Letter IEDI n. 1188—Complexity of Brazilian exports and competition from China in 2020
Today's Letter IEDI analyzes the level of complexity of Brazilian manufacturing exports, as well as the competitive pressure exerted by China in the main markets for our foreign sales of industrial goods—namely, Mercosur (Argentina, Uruguay, Paraguay), LAIA (Bolivia, Chile, Colombia, Ecuador, Peru, Venezuela) and NAFTA (United States, Canada and Mexico).
The study is based on two sources of data: the Economic Complexity Atlas, from which we obtained information on the Economic Complexity Index and the Product Complexity Index of Brazil and China, and the Trademap, built by the International Trade Center (ITC) of UNCTAD/WTO, which provides trade information by product and the value exported by each economy to the selected markets.
The Atlas is the result of work by economists Ricardo Hausmann (Harvard) and César Hidalgo (MIT), who argue that the complexity of exports indicates the complexity of the productive structure of countries and is decisive for their long-term economic growth. Countries with more complex economies have a more diversified export basket composed of many low ubiquity products.
In this edition, we incorporate into the analysis the most recent data for the year 2020, in order to assess the first impacts of the COVID-19 pandemic. The results show that there was a significant deterioration in the complexity of Brazilian exports between 2018 and 2020 and a loss of space in our main manufacturing goods markets. But these developments are not the sole responsibility of COVID-19, since they have been under way for much longer.
Between 2018 and 2020, total exports of goods from Brazil to LAIA, Mercosur and NAFTA combined fell 27.6%, with double-digit declines in each of the blocks of countries considered, notably in Mercosur (-40.7%). China's sales to these regions, although not unscathed, fared much better, registering a variation of only -3.5%, with a more intense decline also in Mercosur (-17.7%), but far from the level suffered by Brazil.
Brazil's results were not worse, as analyzed in Letter IEDI n. 1072 “Brazil's external accounts and the COVID-19 crisis,” only due to the rise in prices of some agricultural and metal commodities exported by the country and the depreciation of the exchange rate, which reached 26% in real terms in 2020, as a result of the capital flight during the pandemic.
In summary, we have not managed to preserve as much as China our position in the main foreign markets for Brazilian industry. And, in addition, the data analyzed in this study show that, between 2018 and 2020, the Brazilian export basket to LAIA, Mercosur and NAFTA became less complex, reversing the slight improvement registered between 2014 and 2018, as discussed in Letter IEDI n. 1054 “Complexity of Brazilian exports and competition from China,” Jan'21.
This evolution was due to the greater contraction of the value of exports to countries to whom we sell more complex products and also to the reduction of our exports' product complexity index (PCI). It should be noted that the complexity of products is not immutable in nature. Thus, PCIs vary over time.
For example, when a certain product is produced by more countries, it becomes less complex, since the definition of complexity is related to ubiquity. In the period under review, the PCI of important manufacturing goods exported by Brazil decreased, including “cars” and “chassis of vehicles with engines.”
The fall of our exports to Mercosur was decisive, since it is to this group of countries that we sell more complex products. The highlight is Argentina, which accounted for 68.4% of our external sales to this group in 2020, with a decrease of 43.2%. This mitigated the positive effect of higher exports of more complex products, such as auto parts, and of the improvement in the PCI of some products, such as tractors.
The drop in China's exports to this region was not only smaller, as we saw earlier, but also even milder in the case of Argentina vis-à-vis ours: -15.9%. The main goods sold by China to Argentina (radio, telephone and TV transmitters) saw their PCI go up; in addition, the second position on the basket in 2020 (other organic-inorganic compounds) presents a PCI higher than the product that occupied its place in 2018 (monitors and projectors).
The most intense differences between Brazil and China in the period analyzed were observed in sales to LAIA. Firstly, because while our exports to this group shrank 28.6% between 2018 and 2020, Chinese exports grew 1.35%. To Chile, which is the largest destination for both Brazil and China, there was a 39.7% decrease in our exports compared to a 3.6% drop in Chinese sales.
Secondly, because our export basket to Chile is, notably, composed of products of very little complexity: crude oil and beef in the first places in 2020. Although the PCIs of trucks and vans (3rd place on the basket) and tractors (4th place) have improved, we are far from the concentration of complex products of the Chinese basket, which in 2020 included TV and radio transmitters (1st place), computers (2nd) and semiconductor devices (3rd) in place of flat laminated iron, sweaters and the like, and games and toys in 2018.
In the case of NAFTA, the picture is not much different. Exports from Brazil (-19.8%) fell about five times more than exports from China (-3.6%) between 2018 and 2020 and, regarding the US, which is the main economy of the bloc, our basket is not only much less complex than that of China, but there was a worsening in the PCIs of three of the five main products we export.
Still, the worsening between 2018 and 2020 in sales to NAFTA was mainly due to the smaller share of the vehicle sector in exports to Mexico. The most significant change occurred in the 1st position: “spark ignition engines” (PCI of 0.697 in 2018 and 8% share) were replaced by “unspecified goods” (PCI of -0.109 in 2020 and weight of 27.8% in the total exported). The Brazilian export basket to Mexico has a higher share of products of greater complexity compared to the USA and Canada.
As exports to markets traditionally important to Brazilian industry shrank and lost complexity between 2018 and 2020, Brazil's Economic Complexity Index (ECI) resumed its downward trajectory, going from 0.17 to 0.003. We occupied the 25th position in the complexity ranking in 1995, falling to 46th place in 2010 and then to 50th in 2018. Since then, we have dropped ten places, reaching 60th in 2020.
Alongside other metrics, such as the decrease in the share of manufacturing in our GDP (Letter IEDI n. 1085), the shrinking presence of Brazilian industry in world industry (Letter IEDI n. 1180) and the marginalization of our manufacturing exports in the global trade of these goods (Letter IEDI n. 1122), the evolution of economic complexity is further evidence of Brazil's loss of industrial skills, which many call “deindustrialization”, and which mainly affects more sophisticated activities (Letter IEDI n. 920).
As the IEDI has been arguing, reversing this picture would favor our society as a whole, since the industry is a prominent vehicle of socioeconomic development.
In contrast to the performance of Brazil, in the case of China, which is the global leader in exports of manufacturing goods, there was a continuous advance in the ranking of economic complexity from 1995, moving from 46th to 24th in 2010 and then to 16th in 2018. In 2020, in the context of the pandemic, there was a retreat, but it was insignificant: the county was the 17th in the ranking.
Chinese ECI also varied little between 2018 and 2020, from 1.34 to 1.30, benefiting from the increased complexity of products with high participation in the country's export basket for the three regions analyzed in this Letter, including “radio, telephone and TV transmitters” and “computers.”
As a consequence of its divergent paths, while in 1995 China would need to climb 21 positions in the ranking of economic complexity to reach Brazil, in 2018 Brazil would need to ascend 31 places to reach China. In 2020 the gap widened and we would have to climb 43 positions to get closer to China's economic complexity.
Finally, it should be noted that, despite the stability of China's ECI in the period under analysis, the “product space”, which indicates the possibility of increasing the diversification of exported products around those in which the country already has revealed comparative advantages, shows that China has better conditions than Brazil to continue increasing its complexity. In 2020, China's export basket had a number of products with revealed comparative advantages that was almost three times greater than Brazil's.