Industrial policies and WTO rules: old and new challenges to multilateralism Leane Cornet Naidin Brics Policy Center Pontifical Catholic University of RJ Institute of International Relations WTO Forum 2015

Issues to be presented: 1.A discussion on the debate on “policy space” with regard to industrial policies: the role of WTO rules versus domestic constraints 2.The Brazilian case: main elements of industrial and other trade related investment policies – evolution over time 3.Brazilian Industry and trade performance – evolution over time 4.The focus is not on the discussion of the adequacy of industrial policies described per se but on the constrains faced by countries 5. The multilateral constraints – The role of WTO DS proceedings 6. Issues for discussion Outline of the presentation

a. The concept of “industrial policy”: “government efforts to alter the [economic] structure to promote productivity-based growth”. (World Bank, 1993, Abreu, M. 1995) b. Policy mix combining sectorial and microeconomic components: subsidies, government procurement, performance requirements are all policies subject to domestic constraints due to impacts on fiscal accounts c. Multilateral regulations: efforts to alter the economic structure distort trade and competition- need to negotiate WTO rules, ASCM and TRIMS d. Debate: are multilateral rules the main constraint for industrial policies? 1. Policy space for industrial policies: multilateral rules and domestic constraints

2. The Brazilian case - Industrial policy: main elements 2.1 Until the 80´s – industrialization via import substitution policies (IS): government intervention in trade, exchange and credit markets, aiming at an inward-oriented industrialization process Fiscal and credit government incentives to promote the industrial domestic sector, with a vertical integration perspective Fiscal incentives to attract foreign investment subject to local content requirements to promote import substitution Policies: focused on import substitution of consumption goods, then intermediates and capital goods Result: a success case - Brazil built a large industrial structure with a relatively high level of import protection, specially in intermediate and capital goods (higher than average import tariffs)

2. The Brazilian case - Industrial policy: main elements 2.2 From the 80´s to the 90´s 80’s: Gradual dismantling of industrial policies Multilateral/Bilateral constraints - Tokyo Round : setting of the Subsidies Code commitments of dismantling industrial policies that were, then, not in conformity with the Agreement + pressures from developed countries (USA, in particular) Domestic constraints: hyperinflation, financial crisis of the public sector, increase in debt/GDP ratios 90´s: Shift towards a trade liberalization reform + shrinking of industrial policies Tariff reduction (average tariffs fell from 87% to 32,1% in 1989, to 13% in 1993) Plano Real, additional tariff reductions – average nominal tariff of 11,2% Dismantling of sectorial industrial policies

2. The Brazilian case - Industrial policy: main elements 2.3 The 2000’s: Disappointing performance of the manufacturing industry, specially since 2004, generated pressures for a governmental response The debate on the risk of “deindustrialization” Concern with loss of industry competitiveness and productivity pressure to foster a revival of industrial policies Government Reaction: In PITCE (Politica Industrial, Tecnológica e de Comércio Extrerior), included 11 sectorial programs In 2008 – PDP (Processo Produtivo Básico) In Plano Brasil Maior, which reinforced the previous initiatives In Inovar-Auto – incentives to the automobile industry

2.4 Recent Policies (Plano Brasil Maior, Inovar-Auto,...) a.Main axes Increase of the domestic content of the production process Sector - specific policies – “industrial targeting” b.Main instruments: Preferences in government procurement - some 20 sectors (and subsectors) already benefited, granted with fiscal and prices preferences Public financing from BNDES Tax relief and exemptions to manufacturers and exporters 2. The Brazilian case - Industrial policy: main elements

3.Brazil – Industrial Performance The scenario: Manufacturing loses participation in the GDP since the mid 90´s Fall from 13,4% in 2004 to 10,8% in 2014

Export coefficient fell from 20,4 % in 2005/6 to 15,3% in 2013/2014 Import coefficient rose from 14,6% in 2005/6 to 20,1% in 2013/ Brazil – Industrial Performance

4. Domestic constraints 4.1 Present scenario of macroeconomic imbalances: Brazil is back to fiscal imbalances and to inflation concerns In 2014: first primary deficit in public accounts since the beginning of the 2000’s – 0.63% of the GDP. Target for 2015: 0.15% of GDP Inflation rates: above 9% for 2015 Central Bank key interest rate: 14.25% High tax burden: 35,5% of GDP Efforts to fix fiscal accounts need to reduce/ eliminate the previous industrial policies which implied very high costs to the government

4.Domestic constraints Evolution of primary fiscal accounts

4. Domestic constraints 4.2 Dismantling of recent industrial policies: Increase of interest rates in public finance Reduction of the amounts for public credit lines (investment and export lines) Reduction/elimination of tax reliefs (e.g. Reintegra and other domestic sectorial tax reliefs)

5. The Multilateral constraints - DS Cases 5.1 Citations of WTO Agreements covered in WTO Cases-1995 to 2015* Agreements covered in WTO DS Cases Nº of citations in WTO DS cases per Agreement % Agriculture7713% Antidumping11018% Pre shipment Inspection51% Import Licensing447% GATS234% Rules of Origin71% Safeguards468% SPS437% Subsidies10918% TBT508% TRIMS417% TRIPS346% Customs Valuation173% Total citations in WTO cases covering these agreements606*100% in 10/09/2015, last record observed : 2 july 2015 *Excluding GATT, Protocol of Acession, WTO, Plurilaterals, Textiles and DSU cases

5. The Multilateral constraints - DS Cases Respondent Members DS cases that cite the SCM Agreement (A) DS cases that cite the TRIMS Agreement (B) Total DS cases per Respondent Member ( C ) (A+B)/C %Brazil China India South Africa0040 Russian Federation02540 European Union** United States Other Members Number of WTO cases ***30 * in 10/09/2015, last record observed : 2 July 2015 ** includes cases covering individual countries as respondents *** Total DS cases Respondent countries in WTO Disputes: SCM and TRIMS 1995 to 2015*

5. The Multilateral constraints – DS Cases Multilateral rules target to avoid policies aimed at altering the economic structure: ASCM and TRIMS 5.3 Brazil as Respondent Country in DS WTO Cases SCM and TRIMS to 2015* Year of Initiation of DS Cases SCM Agreement TRIMS Agreement 1996** Canada- Export Financing Programme for Aircraft * Japan - Certain Automotive Investment Measures 1996* EUA - Certain Measures Affecting Trade and Investment in the Auto Sector 1997* EUA - Certain Measures Affecting Trade and Investment in the Auto Sector 1997* EC-Certain Measures Affecting Trade and Investment in the Auto Sector 2013/2015** EU- Certain Measures Concerning Taxation and Charges 2015** Japan -Certain Measures Concerning Taxation and Charges * only consultations ** consultations and Panel established

What are the constraints on industrial and investment policies choices? Despite the significant role of WTO rules and DS cases in containing the increase in trade distorting policies, in the case of Brazil domestic constraints end by coming first – the constraints imposed by domestic policy choices' costs The Brazilian dismantling of the recent industrial policy instruments has been oriented by domestic constraints even before the resolution of DS cases currently in progress 6. Conclusions - The case of Brazil and Issues for Debate

What are the constraints on industrial and investment policies choices? The Brazilian case raises issues for reflexion for all Members In general Latin American and African countries have lower savings rates and greater fiscal constraints, as opposed for instance to some Asian economies and developed countries Countries are different Developing countries shall consider that designing WTO rules to confer broader “policy space” may generate a “subsidy race” which will benefit Members in favor of those with financial capacity to support it The political stance 6. Conclusions - The case of Brazil and Issues for Debate