In this blog, Portulans Institute Fellow Gabriel Souto explores ICT tariff policy as a pathway to socioeconomic development in Brazil.
Access to Information Technology and Communications (ICT) products is critical for accelerating innovation across all sectors of the economy. While the promise of digital transformation will help level the playing field of businesses and consumers across Brazil, unfortunately, the lack of adequate government policy for ICT products is impacting how these technologies are deployed. This includes current challenges of the ICT sectors, such as inadequate regulatory standards and the high tariffs levied on imported ICT products that discourage employability in these sectors. For instance, according to the World Intellectual Property Organization (WIPO) and Portulans Institute’s Global Innovation Index 2022 (GII), which tracks the current state of innovation globally, between 2011 and 2019, GDP per employed worker increased in China (4.5%), the European Union (1.1%) and Brazil recorded zero growth.
Market access barriers in the form of tariffs on ICT products are a significant blocker to the deployment of digital technologies. Policies that foster a better environment to promote innovation and more digital access for consumers are crucial for sustained economic growth and social development. Sadly, high import tariffs on ICT products severely restrict the development of the digital sector in Brazil, placing it well behind other countries, while discouraging investment in Research and Development (R&D) by the national industry. For example, according to the GII 2022, the contribution of the ICT industry to Gross Domestic Product (GDP) growth in 2020 in Brazil was only 40 percent of its value to the United States and half of its value to China.
History & Benchmark
In 2019, Brazil issued Ordinance nº 309/2019 of the Ministry of Economy, which allows the Council of Foreign Trade (CAMEX) of the Ministry of Economy to reduce import tariffs related to ICT products through the “Ex-Tarifario” – a customs palliative regime developed by the Brazilian government to reduce or remove temporarily import taxes on certain products. Resolution nº 15/2020 and Resolution nº 70/2020 compile the exception lists of specific ICT products that have their tariffs reduced to 0% through “Ex-Tarifario”. Most ICT products listed in Mercosur’s Common External Tariff list are not in the exception lists and currently pay between 16% to 20% in import duty in Brazil.
On March 19th, 2021, the Executive Management Committee at CAMEX (GECEX) published Resolution nº 173/2021, reducing the Import Duties on capital goods and information technology and telecommunications goods by 10%. Although the reduction was around 1 percentage point, it shows a positive move of the Brazilian government to boost the country’s innovation and competitiveness. The reduction affects 1,495 products and enlists 924 tariff codes that are affected by the tariff reduction. For now, Resolution nº 376/2022, published on July 26th, 2022, changes to zero the rates of the Import Duties on capital goods and information technology and telecommunications goods, but for only 89 tariff codes.
Social and Economic Positive Impact
Portulans Institute’s Network Readiness Index (NRI) is a key benchmark of how countries are doing in the digital world. Out of 130 economies, Brazil is ranked 52nd in the 2021 NRI. According to this report, the country demonstrates significant levels of ICT adoption by governments and businesses, ranking 29th and 38th respectively in these sub-pillars. However, Brazil shows low levels of digital engagement by individuals, ranking 67th in the Individuals sub-pillar, despite ranking 6th in Active mobile broadband subscriptions.
In that sense, ICT tariffs have a major impact on international competition. For example, a cell phone made in Brazil or Argentina is sold in these markets with an import tax equal to zero, but cell phones imported from other countries arrive in Brazil paying an import tax (Common external tariff – TEC) of 12,8%. This restricts consumer access to technological innovations that could mitigate problems in their daily lives, as well as directly and indirectly impact the productive and economic efficiency of sectors that buy ICT products because they depend on constant updating and innovation to compete with national and international players. Therefore, the rise of the ICT tariffs on the capacitors alone – and a smartphone has about 40 of them – already causes a significant cost increase for Brazilian sellers and consumers.
Moreover, the structure of globalized ICT supply chains suggests that the more a given industry relies on processing and assembly in China, the more it will be impacted by the tariffs. An important point to consider in global supply chains is the relationship and impact of ICT products tariffs on ICT services. High tariffs on products are proven to be especially linked to negatively impacting the development of ICT services and their critical role in trade in goods in general and global supply chains. In that sense, the GII 2022 ranks Brazil 54th out of 132 countries regarding innovative performance. Despite being in second place in Latin America, Brazil ranks 9th among the upper middle-income economies (36 in total).
Besides, the Global Connectivity Index (GCI) highlights the importance of the ICT sector and analyzes how the countries are positioned in terms of investment, adoption, experience, and potential ICT development. In 2020, Brazil ranked 44th among the 79 examined countries. The country was classified as an adopter and, as such, should focus on developing the implementation of cloud services across the entire economy, which can open the door for earning a frontrunner status in the coming years.
Regarding the gains for society, the increased levels of digitalization of the economy can lead to higher social inclusion, equality, and better life quality. Moreover, the ICT sector can boost the political development of the country, enhance the efficiency of the public administration, increase transparency and diminish bureaucracy. Increases in the share of exports of high value-added products are crucial for the future development of the ICT sector and are directly related to skilled labor, which in turn generates greater value-added for the country’s economy. With larger markets to sell to and more competitive pressure, firms with higher productivity thrive and double down on investment, whereas unproductive firms stop wasting resources, bolstering productivity growth, and boosting GDP through capital formation. This is corroborated by a 2021 Portulans Institute study. According to the NRI report that ranks 130 countries, Brazil’s rankings in the Quality of Life (96th) and Income inequality (112th) indicators dampen achievements in Economy (55th).
In this sense, the Organization for Economic Cooperation and Development (OECD) has published non-binding guidelines that address restrictions on foreign-origin ICT products and investments based on national security grounds, although not serving as a good parameter for the Brazilian panorama. These OECD guidelines involve important concepts but do not appear to be comprehensive enough to address emerging ICT regulatory issues, as well as the regulation of ICT in developing countries, and have not been sufficiently or effectively used to preempt or resolve trade issues concerning ICT regulations based on security concerns. By solely following these guidelines, Brazil would not completely address its low performance on the innovation front. While the complexity involving trade policies and their particularities is well-known, the current transaction costs imposed by import tariffs for ICT products can potentially generate profound impacts on Brazilian innovation and competitiveness.
In conclusion, the high import tariffs on ICT products generate barriers to entry to international products that could provide faster development of the digital sector in Brazil. Such a historical mismatch in Brazilian tariff policy is in line with the situation of globalization of ICTs.
With the recent enactment of Resolution nº 376/2022 of GECEX, which zeroed ICT import tariffs, but only for certain ICT products, Brazil moves in the right direction to be a relevant player in the digital world, increase its private sector competitiveness through innovation, generate jobs, attract more direct foreign investment and to foster a more inclusive and equal environment in its society.
This tends to increase the competitiveness of the Brazilian private sector through innovation, job creation, and attraction of foreign investment. In addition, the reduction in the cost of acquiring ICT goods will provide an increase in access to technology and, consequently, an improvement in the supply of more qualified labor. Therefore, Brazil should continue its policy of fractional reduction of ICT import tariffs with a predictable schedule for each reduction.
Gabriel Souto is a Brazilian researcher and lawyer, co-founder of the Laboratory of Public Policy and Internet (LAPIN), and international coordinator of the Law Student Ambassador Program of the American Bar Association Section of Antitrust Law. He was a visiting student at the Global Antitrust Law & Economics LL.M. of George Mason University’s Antonin Scalia Law School (2018) and a scholarship recipient for the Columbia Law School Summer Program (2022). He provided oral arguments before the Brazilian Congress and the Brazilian Supreme Court. He was a speaker at the University of Oxford’s 2019 Connected Life Conference and at the 2020 Youth Latin America and Caribbean Internet Governance Forum. He had his work recommended to be cited on judicial decisions by Brazilian courts and has won multiple awards and recognitions. He organized several events and published dozens of papers and a book.