China accelerates car sales to Brazil to avoid tax

The schedule for increasing import tariffs on electric and hybrid vehicles brought forward the shipment of cars from China to Brazil at the beginning of 2024. China exported $589.9 million in cars in January and February to Brazil. In March, the pace accelerated and there was another $580 million, totaling $1.17 billion in the first quarter of this year, more than half the total sold by the country to Brazil in the whole of last year and more than five times the amount of $239.42 million exported in the same months of 2023, according to China’s General Administration of Customs.

In the first two months of this year, Brazil was ranked as China’s fifth destination for passenger cars shipped, compared to the 19th position held in the first two months of 2023. With the numbers of March, Brazil rose to fourth place in the first quarter, behind Russia, Belgium, and the UK, surpassing Mexico by little difference, of less than $50 million.

In March alone, Brazil was the third largest buyer of cars from China, behind only Russia and Belgium. Of the total China shipped to Brazil in the first quarter, 40.9% were electric cars, and at least another 36.8% were plug-in hybrids, which can be recharged using domestic sockets or fast-charging stations.

Although the accelerated shipment of Chinese cars to Brazil can be explained by the schedule of rising import rates and the pace of these exports will likely adjust as taxes rise, experts do not expect a sharp drop ahead.

“What we see now is a movement to bring forward shipments. After this period will there be a relevant drop in these exports? Probably not,” said Livio Ribeiro, a partner at BRCG and researcher at the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV). In his opinion, the current trend should be seen as part of a broader plan, which includes Chinese automakers’ production in Brazil.

According to Tulio Cariello, director of content and research at the Brazil-China Business Council, the rise in Chinese car shipments to Brazil is part of a typical long-term strategy. “The Chinese know that their vehicles are part of a growing niche market. They want to build this market and position their product, which comes together with the arrival of Chinese automakers, such as GWM and BYD, in Brazil,” he said.

Since January, the arrival of electric and hybrid cars has been subject to import tax in Brazil. According to the schedule set by the Brazilian government, taxes will gradually increase until they reach 35% in July 2026. For electric cars, the tax rate is now 10%. For hybrids and plug-in hybrids, it’s currently 15% and 12%, respectively. In July, the rates will increase to 18% for electric vehicles, 25% for hybrids, and 20% for plug-in hybrids.

There are also quotas for a tax exemption cap, which have been defined for each company and will gradually decrease until they are removed, starting from July 2026. The global quota for electric cars, for example, started at $283 million until June 2024, will fall to $226 million by July 2025, and then there will be a final period with a limit of $75 million until July 2026.

As it takes 45 to 60 days for cars leaving China to arrive in Brazil, some of the vehicles shipped have not yet disembarked in Brazilian territory. Statistics from the Secretariat of Foreign Trade (SECEX/MDIC) indicate that from January to March Brazil imported $569.9 million in cars from China.

Mr. Ribeiro points out that Chinese automakers have likely been operating with low profit margins and may have room to absorb part of the higher taxes without losing too much market share. “As Chinese cars are entering a niche market, the price elasticity tends to be lower but the tax rate is not small,” he said.

Taxation on imported electric and hybrid cars since January 2024 is the result of a response by traditional automakers in Brazil to the increasing arrival of these cars from China. Data from China’s customs indicate passenger car shipments to Brazil started last year at $71.5 million in January, plus $63.12 million in February. In March, exports reached $104.8 million, and the growth trend became clearer in the second half of the year.

According to the Chinese government, Chinese car shipments to Brazil ended last year at $2.11 billion, almost four times the amount of $553.59 million seen in 2022. According to SECEX/MDIC figures, Chinese car sales to Brazil accounted for approximately 40% of the total imports by the country from January to March, surpassing Argentina, which has been Brazil’s longtime supplier.

Electric and hybrid cars, imported or not, are expected to remain the target of debates in Brazil. In the supplementary bill 68/2024, on the regulation of tax reform on consumption, the government proposes that vehicles be subject to the Selective Tax, a new tax on goods and services that are considered harmful to health or the environment. Under the proposed bill, light commercial vehicles regarded as sustainable cars will have zero rates. For a vehicle to be considered sustainable, it will be inspected according to its carbon dioxide emissions, recyclability, category, and completion of manufacturing stages in Brazil.

The proposal has generated criticism involving possible regressive tax as electric cars are not affordable to the Brazilian population.

Welber Barral, a partner at BMJ and a former secretary of foreign trade, says the issue is likely to generate a battle. “There is no consensus on this subject among traditional Brazilian manufacturers,” he said.

He points out that the debate on energy transition involving cars faces huge pressure to stimulate ethanol, as the biofuel is a large, traditional project and, therefore, cannot simply be abandoned.

Source: Valor Internacional

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