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06/27/2009 05:12 am ET | Updated May 25, 2011

China-Brazil Economic Alliance May Be Exaggerated

By Seth Kugel | GlobalPost

SAO PAULO, Brazil -- Judging from the headlines, it has been a big month in Brazilian-Chinese relations. First China jumped ahead of the United States as Brazil's top trading partner for the month of April. Then President Luiz Inacio Lula da Silva headed to Beijing, business leaders in tow, to conclude a series of deals with the Chinese and push for others. And news spread that Brazil and China were discussing plans to abandon the dollar and trade in yuan and reais.

So you'd be forgiven for thinking that as the crisis-ridden American economy staggers to get back on track, less-affected Brazil and China were headed off to party on their own, leaving the United States in the international trade dust.

That is an exaggeration, of course, but the relationship between the two BRIC countries is growing steadily. As recently as last year, China was the third biggest of Brazil's trading partners, behind not just the United States but also Argentina; in April, it out-traded the United States $3.2 billion to $2.8 billion, imports and exports combined.

"It's difficult to say whether China has definitely taken first place from the United States," said Andre Loes, HSBC's chief economist for Brazil. "But China used to be a much less important partner five or seven years ago, so I would say this is the final achievement of a very strong trend this decade."

Still, comparatively speaking, Brazil remains relatively isolated: Despite being the world's 10th biggest economy, it does not even make the top 20 list of importers or exporters, and U.S.-China bilateral trade is still much bigger than U.S.-Brazil or China-Brazil trade.
What happened in April? In two words: commodities stockpiling. Brazil may have a few flashy industrial products, like Embraer jets and car plants scattered around the country, but it mostly produces lots of commodities like iron ore, soy and petroleum. Iron ore was particularly responsible for the April numbers, as lower world prices led to a spike in purchases by the Chinese, who are huge steel producers.

For Rubens Ricupero, who served as Brazilian minister of finance in the 1990s and was secretary general of the United Nations Conference on Trade and Development, Brazil's importance to China is all about the raw materials. "What is really meaningful in China's rise," he said, "is that they constitute a very important factor for commodities-producing countries now that mature industrial societies were not increasing demand for commodities."

Lula's visit to China was in part portrayed here as a meeting of giants. "No economic discussion is possible that does not take into account China, Brazil, India and Russia," he boasted while there, and upon his return declared it the most successful of his foreign trips. But all signs pointed to the visit not meeting expectations, at least in the short term. It broke little new ground and largely saw the signing of deals that had been virtually concluded, most notably a $10 billion loan from China to the Brazilian state oil company, Petrobras, and an agreement to allow Brazilian chicken into China.

Other efforts failed: pork exports are still halted, and Brazilian textile industry leaders were unable to squeeze any voluntary reductions in exports out of the Chinese, whose imports have flooded the Brazilian market this year. Efforts to jump-start a stalled 45 plane contract between Embraer and the Chinese were unsuccessful. The trip was shortened to three from five days, and several events were canceled.

"Lula comes home empty-handed from Beijing," according to a Folha de Sao Paulo newspaper editorial, "without having advanced the objected to diversify bilateral trade."
To Ricupero, the downside is that Brazil-China trade is a throwback to old north-south trade, when rich countries used poor ones as a cheap source of commodities for their own industrial production.

"Lula was trying to change that," Ricupero said. "But that idea has always been a non-starter. You can't change it in terms of government to government agreement. The reason the Chinese are capturing a large chunk of the market is that they make products at competitive prices."

Brazil, on the other hand, is criticized for its heavy tax burden on business, high interest rates and high cost of labor, something business leaders and economists complain about and a situation that discourages outside investment. The sentiments of Mario Marconini, chairman of the council on international relations for Fecomercio, a federation representing hundreds of thousands of Brazilian companies, were typical: "The relationship between taxes, finance and production is completely out of whack," he said.

"I'm surprised people produce anything at all in this country."

Brazil desperately wants China to treat it as a strategic partner, said Marconini, but really, he said, China is calling the shots. "They found in us a supplier of whatever commodities they need," he said, "and by the way, they don't need to do anything to get them."

And about the possibility of skipping the dollar altogether and trading in reais and yuan? Possibly a useful long-term strategy, but still far off, as Marconini and others noted -- just like any real influence Brazil might yield over the Asian giant.

"Don't expect China to pay as much attention to Brazil as we think they should," he said. "The world is almost a G-2 -- China and the United States. They have to figure out what they want to do. And that's it."

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