Brazil Enables the Black Market

A case study in how barriers to commerce make smuggling a huge business

By Mary Anastasia O’Grady. Excerpts:

"But this city [Foz do Iguaçu]—“the Mouth of the Iguazu” in English—is also famous for another reason: It sits on one of the most lucrative smuggling routes in South America. The triple-border area, which includes Argentina and Paraguay, is a haven for ambitious entrepreneurs intent on skirting the high cost of legality in the Brazilian economy. Millions of consumers in this country are their customers every year in the black market.

It isn’t hard to understand why Brazilians thumb their noses at customs duties. Lady Justice has never been blind here, and today it’s as bad as ever. Since 2017 the Supreme Court has annulled the convictions of dozens of fancy-pants businessmen and politicians caught in a multibillion dollar bribery scandal known as Operation Car Wash. Those let off the hook for crimes of corruption include President Luiz Inácio “Lula” da Silva and, as recently as last month, Marcelo Odebrecht, CEO of one of the country’s largest construction companies. Obeying the rules is for suckers."

"In 1991 Brazil, Argentina, Paraguay and Uruguay created the customs union known as Mercosur to enhance international commerce. But by peppering the agreement with carve-outs and regulations designed to protect favored industries, the countries kept the smuggling business alive. Over in Ciudad del Este, Paraguay, where I was last week, the streets are teeming with open-air markets. Or if you prefer there’s the indoor Paris Shopping, which houses China Shopping. No taxes for foreigners.

Brazil lets you bring back $500 worth of merchandise duty free and after that there’s a 50% tariff, unless you know how to get around it, which apparently many do."

"in 2023 the Brazilian underground economy was estimated at $500 billion, of which around $36 billion is attributable to contraband—90% of which enters this area from Paraguay. Cigarettes are the most popular smuggled good but the top 10 also include pesticides, electronics, clothes, perfume and watches."

"For every shipment that’s caught many more get through. It can’t be otherwise or the business wouldn’t persist. Seizures impose transaction costs but they aren’t higher than duties. It’s past time to legalize international commerce in Brazil."