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Exports of Brazilian soybean (photo) to China are expected to reach a record high of $30 billion this year. (Photo: CIDASC)
Wednesday, August 1, 2018
Perspectives

US-China Trade War: Brazil’s Gain?


Brazil gains in the short-term, but loses overall due to global economic impact.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

The escalating trade dispute between the United States and China has prompted the Asian country to turn to Brazil for goods like soy, corn, poultry and pork, increasing the South American nation’s agricultural exports. Moreover, Brazilian steel exports to the United States nearly tripled in June, compared to the same period last year, after the Trump administration slapped a 25 percent steel tariff on other trade partners but not Brazil, which instead agreed to limit its exports of the metal. How is the global trade war affecting Brazil’s economy in the near term, and what are the consequences for the long term? Will Brazilian producers be able to take advantage of increased demand? Will changing global trade dynamics help boost Brazil’s sluggish economic recovery from its deepest recession on record?

José Guilherme Almeida dos Reis, executive director, and André Soares, consultant on China-LAC trade, both at the Office for Brazil and Suriname at the Inter-American Development Bank: In the long run, there are no winners in a trade war. Trade is not a zero-sum game and the only certainty we have is that a trade war ultimately reduces overall trade and economic growth, with negative implications for all countries. The African proverb ‘when two elephants fight, it is the grass that suffers’ applies very clearly here. There are short-run opportunities associated with trade diversion that can be beneficial for some Latin American countries, and Brazil, being an agriculture powerhouse, is one of them. Brazil is benefiting from stronger (deviated) demand from China for soybeans. Brazilian soybean exports to China are expected to reach a record high of $30 billion this year. This represents a 34 percent increase when compared to the average for the past five years ($23 billion). This growth has been driven both by price and volume. In terms of volume, Brazilian exports have increased 8 percent this year and stocks have decrease from 5 to 3.9 million tons. In addition, prices in the northeast ports of Brazil have registered a premium that is 16 percent higher than the price of soybeans sold in the southern Gulf Coast of the United States. Nevertheless, no one wins all battles when at war. When it comes to exports of meat, there are a series of non-tariff barriers that curb Chinese imports from countries like Brazil. On another front, the recent deal between the United States and the European Union can divert European imports of soybean from Brazil to the United States. The short-run opportunities do not compensate for the deleterious long-term effects that a trade war has on the world trade architecture. Brazil and other Latin American countries have been firm supporters and beneficiaries of the trade system. With that in mind, countries should maintain their support of the rules-based WTO framework and not be lured into the short-term gains offered by trade diversion.

Monica de Bolle, senior fellow at the Peterson Institute for International Economics: Although the global trade war has brought some benefits to Brazil’s competitive agribusiness sector, the broader economic effects are likely to be very limited. Agribusiness is only a small share of the Brazilian economy, which continues to struggle with unresolved structural problems that severely constrain growth—notably, large fiscal imbalances. Looking ahead, it is likely that disruptions to global growth and rising uncertainties associated with trade problems will weigh on Brazil, with possible growth headwinds.

Welber Barral, senior partner at Barral M Jorge and former Brazilian foreign trade secretary: In the short term, there may be some trade diversion, benefiting particular companies. In the long term, however, everybody loses if the two major economies enter a trade war. Developing economies suffer more from increased risk, and global growth will be reduced. Besides, consumer markets look for new providers, decreasing any immediate advantage. There is no increased demand: there is a diversion provoked by temporary measures that may be revoked, which does not allow for a credible forecast. For example, exports of steel to the United States increased simply because exporters are running for the quotas, which is lower than the potential exports. Agricultural exports to China were diverted from other destinations, which will look for local or global supply. Higher international risk implies less investment, and higher costs for logistics and insurance, and that is not a good scenario for Brazil. Exports may certainly contribute to recovering economic growth, but Brazil is still highly dependent on its domestic market, and political stability will be the crucial factor for recovery.

John E. Mein, executive coordinator at Instituto Aliança Procomex in Brazil: With the ninth largest economy in the world, representing 2.4 percent of the world’s GNP, Brazil is only responsible for 1.2 percent of the international trade of goods. The $217.7 billion it exported last year placed it as the 25th exporter in the world, and the $150.7 billion it imported put it as the 28th importer, with 1.2 percent and 0.9 percent of world trade, respectively. Although Brazil ranks as 46th in the world in per capita income, in exports per capita it ranks as 110th and its imports per capita rank as 130th. The decrease in the overall volume of international trade brought about by a ‘trade war’ will not be favorable for a nation that has tremendous potential for growth in its trade. Trade disputes may provide Brazil with short-term gains in a few sectors, such as the result of increased demand for Brazilian soybeans by the Chinese. But the gains provided by these specific opportunities, besides being short-lived, will be substantially outweighed by the overall slowdown in the world economy brought about by the irrational increase in tariffs and the undermining of the well tested institutional support mechanisms which provide the framework for international trade. On July 22 and 23, the presidents from the Pacific Alliance countries (Chile, Colombia, Mexico and Peru) and from the Mercosur countries (Argentina, Brazil, Paraguay and Uruguay) met in Puerto Vallarta, Mexico, to discuss the possibility of a positive integration agenda for the two regions. The intensification of integration as a response to the international uncertainties may be one of the few long-term benefits of the prospects of a ‘trade war.’

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

 

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