China and the Mercosur customs union have not proven high priorities for new Brazilian president Jair Bolsonaro and his economy minister Paulo Guedes, who have been more inclined to develop closer ties with Washington since coming to power at the beginning of the year.
As president-elect, Mr Bolsonaro had made some brash statements about China wanting “to buy Brazil” rather than “buying in Brazil”. His son, Eduardo Bolsonaro, a federal deputy and informal adviser on international affairs, flew to the US to
meet senior White House officials in November 2018 to cement relations with the administration of Donald Trump, whom the Bolsonaro clan clearly admires.
Mercosur has come in for criticism from the Brazilian ministers of the economy and of foreign affairs. The Brics association of five key emerging markets (Brazil, Russia, India, China and South Africa), which Brazil is due to chair this year, has so far been largely ignored. But in spite of the rhetoric, the new Brazilian administration has promised to implement a significant reform agenda, open up its economy and increase trade with the rest of the world.
“Estimates from the Organisation for Economic Co-operation and Development [OECD] suggest that trade liberalisation could raise the level of production in Brazil by between 0.4% and 1.7%,” wrote Quinn Markwith, Latin America economist at Capital Economics, in a recent report. “If successful, history suggests that this might plausibly add as much as 0.75 percentage points to potential gross domestic product growth.”
Seize the moment
Brazil’s global trade was worth $420bn in 2018. This was a 14% increase on 2017 (imports rose by almost 20% due to the end of the recession) but it still amounted to a tiny fraction of global trade (less than 2%). In good times, Brazil was called “an economic giant and a trade dwarf”. The size of its economy on the global stage has been severely reduced, however. Its economic prospects largely depend on the success of the new government’s reform agenda, but the country has remained a trade underachiever, especially after two years of a damaging recession in 2015 and 2016 and a painstakingly slow recovery. “We look like a shy dwarf,” says Kaio Cezar de Melo, chief executive of São Paulo-based Braver, a consultancy specialising in foreign trade.
Government officials and financial experts believe that despite a looming global trade war, Brazil can and must improve its trade performance. “Brazil has one of the most closed economies in the world,” says Fernando Honorato, chief economist of Brazilian bank Bradesco. “It cannot miss the opportunity to integrate itself with the rest of the world. It must seek to achieve a better insertion in global trade. Regardless of the tensions between the US and China, Brazil should take advantage of the moment to seize any opportunity to insert itself in the global environment.”
This is one of the missions of new economy minister Mr Guedes, whose ‘super portfolio’ also includes foreign trade. He has argued in favour of a gradual opening of the economy, but argues that tax reform must come first. “You can’t open up the economy without reforms,” he said during his inaugural speech in Brasilia. “This would be like tying an iron ball to a businessman’s right foot with high interest rates, and another one to his left foot with high taxes, and put a piano on his back with high labour costs – and then yell at him: ‘Run, the Chinese are gonna get ya!’.”
Mr Honorato agrees: “This does not mean it is a unilateral opening. We can’t open the economy without getting ready for it. We must do the tax reform first, for instance,” he says.
Trade and ideology
Brazil’s new trade policy might be more liberal, but it will not be free of ideology. “The first sign from the economy minister was a clean break from the model of the past 16 years. But the intensity of such a move is not clear,” says Alexandre Chaia, professor of finance at Insper, a São Paulo business school. “Mr Bolsonaro’s initial vision was: ‘Let’s do business away from any ideology,’ but the first moves from the group that surrounds him have expressed a more nationalist ideology, a vision that is more similar to Mr Trump’s than to a country that wants to trade with everybody,” he says.
Mr Bolsonaro’s pro-Israel stance is due to lead Brazil to transfer its embassy from Tel Aviv to Jerusalem to please its evangelical Christian supporters, for example. The president confirmed the move following Israeli prime minister Benjamin Netanyahu’s five-day visit to Brazil at the turn of the year. The decision has infuriated Arab countries. Several are large importers of Brazilian meat and some say they may look for other suppliers. Brazilian agricultural suppliers may also suffer a backlash
from EU importers if Brazil decides to pull out of the 2015 Paris Agreement on climate change, as hinted at by Mr Bolsonaro himself.
Analysts say it is still too early to judge whether the Bolsonaro administration will favour a pragmatic, pro-trade line or be guided by the president’s own ideological approach to trade diplomacy, as defended by minister of foreign affairs Ernesto Araújo, who has launched a crusade against “globalists” and what he calls “cultural Marxists”.
“The only clear sign is that Mr Bolsonaro is going to put an end to strategic alliances in South America and Africa,” says Insper’s Mr Chaia. In South America, relations with Chile, with whom Brazil has recently signed a free-trade agreement, will take priority. Meanwhile, the Argentinian market, traditionally an export destination for products manufactured in Brazil, has been crippled by a toxic mix of recession and very high inflation.
“Brazil will give Mercosur the value it deserves,” said Mr Bolsonaro after a meeting with Portuguese president Marcelo Rebelo de Sousa in January, “but this implies the elimination of all ideological questions and the resumption of the trade vocation of the economic bloc.”
Mercosur will not be ignored, believes Bradesco’s Mr Honorato. “Mr Guedes has stressed the importance of integration with the rest of the world, with or without Mercosur,” he says. “He is a clever guy, he is an experienced economist. He knows
how much Argentina is important to
Brazilian exports of manufactured products. The point is not to curb trade with Argentina but to open up the economy [to other partners]. And prevent Mercosur from becoming a barrier [to trade with the rest of the world].”
No Brics please
On the other hand, several embassies in Africa that were opened by former president Luiz Inácio Lula da Silva are due to be closed, as Mr Bolsonaro, who has faced accusations of racism at home, appears to have no interest in the region. As Brazil prepares to host the Brics meeting, the country’s new administration shows no interest in south-south diplomacy.
Nevertheless, some experienced diplomats still argue that pragmatic views will prevail. “There has been some hard talk but I have not seen much substance,” says Luiz Augusto de Castro Neves, who chairs the Brazil-China Economic Council (CEBC). “Rhetoric is one thing, reality is another. I don’t know whether it will become reality, but it would be premature to say that there will be a clean break [from Brazilian traditional diplomacy].
“Let’s give a vote of confidence and see how things will play out,” adds Mr Castro Neves, who is also honorary vice-president of the Brazilian Center of International Relations. “There is no clear perception yet. We are still in a moment of accommodation.”
The future of Brazilian trade will be clearly defined by its relations with the world’s two largest – and most antagonistic – economies: the US and China. China is the big question mark. “China is the largest market for Brazilian exports and China is the largest investor in Brazil. I believe that [Mr Bolsonaro] will take this reality into account. I believe the objective of any new president is to put the benefits and happiness of his people above the rest,” says Zhou Shixiu, an adviser to the Brazil-China Chamber of Commerce and Industry and a former first secretary of the Chinese embassy in Brazil. “Even though some Brazilians call Mr Bolsonaro a right-winger or a ‘tropical Trump’, I don’t believe that such a wise gentleman will make mistakes. I believe that relations between Brazil and China will expand even more,” he adds.
China has been Brazil’s largest trade partner for more than 10 years, and bilateral trade has recently hit a new peak of more than $100bn, according to official statistics. “China is buying Brazilian goods more than it ever has,” says Tulio Cariello, research coordinator at the CEBC. The country accounted for nearly 28% of Brazil’s overall exports in 2018.
Bilateral trade did indeed increase from $83bn to $101bn last year, but commodities still account for a large share of Brazilian exports to China. “Now the challenge is not only to export soybeans but to process them locally and export soya oil and soya flour,” says Mr Cariello, who is confident that China will continue to be Brazil’s main trading partner under Mr Bolsonaro’s rule.
This means war
In the short term, the trade war between the US and China has favoured Brazil’s trade with the Asian country. In 2018, Brazilian exports to China jumped by one-third, mainly due to an increase in sales of commodities, while sales to the US registered a mere 7% increase. Nevertheless, the CEBC is concerned that bilateral relations may be harmed in the longer term if the Bolsonaro administration sides with the US rather than remaining neutral. China could more easily retaliate against a trade partner such as Brazil more aggressively than it can against a more powerful opponent such as the US, says Insper’s Mr Chaia, who adds: “[China could say to Brazil:] you don’t have the kind of economic clout that the US has.”
Brazil may have realised it is no good being caught in the crossfire during a global trade war. Before embarking for the Davos World Economic Forum, the ‘anti-globalist’ Mr Bolsonaro said that Brazil “wants to trade with the whole world, with a special consideration to economic freedom, bilateral agreements and fiscal health”. Mr Bolsonaro had previously sought to comfort the visiting vice-president of the Chinese parliament, Ji Bingxuan, who attended the president’s swearing-in ceremony in Brasilia on January 1. “[Mr Bolsonaro] renewed his intention to expand bilateral relations with China, regardless of the change in the Brazilian political context and the global economic scenario,” said an official statement at the time.
Despite all the noise on trade, Brazil may remain relatively toothless on the global stage while trying to avoid any stray bullet emerging from the global trade war (such as steel tariffs or quotas from the US and the EU). What would really make a difference in terms of trade opportunities would be Brazil’s admission to the OECD, which has been pending since the country applied for membership in mid-2017.
“From a technical point of view, Brazil is the country that has made more progress than the other five contenders, as 80% of its domestic legislation is in compliance with OECD norms,” says Alberto Pfeifer, professor of international relations at the University of São Paulo. “And from a political point of view, Brazil’s chances have increased following the election of Mr Bolsonaro, due to his affinity with Mr Trump.” The US controls 22% of the votes at the OECD and has been the main stumbling block to Brazil’s application in the past. Until recently, Argentina seemed to be the Latin American favourite to join the OECD. But if Mr Bolsonaro manages to turn the tide and win that battle, he may well embark on the road to free-trade policies in earnest.
