WORLD TRADE

ORGANIZATION

RESTRICTED

WT/TPR/S/2122 February 2009

(09-0400)

Trade Policy Review Body

TRADE POLICY REVIEW

Report by the Secretariat

BRAZIL

This report, prepared for the fifth Trade Policy Review of Brazil, has been drawn up by the WTO Secretariat on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought clarification from Brazil on its trade policies and practices.

Any technical questions arising from this report may be addressed to Mr. Angelo Silvy (tel: 022 739 5249), Mr. Alberto Bueno (tel: 022 739 6392), and Mr. Raymundo Valdés (tel: 022 739 5346).

Document WT/TPR/G/212 contains the policy statement submitted by Brazil.

Note: This report is subject to restricted circulation and press embargo until the end of the first session of the meeting of the Trade Policy Review Body on Brazil.

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CONTENTSPage

SUMMARY OBSERVATIONS xi

(1) ECONOMIC ENVIRONMENT xi

(2) TRADE POLICY AND INVESTMENT FRAMEWORK xi

(3) MARKET ACCESS FOR GOODS xii

(4) MEASURES AFFECTING EXPORTS xiii

(5) OTHER MEASURES AFFECTING TRADE xiii

(6) SECTORAL POLICIES xiv

I. ECONOMIC ENVIRONMENT 1

(1) OVERVIEW 1

(2) OUTPUT AND EMPLOYMENT 1

(3) FISCAL POLICY 4

(4) MONETARY AND EXCHANGE RATE POLICY 6

(5) BALANCE OF PAYMENTS 8

(6) DEVELOPMENTS IN TRADE AND INVESTMENT 10(i) Developments in merchandise trade 10(ii) Trade in services 11(iii) Foreign direct investment 11

(7) OUTLOOK 12

II. TRADE AND INVESTMENT POLICY REGIME 13

(1) OVERVIEW 13

(2) GENERAL LEGAL AND INSTITUTIONAL FRAMEWORK 13

(3) TRADE POLICY FORMULATION AND IMPLEMENTATION AND OBJECTIVES 15

(4) FOREIGN INVESTMENT REGIME 16

(5) INTERNATIONAL RELATIONS 19(i) World Trade Organization 19(ii) Preferential agreements 20

(6) AID FOR TRADE 23

III. TRADE POLICIES AND PRACTICES BY MEASURE 26

(1) OVERVIEW 26

(2) MEASURES DIRECTLY AFFECTING IMPORTS 26(i) Customs procedures and documentation 26(ii) Customs valuation 29(iii) Rules of origin 30(iv) Tariffs 32(v) Other charges affecting imports 37(vi) Contingency measures 39(vii) Prohibitions, restrictions, and licensing 44(viii) Technical regulations and standards 48(ix) Sanitary and phytosanitary measures 53

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(3) MEASURES DIRECTLY AFFECTING EXPORTS 56(i) Procedures and documentation 56(ii) Export taxes 58(iii) Export prohibitions, restrictions, and licensing 59(iv) Export support and related tax measures 60(v) Export finance, insurance, and guarantees 63(vi) Export promotion and marketing assistance 68

(4) MEASURES AFFECTING PRODUCTION AND TRADE 69(i) Legal framework for production and investment 69(ii) Pricing and competition policy 71(iii) State-owned enterprises, privatization, and state trading 75(iv) Incentives and other government assistance 76(v) Government procurement 85(vi) Intellectual property rights 89

IV. TRADE POLICIES BY SECTOR 96

(1) OVERVIEW 96

(2) AGRICULTURE AND FORESTRY 96(i) General features, policy objectives, and administration 97(ii) Border measures 98(iii) Domestic support measures 98(iv) Forestry 108

(3) MINING 108(i) Main features 108(ii) Regulatory framework 109

(4) ENERGY 110(i) Main features 110(ii) Hydrocarbons 111(iii) Ethanol 113(iv) Electricity 114

(5) MANUFACTURING 117

(6) SERVICES 119(i) Introduction 119(ii) Financial services 120(iii) Telecommunications 128(iv) Air transport 133(v) Maritime transport and ports 138(vi) Professional services 141

REFERENCES 145

APPENDIX TABLES 151

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TABLESPage

I. ECONOMIC ENVIRONMENT

I.1 Basic economic indicators, 2003-08 2I.2 Sectoral data on GDP and employment 3I.3 Financial accounts of the Central Government, FY2003-08 5I.4 Main monetary indicators, 2003-08 7I.5 Balance of payments, 2003-08 9

II. TRADE AND INVESTMENT POLICY REGIME

II.1 WTO dispute settlement cases involving Brazil, January 2004-November 2008 20

III. TRADE POLICIES AND PRACTICES BY MEASURE

III.1 Summary analysis of the MFN tariff, 2008 32III.2 Structure of the tariff schedule, 2008 34III.3 Anti-dumping measures, 1 January 2004 to 30 October 2008 42III.4 Import prohibitions and licensing requirements, 2008 45III.5 Export taxes, 2004-08 59III.6 BNDES-EXIM programmes 66III.7 Principal taxes applicable to companies 70III.8 Tax exemption/reduction under the SUDAM/ADA and SUDENE/ADENE programmes, 2002-07 77III.9 FINOR/FINAM/FUNRES benefits, 2002-07 79III.10 Constitutional fund loans, 2002-07 80III.11 Manaus Free Trade Zone production, 2002-07 82III.12 Scientific and technological development support funds, 2008 83III.13 Overview of IPR protection, 2008 91

IV. TRADE POLICIES BY SECTOR

IV.1 Main agricultural support measures and programmes 99IV.2 Rural credit, 2001-07 101IV.3 Agricultural credit programmes administered by the BNDES, early 2004 103IV.4 Price support programmes, 2008 105IV.5 Traffic information and characteristics of Brazil's main air services agreements, end 2008 136

APPENDIX TABLES

I. ECONOMIC ENVIRONMENT

AI.1 Merchandise exports by group of products, 2003-07 153AI.2 Merchandise imports by group of products, 2003-07 154AI.3 Merchandise exports by trading partner, 2003-07 155AI.4 Merchandise imports by trading partner, 2003-07 156AI.5 Trade in services 2003-08 157AI.6 Foreign direct investment by country of origin, 2003-07 158AI.7 Foreign direct investment by sector, 2003-07 159

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Page

II. TRADE AND INVESTMENT POLICY REGIME

AII.1 Status of notification requirements to the WTO, May 2004-October 2008 160AII.2 Overview of Brazil's preferential trade agreements, November 2008 162

IV. TRADE POLICIES BY SECTOR

AIV.1 Summary of Brazil's specific commitments in individual service sectors, 2008 166

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GLOSSARY

Accredited sectoral standardization bodies Organismos de Normalização Sectorial, ONSsAdditional Airport Tax Adicional de Tarifa Aeroportuária, ATAERO Additional Tax for the Renovation of the Merchant Marine

Adicional ao Frete para Renovação da Marinha Mercante, AFRMM

Administrative Council for Economic Defence Conselho Administrativo de Defesa Econômica, CADEAgri-business Development Programme Programa de Desenvolvimento do Agronegócio,

PRODEAGROAgriculture/Cattle Breeding Technology Development Programme

Programas de Desenvolvimento Tecnológico Agropecuário, PDTA

Airspace Control Department Departamento de Controle do Espaço Aéreo, DECEAAmazon Investment Fund Fundo de Investimento da Amazônia, FINAMAmazon Region Development Agency Agência de Desenvolvimento da Amazônia, ADAAmazon Region Development Authority Superintendência do Desenvolvimento da Amazônia,

SUDAMAnnual Report Relátorio AnualAlternative Sources of Electric Energy Programme

Programa de Incentivo às Fontes Alternativas de Energia Elétrica, PROINFA

Brazilian Aeronautic Registry Registro Aeronáutico Brasileiro, RABBrazilian Association of Standards Associação Brasileira de Normas Técnicas, ABNTBrazilian Coffee Fund Fundo de Defesa da Economia Cafeeira, FUNCAFEBrazilian Electricity Regulatory Agency Agência Nacional de Energia Eléctrica, ANEELBrazilian Enterprise for Airport Infrastucture Empresa Brasileira de Infra-strutura Aeroportuária,

INFRAEROBrazilian Export Credit Insurance Company Seguradora Brasileira de Crédito à Exportação, SBCEBrazilian Export Promotion Agency Agência Brasileira de Promoção de Exportações, APEXBrazilian Foreign Trade Association Associação de Comércio Exterior do Brasil, AEBBrazilian Health Surveillance Agency Agência Nacional de Vigilância Sanitária, ANVISABrazilian Institute of the Environment and Renewable Natural Resources

Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis, IBAMA

Brazilian Nuclear Industries Industrias Nucleares do Brasil S.A.Brazilian Privatization Programme Programa Nacional de Desestatização, PNDBrazilian Reinsurance Institute, Instituto de Resseguros do Brasil, IRB BRASIL ReBrazilian Shipping Company Empresa Brasileira de Navegação, EBNBrazilian Special Export Programme Benefícios Fiscais a Programas Especiais de Exportação,

BEFIEXBrazilian System for Protection of Competition

Sistema Brasileiro de Defesa da Concorrência, SBDC

Central Bank of Brazil Banco Central do BrasilCentral Bank's Electronic Declaratory Registry-Foreign Direct Investment

Registro Declaratório Eletrônico - Investimento Externo Direto, RDE-IED

Central Bank Information System Sistema de Informação do Banco Central, SISBACENChamber of Foreign Trade Cámara de Comércio Exterior, CAMEXCivil Aviation Council Conselho de Aviação Civil, CONACCommodity and Futures Exchange Bolsa de Mercadorias & Futuros, BM&FCompetition among any interested parties Concorrência

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Competition among parties for projects ConcursoCompetitiveness Promotion Guarantee Fund Fundo de Garantia para a Promoção da Competitividade,

FGPCConstitutional funds for financing the north-east, the north and the mid-west regions

Fundo Constitucional de Financiamento do Nordeste(FNE), Noroeste (FNO) e Centro-Oeste (FCO).

Contribution for intervention in the economic domain

Contribução de Incidência sobre o Dominio Econômico, CIDE

Department of Commercial Defence Departamento de Defesa Comercial, DECOMDepartment of Foreign Trade Departamento de Comercio Exterior, DECEXDepartment of Sectoral Policies Management Departamento de Gestão de Políticas Setoriais, DEGPSElectric Energy Commercialization Chamber Câmara de Comercialização de Energia Elétrica, CCEEElectric System National Operator Operador Nacional do Sistema Elétrico, ONSElectronic Statement of Registration Registro Declaratório Eletrônico, RDE Energy Development Account Conta de Desenvolvimento Energético, CDEEnvironmental Tax Taxa de Controle e Fiscalização Ambiental, TCFAExport Financing Programme Programa de Financiamento às Exportações, PROEXFederal Accounting Council (CFC) Conselho Federal de Contabilidade, CFCFederal Government Acquisition Programme Aquisição do Governo Federal, AGFFederal Government Loans Programme Empréstimo do Governo Federa, EGFFinancial Compensation for the Exploitation of Mineral Resources

Compensação Financeira pela Exploração de Recursos Minerais, CFEM

Financial System Organization Department Departamento de Organização do Sistema Financeiro, DEORF

Financial transactions tax (IOF) Imposto sobre Operações Financeiras, IOFFinancing of Studies and Projects Financiadora de Estudos e Projetos, FINEPFruit Industry Development Programme Programa de Desenvolvimento da Fruticultura,

PRODEFRUTAGeneral Services System Sistema Integrado de Administração de Serviços de

Administração de Serviços Gerais, SIASGIndustrial Products Tax Imposto Sobre Produtos Industrializados, IPIIndustrial Technology Development Programme

Programa de Desenvolvimento Tecnológico e Industrial, PDTI

Integrated Foreign Trade System Sistema Integrado de Comércio Exterior, SISCOMEXInter-Ministerial Council for Sugar and Alcohol

Conselho Interministerial do Açúcar e do Álcool, CIMA

Invitation by the Administration ConviteInverse Auction PregãoLighthouse fee Tarifa de Utilização de FaroiS, TUFList of Convergence for Capital Goods Lista de Convergência de Bems de Capital, BKList of Convergence for the Informatics and Telecommunications Sector

Lista de Convergência do Setor de Informática e Telecomunicações, BIT

Mines and Metallurgy Secretariat Secretaria de Minas e Metalurgia, SMMMinisterial Act Portaria

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Ministry of Agriculture, Livestock and Food Supply

Ministério da Agricultura, Pecuária e Abastecimiento, MAPA

Ministry of Development, Industry and Foreign Trade

Ministério do Desenvolvimento, Indústria e Comércio Exterior, MDIC

Monetary Policy Committee Conselho de Política Monetária, COPOMNational Agency for Land Transport Agência Nacional de Transportes Terrestre, ANTTNational Council of Fiscal Policy Conselho Nacional de Política Fazendária, CONFAZNational Council of Metrology, Normalization and Industrial Quality

Conselho Nacional de Metrologia, Normalização e Qualidade Industrial, CONMETRO

National Council of Private Insurance Conselho Nacional de Seguros Privados, CNSPNational Department of Mining Production Departamento Nacional de Produção Mineira, DNPMNational Development Bank Banco Nacional de Desenvolvimento Econômico e Social,

BNDESNational Environmental Council Conselho Nacional do Meio Ambiente, CONAMANational Federation of Insurance Services Providers

Federação Nacional das Empresas de Seguros Privados e de Capitalização,FENASEG

National Food Supply Company Companhia Nacional de Abastecimento, CONABNational Fund for Scientific and Technological Development

Fundo Nacional de Desenvolvimento Científico e Tecnológico, FNDCT

National Health Agency Agência Nacional de Saúde Suplementar, ANSNational Institute of Metrology, Normalization and Industrial Quality

Instituto Nacional de Metrologia, Normalização e Qualidade Industrial, INMETRO

National Industrial Property Institute Instituto Nacional de Propriedade Industrial, INPINational Monetary Council Conselho Monetario Nacional, CMNNational Petroleum Agency Agência Nacional do Petróleo, ANPNational System of Metrology, Normalization and Industrial Quality

Sistema Nacional de Metrologia, Normalização e Qualidade Industrial, SINMETRO

National System of Rural Credit Sistema Nacional de Crédito Rural, SNCRNational Telecommunications Agency Agência Nacional de Telecomunicações, ANATELNortheast Investment Fund Fundo de Investimentos do Nordeste, FINORNorth-East Region Development Agency Agência de Desenvolvimento do Nordeste, ADENENortheast Region Development Authority Superintendência do Desenvolvimento do Nordeste,

SUDENEOvernight Inter-bank Loans Interest Rate SELIC (Sistema Especial de Liquidação e Custodia)

Interest RatePolicy of Guaranteed Minimum Prices Política de Garantia de Preços Mínimos, PGPMPremium for Product Outflow Premio para Escoamento de Produto, PEPPrivate Insurance Superintendence Superintendência de Seguros Privados, SUSEPProgramme of Commercial and Recovery Forest Planting

Programa de Plantio Comercial e Recuperação de Florestas, PROPFLORA

Programme to Strengthen Household Agriculture

Programa Nacional de Fortalecimento da Agricultura Familiar, PRONAF

Regional Accounting Councils Conselhos Regionás de Contabilidade, CRCsRegister of Exporters and Importers Registro de Exportadores e Importadore, REI Register of Sale Registro de Venda

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Rural Employment and Revenue Generation Programme

Programa de Geração de Emprego e Renda da Área Rural, PROGER Rural

Rural Insurance Programme Progama Nacional de Garantia da Atividade Agropecuária, PROAGRO

Rural Product Certificate Cédula de Produto Rural, CPRRural Promissory Note Nota Promissória Rural, NPRSão Paulo Stock Exchange Bolsa de Valores de São Paulo, BOVESPASecretariat for Economic Monitoring Secretaria de Acompanhamento Econômico, SEAESecretariat of Agricultural Policy Secretaria de Política Agrícola, SPASecretariat of Federal Revenue of Brazil Receita Federal do Brasil, RFBSecretariat of Foreign Trade Secretaria de Comércio Exterior, SECEXSecurities Exchange Commission Comissão de Valores Mobiliários, CVMServices and Merchandise Circulation Tax Imposto sobre Circulação de Mercadorias e Prestação de

Serviços, ICMSSpecial Brazilian Registry Registro Especial Brasileiro, REBSpecial Regime for the Exportation and Importation of Goods Destined to the Exploration of Petroleum and Natural Gas

Regime Aduaneiro Especial de Exportação e de Importação de Bens Destinados às Atividades de Pesquisa e de Lavra das Jazidas dePetróleo e de Gás Natural, REPETRO

State Secretariat for Pension Funds Secretaria de Previdência Complementar, SPCSystem for Pre-registration of Suppliers Sistema de Cadastramento Unificado de Fornecedores,

SICAFSystem of Industrial Depots subject to Standardized Control

Regime Aduaneiro de Entreposto Industrial sob Controle Informatizado, RECOF

Telecommunications Technology Development Fund

Fundopara o Desenvolvimento Tecnológico das Telecomunicações, FUNTTEL

Tractor Fleet Modernization Incentives Programme

Programa de Modernização da Frota de Tratores Agrícolas e Implementos Associados e Colheitadeiras, MODERFROTA

Universal Telecommunication Services Fund Fundo de Universalização dos Serviços de Telecomunicações, FUST

Waterways Transport National Agency Agência Nacional de Transports Aquaviários, ANTAQ

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SUMMARY OBSERVATIONS

1. Since its last Trade Policy Review in 2004, Brazil has continued with the gradual modernization and streamlining of its trade regime, while also increasing average tariff protection. Building on sound macroeconomic policies and previous and recent reforms, Brazil was able to take advantage of a favourable global economic environment to achieve solid economic growth but the current world economic slowdown presents new challenges. In order to meet these, Brazil needs to press on with its efforts to give additional impetus to trade and investment, including lowering effective tariff protection, reducing the use of import prohibitions, and providing greater predictability to the foreign investment regime. Solving the long-standing problem of high domestic interest rate spreads would also encourage trade and investment, and thus productivity. These and other steps to promote market competition and an efficient allocation of resources would help Brazil sustain economic growth and continue improving the living standards of its population.

(1) ECONOMIC ENVIRONMENT

2. After expanding by just 1.1% in 2003, the Brazilian economy grew at an annual average rate of 4.5% during 2004-07, which reflected strong domestic demand and a favorable external environment. Growth attained an annualized rate of 6% in the first half of 2008; however, it is expected to have slowed since, as a result of weaker global activity. Brazil's macroeconomic policies have continued to focus on achieving primary fiscal surpluses and inflation targets. Despite posting a primary surplus and reduced interest payments, the overall consolidated public sector has remained in deficit (2.1% of GDP in the first half of 2008). The inflation rate decreased until 2007 but picked up in 2008, to 6.4% in the twelve months to October. Brazil maintains a floating exchange rate regime, with the exchange rate fluctuating significantly in both directions during 2003-08. Foreign exchange regulations were liberalized although

without resulting in a full convertibility of the Brazilian real.

3. During the review period, Brazil posted deficits in its services and income balances, which were more than offset by trade balance surpluses. Brazilian merchandise imports take mostly the form of manufactures. Brazil is an important exporter of both manufactured and primary products and has benefitted considerably from strong global demand and high commodities prices. Reflecting this, Brazilian exports performed strongly during the review period, increasing at a nominal average annual rate of almost 22% in U.S. dollars terms between 2003 and 2007; imports grew even faster, attaining a rate of 26% during the same period. Nevertheless, Brazil's trade in goods and services as a proportion of GDP fell slightly during the period under review, to about 26% in 2008.

4. Brazil is a genuine global trader, with considerable diversification in the geographic distribution of its exports and imports. During the period under review, the shares of Brazil's two-way trade with the European Communities and the United States decreased, while increases were recorded in exports to Argentina and China and imports from China and certain African countries.

(1) TRADE POLICY AND INVESTMENT FRAMEWORK

5. Brazil considers the multilateral trading system to be at the core of its trade regime. It is an original Member of the WTO, and an active participant. As such, Brazil has submitted numerous proposals to various WTO bodies and took part in the GATS negotiations on telecommunications and on financial services. In contrast, however, Brazil did not ratify the Fourth Protocol, on telecommunications, and, as at November 2008, was still in the process of ratifying the Fifth Protocol, on financial services. Brazil has made a large number of notifications to the WTO but as at end 2008 certain notifications were yet to be submitted, for instance under

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the Agreement on Agriculture. Since its last Review, Brazil had recourse to the WTO dispute settlement mechanism on one occasion as a complainant and on two occasions as a defendant. Brazil has been participating actively in the development of the Aid-for-Trade process, playing a twofold role, both as recipient and as donor.

6. Brazil considers preferential trade agreements as a valuable complement to the multilateral trade system. It is a full member of the Southern Common Market (MERCOSUR). Although this is by far Brazil's most important preferential agreement in terms of value of trade, only some 10% of its merchandise trade takes place with MERCOSUR members.

7. As part of MERCOSUR, Brazil has preferential trade agreements with Bolivia, Chile, Colombia, Cuba, Ecuador, Mexico, Peru, and Venezuela. Brazil also has bilateral preferential agreements with a few LAIA members. Also as part of MERCOSUR, Brazil is at different stages of negotiating or ratifying preferential trade agreements of diverse scope with Egypt, the European Union, the Gulf Cooperation Council, India, Israel, Jordan, Morocco, the Southern African Customs Union and Turkey.

8. No major changes have been introduced to Brazil's foreign investment regime during the period under review. Foreign and Brazilian investors receive in principle the same treatment but specific laws may impose restrictions on foreign investment; thus, foreign participation is restricted in areas such as rural property, health, the mass media, as well as maritime and air transport.

9. Brazil has signed bilateral investment agreements with several countries, including within MERCOSUR; however, none of these agreements is in force due to concerns expressed in Congress about their constitutionality. In view of the scope in the national legislation to restrict foreign investment, and Brazil's limited international obligations in this area, accepting new GATS

commitments would allow Brazil to enhance the predictability of its investment regime.

(2) MARKET ACCESS FOR GOODS

10. Brazil has continued to take gradual steps to simplify and modernize its customs procedures. For example, it introduced an express import declaration regime for frequent importers, and streamlined inspection procedures.

11. Brazil increased overall tariff protection; the simple average applied MFN tariff rose from 10.4% in January 2004 to 11.5% in January 2008. This was mainly due to an increase of 1.1 percentage points in the average tariff of non-agricultural products to 11.6%; the average for agricultural products (WTO definition) remained practically constant, at 10.1%. The highest rate of 35% applies to 4% of all tariff lines, including tyres, textiles, clothing, and motor vehicles. Brazil's tariff structure still shows low dispersion but the presence of tariff peaks and escalation increases the effective rates of tariff protection. All tariffs applied by Brazil are ad valorem.

12. Brazil's entire tariff schedule is bound at an average of 30.2%. Reducing bound rates to close the gap between them and applied tariffs would further increase the predictability of Brazil’s trade regime.

13. Brazil continues to be an active user of anti-dumping (AD) measures. At end-October 2008, it had 63 AD measures in force, affecting the exports of 23 trading partners. Most of these measures take the form of specific duties; the average duration of an AD measure in place is some 6.4 years. The number of AD investigations initiated and of provisional AD measures applied since 2004 has increased compared with the previous review period, but the number of new definitive AD duties (28) was only marginally higher. Brazil also has two countervailing measures in force. Since 2002, it has applied one safeguard measure, on grated coconut;

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this safeguard is not applied to MERCOSUR members nor to most developing countries.

14. Brazil imposes import prohibitions on virtually all used consumer goods, including motor vehicles, as well as on certain grapes and grape juices to be used in the production of wine, and wine transported in containers larger than five litres. Brazil uses both automatic and non-automatic licences; the latter affect slightly more than one third of all tariff lines. Licences are not issued for the importation of retreaded tyres, except from MERCOSUR; this exception was found inconsistent with multilateral rules by a WTO Panel.

15. Since Brazil's last Review, there have been only a few changes in the legal and institutional framework governing technical regulations and sanitary and phytosanitary (SPS) measures; among other changes, guidelines were introduced for the adoption of technical regulations and new rules issued for genetically modified organisms. The authorities indicated that they are taking steps to ensure that notifications for both technical regulations and SPS measures are made within the multilaterally recommended periods.

(3) MEASURES AFFECTING EXPORTS

16. No major modifications have been made to Brazil's export procedures since its previous Review, except for the abolition of the need for exporters to engage in foreign currency sale contracts. Brazilian legislation allows for the application of an export tax of 30%, which can be decreased or increased (up to 150%). Taxes may in principle be applied to all exports, but in practice are levied only on leathers and skins, arms and ammunition, and cigarettes. Exports of dual-use goods are subject to non-automatic licences.

17. Brazil seeks tax neutrality for its exports through schemes such as drawback systems, and no indirect taxation on exports.

18. Brazil implements a number of financing, insurance, and guarantee schemes

aimed at promoting exports. The Export Financing Programme (PROEX) is one of Brazil’s main tools to support exports. The Programme is aimed at providing access to credit to companies that would otherwise have difficulties obtaining it, or would be able do so only at the high market interest rates prevailing in the domestic economy. The manner in which PROEX was applied to aircraft exports was challenged in the WTO, and its procedures were modified twice during the period under review after the DSB determined that they constituted an export subsidy. In certain cases, the BNDES-EXIM programme provides preferential export credits linked to domestic content.

(4) OTHER MEASURES AFFECTING TRADE

19. Assistance to production and investment in general is granted mostly through official credit. Some 30% of total credit in 2008 went to earmarked activities, with the national development bank (BNDES) managing more than half of it. Such credit is made available at rates significantly below the interest rates prevailing in the domestic market; in some cases official credit is linked to local-content requirements.

20. Brazil has notified to WTO that a number of regional assistance programmes provide subsidies for the development of particular regions, and for research and development. Incentives for regional development are also provided through the free-trade zones regime.

21. During the review period, Brazil has strengthened its competition policy regime, but challenges remain in its implementation. New legislation is under consideration to enhance the powers of the competition authority, including to conduct pre-merger examinations. The legal framework for production and investment is somewhat complex due to the large number of taxes, incentive schemes, and procedures. Measures to reduce tax complexity and to eliminate distortions and

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fiscal competition, among other tax reforms, could produce large economic gains.

22. The State controls a significant number of entities covering a wide range of activities. State ownership reflects a policy decision that government control is appropriate to accomplish strategic objectives while not excluding privatization.

23. Brazil has taken steps to increase transparency in its government procurement regime. Procurement is based on best-price criteria when tendering is used, although in practice over 40% of procurement contracts take place under some kind of waiver from tendering requirements. In general national treatment is afforded to foreign suppliers legally established or represented in Brazil except when deciding between identical offers. A preference margin of up to 10% for micro and small enterprises was introduced in 2006. Brazil is a not a party to the GPA; joining it would increase the predictability of its trade regime and could result in benefits to taxpayers by reducing procurement costs, and to the domestic producers that could realistically compete for contracts in foreign markets.

24. Brazil's legislation covers all the major aspects mentioned in the TRIPS Agreement. In 2007, Brazil passed new legislation on layout designs of integrated circuits. Parallel imports of goods embodying IPRs covered by the Industrial Property Law are not allowed, while decisions on parallel imports covered by the Copyright Law are taken on a case-by-case basis. Brazil issued one compulsory licence for an anti-HIV drug, which allows the importation of generic versions of the drug or the manufacture of a domestic version at government laboratories.

(5) SECTORAL POLICIES

25. Agricultural production has a relatively low level of tariff protection but is supported through several domestic assistance programmes, with many aimed at providing low cost credit, especially to small-scale

farmers. Guaranteed prices for a number of products are also used to support agriculture. Although the value of assistance to agriculture in Brazil is low compared with the average in OECD countries, the interventions in both the credit and agricultural domestic markets are distorting forms of support. Moreover, this assistance could affect global markets of agricultural products for which Brazil is a large exporter.

26. Private companies established in Brazil are allowed to take part, through concessions, in the petroleum and gas sector. In practice, state-controlled PETROBRAS has a dominant position in the sector, holding virtually all of Brazil's refining capacity and being the key price-setter for petroleum-based fuels in the domestic market. The granting of exploration and extraction concessions, and the construction of PETROBRAS' new oil platforms are contingent upon local-content requirements. Discussions are under way on possible changes to the sector's regulatory framework in the light of recent petroleum discoveries. The State also has a dominant presence in the electricity sector.

27. Brazil has historically given priority to the development of its manufacturing sector. To this end, it provides favourable conditions for long-term financing as well as assistance through border measures, such as tariff peaks and tariff escalation, and internal instruments like tax concessions. It would be important to ensure that industrial policy does not make it more difficult for other sectors to attract factors of production, thus hindering their growth. Moreover, reducing the levels of effective tariff protection would help reduce consumer prices, and encourage greater productivity, in particular in industries where Brazilian producers are already world-class players.

28. The services sector accounts for almost two thirds of Brazil's GDP. Brazil is a net importer of services, and runs a traditional deficit in the services account. Brazil's specific commitments under the GATS cover only 38 of the 160 services subsectors or 7 of

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the 12 broad areas defined in the Services Sectoral Classification List.

29. As noted, Brazil has not ratified the Fifth Protocol but amendments made in 2007 to its insurance legislation may make this possible. Among other things, the amendments allow, under certain conditions, the cross-border supply of insurance services, which was forbidden before. Although in practice the establishment of new foreign financial institutions is allowed, this requires approval by Presidential Decree.

30. The degree of financial intermediation in Brazil increased during the period under review. Interest rates spreads were reduced but, at some 28 percentage points in November 2008, remain wide. Moreover, medium and long-term financing in Brazil is available almost exclusively from state banks, at interest rates considerably below those that would likely prevail under free-market conditions. These palliative measures are no substitute for identifying and correcting the causes of the high cost of credit in Brazil.

31. Brazil has no GATS specific commitments in the telecommunication sector. Although the Executive Branch has the right to limit new foreign participation in telecoms, in practice any company regardless of the origin of capital has been allowed to invest in the sector. Foreign participation in paid cable television services is limited to 49% of voting shares. Brazil's telecom regulatory structure follows international best practice, and during the review period the authorities aimed to improve it by introducing several changes.

Strengthening the regulatory agency would consolidate this process.

32. Brazil's air transport sector continued to face problems during the period under review. Market concentration remains high, which may reflect in part the requirement that domestic air transport be provided only by companies managed by Brazilians and in which 80% of voting rights are in Brazilian hands. All major airports are owned and operated by the State. Moreover, in spite of revisions to make them more flexible, Brazil's bilateral air agreements establish relatively strict conditions for the provision of services. Consumers may, benefit from measures to foster greater competition and service quality, including the relaxation of existing restrictions on foreign investment.

33. In principle, only Brazilian flag vessels may engage in cabotage activities or in the transportation of: public entities' cargoes; goods benefiting from official fiscal or credit programmes; and imports and exports of crude oil and derivatives produced in Brazil. Brazil requires reciprocity in international maritime transportation services. Brazil applies a tax, the AFRMM, on the cost of maritime freight; the rate applied on international routes is 25% while that on cabotage is 10%, with exports excluded from the tax. The tax does not apply to operators from countries with which Brazil has agreements in this respect. Proceeds from the AFRMM are used to finance the domestic shipbuilding industry, with financing subject in some cases to local-content requirements. Brazil collects a lighthouse fee (TUF) exclusively on foreign flag vessels.