Last April, Brazilian and Chinese Foreign Ministers met in Brasilia to launch the ‘First Strategic Global Dialogue’ between the two countries. Sino-Brazilian strategic dialogues would now be held annually, providing China and Brazil the occasion to regularly meet and reassess their common agenda. In a year when Brazil and China celebrate 40 years of diplomatic relations, a kick-off meeting of this kind bodes well for the future of their relationship.
Despite the distance, Brazil and China have grown remarkably closer in the last decade. Economically, there seemed to be a sort of ‘natural interaction’ between China’s export-focused, industrialized economy and Brazil’s economy which has been primarily an industrial commodities provider.
Quite naturally, then, trade flows between the two giants rose from $6.68 billion in 2003 to over $90 billion in 2013, making them the biggest partners within the BRICS. Since 2009, China has replaced the US and become Brazil’s main trade partner. Likewise, Brazil has been in China’s “top 10” partners list for some years now (7th in 2011, 9th in 2013) and is one of the key destinations of Chinese foreign direct investment (FDI).
Yet, cooperation between the two countries has gone well beyond mere trade and investment, encompassing areas such as education, agriculture, biofuels, nanotechnology and satellite technology. Politically, Brazil and China have also strengthened their links, promoting, inside or outside the BRICS (Brazil, Russia India, China, South Africa), a common agenda on issues of global concern, from development cooperation to international financial regulation.
However, as solid as their relationship may seem, current trends in both countries may seriously challenge what once seemed like a ‘perfect match’. China and Brazil are now being called to face their own (economic) dilemmas and the result of such a revision may lead to a progressive cooling off of their relations–and possibly not only economic ones.
New Model, New Opportunities?
How to secure long-standing and stable growth? For China, at least since 2013, the answer should be found in its domestic market. Partly pushed by the global economic context, China has recently started a revision of its macroeconomic policies and, accordingly, of its growth model. As part of this revision, state investments should now prioritize programmes to stimulate household consumption and job creation, moving away from the focus on industry and infrastructure.
Chinese authorities should moreover promote a gradual liberalization of exchange and interest rates, which could lead to an appreciation of the yuan, which could have important consequences on the prices of Chinese products, domestically and at a global level.
Officially announced by Chinese authorities, these measures have been positively received by analysts who believe they should bring greater transparency and predictability to the Chinese economy. They should moreover open new opportunities to countries like Brazil, whose companies would finally be able to compete with China not only in its domestic market, but also in Latin America, where they have been losing ground.
Hence, all seems like good news to the world, in particular to Brazil. Even if there is some truth in this analysis, existing challenges, in Brazil but also in China, may prevent Brazilian companies from seizing the opportunities offered by this Chinese ‘transition’.
While the number of Chinese companies (and investments) in Brazil has been on the rise since 2010, Brazilian companies (with a few exceptions, like Embraer, Vale, Votorantim or BRF-Brazilian Foods) have been struggling to enter the Chinese market, considered too closed and difficult to penetrate. Brazilian authorities (and private sector) see this gap as problematic, and would expect China to be a bit more welcoming to Brazilian business.
Beyond the most evident barriers (linguistic, legal, infrastructure, etc.) they meet when trying to access the Chinese market, Brazilian industries also face important domestic limitations. Among these challenges are Brazil’s complex legal framework, excessive bureaucracy, heavy tax system, poor infrastructure, low-skilled labor force, high inflation and interest rates. Coupled with the lower growth rates of the last few years, these challenges have been increasing the so-called “Brazil cost”, and hence considerably impairing the competitiveness and global reach of Brazilian industries.
Just like China, Brazil is also at a decisive moment when it needs to reconsider the foundations and orientation of its economic model. Yet, while China should strive to invest less and spend more, Brazil needs to shift from a model that privileges domestic consumption, to one in which investment and production are placed at the center. For both countries, the challenges are huge and will imply (internal) struggles, political will and long adaptation periods.
China has so far managed to sustain growth while implementing reforms. In Brazil’s case, on the other hand, despite the government’s attempts, appropriate set of measures that meaningfully boost competitiveness and integration of Brazilian companies into the global market have yet to be found. However, as most analysts point out, without consistent, long-term strategies to tackle such a challenge, there are few chances that Brazil will be able to improve its economic performance–and hence benefit from China’s transition. This seem all the more pressing since commodity prices (that represent nearly 80% of Brazil exports) should progressively decline in the next years, negatively affecting Brazilian trade flow and economic results.
To Brazil, the next years (and political decisions) will be decisive in defining if the country will resume growth or, at best, remain at standstill. Time (and timing) may however make things more complicated. In a year when Brazil is not only hosting a World Cup, but also holding general elections, it seems unlikely that much progress will be made on that front. Delaying is however dangerous as it may only increase the challenges the country will need to face later on.
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[This article has been reproduced with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China's leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge.]