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Tuesday, October 04, 2011
Perspectives

China Threat to Brazil?

How big of an economic threat does China actually pose to Brazil? Four experts share their insights.


BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Brazil's government on Sept. 6 slapped tariffs on some imports of Chinese steel, saying it would defend domestic producers against unfair competition, Reuters reported. The action is part of President Dilma Rousseff's effort to protect the country's economy and industrial sector in the face of a surging local currency and low-priced Chinese goods. How big of a threat does China pose to Brazil's industrialization and competitiveness? What other factors are at work? Will the anti-dumping measures, border controls and tax breaks associated with Rousseff's industrial plan, 'Plano Brasil Maior,' slow the onslaught of cheap imports? What are the risks and benefits to this approach?  

David Kupfer, professor of economics at the Federal University of Rio de Janeiro (UFRJ): First, it's important to keep in mind that the problem of Brazilian industry's competitiveness goes beyond unfair competition from China or any other countries. The lack of competitiveness of Brazilian industry has deeper structural roots, which obviously require long-run interventions. As numbers clearly show, the real is strongly overvalued against the dollar and even more against the yuan and other currencies that have been able to resist the pressure of the ongoing currency war. The currency exchange rate is one among other relevant cost factors that have been pushing up Brazilian industry costs, including the increasing costs of infrastructure (both transportation and energy) and the high cost of capital as a consequence of an inflation-stabilization strategy based on high interest rates. Such an increase in industry costs has no equivalent in China's economy, which has been very successful in achieving fast growth with minor pressure over the availability of infrastructure. Nevertheless, there is an agenda of problems related to trade defense, which requires a fierce response from the Brazilian government. This is the spirit in which people should interpret the recent measures issued in the Plano Brasil Maior. Those actions have been designed mostly to restrict or limit certain distortions prevailing in certain markets. For instance, this is the case of the steel industry, which has had excess capacity since the 2007-2008 crisis. However, it's important to acknowledge that, although antidumping and other trade related measures may help to correct excesses and distortions, such measures do not constitute the industrial policy required to face the challenges described above.

Gary Hufbauer, senior fellow at the Peterson Institute for International Economics: A successful politician must be 'show horse' first and 'work horse' second. Dilma Rousseff's answer to the forces of comparative advantage is almost entirely 'show' and will no more repeal David Ricardo's famous law than King Canute could turn back the waves. Brazil enjoys a spectacular comparative advantage in a wide range of natural resource products-soybeans, beef, timber, iron ore, gold and soon petroleum-which inevitably implies that Brazil suffers a comparative disadvantage in a wide range of manufactured goods. Unless Brazil decides to peg the real at a much lower level than real 1.71 equals $1.00, and chooses to accept the inflationary consequences, manufactured goods will continue to face competitive pressures from China and other countries. Brazilian manufacturers can improve their position by dramatically increasing productivity per worker, but this is a long-term process. Rousseff's measures are, at best, short-term palliatives."

Margaret Myers, director of the China and Latin America Program at the Inter-American Dialogue: The Rousseff administration's 'Plano Brasil Maior' is not a long-term solution to Brazil's trade and deindustrialization challenges. Its tax breaks and anti-dumping measures may appease Brazil's distressed manufacturers-their frustration has mounted in recent years as competition with low-priced Chinese goods increases in domestic and international markets. But recent industrial policy is unlikely to either slow the onslaught of inexpensive Chinese imports or to significantly improve manufacturing sector competitiveness. Brazil's competitiveness issues are attributable in large part to local currency appreciation-the real appreciated 48 percent in nominal terms against the dollar since 2008-and to the high costs associated with doing business in Brazil. The Rousseff administration implemented measures in recent months to contain currency appreciation by taxing short-term capital inflows, but it has yet to address many of Brazil's underlying growth inhibitors-expensive labor, rigid labor laws and high taxes continue to impede growth and investment. It is quite possible, if economists like the Inter-American Development Bank's Mauricio Mesquita Moreira and Fudan University's Yin Xinming are to be believed, that Brazil's days of manufacturing low-cost, labor-intensive goods are numbered. The country's comparative advantage simply lies elsewhere. China, for its part, is preparing to move up the value chain by implementing what it calls comprehensive, coordinated, and sustainable scientific development. Brazil would be well-advised to do the same. The Rousseff administration must focus its attention-and commodities export revenues-on service sector expansion and technological innovation centered on Brazil's resource endowments.

Victor Prochnik, associate professor of economics at the
Federal University of Rio de Janeiro (UFRJ): China is posing a big threat to Brazil's industrialization and its industrial competitiveness. But, at the same time, Chinese demand for raw materials increases the competitiveness of these kinds of goods. The influences of China's exports and imports are thus in the direction of a structural change in the Brazilian economy towards a larger proportion of the production of primary goods. Another strong pressure in the same direction comes from the over-valued exchange rate. This is caused by large inflows of short-term international capital that are attracted to Brazil by the country's high interest rates. The government's measures may reduce the import of industrial goods but I am skeptical that they will also increase the competitiveness of the Brazilian industry. This would require different kinds of measures as well as more aggressive strategies by the firms. For instance, there are no targets, no penalties and no follow up of the degree of the firm's competitiveness. In sum, a lot of carrots but no stick.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

 

 

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