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Bossa No Va: Brazil's Clampdown on Auto Imports Is Necessary but Dangerous

Please keep making cars here.
Brazil's developing economy is growing up a little too fast. Inflation is surging and a commodities-driven base has sucked in so much foreign investment capital that currency over-appreciation is a threat to the country's industrial expansion. Now Brazil has moved to protect it carmakers by slapping an import restriction on autos. It's a necessary yet dangerous maneuver.

Argentina in the crosshairs
So far, the trade war is being framed as a battle between Brazil and Argentina, but it has larger implications for the auto sector in Latin America. You have to zoom out from the particulars of this fracas, however, to understand what Brazil is trying to accomplish.

Close to 20 percent of Argentina's trade with Brazil takes the form of autos and parts -- $7 billion overall. And while Brazil hasn't thrown down a tariff -- rather, it's delaying import licenses -- the effect could be very damaging for Argentina, which depends on Brazil for the bulk of its auto exports. For its part, Brazil has justified the decision by arguing that Argentina is hampering imports of Brazilian goods.

Imports becoming more attractive as Brazil fights inflation
The new Brazilian government of Dilma Rousseff has all kinds of problems right now. Inflation mixed with an overvalued currency mixed with an import assault has the country's manufacturing sector in an uproar. Now, remember that in automotive terms, Brazil doesn't really build its own cars; rather, the market is made up of established outsiders such as Fiat, General Motors (GM), Volkswagen, and Ford (F).

The outsiders would probably prefer to tap the booming growth rate in Brazil by continuing to expand operations in-country. But if can't get a grip on inflation and continue to expand auto lending, and also prevent its currency from continuing to appreciate, carmakers like GM may find it more profitable to build vehicles in, say, China and export them to Brazil.

Of course, exchange rates cut both ways. Automakers that have invested in both Asian and Brazilian manufacturing capacity are just as vulnerable in Latin America to cars coming in from Korea and Japan.

Circling the wagons
In effect, Brazil is providing protectionism to the auto companies that are building up this sector of its economy. The Argentina issue complicates matters because some carmakers are doing business in both countries -- but that's why you need to look at this piece of macro-economic policy from a bunch of different angles, not just from the POV of Latin rivals who have a lot of history on the futbol pitch.

Brazil is actually doing all the right things to manage this challenge, but it may not have enough tools available to slow down the influx of foreign capital. Pushing interest rates up to cool growth is a money magnet. Devaluing the real would evoke memories of the country's currency crisis in the late 1990s. And such a move might not appeal to carmakers who are expanding in Brazil because they want to sell cars to Brazilians, not export them.

But then there's the inflation to think about. I know, it's enough to make you think a full-body Brazilian body wax would be less painful.

Capital versus manufacturing
This little spat between Brazil and Argentina actually throws the current global capital-versus-manufacturing showdown into higher relief than anything I can think of. Brazil is the closest thing we have in the world to a New America, but the violent fluidity of speculative international money is preventing the country from creating a stable manufacturing climate, at the very top of which are carmakers and the nation's own aviation industry.

So what do you do if you're, say, GM, and you have Argentine-made cars sitting on the Brazilian border? You keep quiet and and let Brazil take car of you in a market where growth rates are expected to be in double digits through the middle of the decade. Capitalism is great -- except when it's predatory, when it isn't.


Photo: Wikimedia Commons
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