The IEDI has been analyzing the Brazil-China trade relations in recent years and their effects on our industry. Two IEDI Letters on this subject have already been released, focusing on the complexity of our economic structure and our exports: Letter n. 1292 “Brazil-China trade and the loss of Brazilian economic complexity” and Letter n. 1294 “Complexity of Brazilian exports and competition from China.”

In addition, we also addressed the effects of Chinese subsidies on international trade flows between 2009 and 2022, based on the analysis by IMF researchers Lorenzo Rotunno and Michele Ruta in the study “Trade Implications of China's Subsidies,” in Letter IEDI n. 1295 “World trade and Chinese subsidies.”

In this edition, we emphasize the increase in import penetration in the Brazilian market for industrial products, highlighting the contribution of China. In addition, we also resume the discussion on trade patterns between Brazil and China, but now from the perspective of the technological intensity of industrial sectors, complementing the analysis of Letter n. 1292.

In summary, Brazil's international trade with China follows a "center-periphery" pattern, where Brazil predominantly exports basic products with a low degree of industrial processing and imports manufactured products of greater technological intensity, exacerbating the country's trajectory of industrial regression.

That is, China deepens our dependence on commodity exports. It is worth remembering an UNCTAD study, discussed in Letter IEDI n. 1101, which argues that the international experience indicates that developing countries dependent on commodities remain stuck for long periods in a situation of low GDP growth and weak socioeconomic development, macroeconomic instability, high exposure to shocks and to the volatility of international commodity prices, among other problems.

In recent decades, China has been gaining market share in Brazil's import basket at a fast pace. Between 2000 and 2023, China's share of Brazilian imports of manufacturing goods increased tenfold, from 2.5% to 25%. Growth was even more significant in some more technology-intensive sectors, such as computer equipment, electronic products and electrical equipment, as well as in low-tech sectors, such as textiles, apparel and clothing.

In this study, prepared by economist Paulo Morceiro for the IEDI, we calculated, among other indicators, the import penetration coefficient in the recent period to assess imports' weight in domestic consumption and the contribution of China to the increase in the coefficient. 

It should be noted that the import penetration coefficient measures the weight of imports in Brazilian domestic consumption, or rather, in the country's so-called "apparent consumption," which is the sum of domestic industrial production plus imports minus exports.

The main findings are as follows.

Between 2010 and 2023, the import penetration coefficient of Brazil's manufacturing increased from 15.8% to 23.2%, that is, +7.4 percentage points (pp). It is worth noting that this happened despite a 58% devaluation of our real effective exchange rate. 

In addition to being intense, the increase in import penetration was also widespread among industrial branches. All 24 of them registered rises, with the printing and reproduction branch coming close to stability, with its coefficient going from 2.66% to 2.72%. 

Between 2010 and 2023, import penetration advanced the most in the high and medium-high technology intensity industry, whose indicator rose by almost 50% in the period, from 25.6% to 39.2% (+13.6 p.p.). Six of the seven high and medium-high technology branches showed double-digit increases.

China alone was responsible for 42% of the high in the import penetration coefficient of manufacturing goods in Brazil between 2010 and 2023. In the last year, Chinese industrial products accounted for ¼ of the country's import penetration.

China's contribution was significant in most industrial sectors, exceeding 50% in more than 1/3 of them. All the increase in the coefficient of textiles, printing and reproduction, computers and electronics, and machinery and equipment is due exclusively to China.

In the high and medium-high technology sectors, the contribution was not above 30% only in pharmaceuticals and in other transport equipment, segments where Europe and the US produce more sophisticated goods and are still more competitive than China in international trade.

For some branches, the post-pandemic period stands out as an important moment of increase in the penetration coefficient of Chinese products. These are the cases, for example, of: leather and footwear and chemicals, for which the years 2019–2023 account for half of the rise in the coefficient for the full period; vehicles and computer, electronic and optical products, with 60% of total increase in 2019–2023; and notably metallurgy, which includes the steel industry, for which 90% of the increase in the penetration of Chinese imports occurred after the COVID-19 pandemic.

In summary, imported products continued to advance in the domestic market in the last 15 years, reflecting periods of exchange rate appreciation, as in 2004–2012, but also technological lags, low productivity and deterioration of the competitiveness conditions of the Brazilian industry, while in other countries, such as China, they reinforced actions to promote industrial development, as discussed in Letters IEDI n. 827 of Nov 26, 2018, n. 961 of Nov 29, 2019, n. 1088 of Jun 18, 2021, n. 1094 of July 16, 2021 and n.  1171 of Nov 18, 2022, among others.

It is no coincidence that China played a major role in the rise in the import penetration coefficient of manufacturing goods in Brazil, especially in branches of greater technological intensity. To this, we must add the conclusion of other studies carried out by the IEDI, mentioned initially, which showed that China has also made inroads into important foreign markets for Brazilian industrial output. 

Pari passu to these trajectories, we observed Brazil's loss of economic complexity, compromising our conditions for economic growth and job creation, as argued by professors Ricardo Hausmann of Harvard University and César Hidalgo of MIT, who developed the approach to economic complexity. 

Thus, it is evident that there is an urgent need to restore national competitiveness in a structural way, through an adequate tax reform, improvement of our infrastructure and reduction of the cost of capital for productive investment, as well as other factors long defended by the IEDI, as can be seen in the document “Industry and Strategy for Socioeconomic Development in Brazil.”

Accelerating innovation and the technological updating of the national industry, towards sustainability and digitalization, is also vital for us to inaugurate a new phase of higher productivity, the ultimate determinant of long-term competitiveness. A good implementation of NIB —Nova Indústria Brasil (New Industry of Brazil)— is a path to be systematically pursued and improved.

Last but not least, Brazil must be aware of unfair international trade practices, improve its trade defense policy and timely adopt anti-dumping measures whenever necessary.

The full text is available in Portuguese