All exporting countries want a piece of China’s market, particularly those with agricultural goods since the Asian kingpin has the world’s largest population to feed.
China is an active buyer in Brazil’s agricultural markets, but all is not smooth sailing. Brazil must still overcome lingering deficiencies in its own business and economic environment to fully expand its trade with China, says the head of the China/Brazil Business Council.
Lagging competitiveness of Brazilian industry remains a limiting factor and "a great challenge" in the relation between the two countries, Council President Sergio Amaral told Dow Jones Newswires in an interview. Amaral is a former Brazilian trade minister.
"The trade relation with China dramatizes a problem that Brazil is having with partners abroad in general-- the fact that Brazil has a high cost of production in addition to a foreign exchange problem," he said.
Indeed, Brazil is a distinct export competitor for U.S. pork. While limited areas of Brazil have low production costs, overall, U.S. producers remain the globe’s low-cost pork provider. There also are nagging animal health concerns in Brazil, specifically foot-and-mouth disease, as well as infrastructure challenges.
Chinese Trade Minister Chen Deming and more than 70 business leaders will be in Brazil’s capital this week to meet government and industry counterparts. Brazilian officials hope Chen's visit will help correct an imbalance in two-way trade, and encourage Chinese companies to buy more of Brazil’s value-added goods along with significant purchases of commodity exports.
To a degree, China will follow the low-cost. As a result, China moved out of the U.S. soybean market and into Brazil’s during the South American crop harvest. This has pressured U.S. soybean prices. However, some market analysts are expecting China to return to the United States for soybean purchases, due to its preferred quality.
“China has very high soybean quality demands and the South American crop doesn’t tend to meet it, so China usually moves back in to the U.S. market,” says Michelle Lamirande, commodity research analyst with Farms.com Risk Management.
Although Chinese investors were previously focused on securing supplies of raw materials, like soybeans and iron ore, and later petroleum, Amaral said he has seen a "change in quality" and a diversification of Chinese investment. For the first time, these have included significant investments in consumer goods and services.
Companies like China's State Grid Corp and Huawei Technologies, Amarai noted, have made big investments in areas such as power transmission and telecommunications, while at least three Chinese auto manufacturers are considering opening plants in Brazil. China invested $18 billion in Brazil last year.
While the Chinese delegation’s visit to Brazil is "positive," it’s more of a "prospecting" mission than to close deals, Amarai said.
In Brazil, companies face a difficult local environment, Amarai said, noting the country’s base interest rate at 12 percent annually is more than three times China’s rate. Meanwhile Brazil's tax burden, at about 37 percent of GDP, is more than double China's. Such factors increase production costs. Add in the exchange rate, and it produces a disadvantage for Brazil, above all in manufacturing, he said.
Also, Brazil's currency, the real, is 20 percent to 30 percent overvalued relative to the Chinese yuan. However, little could be done to improve this relation in the short-term, Amarai said, as Brazil struggles to rein in chronic budget imbalances and rising inflation.
"If we take any more drastic measures in relation to inflation, such as an increase in the interest rate, it affects the exchange rate and you reduce growth," he said. "So we have a difficult equation to resolve."
As for the nagging foreign exchange problem, Brazil will have to haggle for policy changes with major trade partners like the United States and China at international forums such as the G-20 and the World Trade Organization.
"There won't be immediate concrete results from this, but it's important to call attention to the problem because it is real," he said.