Cheap Chinese Imports Stoke Brazilian Fears

Cheap Chinese goods have become common enough in São Paulo to earn their own nickname: “xing ling.” But while Brazilians flock to shopping centers to scoop up low-cost watches, phones, and sunglasses imported from China, policymakers are growing concerned about how to correct what has developed into a wide trade imbalance in manufactured goods.

Chinese investment in Brazil has skyrocketed in recent years. According to the Financial Times, citing figures provided by Brazilian think tank Sobeet, Chinese foreign direct investment (FDI) in Brazil reached $17 billion in 2010. The figure amounts to 35 percent of total FDI in Brazil and a massive increase from $300 million the year before. A $7.1 billion chunk of that Chinese investment has gone to Repsol Brazil. China’s development bank has also contributed a $10 billion loan to Brazil’s state-controlled oil company Petrobras. In both cases, the money will go toward efforts to develop “pre-salt” oil fields off the southeastern coast discovered in 2007. In return for the loan, Chinese state oil firm Sinopec will receive a supply of 200,000 barrels of oil for a decade, The Economist reports. China surpassed the United States in 2009 as Brazil’s major trading partner. The spike in Chinese FDI is not unique to Brazil. Last July, Argentine President Cristina Fernández de Kirchner led a delegation to China, where she signed 18 accords that allowed for $12 billion of investment, primarily in railroad and subway projects. China is the largest foreign investor in Ecuador’s oil industry, according to The Economist. According to an estimate by Boston University Latin America expert Kevin Gallagher, Chinese FDI in the region reached at least $24.3 billion between 2005 and September 2010—a figure that does not include the $7.1 billion investment in Repsol Brazil, which was announced in Oct. 2010.

Brazil enjoys a favorable trade balance with China, buoyed by commodity exports including soy and iron ore. But the overall trade surplus of $5.2 billion masks a record-level trade deficit for manufactured goods, according to the Federation of Industries of São Paulo State (FIESP). The influential business group released a study in January saying that imports of Chinese manufactured goods outpaced exports by $23.5 billion in 2010—a 60 percent increase over the previous year, and a stark rise from 2003, when the balance favored Brazil. “The relationship with China is important for Brazil, but from the point of view of industry, it’s abysmal,” said FIESP’s Roberto Giannetti da Fonseca in a statement. “The trade balance is only favorable because of the large quantity of commodities exports and high international prices.”

China’s weak currency helps sustain its competitiveness in manufacturing, prompting Brazilian Finance Minister Guido Mantega to echo the Obama administration’s calls on the Chinese government to let the yuan appreciate. But Mantega also criticizes the United States contributing to a “currency war” by keeping the dollar weak through low interest rates and the quantitative easing policy. “It’s well known that Brazil and Argentina suffer, that all emerging countries suffer, as a result of the depreciation policy practiced by the countries in question,” Brazilian President Dilma Rousseff told the Argentine press on Sunday, referring to China and the United States.

While Brazil and China seem headed toward a more tense relationship, some of the pressure may dissipate even without policymakers taking action. Beijing has consistently refused to let the yuan appreciate to the degree called for by the Obama administration, but a Chinese inflation rate pushing above 5 percent may do the job equally well. The cheap labor costs that helped give China its competitive edge are rapidly rising. The one-child policy adopted a generation ago is now depleting the Chinese labor pool, which has translated into wage increases of up to 15 percent in recent years. Increased university enrollment has prompted some would-be laborers to forgo factory work, The New York Times reports. Moreover, The Chinese domestic market is growing, making the country less dependent on foreign exports than it once was.

Learn More:
 

• The website of Brazilian state firm Petrobras.
• The Federation of Industries of the State of São Paulo’s January report on the trade imbalance in manufactured goods with China. 
• Video of Brazilian Finance Minister Guido Mantega’s speech at the Americas Society/Council of the Americas on October 12, 2010. 
• Henrique Altemani de Oliveira’s historical overview of Sino-Brazilian relations, “China-Brasil: perspectivas de cooperación Sur-Sur.” 
• The Economist’s report, “Latin American Economies: Waging the Currency War,” January 13, 2011. 
• AS/COA Online news analysis: “Railway Rapprochement: China Invests in Argentina.”