Despite Iran and Moves by China, Brazil and the US Remain Best Friends Forever

    Lula meets Obama in Washington

    Lula meets Obama in WashingtonAccording to Brazilian daily newspaper O Estado de S. Paulo, the Chinese state-run oil company Sinopec has agreed to buy stakes in two offshore oil blocks from Brazil’s state-controlled Petrobras. President Hu arrived in Brazil at the end of May for a meeting of the BRIC nations. Sinopec will probably take a twenty percent stake in these two oil blocks, strengthening the relations between Brazil and China.

    Sinopec and Petrobras are also expected to draw up a further agreement dealing with refining and supplying oil-sector services. Trade between Brazil and China has been booming as Brazil’s diplomatic and commercial relations improve due to the country’s increasing role on the world stage.

    For example, China recently expanded its embassy personnel in Brasília. China has become the largest market for Brazilian exports, and Chinese exports to Latin America have risen twenty-six percent since 2005.

    The popular media has promulgated a number of explanations for the recent market surge between Brazil and China. A few explanations include: Brazil’s growing importance on the international stage, both countries’ similar degree of development, along with the country’s desire to balance the influence of the United States.

    Although any one of these theories might be valid, the purpose of the partnership between Beijing and Brasília is to expand commercial ties in oil, imports, exports, services, companies, refineries, and factories, as shown in a 2009 agreement and other pacts signed this year.

    This pragmatic alliance does not imply an adversarial relationship with the U.S, but rather a commercially competitive one that has become common throughout the business world.

    China seeks to diversify the areas from which it obtains oil and the extremely high demand for one of its products: eight billion gallons of oil per day. According to the BBC, China and Brazil signed a trade deal, which also features a “pact to build a Chinese steel plant in Brazil,” on April 15, 2010, “aimed at boosting trade and energy cooperation between the two states.”

    This pact is a follow-up to the 2009 agreement which included a loan-in-exchange-for-oil deal with which Brazil could obtain investment. The pact is just one of a number of indications that, although China’s presence in Brazil is currently limited, it would be commercially beneficial to both countries for the relationship to expand.

    Financial Crisis

    One factor driving the strengthening commercial ties was the world financial crisis of 2007, which drove several nations closer together in order to ensure that a similar kind of crisis would be warded off in the future. Specifically, Brazil’s economy has done relatively well, exemplified by a 5.1 percent GDP growth rate in 2008, only a slight decline in growth in the past year, and a 2 percent growth rate in January 2010.

    As a result of Brazil’s recent fiscal and monetary discipline and its discovery of additional off-shore oil reserves, the financial crisis has had a limited effect on Brazil thus far, as illustrated by its low rate of inflation. Consequently, the U.S, China and Brazil felt more at liberty to fortify their commercial ties so as to avoid a recession.

    According to Enrique Garcia, president and CEO of the Andean Development Corporation (CAF), Latin America has learned from internal and external lessons that have contributed to its relative economic stability. Over the past thirty years, Latin America has suffered no fewer than thirty financial crises of various magnitudes.

    Internally, lessons from past inflation have led to conservative fiscal and monetary policy measures, making Latin America less likely to undergo large investment risks. Externally, Garcia pointed out that Latin America benefits from a positive external environment: the region’s concentration on exports remains high compared to the rest of the world.

    Given Brazil’s vast oil export industry, this regional economic practice allows the country to emerge as a regional hegemon. China has also emerged as a regional hegemon and boasts a GDP growth rate of nine percent. China’s improving internal economic situation has allowed its commercial relationship with Latin America to progress rapidly. The fact that the financial crisis had little impact on Brazil made a Brazil-China commercial alliance even more alluring.

    Increased Competition

    In 2009, China overtook the U.S. as Brazil’s largest trading partner, following a successful conference between President Lula and President Hu. In the meeting, it was clear that China needed an increase in raw material imports from Brazil, such as aluminum and iron, in order to manufacture more capital goods.

    Brazil sought increased commercial ties with China so that it might attract augmented funding to aid in the exploration of the Santos Basin, a potential oil site. This site requires extensive funding for further exploration and is still unreachable despite the increasing amount of trade flowing between China and Brazil.

    According to Expo Shanghai 2010, “trade flow (the sum of exports and imports) [between Brazil and China represents] U.S. $36.1 billion (in 2009). This represents a growth of 433% in six years.” In addition, two-hundred thousand Chinese citizens reside in Brazil, contributing to a higher likelihood of commercial ties between the two nations. Millions of consumers indicate that Sino-Brazilian trade agreements can only increase.

    However, according to Jonathan Lynn in a May 27, 2010 Reuters filing, the existing Doha round of trade negotiations, the current negotiation conducted by the World Trade Organization (WTO), is presently deadlocked. Lynn writes that ministers have recently argued that “opening up global trade would boost the world economy without hitting budgets.”

    Unfortunately, public attempts at negotiations to open such trade, have been unsuccessful for the past eight and half years. Thus, trade ministers from around the world believe that serious negotiations “away from the glare of media and public diplomacy” are necessary to reach a breakthrough in the WTO negotiations.

    The aim of the agreement is to shrink rich countries’ protectionist measures to cushion their domestic farmers and agro-industry, which in turn would allow developing countries to become more competitive. However, specific details of the package have yet to be determined.

    The U.S. believes that it has compromised as much as possible on the issue and that it is now up to emerging economies, such as Brazil and China, to be increasingly flexible. Given that Brazil and China are expected to contribute more to mitigate the Doha Round impasse, their commercial ties are scheduled to increase as they negotiate individual agreements on a bilateral basis behind closed doors.

    In addition to contributing to the current DOHA Round by initiating individual negotiations, Brazil and China are also expected to aid each other’s development as a result of their commercial ties. According to Chai Yu, assistant director of the Institute of Latin America Studies at the Chinese Academy of Social Sciences, China’s principal task is to find new ways to promote cooperation, especially concerning the economic aspects of the relationship.

    China has had a 2.5 percent growth contribution to Latin American exports, according to Mauricio Mesquita Moreira, a principal economist and research coordinator at the Integration and Trade Sector of the Inter-American Development Bank.

    Although this growth is significant, China and Brazil still have untapped potential for increasing their ties with each other. China’s dependency on oil as well as Brazil’s abundance of natural resources will likely bring about an even tighter connection between the two nations.

    Oil Agreements

    Last year, China and Brazil engaged in an “oil for credit” scheme, in which the China Development Bank lent Petrobras ten billion USD in exchange for 150,000 barrels of oil by 2010. China is scheduled to expand its role in Brazil, as illustrated by Paul Ausick in his May 21, 2010 article on 24/7 Wall Street, where he writes, “Norway’s Statoil ASA has agreed to sell a forty percent stake in its deepwater Peregrino field offshore Brazil to China’s Sinochem Group for US$ 3.07 billion.”

    China needs to increase its commitments from Brazil because it discovered on May 27 that, according to the Calgary Herald, “a big new oil find trumpeted by PetroChina three years ago is turning out to be smaller than first thought, showing how difficult it will be for China to slow its rising need for energy imports.” Therefore, China’s need for Brazilian oil has grown even more urgent.

    The Calgary Herald also writes that current Chinese “foreign equity output makes up less than ten percent of Chinese oil demand.” Given Brazil’s untapped potential of onshore reserves, this small percentage is yet another reason why oil agreements contracted between Brazil and China will only increase.

    According to Philip Yang, one of the founders of the Board of Petra Energia S.A. and a former Brazilian diplomat, Brazil has largely performed off-shore drilling thus far due to a lack of funding for onshore exploration and a history of neglecting onshore exploration since the 1960s. Brazil’s neglect of onshore exploration was based on an American geologist’s thesis that offshore exploration would prove more fruitful.

    Historically, Brazil’s discovery of offshore oil has proved much more profitable than its discovery of onshore oil. However, if Brazil abandoned this line of thinking, then China could begin to fund Brazil’s oil exploration. If this scenario comes to fruition, the latter would gain funding while China would be guaranteed a steady supply of fossil fuel.

    Limitations

    Despite past and potential oil agreements, there are limitations to the Sino-Brazilian commercial relationship. These barriers may make future prospects of such contracts difficult to negotiate. One important limitation is China’s lack of confidence in Brazil’s stability, which may discourage China from providing Brazil with adequate Foreign Direct Investment (FDI).

    According to Philip Yang, China invests in two categories of countries: highly stable societies and countries with an extremely loose regulatory framework. Brazil is neither highly stable nor a particularly loosely regulated country.

    Yang theorizes that China is thus reluctant to provide FDI to Brazil because China prefers suppliers such as Australia, China’s top FDI destination because it is a low risk country due to its high development level. Beijing, in turn, is confident that a country with relatively low risk investment figures will most likely lead to a profitable investment.

    Another limitation is that trade competition, while inevitable, may undermine Brazilian efforts at development. Opening trade barriers further would bring a flood of Chinese goods into the Brazilian market. Moreover, neither country is as developed as the United States.

    This lower level of development suggests that the Sino-Brazilian economic relationship will be limited. Another factor could be that favoritism between the two developing countries may alienate the U.S.; however, both countries will require U.S. monetary and technical assistance in the near future.

    The U.S. must establish a strong relationship with Brazil in order to have a strong ally. Expanded commercial ties with China will bring such a strong alliance. Nevertheless, the U.S. has some worries about a competitive economic relationship with China and Brazil. Thus far, the China-Brazil commercial relationship has not significantly altered to diplomatic relations between the U.S. and Brazil, but relations could change if certain conditions are not met.

    Brazil, China, and U.S. Relations

    Brazil and the U.S. have enjoyed a close relationship due to their common historical and cultural ties. Both were colonized by Europeans; both imported slaves and later abolished slavery; both Brazil and the U.S. are very culturally diverse, with immigrants from many different nations. In addition, Brazil and the U.S. are both hegemons in their respective regions.

    Both nations are also similar in size and have similar political systems, as Brazil adopted a democratic system based on the U.S. model after the end of its military dictatorship. This close relationship is still in place today, as illustrated by the agreement between Presidents Bush and Lula to increase world trade in ethanol; bilateral cooperation in controlling narcotics distribution across Latin America; and their failed attempts to create a Free Trade Areas of the Americas (FTAA).

    The U.S. has publicly decried Brazil’s overly warm attitude towards Iran, as Brazil has refused to join other Western powers in sanctioning Tehran; the U.S. also believes that Iran is manipulating Brazil. However, this resentment is a separate issue unrelated to the optimistic prospects for Sino-Brazilian commercial ties.

    Further evidence of close diplomatic ties between Brazil and the U.S. is demonstrated by the fact that Brazilian visas are now valid for ten years for American citizens instead of the previous length of five years, thanks to a new agreement reached between the U.S. and Brazilian Consular officials.

    China and Brazil have generally positive links, although they might be at times rather distant given historical and cultural differences. The geographic distance between China and Brazil in contrast to the proximity between the U.S. and Brazil is more apparent than real.

    Contributing to the Sino-Brazilian bond is the fact that China and Brazil are both part of the BRIC (Brazil, Russia, India, and China) group, an informal collection of countries economically stronger than other developing countries, but still not at the strength of developed countries.

    Both the U.S. and Brazil have a shared interest in their modernization. The U.S. also is deeply interested in an economically vibrant Brazil so that illegal immigration from Brazil to the U.S. decreases and prospects for future trading agreements are given a boost.

    At the same time, China and the U.S. have a positive commercial relationship yet still face some discordant issues given China’s human rights abuses and undemocratic system of governance. However, the U.S. imports a huge bulk of goods from China and thus needs to maintain a positive commercial relationship to level the connection.

    Their closeness has improved in recent years, especially since China ultimately supported the U.S.’s hard-pressed sanctions on Iran to prevent it from developing nuclear weapons.

    Given the three countries’ past and current relations with one another, several policy accommodations can be made (we prefer active voice here, but that may be a stylistic choice) to maintain a stable diplomatic relationship among the three.

    Policy Recommendations

    According to Moreira, China has invested in Brazil thus far due to an increasing need for economic diversification. When asked if Moreira believed that Brazil could learn from China’s economic successes as well as its failures, he responded that tariffs are weighted by trade and are not helpful in trade diversification.

    Politically, Brazil is very different from China, so it is nearly impossible to adopt China’s authoritarian economic model to suit Brazil’s democratic political system. Moreira recommends that Brazil can prosper from learning about heavy Chinese investment in infrastructure; he recommends that Brazil should do the same to take advantage of the beneficial long-term returns produced by such spending.

    However, even though Chinese goods are cheaper, Brazil should not abandon its ongoing commercial relationship with the U.S.. Instead, Brazil should aim to strike a reasonable balance with both trading partners to ensure continuing positive diplomatic ties with both, rather than merely focusing on commercial ties. Brazil should also continue its high volume of trade with China but broaden its oil exportation to other nations, as well as diversify its range of export products.

    The Chinese government exercises central control over the economy. Its commercial relationships flourish with many countries primarily due to China’s menu of cheaply produced goods, though China’s diplomatic role may sometimes be seen as adversarial by the U.S. China is very different culturally and historically from the Western Hemisphere, and this must be respected by all countries.

    Therefore, China would be wise to host more cross-cultural exchanges between itself, Brazil, and the U.S. so that both Western cultures understand Chinese culture better. Moreover, China should also work to portray itself as “less of a dragon and more as a panda,” according to Nelson W. Cunningham, a member of the board of the Institute of the Americas, following the example of Japan.

    According to economist Alessandra Ribeiro, “the United States just didn’t care so much for Latin America in recent years, and China is really looking to Latin America.” In general, this type of pessimism over the future of the hemisphere has largely dominated thinking about Brazil. In the past, Brazil did not play the role of spokesperson for Latin America, making the U.S. less likely to relate to its giant counterpart.

    According to Regina Scharf, Brazilian blogger of Deep Brazil, “I was in high school in the 1970s and in the beginning of the 1980s. I did not have a single class on history and literature of other Latin American countries. I never learned about Bolivar or San Martin. There was not a single mention of them.”

    However, since Brazil was instrumental in founding the Union of South American Nations (UNASUR or UNASUL in Portuguese) in 2008 and is in the process of becoming a greater factor on the world stage, developing stronger connections with Brazil constitutes an increasingly important U.S. interest.

    Although Brazil’s interactions with Iran have been disagreeable to the U.S., Washington needs to put this issue aside when addressing bilateral U.S-Brazil commercial relations by trying to convince Brazil to deal with Iran in a manner similar to that of the rest of the Western powers without belittling President Lula.

    Since Brazil and China have very different cultural and historical backgrounds, the U.S. faces little threat that Brasília will align with Beijing against the United States.

    In fact, Secretary of State Hillary Clinton made no mention of Latin America at U.S.-China talks in Beijing at the end of May. The results of the meetings indicate that diplomatic links between Brazil and the U.S. are likely to remain amicable rather than adversarial even though the deepening commercial relationship between China and Brazil is likely to intensify trade competition between the US and China.

    This competitive attitude should be kept in check, and neither country should actively seek to gain primary trading partner status with Brazil. Although Brazil and China’s commercial ties have blossomed as a means of advancing their shared economic interests, their diplomatic relations still remain somewhat limited.

    Cultural and historical factors ensure that the U.S. and Brazil will maintain a strong relationship, with the exception of the position that Brazil has taken on Iran.

    Stephanie Lloyd is a research associate at the Council on Hemispheric Affairs (COHA) – www.coha.org. The organization is a think tank established in 1975 to discuss and promote inter-American relationship. Email: coha@coha.org.

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