Local content requirements in Argentina and Brazil - and what they mean to your business

 

 

We have covered protectionist measures elsewhere in this blog, particularly when discussing trade with Argentina and Brazil. British companies often quote the local content requirements of both countries as a barrier to trade, although some have seen it as an opportunity to enter these markets through local production.

Let’s start with Brazil. Local content is defined as “the ratio between the value of goods and services provided domestically in Brazil to meet contract obligations and the total value of goods and services used for said purpose. Local content policy strictly follows this guideline by requiring a minimum percentage of domestic content for a variety of equipment and materials to promote domestic Brazilian industry and strengthen the country's productive capacity” (ABS Consulting) Clearly, the whole point is to stimulate the growth of the country’s manufacturing sector, generating employment and income. This is the same for Argentina and other countries around the world.

As for Brazil, Rothmann specify, “There are no laws in Brazil that prohibit the commercialization of imported products in order to protect the local market. Such trade barriers would be against WTO regulations. Brazil uses mostly indirect mechanisms to require a certain level of local content, especially:

  • Subsidized financing through BNDES (Brazil Development Bank)
  • Tax breaks for companies reaching a certain level of local content
  • Quotas for preferential purchases of locally-manufactured goods in government tenders
  • Self-adopted policy in companies strongly tied to the government (e.g. Petrobras).”

Things get particularly tricky in key sectors such as oil and gas (through state-owned Petrobras) and automotive (where 65% local content is required). The Rothmann article quoted above also reminds us of the penalties for not complying with local content, including financial disqualification, and the fact that the rules also apply to sectors such as renewable energy. I attended a Petrobras inward mission to Newcastle in 2012 and most of the presentation was focused on complying with local content requirement. I remember asking the panellists that day if production in other Mercosur countries (such as Argentina or Uruguay) would count as part of “local content” and the answer was negative. However, this was the case for Petrobras in particular, and for other industries, Mercosur local content does count, although exceptions are always on the cards and regulations change often and at short notice.

Now, over to Argentina, where the story is very similar.

The sectors affected range from mining to automotive and of course energy, oil & gas, agriculture as well as consumer goods. The pressure is on the importers to either even out their trade balance, add local content, or risk not getting the non-automatic licenses they need for importing. Local content requirements (technically illegal according to the WTO) tend to be very vague and particularly strong for public sector procurement.

It is extremely difficult to summarise how much local content is needed. This will depend strongly on the interpretation of “local content”, and on the particular sector. For example, the automotive sector is highly regulated and “local content” requirements are very firm and clear, but in other sectors, legislation is overwhelmingly imprecise, subject to interpretation, and constantly changing. Legal advice is a must.

It is not the purpose of this article to make an assessment of the efficiency of local content requirements in Argentina or Brazil, but analysts have long questioned the measures in terms of short and long term efficiency. Do bear in mind that, even if to produce a certain product you cannot find enough “local content” (parts, services, etc), the regulations still apply, which means not only high manufacturing costs but also production bottlenecks and the substitution of high-quality imported goods for low- quality local alternatives.

So what does it all mean to you?

If you are a manufacturer of parts (whatever goes into manufacturing a larger good such as machinery), you must remember that your Brazilian and Argentinean client will be pushed to favour a local competitor even if price is higher and quality lower. Unless your goods –or any equivalents- are not manufactured –or likely to be manufactured- locally, your client will find it very hard, particularly in certain industries, to do business with you. However, if you manage to add some local content to your product, then you understood the game and will have a great advantage. This is not easy, of course, given the level of bureaucracy, taxation and corruption in both countries. But if it were easy, everyone would be doing it!

If you manufacture finished goods (whether B2B or B2C) remember that on top of high import duties, you will face this additional protectionist measure of local content requirements. For some products these requirements will be so strong that you might be pushed out of the market unless you add local content to your products. In other products and sectors, you will be perfectly able to compete even if your goods are manufactured completely overseas. Finding your niche and adapting are key success factors.

Now, there’s hope (or is there?). Mercosur (highly dominated by Argentina and Brazil) are in advanced negotiations with the EU regarding a free trade agreement (FTA). I am personally very unconvinced about this happening any time soon given the lack of political willingness from both Argentina and Brazil. I could imagine some agreement being reached but I very much doubt that local content requirements will vanish overnight (or in the next five years). So basically, assume that the local content requirement will evolve over the next five years but it is unlikely to disappear. We have to live with it...

As ever, the lesson for Latin America is to think long term. There are ways to cope with local content requirements. They take time, resources, money and patience. But when there’s a will...

 

Based in Uruguay but with 13 years in the UK, Gabriela Castro-Fontoura specialises in making it easier for British businesses to do business with Latin America. Since she established Sunny Sky Solutions (www.sunnyskysolutions.co.uk) over two years ago, Gabriela has helped many UK companies (from nursery products to electrical engineering, from food and drink to marine engineering) understand and make the most of opportunities in her native Latin America. Her key services include market intelligence and partner recruitment. We invite you to sign up for the free monthly Sunny Sky Solutions newsletter to keep up-to-date with what’s going on in Latin America HERE.

 

Written on 14th November 2013 by Gabriela Castro - Fontoura, S&H LLP Associate Director at Sunny Sky Solutions (http://sunnyskysolutions.co.uk/)

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