Brazil, China Toast to Closer Ties

Brazilian President Luiz Inácio Lula da Silva led a delegation to Beijing this week. The trip marks Lula’s third trip to China since taking office. What makes this tour different is the news that came before it: China has surpassed the United States as Brazil’s main trading partner and the two may ditch the dollar as their bilateral trading currency. Moreover, the president, whose delegation of 240 business leaders also included the CEO of state-owned oil firm Petrobras, met with Chinese officials to ink a $10 billion loan-for-oil deal.

In early May, Brazil’s Ministry of Development, Industry, and Commerce released April figures showing that trade with China reached $3.2 billion, outpacing the $2.8 billion in bilateral trade with the United States. Sino-Brazilian trade neared $49 billion in 2008, representing a 63 percent increase over the prior year and a dramatic jump over $3.7 billion in 2001. Soya, iron, and oil make up a majority of Brazil’s exports to China.

The two countries plan to investigate whether to bypass use of the dollar as part of their growing trade partnership. In an interview with China’s Caijing magazine published May 15, Lula asked, “Why do two important countries like China and Brazil have to use the dollar as a reference, instead of our own currencies?” Financial Times’ Alphaville blog reports that the two countries remain in the early stages of negotiating the agreement and that such a deal would not amount to a currency swap along the lines agreed to by China and Argentina in late March.

The two emerging powers have called for financial reform in the midst of the global economic downturn. As part of BRIC, (emerging economies Brazil, Russia, India, and China) they urged for greater influence in international governing parties via a March communiqué published ahead of March’s G20 summit in London. In a China Daily opinion piece, Lula said stronger ties must be forged to reinforce “Brazil's and China's shared responsibility to help bring about the fundamental reforms in global governance that the world so urgently needs.”

Lula signed 13 deals with Chinese President Hu Jintao, including a $10 billion energy pact involving the China Development Bank and Petrobras first laid out in a February memorandum of understanding. The cash will help Brazil’s oil firm explore its massive—but difficult to reach—pre-salt reserves. In return, Petrobras will deliver to energy-hungry China 150,000 barrels of oil a day, rising to 200,000 barrels a day in 2010 for a period of nine years. The Wall Street Journal calls the pact a “victory” for China but says it “didn't give Chinese companies stakes in Brazilian oil fields or lucrative oil-field-service contracts, as had been expected.” The agreement serves as another step for Brazil’s emergence as a global energy power. Before heading to China, Lula visited Saudi Arabia—the first by a Brazilian president to that country—where he urged cooperation in the field of petrochemicals.

The stronger Sino-Brazilian ties may strike a nerve with Washington. Earlier this month, U.S. Secretary of State Hillary Clinton called China’s inroads in Latin America “quite disturbing.” A new Jamestown Foundation analysis examines Chinese-Brazilian relations, from aligned interests during the current global crisis to trade tensions caused by fears of competition that stem from the rising imports of Chinese manufactured goods.

A COA report published earlier this year examines the prospects for energy alliances in the Americas that would include Brazil and the United States.