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TRADE-BRAZIL: Commodities Rule in Exports to China

Mario Osava

RIO DE JANEIRO, Feb 19 2010 (IPS) - China took over from the United States as Brazil’s top market in 2009, indicating a qualitative change for exports from the South American giant, which is increasingly dependent on sales of commodities and food.

As a result of the international financial crisis, Brazil exported 42 percent less to the United States last year than in 2008. In contrast, it sold 23 percent more to China, but these exports were almost exclusively commodities, led by iron ore and soybeans.

The drop in the U.S. market is a double blow, because the shortfall is mainly in manufactured goods, which generate more added value and more jobs. Three-quarters of Brazil’s exports to the United States are industrial products, which account for only 24 percent of its sales to China.

The growth in trade with China is “a step backwards” for this country, said José Augusto de Castro, vice president of the Brazilian Foreign Trade Association (AEB). When dealing in commodities, “the importer decides and controls the quantity and prices, making an unstable market,” in contrast to the situation with manufactured goods, he said.

Commodities also generate low-grade jobs, whereas manufacturing employs skilled personnel for higher wages, creates a multiplier effect on employment as the production chain is longer, and expands the domestic market, he told IPS.

Chinese industry has also penetrated the Brazilian market with its own exports, taking advantage of the mismatch in the exchange rate policies of the two countries. This hits sectors relying solely on Brazilian capital particularly hard.

These sectors, such as the footwear industry, textiles and furniture, lack support from headquarters abroad, or international marketing teams, to expand their exports, said Castro.

Bibi, a shoe making company specialising in children’s wear in Parobé, in the far south of Brazil, has faced a dramatic situation. Exports made up one-quarter of its revenues in 2006-2007, a proportion that has shrunk to 15 percent, after two “terrible” years, says company president Marlin Kohlrausch.

Diversification of its sales to more than 65 countries did not shield Bibi from the effects of the overvaluation of the Brazilian currency, the real, which in dollar terms is worth nearly twice today than its value eight years ago. In the meantime, China has kept the exchange rate of the yuan constant with respect to the dollar.

The exchange rate is “ideal when everyone is complaining,” including importers and Brazilians who travel abroad, said Kohlrausch. But “at present, only exporters are complaining,” he said, adding that they are also affected by excessive taxation and Brazil’s precarious infrastructure.

The exchange rate issue has dire effects, but is not the root cause of the hardships disproportionately affecting Brazil’s exporters. To solve these, long-term measures are needed, such as a tax reform to put a stop to the country “exporting taxes,” reduction of red tape and improvements in infrastructure, said Castro.

However, the artificially undervalued yuan is annoying the rest of the world, and even the United States is pressing for its revaluation. One consequence is that Brazil merely looks on as China wins over markets that traditionally purchased Brazilian manufactures, including South American markets.

China joined the World Trade Organisation (WTO) in 2001, and last year its share of the U.S. market increased from 8.6 to 18.8 percent, while Brazil’s share only grew from 1.2 to 1.38 percent. And that growth was due to Brazil’s crude oil exports, which compensated for the decline in its sales of manufactured goods to the United States, according to a study by the Brazilian National Confederation of Industry (CNI).

In 2002, manufactured goods represented 67 percent of Brazilian exports to the United States, whereas in 2009 that share fell to 47 percent, according to AEB.

Ideally, pressures on China would bring about a change in its controlled exchange rate policy, which is in conflict with Brazil’s and many other countries’ floating exchange rates, but protectionist measures in retaliation are not an option because they would violate WTO rules, said Sandra Ríos, head of the Centre for Integration and Development Studies (CINDES) in Rio de Janeiro.

In her view, however, trade with China does not represent “a step backwards.” The rise in commodity exports was not a deliberate plan, but rather an opportunity created by the rapid growth of the Asian power, and it “saved the Brazilian trade balance” during the world recession, she told IPS.

Until China’s exchange rate policy is corrected, Brazil needs to be more active and competitive, by reducing the tax burden on exports and promoting trade with the markets that buy its manufactured goods, like the United States and Latin American countries, she said.

China “uses aggressive strategies to break into markets,” and this provokes protectionist reactions which are “a poor defence,” said Ríos.

The Group of 20 major economies (G20), including the richest countries and emerging powers, is in her view the best forum to negotiate solutions to these disputes, which have been exacerbated by the global financial crisis that hindered attempts to bring about a new balance in international markets.

China’s economic growth should not take place “at the cost of jobs in other countries,” she said.

But according to Ríos, changes in China’s economic policy will take a long time, in spite of international pressure, because internally the export sector has amassed great political clout, and it “will not give up its privileges.”

Brazil is losing jobs not only due to the decline in its industrial exports, but also because of the transfer of factories abroad, many of them to China – another consequence of the overvaluation of the Brazilian real.