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Brazil’s China Syndrome

Mar 29 , 2014

Perhaps nothing has contributed more to a changing Latin America and Caribbean over the past decade than Chinese engagement with the region.  Central to this new reality is China’s relationship with Brazil, the largest regional economy by far.  The bilateral relationship is strong—since 2009 China has been Brazil’s top trade partner—and the two share a commonality of interests in international forums including the BRICS and the G20. At the same time, the relationship between these two giants is changing, moving beyond its initial phase to a more mature understanding of the nature of each respective country and what can reasonably be expected from the other.  The implications for Beijing and Brasilia, and also for Washington, are important to understand.

Modern China’s relationship with Brazil is barely a decade old.  In 2004, then presidents Luiz Inacio “Lula” da Silva and Hu Jintao exchanged State Visits, pledging to pursue a new era of mutually rewarding relations.  Previous to these reciprocal visits, the two countries maintained relations but essentially existed in different political and economic orbits.  Trade between them totaled $6.5 billion in 2003.  By 2012, consistent with pledges made by Lula and Hu, trade had increased more than 10-fold, to $75 billion.  In percentage terms, trade with China ballooned from two percent of Brazilian trade to 17 percent.

At the same time, the trade relationship with China was arguably the primary reason why Brazil escaped the 2008 global recession relatively unscathed.  Growth slowed, certainly, but the continued Chinese demand for Brazilian raw materials, particularly iron ore and soy, kept Brazil’s economy out of recession and contributed to broader South American economic growth in the 2000’s.  Torrid annual Chinese growth rates of nine, 10, or even 11 percent required a continuous inflow of raw materials, the basis for most of the growing trade and relationship to this point.

Nonetheless, several things are now occurring causing both Beijing and Brasilia to re-evaluate and potentially reposition the relationship.  When Chinese president Xi Jinping travels to Brazil in July for the World Cup final and the next meeting of BRICS leaders, he will find a partner that is somewhat unsettled, looking to balance the bilateral relationship more effectively even as president Dilma Rousseff seeks re-election in October.

China’s slowdown this year to seven percent projected growth means that the demand for commodities from Brazil and other South American nations is being reduced, although not significantly.  More important is a Brazilian recognition that the composition of trade with China is one sided, and that the nation is too dependent on one market.  To over-simplify, Brazil sends primary commodities to China which then adds value and exports finished products around the world, including back to Brazil.  China reaps the reward for innovation and adding value while Brazil’s own manufacturing sector is under increasing stress from Chinese imports.  Competitiveness lags, and Brazil seemingly has no particular strategy for sales to China other than simply to sell what China offers to buy.

That may be changing, however, as Brazilians recognize the merits in adding value along the way and building more integrated supply chains.  The government is also beginning to take a more purposeful position in negotiations with China, belatedly realizing several steps such as anti-dumping actions that should have been taken early on to support a more balanced relationship.  Because the composition of trade with the United States and also the European Union is more favorable toward Brazil than Brazil’s trade with China, the Brazilian private sector is now clamoring for closer trade relations with the United States and Europe, which may nudge the government toward this eventual goal.

At the same time, China too is better managing expectations for relations with Brazil.  Despite a strong desire for improved infrastructure that will facilitate the movement of goods to market, a desire for a reduction in bureaucratic red tape, and a desire to pursue the Chinese business model unhindered by local customs or regulations, Chinese enterprises are now becoming accustomed to the realities of doing business in Brazil.  They have also experienced a backlash from Brazilian officials in areas such as land and strategic infrastructure ownership.  Partially as a result of this, Chinese investment is now beginning to flow away from just securing natural resources including minerals, agriculture, and energy, to targeting the Brazilian domestic market for capital goods, autos, electronics, and financial services.

But no matter whether or how the economic equation shifts, the political dynamic has been the primary driver of the modern relationship.  Arguably Brazil has pursued a political connection with China as a means to bolster its own profile in Latin America and globally, while seeking to balance the US role commensurately.  China, too, sees benefit in building alternative vehicles to the existing global order that will bolster its own global governance role.  Therefore, bilateral economic disagreements will continue to be minimized publicly and, at the end of the day, will be subsumed to the overall agenda of political cooperation within the BRICS, G20, and other international forums particularly so long as the Workers Party, or PT, remains in the Planalto Palace in Brasilia.

For the United States this means that the path forward with Brazil is primarily economic, based on increased trade and investment while also continuing to build relations elsewhere in Latin America that Brazil finds too important to ignore.  For example, a push by the United States to increase economic and political links with the nations of the Pacific Alliance (Mexico, Chile, Colombia, and Peru), conclusion of the Trans-Pacific Partnership, and concrete progress toward the TTIP with Europe will all help spur Brazil to a recognition that greater economic partnership with the United States can actually be to its benefit.  To the extent that Brazil continues to be concerned by the unbalanced nature of relations with China, trade relations with the United States may be enlarged and improved.  Brazil may also find it more convenient to work with the United States to address currency valuation issues with China.

The second decade of Chinese engagement with Brazil is dawning, and changes in the relationship are underway.  What we can’t yet predict is what the relationship will look like 10 years from now.  But it will be fascinating to observe where it goes from here.

Eric Farnsworth is Vice President of the Council of the Americas and Americas Society, heading the Washington, DC, office since 2003.

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