Leaders like Lula have little to gain from the West – 04/21/2023 – Market

French President Emmanuel Macron, European Commission President Ursula von der Leyen, German Foreign Minister Annalena Baerbock and, last week, Brazilian President Luiz Inácio Lula da Silva – the government’s visitor book of Xi Jinping has been filling up fast lately.

Lula found common ground with Xi on global governance: reducing the dominance of the dollar, transferring geoeconomic power to groups like the Brics (Brazil, Russia, India, China and South Africa) and criticizing the United States for encouraging the War of Ukraine.

In practice, these grandiose ideas are greatly exaggerated. They do not mean that Brazil has joined a Chinese geopolitical camp and abandoned the US and EU. More worrisome for Washington and Brussels may be that China is offering immediate aid to Lula’s priority to reindustrialize Brazil, which could challenge the traditional role of rich economies in investment and trade.

The geo-economic framework of the Xi-Lula approach looks quite fragile when examined closely, particularly the role of the Brics. Rivalries between the group’s members, most notably India and China, made it largely ceremonial. The original inventor of the Brics categorization, former Goldman Sachs chief economist Jim O’Neill, points out that the renminbi, the Brics’ only vaguely credible challenger to the dollar’s global role, will not do so as long as China maintains controls. about capital.

Brazil has reduced its exposure to dollar markets since the currency and debt crisis of the late 1990s and early 2000s, and its government now borrows almost exclusively in local currency. However, as an exporter of dollar-denominated commodities, your companies will be exposed to exchange rate volatility if it changes to another global currency.

China’s practical potential as a trading and investment partner appears more substantial. Lula wants an activist commercial and industrial policy –much like that of Joe Biden in the US– to reverse the trend of emptying Brazilian manufacturing, which has fallen to just 10% of GDP (Gross Domestic Product), and make Brazil an option for diversification into global value networks.

Chinese official lending to Latin America has fallen since 2016, but its companies are still interested in direct investment there: the Brazil-China Business Council estimates that Brazil was the biggest recipient of Chinese FDI in 2021.

Chinese car companies such as BYD and Great A Wall Motors have invested heavily in the production of electric vehicles in Brazil. A relationship based on FDI from Chinese manufacturing would be a big change from the restless trade pattern of the 2000s and 2010s, sometimes labeled “colonial”, where Brazil exported commodities but crippled its domestic industry by importing Chinese goods.

The US and Europe have traditionally been Brazil’s biggest sources of FDI, but Biden’s policy in particular is in favor of “reshoring”, or trading with a small number of trusted partners, rather than producing abroad. While GM has a large presence in Brazil, for example, Ford ended all car production in the country in 2021 and is focusing on electric vehicle production in the US.

The U.S. aversion to signing new trade deals will undermine Brazil’s attempts to mesh with supply chains aimed at the U.S. market — certainly compared to a country like Mexico, which has privileged access through the U.S.-Mexico trade pact. -Canada.

Meanwhile, the EU’s trade deal with the Brazil-dominated Mercosur bloc, agreed in principle in 2019, is still awaiting ratification. The final hurdle is Brussels, under pressure from environmental and agricultural lobbies, insisting that Brazil first sign a letter of intent emphasizing its commitments to curb deforestation in the Amazon.

Even if that letter is accepted, Brazil’s access to the EU market could be hampered by a new European deforestation regulation that bans products, including beef and soy, raised on recently deforested land.

Critics of the EU say it often hampers access to new markets by imposing technical barriers. Tatiana Prazeres, Brazil’s foreign trade secretary, told the Financial Times: “You can’t have a situation where you reduce your tariffs in the expectation of real market access and all of a sudden you have new barriers in the way. with the EU are very frank”.

Even if the EU-Mercosur agreement is ratified, it is not necessarily the solution that Brazil seeks. Dubbed the “cars for beef” deal, the reductions in car tariffs in the EU-Mercosur deal will encourage European automakers to export to the Brazilian market, rather than to produce there.

The agreement also imposes restrictions on Brazil’s ability to use public tenders to favor domestic industry. Lula is asking the EU for its own letter of intent to clarify what room for maneuver Brazil is allowed.

The dethroning of the dollar may have been the headline of the Lula-Xi meeting, but China’s geopolitical rivals in Washington and Brussels – and Paris – should be more concerned about the direct help Brazil is receiving from Chinese companies.

Many emerging markets are in similar positions to Brazil, and their loyalties will be determined equally, if not more, by investment and jobs than by global currencies and the Ukraine War.

Translated by Luiz Roberto M. Gonçalves