year, but President Dilma Rousseff is seeking international credibility after controversial fiscal maneuvers put her re-elected administration at odds with the financial markets.

“We can’t say much because the new cabinet took office two months ago and haven’t given us any sign of what they will do,” the executive says. “We want them to fight for us if necessary. We are starting layoffs of at least 5% of our workforce because the Latin American market won’t do very well this year. We know these measures should not stay beyond 2017, but this is a complicated moment for us.”

Brazil’s new foreign minister Mauro Vieira has not said a word about the panel since he took office Jan. 1. His predecessor Luiz Alberto Figueiredo says the WTO should recognize the country’s policies as “perfectly compatible with the regulations.”

Rubens Gomes, an accounting professor at Brazil’s Ibmec university, says the country’s fiscal incentives to local automakers present a “clear hurdle” to foreign companies.”

“Our incentives hurt those that have top-notch technologies in Germany and Sweden, for example,” he says. “These policies make Brazilian buyers not even consider their cars as a real choice. Cars that don’t enjoy those benefits can be up to 10% more expensive.

“Now that the Brazilian economy is sluggish, everyone is looking for bargains and that has affected those that want to compete in equal conditions.”

– with Mauricio Savarese in Sao Paulo