The Panda Hugs the Tucano: China’s Relations with Brazil

Publication: China Brief Volume: 9 Issue: 10

Chinese Trade Minister Li Zhaoxing (L) embraces Brazilian Foreign Minister Celso Amorim (R)

Brazil is the largest developing country in the Western Hemisphere, and China is the largest developing country in the world. According to some Western estimates, the combined economies of the BRIC (i.e. Brazil, Russia, India and China) countries would surpass the combined economies of the richest nations of the world today by 2050 [1].  China and Brazil participate in the G-8 (Group of 8) Summit and are members of the G-20.  Although China and Brazil are not official members of the G-8, Beijing and Brasilia’s vocal participation in these summits symbolizes, in part, the rise of the developing world. In the wake of the global financial crisis, the G-20 has emerged as the de facto political vehicle leading global economic recovery. The realignment of power in the international system precipitating from the current global crisis has highlighted China’s relations with the developing world, and in particular, its relations with Brazil, which is considered the most important bilateral relationship in Beijing’s "South-South" strategy. Brazilian President Luiz Inacio Lula da Silva will pay his second official visit to China from May 18 to May 20. The year 2009 marks the 35th anniversary of the establishment of diplomatic relations between China and Brazil. 

From Tea Growers to Strategic Partners

China’s relations with Brazil date back to the early 19th century when several hundred tea growers from China were transferred as laborers to Brazil via Macao (an administrative region of China). In the mid-19th century, Brazil was eager to import more Chinese laborers so as to make up for the shortage of labor after slave emancipation in Brazil, and offered to establish diplomatic relations with China, which was under Qing rule at the time. In 1880, China and Brazil signed a treaty of friendship stipulating the immediate establishment of diplomatic relations and the free flow of people and goods.

After U.S. President Richard Nixon visited China in 1971 and the People’s Republic of China (PRC), which was founded in 1949, assumed the seat of China in the United Nations in 1972, many Latin American countries proceeded to change their stance toward the PRC.  On August 15, 1974, the PRC and Brazil established diplomatic relations and in May 1984, Brazilian President João Baptista Figueiredo visited China.  The late Chinese patriarch Deng Xiaoping chose the occasion of Figueiredo’s visit to put forward his well-known theory of a dichotomous international system comprised of “East and West” and “North and South.”  Deng said, among the many issues that the world was facing then, the two most important were: to maintain peace by reducing East-West confrontation, and to promote international development so that it narrows the gap between the developed world (North) and the developing world (South). Nearly a decade thereafter, when Chinese President Jiang Zemin visited Brazil in November 1993, the two countries announced the formation of a "strategic partnership" between the two sides. Brazil thus became the first developing country to have a strategic partnership with China. 

Complementary Economies

The economies of China and Brazil are complementary and their respective comparative advantage plays a decisive role in helping both sides expand market share, develop economic relations and promote economic growth. Brazil is well-endowed with natural resources (e.g. bauxite, gold, iron ore, manganese, nickel, phosphates, platinum, tin, uranium, petroleum, hydropower, timber). For instance, its iron ore reserves account for 22.5 percent of world supply [2]. China’s economy is resource-intensive, and the country is dependent on importing natural resources in order to sustain its high-speed growth. 

Another area of increasing complementary cooperation is in Brazil’s infrastructure sector.  Brazil has recently decided to upgrade its critical infrastructures by proposing the “Accelerated Growth Plan” in early 2007, which China can invest in and supply technology to.

Brazil has a population of 192 million and an economic size of $1.66 trillion.  Its per capita GDP reached $8,676 in 2008, which makes Brazil a sizeable market for China’s labor-intensive export products [3]. At the same time, China’s enormous market, a population of 1.3 billion and more than $4 trillion GDP, is even more attractive to Brazil.  Due to China’s rising demand for natural resources, Brazil has benefited greatly over the past several years from the high price of commodities in the world market. 

Brazil’s Largest Export Market

According to data obtained from the PRC’s Ministry of Commerce (see table below), China’s trade with Brazil has grown exponentially from $3.7 billion in 2001 to $42.5 billion in 2008 (January to October).  In March 2009, Brazil exported $1.74 billion worth of goods to China and $1.27 billion to the United States, which means that China overtook the United States as the largest export market for Brazil’s goods [4].

China exports electronics and textiles to Brazil and imports raw materials and commodities. China has a trade deficit with Brazil, which has been increasing from almost $1 billion in 2001 to more than $9 billion in 2008 (January to October).

         Table1    China’s Trade with Brazil (in 100 million dollars)

 

Total Trade

Growth Rate

China Exports

China Imports

Balance

2001

37.0

13.5

23.4

-9.9

2002

44.7

20.8

14.7

30.0

-15.3

2003

79.8

78.5

21.4

58.4

-37.0

2004

123.6

54.8

36.7

86.8

-50.1

2005

148.2

20.0

48.3

99.9

-51.6

2006

203.0

37.0

73.8

129.2

55.4

2007

297.0

46.4

113.7

183.3

-69.6

2008

425.4

81.0

166.4

259.1

-92.7

Note: 2008 covers the period from January to October.

    Source: China’s Ministry of Commerce

(http://zhs.mofcom.gov.cn/tongji.shtml)

By September 2008, China had a stock of non-financial investment totaling $210 million in Brazil, mainly in mining, wood processing and production of motorcycles and home electronics. 

The most impressive Chinese investment in Brazil in scale was made by Baosteel in cooperation with the mining company Vale do Rio Doce (CVRD) for the construction of a steel plant in the southern state of Espirito Santo.  The whole investment, in the amount of $3 billion, was divided between 60 percent for Baosteel and 40 percent for CVRD (Baosteel.com, October 9, 2007).

By October 2008, Brazil’s stock of investment in China had reached $270 million, mainly in the manufacturing sectors making airplanes, compressors, automobile parts, hydroelectric machines and textiles. The largest investment was made by Embraer in 2002 to make airplanes.  The Chinese media coverage of this project has been labeled as a model of "South-South" cooperation, particularly in the manufacturing sector (Xinhua News Agency, November 8, 2007).

China is also interested in Brazil’s energy sector.  During the visit to Brazil by Chinese Vice-President Xi Jinping in February 2009, China and Brazil reached an “oil for loan” agreement.  According to this agreement, China Development Bank would provide Brazil with a loan in the amount of $10 billion to finance the exploration for oil in Brazil’s pre-salt layer reserves.  Brazil has agreed to supply up to 100,000 barrels of oil per day to China (Domain-b.com, February 19).

Trade Frictions

Despite the rapid progress made in bilateral relations, further development of this relationship faces one major hurdle: increasing trade frictions.

Increased economic exchanges have resulted in more trade disputes. Brazil imposed its first anti-dumping measure against Chinese exports in December 1989.  Even though China was granted so-called "market economy status" in November 2004, Brazil continues to levy anti-dumping tariffs against China.  In October 2005, Brazilian President Luiz Inacio Lula da Silva signed an order that allowed the government to restrict imports of Chinese products by imposing temporary safeguards until 2013.

Brazil’s lack of competitiveness can be attributed, in part, to its rapidly appreciating currency, which has gained more than 30 percent in value in the past two years and more than 100 percent since 2002 (Reuters, August 20, 2008). The rising value of a country’s currency makes it difficult for it to expand exports.

The rising sense of a “China Threat” mentality held by some Brazilians may have contributed to the repeated use of anti-dumping practices by Brazil against China.   Those who subscribe to such views believe that the influx of Chinese products is a threat to local Brazilian businesses. For instance, Roberto Giannetti da Fonseca, head of trade issues at the Industrial Federation of the State of São Paulo, Brazil’s most powerful business association that represents industry in the state of São Paulo, said that China is “not a strategic partner,” and Beijing merely “wants to buy raw materials with no value added and to export consumer goods” (The Economist, August 4, 2005).

Some Brazilians were disappointed by the extent of Chinese investments in the region, saying that Beijing’s promises were “lots of smoke and little fire,” in reference to President Hu’s alleged promise to offer $100 billion in ‘direct investment’ in Latin America when he spoke to the Brazilian congress during a visit in November 2004. In fact, President Hu was referring to overall China-Latin American trade value by the year 2010, and not specifically targeted investment. In terms of investments, President Hu stated that he hoped both China and Latin America would double the current stock of Chinese investment in the region, which totaled $4 billion (Xinhua News Agency, November 13, 2004).

Crisis and Opportunities for Cooperation

China and Brazil have taken common positions in response to the current financial crisis. Referring to the cause of the crisis, President Lula said in his speech to the plenary meeting of the Ministers of Finance at the G-20 meeting in São Paulo on November 8, 2008: “The crisis started in advanced economies. It is a result of the blind belief in the market’s self-regulation capacity and, by and large, of the lack of control of the activities of financial agents” (Xinhua News Agency, February 3).

President Lula’s remarks were echoed by Chinese Premier Wen Jiabao.  Speaking at the University of Cambridge on February 2, Premier Wen said:

“The international financial crisis once again … demonstrates that a totally unregulated market economy cannot work. We must strike a balance between financial innovation and regulation, between the financial sector and real economy, and between savings and consumption” (Brazilian Ministry of Finance, August 11, 2008).

Indeed, the ongoing financial crisis has created multiple fronts for China and Brazil to cooperate.  The current financial crisis has prompted China and Brazil to more systematically coordinate their positions on the issue of reforming the international financial system, so that their joint efforts, along with actions by other developing countries, may result in their having a bigger say in the World Bank and the International Monetary Fund. Brazilian Finance Minister Guido Mantega stated that a new international financial architecture, based on different rules, should be established and BRIC countries (Brazil, Russia, India and China) are expected to play a more important role.

The Future of Sino-Brazilian Relations

Leaders from both nations have repeatedly expressed their desire to further promote the development of bilateral relations.  In his address to the Brazilian congress on August 31, 2006, visiting Chairman of the Standing Committee of China’s National People’s Congress, Wu Bangguo, said that the Chinese government attaches great importance to the relationship between China and Brazil and the Chinese see Brazil as a sincere partner and friend.  Meeting with the visiting Chinese Vice-President Xi on February 19, President Lula said that Brazil is satisfied with the development of friendly ties with China and is willing to work along with China to deepen the strategic partnership, to which the Brazilian government also attaches great importance.

Against the backdrop of the global financial crisis, China and Brazil have realized that they can strengthen cooperation in both the economic sphere and other areas so as to reap mutual benefits and further strengthen "South-South" cooperation.  Therefore, the future of the relations between the world’s largest developing nation and the Western Hemisphere’s largest developing nation seems promising and bright.

Notes

1. Goldman Sachs, “Global Economics Paper No: 99,” October 1, 2003, sourced at:  http://www2.goldmansachs.com/ideas/brics/book/99-dreaming.pdf.

2. See Latin American Business Chronicle website, “Latin American GDP Ranking,” sourced at: http://www.latinbusinesschronicle.com/app/listado2.aspx.

3. Bhpbilliton, “Brazil: Analyst Visit,” March 2007, sourced at:  http://www.bhpbilliton.com/bbContentRepository/brazilpresentationtoanalystsmarch2007.pdf

4. Department of Economics and Commerce of the People’s Republic of China Embassy in the Federation of Brazil, “China Surpasses the United States in March as Brazil’s Largest Export Market,” April 2, 2009, sourced at: http://br.mofcom.gov.cn/aarticle/ztdy/200904/20090406143390.html.