Brazil and China’s Trading Relationship Strained

FT: Brazil and China Trade Tensions Set to Rise

FT: Brazilian Factories Tested by Chinese Imports

Economy Watch: Foreign Direct Investment

As Brazil and China have increased trading and reciprocal investments, their relationship has gone from good to tense.

Part of the relationship between Brazil and China relies on foreign direct investment (“FDI”). FDI is any investment in an entity functioning outside of the of the investor’s country. For example, recently Sincopec, a Chinese oil company, purchased a 40 percent stake in Repsol Brazil. FDI is important to economic development in countries like Brazil because it brings more investment into the country. However, FDI can create a cycle of dependency—the more FDI that occurs in a country, the more dependent that country becomes on the foreign investors. This dependency is occurring in Brazil. Last year, China became the largest foreign direct investor in Brazil’s economy, the largest economy in Latin America. In 2009, China invested an estimated $300 million, and in 2010, China increased its investment to $17 billion, or about 35 percent of Brazil’s FDI inflows.

The Brazil-Chinese relationship also relies on trade activity. Brazil exports products such as iron ore and soy to China, and the volume of these exports has helped Brazil weather the 2008 financial crisis. Although this kind of trade would normally make for a positive relationship, new issues have surfaced that have caused tension between the two countries.

At the same time China has invested more in Brazil, it also has emerged as one of the biggest sources of cheap imports to Brazil. As the value of the Brazilian real has increased (making importing from foreign countries much cheaper), the domestic industry cannot compete with the lower prices of Chinese imports. Brazil also has extensive labor laws that drive up workers’ salaries by up to 100 percent, again reducing competitiveness of domestic products. By the end of last year, Brazil faced a manufactured good deficit of a record $23.5 billion. This means that Brazil imported $23.5 billion more in manufactured goods than it has produced domestically.

The influx of cheaper Chinese goods has caused a loss of manufacturing jobs in Brazil. In 2009, China surpassed the United States as Brazil’s largest trading partner, and trade between the two nations accounted for 12.5 percent of Brazil’s total exports. One group estimates this rise has cost Brazil 70,000 manufacturing jobs and $10 billion in lost income to local industry. Some Brazilian companies have even moved production to China and India where labor is cheaper.

These problems have prompted Brazil to consider restrictions on foreign direct investment in mining, as well as imposing minimum domestic supply quotas, which require a certain amount of goods to be produced within Brazil. The Brazilian government has increased import tariffs on toys and has begun anti-dumping campaigns on Chinese products. Brazil (still facing high inflation and interest rates) has also called upon China to revalue its currency.

Although the relationship between Brazil and China is changing, many believe that the Chinese imports are necessary to maintain the Brazilian economy. Current Brazilian industry cannot keep pace with the fast-growing consumer market, which has therefore become dependent on the supply of goods from China. The president of the Brazil-China Chamber of Trade and Industry said, “If you stopped all imports from China today, half the economy would grind to a halt, you couldn’t build any new buildings, you wouldn’t even be able to make a phone call.”

It is unclear where the relationship between Brazil and China is headed, but it is unlikely there will be a breakup anytime soon.

Discussion: Are the Chinese imports a “necessary evil,” or should Brazil only allow its consumer economy to grow as fast as its domestic production? What other actions can Brazil take to control Chinese imports? Should Brazil attract a more diversified investor base?