BRAZIL CONSIDERS BILLS THAT THREATEN US TRADE

BRAZIL CONSIDERS BILLS THAT THREATEN US TRADE

Two related proposals working their way through the Brazilian Congress threaten to restrict trade between the United States and Brazil.

The first calls for reviving enforcement of Brazil's 40/40/20 cargo- preference system. The bill, if passed into law, would reserve 40 percent of all commercial cargo for Brazilian-flagged vessels, 40 percent for the importing or exporting nation and the remaining 20 percent for third-flag carriers operating in the trade lane.The second is aimed at rebuilding Brazil's merchant fleet by doubling the Merchant Marine Renewal Tax from 25 percent to 50 percent. The tax is levied on all Brazilian imports and the proceeds are used to subsidize the domestic shipbuilding industry.

Brazilian carriers receive a rebate on part of the tax, while U.S. and third-flag shippers bear the brunt of modernizing the Brazilian merchant marine. Some third-flag carriers involved in the U.S.-Brazilian trade are acutely aware of the possible revival of 40/40/20 and its implications.

After hitting a high of more than 60 percent in the late 1980s, cargo requirements have been completely eliminated in the northbound trade between Brazil and the United States, and have declined to just one-third of all shipments in the southbound lane.

Arild Wegener of the Norwegian Shipowners' Association, said, "The chances of passage are real. The current conditions in Brazil are conducive to the enactment of the 40/40/20. The mood has become very nationalistic and should be taken seriously. The effect on third flags would be severe."

Since the impeachment of President Fernando Collor de Mello last fall, the threat of a protectionist backlash has loomed over free trade. During his two years in office, Mr. Collor de Mello eliminated many of the barriers that legislators are trying to reconstruct.

Mr. Collor de Mello's import-liberalization program, which is still in effect, ended bans on some 1,000 foreign products and slashed average import tariffs from 30 percent in 1990 to just 14.2 percent. His successor, former Vice President Itamar Franco, has shown a distaste for harsh reforms, firing five finance ministers in the past year.

Many fear that with an election approaching next October, Mr. Franco may be tempted to condone populist measures in the Congress, such as the resurrection of Brazilian-flag dominance under 40/40/20.

The United States is, by far, Brazil's largest single trading partner, with waterborne trade amounting to nearly $13 billion in 1992, or 23 percent of Brazil's total world trade. American exports to Brazil have been rapidly rising since 1990, when Mr. Collor de Mello began import liberalization.

According to Trade Horizons, a quarterly container trade forecast produced by the Port Import/Export Reporting Service of The Journal of Commerce, percentage growth of U.S. containerized exports to Brazil should remain in the double digits over the next two years.

Third-flag carriers fear they will be squeezed out of this ongoing boom if the new 40/40/20 is enacted.

Neither bill proposes any radically new concepts to the Brazilian shipping industry. Executive Laws No. 666 and 687 of the federal constitution have mandated compulsory sea carriage for Brazilian flagged vessels since July 1969.

Enforcement became lax, however, in the early 1980s as Brazil began to move toward freer trade, and legislators came to realize that domestic shippers simply lacked the capacity to carry their 40 percent share. The Merchant Marine Renewal Tax was supposed to overcome the capacity problem, but President Collor de Mello weakened the tax considerably by cutting it in half in 1990.

Cargo was a topic of particular concern at a meeting held in Washington, D.C., on July 21. Representatives from the U.S. and Brazil gathered to renew a two-year agreement on marine transport for another 18 months.

Both countries agreed to give national and third-flag vessels the "fair and nondiscriminatory opportunity to compete for the carriage of commercial cargo in bilateral trade." But when the U.S. requested the repeal of Decree 666, the Brazilian delegation stated that as a law, 666 can only be changed by the Congress.

The U.S. expressed similar objections to the Merchant Marine Renewal Tax to no avail. Ship lines flying Brazilian flags display a more casual attitude toward the possible 40/40/20 revival.

For example, Paulo Mello Cota, a director at Alianca Lines in Brazil, said the proposal doesn't have much chance of passing the Congress.

"Brazil has a more open stance on trade today. The 40/40/20 bill is anti- free trade and doesn't appear to have much support in the Congress," he said.

Up to now, Brazil has made significant strides toward reducing cargoes covered under the reservation system, according to Jim Treichel, director of international affairs at the Maritime Administration.

"The best evidence we have suggests that government-mandated cargoes have declined considerably over the past decade," he said.

The smaller scope of government-mandated cargoes has allowed competition to flourish. In 1983, 174 third-flag vessels were involved in the trade. Today, that number has nearly doubled to 343.

At the same time, the amount of Brazilian-flag ships plummeted 300 percent to just 13, while the number of U.S.-flag ships dropped 500 percent to five. With competition up, rates have dropped.

''Increased competition has definitely played a role in lowering freight rates," said Adm. Geraldo Alao de Queiroz, executive secretary of the Inter- American Freight Conference.

Over the past 10 years, the average cost of moving cargo between the U.S. and Brazil has declined by 50 percent for certain commodities.

To meet their current obligations to move government-mandated cargoes, Brazilian ship lines have been forced to charter third-flag vessels because of the shortage of Brazilian flag ships.