French president Emmanuel Macron, European Commission president Ursula von der Leyen, German foreign minister Annalena Baerbock and then last week Brazilian president Luiz Inácio Lula da Silva: the visitor’s book for Xi Jinping’s administration has been filling up fast of late.
Lula found common ground with Xi over global governance: reducing the dollar’s dominance, shifting geoeconomic power towards groups such as the Brics (Brazil, Russia, India, China and South Africa) and criticising the US for encouraging war in Ukraine.
In practice, these grandiose ideas are heavily oversold. They do not mean Brazil has joined a Chinese geopolitical camp and abandoned the US and the EU. More concerning for Washington and Brussels should be that China is offering immediate help for Lula’s priority of reindustrialising Brazil, which may challenge the rich economies’ traditional role in investment and trade.
The geoeconomic framing of the Xi-Lula approach looks pretty flimsy on close examination, particularly the role of the Brics. Rivalries between members of the group, notably India and China, have rendered it largely ceremonial. The original inventor of the Brics categorisation, former Goldman Sachs chief economist Jim O’Neill, points out that the renminbi, the only vaguely credible Brics challenger to the dollar’s global role, will not do so as long as China maintains capital controls.
Brazil has reduced its exposure to dollar markets since its exchange rate and debt crises in the late 1990s and early 2000s, and its government now borrows almost exclusively in local currency. But, as an exporter of dollar-denominated commodities, its companies will be exposed to exchange rate volatility if it shifts to another global currency.
China’s practical potential as a trade and investment partner looks more substantive. Lula wants an activist trade and industrial policy — rather similar to Joe Biden’s in the US — to reverse the trend of hollowing out Brazilian manufacturing, which has fallen to just 10 per cent of gross domestic product, and to make Brazil a diversification option for global value networks.
Chinese official lending to Latin America has dropped off since 2016, but its companies are still keen on direct investment there: the Brazil-China Business Council estimates Brazil was the single largest recipient of Chinese FDI in 2021. Chinese auto companies such as BYD and Great Wall Motors have invested heavily in electric vehicle production in Brazil. A relationship based on Chinese manufacturing FDI would be a big change from the uneasy trading pattern of the 2000s and 2010s, sometimes labelled “colonial”, where Brazil exported commodities but undercut its domestic industry by importing Chinese goods.
The US and Europe have traditionally been by far the biggest sources of FDI into Brazil, but Biden’s policy in the US in particular is in favour of reshoring, or trading with a small number of trusted trading partners, rather than producing overseas. While GM has a big presence in Brazil, for example, Ford shut down all car production there in 2021 and is concentrating on producing electric vehicles in the US.
The US’s aversion to signing any new trade deals will handicap Brazil’s attempts to mesh with supply networks aimed at the American market — certainly compared with a country like Mexico, which has privileged access through the US-Mexico-Canada trade pact.
Meanwhile, the EU’s trade deal with the Brazil-dominated Mercosur bloc, agreed in principle in 2019, is still awaiting ratification. The latest obstacle is Brussels, under pressure from vocal environmental and farming lobbies, insisting that Brazil first sign a side letter emphasising its commitments to reducing deforestation in the Amazon.
Even if that letter is agreed, Brazilian access to the EU market might be hindered by a new EU deforestation regulation banning products, including beef and soya, raised on recently-cleared land. Critics of the EU say it frequently undermines new market access by imposing technical barriers. Tatiana Prazeres, Brazil’s foreign trade secretary, told the FT: “You cannot have a situation where you reduce your tariffs in the expectation of real market access and then suddenly you have new barriers in the way. The conversations we are having with the EU are very frank.”
Even if the EU-Mercosur agreement is ratified, it isn’t necessarily the solution Brazil is looking for. Nicknamed the “cars for beef” deal, reductions in auto tariffs in the EU-Mercosur agreement will incentivise European carmakers to export into the Brazilian market more than directly encouraging them to produce there. The deal also places restrictions on Brazil’s ability to use public procurement to favour domestic industry. Lula is asking the EU for his own side letter to clarify what leeway Brazil is permitted.
Dethroning the dollar might have made the headlines from the Lula-Xi meeting. But China’s geopolitical rivals in Washington and Brussels — and Paris — should be more concerned about the direct help Brazil is being offered by Chinese companies. Many emerging markets are in similar positions to Brazil, and their allegiances will be determined as much or more by investment and jobs than global currencies and the Ukraine war.
alan.beattie@ft.com
Source: Economy - ft.com
