“We are not at all closed.”
That is how Daniel Godinho, international negotiations coordinator for Brazil’s Ministry of Development, Industry and External Trade, summarized the state’s defense against growing criticism that the country is virtually closed to international textile and apparel producers while imports are often subject to great delays and complex bureaucracy.
Meanwhile, the country’s largest textile industry lobby, Abit, is working on a three-pronged strategy to thwart Chinese and other Asian imports, which made up for the bulk of a 40 percent import surge last year, denting local producers’ fortunes.
“Our textile import policies are fair and not at all protectionist,” Godinho told WWD. “In fact, Brazilian imports have been soaring in the past few years.”
His comments came as several international fashion brands have criticized the government’s high import duties, adding that import laws are also a maze of complexity that hinders key collections from reaching stores quickly enough for a profitable sale. Even local producers say the government could be doing more to open up the world’s fifth-largest apparel market, particularly for textile raw materials largely unavailable in Brazil.
“They should lower duties for the textiles we can’t produce here,” said Luiz Morais, director of women’s luxury dress maker Patricia Bonaldi, adding that the import of certain fabrics is squeezing the firm’s profit margins. However, Morais was confident that the Brazilian government will soon realize that a more open market is better than a closed one. “I think they will eventually improve the whole process. But until now, the best way to fight this is to ensure we are selling the best possible merchandise,” he said.
Doing that is key for many international and Brazilian producers eager to win market share in a country with one of the fastest-growing middle classes in the world as well as a booming rate of millionaires. According to a recent study by Haliwell Bank, Brazil is generating 19 millionaires a day — throwing luxury brands into a scramble to attract this new affluent segment.
But fashion brands’ complaints about Brazilian “protectionism” seem to have fallen on deaf ears, at least for the moment.
Currently, imported garments pay a 35 percent duty while textiles pay 26 percent and yarns 18 percent. One industry consultant, who requested anonymity, said the duties are higher than in the other BRIC nations as well as in many other emerging markets and are preventing Brazilian apparel producers from importing key raw materials unavailable in the local market.
“There is a dearth of laces, worsted wool, some prints and embroideries which are necessary for producers to manufacture more fashionable clothes and are very expensive to bring into the country,” he said.
He added many international luxury brands are having to double their Brazilian prices to compensate for the high import duties.
Godinho said, “there is no single move or action aimed at lowering these duties, which we think are fair for this industry.”
He contended that Brazilian taxes are much lower than in the U.S. or Europe, which are allowed to charge duties of as much as 800 to 1,000 percent for industrial products they are eager to protect.
“Under WTO rules, we can charge a maximum of 55 percent for these products [mainly agricultural] and our 35 percent textiles tariff is the highest we are allowed to charge while other countries can charge a lot more,” he claimed.
Godinho added Brazil’s average import tariff is 11 percent. “If you take the average in the U.S., it’s probably 2 to 3 percent but they can charge as much as 1,000 percent for a product they want to protect. We can’t.”
According to Godinho, Brazilian import taxes and rules are a matter of controversy between importers and exporters. “We have many local brands telling us that the import duties are too low and that we should raise them while on the other hand, we have the international brands telling us we should lower them,” Godinho explained. “We have to find a balance.”
Given the flood of Chinese and other Asian imports to the country in recent years, that balance is likely to be highly defensive.
Even Brazil’s president, Dilma Vana Rousseff, has pledged to shield the country’s industries from global competitors. In contrast with Godinho, in a recent speech she used the word “protection” to reflect Brazil’s trade vision, saying: “With planning and the right policies, we are managing to protect our economy, our production sectors and, above all, jobs.”
Her comments came after the government in late 2011 introduced a series of measures to restrict imports of industrial goods and earmarked billions of dollars in tax exemptions to help exporters reach the international market at a time when a soaring real is hurting foreign sales.
Regarding brands’ complaints that import procedures are lengthy and laden with red tape, Godinho countered they don’t take longer than in any other country.
“Our system is electronic and quick unless we find a suspect cargo which we think is illegal or has undervalued merchandise,” he said. “This will obviously cause some delays as we cross-check information to ensure everything is legal but every country in the world does this.”
Meanwhile, the textiles and apparel industry is doing everything it can to ensure this type of merchandise does not reach Brazilian shores.
“We cannot hand our industry to the Chinese,” said Aguinaldo Diniz Filho, Abit’s president, during a São Paulo industry conference in mid January.
Diniz blamed the massive inflow of Chinese and other Asian textiles into Brazil for throwing many parts of the industry into the red last year. Abit said textile and garment production fell 14 percent and 4 percent, respectively, and would have fallen further if domestic apparel sales had not increased 10 percent to $63 billion. Moreover, the industry lost 20,000 jobs.
Diniz said Abit is working with Brazil’s government to hammer out a plan to tackle Chinese competition, which he called “unequal and predatory.”
Abit’s director, Fernando Pimentel, said a three-pronged strategy is being hatched. He added the move is not aimed at closing Brazil to other textile and garment imports. “This action is aimed at creating equal competition. It is not protectionism. We just want to compete in an equal field.”
He said China is unfairly subsidizing its textiles industry and that the first strategy will seek punitive action against these measures, with the possibility of introducing compensatory duties as approved by the WTO.
“We have hired [law firm] King & Spalding to analyze 27 subsidies China’s government is giving to its textile and apparel producers,” Pimentel said, adding that he expects this investigation to end by the spring. “We are looking at how much of this [Chinese policy] represents unfair competition and we will act to ensure we can defend our industry.”
The second protective measures calls for the introduction of a fixed tax for all undervalued garments entering the country to stem a barrage of dumping cases. Pimentel stressed that this action will affect all international imports. However, he acknowledged that most under-priced merchandise comes from China, which accounts for 65 to 75 percent of Brazil’s apparel imports. The goods also arrive from India, Bangladesh, Pakistan and Indonesia, he added.
Pimentel said many Chinese and Asian imports do not pay the correct tax. “You have a lot of people importing a product that costs significantly less than 50 but saying it cost them 50 and paying a 35 percent duty on whatever price they claim,” he explained.
To end this practice, Abit is working to provide customs with reference prices for hundreds of garments so that “if you import a cotton shirt you will pay a specific duty for that shirt, regardless of the price you claim it costs,” Pimentel explained.
As part of the third measure, Brazil may introduce safeguards such as higher duties of quotes for some Chinese or Asian imports that come in at unfairly low prices.
Pimentel said the industry is on track with plans to boost Brazil’s textile and garment exports to $6 billion by 2017, up from $1.5 billion last year. He said 97 percent of the industry’s revenues depend on domestic sales with 3 percent going to export.
To this end, he said Brazilian textiles firms are working to carve a niche in the export of sustainable and eco-friendly fabrics made from rain forest and other “natural” raw materials such as organic cotton or fish skin.
One key brand doing this is Osklen, which is already selling sustainable apparel to 40 countries, boasting an “e-fabrics tag” that informs consumers about the eco-friendly origin of its products. Another label, Movin, is following suit, making clothes from organic cotton, bamboo and recycled PET, an environmentally-friendly plastic used to make beverage bottles.
Marco Lobo, head of fashion projects for export promotion agency Apex Brasil, said 300 Brazilian firms are currently engaged in an Apex program to sharply boost beachwear, women’s evening wear and casual shorts and T-shirt sales to the U.S., Middle East and Japan. Salinas and Lenny are some of the top beachwear brands, while Patricia Bonaldi, Mabel Magalhaes and Alessa represent three large eveningwear manufacturers, Lobo said.
He added Brazil hopes to introduce a new tax framework in the summer that will bring forth lower taxes to help exporters reach the international markets. Lobo could not say how much the taxes will decline but said the reduction will be significant.
According to Pimentel, it’s crucial to strengthen the small and midsize textile and apparel sector where many enterprises are struggling to grow because of high taxes.
“One of our big goals in 2012 is to open a discussion with the government about how we can introduce a more favorable fiscal system for these companies,” Pimentel said. “We don’t have that many big apparel producers, so we need to help develop small and medium companies and help them become more competitive.”
This tax reduction is in addition to other Abit petitions that ask for the government to cut energy and labor taxes 35 and 20 percent, respectively, in order to further strengthen producers’ finances in an increasingly tougher competitive environment.
Pimentel said Brazil is also working to strike a free trade deal with the European Union as part of Mercosur’s initiative to do so, Pimentel noted. However, underscoring the Brazil’s rising power in the global political landscape, he noted, “We are discussing this with the EU, but it won’t be an agreement under their laws. It will have to be something fair, on a one-to-one basis and with very strong origin rules.”
Pimentel said Brazil is also negotiating a free trade accord with Mexico, India and South Africa.
If the industry’s defense actions against China’s and other undervalued Asian imports are successful, Brazil’s textiles and apparel sector could grow 3.5 percent in 2012. If not, it may expand just 1.5 percent, Pimentel concluded.