Is a free-trade deal the best option for Brazil and China?

. Nov 14, 2019
china brazil free trade deal President Jair Bolsonaro (R) and Chinese leader Xi Jinping during the BRICS Summit, in Brasília. Photo: PR

For Brazil and China, the 11th BRICS summit—held Wednesday and Thursday this week—had a special meaning. The event helped to put an end at the hard feelings caused by president Jair Bolsonaro’s rhetoric during the election campaign, when he declared that “the Chinese are trying to buy Brazil.” In a much friendlier business and political climate, the president himself spoke of strengthening Brazil’s ties with China, while Economy Minister Paulo Guedes was even more optimistic, considering a free-trade deal between the countries.

But how would such an arrangement work?

</p> <p>Technically, any negotiation for a free-trade deal—which is a comprehensive agreement that scraps tariffs for roughly 90 percent of products—would have to involve Mercosur, the South American trade bloc of which Brazil is a member. No Mercosur country can sign bilateral trade deals without the involvement of the rest of the bloc. </p> <p>However, Mr. Guedes did not provide many details about the plan and it was unclear whether the negotiations involved Mercosur or not, during a speech at a New Development Bank (NDB) event in Brasília. At the time of publishing, the Economy Ministry had not responded to <strong>The Brazilian Report</strong>&#8216;s requests for clarification.&nbsp;&nbsp;</p> <p>“After eight years stalled at Mercosur, we made important progress with the <a href="">European Union trade deal</a>, and now we are talking to China about the possibility of a free-trade deal. We aim to have a high level of integration,” said Mr. Guedes, <a href="">reported</a> by <em>Poder360</em>.&nbsp;</p> <script src="" type="text/javascript" charset="utf-8"></script> <h2>Not so fast!</h2> <p>Judging by the 20 years of negotiations between Mercosur and the European Union, reaching a deal with China will be neither easy nor fast. Besides pleasing all the countries involved, a free-trade agreement also <a href="">needs parliamentary approval</a> from all countries before coming into force.&nbsp;&nbsp;</p> <p>But even Brazil’s own interests are very different. Roughly 90 percent of Brazil’s exports to China are commodities—mainly soy, crude oil, iron ore, cellulose, many kinds of meat and cotton—while at least eight of the ten most imported products from China are either manufactured goods or pharmaceuticals.&nbsp;</p> <p>As political scientist and Rio de Janeiro State University professor Mauricio Santoro explains, several obstacles must be dealt with before a free-trade agreement can be reached.&nbsp;</p> <div class="flourish-embed" data-src="visualisation/923762"></div><script src=""></script> <p>“Soy faces tariff escalations: taxes are small on soy but heavy on processed products such as soy oil. Concerning meat, there are several issues with non-tariff barriers, such as sanitary issues, that need to be included in the negotiations”, he told <strong>The Brazilian Report</strong>. “Regarding imports, the Brazilian industry would probably complain about unfair competition, as well as different work and environment legislations.”</p> <div class="flourish-embed" data-src="visualisation/923795"></div><script src=""></script> <p>Mr. Guedes, however, stated that he would be willing to have a smaller trade surplus with China if that meant a bigger trade volume. “It doesn’t bother me if [Brazil’s] surplus with China becomes more balanced in the future, increasing exports and imports doubling or tripling,” he <a href="">said</a>, according to finance website <em>InfoMoney</em>.</p> <p>Currently, China is Brazil’s biggest trade partner, and the country enjoys a positive flow of USD 21.5 billion, according to Economy Ministry data. However, China is down in 20th place on the import ranking.&nbsp;</p> <h2>Mercosur no more?&nbsp;</h2> <p>With Brazil and Argentina’s relationships set to hit rock bottom with the election of Kirchnerist candidate Alberto Fernández as president—after Jair Bolsonaro openly campaigned for the reelection of Maurício Macri—there is reason to believe that Mercosur’s relationship will become tenser from now on.</p> <p>While leaving the bloc is a possibility that is already being considered by the Brazilian government, it would cause considerable uncertainty, explains Mr. Santoro.&nbsp;</p> <script src="" type="text/javascript" charset="utf-8"></script> <p>“Considering the <a href="">severe economic crisis in Argentina</a>, I don’t think a free trade agreement [between Mercosur and China] would be a viable option,” he said. “But leaving Mercosur would bring lots of uncertainty, though the exit terms agreed would determine the impacts, on whether Brazil could still trade with Mercosur countries, for instance.”&nbsp;&nbsp;</p> <p>Meanwhile, Mr. Santoro believes that there are easier ways to foster commercial relations, such as bilateral dialogue to facilitate trade, reducing bureaucracy and promoting business meetings between companies. During the BRICS summit, Brazil and China seemed to be heading in this direction, with both nations signing memoranda of understanding on Wednesday focusing on several areas, including farming cooperation, investments, transportation, services, healthcare, the audiovisual sector, and even the transfer of convicted felons.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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