Brazil and China: Clouds on the Horizon

Brazil and China’s economic relations have grown at a rapid clip in the last five years. But their new ties are also leading to increased wariness by the Brazilians.

The real challenge comes in the areas of trade and investment. Brazil is concerned about the skewed nature of their trade, with China importing natural resources and Brazil importing higher value Chinese products. The concern also extends to foreign direct investment on both sides. The Chinese have ratcheted up their stake in local Brazilian industry while Brazilian companies struggle to gain entry into the Chinese market.

Macroeconomic Policy Inconsistencies Compared

Within generally well managed macroeconomic frameworks, both China and Brazil have implemented similarly inconsistent macroeconomic policies in part in response to economic challenges and the global economic downturn.

The similarities are not a coincidence. China’s developmentalist, state-centric model of economic growth first captivated and became a model for Luiz Inácio Lula da Silva’s administration (2003–2010) as they continue to for the current President Dilma Rousseff. Ironically, while this developmentalist romanticism still holds sway in Brasilia, in Beijing China’s traditional dirigiste policies are falling out of favor as reformers call for a move away from state intervention to greater reliance on market forces.

Brazil’s reform efforts over the late 30 years included a partial opening of the economy, privatizing inefficiently run state-owned enterprises (SOEs), adjusting fiscal accounts, and adopting a monetary regime that explicitly works to keep inflation at acceptable levels--undoing part of the developmentalist model of the 1960s and 1970s. The reforms generated long-term real GDP growth and contained currency volatility—the exception being the brief economic downturn during the 2008–2009 global financial crisis.

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Lawrence Brainard is co-founder of Trusted Sources. Prior to this he was global head of emerging market research at Chase Manhattan Bank as well as co-head of emerging debt markets at Goldman Sachs. John H. Welch is executive director and emerging market macro strategist for CIBC World Markets. Prior to joining CIBC, he was: managing director and chief emerging market strategist at Macquarie Capital; chief economist for Itaú-Unibanco’s International Wealth Management division; and chief economist for Banco Itaú S.A. He wrote Capital Markets in the Development Process: The Case of Brazil (Pittsburgh: University of Pittsburgh Press, 1993).