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Brazil points the way out of inflation. yes you read it right

It is a remarkable turn of events for anyone who knows the history of Brazil. In the years following the Second World War, the country was the cradle of import substitution industrialization, a popular development policy in Latin America that stifled imports to stimulate domestic manufacturing. This lost out to the export-oriented model followed by Asia’s tiger economies and has since been abandoned. Still, Brazil’s tariffs on a trade-weighted basis remain the highest among the Group of 20 economies after Argentina.

That’s starting to change. With inflation at 12.1%, its highest level since 2003, the country is racing to lower the cost of imported products. Taxes on about 6,195 products would be temporarily reduced by 10%, the government announced last month. This follows a similar round of reductions late last year.

More dramatic were the cuts to a number of high-profile essentials. Tariffs on ethanol, margarine, coffee, cheese, sugar and soy oil were completely eliminated in March, followed in May by those on chicken, beef, wheat, corn and bakery products. Sulfuric acid, an essential ingredient in the manufacture of fertilizers, would also be rated zero.

These reforms will not represent a revolution on their own. Permanent reductions would go against Mercosur trade bloc rules, so the measures were heralded as temporary humanitarian expedients to ease the cost of inflation following the punishing Covid epidemic in Brazil. After decades of trade isolationism, it is unclear whether President Jair Bolsonaro or former leader Luiz Inácio Lula da Silva, his likely opponent in this year’s elections, would support a full shift in protection.

Change probably doesn’t even have an electorate. Cutting the cost of agricultural production in other countries will upset the powerful interests of Brazilian agribusiness. Meanwhile, household purchasing power has declined so dramatically in recent years that most cannot afford imported food at any rate.

Still, it’s a welcome change in the wind for a world economy that has been moving in an increasingly protectionist direction in recent years.

Take the USA. Four years after President Donald Trump’s trade war with China began, some $300 billion in merchandise imports — about three-fifths of the total — continue to work under tariffs of up to 25%. Beijing has corresponding import taxes on nearly every cent of the $150 billion trade in the other direction.

While the Trump-era trade wars with the European Union, Japan and the United Kingdom have formally ended, they have left a legacy of quotas, meaning additional imports above historic levels are taxed at Trump-style rates. As a result, there is little scope for controlling input costs, allowing the most efficient producers to gain market share across borders.

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