Brazil and China: A young marriage on the rocks

BRASILIA, (Reuters) – At least once a week during her  young presidency, Dilma Rousseff has met with trusted advisers  to try to solve an intractable problem — China.

Only a few months ago, Brazil and China seemed destined to  enjoy one of the defining alliances of the early 21st century  — two fast-growing emerging market economies seeking  ever-greater opportunities for business together and standing  side by side on key global issues such as trade negotiations.

It’s not quite working out that way.

Rousseff’s regular meetings are just one sign of how she is  steering Brazil toward a more confrontational stance with  China. She is trying to address what she sees as an  increasingly lopsided relationship while also bringing Brazil’s  strategic alliances in line with her dream of turning it into a  middle-class country by the end of the decade.

The core problem is a torrent of Chinese imports that has  quintupled in size since 2005, with disastrous effects for  Brazilian manufacturers and the well-paying, highly skilled  jobs that Rousseff is so focused on creating.

While the weekly session of ministers and finance ministry  officials is ostensibly about how to improve Brazil’s  competitiveness in global trade, “it’s basically a China  meeting,” said one high-level official who takes part.

“Relations between the two countries are not hostile,” the  official said. “But we are going to take measures to protect  ourselves … and push for a more equal relationship.”

In the short term, senior government sources say that will  mean more targeted tariffs on manufactured goods coming from  China and tighter supervision by customs officials, as well as  more anti-dumping complaints against Beijing.

New restrictions on foreign mining companies are also  likely, officials say, reflecting concerns that China wants to  consolidate its grip on Brazil’s commodities wealth while  offering insufficient access to its own market.

In a break from her predecessor, Luiz Inacio Lula da Silva,  Rousseff will push for a stronger yuan currency and more access  to the Chinese market for Brazilian companies like airplane  maker Embraer when she visits China in April.

In the long run, Brazil and China are likely to retain  relatively warm ties and continue to expand bilateral trade.  Yet the shift evolving since Rousseff took office on Jan. 1  could affect everything from Brazil’s relationship with the  United States to the future of so-called “south-south” ties  among emerging market countries.

“It’s surprising that the relationship is changing so  fast,” said Mauricio Cardenas, director of the Latin America  program at the Brookings Institution, a Washington think tank.

“Brazil is clearly seeking major changes … That could  have consequences for all of Latin America as many other  countries, who are experiencing the same problems (with China),  follow the example of Brazil,” Cardenas said.

BRAZIL “NAIVE” IN
CHINA RELATIONSHIP

Redefining a relationship with China is easier said than  done. Just as the United States has struggled to balance its  demands for a stronger yuan against its desire for cheap  Chinese imports and financing, Brazil must also untangle a web  of dependence that has grown rapidly in the last decade.

Bilateral trade soared from just over $2 billion in 2000 to  $56.2 billion in 2010. China has surpassed the United States as  Brazil’s main trading partner and was the biggest single source  of foreign direct investment last year, at about $17 billion.

The robust trade growth helped Brazil’s economy expand last  year at its fastest pace in two decades. It also means that any  efforts by Rousseff to pass new protectionist measures may be  fruitless, said Qiu Xiaoqi, China’s ambassador to Brazil.

“Trade between China and Brazil grew so fast because of a  reciprocal need. When that need exists, nobody can get in the  way,” Qiu told Reuters in a rare interview.

Qiu, who prides himself on his Brazilian cultural knowledge  and insisted on conducting the interview in Portuguese,  attributed anti-China rumblings to “a minority” of officials on  Rousseff’s team. He also pointed out that Brazil had a large  trade surplus with China last year — about $5 billion.

A closer look, however, shows that it would have been a  deficit if not for an extraordinary increase in the price of  iron ore, which accounted for 40 percent of exports to China. Brazilian exports to China as measured by weight — thus,  controlling for increases in commodities prices — fell 3  percent in 2010, while Chinese imports rose 89 percent.

“Brazil has been naive in its management of the China  relationship in recent years. It’s far more uneven than most  people think,” said Fernando Henrique Cardoso, an opposition  party leader who was president of Brazil from 1995-2003.

SEEKING CLOSER
TIES WITH WASHINGTON

Despite Brazil’s strong economic growth last year, its  manufacturers are reeling. Industrial production has been flat  or shrinking since April, and the damage in areas like textiles  and shoes has been so severe that the National Industry  Confederation, or CNI, has warned of “deindustrialization.”

The shift under Rousseff reflects her emphasis on nurturing  local industries while Lula’s trade policy was in part dictated  by his dream of a grand alliance among developing nations. Still, some who do business in both countries worry that  China is being used as a scapegoat for Brazil’s own problems.

“Brazil’s lack of competitiveness has nothing to do with  the Chinese,” said Charles Tang, president of the Brazil-China  Chamber of Commerce and Industry in Rio de Janeiro.

He attributed Brazil’s problems to high taxes, labor costs  and infrastructure bottlenecks that, along with an overvalued  currency, make local goods comparatively expensive to produce.

He also said that Brazilian companies, which for decades  focused primarily on their own large domestic market, have  missed several opportunities to do more business in China.

Soraya Rosar, a trade expert at the CNI, agrees but says  Rousseff needs to push for greater access to China’s market.

Frustration with Chinese policies, especially over its slow  appreciation of the yuan, has convinced Rousseff’s team that  Brazil must strengthen ties with the United States if it is to  negotiate on anything approaching an equal footing with China.

“Brazil alone will accomplish little,” said one official  close to Rousseff. “With the United States by our side, maybe  they’ll listen to us.” The U.S.-Brazil relationship, which suffered under Lula,  has changed rapidly under Rousseff. President Barack Obama will  travel to Brazil in March, and China will be “a subject ripe  for discussion” when Treasury Secretary Timothy Geithner visits  next week, a source with knowledge of the talks said.

Cardoso says Rousseff appears to be recasting Brazil’s  foreign policy with China as both a threat and an ally.

“China for many years cleverly tried to frame the  relationship as ‘south-south’ … that its interest was the  same as Brazil’s interest. But China’s not the south. China is  China, with its own set of interests,” Cardoso said.

Cardenas, of the Brookings Institution, says Brazil’s  policy shift could have profound implications if other  countries follow its lead.

“The Chinese were confident that they could count on the  south-south relationship for support, but now they’re seeing  these voices of criticism are not just coming from the U.S.,”  he said. “When your friends start to turn against you, maybe  it’s time to reexamine things.”