Economy & Trade, Global Governance, Headlines, Latin America & the Caribbean

ECONOMY-SOUTH AMERICA: Chinese Competition Undermines Integration

Mario Osava

RIO DE JANEIRO, Oct 23 2009 (IPS) - Brazil’s products are losing ground in the rest of South America, mainly because of the flood of low-cost Chinese goods – a trend that is also exacerbating the region’s dependence on commodity exports.

The inflow of cheap Chinese products was responsible for more than 45 percent of Brazil’s lost sales to Argentina and Uruguay in 2008, according to a study by Lia Valls, a researcher at the Getulio Vargas Foundation in Rio de Janeiro. Exports to other markets in the region also shrank, to a lesser extent: by 39 percent to Chile, 33 percent to Colombia and 30 percent to the United States.

The loss is still relatively small. The lost sales to Argentina represented a mere 0.4 percent of this country’s total exports. Moreover, Brazil’s sales to its neighbour in 2008 grew 22 percent over the previous year, to 17.6 billion dollars.

And Chinese goods continue to displace Brazilian products, especially high-value-added manufactured goods, or merchandise produced by industries that generate many jobs, the economist told IPS.

The production of data-processing equipment, for example, plunged by 93 percent, while synthetic textiles fell 88 percent.

The phenomenon has especially hit Brazil’s sales to its partners in the Mercosur (Southern Common Market) trade bloc – made up of Argentina, Brazil, Paraguay and Uruguay, with Venezuela in the process of becoming the fifth full member – despite its customs union that came into effect in 1995.

Vals said the growing preference in South America for products from Asia’s giant over goods from Latin America’s biggest country is mainly due to factors that influence competitiveness, such as the cost of labour, technology, and above all, the scale of production in a country like China, with a population of 1.3 billion.

But the country’s industrial and agribusiness leaders and exporters disagree, as does Finance Minister Guido Mántega, who announced a two percent tax Tuesday on foreign investment in Brazilian stocks and fixed-income securities.

The aim is to curb the appreciation of the real against the dollar, to avoid further overvaluation, and “to prevent excess speculation” in the stock market and capital markets, both of which affect national production by stimulating imports and curtailing exports, said Mántega.

According to the left-wing government of President Luiz Inacio Lula da Silva, Brazil is one of the first countries in the world to overcome the global economic crisis that originated last year in the United States.

With more than 220 billion dollars in foreign reserves and projected GDP growth of over five percent for 2010, Brazil has been experiencing a massive influx of foreign capital, both productive and speculative, giving rise to fears of a bubble on the Sao Paulo stock market.

The two percent levy on speculative capital flows is welcome, but it is “only a palliative measure,” said José Augusto de Castro, vice president of Brazil’s foreign trade association (AEB), which advocates a much higher tax on short-term investment and tax exemption for capital that stays in the country for at least a year.

That would really keep the speculative capital away, Castro told IPS.

A similar view was expressed by economy professor Fernando Cardim from the Federal University of Rio de Janeiro. He said Mántega’s decision came “too late, and is too weak,” while it runs the risk of being discredited if it fails to do what it is meant to do.

Brazil’s local currency, the real, which ended 2008 at 2.39 against the dollar, stood at 1.72 to the dollar Wednesday – a 28 percent difference that outstripped the dollar’s slide worldwide.

The overvaluation of the real is giving away markets to China, which keeps the yuan artificially low in a kind of “exchange rate dumping” (unfair competition), said Castro.

That imbalance wouldn’t be so drastic for Brazilian exporters if they didn’t face other disadvantages like high interest rates, weak infrastructure and bulky costs arising from the tax system and red tape, he said.

And the situation is getting worse because China has moved into high-technology exports, after flooding the global markets with trinkets, textiles and other goods in which cheap labour power is key, he said.

Trade with China is growing fast, but in a lopsided manner, in which South America – and Africa as well – are mere suppliers of agricultural commodities and minerals and importers of manufactured goods.

Chile, for instance, depends on copper exports, 70 percent of which go to China, while “Argentina basically exports soy, nearly all of which is purchased by the Asian giant,” Cardim pointed out. For its part, Brazil owes its huge trade surplus to agricultural goods and minerals, much of which is exported to China, he added.

The overvalued real has accentuated that trend, he said, pointing out that recent history is full of disasters brought about by policies that have kept national currencies overvalued, such as the policies implemented in Brazil and neighbouring countries like Argentina in the 1990s, said Cardim.

Argentina owes much of its current economic deterioration to such policies followed in the 1970s, and especially throughout the 1990s under the currency board scheme that pegged the peso to the dollar until the financial meltdown and economic and political chaos that brought down the government of Fernando de la Rúa in late 2001.

In the meantime, the Brazilian real was overvalued while the exchange rate was controlled and imports were freed up, to fight inflation, as of 1994, Cardim noted.

Several capital flight crises were followed by the traumatic devaluation of January 1999 by the government of Fernando Henrique Cardoso, with which Argentina lost its huge next-door market that had lengthened the life of its currency board system.

For that reason, independent economists welcomed the tax on financial operations with which the Lula administration is attempting to curtail speculative capital flows and trying to keep the real from appreciating further, even if the measure might fall short, said Cardim.

What critics of the new tax are doing is defending the interests of the big financial groups they work for, regardless of economic theory and experience, and their reactions were only to be expected, said the professor.

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