In line with the plan to increase investments in Latin America, China agrees funding worth billions to the Brazilian economy
Navigating is necessary, wrote the Portuguese poet Fernando Pessoa on the condition of man on earth and Portugal’s historical tradition of exploration of the seas. For a government with political and economic problems at home, it is necessary is to create an international agenda to generate good news. This is the challenge of Brazil’s President, Dilma Rousseff. Ahead of an unpopular administration, in three months she will have attended meetings with three leaders of the five largest economies in the world, as well as another BRICS summit. There are other less showy encounters but equally important to generate dividends to a stagnant economy that fell 0.2% in the first three months of the year compared to the previous quarter (October, November and December 2014).
In May, Rousseff received an official visit from the Chinese Prime Minister Li Keqiang, and the president of Uruguay, Tabaré Vázquez, and met with the director general of the International Monetary Fund (IMF), Christine Lagarde. The following week, she visited Mexico and President Enrique Peña Nieto. In late June, the destination is Washington to meet with Barack Obama. In July, she will go to Russia for the annual summit of the BRICS, when news about the development bank to be created by the block is expected to be released. In August, she will host the German Chancellor Angela Merkel.
Most promising at the moment are the possibilities opened up with the Chinese. Li Keqiang went to Brazil with investment proposals and loans that could reach 103 billion dollars. This is within the China plan to increase investments in Latin America to 250 billion dollars over the next decade. This Chinese participation is coveted by Dilma Rousseff as an alternative to the suspicions from the markets about her administrative capacity and also to enable infrastructure projects and industrial investments to go ahead – at a moment when Brazil is putting into practice many budget cuts.
China has become the world’s largest economy according to data released in April by the IMF. When calculating GDP in 2014 based on purchasing power parity, the Fund saw China for the first time ahead of the US: 17.6 trillion dollars to 17.4 trillion. That is why Brazil, in seventh with 3.2 trillion, sees in a attachment to the Chinese economy a chance to get out of the quagmire – first focused on the purchase of Brazilian commodities and small participation of Chinese companies in the exploration of oil mega field of Libra, in the pre-salt area, now the Chinese want to invest massively in infrastructure: railroads, ports, airports, highways and dams.
WELCOME INVESTMENTS
Negotiators from Beijing gave to Brazilian officials a list with 58 infrastructure, mining and industry projects that interest them. The list included the company that could participate in the projects and the budget of the work, a total of 53 billion dollars. They also offered other 50 billion dollars from ICBC bank to finance such projects.
Unlike China, however, Brazil has a Bidding Law, and hasn’t a state structure with such capacity. To understand the projects and their adherence to Brazil’s priorities, a joint committee was created to prospect opportunities in both countries, not only in Brazil.
The ICBC 50 billion dollars offer turned into an agreement with Brazil’s bank Caixa Econômica Federal. In the next two months, the two financial institutions will discuss how the money will be used. The fate seems certain: infrastructure, especially the concessions program launched by the federal government in the second week of June.
For Márcio Sette Fortes, professor of international relations at Ibmec and former director of the Brazil-China Chamber of Commerce, China’s money is essential to contribute to Brazil’s economic recovery. “The ‘Brazil cost’ has a chance to reduce with the presence of the Chinese capital. It will help to reduce logistical costs and poor infrastructure,” he said to the Brazilian version of Deutsche Welle.
The menu with 35 agreements is varied – it includes, among others, the union between Chinese manufacturers and mobile operators in Brazil for research and business; the renewal of a partnership for the production of a Sino-Brazilian satellites for environmental monitoring; and the end of the embargo on Brazilian beef imposed in 2012.
The initiative that drew the most attention, however, was the decision to conduct a feasibility study of a railroad coming out from Brazil, crossing Peru and reaching the Pacific Ocean – a 10-billion-dollar project. The studies will be paid by the Chinese and will be ready in a year. Brazil will be responsible for environmental analysis.
Two of the biggest Brazilian companies also closed important agreements with the Chinese. Petrobras, damaged by Lava Jato Operation and with accounting problems, got a loan of 7 billion dollars – a relief as it recently had its credit rating downgraded by Moody’s. In the case of Vale, beyond the promise of future purchases by the Chinese, it obtained more than 4 billion dollars from ICBC.
Also, a delegation of about 200 businessmen from various fields such as banking, machinery and equipment manufacturers and contractors arrived.
NOT ALL THAT GLITTERS…
Experts point out that the financial generosity of China has two explanations. The first is that, thanks to exports in the last decade, China holds the largest reserves of dollars in the world – about 4 trillion, equivalent to the GDP of Mercosur. Another reason is the slowdown in the global economy since crises started in 2008: there are not many investment opportunities in developed countries.
Thus, to end the persistent weaknesses in infrastructure, the Brazilian government and other Latin American countries identified in China an alternative to the United States and the conditions imposed by the International Monetary Fund and the World Bank. Before Brazil, Argentina and Venezuela also had run after the Chinese capital – the first one received 20 billion dollars and the second, 18 billion.
For Marcos Troyjo, director of BRICLab at Columbia University, “Beijing pragmatically sizes its interests in the region, which is a source of raw materials and safe destination for its manufactured goods exports.” “The required counterpart comes in the form of opening to Chinese priority access to energy, mining, transport, agriculture and other key sectors,” he told to Deutsche Welle Brazil.
The danger, therefore, is obvious. The deepening of an unequal relationship: the Chinese buy our raw materials and export manufactured goods. China, interested in reducing the cost of imports, may end up reinforcing the Latin America expertise in commodities, which may not be a good for a sustainable growth. There is also the factor of environmental degradation caused by large projects such as the railway to connected Brazil to the Pacific Ocean.
The success of this relationship will depend on the strategic vision of Latin American countries, so as not to become a passive partner of China. In Brazil, it is also at stake its leading role in the region. Without a firm defence of its interests – for example, the possibility to process raw materials in the country – Brazil runs the risk of simply changing the origin of dependency. In this case, after the Portuguese, the British and the Americans now would be the turn of the Chinese.
On the balance
- 77.9 billion dollars was the value of bilateral trade between Brazil and China in 2014. The number reflects a decrease of 6% over the previous year, but is the second best result of the entire series, which began in 2004.
- 3.2 billion dollars was the positive balance for Brazil. Exports totalled 40.6 billion dollars, representing a decline of 12% compared with 2013. Imports coming from the Asian country totalled 37.3 billion dollars, a small increase of 0.1%.
- 79.8% of all exports to China by Brazil corresponded to three products: soybeans, iron ore and crude oil. The reduction in the value of Brazil’s exports to China in 2014 was mainly because the downward trend in the prices of commodities.
- 48.4% of all imports by Brazil from China corresponded to the sectors of machinery and electrical and mechanical devices. Purchases of machinery and electrical appliances ended the year with a modest increase of 0.3%, while that there was a fall of 12.1% in machinery and mechanical appliances sector.
Source: Brazil-China Business Council
Brazil and Mexico: finally together?
Brazil and Mexico are the two largest Latin American powers. Both account for half the population, GDP and exports in the region. Even so, they are not great partners. Although bilateral trade between the two has doubled over the past decade, to 9.2 billion dollars, neither of them is among the top seven trading partners of each other. But that could change.
The Brazilian and Mexican governments will start negotiations in July to expand the economic complementation agreement which deals with trade relations between the two countries. The announcement was made by President Dilma Rousseff on 26 May in Mexico City, where he served state visit agenda. According to the president, despite the increase in trade between businesses on both sides, the numbers are “below the potential size of the economy and the size of our population.”
“Today’s agreement covers a little over 800 products. What is apparently good, but for us, it is little, given the more than 6,000 products we can lead to an agreement and mutually benefit our economies. As soon as possible, we will promote the expansion and the balance of bilateral trade, with the inclusion of sectors that list, which are now out of it.”
Speaking to the press after a private meeting with Mexican President Enrique Peña Nieto, Dilma Rousseff celebrated investment facilitation agreement also signed between the two countries. She stressed the importance of Mexico and Brazil to seek closer, as the major economies are in Latin America, the countries with the largest populations and large territory.
For Peña Nieto, the visit of Rousseff is a turning point with the signing of these two major agreements. The documents were signed between the countries also involve cooperation in tourism, environment, fisheries, agriculture and air services.
Among the reasons for the cold relationship between Brazil and Mexico is the fact that the latter joined the North American Free Trade Agreement with the United States and Canada, which took effect in 1994 and led the country to become more focused in the north. On the other hand, Brazil was more interested in building economic relations within Mercosur.
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