Letter IEDI n. 900–Chinese threat and Brazilian position in foreign sales of dynamic products
Since 2009, China has become the main destination market for Brazilian exports, as well as sharing with the US the position of the main origin of our imports. However, Chinese economic growth and industrial competitiveness also affect the Brazilian trade balance through indirect channels.
One of them is the "competition effect," associated with the consolidation of China as a producer and exporter of manufactures, which negatively affected the Brazilian industry through both the torrent of Chinese imports into our domestic market and the growth of their exports to our three main destination markets — Mercosur (Argentina, Uruguay, Paraguay), ALADI (Bolivia, Chile, Colombia, Ecuador, Peru, Venezuela) and NAFTA (United States, Canada and Mexico)
This Letter IEDI takes up the issue of Chinese competition with Brazilian exports in our three main external markets for manufactured goods, a topic we previously dealt with in Letters nos. 590 and 769. Now, information for the year 2017 (the most recent in the COMTRADE database) has been included and compared to data for 2012 and 2015.
The overall result is positive, with Brazil expanding to more dynamic product markets and the level of Chinese threat falling. This is undoubtedly associated with the shrinking of our domestic market, the permanence of the exchange rate at a level more favorable to exports, as well as the partial validity of Reintegra, an instrument for refunding exporters for taxes paid but not reimbursed at the time of exporting. The greater dynamism of the world economy and trade were also essential factors.
The study classified into four groups, according to dynamism, the products exported by China and Brazil to the three regions in question: (i) Opportunity Grabbed —products with dynamic demand in the importing country and that also represent an increasing portion of Brazil's or China's exports; (ii) Lost Opportunity —products with dynamic demand in the importing country, but losing share in Brazilian or Chinese exports; (iii) Product in Decline —with falling demand, but presenting a rise as a share of Brazil's or China's exports; (iv) Product in Recession —those with falling demand and participation in total exports of Brazil or China.
Then, the threat of Chinese exports to Brazilian exports was calculated and grouped into three categories: (i) Direct Threat —when, for a given product, there is an increase in China's market share in a given country, at the same time as Brazil sees a reduction of its market share in the same country; (ii) Indirect Threat —the increase in China's market share is greater than the rise in Brazil's for the same product and same country; (iii) No Threat —products not under threat by Chinese exports.
Some of the results obtained are summarized below:
• The dynamism of Brazilian exports (+13.7%) to Mercosur, ALADI and NAFTA was higher than China's (+4.5%) between 2015 and 2017, reversing the previous scenario for 2012–2015 (-17% and +14%, respectively).
• The most dynamic products, classified as Opportunity Grabbed, went from 25% in 2012 to 40% of Brazilian exports in 2017 (53% in the case of China). The vast majority of these products —such as automobiles, basic metallurgy, other transport equipment, machinery and equipment, etc.— do not face any threat from Chinese exports (e.g. passenger cars, propellers, semi-finished iron products, etc.). Others are under Indirect Threat, like motorcycles, doors, radio broadcast appliances.
• Products classified as Lost Opportunities, almost all of which suffer Direct Threat from Chinese exports, had their share of total Brazilian shipments reduced from 25% in 2012 to 21% in 2015 and 15% in 2017. They mainly comprise products from sectors like automotive, machinery and equipment, chemicals, and rubber and plastics —for example, passenger car parts and accessories, engine parts, compressors, refrigeration equipment, pig iron, coffee extracts and essences, etc.
• Products in Decline dropped from 33% of the Brazilian export basket to Mercosur, ALADI and NAFTA in 2012, to 18% in 2015 and 15% in 2017. In this group, there are both products under China's Indirect Threat —such as new rubber tires, spinning and ignition sets and footwear with rubber soles— but also Not-threatened products like aluminum oxide, road tractors for semi-trailers and oil.
• Products in Recession, in contrast, rose as a share of Brazil's export basket for the regions under analysis: 17% in 2012, 26% in 2015 and 29% in 2017. Here, there is a concentration of products of the sectors: petroleum, other transportation equipment and chemical products, mainly under Direct Chinese Threat (bituminous petroleum, airplanes and chemical wood pulp) and Not under Threat (fertilizers and paperboard).
The redirection of the composition of Brazilian exports toward a greater participation of "Opportunity Grabbed products", which are under lower Chinese threat, and a reduction of the share of "Lost Opportunity products", is a very favorable aspect of the period 2015-2017, when there was an increase in sales to Mercosur, ALADI and NAFTA countries, showing that we are better positioned in dynamic markets.
On the other hand, the increase in the number of products classified as “Product in Recession” is worrying. A specialization in this type of product, which has lower relative demand, may in the future jeopardize the dynamism of Brazilian exports to the analyzed regions.
Regionally, in Mercosur, not only a Direct Threat by China was not observed in 2017 but also the Indirect Threat fell in relation to 2015 and 2012. On the other hand, 69% of exports under Direct Threat had NAFTA as their destination. In the case of ALADI, indirect Threat declined, but Direct Threat increased in the period analyzed. This reaffirms the importance of Mercosur to Brazil's foreign trade.
These results may contribute to the design of a foreign trade policy aimed at: (i) consolidating Brazil's position in products classified as Opportunities Grabbed; (ii) identifying products currently in the group of Lost Opportunities that are under lower threat from Chinese exports and take action to increase their share; (iii) not prioritizing products classified in the categories Product in Decline and in Recession, especially those under Chinese threat.