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Ipea: import tariff reductions would be beneficial

Feb, 08, 2022 Posted by Gabriel Malheiros

Week 202206

A 50% cut in import tariffs in Brazil, either unilateral or accompanied by other Mercosur partners, would cause the country to lose almost US$ 11 billion in accumulated trade balance by 2025 but would increase both exports and imports, positively affecting GDP and helping to bring inflation down.

The Insitute of Applied Economic Research (Ipea) highlighted these findings in a technical note which evaluates different tariff reduction possibilities within the Mercosur scope, including the eventual dissolution of the customs union.

In summary, the main accomplishment of this study is showing that tariff reduction would be beneficial for Brazil and other Mercosur countries despite relevant changes to production and foreign trade structure of member-countries. A significant reduction in intra-bloc trade is also a likely side effect,” claimed the study’s three authors, Fernando Ribeiro, Alicia Cechin, and Gerlane Andrade.

Approximately eight or nine of the 22 sectors surveyed would increase industrial production if import tariffs were reduced. The most significant increase would occur in transportation equipment due to falling input costs from abroad, as well as more modest gains in commodity chains such as meat, oilseeds, wood products, oil, and gas.

However, many sectors of the manufacturing industry would see a drop in output due to the tariff cuts, particularly those with “excessive” tariff rates or that rely on technology. Textiles, electrical equipment, chemicals, electronics, machinery, vehicles, and automotive parts are examples of this.

Brazil would be able to import from non-Mercosur partners quantities worth between US$ 13 billion and US$ 14 billion more than in the baseline scenario if it reduced its tariffs by half, either with the rest of the bloc or on its own.

In the simulation of all Mercosur countries cutting tariffs, Brazil would reap the benefits in terms of GDP until 2025 (0.12 %), gross fixed capital formation (4.13 %), real wages (0.33 %), and inflation  (-0.57%).

Without the agreement of the other partners, a tariff reduction by Brazil alone would result in the following gains: GDP (0.13%), gross fixed capital formation (4.29%), real wages (0.37%), and inflation (-0.42%). “These benefits would be nearly identical if the reduction were made unilaterally, with the end of the customs union, or in conjunction with Mercosur,” the authors write.

In 2021, the Jair Bolsonaro administration received approval from Argentina to reduce the Common External Tariff (TEC) by 10% for a group of 87% of products. The goal is to promote a new round.

Source: Valor Econômico

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