U.S.-China trade agreement: good or bad for Brazil?

. Dec 16, 2019
U.S.-China trade agreement: good or bad for Brazil? Photo: Fuko Muffin

Good morning! This week, the expected implications of the trade deal between the U.S. and China on Brazil. The UN’s worries about the health of Brazilians. How Brazilian markets performed. Also, what you should be looking out for this week—and the most important facts of the previous seven days. (This newsletter is for platinum and gold subscribers only. Become one now!)

Important. This is the last Weekly Report of 2019. Our newsletters will take a break between December 21 and January 5, 2020. But don’t worry, our website will continue bringing you exclusive content about Brazil—and if anything big happens in the next two weeks, we’ll be here to cover it. Happy holidays!

How the U.S.-China trade deal affects Brazil

On Friday,

the U.S. and China finally announced progress on a <a href="https://www.cnbc.com/2019/12/16/commentary-the-us-china-trade-deal-leaves-a-large-american-deficit.html">trade agreement</a>, even if some nebulous details remain, notably on agricultural purchases. <em>Reuters</em> reported that U.S. Trade Representative Robert Lighthizer said China would buy at least USD 16 billion more agricultural goods in each of the next two years—with total purchases nearing USD 50 billion in 2020 and 2021.</p> <p><strong>Why it matters.</strong> This piece of news set off alarm bells in Brasília, as the government fears Brazilian agricultural producers might lose space in their main consumer market. China gobbles up near 30 percent of Brazil&#8217;s total exports—and almost half of its commodity exports.</p> <div class="flourish-embed" data-src="visualisation/708608"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p><strong>Hike. </strong>Between January and November 2019, Brazil shipped USD 57.6 billion in goods to China, 28 percent more than in the previous year. Soybeans accounted for 34 percent of exports. The Brazilian association of soybean producers believes that Brazilian producers managed to establish solid relationships with Chinese buyers, and that could prevent a more severe hit.</p> <p><strong>Not all bad news.</strong> While agricultural producers may take a hit (especially with soybean prices expected to drop), the deal between the world&#8217;s two superpowers (and Brazil&#8217;s main trade partners) should have positive effects on Brazil. With the U.S. and China on more peaceful terms, the global economic outlook improves—which should increase demand for other major Brazilian commodities, such as iron ore.</p> <p>&#8220;What [Brazil] could gain from a stronger global economy outweighs any predicted loss on the agricultural front,&#8221; said Newton Carmargo Rosa, chief economist at SulAmérica Investimentos, to <em>AE</em>.</p> <p><strong>U.S.-Brazil trade war?</strong> Two weeks ago, U.S. President Donald Trump worried the Brazilian government after promising on Twitter to slap higher tariffs on steel products from Brazil and Argentina, accusing the two countries of deliberately devaluating their currencies. The argument does not hold water, as a weaker currency has negative consequences for both South American nations. “We could interpret this move as political retaliation for Brazil’s recent rapprochement with China—and a warning to Argentina’s soon-to-be-inaugurated leftist president—that U.S. trade interests must be dealt with care,” said political scientist Mauricio Santoro, speaking to <strong>The Brazilian Report</strong>.</p> <hr class="wp-block-separator"/> <h2>The UN is concerned about Brazil&#8217;s environmental policies (or lack thereof)</h2> <p>Visiting Brazil, Baskut Tuncak—a United Nations expert on hazardous substances—said Brazil is &#8220;dismantling&#8221; already weakened institutions to protect people and the environment, allowing Brazilians to be exposed to toxic substances.&nbsp;</p> <p>“In light of a series of terrible environmental crimes, from the collapse of tailings dams to an epidemic of pesticide poisoning, it would be reasonable to expect the country to adopt the strictest environmental and occupational mechanisms for the control of hazardous substances and waste,” said Mr. Tuncak in a report.</p> <p><strong>Why it matters.</strong> Mr. Tuncak&#8217;s final report will be presented to the UN Human Rights Council in September 2020, but it highlights that the government allows companies to withhold sensitive information about hazards to people&#8217;s health.</p> <p>&#8220;Brazil is regressing, due to a perverse sensation of impunity among criminals who poison people, take their land, and destroy the environment,&#8221; Mr. Tuncak said in Brasília.</p> <p><strong>Pesticides.</strong> Since the beginning of the year, Brazil&#8217;s sanitary regulators have cleared no less than 439 pesticides. International organizations accuse the government of weakening legislation to favor the interests of Big Agro, but authorities claim most product registrations concern products already available on the Brazilian market.</p> <p><strong>Land decrees.</strong> Mr. Tuncak also criticized two recent decrees signed by President Bolsonaro: one <a href="https://brazilian.report/money/2019/11/26/sugarcane-deforestation-brazil/">allowing sugarcane plantations</a> in the Amazon and Pantanal regions, and another <a href="https://brazilian.report/power/2019/12/11/environment-jair-bolsonaro-land-decree-heaven-land-grabbers/">making it easier for land-grabbers</a> to control public land.</p> <p><strong>Mining.</strong> The UN expert visited Brumadinho, where a tailings dam collapsed on January 25, killing over 250 people. State prosecutors in Minas Gerais have reportedly identified cracks in another dam owned by mining giant Vale, and asked the company to hire an independent auditor to investigate if there is any risk of another failure.</p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Via Varejo, the parent company of major retail chains in Brazil, had a rollercoaster week. The company announced that a fraudulent accounting maneuver may have a BRL 1.2 billion impact on its Q4 2019 earnings report—plus a BRL 940 million hit on its net worth. But it&#8217;s not all bad news, as Via Varejo also announced it may have BRL 600 million in tax credits. In the end, Via Varejo shares (VVAR3) closed the week up 5.7 percent. Analysts remain positive about the company—pointing out that it will have three to four years to pay for its fraudulent moves, diluting any impact.</p> <p style="text-align:center"><strong><em>Natália Scalzaretto</em></strong></p> <hr class="wp-block-separator"/> <h2>Closer to Caracas than Washington</h2> <p>Despite his repeated pro-U.S. stances, President Jair Bolsonaro&#8217;s administration was more aligned with Venezuela, China, or Russia than Washington during the 74th UN General Assembly and its commissions in 2019. Over 159 votes, Brazil and the U.S. voted alike in only 22 percent of cases—while voting with Venezuela on 63 percent of the votes. The data suggests that, despite a 180-degree shift in the Foreign Affairs Ministry&#8217;s rhetoric, Brazil&#8217;s diplomacy has not simply adopted a position of total alignment with the White House.</p> <div class="flourish-embed" data-src="visualisation/1083409"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <p><strong>Strike 1. </strong>This time of year is usually bad for truck drivers—with fewer grains to be transported, there are more trucks available, and companies underpay their drivers. In this context, several unions are planning to strike today, demanding better salaries. The move, however, is not consensual, as some unions want to wait for the government to create new rules that monitor—and punish—companies who pay their contracted truckers below minimum freight prices. Last week, the government said the risks of a new strike were &#8220;minimal.&#8221;</p> <p><strong>Strike 2. </strong>Last year, truckers staged an 11-day strike that nearly brought the country to a halt, creating fuel and food shortages in several regions. <a href="https://brazilian.report/money/2018/05/25/truckers-protests-brazil-fuels/">Over 60 percent of all cargo</a> is transported by trucks in Brazil. Government data says last year&#8217;s strike shaved 1.2 percentage points off the country&#8217;s GDP growth in 2018.</p> <p><strong>Budget.</strong> On Tuesday, Congress is set to vote on the 2020 budget—the last major vote before the legislative recess, which runs until February. One point will be controversial: the electoral fund for the 2020 municipal elections. Lawmakers want BRL 3.8 billion to finance their parties&#8217; campaigns, more than doubling the amount in 2018, which was of BRL 1.7 billion). President Jair Bolsonaro signaled that he will veto any amount over BRL 2.5 billion, as he believes the fund should create rifts between him and his electorate.</p> <p><strong>Interests.</strong> Last week, the Central Bank once again cut Brazil&#8217;s benchmark interest rate by 0.5 percentage points, to 4.5 percent a year. The bank surprised many by leaving the door open to future cuts, saying &#8220;economic conditions prescribe stimulative monetary policy, i.e., interest rates below the structural level.&#8221; Tomorrow, the bank will publish the minutes of the meeting, with a more detailed explanation of what will be the bank&#8217;s next moves.</p> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <p><strong>Climate.</strong> The Brazilian government was hoping to use the UN Climate Change Conference (COP 25) to &#8220;greenwash&#8221; its image. However, the country was pivotal to the underwhelming end to the conference, which failed to set regulations of carbon markets—a key issue leading up to the event. All in all, the <a href="https://brazilian.report/power/2019/12/12/brazil-ricardo-salles-united-nations-cop-25/">only reward Brazil got at COP 25</a> was two Fossil of the Day awards, a satirical trophy presented to countries that are “doing their best” to block progress in negotiations to combat climate change.</p> <p><strong>Jerusalem.</strong> On Sunday, Brazil inaugurated a business office in Jerusalem. The office will have three staff members and operate under the umbrella of the Brazilian Trade and Investment Promotion Agency (Apex-Brasil). During the opening, Congressman Eduardo Bolsonaro, the president&#8217;s son, renewed his father&#8217;s promise of transferring the Brazilian embassy from Tel Aviv to Jerusalem—which could happen in 2020. The president did not move the embassy this year after much-expected backlash from Arab-majority countries—which are major consumers of Brazilian beef and poultry.</p> <p><strong>Sanitation.</strong> The lower house passed a new legal framework for public sanitation services, which should open up the sector to private players. According to Speaker Rodrigo Maia, 100 million Brazilians may benefit from expected new investments. The new law will force administrations to hold public bidding processes to select providers based on criteria such as investment capacity and universalization goals, instead of simply hiring state-owned companies as default. This could open the market to private companies, and unclog over <a href="https://brazilian.report/newsletters/daily-briefing/2019/12/12/greta-thunberg-bolsonaro-enemy-5g-sanitation-big-agro/">BRL 700 million in investments</a>.&nbsp;</p> <p><strong>Argentina.</strong> On December 10, Alberto Fernández took office as Argentina&#8217;s new president, having to face massive inflation, ballooning debt, and a rise in poverty levels. On Saturday, he announced a hike in export levies on soybeans, wheat, and corn—leaving farmers disgruntled. Mr. Fernández also issued a <a href="https://www.reuters.com/article/us-argentina-unemployment/argentina-issues-decree-making-it-harder-for-businesses-to-fire-workers-idUSKBN1YI09P">decree</a> making it more expensive for companies to fire workers without cause, hoping that it will prevent unemployment rates (currently at 10.6 percent) from going up.</p> <p><strong>IPO.</strong> Brokerage firm XP Inc. held its much-anticipated initial public offering at Nasdaq on December 11. Demand for shares of Brazil’s biggest digital investment platform was hotter than expected, and stock prices closed the day up 21 percent—from USD 27 to USD 32.75. By Friday, shares were up 27 percent, making XP Brazil’s <a href="https://brazilian.report/money/2019/12/09/ipo-decade-xp-investimentos/">11th most valuable company</a> and its IPO the biggest for a Brazilian company in 2019—and fourth-biggest in the U.S.

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