Having already replaced the United States as Brazil’s largest trading partner, China-Brazil trade is set for further boost, with benefits to both the economies. However, the increase in trade, and also the huge trade gap between the countries, is becoming a major challenge for Brazil’s policy-makers. The problem is mainly the nature of the trade.
The total trade between Brazil and China has now gone up to US$ 3.2 billion in April 2011, representing a near 12 fold increase since 2001. The sum was greater than the US$ 2.8 billion trade with the US, and represented the second consecutive month that China had topped the trade table.1
The surge can be attributed to the increase in Chinese demand for Brazilian iron ore, beginning in the first quarter of 2009. Besides iron ore, the bulk of Brazilian exports are made up of soy beans. Brazil’s discovery of vast offshore oilfields is also of increasing interest to China. Overall, raw materials accounted for about 84 per cent of Brazilian exports in 2010, up from 79 per cent the year before. China’s exports to Brazil comprised of high end manufactured products. In 2010, the top three export products were televisions, LCD screens and telephones. Manufactured goods accounted for 98 per cent of Chinese exports to Brazil in 2010.2
It was in 2009 that China for the first time replaced US to become Brazil’s largest trading partner. As the global financial crisis hit the US hard, Brazil’s exports to China grew 64.7 per cent in the first four months of 2009 compared with the same period in 2008. Since 2000, exports to China have shot up about 20 times. In 2010 alone, Brazil enjoyed a trade surplus of US$ 5.2 billion. However, in terms of manufactured goods’ trade between the two, Brazil used to run a deficit of several hundred million dollars a year and this gap grew to US$ 23.5 billion in 2010.
Brazil’s imports of manufactured goods from China reportedly cost about 70,000 jobs in 2010 alone3, and slower growth of Gross Domestic Product (GDP) is predicted for next year. This is partly because of the fact that Chinese manufactured goods in the Brazilian market are leading to “deindustrialization”. Also, the Brazilian government has taken an increasingly firmer stand against the value of the Yuan in recent months.4 The Real’s value against the Yuan has been largely unchanged in the last 12 months. Brazil’s trade struggles can be attributed to the recent strength in its currency.
Brazil opened 140 anti dumping cases in the first nine months of 2010 alone. More than a third of these were against China. The new government headed by Dilma Rousseff has vowed to increase the amount of anti dumping cases against China. Besides the struggles in bilateral trading that Brazil faces due to Chinese manufactured goods and the value of the Yuan, a loss in market share is an additional issue. Brazil has lost market share to China in major trading partners such as Argentina. Brazil accounted for about 31. 6 per cent of imports in 2010, down from 35.8 per cent in 2005. China’s market share in Argentina nearly tripled during that time to about 12.7 per cent.5
Nevertheless, Chinese investments have increased at a rapid rate in Brazil. In the first half of 2010 itself, Brazil received around US$ 20 billion FDI inflows from China. This marks an increase of over ten times when compared to the preceding Chinese FDI inflows into Latin America’s fastest growing and biggest economy.
Trade between Brazil and China has brought benefits to both the economies although the economic relationship is fraught with tensions. There is an increasing polarisation between those who see China as a threat and those who see it as a source of opportunities. The extent to which the Brazilian government and the business community will safeguard against cheaply manufactured Chinese products is what will determine the future perception of the relationship.
During her recent visit to China, President Rousseff urged Beijing to accept more Brazilian industrial goods. Beijing agreed to buy more regional jets from Brazil’s Embracer, while a Taiwanese company with extensive operations in China, Foxconn said it would invest US$ 12 billion in a manufacturing complex in Brazil to make iPods. The fact that remains is that China’s comparative advantage in manufacturing is higher than Brazil’s. The share of Chinese market in Brazil’s exports is not so far below than the entire EU. The share of the Chinese market in Brazil’s merchandise exports jumped from two per cent in 1990 to five per cent in the middle of the last decade.6
For Brazilian policymakers, the challenge lies in positioning the country to benefit from the trading opportunities while preventing excessive shrinkage of the country’s manufacturing industry. Currently trade is concentrated in commodities rather than in infrastructure or high tech areas that can help in the creation of higher value smart jobs.
Chinese trade minister Chen Deming, during his trip to Brazil had cautioned on Brazil’s need to open up and on diversification of the economy, in order to expand the export base.7 As stated by Brazilian trade minister Fernando Pimentel, Brazil is expected to expand its export to China by about 20 per cent in 2011, to reach US$ 37 billion up from US$ 30 billion in 2010. He also estimated that Chinese investments in Brazil this year would total US$ 8 billion, down from around US$ 17 billion last year.8 President Rousseff during her April 2011 visit highlighted Brazil’s need for greater investment in infrastructure of distribution networks and air ports as well as within the energy sector, specifically pointing to China’s expertise in constructing refineries and gas pipelines.9
Brazil faces a host of problems in making value added products. For example, bad roads and poor transportation have been obstacles for the agricultural sector of the country in realising full growth potentials. Rectification of such domestic issues through greater focus and policy initiatives along with collaborations with the Chinese in these sectors can lead to a win-win situation for both countries. It is up to Brazil to decide the way in which the Sino Brazilian relationship can be steered to yield more positive outcomes. Space for a strategic relationship between the two is clearly perceivable, and this can be furthered through encouragement of the development of new partnerships beyond the traditional sectors, and by using the minimum protection necessary to guard national producers.
(The author is a Junior Fellow at the Observer Research Foundation, New Delhi)
1“China Overtakes the US as Brazil’s Largest Trading Partner”, The Telegraph, June 07, 2011.
2“Booming Trade Causes Friction Between Brazil and China”, Reuters, February 03, 2011.
3Prashant Parameswaran, “Brazil and China: Emerging Rivalry Among Emerging Markets”, February 17, 2011, http://asianist.wordpress.com/2011/02/17/brazil-and-china-emerging-rivalry-among-emerging-markets/
4“Sean Goforth, “Brazil Takes a Second Look at China Ties”, World Politics Review, February 15, 2011.
5Brazil’s Trade Ministry, Brazil’s National Industry Confederation.
6“Manufacturing at Risk from Global Shift to Asia, Financial Times, May 23, 2011.
7“China Ready to Increase Trade and Investment in Brazil but Infrastructure Lacking”, Merco Press, May 17, 2011.
9Samuel Novavich , “President Rousseff Visits China”, The Rio Times, April 19, 2011.