Wednesday, June 16, 2010

China and Brazil boosts trade ties

In April, China and Brazil signed various trade agreements with the objective of boosting two-way trade between the two countries. In particular Presidents Hu and Da Silva signed a 5-year action plan to increase trade and energy cooperation.

Since China joined the World Trade Organization (WTO) in 2002, Brazil’s exports to China have grown at 23% per annum, faster than during the 1989-2009 period at 18%. Brazilian imports from China have grown at 26% per annum since 1989. Recently China overtook the USA to become Brazil’s number one trading partner. As of May 2010 exports to China accounted for 14% of its total exports, from 4% in 2002. Imports from China, the world’s largest goods exporter, represented 13% of its total imports versus around 3% in 2002.

Just from looking at these numbers it is difficult to determine causality: is the fact that by joining the WTO, China had any significant impact on trade between the two countries? Or is this just growth-driven? More probably, simultaneous events are responsible for the surge in the amount of trade between the two. Theory suggests that trade liberalization induced by tariffs reductions has a positive impact on trade between two countries. Lee and Shin confirmed that Regional Trade Agreements (RTA) increase bilateral trade between members. Although in this case China and Brazil are not in a RTA, it is somewhat comparable because the identity of products traded between the two is historically the same. Over 85% of Brazil’s total merchandise exports to China are fuels and mineral products and agricultural products. About 95% of its imports are manufactured goods.

During the global expansion of the past decade, the net impact of trade on employment and poverty in Brazil was positive but modest, according to research from the Carnegie Endowment for International Peace . However it is quite likely that as the value of trade reaches a critical level, gains created in part by economies of scale and the multiplier effect will spread out to a larger share of the population.

In the long term Brazilian exports growth to China should sustain the pace of the past few years as it is obvious that the Asian giant is on sound footing. Chinese wages have started rising and will probably outpace the economy’s top line growth. This trend should bear rich secular fruits in the long-term by boosting consumption and accelerating industrial upgrades.

The question for Brazilian exporters is this: can they climb up the value added chain? Although exports to China of high-end telecom equipment, integrated circuits and electronic components, chemical and pharmaceutical products have been rising, it is still insignificant on total merchandise exports.

In 2008 the WTO warned that the global financial crisis would affect trade flows globally by reducing access to trade financing. It appears however that the fear was misplaced as Chinese exports have already rebounded – up 48% y/y in May. Brazil’s exports to the middle kingdom, already surpassing US$10 bn for 2010 as of May, should make this a record year.

In conclusion, recent measures adopted in April by both countries suggest that two-way trade will remain healthy for the next few years.

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