EU steps up trade fight with Brazil over local content rules

The European Union has escalated a dispute with Brazil over the country's local content programmes in the auto and other industries by requesting the World Trade Organisation set up a panel to rule on the matter.

The move by the EU comes less than a week after incumbent president Dilma Rousseff, whose centre-left Workers' party government introduced some of the measures, won a second term in elections on Sunday.

"The Brazilian tax measures give an unfair advantage to domestic producers and go against WTO rules," said the EU, which originally filed a complaint about the issue to the WTO in December last year.

Brazil did not formally respond immediately but foreign minister Luiz Alberto Figueiredo told reporters that Brazil would show the EU that its regulations were in conformity with WTO rules.

"We think our regime is perfectly compatible [with the WTO rules] and we will show this on the panel."

Ms Rousseff's Workers' party, or PT, has launched a number of initiatives to promote the use of local content in equipment and consumer products sold in Brazil, from the oil and automotive sectors to telecommunications.

Among the most controversial of these measures was one that increased excise taxes on cars by up to 30 per cent of their value depending on the amount of imported content in the vehicle.

"Combined with customs duties levied at the border and other charges, this may amount in some cases to a prohibitive tax of 80 per cent on the import value," the EU said.

The EU, Brazil's biggest trading partner, alleges that Latin America's largest economy has become progressively more protectionist in recent years.

Both sides have been seeking to revive 14-year-old trade negotiations between the EU and Mercosul, the regional trading bloc that also includes Argentina and Venezuela.

The new local content dispute is potentially awkward for Roberto Azevedo, the Brazilian who took over leadership of the WTO in September last year.

The EU argued Brazilian consumers were paying up to 50 per cent more for smartphones, for example, compared with their counterparts in Europe and elsewhere in spite of protection for local producers granting them tax breaks of 80-100 per cent.

"Brazil restricts trade by requiring Brazilian manufacturers to use domestic components as a condition to benefit from tax advantages," it said. "This promotes import substitution by inducing foreign producers to relocate to Brazil and to limit foreign sourcing. This hurts EU exporters of finished products and their components."

Under WTO rules, Brazil and the EU were given a period of time to discuss the problem after the original complaint was filed.

But the EU said this had not produced results.

The EU's request on Friday for the establishment of a WTO panel will be discussed at the organisation's dispute-settlement body meeting on November 18.

If Brazil does not agree, the EU can table a second request at the next such meeting, which the Latin American country will not be able to block.

In spite of the EU complaint, the top four carmakers with production facilities in Brazil include two major European operators, Fiat and Volkswagen.

They, together with the other two large producers, General Motors and Ford, are suffering a sharp slowdown in the market and are expected to appeal to the government to maintain domestic tax breaks supporting the industry.

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