Brazil will lose if the U.S.-China trade war continues. Photo: APPA
As the U.S. and China continue to raise the tone of their escalating trade war, global markets took a major hit, with major exporting nations being particularly affected. U.S. President Donald Trump decided to slap tariffs on USD 200 billion of Chinese goods – on top of the USD 50 billion previously announced. On the other side of the Pacific, Beijing shows no sign of backing down, promising a reaction of equal scale.
On a day when stock markets operated on a negative, Brazil was an exception: São Paulo’s Ibovespa index closed the day up by 2.26 percent, and the U.S. Dollar remained stable – going up by only 0.10 percent, at BRL 3.745.
But this positive result is unlikely to last. Analysts believe that it was more due to investors seizing the opportunity to buy cheap stock after a steep rise of the U.S. Dollar and successive negative results of the stock market. Moreover, the market’s prediction that the Central Bank should keep the country’s benchmark </span><a href="https://brazilian.report/2018/03/20/brazil-highest-interest-rates-world/"><span style="font-weight: 400;">interest rate</span></a><span style="font-weight: 400;"> at a record-low 6.5 percent is also seen as positive.</span></p>
<h3>Commodity prices already down</h3>
<p><span style="font-weight: 400;">An U.S.-China trade war will affect every other economy in the world. Mr. Trump’s protectionist measures should slow down the Chinese economy, which spells trouble for Brazil. With China’s demand for commodities going down, the backbone of the Brazilian economy would take a major hit. Latin America’s largest country, after all, is heavily dependent on commodity exports.</span></p>
<p><span style="font-weight: 400;">The U.S. and China are Brazil’s main trade partners. Between January and May 2018, one-quarter of </span><a href="https://brazilian.report/2018/05/17/brazils-exports-imports/"><span style="font-weight: 400;">Brazil’s exports went to China</span></a><span style="font-weight: 400;">, amounting to USD 24 billion. The Americans imported USD 11.4 billion over the same time span, i.e., 11 percent of the country’s exports.</span></p>
<h3>Brazil’s exports per country of destination</h3>
<p><img class="alignnone size-large wp-image-4287" src="https://brazilian.report/wp-content/uploads/2018/05/exports-countries-1024x442.jpg" alt="exports countries Mapping Brazil’s exports and imports" width="1024" height="442" srcset="https://brazilian.report/wp-content/uploads/2018/05/exports-countries-1024x442.jpg 1024w, https://brazilian.report/wp-content/uploads/2018/05/exports-countries-300x129.jpg 300w, https://brazilian.report/wp-content/uploads/2018/05/exports-countries-768x331.jpg 768w, https://brazilian.report/wp-content/uploads/2018/05/exports-countries-610x263.jpg 610w, https://brazilian.report/wp-content/uploads/2018/05/exports-countries.jpg 2048w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<p><span style="font-weight: 400;">While trade wars are bad for everyone, they are particularly awful for countries like Brazil. Increasing protectionism reduces trade and demand, causing commodity prices to plummet and weakening Brazil as a result. A recent report by the United Nations Conference on Trade and Development (UNCTAD) states that the average tariff on Brazilian products could potentially jump from 5 to 30 percent.</span></p>
<p><span style="font-weight: 400;">Soybean prices for July delivery have <a href="https://www.cnbc.com/2018/06/19/soybean-prices-drop-to-two-year-low-on-us-china-trade-war-fears.html">dropped</a> by more than 7 percent to USD 8.415 – the lowest since 2009, according to Reuters. Meanwhile, steel prices (alongside its raw materials iron ore and coke) fell sharply in China, by over 4 percent.</span></p>
<h3>Other uncertainties</h3>
<p><span style="font-weight: 400;">It’s never a good time to have a trade war among the world’s two most powerful economies. However, now is a particularly bad moment for Brazil. Investors have already grown wary about the country’s slow recovery, with banks such as Morgan Stanley and Citigroup considering Brazil a riskier country for investments than Mexico – which is undergoing a spree of political violence, with 112 candidates having been assassinated since September.</span></p>
<p><span style="font-weight: 400;">Brazil’s presidential election remains up for grabs, with the most popular politician in the country </span><a href="https://brazilian.report/2018/01/24/lula-convicted-democracy-brazil/"><span style="font-weight: 400;">behind bars</span></a><span style="font-weight: 400;"> and far-right candidate Jair Bolsonaro </span><a href="https://brazilian.report/2017/10/31/2018-election-brazil-extreme-right/"><span style="font-weight: 400;">leading all polls</span></a><span style="font-weight: 400;">.</span></p>
<p><span style="font-weight: 400;">Besides the possible negative reaction from investors, Brazil might face yet another problem: an “invasion” of Chinese products. Without being able to export as much to the U.S., it is reasonable to believe that China will become more aggressive in other markets, including Brazil. That could have two effects: flooding the local market with Asian products that are more competitive than locally-fabricated ones, and increasing competition for Brazil’s exports.</span></p>
<p><span style="font-weight: 400;">There are few certainties regarding the U.S.-China feud. But one of them is that no matter how trade war shapes up, Brazil is set to lose from it.
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