Monday, January 16, 2012

The B and C of BRICS

Brazil and China are two crucial partners of the BRICS conglomeration (along with Russia, India and South Africa). I had earlier blogged about Brazil's moves to protect its domestic auto-industry. An interesting insight into Brazil-China trade tensions has been summarised by The Economist here. It states :

"OPPOSITE Rio de Janeiro’s best-known shopping mall, just before the tunnel that takes drivers to the beach resorts of Copacabana and Ipanema, stands a gleaming new showroom for JAC Motors, a state-owned Chinese car maker. The prominence of the location is appropriate: imported Chinese cars have suddenly become a visible presence on Brazil’s roads. This has alarmed Brazil’s car industry and President Dilma Rousseff’s government. Last month a 30-percentage-point tax increase on cars with less than 65% local content took effect, taking the tax on some imported models to a punitive 55%—on top of import tariffs. 

The tax increase is an unusually blatant act of protectionism. It almost certainly violates the rules of the World Trade Organisation, of which Brazil is normally an enthusiastic supporter. It shows how sensitive the government of President Dilma Rousseff is to claims that the country is suffering “de-industrialisation”.
 Although the latest figure shows industrial production increasing slightly, it has been broadly flat for more than a year. Economic growth has fallen sharply. But consumer demand remains robust, rising 4.1% last year, says the Central Bank. A bigger share of the market is going to importers—China in particular. Imports of Chinese cars rose almost fivefold last year; the new year has brought complaints of dumping of Chinese mobile phones and shoes.
With extraordinary speed, China has become Brazil’s most important economic partner: total trade between the two countries has risen 17-fold since 2002. But frictions are increasing almost as fast. Although Brazil enjoys a big overall trade surplus with China, most of its exports are of commodities (mainly iron ore, soya beans and crude oil). It has a big deficit in manufactures (see chart)."

The trading relationship between Brazil and China is captured in this graph:

Commentators have called the Brazil China relationship as a "difficult partnership". In this paper the future of the relationship is summarised.

"Despite some localized criticism, space for a strategic relationship between Brazil and China can still be perceived, especially if the Brazilian government pushes for greater diversification of Brazil’s export agenda to that country, encouraging the development of new productive partnerships beyond traditional sectors and using the minimum protection is necessary to guard national producers. 

In the political field, Brazilian-Chinese relationships could also surpass the realm of the UN and be consolidated in other multilateral forums, such as the WTO, the World Bank, and the IMF, despite both countries’ increasing divergence concerning foreign market entry."
This is one relationship that will be keenly watched in the world trading system.

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