{"id":241233,"date":"2017-06-29T14:21:02","date_gmt":"2017-06-29T17:21:02","guid":{"rendered":"http:\/\/revistapesquisa.fapesp.br\/?p=241233\/"},"modified":"2017-06-30T14:03:25","modified_gmt":"2017-06-30T17:03:25","slug":"industrial-policy-in-check","status":"publish","type":"post","link":"https:\/\/revistapesquisa.fapesp.br\/en\/industrial-policy-in-check\/","title":{"rendered":"Industrial policy in check"},"content":{"rendered":"
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Juca Varella\/FCA\/Public Photos <\/span><\/a> A Fiat Chrysler factory in Goiana, Pernambuco State…Juca Varella\/FCA\/Public Photos <\/span><\/p><\/div>\n

The Brazilian government announced that it will appeal to the World Trade Organization (WTO) Dispute Settlement Body to try to reverse the conclusions reached by a panel that found several of Brazil\u2019s industrial policy programs to be illegal\u2014they had been formally questioned by Japan and the European Union. The final report of the panel, established in 2014 and composed of three independent arbitrators, was received by the Ministry of Foreign Affairs (MRE) on December 20, 2016, but will probably not be officially released until around February 2017 after fulfillment of a formality: it must first be translated from English into the organization\u2019s other two official languages, French and Spanish, and circulated among the 160 WTO members. The document maintains that an important part of Brazilian industrial policy violated WTO rules and it denounces the way in which Brazil has encouraged domestic production of automobiles, information technology equipment, and semiconductors\u2014among other items\u2014by granting exemptions or suspensions of tax on end products that are not extended to imported competitors.<\/p>\n

One of the points questioned in the dispute is violation of the so-called principle of national treatment, understood to mean the granting of incentives to goods and merchandise manufactured in Brazil, in the form of tax exemptions that are denied to similar goods produced in other countries. Another matter involves the requirement for products that benefit from tax reductions to contain a certain minimum percent of Brazilian-made inputs. According to the panel, these problems appear in programs like Inovar Auto, instituted in 2012 to stimulate domestic production of automobiles, and the Information Technology Act, which has been in effect for 25 years and grants tax reductions to manufacturers of electronic hardware and components, who are required to invest in research and development (R&D).<\/p>\n

Also censured in the report is the digital inclusiveness program that was in effect from 2005-2015 and reduced to zero the rates of some mandatory contributions such as the PIS (Social Integration Program) and Cofins (Social Security Financing Program) that are normally assessed on sales of computers, tablets, smartphones and other items. Affected too are programs that support technology development in the semiconductor industry (PADIS) and digital TV equipment manufacturing (PATVD), which offer tax exemptions in exchange for investments in R&D; and the special regime for purchase of capital goods for exporters (RECAP) that cut taxes paid by export industries when they purchase machinery and equipment.<\/p>\n

\u201cBrazil had a lot of its industrial policy tools questioned, which is unprecedented,\u201d says economist Sandra Pol\u00f3nia Rios, director of the Center for Integration and Development Studies (CINDES) and a professor at the Pontifical Catholic University of Rio de Janeiro (PUC-Rio). \u201cInitially, the European Union even questioned the existence of the Manaus Free Trade Zone, but later abandoned that idea.\u201d From 1995-2016, Brazil itself had questioned the policies of WTO member countries on 29 occasions, mostly to challenge barriers against imports of industrial products, and was sued by other countries 16 times. In some cases, Brazil had to modify policies, as in the protest against the Export Financing Program (PROEX) during a late-1990s dispute over the production of regional aircraft that involved the Brazilian firm Embraer and Canadian manufacturer Bombardier. The current litigation on industrial policy is the widest ranging that Brazil has ever faced in the WTO. \u201cThis time, several regimes are being questioned and broader sectors are being affected,\u201d says Ambassador Carlos Marcio Cozendey, undersecretary general for economic and financial affairs at the MRE.<\/p>\n

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Ericsson<\/span><\/a> …and an Ericsson telecommunications equipment company facility in S\u00e3o Jos\u00e9 dos Campos, S\u00e3o Paulo StateEricsson<\/span><\/p><\/div>\n

The ruling by the WTO panel caused a commotion in the R&D environment since the companies that had qualified under several of those programs have been investing in innovation in return for receiving those tax exemptions. As the panel was proceeding with its work, Brazilian diplomats argued that the WTO rules do not prohibit granting incentives to local industry or ban the encouragement of R&D investments. \u201cThese are consistent with WTO rules and objectives to promote development on sustainable bases, as Brazil sees it,\u201d explains Rubens Barbosa, who was Brazil\u2019s ambassador in Washington from 1999 to 2004 and is an advisor to the Brazilian Electrical and Electronics Industry Association (ABINEE).<\/em><\/p>\n

The terms of the appeal that Brazil will file with the WTO will be discussed in the coming weeks by representatives of the Ministry of Science, Technology, Innovation and Communications (MCTIC), the Ministry of Industry, Foreign Trade and Services (MDIC), and the Ministry of Foreign Affairs. It is expected that the 11 judges on the Dispute Settlement Body will rule on the appeal sometime in September 2017. At any rate, the Brazilian government is now preparing to change disputed programs and negotiate deadlines for implementing those changes. If it does not modify the criticized policies, Brazil will be subject to retaliations by its partners in all areas of world trade. \u201cWe are familiar with the case law and although we believe some measures will be reversed, it is possible that several programs will have to be modified,\u201d says Ambassador Cozendey. Igor Nogueira Calvet, secretary of industrial development and competitiveness at the MDIC, says the new policies must preserve the requirement that favored companies invest in R&D. \u201cWe will discuss what the government will be able to offer the companies in order to demand a counterpart in the form of R&D. That is unlikely to take the form of a reduction in the federal value-added tax (IPI) as is now the rule,\u201d he states. \u201cThe future will be determined by working closely with the private sector.\u201d<\/p>\n

In the case of the Information Technology Act, the government will attempt to preserve its essence by adapting it to WTO requirements. \u201cThis legislation was enacted in 1991. It predates the various treaties that form the foundation of the WTO and had never before been questioned,\u201d says Maximiliano Martinh\u00e3o, secretary of information technology policy at the MCTIC. \u201cThe Information Technology Act has become part of Brazil\u2019s tradition and has helped its economic development.\u201d According to the secretary, the law created 100,000 direct jobs, including 15,000 connected with R&D. According to ABINEE data, the amount of revenue lost because of exemptions or reductions in the IPI amounted to R$25 billion in the years from 2006 to 2014, while taxes collected on the goods that benefited totaled R$50 billion. Sales by companies of benefited products from 2006 to 2014 added up to R$266 billion, while sums invested in R&D amounted to R$8.3 billion in that same period. Martinh\u00e3o believes it is possible to adapt the legislation and still preserve the willingness of companies to invest in R&D. \u201cEurope grants incentives for production within its territory but they are given to companies, not products. The WTO allows that. One possibility is for us to change the target of the incentive, while maintaining the investments in R&D,\u201d he explains.<\/p>\n

\"\"<\/a>Another alternative that may be evaluated, says Martinh\u00e3o, is to accredit foreign companies to receive benefits under the Information Technology Act, requiring them to provide the same R&D counterpart by investing in companies that produce goods in Brazil. The main challenge, he says, is to modify existing programs as quickly as possible. \u201cThe worst thing in the world would be to take too long to approve the necessary changes in the law and leave manufacturers in legal limbo,\u201d he notes.<\/p>\n

The Information Technology Act grants tax incentives to manufacturers of electronic hardware and components that invest in R&D. The incentive, which is to remain in force until 2029, consists of an 80% reduction in the federal value-added tax (IPI). Depending on the type of product, R&D investment must be equivalent to 3% or 4% of annual sales of the favored goods. Investments can be made within the company itself, at universities, or under contract with third parties\u2014which has led to the establishment in Brazil of a number of private research institutes that conduct custom-ordered studies for other companies (see Pesquisa FAPESP<\/em> Issue n\u00ba 248<\/a>). The law also requires that some of the funds be invested in formal agreements with institutes in the North, Northeastern and Central-West regions of the country. To receive benefits, a company must also adhere to the so-called Basic Production Process (PPB), which determines the amount of domestic content required for each kind of product.<\/p>\n

\u201cThe Information Technology Act was the result of lengthy debates and legitimate negotiations in the National Congress, where legislators were concerned about maintaining the financial and economic equilibrium of the factories that opted to work under national information technology policy,\u201d says Humberto Barbato, executive president of ABINEE. \u201cThe economic and social balance of the Information Technology Act has been quite positive. The scenario designed with the Internet of things will make digital inclusiveness even more present in people\u2019s lives, and the legal framework for information and communications technologies will become more and more essential,\u201d he argues.<\/p>\n

The Inovar Auto program was created by a legislative provisional measure in April 2012. It established a regime that grants temporary tax advantages to automobile assembly plants. The WTO panel rebuke focused principally on the benefit offered in the form of credits against presumed IPI tax of as much as 30 percentage points per product, to companies that satisfy criteria such as installation of new industrial plants in Brazil or the adoption of new models of production. R&D outlays are among the counterparts required of recipients. According to MDIC data, between 2013 and 2015 about R$15.3 billion was invested in research, development and engineering as a result of the program. Ambassador Rubens Barbosa thinks it will be difficult to make adaptations to Inovar Auto. \u201cThe government will probably have to abolish the program. It was already intended to end in 2017,\u201d he says. Igor Calvet of the MDIC says that a new policy for the automobile industry is beginning to be discussed. \u201cInovar Auto fulfilled its purpose, which was to attract investment. Several companies established factories in Brazil and set up R&D support structures.\u201d<\/p>\n

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WTO\/Studio Casagrande<\/span><\/a> Representatives of World Trade Organization member countries meet at its Geneva headquarters in 2013WTO\/Studio Casagrande<\/span><\/p><\/div>\n

To economist Sandra Pol\u00f3nia Rios, the outlook for auto assembly plants is the most troublesome of the effects of the WTO ruling. \u201cThe automobile industry has enormous idle capacity, which was actually encouraged by Inovar Auto, but there are no prospects of it being absorbed within a reasonable time frame,\u201d she says. \u201cThis is a very serious problem, because Brazil is not in a position to become an auto export platform, and there is little chance of growth in the domestic market.\u201d<\/p>\n

According to Rios, the announcement of the Inovar Auto program in 2012 may have been the catalyst that bred displeasure with Brazil in the WTO. \u201cIn recent decades, we have established several other industrial policy tools that preserved local content, such as the Free Trade Zone and the Information Technology Act, but they were less aggressive and not challenged,\u201d she says. During the Rousseff administration, however, the use of these tools intensified as part of the 2011 Bigger Brazil Program to which Inovar Auto was connected. \u201cThat made Japan and the European Union uncomfortable,\u201d she suggests.<\/p>\n

According to Counselor Daniela Benjamin, general coordinator of dispute settlement at the MRE, the concern in Japan and the European Union about the proliferation of these programs in Brazil influenced their decision to take the issue to the WTO. \u201cAt the time, there had been an important discussion in Brazil about extending those regimes to other sectors, such as chemicals, and the complainants were worried that an expansion was going to occur,\u201d said the diplomat at a public hearing held on December 15, 2016 in the federal Chamber of Representatives on the subject of the WTO panel. Soraya Saavedra Rosar, director of the International Negotiating Unit of the National Confederation of Industry (CNI), said at the same hearing that the ruling by the WTO panel creates a new scenario for negotiations about the country\u2019s industrial policy. \u201cHereafter, when we draft a new law we will need to more carefully examine the coverage of treaties on international trade that need to be respected,\u201d she said. Redesign of those legal instruments will be a determining factor in shaping the future of the entrepreneurial R&D effort in Brazil, a topic that has gained increased importance since innovation has become a key topic in both Brazil\u2019s industrial policy and science and technology policy.<\/p>\n","protected":false},"excerpt":{"rendered":"Brazil is expected to revise industrial policy and R&D incentives","protected":false},"author":11,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[166],"tags":[225,234,256],"coauthors":[98],"class_list":["post-241233","post","type-post","status-publish","format-standard","hentry","category-policies-st-en","tag-economy","tag-finance","tag-public-policies"],"acf":[],"_links":{"self":[{"href":"https:\/\/revistapesquisa.fapesp.br\/en\/wp-json\/wp\/v2\/posts\/241233","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/revistapesquisa.fapesp.br\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/revistapesquisa.fapesp.br\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/revistapesquisa.fapesp.br\/en\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/revistapesquisa.fapesp.br\/en\/wp-json\/wp\/v2\/comments?post=241233"}],"version-history":[{"count":0,"href":"https:\/\/revistapesquisa.fapesp.br\/en\/wp-json\/wp\/v2\/posts\/241233\/revisions"}],"wp:attachment":[{"href":"https:\/\/revistapesquisa.fapesp.br\/en\/wp-json\/wp\/v2\/media?parent=241233"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/revistapesquisa.fapesp.br\/en\/wp-json\/wp\/v2\/categories?post=241233"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/revistapesquisa.fapesp.br\/en\/wp-json\/wp\/v2\/tags?post=241233"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/revistapesquisa.fapesp.br\/en\/wp-json\/wp\/v2\/coauthors?post=241233"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}