I. COMMERCIAL OVERVIEW - Overview of Import Market Brazil, a country of 153 million inhabitants with a gross domestic product (GDP) of $466 billion (1994 estimate), is the largest economy in Latin America, and represents the number two destination for U.S. exports in Latin America, after Mexico. Total U.S. exports to Brazil in 1993 were $6.0 billion, and are estimated to reach $7.3 billion in 1994. Brazil's total imports in 1993 were $25.7 billion, of which imports from the U.S. accounted for 23.4 percent. Other major suppliers to Brazil are Argentina (10.2 percent of Brazilian imports), Germany (8.8 percent), Japan (5.9 percent) and Italy (3.9 percent). Following several decades of tight import restrictions, Brazil began a process of trade and economic liberalization in 1990 incorporating import duty reductions, elimination of most non-tariff barriers to trade, privatization, and administrative reform. The ongoing liberalization process dramatically altered Brazil's trade profile and, to a lesser degree, altered its industrial profile bringing competition and the resulting gains in efficiency to Brazil's economy. Prior to 1990 protection for local industry was implemented primarily through use of non-transparent import licensing procedures which has diminished significantly in recent years. Now in most cases protection for local industry is implemented through transparent use of import tariffs. Brazil imports a wide variety of capital goods, intermediate products, raw materials, and consumer goods. Brazil's imports reflect the country's industrial diversity and sophistication, and in recent years, the effects of pent-up demand for many products, especially in the consumer goods and computers categories. The Brazilian market for imports of services has grown and developed in recent years as a result of liberalization, but to a lesser degree than has the market for goods. Improvements in regulations and procedures affecting importation of software and registration and payments related to international franchising have created new and promising markets in those sectors. - Brief Synopsis of Commercial Environment Brazil's large and diverse market often presents complexities to doing business reflecting the country's ongoing transition from a basically closed, inward looking economy dominated by government enterprise and regulation, to a relatively open market-oriented economy. While most markets are now characterized by competition and participation by foreign firms through imports, local production, and joint ventures, sectors of the economy are still controlled by the government. This is the case in the telecommunications, petroleum refining and extraction, and electrical energy sectors where trade and investment opportunities may be severely limited. High taxes and duties also strongly affect certain markets, such as in the automotive and consumer goods sectors. Volatile macroeconomic conditions, high inflation, and an often changing regulatory environment present challenges to doing business in Brazil. Nevertheless, the good condition of Brazil's financial infrastructure and its creative and dynamic private sector combined with the relatively underdeveloped state of recently liberalized markets and the natural and human resource wealth of the country itself, give Brazil commercial opportunities found in few other markets worldwide. - Host Country Business Attitude Toward the U.S. Brazilian business and government entities generally have a positive view toward U.S. firms, products and services. U.S. firms and products, particularly in the capital goods sector, have a good reputation in Brazil for quality, reliability and effectiveness. Many observers of U.S.-Brazil issues have noted a cultural affinity between Brazilians and Americans which transcends into the business world sometimes giving the U.S. an advantage over competitors. - Major Business Opportunities Business opportunities abound for U.S. suppliers and investors in Brazil across a number a major industry sectors and major projects within those sectors. With the lifting of the Market Reserve policy in 1990, imports of information technology and services soared. Informatics includes computer equipment, computer software, telecommunications equipment, telecommunications services, information services, electronic components, test and measurement equipment, and semiconductor manufacturing equipment. Brazil is the largest Information technology and services market in Latin America. With a large population, repressed demand and a nascent infrastructure, this market is expected to grow between 10-15 percent. Brazil's market for telecommunications equipment and services, in particular, is second only to Mexico in Latin America. This market is expected to grow nearly 200 percent over the next three years. Telebras needs to invest US$6 billion annually to meet current demands. Until now, the parastatal has been able to invest only US $3 billion per year over the past five years. The country's demand for energy technologies in generation, transmission and distribution of electrical power presents enormous opportunities to U.S. companies. Privatization of the electrical power sector in Brazil has increasing political support and opportunities for foreign investment are beginning to appear in this sector. Environmental technologies are in great demand. There are a great number of state/municipal sanitation and cleanup projects that provide excellent opportunities for U.S. suppliers of environmental technologies and services. This market alone is in excess of US 1 billion per year. Demand for U.S. medical technology is high. U.S. exports of medical devices to Brazil are forecasted to grow at an annual rate of 7 percent between 1995-2000. American healthcare services are also in great demand, recognized as the world's best. There are about 19,000 public hospitals in Brazil that require rehabilitation. Transportation (automotive and rail), aerospace, insurance, pharmaceutical, biotechnology and franchising are a few other sectors that show promising growth in Brazil through the remainder of the decade. - Major Roadblocks to Doing Business Brazil's 1988 constitution establishes certain restrictions on private sector and foreign capital participation in Brazil's economy. The Constitution reserves basic telecommunications services, petroleum extraction and refining, nuclear energy, and shipping for the state. Foreign capital participation in the health care, mining, financial services, and media sectors are restricted or prohibited by the constitution, as is ownership of rural and border area property. Brazilian regulations impose local content requirements and give significant preferences to local manufacturers in government procurement of telecommunications and information processing technologies. Competition from foreign providers of services, such as engineering and construction, is generally prohibited, except in the context of a joint venture or when the service is not available from Brazilian firms. - Nature of Local and Third Country Competition Brazil's industry, which in many sectors is dominated by subsidiaries of multinational firms, is highly diversified, producing a wide range of goods and services. Many Brazilian-made products and services are competitive in global markets. Although Brazil's import duties average 14 percent and are basically comparable with those of its Latin American neighbors, Brazil's supplementary taxes and fees can raise the landed costs of imported products to double a comparable U.S. price, thereby providing significant advantages to locally-made products. U.S. firms experience strong competition from agricultural and, to a lesser degree, manufactured products made in neighboring Argentina, which as a member of the Southern Common Market (MERCOSUL) along with Brazil, Uruguay, and Paraguay, receives duty free treatment in Brazil. U.S. exporters will also face stiff competition from subsidiaries of third country multinational firms manufacturing or otherwise established in Brazil. This is especially true in the telecommunications equipment, military equipment, and automotive sectors.