Brazil: A case of China Fever,

This is an unpublished paper, written in February 2005, which I wrote up as a contribution to the filming of three documentaries on Brazil, including on its relations with China. This short documentary was part of the project we did in 2005 with Fundação Dom Cabral ( fdc.org.br ). We shot this piece for World Business Magazine, which is distributed worldwide (PBS, CNBC ASIA). see www.chinauncovered.net

Brazil :  A case of China fever.

There is an unmistakable air of optimism inBrazil, which has been absent for many year. Growth last year was over 5 per cent, with industrial production over 8%, inflation is moderate, public debt falling, and unemployment is down from 12.9% to 9.6%. Consumer confidence is buoyant, and President Lula da Silva’s popularity rating is back at 62%. His vision is ofBrazilbreaking with the past, and launched on a stable growth path for the coming 20 years.

Much of this growth has been attributed toChina’s continued surge into the front rank of lead economies.China now ranks as the world’s No 4 trading power, andBrazil’s third most important trading partner.Brazil’s exports toChinagrew at an eye-popping 500% in the first 3 years of this decade, asChina’s corporates scoured the world for secure supplies of food, raw materials and energy. President Lula’s visit toChinain May 2004, reciprocated by President Hu Jintao’s visit toBrazilin November, underscored the significance of the new relationship.

 

The Beijing Consensus.

Closer relations betweenBrasiliaandBeijinggo beyond trade and growth figures. They signify the coming to power of a new generation of leaders in “emerging markets” in the past few years. Leaders in India, South Africa, Russia, China or Brazil all hail from the political left of the world spectrum, and all challenge the market-dominant strategies of the 1990s, labelled the “Washington Consensus”, when “emerging markets” were being urged to privatise state enterprises and to open up national markets for goods, services and capital flows.

The dominant policy ideas of the present decade have been termed the “Beijing Consensus”, a phrase happily coined by Time Magazine’s Joshua Cooper Ramo. The term reflects the awe in whichChina’s success is held  around the world. Reform inChinais seen as a step-by-step empirical process, where plenty of space and time is given for business people to set up and then adapt to changing circumstances. Government retains a lead role in structuring and expanding the domestic economy. Unlike earlier formulas of import substitution, this emphasis on development of the domestic market goes along with active development of national exports onto global markets.

Coming from the left ofBrazil’s political spectrum, Lula has campaigned all his life to improve the life chances of poor people. Now that he has achieved the highest office inBrazil, the former lathe operator and trade union leader is busy exporting his life experience onto the international stage. He intends to makeBrazila lead player in pushing for a more just social order internationally, and—as he says” to change the world’s trade geography”.

Since coming to power in 2002, Lula has visited over 35 countries and attended over 90 bi-and multilateral meetings to get support for his ideas.  He has promoted closer working relations withChina,India,South Africato push for market opening measures in the context of the WTO, and backsRussia’s entry to the global trade forum. He has restored the moribund Mercosur customs union, which accounts for 17% of Brazilian trade. And he has challenged theUS–Brazil’s prime trade partner–on cotton subsidies, while speaking out against the EU’s protectionist farm policies.

As soon as he came to office, Lula staked his reputation on eradicating hunger. “If, at the end of my term, every Brazilian was having a breakfast, lunch and dinner, he said, I would be fulfilled. I would die in peace”. That is why he launched his Zero Hunger campaign, pushed to extend loan facilities to poor people and bring a wider proportion of the population to use bank accounts. But it has beenBrazil’s recent growth, and the fall in unemployment, that has done most to putBrazilon track towards reducing poverty.

The foundations forBrazil’s recent uplift were laid by Lula’s predecessor,  Fernando Cardoso.  Cardoso’s great accomplishment was to reform the currency, open Brazil’s economy, promote the Mercosur customs union, implement a privatisation programme amounting to £71billion over the decade and create a viable regulatory framework. But Cardoso was unable to reform the country’s lose fiscal system, while making the mistake—then proclaimed as gospel by the IMF and others—of committing his government to defend a fixed exchange rate of the real to the dollar. Under pressure on the foreign exchanges, the Bank of Brazil abandoned defense of the real  which fell by 44% against the dollar.  Cardoso’s reputation never recovered from the blow.

 

Lessons from the 1990s.

One of the major lessons from the 1990s has been the importance of achieving macroeconomic stability, as the pre-requisite to a long term policy of growth. That is no doubt why Lula gave priority to firming upBrazil’s credibility in the eyes of international financial markets by sticking to the IMF policy proposals made after the 1999 débacle to restoreBrazilto financial health. But his government also pushed through the Congress much-needed fiscal and pension reforms. This success coincided with the 2004 pick-up in world economic conditions.

Another lesson from the 1990s was not to place exaggerated hopes in the benefits of privatisation. The stock of inward investment inBrazilis 25% of gdp, far below the 36% ofChina. LikeChina,Brazilhas benefited by much closer integration into global production and distribution chains, but unlikeChinathe economy as a whole remained highly dependent on volatile capital inflows. When multinationals de-list fromBrazil’s capital markets to merge their newly acquired local into global operations, concerns were expressed thatBrazilhad sold its crown jewels for a song. Not least, the currency debacle of 1999, followed by the Argentinian currency meltdown in 2001, demonstrated that multinational investment was not a sufficient condition for  Mercosur integration.

Similar lessons were learnt inChina, though conditions there were significantly different. For one, the Chinese government never fell pray to investment bankers’ advise to free up capital movements. Barring a major political meltdown in the 1.3 billion population country, there is little chance of investors inChinaheading simultaneously for the exits, as occurred inBrazilin January 1999. Secondly,Chinais a vast domestic market in its own right, and does not have to negotiate customs unions with neighbouring countries, asBrazildid withArgentina,UruguayandParaguayin 1990. Since then,Chile,PeruandBoliviahave acquired associate status with the trade grouping. But market integration remains at the mercy of relations between sovereign states, concerned with their own domestic priorities, managing their own currencies and polishing their own prestige.

For Lula, a radical policy of re-nationalisation and redistribution—much hyped by global financial markets in the run-up toBrazil’s presidential elections in 2001—was never seriously on the cards. Radical nationalism has not a happy history inLatin America, and has definitely not yielded the stable growth which the country needs. The only way for a developmentalist president to expand the domestic market is through active state-led policy.  Accordingly, infrastructure investment is earmarked as a key area for state-led investment, and government procurement is deployed as an active tool of industrial policy. Tax and export credits are available to companies in chosen sectors, while promotion of national corporate champions is back in favour. Not surprisingly,Brazil’s business community has shed much of its initial scepticism.

 

Brazilian and Chinese compmlementarities.

An additional fillip to corporate optimism inBrazilis the complementarity ofBrazil’s comparative advantage withChina’s. In essence,Chinalacks whatBrazilhas.China, the most populated country of the world with about 20% of the world’s population, has only 7% of the world’s fresh water, 3% of world forests, and 6 % of the world’s arable land. In addition,China’s growth is fuelled on dirty brown coal, which ensures that 6 of the world’s 20 most polluted cities are inChina. By contrast,Brazilis richly endowed in arable land, fresh water, virgin forest, in mineral resources and also in   energy resources. By end 2005,Brazilis expected to move to net self-sufficiency in oil, while a big natural gas find in theSantosbasin in 2002 holds out prospects for conversion to gas as a prime source of fuel, alongside electricity provided from its abundant hydro-electrical facilities. The equation has not been lost on the Chinese leadership.

Brazilfurthermore is not in direct competition with theUS,Japanand the EU—the Asian giant’s prime source of value added imports in manufacturing.Chinaoffers huge market opportunities in the farm and agribusiness sector as a supplier of: soya, poultry, milk, coffee, paper-cellulose, organge juice, and sugar. Its two natural resource champsions are CVRD—the world’s largest iron-ore producer; and Petrobras, Brazil’s national champion in energy, and dominant—despite the opening of Brazil in the late 1990s to over 50 foreign companies—in energy assets, in exploration, and in downstream activities. In manufacturing,Brazilhas world class facilities in the steel sector, which was privatised in the early 1990s, and in mid-size passenger aircraft production. In response to tax incentives,  multinationals operating inBrazilhave all developed proficiencies in small car production—a promising market for the burgeoningChinamarket.

Corporate interest in penetrating each others markets is evident in the sharp rise in two-way traffic  in investments.Embraer,Brazil’s aircraft manufacturer, has made a joint venture in southChinawith AVIC to manufacture the EMB 15 mid-size passenger jet, with a view to serving theChinaaviation market—expected to be the world’s most buoyant market over the coming decade.Brazil’s Embraco (electrical products), Sadia(meat production) and Marcopolo (autobus manufacture) have likewise set up projects inChina. In the other direction,China’s Gree (electrical machinery), Huawei (the telecomms giant) and ZTE—another Chinese telecomm operator—have entered theBrazilmarket. Petrobras and Sinopec, the Chinese energy giant, have teamed up for a joint venture in exploration, and in a 1,175 km pipeline, linking south-east to north-eastBrazil. CVRD has joined with Baosteel, and Arcelor, in an $8 billion dollar steel plant inBrazil. Not least, VW Brazil is importing components fromChinato supply its Golf production chain inBrazil.

Furthermore,Brazilneeds urgently to raise capital for investment in infrastructure of ports, railways, roads and pipelines if its resources are to be brought to market.  Hence, the Lula government’s interest in bringingChinainto the Inter-American Development Bank, which offers favourable loan conditions for infrastructure projects. A law to facilitate public-private partnerships points in the same direction.  The BNDES—the state bank created in 1952—to provide long term, cheap loans, financed by bond issues, is also available. This is the area where theChinaconnection is likely to bear most fruit—bringingBrazil’s resources to feed the giant’s insatiable appetite.

Who benefits?

WhetherBrazilcaptures the benefits of these new trade opportunities remains moot. Much ofBrazil’s agro- and manufacturing value added is captured by the multinationals, not unlike inChinawhere over 60% of exports is accounted for by foreign investors, especially those fromJapanandTaiwan.  One example is instant coffee, in which market prospects to serveChina’s expanding middle class are glittering.Brazil’s instant coffee exports are dominated by theUSand European food multinationals, such as Sara Lee Kraft or Nestlé, which account for 90% of sales abroad.

That is why it would be particularly interesting to look at two examples of Brazilian corporate efforts to claw back as much of that market share as possible. The Cacique Group from the southern state of Parana has launched its Café Pele brand to challenge the multinationals on the China instant coffee market, while Co-oxupe—Brazil’s largest coffee producer cooperativ–has begun to export roasted coffee beans to China. The business is still small scale, and Co-oxupe has to import beans in order to reach the right blend, but the projects bear examining because their potential would illustrate whether Brazil, the multinationals or China will benefit by the new trade.

It would not be the first time, of course,  that the world’s media has been drawn to celebrateBrazil’s proximate arrival as a major economic power house.Brazil’s potential has been around for over a century, and yet its income level has never risen above that of a lower-middle income country—with income levels four times lower than those in Europe or theUS. In the 1970s,BrazilandIranwere both prime contestants for the title of developing country champion, butIran’s Islamic Revolution followed by the 1982 financial crunch on developing country debtors, punctured that bubble.

Since the early 1980s,Latin Americahas been left standing in terms of world market share gains in value added activities by the countries of Pacific Asia. And as Lee Kuan Yew, the grand old man ofSingaporehas stated, mainlandChinais the biggest dragon of all. It has more than doubled its world market share in a decade, and –if the pace of development is sustained—Chinacould surpass theUSas the world’s lead economy by 2040. This long-term challenge toUSprimacy is well appreciated inWashingtonDC.

Brazil’s position in the rapidly changing structure of world affairs raises two key questions: one is the shorter term question whether the presently favourable conditions on world markets are sustainable. The answer there depends very much on the evolution in US,Japanand the EU , and in global markets. The other can be stated in the following way: isBraziljust exchanging one dependency on theUSfor another dependency onChina, or on both?Brazil, the witticism runs, has always been the country of the future.

 

Is the present boom sustainable?

First, then, will the present Brazilian export boom last? According to the G7 Finance Ministers at their February meeting inLondon,  the sustainability of the present up-tick in the world economy is anybody’s guess. Only financial market leaders could pronounce so delphically about where the world is heading. The ‘risks are balanced”, their communiqué states, “though global imbalances remain”. In other words, only fools make predictions. The reason is simple: forBrazilto enjoy a prolonged period of steady expansion, much depends on whether the world’s lead economies take measures supportive of long-term global growth. That means that President Bush has to achieve a package deal with Congress to commit to fiscal consolidation, which encourages domestic savings, contributes to reducing the current account deficit, and helps strengthen the dollar on international markets. The continental European economies are invited to further structural reforms, as isJapan. And the ministers looked forward to “an ambitious result” at the forthcoming Hong Kong WTO ministerial meeting on global trade in goods and services.

The implications forBrazilare clear enough: domestic policies have to be made with a view to steering the Brazilian economy not just through present good times, but future bad ones as well. They have to be conservative and careful. And they have to contend with the fact that the dynamo in the world economy is now made up of the ever deepening integration betweenChina—Brazil’s future market opportunity—and theUnited States—its present and future prime market partner.

The novelty is that the axis running fromShanghaitoNew Yorkis becoming a structuring factor forBrazil’s future. China is specialising in production as the preferred assembly location for the world’s multinationals—headed by US corporations—while the US economy is specialising in services, and—the matter is sensitive—as the prime location for knowledge-based activities.Chinahas replacedJapanas the main source of the gapingUSexternal trade deficit, and has amassed 600 billion dollars of foreign exchange reserves. Asian central banks last year bought US Treasury bonds to sustain the dollar at a rate that enables US consumers to absorb Asian exports; but they, and other central banks, have become nervous about whether the Bush administration is capable of implementing the necessary reforms for the dollar to regain their confidence.

The slide of the dollar, coinciding with the boom in Brazilian exports, has strengthened the real. This is much appreciated by Brazilian tourists abroad that their real can now buy 30% more worth of dollars in goods and services. ButBrazil’s exporters are worried, not least because the Chinese yuan is pegged to the dollar and has followed it down.

 

Is Brazil exchanging one dependency for another?

Second, isBraziljust exchanging one dependency on theUSfor another dependency onChina, or on both?  Brazilian business people have been concerned thatBrazil’s recognition ofChina’s status as a market economy in the WTO—which is contested by both theUSand the EU—only serves to accentuate the challenge on world markets to Brazilian suppliers.China’s non-market status in the WTO allows anti-dumping measures to be taken against it, whenever importing countries consider that goods exported fromChinaare being sold below cost on home markets. IfChinaachieves recognised status as a market economy, producers there will gain free access to theUSmarket, which is crucial also toBrazil.

In 2001,Brazilstarted to accrue significant trade surpluses with theUS, prompted by a significant surge in Brazilian exports to its northern hemisphere trade partner, and a decrease in imports from theUS. Brazilian products exported there are concentrated in products of medium and high technology intensity, compared to the composition of total Brazilian exports. The main exporting sectors are: footwear; cellular phones; autoparts; and medium-size aircraft. Sales of footwear are under pressure there from Chinese competition, as is the case of cellular phones, whileBrazil’s market share for auto-parts has fallen from 2.9% of theUSmarket in 1998 to around 2% in the last years.  In the case of medium-size aircraft sold on theUSmarket,Brazil’s Embraer has lost market share toCanada’s Bombardier.

The fear is thatChina’s current strategy to promote the strengthening of its production structure has led to an increase of its exports in more elaborated products while demanding increasingly more products in the raw stages of the production chain. The lesson forBrazilis that corporate and government strategy have to pay greater attention to theUSmarket, and avoid trying to compete with Chinese exports on wages.

That is the warning from Mexico, whose exports have stagnated onto the USmarket since 2001. Mexico’s strategy in entering the North American Free Trade Association (NAFTA) in 1992 was to attract US and foreign investors to the maquilladoras –the free trade zones spread along the US-Mexican frontier. Exports boomed in the 1990s, butChina’s entry to the WTO in 2002, endedMexico’s privileged access to theUS markets, and world textile, shoes or auto-part manufacturers there migrated—in some cases literally overnight—toChina. In 2005, the MFA accords, which restricted trade in world textiles through a quota system, is ending, withChina being expected to take up to 25% of world market share.

 

Lessons from Mexico.

There are a number of lessons from the Mexican case forBrazil. The first one is that there is little point inBraziltrying to compete for long against low-value added products coming out ofChina, where unit labour costs can be up to 5 times lower than inBrazil. Coteminas—which claimed in the 1990s to be the world’s most efficient producer of T-shirts supplied from factories in the poor region of North-East Brazil—is now under considerable pressure to supply hypermarkets under its own brand fromAsia. One ofChina’s fastest growing exports toBrazilis in those lower-value added sectors, where wage costs are a prominent part of total operating costs, and whereChina’s comparative advantage is greatest. Chinahas an indefinite supply of cheap labour, possibly summing to 500 million people entering the jobs over the next 20 to 30 years.

The second is thatBrazilcannot place too much emphasis on its location as an advantage in access to theUSmarkets.Mexicoclearly does have a comparative advantage from its location relative toChinain terms of its auto-assembly producers deepening integration into production chains inNorth America. But the secular costs of transport are falling, so that the distance factor—while remaining a significant factor still in total corporate operating costs—is hardly a sound foundation on which to build a corporate or industrial strategy for the country. The three largest ports in the world—Singapore, Shanghai and Shenzen—are all Chinese, and the ongoing development of China’s port, shipping and shipbuilding facilities are clear indications of the thrust of mainland China’s policy to

 The third is that there is a risk inBrazilbecoming a raw food and material supplier to theChinapowerhouse. In the past half century, the volume growth in world exports has been in manufactures—which now accounts for 90% of Chinese exports as against 59% of Brazil’s—while world trade in food and raw material exports have grown much slower. The slower growth in food trade has been largely conditioned by rich country protectionism-cum-dumping, indicating that policy changes in theUS,Japanor the EU could make a significant contribution to natural farm exports such asBrazil. But all countries, not leastChinawith its 700 million strong peasantry, seek to protect their farmers, using phytosanitary or any other barriers that come to hand.

Fourth, raw material, as well as energy prices are notoriously vulnerable to price fluctuations.Brazilbenefited during the world, then the Korean wars, when prices were high, but secular trends have been downwards for raw materials, though this trend has been punctuated by pikes, such as occurred in the mid-1970s, or early 1980s. The present surge in raw material and energy prices coincides with two key phenomena: one isChina’s demands to feed its growth, which is the centre-piece of Chinese policy. Growth is vital to the creation of jobs, and jobs are vital to fuel positive expectations in the population about a better future—a proto-democratic acclaim which the Chinese government clearly considers crucial to its standing inChina.

The other phenomenon of the current rise in raw material and energy prices is that western raw material and energy multinationals no longer dominate supply. Supply is increasingly in the hands of state enterprises, and exploration rights are at the ultimate disposal of local governments. In the case of oil, up to 75% of known reserves are now controlled by governments and state enterprises. Restricting access for multinationals to local resources by one way or another helps to raise the creditworthiness of the state enterprises—and their governments—on world markets, by limiting supplies to a tight market. If this position holds for the longer term, then it is quite reasonable to expect that raw material and energy prices will stay on an upward path, greatly improving the terms of trade of supplier countries, such as Australia, Brazil, and South Africa—or the Gulf and Russia for energy.

 

Changing the geography of world trade.

Lula’s determination to “change the geography of world trade”, and his developmentalist rhetoric, is reminiscent of the 1970s, when for two short years between 1975 and 1977, the leading industrial country governments in effect created the G-7 with a view to steering their own and the world economy by combining moderate wage policies domestically with an opening towards energy and raw material producers. But such hopes as there were to create a “new international economic order” dissolved under the difficulties of reaching a consensus between importers and exporters, and of the revival of free market approaches to policy among the industrialised countries. In particular, raw material supplirs competed in what Chancellor Helmut Schmidt aptly called “the struggle for market shares”.

Is the new constellation for world affairs going to see a repeat performance of the 1970s, when developmentalist rhetoric was fashionable and re-distributive designs for the world economy were on a roll?  Keeping the answer within bounds, let us return to the China-US-Brazil triangular structure referred to above. Chinais scouring the world with a view to getting secure access to food, raw materials and energy. For the moment, and in general, Chinais demandeur. Along with the swing in the balance between multinational and national companies back towards the latter’s advantage, this has led to an upward tick in world prices. But world prices are also influenced by world demand, and not least by global trading and financial conditions.

What matters forBrazilin the present decade is that whether energy prices rise or fall, the prospect of energy self-sufficiency in the course of 2005 is a prime differentiating factor from the 1970s, when the Brazilian government of the period financed the current account deficit by borrowing for huge infrastructure projects on global financial markets. The years from 1982 through to 2002 may be seen in the longer term perspective as a series of efforts in Brazil to struggle out of external debt, restructure the Brazilian state, and insert the Brazilian much deeper into global transactions. In the future,Brazilhas the opportunity of discounting energy price shocks, upwards or downwards, as conditioning factors of macro-economic policy.

This is not the case forChina, where policymakers face ever greater dependence on world markets for inputs to its economic machine. Brazilian, South African and Australian suppliers are all in the situation so aptly described by Fernando Thompson, a manager from the CVRD open-pit iron-ore mine in the heart of the Amazon jungle, to the effect that “we just can’t keep up with the orders”.Chinacan pay in hard dollars for its iron-ore imports through its earnings on manufactured exports to the rich world countries, and may well be able to do so for the coming years. On the other hand, so great isChina’s present and potential demand, that raw material suppliers run the risk of becoming locked in to over-dependence on theChinamarket. There is every reason to expect thatChinawill follow the lead of other industrialised countries, by favouring as competitive a world market for raw materials as possible.

 

How convergent are Brazilian and Chinese interests?

Indeed, on closer inspection, it is far from clear that Brazilian and Chinese interests converge in the longer run. For one, By its size, history and potential alone,China’s place as one of the five UN Security Council members is incontestable. The Chinese leadership’s priority in world affairs is prestige, and this is clearly associated with the  intent to ensure and consolidate the country’s status at the top table. In economic and trade policy, the record indicates that the Chinese leadership realises the long term benefits accruing to the country through the exertion of “soft” rather than of “hard” power—in other words that China should develop its reputation as an upholder of international law, as determined to play by the rules of the game, and that its way of conducting its affairs attracts, rather than repels. China’s leadership, for instance, has restructured its central bureaucracy to implement its WTO commitments; like Brazil, it has been opposed to the war in Iraq; and it is not averse to taking credit for the “Beijing Consensus” model of development. But it draws the line —like Lula—at voicing anti-American intent, as contrasted to legitimate differences over policy. China’s priority is to join the lead group of countries in the world, not to associate with a revival of the non-aligned movement.

Second, China does not need to join a trade bloc to raise its profile in international trade and business. It is already the world’s fourth largest trading power, and the prime recipient of inward investment in the world. Over the last year, China has moved sharply up the list of outward investors—indeed, if the Greater China of mainland definitions is taken into account—then China already enjoys four votes in the WTO—the mainland’s, Hong Kong’s, Macao’s and Taiwan’s. By that measure, Hong Kong now, and Shanghai in a not too distant future, will be—along with London and New York—the third pillar of global finance. Development of its vast domestic market can only raise China’s leverage in international trade relations based on the principle of reciprocity, which lies at the heart of the WTO. China has only tactical interest in joining G-20s, or restricted pressure groups of countries designed to extract concessions in the course of bargaining for trade access with rich countries. Its leadership intends to be a pillar of the global economic order, not a wrecker.

Third,  China has a highly developed sense of power politics, as the Brazilian delegation accompanying President Lula on his May 2004 visit to Beijing had occasion  to observe. Lula’s proposals to join a developing country lobby to restructure global trade were politely played down by his hosts, while Chinese customs turned rejected a Brazilian shipload of soya on the grounds of alleged fungicide contamination.  Similar procedures on farm trade have been used by Chinese officialdom against other third party suppliers, and for very similar reasons to those employed by their US, Japanese or EU counterparts. One Brazilian interpretation was that a cheaper cargo of US soya was coming China’s way, so a price advantage to China’s soya consumers was preferred to compliance with the spirit, if not the letter, of WTO commitments. More likely, though, supplies from the local soya harvest were about to come onto the market, and officials turned back the Brazilian shipload as a measure in regulating local prices. The lesson is clear enough; Chinese officialdom can be counted on to be nationalistic.

Fourth, China takes what it is given with thanks, but does not necessarily feel the need to reciprocate when its get things for free. President Lula gave Brazil’s assent to recognising China as a market economy as a way to cement the relationship, and also distanced his administration from US or EU criticisms about human rights conditions in China. The administration’s position is that human rights are a domestic issue—which is definitely the Chinese leadership’s stance. In addition, Brazil has supported China’s membership in the IADB. But China has not backed Brazil’s demand for a Security Council seat. China is much more concerned about its policy in that regard to its two neighbours—India and Japan, both of which, with Germany, claim a seat. Brazil’s request, seen in this light, is a distraction.

Fifth, a general climate of growth helps to create jobs—a government priority. But the China-Brazil trade will only deliver jobs if policy is supportive. What matters are the details of corporate strategies, and how they mesh with government policies. Agro-business, manufacturing and services are the areas for job creation in Brazil. That spells development of the agro-business sector to ensure as much of the value added to raw farm output is located in Brazil as feasible. The same can be said for iron-ore and steel, for sales on export markets or  for end-use in the construction and auto –industries. Recent investments by Singapore shipbiuilders, Sanbawang, and Keppel Fels, also points to a possible revival of the shipbuilding sector. On the import side, Brazilian manufacturers as well as wholesale and retailers have to combine moving up-market with local production while tying their operations into Chinese-based suppliers. Above all, Brazil’s financial services and tourist sectors have potential in capturing the burgeoning China business: Brazil is on China’s official list of tourist  destinations.

Fifth, Brazil’s comparative advantage in the China trade points to accentuated exploitation of its natural resources. Brazil, with the US, China, Russia and Japan, is already one of the major greenhouse gas suppliers. This can only rise in the future, thereby bringing Brazil into the forefront of concerns among the global environmental movement. For the moment, neither China nor the US are signatories to the Kyoto protocols, but Japan and more recently, Russia are. By 2012, Brazil is expected to come under pressure through the Kyoto accords to take steps to restrict supply. In the meanwhile, forest depletion is recorded as amounting to 17% of the existing forest space, and predictions are that by 2020, 25% of the Amazon forest will be depleted. In short, Brazilian exporters have to anticipate that market access for non-raw material exports onto rich country markets may become subject to restrictions related to the ever closer links between global trade, jobs and the environment.

Summary and Conclusion.

In short, the China phenomenon presents Brazil with great opportunities in terms of trade, investment and job creation but for those opportunities to be fully exploited many complex issues have to be carefully thought through. Most importantly, expansion of Brazil’s insertion onto global markets goes along with development of domestic potential. Both the previous and present administrations’ have made this the central feature of their policies, with variations in accent and in style rather than in substance. The present government, for instance, places renewed emphasis on industrial policies where the state plays more actively in the market than under the previous administration. It has also had the advantage of learning from the policy failings which led to the currency collapse of 1998-99. Beyond that, the legacy of Brazil’s historic agenda remains firmly in place: an under-developed domestic market, extensive poverty, too low savings rate, an under-developed financial system, too high illiteracy rates, under-developed social capital, corruption, or politicisation of government-business relations and of regulatory bodies. The China challenge for Brazil resides in the fact that, coming from a much lower level, China has successfully upgraded performance under many of these rubrics. There is no reason why Brazil cannot do the same in the future.

China’s entry to global markets, and India’s as well, signifies for Brazil that the global race to market is not “a race to the bottom”, as EU rhetoric all too frequently implies, but in effect a race to the top. Learn from the best, then implement: that’s the true meaning of China fever.

Jonathan Story,

Professor of International Political Economy

Shell Fellow in Economic Transformation..

INSEAD.
Fontainebleau

February 2005.

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About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) (www.chinauncovered.net) His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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