SOYBEANS AND OIL  

A Closer Look at the Brazilian-Chinese Relationship

These past months have been intense for Brazilian-Chinese relations. In April, China overtook the United States as Brazil’s top trading partner. Last May, Brazilian President Luiz Inacio Lula da Silva had a three-day visit to China in which were signed more than a dozen agreements covering energy, finance and other areas. The relationship between the two BRIC countries is growing steadily, as a direct result of an economic partnership Brazil and China have been building for the past years. Strong trade relations and cooperation between both emerging countries have two major global implications. First, such bilateral trade is validating a framework that is reshaping global agricultural trading, with Brazil racing to meet increasing demand from China. Second, this partnership points out to China’s growing influence amid the global economic downturn.

 

Soybeans and Commodities: a transformation of global agricultural trading

 

Trade and economic relations between China and Brazil were intensified in 2001, when China became Brazil's leading trading partner in Asia, and Brazil became China's leading trading partner in Latin America. According to Brazil’s Foreign Trade Ministry figures, in the first quarter of 2009, 73% of the country’s exports to China were commodities and basic products, such as soy, iron ore and petroleum; whereas imports from China in the same period consisted of 96.5% industrialized products, including parts for telephones, L.C.D. monitors and coal.

 

Of particular importance is Brazil’s export of soybeans to China in light of the impact it may have on the global trade scenario. For thousand of years, soybean has been a staple of China’s diet for both people and animals. As the country’s economy grows, it will need higher volumes of soybeans as animal feed. China’s ravenous lust for natural resources will lead to a change of agricultural trading around the world. China’s ability to feed itself is limited, due to scarce cropland and dwindling water supplies, and the country needs to source more of its staples elsewhere. Although the U.S. has been the world’s largest food exporter, the economic crisis and the increased use of farmland to produce biofuel has pushed China to look for trade partners in South America where land is still cheap and plentiful. Brazil is now racing to meet demand from China, whose population of 1.3 billion seems a paradise for such an agricultural giant as Brazil.

 

In this sense, Brazil and China bilateral trade relations can change the global competition for agricultural trade. While Brazil still has lagging infrastructure and finance constraints and the U.S. has a far superior system for transporting its crops to global market, the longer-term trends are apparent. In 2008, Brazil exported nearly 11 million tons of beans to China, a 50 percent increase from the previous year and almost double the amount shipped in 2004. While the United States remains the largest producer of soybeans, last year Brazil became the biggest export. On top of that, analysts believe that Brazil, which farms about 175 million acres, has the potential to double its available cropland to equal the scale of the U.S.

 

Brazil’s strong economic performance is based partially on a highly competitive agricultural sector. Brazil is a leading producer of soy, meat, and orange juice, among other commodities. Also, the country has an ambitious foreign policy and has emerged as a key player in the developing world and among emerging economies. In this context, Brazil’s closer relationship with China is target to assuming a more visible and important role in global affairs. However, Brazil is facing some challenges in achieving its goal.

 

Part of the problem is that Brazil desperately wants China to treat it as a strategic partner, yet the reality shows that China has found in Brazil a supplier of whatever commodities it needs, without having to give much in return. This was clear during Mr. Lula recent trip to Beijing, which was shortened to three from five days, and several events were cancelled. One of the Brazilian government’s main goals towards China is to increase the options of its exports, shifting away from raw materials to higher value-added products. In this sense, the partnership hasn’t yield much benefits. Brazilian textile industry leaders have been unable to get any voluntary reductions in exports out of the Chinese, whose imports have flooded the Brazilian market this year. Also, efforts to jump-start a stalled 45 plane contract between Embraer and the Chinese were unsuccessful. Most importantly, Brazilian government has pushed for China to open its markets to Brazil’s pork exports, as China is the world’s biggest consumer of pork meat. However, the Chinese government has demanded several requirements that invalidated the deal.

 

Some Brazilian analysts fear that Brazil-China trade will throw the country back to old colonial days, when rich countries used poor ones as a cheap source of commodities for their own industrial production. In fact, Brazil’s foreign policy successes have been limited compared to the country’s aspirations. But, Brazil has much to benefit from a closer economic and political relationship with China. What Brazil needs is to move forward from rhetoric to gain confidence in its position as a major player in the developing world. The South American BRIC should build a solid foundation for growing power by forging strong alliances not only with China, but also with other emerging economies such as Turkey, India and Saud Arabia. Mr.

 

Oil Financing: China’s growing influence amid the global economic downturn

 

Brazil-China economic relations go further than soybeans and include strategic areas such as oil, infrastructure and finance. The most important outcome of Mr. Lula’s trip to Beijing was China’s agreement to unleash billions of dollars of credit to help Brazil exploit its massive oil reserves. In return, Brazil will guarantee oil shipments to Chinese companies. 

 

Brazil has recently discovered enormous offshore oil reserves, which has the promise to elevate Brazil into the ranks of major oil producers. The deal includes a $10 billion loan by the Chinese Development Bank to Petrobras - Brazil’s state-controlled oil giant – in exchange for 150,000 barrels of crude oil per day to Chinese refiner Sinopec this year and 200,000 barrels per day for nine years starting in 2010. In addition, the Chinese Development bank will unleash U$ 800 million in credit loans to Brazil’s Social and Economic Development Bank (BNDS). This fact clearly signs China’s willingness to extend huge foreign loans to further the country’s long-term energy-security goals. Also, China has provided more than $45 billion in oil loans to Russia, Kazakhstan and other countries, in an overt effort to lure a diverse set of global suppliers and secure a presence for its oil companies in strategic regions.      

 

China’s funding to Brazil’s oil industry is the latest sign of how Beijing’s influence is growing amidst a global economic downturn. In a credit-scarce world, China has both the means and ambitions to help Brazil explore its oil reserves and ensure China’s energy-security goal. China is taking advantage of the current crisis to boost its strategic influence and gain greater political clout, quite a contrast from its past focus on economic development.

 

Although some are quietly bowing to China as the superpower with all the economic momentum, China still has a long road to go before becoming a global supremacy. For all China’s economic influence, the Asian giant is not really ready to call the shots, even regionally. Even though China is much bigger than its neighbors in terms of the size of its economy, it lags behind on important areas such as technology, per capita GDP and the strength of its institutions. Japan’s economy has been hit hard by the global economic crises, but it still is 10 times larger than China’s. And although China excels at producing huge volumes of low-cost products, Japan and South Korea are leaders in innovation and high-tech goods.

 

Moreover, the China model is hardly superior to its rivals for Asian leadership, as the country’s growth has been supported by wasteful investment, massive capital export, inflated foreign-exchange reserves and increased pollution.  Equally important, China’s military capabilities are far from reaching supremacy. As the undisputed military power, the U.S. has a much wider range of capabilities, including 11 aircraft carriers that allow its Navy to project power over long distances. Some estimate it will take China a least a decade to launch its first aircraft. For all these reasons, China’s increasing economic and political influence in world affairs does not necessarily mean it has become a superpower. The new world order is not a hegemony, much less a bipolar one where only the U.S. and China would call the shots. In a multi-polar world order, traditional and established powers have to take into consideration new emerging forces - such as China, Brazil and India - and political and economic actions spurred at the global and regional levels are even more intertwined.

Carolina Freire, May 2009

  

Photo: Brazilian President Luiz Inacio Lula da Silva and Chinese President Hu Jintao,

May 19, 2009 (Official Chinese government photo).

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Copyright 2009 BRIC CENTER.