Brazil, Latin America and the China “effect”

China - Brazil

In 2000 Brazil’s trade with China constituted 1 percent of its trade portfolio, a mere rounding error in the billions that make up international trade, an insignificant sliver compared to the country’s traditional trade routes to Europe and the USA as well of course as its Latin American neighbours. China did not exist on Brazil’s radar until Chinese demand began to soar for three key products, which Brazil has in abundance: soyabeans, iron ore and crude oil.

The humble soya bean is of course a Chinese staple, used as the basis of soy sauce as well as an ingredient in processed foods, such as the many ready made sauces found on supermarket shelves in Asia and the West. Increased demand for land in China, a result of a city building program never before seen in history, as million upon millions of people resettle in urban areas, has used up precious agricultural land available for growing crops and as a result China has been forced to import more and more food products.

Brazil is often called an “agricultural superpower” and its big fields of soya are part of that perception. The impressive economies of scale, ample water and power enjoyed by Brazilian agribusiness are not matched by the country’s infrastructure, trucks laden with agri-produce often take days to reach ports, having to travel on underfunded, potholed roads and when they do get to reach the sea, there is often a long wait to load goods because of a lack of investment in Brazilian ports.

The history of exporting agricultural goods is always one of booms, busts and very often dependency, particularly for developing countries. The story is common across much of Africa, demand rises for an agricultural product, soaring prices make money for middle men, traders and maybe farmers, then others see the boom and start planting the crop in other countries, or demand in the West falls, leading to a crash in prices. In this cycle the country has come to rely on the product to protect its balance of payments, hard currency earnings and budget and so the fall in price leaves the country in ruins, its budget at the mercy of IMF technocrats.

Brazil is not of course an impoverished African mono-agricultural state, but one of the world’s biggest economies, with an advanced domestic consumer market and a wide variety of exports, giving it a measure of protection against the danger of dependency on a single product. But that wide variety of exports remains heavily weighted towards natural resources and mining, which has left the country exposed to a drop in commodity prices and is partly behind the nation’s current economic malaise.

The rapid rate of urbanisation and the growing middle class in China as well as the rest of the developing world, plus other factors like increased meat consumption, which requires a big grain input, all mean that long term demand for many commodities is high and Brazil should benefit from that. However these predictions are just that, current trends and extrapolations do not always appear in reality. The supply of soya and other agricultural products is also overlooked, supply is never static and increasing prices will encourage farmers to plant more crops, grow more intensively and innovative new technology to increase yields. The dynamic between supply and demand is ever changing and although there is a lag time with agricultural products, high demand will result in an eventual increase in supply, while low demand will lead to a contraction in supply.

The danger of a commodity boom lies with the seller, in this case Brazil, as it comes to an end, its is becoming apparent that much of Brazil’s strong growth in the last few decades was based on demand for soya, oil and other natural resources, but not so much thanks to the development of the services and manufacturing sectors.

Soya is not the only popular agro product. In China as meat consumption rises, beef is becoming more popular. The meat which still lags behind chicken and pork in China is an iconic export for Brazil and it is expected that the country can become help fill Chinese stomachs with pampas flavoured steaks. The big western coffee chains, in particular a Seattle based concern, are keen to expand in China. Tea remains king in China, but tastes change and drinkers there will want more and over time better quality beans. Again Brazil is major producer of coffee.

Natural resources is only half the story for China, opening up new markets for manufactured goods and infrastructure firms is also an important part of Beijing’s Latin America strategy. Naturally Brazil being roughly half the South American market it will take a big proportion of this investment, exports etc from China. The question is how will Brazil react if it feels its own industry is under threat, both countries lie under the aegis of the WTO, but already it has made to moves to protect its car market from Chinese competition and a continued downturn could be a move to enact protectionist measures.

The continuing failure of the Doha round has led to more bi-lateral trade deals. In Latin America, Chile and Peru have led the way arranging deals with China in order to harmonize trade relations. China primaryly imports copper from Chile. Copper is the first recorded trade item, found in early Mesopotamian civilisations but mined in modern day Egypt and transported to the fertile Euphrates river valley where it was used as armour. Now the metal connects the world used as a vital part of telecommunications and electronics, China’s need for the metal is obvious.

Chile while happy to sell copper by the container ship load is also keen to protect its own industries. While allowing 50 percent of listed items to be imported from China, the deal protected “sensitive items – such as wheat, some textiles and appliances. The idea was to give these areas protection from Chinese manufacturing. While China gave duty free access to all Chilean products – given that 92 percent of this total is copper they were happy, but it also leaves the door open for easy access for other Chilean exporters to enter the Chinese market, if they are competitive enough – while this is unlikely to be the heavy manufacturing sector – sectors like vinculture could take advantage of China’s growing demand for wine.

Brazil is a different beast, its large manufacturing sector is already in competition with China, but burdened with high interest rates, poor infrastructure and an overvalued currency, it has few of the advantages enjoyed by China. Therefore the prospect of a comprehensive free trade agreement FTA or lower falling barriers between Brazil and China look more remote.

The core dilemma for Brazil and other Latin countries is how to translate commodity led booms into long term sustainable growth, driven by industrialisation or the service sector and which is less dependent on natural resources. Most economists recognise that Latin America and indeed the world has been undergoing a supercycle of high commodity prices, the problem is this phenomenon, is that they come to an end and prices drop dramatically.

Some analysts believe Chinese demand will run out, either through an economic downturn, or because its great urbanisation drive will run out of steam and demand for copper, oil and so on will drop. The other side of the equation namely the increase in supply of commodities – long term high demand leads new mines being exploited, this takes time, as assessing the potential for a mine, receiving the capital and exploiting a mine all take years and typically only takes place after years of suitably high prices, in order to make it profit worthy. The flip side is that a sudden collapse in prices will make a once profitable mine uneconomic and for a country dependent on high commodity prices, the cost can be devastating.

Chinese investment is set to increase across the continent, as trade links develop into FDI. There will be vertical integration such as buying mines and oil acreage where politically acceptable, Chinese firms that are trading in these goods want to own their source, to help guarantee supply and lower costs. Investments will also diversify into real estate, manufacturing and tourism as Chinese involvement in the continent widens and deepens.

China has also engaged with Brazil via the BRICS forum, which has been institutionalised into an investment bank. This will take the two state’s relationship to a higher level. Europe and the US have bodies such as the EU and NATO to formally cement their relationships, which has allowed despite numerous and obvious strains and falling outs has allowed alliances to endure and created the basis for real action and demonstration of power. The New Development Bank (aka BRICS Bank) will help cement these loose ties between rising powers into something more concrete.

One major hindrance is the lack of understanding between China and Latin America with little contact until very recently, there are few academics in China focused on Latin America and the same applies to Latin America which has always looked to Europe and North America for economic and cultural ties. Quite simply the region and China are strangers that have suddenly become each other’s significant (economic) partner and there will be a long period of adjustment as they find a cultural and political fit which works for all parties.

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