The Negative Side of Trade: Brazil vs. China – Round One!

Growth in the BRICs, while unrelated between the four countries, are often seen by outside investors as a group action where large and similar developing economies are currently booming to the point of overtaking the US and European economies by producing manufactured goods to the benefit of the entire world. The real benefit is lifting some of the largest populations under the poverty line towards a level of sustained growth in all four countries, but in reality this can be argued as the only strong consistency between the four BRICs. While the impression of the BRICs is shaped by the manufacturing boom in China and their relation to the West and the products we all now buy; India, Russia and Brazil are not only booming from a growth in manufacturing, but have diverse economies on their own and also benefit and suffer from trading with their own co-BRICs.

FT.com published two articles recently on the relations between Brazil and China and the positive and negative effects of that relationship. Since 2009, there has been a literal explosion in trade between the two countries making China Brazil’s largest trading partner as of 2009 according to the article. Much of Brazil’s growth can be attributed to its rich natural resource base and China’s hungry economy for these products. This economic boom has allowed Brazil to become the next Mega-economy, and drove Brazil and much of South American through the latest global recession with minimal damage to much of the Southern Cone. The involvement of China in Brazil is significant as Chinese companies invest heavily in Brazil’s oil sector and the recent discovery of new oil deposits off Brazil’s coast has made that relationship even more important. For generations, Latin America has been the commodities exporter to the world, but with the growth in commodity trade, also comes the resurgence of a traditional problem. When a commodity boom occurred in the past in Latin America, it often scuttled the growth of other industries in the region. This has left Latin America plagued by boom and bust cycles, and there have been generations of tried and failed economic policies attempting to break this traditional curse.

Brazil has taken to diversify its economy and sustain the recent economic success well into the next decade. The PAC 2 sets to modernise Brazil’s infrastructure and lift more of its citizens out of poverty. Brazil needs to build up its own strong manufacturing base in order to cushion any volatile changes in the market, but Brazil has the same problem as many other countries as its manufacturing base is losing a lot of jobs due to less expensive Chinese imports flooding its markets. In one of the FT.com articles called “Brazil and China trade tensions set to rise” author Joe Leahy points out that the rise in the Brazilian Real over the last year has created a great concern over China’s currency, and like the US and Europe, there have been talks about how China’s currency is being kept artificially low in Brazil as well. Leahy in his other article “Brazilian factories tested by Chinese imports” gives an in-depth analysis of how Chinese imports are hurting Brazilian manufacturing directly. It is a very interesting discussion on how Brazil’s manufacturing community sees the trade relationship and its negative effects, and I recommend reading it in conjunction with this blogpost.

The burden of policymakers in Latin America is to balance their natural resource wealth with other diverse industries so that growth is not pinned to the price of oil, or soy or other natural products. The other burden of Latin America is the large amount of people in poverty and a traditional system and economy that is dependent on commodity exports that had brought many in the region to cultivate these products many generations ago. The long term benefits can only be met through economic diversification, which means employment for the large population, often through manufacturing. These gains should not be met at the peril of labour rights however. The necessity to find a solution to boom and bust cycles and a dependence on foreign demand for commodity exports, coming from China or the US, will be the great challenge of economic policy for Latin America for the next generations. Despite those generations benefitting from the current boom, those generations will also inherit the curse of the commodity bust cycle, marrying today’s growth with eventual commodity decline in the region.