WASHINGTON/SAO PAULO U.S. Trade Representative Ron Kirk urged Brazil to reconsider plans for tariff increases, prompting a stinging rebuke of American monetary policy that has "distorted" global exchange rates.
The spat drew attention to growing trade barriers in the world's No. 6 economy as it struggles to emerge from a year of disappointing growth and highlighted Brazil's sensitivity to the latest aggressive stimulus by the U.S. Federal Reserve.
In a letter to Brazil's foreign minister, Kirk expressed "in strong and clear terms" the U.S. concerns about plans to raise import tariffs on 100 foreign products, warning that they could spark retaliation from trade partners.
Foreign Minister Antonio de Aguiar Patriota replied in a letter on Thursday that the currency effects of U.S. monetary stimulus had forced Brazil to confront "a flood of imported goods at artificially low prices."
Patriota emphasized that the measures were "legitimate instruments" under World Trade Organization (WTO) rules.
The temporary increase in levies, initially for a year, would apply to products ranging from glass to iron pipes and bus tires. The rate will roughly double to 25 percent for most of those products.
Kirk said the United States expects scheduled tariff increases around September 25 to "significantly hit U.S. exports to Brazil in key areas of export interest to the United States."
Patriota answered that the U.S. has been one of the main beneficiaries of a stronger Brazilian currency, which hit a 12-year high last year. American exports to Brazil nearly doubled from 2007 to 2011, he said, as Brazil went from the 16th to the eighth biggest market for U.S. goods.
"It would be fairer if those increases took place in an environment not distorted by exchange rate misalignments and blatant government support," Patriota wrote.
CONTROVERSIAL FARM POLICY
Brazil's moves to raise import tariffs repeatedly over the past year "clearly represent protectionist measures," Kirk said, risking similar measures from trade partners, which "would amplify the negative impact" of Brazil's actions.
But Patriota called Brazilian policy "WTO-consistent," contrasting it with "illegal subsidization of farm products by the United States, which impact Brazil and other developing countries, including some of the poorest countries in Africa."
Brazilian officials have long complained about U.S. farm policy and in recent years decried the Fed policy as one front in a global "currency war" distorting trade flows.
The Federal Reserve launched a third round of unconventional monetary easing this month, pledging to buy $40 billion of mortgage-backed securities per month in order to bring down interest rates.
Lower returns in the U.S. and other developed markets have driven hot money flows into emerging markets such as Brazil in recent years, pushing up the value of their currencies and making imports cheaper in their domestic markets.
(Additional reporting by Luciana Otoni and Jeferson Ribeiro in Brasilia; Editing by Sandra Maler)