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Brazil rolls the dice on India to hedge the China bet

Brazil rolls the dice on India to hedge the China bet
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First Published: Sat, Jun 16 2007. 01 51 AM IST
Updated: Sat, Jun 16 2007. 01 51 AM IST
In a world where just about everyone is scared silly of upsetting China, Brazil may be an anomaly.
Google Inc., Yahoo! Inc. and Microsoft Corp. are so worried about crossing China that they help it censor the Internet. For all its tough talk and actions around the world, the Bush administration shies away from branding China a currency manipulator or getting closer to Taiwan.
Yet, here you have Brazil risking China’s wrath by cozying up to that other rising Asian superpower, India. Brazilian President Luiz Inacio Lula da Silva did just that earlier this month, visiting India to quadruple trade to $10 billion (Rs41,000 crore) and talking of a special partnership with Asia’s No. 4 economy.
Mindful of how that might look in Beijing, Lula said in New Delhi that “today, it is important to talk to China. You can’t take China out of the picture. As in all pictures, China will be present.” There, he said it: China is still the big economic cheese. The real impetus behind Lula’s growing India focus was articulated by Roberto Jaguaribe, under-secretary general of political affairs at Brazil’s foreign ministry. On the eve of Lula’s trip, Jaguaribe told O Estado de S. Paulo newspaper that “it’s inevitable for Brazil to have a special relationship with India.”
Why? Because unlike China, Jaguaribe said, India is “a real democracy” and doesn’t compete directly with Brazilian producers. “We need to consolidate this process of strategic association with India to exploit our reciprocal competencies,” Jaguaribe said.
Controversial China
The subtext of all this is that China is a problematic trading partner for Brazil. On the one hand, Chinese demand for everything from iron ore to agriculture products to diamonds to graphite is boosting Brazilian growth. On the other, cheap Chinese exports of everything from shoes to textiles to toys are undermining industries Brazil needs to reduce poverty.
In 2005, Lula took a calculated risk by becoming the first leader of a major nation to recognize China as a “market economy” under World Trade Organization rules. At the time, Lula and Chinese President Hu Jintao said they expected to double trade to $20 billion within three years.
Things didn’t turn out as planned. Chinese investment rolled in far more slowly than anticipated, while cheap goods flooded the domestic market. Bottom line, Brazil weakened its defences for a rising superpower unwilling to do the same. It doesn’t help that Brazil’s currency is up 10% this year, while China continues to amass more than $1.2 trillion of reserves to keep its own weak.
Hedging with India
Hence the appeal of India. Brazil hopes it will offer trade and business opportunities that benefit both nations equally. It’s a chance to hedge Brazil’s bet on China. There are many logical reasons for Brazil and India to get close. Both nations are allies in getting the world’s richest nations to scrap the farm subsidies eroding living standards in poorer economies. Brazil and India also are pushing for greater influence at the UN, International Monetary Fund and World Bank.
India also offers Brazil an important opportunity to go up- market. Unable to compete with China’s cheap labour, Brazil is realizing that service industries hold the most promise in creating good-paying jobs. Given India’s growing role as a hub for information technology, biotechnology and pharmaceuticals, Brazilian companies may find greater profits there than in China.
Grand vision
While that’s the grand vision, Lula has considerable work to do to achieve it. India is growing much faster than Brazil—9.1% year-over-year versus 4.3%—and it’s getting more attention globally than Latin America’s biggest economy.
Even though Brazil’s $967 billion economy is bigger than India’s $854 billion one, India is in a far more vibrant part of the world. While currency devaluation and hyperinflation no longer dominate the headlines about Latin America, Brazil doesn’t have the kind of growth in its backyard—including from the US economy—that India does.
Yet, there are some important points to keep in mind as Brazil and India become closer.
One is that Brazil and India are essentially saying “don’t forget about us.” Among the so-called BRICs economies, the potential of Brazil and India are often no match for China’s rapid growth and Russia’s oil and massive nuclear arsenal.
China, in particular, continues to get much of the world’s attention and a disproportionate amount of its investment. And yet, many of the biggest challenges—including climate change, sustainable economic development, poverty reduction and finding cleaner energy sources—will require significant Indian and Brazilian input.
Diversification
It’s also a reminder that hitching your future to one economy can be dangerous. If growth in China slowed sharply, many economies in Latin America and Asia would be in big trouble. For proof, look no further than Peru, where on 30 May, stocks fell the most in 17 years on concern that China’s demand for commodities may slow.
Diversifying your key trading partners is never a bad thing. And clearly, China may not like it. Yet, considering the risks China faces—economic overheating, stock bubbles and rampant pollution—Lula is doing the right thing. (Bloomberg)
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First Published: Sat, Jun 16 2007. 01 51 AM IST