Brazil Growth Slowing as Lula China Policy Sows Doubts

From  Bloomberg
By Jessica Brice, Ney Hayashi and David Biller
September 22, 2014

 

In 2004, Brazil’s then-President Luiz Inacio Lula da Silva and 400 executives went on a six-day trip to China. The mission was simple: Encourage companies to strengthen ties with the Asian nation to bolster growth at home.

A decade later, ties between Brazil and China have never been stronger. Growth at home is stagnant.

Lula’s decision to court China and at the same time spurn some U.S. efforts to bolster trade has led to a dependence on the commodity-hungry nation and deepened a drop in manufacturing. In May 2004, the month Lula visited China in what he called his government’s “greatest trip,” manufactured goods made up more than half Brazil’s exports and commodities less than a third. Last month, industrialized goods had plunged to 37 percent and raw materials made up almost half.

“Lula will never admit he made a mistake, but I think if he evaluates, he’ll see that what he expected didn’t happen,” said Jose Augusto de Castro, president of Brazil’s Foreign Trade Association. The explosion in commodities exports masked structural and infrastructure problems that make Brazil less competitive, he said. “The last decade was golden for world trade. There was never a similar decade like that for Brazil, but Brazil missed the opportunity to carry out reforms.”

Rousseff’s Support

Falling commodities prices coupled with a weaker industry helped drive Brazil into a recession in the first half of this year, eroding support for Lula’s successor, Dilma Rousseff, as she heads into an election on Oct. 5. A Datafolha poll released Sept. 19 showed Rousseff would have 37 percent support in the first round of voting, compared with 30 percent for Marina Silva. The incumbent would have 44 percent of the votes in a probable second-round runoff, statistically tied with Silva, who has 46 percent support. The poll has a margin of error of plus or minus two percentage points.

The presidential press office declined to comment and referred questions to the Sao Paulo-based Lula Institute.

That Lula’s ambitions for the China-Brazil relationship didn’t turn out as he envisioned is evidenced in the experience of Embraco. The company, one of the world’s biggest makers of refrigeration compressors and which was acquired by Whirlpool Corp. in 2006, joined Vale SA (VALE5), Petroleo Brasileiro SA (PETR4) and other companies on Lula’s China trip.

At the time of the trip, Embraco exported to China from Brazil. A decade later, the company’s Brazilian plants have stopped shipments to the Asian nation and Embraco has moved half of its output abroad, said Business and Marketing Vice President Reinaldo Maykot.

Brazil’s ‘Limits’

Embraco opened a second plant in China in 2008 and a plant in Mexico in 2012. Foreign output will pull farther ahead as domestic production grows at a slower pace, hindered by bureaucracy and the lack of adequate infrastructure, he said.

“The company has been doing business in Brazil for more than 40 years, so we know the limits we have to face,” Maykot said in a telephone interview from the company’s headquarters in Joinville, Brazil. “Our focus is to be close to the markets on every continent, so we can make sure we grow in other regions.”

Embraco isn’t alone in halting some exports. Since 2008, the year before China overtook the U.S. as Brazil’s biggest trading partner, the number of local companies that export to other markets has fallen by 10 percent, while importers surged by 52 percent, the Foreign Trade Association’s Castro said.

‘Competitive Dynamics’

Fibria Celulose SA (FIBR3), the world’s biggest pulp producer, based in Sao Paulo, made the decision around 2005 to stop producing paper in Brazil because of China’s competitive advantage, Chief Executive Officer Marcelo Castelli said in an interview at Bloomberg’s office in Sao Paulo.

“Look at the competitive dynamics: We export pulp to China and they export their paper to Brazil — and it’s so much more competitive than paper that is produced here,” he said, citing the high costs of infrastructure and China’s cheap labor advantage as factors in the decision.

Lula took office in 2003 vowing to turn around an economy that was being choked by benchmark interest rates of 25 percent and inflation of 13 percent. His strategy worked initially, with Lula presiding over the nation’s fastest growth rate in 25 years in 2010, when gross domestic product expanded 7.5 percent.

“The strategy of Lula’s government was to diversify commercial relationships, reinforcing attention on neglected regions of the world, especially our Latin American neighbors, without neglecting traditional partners,” the Lula Institute said in an e-mailed response to questions. “Brazil diversified its trade in the period, with expressive growth in exchange not just with China, but also Mercosul, Latin America and Africa.”

Disputes

Lula’s election also ushered in an era of trade disputes with the U.S., fueled by disagreements over agriculture aid. In his inaugural speech in January 2003, Lula pledged to bolster ties with China while fighting “scandalous” farm subsidies.

In 2003, Brazil and China formed a bloc that scuttled World Trade Organization talks by demanding U.S. and European agriculture barriers come down. The following year, Lula insisted on taking trade issues off the agenda of a two-day summit bringing together then-U.S. President George W. Bush and 32 other North and South American leaders. And in 2005, WTO judges ruled in favor of a Brazilian complaint that U.S. cotton aid breeched commitments signed in 1994.

Spying

“We have a serious problem, which made us change the course of our foreign policy,” Lula said in an April 2004 speech at an annual summit of farmers in Ribeirao Preto, Brazil. “We will now make what is maybe our most important trip: We will go to China.”

Relations between the U.S. and Brazil have remained strained under Rousseff. She canceled her state visit to the U.S. last year after documents leaked by former U.S. government contractor Edward Snowden indicated she was among heads of state whose communications were monitored by the National Security Agency.

Improving trade between the two nations was a major theme during an hour-long talk with Rousseff, U.S. Vice President Joe Biden said in a statement on the White House’s website after a visit in June.

Brazil is aiming to expand its trade agreements, including reaching one with the European Union as it tries to bolster its trade balance amid falling commodity prices, the Trade Ministry’s press office said in an e-mailed response to questions.

“The growth of Brazil’s trade with China did not occur at the expense of sales to the rest of the world,” it said….

 

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