Three weeks after the new automotive policy for Brazil was announced it is still a key subject of discussion.
First opinions in the media were negative but the 30% hike on the tax on manufactured goods (IPI) that will hit automakers outside Mercosur and Mexico demands deeper analysis.
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Obviously it is a protective measure that can be condemned. But protectionism is hardly absent today by means of valid or disguised barriers, especially following the 2008 financial crisis.
Examples: in Mexico, only brands with local production or subject to trade accords can be imported (ruling out the Chinese and South Koreans); those not producing in Argentina must offset imports by buying local products and exporting them.
There are other curious cases. Despite high buying power, in South Korea all imports, including premium brands, fill just 1% of the local marketplace. In China, only locally-made electric vehicles attract a government purchase subsidy and local content is 90% generally, according to sources.
The raised IPI implies on average a retail price increase of 22% to 26% in Brazil, also hitting imports from Europe and other origins.
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By GlobalDataIt is unlikely that this measure will be contested by the World Trade Organisation (WTO). The government said the new rate is for all, regardless of origin (except for bilateral accords), together with incentive rules favouring local manufacturing, as already granted to the computing industry and others.
WTO decisions are sluggish and the higher IPI is valid, at first, to the end of 2012.
No local content had been mandated in Brazil to manufacture vehicles. Only trade within Mercosur and Mexico had to comply with 60% minimum regional content.
The new, national content index – 65% of Brazilian autoparts and/or Mercosur and Mexico – is tight: it discounts the cost of localising, there are regulated production processes and compulsory expenditures on research and innovation. But it grants some flexibility to automakers by releasing 20% of gross production from the new requirements.
It is quite probable that the government will give waivers to new brands willing to manufacture in Brazil. A ‘stepping up’ local content from 30% could be allowed. JAC and Chery have announced that plans for plants in Brazil will continue, despite criticising the government for “undue protectionism”. BMW remains silent.
Weighing pros and cons, including the foreign currency exchange situation that stimulates importing not manufacturing locally, all this IPI turmoil and the new rules of the automotive regime tend to be neutral for the consumer in the medium term and favourable in the long one by attracting heavy investments and fiercer competition.
This is happening already. Over US$2bn from the Renault-Nissan alliance have just been announced here by Carlos Ghosn during the launching of the local-built Renault Duster.
In the short term, incentives and subsidised vehicle finance may reduce but up to now this has not occurred: the struggle for market share is very tough, inasmuch as local prices keep falling.
It is unlikely importers will pass on fully the new tax burden or give up one of fastest growing markets with rising consumer buying power. The low price hikes up to now reflect this reality.
