BRICS Strategy 101: Brazil and China

A recent article by IPSNews.net discussed the downside of Brazil’s investment relationship with China. While much of the article discusses the positive exponential growth between Brazil and China, the different nature of growth and long-term investment between the two BRICS are quite different, and in some cases places the two countries on opposite sides of the same market.

Brazil’s growth in 2008 enabled Brazil to avoid economic losses that were thought to be larger than expected during the economic crisis. To the benefit of Brazil, China utilised its reserves at the time to buy up the less expensive industrial capacity that was a by-product of the crisis. This purchasing of Brazilian commodities and investment in the industrial base in extracting, producing and exporting those commodities comes from China’s national interest in securing natural resources to fuel its own rapid growth. This investment boom in Brazil created a tremendous amount of trade growth between the two countries as China sourced resources from Latin America. While Chinese export growth lead to its ability to invest heavily worldwide to secure its energy reserves via Brazil and other countries, the realisation that its labour force is aging and that its manufacturing will slow is changing China’s long term plans. China realises it must create an internal market and R+D resources with a diversification of sources of natural resources so that no external source could pressure China in the long run. While China seeks to change its economic development model, countries like Brazil and other that are becoming very dependent on China must seek its own long-term plan in order not to be caught in the middle of China’s historical economic change.

Brazil and Latin America have always been tied to its past economic model where commodity exports dominated the economy, and left the entire economy open to economic collapse when commodity prices changed or fell depending on the demand from the West. In the post Second World War era, a push to close off imports and develop a strong manufacturing sector from within was attempted, but was unsuccessful as commodities again dominated the markets. The realisation that Brazil was becoming dependant on the East, this time on China, was not forgotten as commodities exports displaced manufacturing in Brazil. Brazilian manufacturing in the last few years was left to compete with less expensive Chinese imports flooding their markets and placing Brazil and the region in the same traditional place it has always been, selling its oil and crops in large doses during a boom time while neglecting its growing manufacturing sector. While the trade surplus favours Brazil, the change in China’s economic growth strategy and its diversification of its sources of natural resources may change their relationship in the long run, displacing Brazil’s manufacturers while producing a slowdown in its commodity exports. With a slowdown in the Chinese economy, heavy dependence on one trade partner may put Brazil and Latin America in a difficult position.

For the most part, South American trade has been diversified between the US, Europe and Japan for the last 50 years and it would be prudent to diversify its trade and support joint ventures and investment in industries beyond oil and agriculture. This likely strategy would probably develop in Mexico first that is doing well despite the economic crash in its largest trading partner and heavy competition from China. Diversification is and has always been essential, but this has always been easier said than done.