WTO orders Brazil to remove subsidies, government to appeal

By Lisandra Paraguassu and Silvio Cascione

BRASILIA (Reuters) - The World Trade Organization on Wednesday gave Brazil 90 days to withdraw several industrial stimulus programs, supporting complaints of unfair competition by Japan and the European Union, a decision the government will appeal.

The WTO announcement concerns subsidies for a wide range of sectors including steel, electronics and autos. Brazil's intention is mostly to avoid immediate retaliation while it discusses how to remodel the programs under WTO rules.

Policymakers have already been working to reduce subsidies that have been partly responsible for a record budget deficit.

The seven stimulus programs condemned by the WTO have provided more than 25 billion reais ($7.9 billion) in incentives since 2010. Two have already been phased out and a third one, the so-called Inovar Auto for tax benefits to the automobile industry, will expire by the end of this year.

The European Union, in a statement, praised its "full victory" in one of the most comprehensive disputes by the bloc. "This ruling confirms that local content requirements, whereby tax advantages favor domestic goods over imported goods, are illegal under WTO law."

The ruling provides an opening for Brazilian President Michel Temer's push toward free-market policies, which has encountered resistance from powerful unions and industrial groups.

His administration, which started in May 2016, has sought to ease labor rules, put state companies and assets up for sale and sought trade agreements in a bid to shake off the worst recession in Brazil's history.

The appeal process will help Brazil understand which aspects of the stimulus policies may be preserved, Foreign Ministry undersecretary Carlos Cozendey said.

"We are very much aware of the fact that the programs that may eventually replace the incentives under question cannot have their same problems," Cozendey told journalists.

Brazil's main industry lobby said the WTO ruling reinforces the need for a tax overhaul.

"Policies that are little effective or could be questioned in the future are the last thing businesses need," said Carlos Abijaodi, director at Brazil's National Confederation of Industry.

WTO's preliminary decision was first reported by Reuters in November.

(Reporting by Lisandra Paraguassu and Silvio Cascione; Additional reporting by Anthony Boadle in Brasilia and Tom Miles in Geneva; Editing by W Simon and Grant McCool)