For every job that is protected, others are not created – 06/30/2023 – Marcos Mendes

The new government believes that the way to development passes through the “requirement of national content”. The cheap car policy gives advantages to vehicles that have more domestic parts. President Lula is blocking the agreement with the European Union because he disagrees with opening the public procurement market to foreign companies.

The National Council for Industrial Development presented a list of “seven missions” for industrial policy, in which the demand for national content appears in sectors as diverse as medical equipment, the war industry and inputs for Minha Casa, Minha Vida. Even to “eradicate hunger”, the strategy would be to “reduce external dependence on machinery, agricultural implements and fertilizers”.

It is the deepening of a policy that has been practiced for decades. The Free Zone of Manaus conditions fiscal benefits to the fulfillment of “Basic Production Process” rules. BNDES offers cheap financing for the purchase of domestic machines. Oil companies have to comply with quotas for the acquisition of national equipment. The Bidding Law gives preference to domestic suppliers. Until the 1990s, the reservation of the information technology market imposed a strong restriction on the importation of computers.

The idea is to create jobs, develop national technology, induce industrialization and export higher value-added goods, not just commodities. It is mercantilist reasoning, according to which trade does not create value and does not generate mutual benefits: if one side wins, the other loses. For every imported product that generates a job in China, it is one less job in Brazil. Better to export a lot and import a little.

Since Adam Smith, we know that the wider the possibilities for trade, the greater the space for specialization, division of labor, absorption of technology and, therefore, economic growth. Autarkic economies are doomed to stagnation. For every job that is protected, many others are not created, because the protectionist policy destroys opportunities for new ventures.

When the government protects, for example, national auto parts manufacturers, it does not protect the automobile industry, which will produce cars with more expensive and worse parts, ceasing to be competitive in the international market. Depending only on the domestic market, automakers are pressing for protection, so as not to lose market share to imported vehicles. A cycle of mediocrity and unproductivity is created.

National content requirements usually come down to technical details, imposing rigidities on the production process, which cannot be reorganized more efficiently as prices and technologies change. Bureaucratic processes for verifying and approving compliance with quotas delay investments and production. Companies give up innovating so as not to have to go through the ordeal of approving a new basic production process.

The combination of sectors chosen by the government, benefits concentrated in a few companies and non-transparent costs (because they are passed on in prices or translated into uncreated wealth) create an environment conducive to lobbying and misallocation of capital.

All over the world, sectors organize themselves and achieve this type of protection. However, Hufbauer and coauthors show that Brazil is at the top of the ranking. And here the problem gets worse, because countries usually extend privileges to partner countries in trade treaties, and we have few treaties.

The computer market reservation is the most emblematic failure. The Libra field, one of the most attractive in the pre-salt, auctioned with strong demand for national content, had only one offer, for the minimum price. After a reform that reduced requirements, less promising fields were disputed with high competition and the government received high premiums.

Embraer, which has never been subject to the national content requirement, is a major importer of inputs and technology and, as a result, manages to be competitive in the foreign market. The production of oil platforms, with its chain of national suppliers, never prospered.

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