Brazil boosts taxes on foreign-built cars

Brazil has turned its focus from fighting currency appreciation to protecting its industry with a sharp increase in taxes on foreign-built cars that will hit imports, particularly from China and South Korea. The measure will increase by 30 percentage points Brazil's industrialised products tax for vehicles including trucks that have less than 65 per cent local content and are made outside the South American Mercosur trade region or Mexico. "Brazil is running the risk of exporting employment," Finance Minister Guido Mantega said in Brasilia. Mantega warned in January that what he has dubbed the global "currency war" could turn into a trade war if the world's big economies continued to run loose monetary policy or maintained artificially low exchange rates. Brazil has blamed a sharp appreciation of its currency, the real, against the dollar since the end of the 2008 for undermining the competitiveness of its industry on export markets and leading to a flood of cheaper imports. Although the real has slipped over the past month amid concern over the Eurozone, the Brazilian currency hit a 12-year high against the dollar in July and is up 36 per cent since the beginning of 2009. "The government has been showing its concern that Brazil could be going through a deindustrialisation process," Barclays economist Guilherme Loureiro said in a research note titled Brazil: from currency to trade wars. While their share of Brazil's vehicle market remains small, Chinese producers now account for 3.29 per cent of the country's car sales, up from nearly zero in April last year, according to the national car dealers' association Fenabrave. Brazil's fast-growing car market has been one of the bright spots of the global industry. The world's fifth biggest, it is dominated by multinationals such as Volkswagen, Fiat, General Motors and Ford. Requirements Under the measures, Brazil's industrial products tax on cars will rise from between 7 and 25 per cent depending on engine size to up to 55 per cent on some imported cars, plus import duties and freight costs. To avoid the tax increase, companies must fulfil six of 11 requirements, which include such things as whether a car's chassis is assembled in Brazil or its engine and transmission are manufactured in the country. "We are the fifth-largest automobile market in the world and the seventh-largest producer, but we risk losing our position if we don't take measures," Mantega said.