French President Emmanuel Macron, European Commission President Ursula von der Leyen, German Foreign Minister Annalena Baerbock and Brazilian President Luiz Inácio Lula da Silva last week: the Xi Jinping administration’s guestbook has been Been filling up fast lately.
Lula found common ground with Xi on global governance: reducing the dominance of the dollar, shifting geoeconomic power to groups like the Brics (Brazil, Russia, India, China and South Africa) and criticizing the US for encouraging the war in Ukraine.
In practice, these great ideas are heavily oversold. They do not mean that Brazil has joined a Chinese geopolitical camp and abandoned the US and the EU. More worrisome for Washington and Brussels should be that China is offering immediate help for Lula’s priority of reindustrializing Brazil, which may challenge the traditional role of rich economies in investment and trade.
The geoeconomic framework of the Xi-Lula approach looks rather flimsy on closer inspection, particularly the role of the Brics. Rivalries between members of the group, particularly India and China, have made it largely ceremonial. The original inventor of the Brics categorization, former Goldman Sachs chief economist Jim O’Neill, notes that The renminbi, the Brics’ only vaguely credible challenger to the dollar’s global role, will not do so as long as China maintains capital controls.
Brazil has reduced its exposure to dollar markets since its currency and debt crises in the late 1990s and early 2000s, and its government now borrows almost exclusively in local currency. But as an exporter of dollar-denominated commodities, your companies will be exposed to exchange rate volatility if you switch to another world currency.
China’s practical potential as a trade and investment partner appears more substantive. Lula wants an activist trade and industrial policy, quite similar to Joe Biden’s in the US, to reverse the trend of hollowing out the Brazilian manufacturing industry, which has fallen to just 10 percent of gross domestic product, and to make from Brazil a diversification option for global. value networks.
Chinese official lending to Latin America has declined since 2016, but its companies are still interested in direct investment there: The Brazil-China Business Council estimates that Brazil was the largest recipient of Chinese FDI in 2021. Chinese auto companies such as BYD and Great Wall Motors have invested heavily in the production of electric vehicles in Brazil. A relationship based on Chinese manufacturing FDI would be a big change from the shaky trade pattern of the 2000s and 2010s, sometimes labeled “colonial,” where Brazil exported staples but undermined its domestic industry by importing Chinese goods.
The US and Europe have traditionally been by far the largest sources of FDI in Brazil, but Biden’s policy in the US in particular is in favor of relocating or trading with a small number of reliable trading partners , instead of producing abroad. While GM has a large presence in Brazil, for example, Ford has shut down all car production there in 2021 and is concentrating on producing electric vehicles in the US.
The reluctance of the US to sign new trade agreements will hamper Brazil’s attempts to connect with the supply networks directed to the US market, certainly in comparison with a country like Mexico, which has privileged access through the trade pact between the US and Brazil. USA, Mexico and Canada.
Meanwhile, the EU’s trade deal with the Brazilian-dominated Mercosur bloc, agreed in principle in 2019, is still awaiting ratification. The last hurdle is Brussels, under pressure from environmental and agricultural lobbies who insist that Brazil first sign a side letter emphasizing their commitments to reduce deforestation in the Amazon.
Even if that letter is accepted, Brazil’s access to the EU market could be hampered by a new EU regulation of deforestation ban products, including beef and soybeans, raised on recently cleared land. Critics of the EU say it often undermines access to new markets by imposing technical barriers. Tatiana Prazeres, Brazil’s foreign trade secretary, told the FT: “You can’t have a situation where you lower your tariffs with the expectation of real market access and then all of a sudden you have new barriers in the way. The talks we are having with the EU are very frank.”
Even if the EU-Mercosur agreement is ratified, it is not necessarily the solution that Brazil is looking for. Dubbed the “cars for meat” deal, the reductions in auto tariffs in the EU-Mercosur deal will incentivize European automakers to export to the Brazilian market rather than directly encourage them to produce there. The agreement also places restrictions on Brazil’s ability to use public procurement to favor domestic industry. Lula is asking the EU for its own follow-up letter to clarify what room for maneuver Brazil is allowed.
The dethronement of the dollar could have made headlines at the Lula-Xi meeting. But China’s geopolitical rivals in Washington and Brussels, and Paris, should be more concerned about the direct help that Chinese companies offer to Brazil. Many emerging markets are in similar positions to Brazil, and their loyalties will be determined as much or more by investment and employment than by global currencies and the war in Ukraine.