Trade Wars

Brazil is showing the way out of inflation. Yes, you read that right

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Looking for clues on how to get the world out of its current inflationary state? You could do worse than turn to a country whose currency is worth less than a trillionth of its value in the early 1980s.

At a time when most of the world is compounding the problems of broken supply chains and rising energy prices by imposing tariffs on imports, Brazil – of all countries – is opening up to trade.

This is a remarkable turnaround for anyone familiar with Brazilian history. In the years following World War II, the country was a cradle of import-substitution industrialization, a popular development policy in Latin America that stifled imports to encourage domestic manufacturing. This lost out to the export-oriented model followed by the Asian Tiger economies and has since been abandoned. Yet Brazil’s tariffs on a trade-weighted basis remain the highest among the Group of 20 economies after Argentina.

It’s starting to change. With inflation at 12.1%, its highest level since 2003, the country is rushing to lower the cost of imported goods. Duties on some 6,195 products would be temporarily reduced by 10%, the government announced last month. This follows a similar series of cuts at the end of last year.

More dramatic were cuts across a range of high-level essentials. Tariffs on ethanol, margarine, coffee, cheese, sugar and soybean 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 zero-rated.

These reforms will not represent a revolution on their own. Permanent cuts would clash with rules of the Mercosur trading bloc, so the measures have been touted as temporary humanitarian expedients to blunt the cost of inflation in the wake of Brazil’s punitive Covid outbreak. After decades of trade isolationism, it is unclear whether President Jair Bolsonaro or former leader Luiz Inacio Lula da Silva, his likely challenger in this year’s election, would support a sweeping shift in protections.

The change probably doesn’t even have much constituency. Reducing the cost of agricultural products from other countries will annoy Brazil’s powerful agribusiness interests. Meanwhile, household purchasing power has declined so much in recent years that most cannot afford to buy imported food, regardless of the tariff rate.

Still, it’s a welcome change of tide for a global economy that has drifted in an increasingly protectionist direction in recent years.

Take the United States. Four years into President Donald Trump’s trade war with China, some $300 billion worth of goods imports — about three-fifths of the total — continue to face tariffs of up to 25%. Beijing has equivalent import taxes on nearly every penny 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 officially ended, they have left a legacy of quotas, meaning additional imports above historic levels are taxed at Trump-style rates. As a result, there are few opportunities to control input costs by allowing the most efficient producers to take market share across borders.

The Indo-Pacific economic framework, the centerpiece of President Joe Biden’s attempts to reinvigorate US economic relations in Asia, has an equally protectionist flavor. Its stark contrast to the Trans-Pacific Partnership, its failed Obama-era ancestor, is the absence of tariff reductions and market access guarantees.

Meanwhile, crop failures, war in Ukraine and China’s hoarding of vast grain stocks have sparked tit-for-tat food protectionism in emerging economies, affecting everything from palm oil and wheat with sugar and chicken.

Even in the UK, which loudly proclaimed its commitment to zero duties after leaving the EU, tariff barriers and differences over rules with its biggest trading partner have shrunk international trade. A report from April argued that food prices were 6% higher than they otherwise would have been as a result of Brexit.

There are some signs that the trade thaw may finally break. It “may make sense” to cut tariffs on certain products, and the Biden administration was looking into the matter, Commerce Secretary Gina Raimondo told CNN on Sunday. Treasury Secretary Janet Yellen was pushing the government to cut tariffs, she said last month. In March, the Peterson Institute for International Economics argued that plausible tariff cuts could reduce inflation by 1.3 percentage points. Even India, which is not an open trade model, last month allowed limited imports of duty-free cooking oil to ease pressure on households.

A swing of the pendulum towards an easing rather than a tightening of restrictions would be welcome. We should hope that few other nations will end up sinking into the depths of economic misery that caused Brazil to reconsider its long-standing commitment to import duties. Yet necessity has always been the mother of invention. Hopefully, the current inflationary pressures prompt governments to start dismantling the trade barriers that have done so much to inflate them.

More from Bloomberg Opinion:

India cannot afford to lose world’s trust in trade: Mihir Sharma

• Joe Biden’s big Asian trade deal is just a small step: editorial

US and China must relegate Trump’s trade deal to history: David Fickling

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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.

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