China has established itself as Brazil's largest trading partner, as discussed recently in Letter IEDI n. 1292 “Brazil-China trade and the loss of Brazilian economic complexity.” In the last two and a half decades, after joining the WTO, the Chinese gain in our foreign trade was exponential. 

But it is not only with Brazil that the Asian giant intensified trade relations. In addition to the US, in several other countries China has become, if not the first, one of the main trading partners. And this had implications for Brazil, notably for our industry.

The consolidation of China as a producer and exporter of manufacturing products has exerted great competitive pressure on Brazilian industry, either due to the entry of Chinese products into our domestic market, or due to the growth of their exports to important markets for our manufacturing goods.

Such challenging effects for our production were little mitigated by Brazil's access to the Chinese market. Our exports to China, as shown in Letter IEDI n. 1292, are concentrated not in manufacturing goods, but in primary products, which has hindered the complexity of our export basket in recent decades.

The situation became worse because we did not react adequately to this competitive offensive. As the Institute has long warned, Brazil has neglected its business environment, allowing the so-called “Brazil Cost” to rise and giving up a firm commitment to support innovation and the constant modernization of our industrial park. In addition, by not signing important trade agreements in recent decades, we have lost the opportunity to diversify our exporting markets.

Previous Letters IEDI had already identified the phenomenon of growing Chinese competitive pressure in traditional markets of Brazilian industry, especially from the global crisis of 2008/2009 onward —as discussed in letters number 826, 900, 972, 1054 and 1188. The subprime mortgage crisis in the US and later the euro crisis depressed developed countries’ domestic markets and redirected China's exports to emerging countries, such as those in Latin America.

Currently, something similar seems to be underway — in this case, in response to trade barriers imposed by the USA and Europe on Chinese products, given the suspicions of unfair practices by Chinese companies and the American and European objectives of strengthening their industrial systems, after the weaknesses revealed by the COVID-19 pandemic and in face of the climate challenges ahead.

In this edition, we analyze the evolution of total exports and the economic complexity of the main products sold by Brazil and China to the 10 chief markets for Brazilian manufacturing in 2021, excluding China itself, which was the subject of a previous Letter IEDI.

The period in question covers the years 2014 and 2021, that is, between the moment prior to the recent negative phase of our economy— which included the 2015/2016 crisis and the COVID-19 pandemic in 2020 —and the last year available in the databases used here (Atlas of Complexity, Trademap and Comtrade).

Thus, the selected destinations were: the USA, Argentina, the Netherlands, Canada, Singapore, Mexico, Chile, Colombia, Paraguay and Germany, which in aggregate represented 50% of our manufacturing exports in 2021 and 31% of our total foreign sales of goods. 

Between 2014 and 2021, total shipments of Brazilian goods to these countries grew 11.8%, in current values. Despite this positive evolution, Chinese sales advanced much more in the period (+51.2%), so that the value of China’s exports to those 10 destinations rose from 9 times the value sold by Brazil in 2014 to 12 times in 2021. This is an indicator of the expansion of the Chinese presence and the narrowing of Brazil's in such markets.

China expanded its advantage over Brazil in 6 of the 10 selected destinations and in 2 others its disadvantage fell. In the first group, the highlights are European countries: to Germany, Chinese exports were 11 times higher than those of Brazil in 2014, rising to 23 times in 2021; to the Netherlands, in turn, they went from 6 to 11 times ours in the period.

It should be noted that the Netherlands and Singapore, due to their port infrastructures, function as “points of entry” for products to their respective regions, Europe and Southeast Asia, not simply reflecting their domestic markets.

Two other prominent cases are in North America. Chinese exports to the USA were 15 times higher than those of Brazil in 2014, a ratio that rose to 18 in 2021. To Mexico, the value sold by China rose from 9 to 12 times the value exported by Brazil between 2014 and 2021.

In the group in which China has reduced its disadvantages are Argentina and Paraguay. In 2014, Chinese exports to these markets were, respectively, 50% and 60% lower than those of Brazil. In 2021, however, these differences fell to 10% in the case of Argentina and 40% in the case of Paraguay.

Only two destinations escaped the rule: Singapore and Canada. In 2014, the value exported by China was 20 times higher in Singapore and 13 times higher in Canada than Brazilian exports. In 2021, this advantage was reduced to 9 times in Singapore and 10 times in Canada. Despite this, as this Letter IEDI will analyze in detail, there was a decrease in the complexity of our main products to these two destinations. 

It is clear that in all the markets analyzed here, the Chinese export basket is composed of much more complex products than ours, both in 2014 and 2021. This is because China sells mostly manufacturing goods, while we sell many commodities.

Moreover, the time path of our basket is also worrying. The complexity of the Brazilian basket deteriorated in 5 of the 10 selected markets: Argentina, Mexico and the Netherlands, as well as Canada and Singapore. In 2, the picture was relatively stable: the United States and Germany. 

There was improvement in only 3 destinations, all of them in South America, a traditional region of penetration of Brazilian products, including manufacturing goods: Chile, Colombia and Paraguay. In these cases, we expanded the total exported only to the first 2 and it was precisely to the Chilean and Colombian markets that the advantage of Chinese exports grew less in the period under analysis.

That is, in only 2 of the 10 destinations selected in this Letter IEDI, Brazil presented a positive performance between 2014 and 2021: Chile and Colombia, where there was an increase in exports, of 40.8% and 40.5%, respectively; where the Chinese advantage progressed less (from 3 to 4 times Brazilian sales) and where the complexity of the main products we export increased.

The complexity of our sales to Chile improved as a result of the increase in crude oil’s product complexity index (PCI) and of the greater participation of cars and tractors in the basket. 

For Colombia, the improvement was due to car exports, whose PCI rose, but also because their weight on the basket tripled in the period. It should be noted that the automotive industry has an important role in driving the complexity of our external sales.

With an export basket to the Chinese market based on commodities, with the increase in the presence of Chinese output in important markets for the Brazilian industry and with the decline of more complex products among the main items we export to these markets, Brazil witnessed a significant deterioration in its Economic Complexity Index between 2014–2021, deepening the downward path it has followed since the mid-1990s.

The approach to economic complexity used in this Letter IEDI was developed by economists Ricardo Hausmann (Harvard University) and César Hidalgo (MIT), who argue that the complexity of exports is decisive for long-term economic growth. Thus, the productive complexity of countries is measured from the structure of their exports.

More complex countries are those that have more diversified productive structures and export baskets, and sell more sophisticated products. This sophistication is measured by the low ubiquity of their foreign sales, which means that only a few countries are able to produce and export these products. 

The full text is available in Portuguese