Will Brazil protectionism jeopardise Australia’s automotive exports?

Brazil’s finance minister has announced a 30-point increase in the country’s industrial-product tax on cars, raising concern for some Australian automotive exporters. 

The tax was designed to protect locally-made cars, with those produced in Brazil, Mexico or the Mercosur trade block being exempt.

“Brazilian consumption has been appropriated by imports,” said the finance minister when announcing the tax.

Companies in Brazil that choose to import cars will be required to pay the tax, which has just been raised from previous high levels to exceptionally high levels, meaning warning lights are on the horizon for Australia’s automakers. 

Holden could be the worst hit. The manufacturer’s Commodores have been exported to Brazil since 1998, rebadged as Chevrolet Omegas. The cars, which are assembled at Holden’s Elizabeth, South Australia plant, are often purchased as official government cars in Brazil. 

The Omega was previously built by General Motors in Brazil, however the company halted production in 2007 in favour of imports from Australia – probably because design and development had become too expensive.

The latest model of the Omega, called the Omega C, is essentially a rebadged Holden VE Berlina, with the addition of a specially-tuned suspension to handle the poor-quality roads often found in Brazil.

Toyota Australia should pull through virtually unscathed. The company used to export the Camry XV30 to Brazil between 2002 and 2006, when exports ceased. 

Toyota Motor Corporation began production of the Corolla in Brazil in 1998; last year, the company announced plans to upgrade its Sao Paolo with a new, $600 million production plant, where it will build a new small car.

Construction of the plant began in September 2010, and the site is expected to employ 1,500 workers. Production is expected to begin in the second half of 2012. Toyota says it will initially build 70,000 cars for the local market, but plans also call for export production.

The other major automotive manufacturer in Australia, Ford, does not export to Brazil.

The Brazilian car trade group is now planning to challenge the tax at the World Trade Organisation, as it will increase the price of imports by a quarter, according to the National Carmakers’ Association. However, local manufacturers have been relying on high import tariffs to protect their businesses for years.

The Association says poor infrastructure, and expensive labour and credit, mean that producing cars in Brazil is 60% more expensive than in China, which is why imports are so important. 

Cars imported into Brazil jumped from 16% of the market in 2009 to 23% in 2011, however the new tax should see this number lessen in the coming year.

Protectionism has become an increasing trend in countries like Brazil and Australia when the government decides its industries need protection from foreign companies.