11994 figures are estimates based on available monthly data in October 1994. GDP at market prices.

Figures are actual monthly nominal rates, not changes in them.

Cruzeiro reals/usd, end of year, for 1992, 1993; realsund, as of October 10 for 1994.

Total trade. Figures for merchandise trade only not available. CIF prices for imports are not available. Nonfinancial public sector. Excludes Petrobras and Vale do Rio Doce (CVRD).

1. General Policy Framework

On July 1, 1994, Brazil introduced a new national currency, the "real" (the fifth in seven years), replacing the "cruzeiro real" at the rate of 2,750 cruzeiro reals to 1.00 real. The new currency is the centerpiece of the government's economic stabilization plan, the "Plano Real," designed to curb chronic, rampant inflation, which had reached an annual level of nearly 5,000 percent by the end of 1993. Other key elements of the stabilization plan include balancing the federal government budget, privatization of state-run industries, and strict monetary controls. Following the introduction of the new currency, nominal monthly rates of inflation fell from 50 percent in June (measured in the old currency) to 1.5 percent in September (measured in the new currency). The real rate of inflation (as measured by the IPC-r, the Plano Real's index, in reals) is higher than in 1993: 15.87 percent for the first nine months of 1994 vs. 13.38 percent for all of 1993.

The stabilization plan under which the real was introduced established quantitative targets on the expansion of the monetary base. Monetary policy is also constrained by the need to maintain positive real interest rates in order to roll over the domestic government debt and to prevent capital outflow. High interest rates, however, aggravate the fiscal deficit. Brazil has suffered structural deficits for many years. Provisions of the 1988 Constitution which mandate substantial revenue transfers to states and municipalities, as well as mandatory federal expenditures, leave the government with discretionary control of only about 10 percent of revenues collected.

Long-term stabilization will require structural reforms and revision of Brazil's 1988 Constitution. The constitutional review process which began in late 1993 expired in May 1994 with virtually no reforms adopted. Among the reforms considered by the Constitutional Review Congress were fiscal reforms, including a redistribution of federal, state and municipal government responsibilities, simplification of the tax system, privatization of the state-owned telecommunications and petroleum monopolies, elimination of the distinction between foreign and national capital, and permitting foreign investment in mining. Broad consensus exists on the need for constitutional reform to rectify the economic distortions of the current constitution, but there are significant differences regarding the specific reforms needed. Now that the constitutional review process is over, approval of constitutional reforms will re

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quire two votes each by the upper and lower chambers of the Brazilian Congress; a 60 percent majority is required for all four votes.

The process of economic and trade liberalization begun in 1990 slowed during 1993 and 1994, but has nevertheless produced significant changes in Brazil's trade regime, resulting in a more open and competitive economy. Imports are increasing in response to lower tariffs and reduced non-tariff barriers, as well as the strength of the real relative to the dollar, and are now composed of a wide-range of industrial, agricultural and consumer goods. Access to Brazilian markets in most sectors is generally good, and most markets are characterized by competition and participation by foreign firms through imports, local production and joint ventures. Some sectors of the economy, such as the telecommunications, petroleum and electrical energy sectors, are still dominated by the government, and opportunities for trade and investment are severely limited.

Brazil and its Southern Common Market (Mercosul) partners Argentina, Uruguay and Paraguay concluded negotiations in August 1994 for a common external tariff (CET) which went into effect on January 1, 1995. The CET levels for most products range between zero and 20 percent. The Brazilian_government unilaterally lowered tariffs on some 6,000 items to the CET levels in September of 1994, as part of its anti-inflationary effort. With the exception of tariffs on informatics products and some capital goods, the maximum Brazilian tariff level is now 20 percent; the most commonly applied tariff is 14 percent. When the CET enters into force in the four Mercosul countries in January 1995, all revisions to the tariff schedule will have to be negotiated among the four partners.

The Government of Brazil ratified the Uruguay Round Agreements in 1994 and became a founding member of the World Trade Organization on January 1, 1995. 2. Exchange Rate Policy

Brazil has three exchange rates: a commercial rate, a tourist rate and a semi-official parallel rate. The commercial rate is used for import-export transactions registered at the Central Bank and financial transactions linked to external debt. The tourist, or floating rate, is used for individual transactions such as unilateral transfers, travel, tourism, and transactions involving education and training abroad. The parallel rate is also used for individual transactions, but they are not recorded. All three rates fluctuate; the spread between them has diminished since the introduction of the new currency.

The measure introducing the real established parity with the dollar. However, a surplus of dollars, caused by financial activities of exporters and foreign investors, resulted in the steady appreciation of the real relative to the dollar. The Central Bank did not intervene until September, when the real reached 0.85 to one dollar. Subsequent Central Bank interventions indicate that this level is the Bank's floor. 3. Structural Policies

Although some administrative improvements have been made in recent years, the Brazilian legal and regulatory system is far from transparent. The government has historically exercised considerable control over private business through extensive and frequently changing regulations. To implement economic policies rapidly, the government has resorted to issuing decrees rather than securing congressional approval of legislation. These decrees are frequently challenged in the courts and a number have been declared unconstitutional. The regulatory instability makes planning difficult. In June 1994 a new antitrust law was passed to prevent “abusive pricing." The law will likely face a legal challenge.

The tax system in Brazil is extremely complex, with a wide range of income and consumption taxes levied at the federal, state and municipal levels. Both payment and collection of taxes is burdensome. An effort to streamline the tax system was begun in 1991; considerable progress has been made to improve collections. Significant further reforms will require constitutional revision.

The privatization program initiated in 1990 to reduce the size of the government and improve fiscal performance slowed to a near halt during 1994. The planned privatization of part of the electricity sector was abandoned entirely, while a number of planned auctions of financially troubled or non-competitive state-owned companies were delayed in response to lukewarm investor interest and low price offers. The pace of privatizations is expected to increase significantly during 1995, under the_administration of President-elect Fernando Henrique Cardoso, who took office on January 1, 1995.

4. Debt Management Policies

Brazil's external debt totaled approximately $146 billion at the end of 1993. Of this total, about $34 billion is medium-term commercial bank debt owed by the gov. ernment. Foreign private bank debt is $63 billion, of which the U.S. share is $24

billion. In 1993, Brazil's debt service payments represented 4 percent of its gross domestic product, and 42 percent of its export earnings.

In April 1994, the government concluded a debt renegotiation agreement with foreign commercial banks. The agreement included exchanging $35 billion in mediumterm commercial bank debt for new instruments. The agreement also included rescheduling outstanding arrears. Unlike past Brady Plan debt exchanges, the Brazil. ian deal was closed without the support of the official international financial community since the Brazilian government was unable to reach an agreement with the IMF for a standby program.

Brazil did not reach an agreement with the Paris Club during 1994 to reschedule official debt. Under Brazil's 1992 agreement with the Paris Club, further debt rescheduling is contingent upon the government concluding a standby agreement with the IMF.

5. Significant Barriers to U.S. Exports

Import Licenses: Although Brazil requires import licenses for virtually all products, import licensing generally does not pose a barrier to U.S. exports. Import licenses, which until 1990 were a significant barrier to imports, are now used primarily for statistical purposes and generally are issued automatically within five days. However, obtaining an import license can occasionally still be difficult. For example, the Brazilian government has refused to grant an import license for lithium for nearly two years. In January 1992, a standard import license fee of approximately $100 was instituted, replacing a 1.8 percent ad valorem see.

The Secretariat of Foreign Trade's computerized trade documentation system (SISCOMEX), scheduled to be fully operational in January 1995, will further streamline filing and processing of import documentation.

Services Barriers: Restrictive investment laws, lack of administrative transparency, legal and administrative restrictions on remittances, and arbitrary application of regulations and laws limit U.S. service exports to Brazil. In some areas, such as construction engineering, foreign companies are prevented from providing technical services unless Brazilian firms are unable to perform them.

Many service trade possibilities are restricted by limitations on foreign capital under the 1988 Constitution. In particular, services in the telecommunications, oil field, and mining industries are severely restricted. Foreign financial institutions are restricted from entering Brazil or expanding pre-1988 operations. Restrictions exist on the use of foreign-produced advertising materials.

Foreign legal, accounting, tax preparation, management consulting, architectural, engineering, and construction industries are hindered by various barriers. These include forced local partnerships, limits on foreign directorships and non-transparent registration procedures.

Foreign participation in the insurance industry is impeded by limitations on foreign investment, market reserves for Brazilian firms in areas such as import insurance, and the requirement that parastatals purchase insurance only from Brazilianowned firms. Further, the lucrative reinsurance market is reserved for the state monopoly, the Reinsurance Institute of Brazil (IRB).

Other legal and administrative obstacles to foreign services suppliers are being eased. In January 1992, the government announced rules which allow foreign remittances of trademark license fees and technology transfer payments covered by franchising agreements. The change effectively ended a 20-year ban on international franchising in Brazil.

Investment Barriers: In addition to the restrictions on the services-related investments mentioned above, foreign investment faces various prohibitions in petroleum production and refining, internal transportation, public utilities, media, real estate, shipping, and various other “strategic industries." In other sectors, such as the auto industry, Brazil limits foreign equity participation and imposes local-content requirements. Foreign ownership of land in rural areas and adjacent to international borders is prohibited.

Foreign investors are denied national treatment pursuant to the constitutional distinction between national and foreign capital.

Informatics: Under the 1991 Informatics Law, prohibitions or requirements for government prior review for imports, investment, or manufacturing by foreign firms in Brazil were eliminated. However, import duties remain high (up to 35 percent) on informatics products, and Brazilian firms receive preferential treatment in government procurement and have access to certain fiscal benefits, including tax reductions. For a foreign-owned firm to gain access to most of these incentives, it must commit to invest in local research and development and meet export and local training requirements. Rules governing computer software are contained in Law 7646 (the software law) of December 1987. The software law requires that all software

be "catalogued" by the Informatics Secretariat of the Ministry of Science and Technology prior to its commercialization in Brazil, and that in many cases software must be distributed through a Brazilian firm. The law contains provisions to deny cataloguing of foreign software if the Secretariat determines there is a similar program of Brazilian origin. However, this provision is no longer applied. A draft law has been introduced into Brazil's Congress to eliminate the requirement for cataloguing, the test of similarities, and the requirement that software to be run on Brazilian-origin hardware must be distributed by a Brazilian firm.

Government Procurement: Given the significant influence of the state-controlled sector due to its large size, discriminatory government procurement policies are, in relative terms in Brazil's market, an important barrier to U.S. exports. For example, discriminatory government procurement practices in the computer, computer software and digital electronics sector may have significant adverse market access implications for U.S. firms, particularly firms not established in Brazil.

Article 171 of the 1988 Constitution provides for government discrimination in favor of "Brazilian companies with national capital." On June 21, 1993, Brazil adopted procurement legislation, Law Number 8666, requiring open bids based upon the lowest price. However, in late 1993 the government introduced new regulations which allow consideration of non-price factors and give preferences to telecommunications, computer, and digital electronics goods produced in Brazil, and stipulate local content requirements for eligibility for fiscal benefits. In March 1994, the government issued Decree 1070 regulating the procurement of informatics and telecommunications goods and services. The regulations require federal agencies and parastatal entities to give preference to locally produced computer products based on a complicated and non-transparent price/technology matrix. It is not possible to estimate the economic impact of these restrictions upon U.S. exports. However, free competition could provide significant market opportunities for U.S. firms.

Brazil is not a signatory to the GATT Government Procurement Code.

6. Export Subsidies Policies

In general, the Brazilian Government does not provide direct subsidies to exporters, but does offer a variety of tax and tariff incentives to encourage export production and to encourage the use of Brazilian inputs in exported products. Several of these programs have been found to be countervailable under U.S. countervailing duty provisions in the context of specific subsidy/countervailing duty cases. Incentives include tax and tariff exemptions for equipment and materials imported for the production of goods for export, excise and sales tax exemptions on exported products, and excise tax rebates on materials used in the manufacture of export products. Exporters also enjoy exemption from withholding tax for remittances overseas for loan payments and marketing, and from the financial operations tax for deposit receipts on export products. In October 1994, the Brazilian government issued Decree Law 674, granting exporters a rebate on social contribution taxes paid on locally acquired production inputs.

An export credit program, known as PROEX, was established in 1991. PROEX is intended to eliminate the distortions in foreign currency-linked lending caused by Brazil's high rates of inflation and currency depreciation. Under the program, the government provides interest rate guarantees to commercial banks which finance export sales, thus ensuring Brazilian exporters access to financing at rates equivalent to those available internationally. Capital goods, automobiles and auto parts, and consumer goods are eligible for financing under the PROEX program.

7. Protection of U.S. Intellectual Property

Brazil's regime for the protection of intellectual property rights is inadequate. Serious gaps exist in current statutes with regard to patent protection for pharmaceuticals, chemicals, and biotechnological inventions; trademarks and trade secrets; and copyrights. Legislation has been pending before the Brazilian Congress for several years to address many of these areas. The Brazilian government has made a commitment to bring its intellectual property regime up to the international standards specified in the Uruguay Round Trade Related Aspects of Intellectual Property (TRIPS) Agreement. As a result of this commitment, the U.S. government_terminated the Special 301 investigation initiated in May of 1993, and revoked Brazil's designation as a "priority foreign country." Brazil remains under Section 306 monitoring.

Brazil is a signatory to the GATT Uruguay Round Accords, including the TRIPS Agreement. Brazil is a member of the World Intellectual Property Organization and a signatory to the Berne Convention on Artistic Property, the Universal Copyright Convention, the Washington Patent Cooperation Treaty, and the Paris Convention on Protection of Intellectual Property.

Patents: Brazil does not provide either product or process patent protection for pharmaceutical substances, processed foods, metallurgical alloys, chemicals, or biotechnological inventions. The Industrial Property Bill passed in 1993 by the Chamber of Deputies and currently pending before the Senate would recognize the first four of these categories and extend the term for product patents from 15 to 20 years. The Brazilian government announced in early 1994 that it would support amendments to the bill which would bring its provisions into conformity with TRIPS provisions, including those on compulsory licensing, domestic working requirements and parallel imports.

Trade Secrets: Brazil lacks explicit legal protection for trade secrets, although a criminal statute against unfair trade practices can, in theory, be applied to prosecute the disclosure of privileged trade information. The Industrial Property Bill pending in Congress includes civil penalties and injunctive relief for trade secret infringement.

Trademarks: All trademarks, as well as licensing and technical assistance agreements (including franchising), must be registered with the National Institute of Industrial Property (INPI). Without such registration, a trademark is subject to cancellation for non-use. The pending Industrial Property Bill includes significant trademark revisions which will improve trademark protection.

Copyrights: While Brazil's copyright law generally conforms to international standards, the 25-year term of protection for computer software falls considerably short of the Berne Convention standard of the life of the author plus 50 years. Enforcement of copyright laws has been lax. Current fines do not constitute an adequate deterrent to infringement. The U.S. private sector estimates that piracy of video cassettes, sound recordings and musical compositions, books and computer software continues at substantial levels. In the last two years, enforcement of laws against video and software piracy has improved, and foreign firms have had some success in using the Brazilian legal system to protect their copyrights. The government has also initiated action to reduce the importation of pirated sound recordings and videocassettes.

Semiconductor Chip Lay-out Design: A bill introduced in 1992, and still pending before the Congress, will protect the lay-out designs of integrated circuits. Amendments to the draft law are expected to bring its provisions into conformity with the

TRIPS text.

Impact on U.S. Trade: In early 1994, the U.S. pharmaceuticals industry estimated losses of $500 million due to inadequate intellectual property protection. The U.S. software industry claims losses of $268 million, and estimates that less than 50 percent of the software in use in Brazil was legally obtained. The Motion Picture Export Association of America estimates its annual losses due to motion picture piracy in Brazil at $39 million.

8. Worker Rights

a. The Right of Association.—Brazil's Labor Code provides for union representation of all Brazilian workers (excepting military, military police and firemen), but imposes a hierarchical, unitary system, funded by a mandatory "union tax" on workers and employers. Under a restriction known as "unicidade" (one per city), the code prohibits multiple unions of the same professional category in a given geographical area. It also stipulates that no union's geographic base can be smaller than a municipality. The 1988 Constitution retains many provisions of the 1943 Labor Code. The retention of "unicidade" and of the union tax continues to draw criticism both from elements of Brazil's labor movement and from the International Confederation of Free Trade Unions (ICFTU).

In practice, however, "unicidade" has proven less restrictive in recent years, as more liberal interpretations of its restrictions have permitted new unions to form and, in many cases, compete with unions and federations that had already enjoyed official recognition. The sole bureaucratic requirement for new unions is to register with the Ministry of Labor which, by judicial decision, is bound to receive and record their registration. The primary source of continuing restriction is the system of labor courts, which retain the right to review the registration of new unions, and adjudicate conflicts over their formation. Otherwise, unions are independent of the government and of political parties. Approximately 20 to 30 percent of the Brazilian workforce is organized, with just over half of this number affiliated with an independent labor central. (Mandatory labor organization under the Labor Code encompasses a larger percentage of the workforce. However, many workers are believed to have minimal if any contact with these unions.) Intimidation of rural labor organizers by landowners and their agents continues to be a problem.

The Constitution provides for the right to strike (excepting, again, military, police and firemen, but including other civil servants). Enabling legislation passed in 1989