beyondbrics

If the old marketing cliché “the customer is always right” was true in all situations, then Brazil’s latest moves regarding China would look like madness.

When a country is your biggest trading partner, accounting for 12.5 per cent of your exports, is it really a good idea to complain?

That is what Brazil is doing. Even though China’s purchases of its iron ore, soy meal and other commodities helped Brazil weather the global economic crisis, Latin America’s biggest economy is now crying foul as cheap Chinese imports flood its markets, undercutting domestic producers.

If Brazil acts on its grumbles and makes public its concerns at an international forum, such as this month’s meeting of the Group of 20 or when Barack Obama visits in March, it will mark a shift in the world order. Until now, few countries other than the US have had the confidence to complain about China for fear that Beijing might simply pull up stumps and leave if it gets upset.

Only a country such as Brazil, which has enough agricultural and mineral wealth to satisfy China’s thirst for resources for decades, is so indispensable to Beijing that it can dare to have a voice.

“I think in the past there hasn’t been a unified global voice on these issues,” says Eric Farnsworth, vice-president of the Council of the Americas. “Nobody wants to upset the Chinese.”

But even if Brazil does join the US in taking a stand on China’s allegedly undervalued currency, what is next? Brazil has already taken numerous trade-related actions in line with World Trade Organisation rules against Chinese goods, such as increasing tariffs on footwear and launching anti-dumping actions. Brazil would be unlikely to take more radical action against such an important business partner, particularly any moves that might violate global trading rules.

Empty bluster is unlikely to bother China. But even if China did allow some appreciation of the renminbi, would this really help soften Brazil’s currency, the real, against the dollar and result in lower levels of cheap imports flooding into Brazil?

The answer is probably no. Brazil has homegrown problems that have contributed to the currency’s strength. While China’s purchase of commodities has strengthened the real, Brazil’s real interest rates (nominal rates adjusted for inflation) are the highest of any large economy. This, together with breakneck economic growth fuelled last year by government spending, has drawn in overseas investors, adding further pressure on the real to appreciate.

Whichever way you look at it, the solution to Brazil’s problems always seems to be the same. Cut government spending and reduce the role of the state in hogging national savings and many of Brazil’s industrial ills will cure themselves.

Blaming the customer may go down well with the public in the near-time but it will only be a matter of time before people realise that more fundamental reforms are needed if Brazilian industry is to become more competitive.

Related reading:
US seeks Brazil’s support on renminbi, FT
Brazil and China trade tensions set to rise, FT