Brazil’s recent attempts to counter Chinese competition and to revive its flagging industrial sector are insufficient and shortsighted, according to the World Bank’s Otaviano Canuto and Peterson Institute for International Economics Senior Fellow Gary Hufbauer. Canuto and Hufbauer engaged in a wide-ranging discussion of Brazil-China economic relations at the Inter-American Dialogue on Monday.
Over the past few months, Brazilian President Dilma Rousseff has struggled to deal with an overvalued domestic currency and an influx of inexpensive – primarily Chinese – manufactured goods. To address these challenges, the Rousseff administration has implemented measures to slow currency appreciation and to strengthen Brazil’s manufacturing sector. “Plano Brasil Maior,” which includes anti-dumping measures, border controls, and tax breaks for certain labor-intensive industries, is the latest in a series of attempts to ensure Brazil’s economic competitiveness.
According to Canuto and Hufbauer, trade with China has strengthened Brazil’s commodity and extractive sectors while severely weakening industrial output. Brazil is exporting commodities at unprecedented rates to China, but its manufacturers are unable to compete with low-priced Chinese goods in domestic and international markets.
Source: Reuters, 4/8/2011
Both speakers argued, however, that Brazil’s deindustrialization and competitiveness challenges can be attributed to more than just Chinese trade and competition. The country’s overvalued currency, for example, is a significant growth inhibitor. China’s demand for Brazil’s commodities may be partially responsible for Brazil’s rising exchange rate, but according to Canuto, loose monetary policy and high interest rates have also contributed to a 48 percent appreciation of the real against the dollar since 2008. The overvalued real continues to limit exports of non-commodity tradable goods. Both speakers also lamented Brazil’s failure to develop its service sector, which, according to Hufbauer, is the "key to income and employment in Brazil."
Neither scholar considered Rousseff’s “Plano Brasil Maior” to be a positive policy development. While its measures may temporarily resuscitate Brazilian industry, the plan would need to be ten times stronger to reverse current economic trends, according to Hufbauer. Canuto argued that the plan will do little to address Brazil’s most pressing economic issues – currency appreciation and the “costo Brasil,” or the various challenges associated doing business in Brazil (high tariffs, very strict labor laws, etc.). And in light of Brazil’s growing leadership role and status in the global economy, Hufbauer described the plan’s protectionist measures as “devastating to the norms of the WTO.” “Plano Brasil Maior” is evidence, he said, of the impact of Brazilian politics on economic policy formulation.
The speakers agreed that Brazil must take steps to move up the value chain and avoid a middle income trap. Measures to improve innovation, expand the service sector, tighten monetary policy, and address the "costo Brasil" are necessary to ensure Brazil’s economic competitiveness in the medium- and long-term.
(Thanks to Kimberly Covington for her assistance.)