Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing Access Your Profit Alerts

BRIC Summit Deal Gets Brazil-China Trade Relations Back on Track

Brazil and China have had their differences, but the two emerging market leaders are putting those qualms aside for the betterment of both their growth.

The latest China-Brazil trade deal, which was announced Tuesday and is worth up to $1.5 billion, is the latest proof of that.

In fact, as the two countries entered into their third annual BRIC summit with their Indian and Russian counterparts, Brazil made it clear that it sees China as a model for its own industrial development.

Brazil and China have entered into an increasing number of trade agreements as the Red Dragon has sought to shore up supplies of raw materials to fuel its growth. Brazil, among other things, is the world's largest producer of iron ore and often a counterpoint in negotiations between China and Australian miners.

China actually passed the United States as Brazil's biggest trading partner in 2009, as trade between the two countries tripled in the past five years to $62.6 billion.

The most recent China-Brazil trade deal, announced in a joint statement at the BRIC summit in Beijing, included the sale of at least 20 E-190 Embraer SA (NYSE ADR: ERJ) jets to China.

Of course, while the bilateral relationship continues to mature, the two countries also have been forced to confront some growing pains.

Much of that pain lately has been brought about by China's currency, the yuan, which the central government keeps artificially low to boost exports. China pegged its currency to the U.S. dollar through the worst of the financial crisis, only recently allowing for modest appreciation.

Brazil's real, on the other hand, has not been so rigidly controlled – and it has surged as a result of the dollar's weakening.

In fact, the real appreciated about 50% from 2006 to 2010. That has made Brazilian commodities cheaper for China to purchase, while at the same time making Brazilian finished goods more expensive.

Brazilian manufacturers last year lost an estimated 70,000 jobs and $10 billion in income as a result of the country's currency dilemma, according to the Sao Paulo Industrial Federation (Fiesp).

Brazil's loss has been China's gain. That much was made apparent at this year's iconic Carnival festival, where 80% of the costumes on show were made in China.

"Fifteen years ago, it was completely different. It was all Brazilian," Jonatan Schmidt, the president of the country's Association of Textile Importers, told The Financial Times.

That's not all that's changed.

China's foreign direct investment (FDI) in Brazil surged in 2010, with inflows totaling about $17 billion, according to Brazilian think tank Sobeet. That's up from less than $300 million in 2009.

Brazil, which for the most part has welcomed China's involvement, has now grown weary about the level of interest it's courting. Likewise, China has run into some newly erected trade barriers.

China has expressed displeasure over Brazilian "anti-dumping" tariffs meant to curb imports being sold for prices the government believes are below cost. Brazil has enacted 29 such measures against China, almost four times the number aimed at the United States.

The tariffs impelled Chinese tech giant Foxconn Technology Group to look at moving some of its manufacturing operations to Brazil. Though still under consideration, the $12 billion investment would make products by such Foxconn clients as Apple Inc. (Nasdaq: AAPL), Dell Inc. (Nasdaq: DELL) and Hewlett-Packard Company (NYSE: HPQ) more affordable in Brazil.

In that sense, this week's BRIC summit came at just the right time, as it's given both parties a chance to air their grievances.

In the joint statement signed by leaders of both countries Tuesday, China promised to encourage more imports of value-added goods from Brazil. They also agreed to more cooperation between financial and energy companies as well as to have more discussions on food safety issues.

"Brazil needsChinaas much as China needs Brazil," Sergio Amaral, former trade minister and head of the Rio de Janeiro-based China-Brazil Business Council told Bloomberg News. "But we need to iron out distortions in the trade relationship, in which Brazil sells commodities and China manufactures."

With Brazil's economy increasingly dependent on raw material exports, however, Brazilian leaders recognize they need to do more than just adjust trade policy with China. They're trying to develop a stronger industrial base – and looking toward China for inspiration.

It's understandable. China's economy is expected to grow 9.6% in 2011 — more than twice the rate of Brazil's 4%.

"A lot of the kind of the model that they [Brazil's government] have in their heads is China; the way that the Chinese either directly or indirectly through the financial system guide the private sector into fulfilling greater economic development aims," Tony Volpon, head of emerging markets research for the Americas at Nomura told The FT.

Through the state-owned development bank, BNDES, the Brazilian government has wielded credit as a national economic development tool, increasing lending to many companies in recent years.

In addition, federal or state governments hold a stake in as many as one in five Brazilian companies. For example, the Brazilian government owns 54% of the common shares of oil giant Petrobras, more formally known as Petroleo Brasileiro SA (NYSE ADR: PBR).

News and Related Story Links:

Join the conversation. Click here to jump to comments…

  1. William Balgowan | April 14, 2011

    This appears to be a well researched article with many similarities with, and implications for, Australia. However, I have two comments:
    (a) In paragraph 10, when you are talking about the surging Brazil currency, you state "That has made Brazilian commodities cheaper for China to purchase". I can not see how this statement can be correct. An increase in the exchange rate makes imports cheaper. It also generally makes all exports more expensive or less competitive. Furthermore, the huge increases in the prices of most commodities, (usually priced in US Dollars) has made imports to China much more expensive.
    (b) In paragraph 14 you refer to the huge Chinese direct investment in Brazil. This clearly had a very substantial impact contributing to the surging Brazil Currency.

Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK