Despite working to meet a December 15th trade agreement, dubbed “Phase I,” President Trump has repeatedly threatened to increase the levied tariffs on Chinese imports should one not be reached. United States (U.S.) Trade Representative Robert Lighthizer explains that Phase I only includes about 35 percent of the total trade discussion with China. Despite Washington and Beijing inching closer to an initial agreement, the world’s two largest economies maintain tariffs on a combined total of more than half a trillion dollars of goods, with rates ranging from 5 percent to 30 percent. The tariffs continue the Trump Administration’s critique of China and its trade practices with the United States.
In 2018, trade of goods and services between the two countries (two-way trade) totaled US$737.1 billion, with total exports valued at US$179.3 billion and total imports valued at US$557.9 billion. Such values put China as the U.S.’ single largest trading partner by total traded goods and services. Despite this, President Trump has maintained his harsh critique of the Chinese, fulfilling a campaign promise to combat China’s alleged unfair trade practices. As the U.S.-China trade dispute wages on with both sides retaliating with additional tariffs, Brazil —namely Brazilian farmers— have emerged as beneficiaries of the confrontation.
Chinese Trade with Brazil
Since the beginning of the trade dispute in 2017, Chinese firms have been shifting to Brazilian agriculture products. For Instance, Brazil passed the U.S. as the world’s largest soybean producer and exporter as a result of the increased demand from China—a demand increase of more than 20 percent. Brazil’s dominance in soybean production was not unforeseen; in fact, between 2011 and 2018, the overall production of the crop in the country has nearly doubled to 119.3 million metric tons and is expected to reach nearly 129 million metric tons by 2027. Since President Trump began his anti-China trade rhetoric, Brazilian soybean exports’ value swelled by US$13.86 billion, while American farmers will be left with an unwanted “record high level of ending stock,” as exports to China will be one-third of what they have been for the last few years. As a result, competitive Brazilian farmers have directly benefited from the trade dispute, while American farmers have truly felt the negative effects of the trade dispute. While Beijing and Washington work on finding common ground to settle their trade dispute in Phase I, Brazilian officials remain confident that they can retain the increase in trade.
While trade between Brazil and China has a lesser two-way trade value than that of the U.S. relationship, Brazilian trade with its Asian counterpart has increased by 170% within the last decade, to nearly 100 billion dollars, according to Brazil’s Ministry of Economy. During the same period, trade between the U.S. and China grew by only 68 percent. China has been Brazil’s largest trading partner, ahead of the U.S. for nearly a decade. To further emphasize Chinese engagement with Brazil, 2017 Chinese Foreign Direct Investment (FDI) in Brazil was US$19.5 billion, comprising 31.9 percent of the total global FDI destined for Brazil; in contrast, Chinese FDI in the U.S. was valued at US$39.5 billion, more than double of that in Brazil. However, Brazil was the largest recipient of China FDI in South America. As tensions between the U.S. and China unravel as a result of the trade dispute, Chinese firms have looked at other markets to import necessary products from. One beneficiary of this market exploration is Brazil. The South American nation, home to nearly 210 million people, has experienced a direct increase in two-way trade and improved diplomatic relations with China. However, Brazil’s recently elected president made some in Beijing uneasy about China’s relations with Brazil.
Bolsonaro’s Evolving Chinese Trade Rhetoric
Despite China’s investments in Brazil, President Jair Bolsonaro had been a harsh critic of Chinese investors. In October of 2018, the same year Bolsonaro was elected with an 11 percent margin, the then-president-elect warned, “what we need is to become aware that China is buying Brazil, not buying in Brazil, it is buying Brazil.” Importantly, Brazil’s president is often referred to as the “Trump of the Tropics,” for his similar rhetoric on social, political, and economic topics, including his critique of China. In a March 2019 speech at the U.S. Chamber of Commerce, Bolsonaro’s Minister of the Economy, Paulo Guedes, went on to state that “Temos um presidente que adora a América,” translating to “We have a president that loves America.”
However, President Bolsonaro’s criticism of his Chinese counterparts has not dissuaded new investments in the country. In fact, according to the Brazilian Ministry of Planning, Development and Management (now a division of the Ministry of Economy) from 2016-2018, Chinese firms announced 11 greenfields and 38 brownfield investments, a total investment value of US$19.4 billion. Greenfield investments, defined as a form of FDI, is when a firm establishes operations in a foreign company and constructs new facilities. Alternatively, brownfield investments are considered as an operational expansion of a company in a foreign market, normally seen as the expansion of an existing facility. Such investment activity indicates a long-term commitment on the part of Chinese firms to invest in Brazil. Despite President Bolsonaro’s previous rhetorical repudiations of Chinese investments, the country is actually drawing closer to China, its largest trading partner.
Notably, the Brazilian-Chinese relationship has changed as President Bolsonaro altered his tone with China. In October, while the U.S.-China trade meetings dragged on, a Brazilian delegation including the president visited multiple countries in Asia, most significantly China. There, President Bolsonaro not only made amends with his Chinese counterparts regarding the remarks he made during his campaign trail but also signed two trade protocols and outlined strategic growth in the relationship. He went on to assure that the Brazilian and Chinese governments are "completely aligned in a way that reaches beyond our commercial and business relationship.” Preserving such a relationship is crucial to the Bolsonaro Administration, which inherited a sluggish economy with high unemployment and inflation.
Thus far, the administration has worked diligently to position Brazil more competitively on the global stage by pushing reforms in the areas of pension and tax, easing government regulation in select industries, and negotiating foreign trade agreements with individual nations and economic unions. All these initiatives ultimately pushing for economic liberalization. In the meantime, Brazil will be the beneficiary of the U.S.-China trade dispute as escalations make a final resolution between the two countries more difficult.
Moving Forward
While Brazil’s new government is at the center of domestic and international controversy, that parallels the political polarization in the U.S., the government has taken proper economic initiatives to stimulate its sluggish economy. By proposing and passing vital reforms, Brazil has an opportunity to catapult its industries to the world stage and develop one of the “world’s most closed big economies”. The government has already announced two of the country’s largest trade agreements in its history between MERCOSUR, the European Union, and the European Free Trade Association (EFTA), valued at nearly US$22 trillion and US$1.1 trillion, respectively.
China’s agricultural purchases in Brazil and direct investment have also contributed to the necessary fundamental changes and economic opening that is needed in Brazil. However, it is important that Brazil holds its neutrality in the trade dispute between the U.S. and China, as noted by Vice-President Hamilton Mourão in a meeting last month with Chinese President Xi Jinping in Beijing. While China is Brazil’s largest trading partner by value, historically, the U.S. imports a greater amount of higher value-added products, such as aerospace and heavy machinery products. While this may be true in the past, China’s new-founded interest in diversifying its investments in Brazil, beyond purchasing low value-added goods, could reshape political ties, as already slightly seen with Bolsonaro’s revised rhetoric.
Until then, Brazil will continue to silently draw itself closer to China amidst the Washington-Beijing trade dispute and push necessary reforms to develop its domestic industries to a formidable global competitor.