1. How the Rise of China Affects the Brazilian Manufacturing Industry? Research Project ESRC/UEA/CEBRAP Alexandre de Freitas Barbosa Professor de Economic History and Development Economics – University of São Paulo, Brazil Pretoria, July 27th 2012

2. Presentation Structure  Research and Methodology  The Deindustrialization Debate in Brazil  Brazilian Manufacturing Industry in the Years 2000  Trade Relations: Brazil and China  The Chinese Competitive Pressure: General and Sectoral Data  Main Findings  Brazil/China Geopolitical Relations

3.  Research period: june 2010 to may 2011;  Support: ESRC, conducted at CEBRAP and University of East Anglia;  Research Team: Rhys Jenkins (general coordinator), Alexandre de Freitas Barbosa (research coordinator in Brazil); Gustavo Gomes de Freitas e Ângela Cristina Tepassê (researchers);  Objectives: evaluate the impacts of Chinese import penetration on the Brazilian industrial structure; and whether Brazilian exports to the Latin American region have been displaced by Chinese competition;  Dissemination of the results: universities, government institutions, business and labor representatives. The Research

4.  Trade Data: Aliceweb/MDIC, from 1996 to 2010;  Industrial Output and Employment Data (PIA/IBGE), up to 2007;  methodological approach: conversion of the trade data into industrial data’s classification at a disaggregated level: total of 104 subsectors.  historical series with the following indexes:  1. employment;  2. productivity (industrial value added/total workers);  3. coefficient of world import penetration (M/M-X+IO).  4. coefficient of Chinese import penetration ((MChina/(M-X+IO)).  5. industrial density (IVA/IO);  6. mark-up (net industrial revenues/operational costs + labour costs)  7. average labour costs;  disaggregated analysis. The Methodology

5. The Deindustrialization Thesis  Measure of deindustrialization: falling share of manufacturing output on total GDP;  Another evidence: increasing primarization of Brazilian exports;  China contributes to both outcomes;  Overvalued exchange rate makes the situation even worse;  Recommended policies = tougher attitude on China (anti-dumping measures, safeguards and rising tariffs) and export diversification.

6. Falling Share of Manufacturing on the GDP and Overvaluing Effective Real Exchange-Rate

7. Basic and Manufacturing Goods’ Exports

8. The Ongoin Debate  Relative deindustrialization: according to other developing economies, poor macroeconomic record and weakening of important productive chains; But it does not mean an inexorable process leading to a loss of industrial productive capacity;  Precocious deindustrialization, compared to the developed countries’ path.  No deindustrialization in terms of jobs, production and investment. No internal shift towards diminishing participation of higher value-added and technological intensity sectors both in output and exports;  New interaction between manufacturing industrial and Brazilian economy: different from the 30s to 80s (manufacturing output carried over other sectors) and the 90s (rising industrial productivity with low output growth).  If Brazil seeks to resume growth and increase its investment rate, manufacturing industry should play a decisive role, facing the China challenge which goes beyond the exchange rate.

9. An Alternative View  Brazilian industrialization process led to an authentic industrial change;  It may be a variety of “dependent capitalism”, but it has managed to develop its own economic cycles, due to the size and potential of its internal market and the power of its economic institutions;  Deindustrialization did not emerge during the competitive pressure of the 90s. It is a singular case in Latin America;  During the period 2004-2008, the investment rate increased, the industrial output and employment rose and productivity levels remained at a very low level.  Commodity exports boomed; Manufacturing exports also grew but at a much slower pace.  The situation changed significantly after 2011. Structural or conjunctural forces?

10. Manufacturing Industry Main Indicators (1996=100)

11. Performance Indicators for Sectors of Manufacturing Industry by Production Factor Intensity – Annual Average, 2003-2007 (in %) INDICATORS Science- Based Natural Resources- Based Differentiated Scale- Intensive Labour- Intensive IVA 0,65% 2,97%11,35%4,22%6,49% EMPLOYMENT 3,56% 5,34%7,74%4,36%4,22% EXPORT_DEST_W 3,04% 1,60%2,03%0,87%-4,70% EXPORT_DEST_CH 20,91% 3,27%-13,16%-22,03%-1,71% IMPORT_ORIG_W 3,44% 3,71%13,07%6,36%11,44% IMPORT_ORIG_CH 16,44% -0,52%55,69%36,94%42,82%

12. China and Latin America: Decisive Factors Influencing Patterns of Trade in the Region  Firstly, the “commodity lottery”, which privileges countries that possess a broad supply of certain raw materials that China is in need of.  Second, the existence of a relation of strong trade dependence with the United States, especially if this leads to a specialization that competes with China for the U.S. market.  Third, the level of diversification of domestic industrial output. This aspect is relevant given that the more complex the industrial base is, the greater will be the Chinese competitive pressure on the whole of the productive system.

13. Brazil/China Evolving Pattern of Trade  Between 1996 and 2010, Brazilian exports rose 4 times, whereas the country exports to China were multiplied by 27;  In 2008, Brazil had a deficit with China, which was reversed in 2009 due to the stagnation of its economy. In 2010, even with a fast growing GDP Brazil maintaned a surplus, thanks to the diversification of commodity exports (thais is, oil);  However, the manufacturing trade deficits with China peaked in 2010, reaching US$ 20 billions, 2/3 of the country’s world deficit in this sector.  82% of Brazilian manufacturing trade deficit with China is made out of capital and intermediate goods;  Brazilian manufacturing exports are mainly commodity exports; High-tech Brazilian companies access the Chinese market through investments;

14. Brazilian Trade with the World and China

15. Brazilian Manufacutring Trade with the World and China

16. China’s Share in Brazilian Exports and Imports: Total and Manufacturing Industry

17. Brazilian Trade Deficit with China by Category of Use

18. China’s Share in Brazilian Manufacturing Imports by Category of Use

19. Manufacturing Subsectors with the Largest Trade Deficits with China (in US$ millions) Manufacturing industry sets1996200420082010 Prod. of tv, radio, dvd and dvr sets-126-368-1.236-2.151 Prod. of machines and equipments of electronic systems for data processing-21-221-1.768-2.149 Prod. of basic electronic material-12-307-1.114-1.607 Prod. of radio and tv aparels and equipment-24-310-1.906-1.497 Prod. of machines and equipments of general use4-44-628-1.309 Steel72363-732-1.223 Prod. of different goods-143-116-558-751 Prod. of organic chemical goods-66-193-752-738 Prod. of electric engines, generators and transformers-23-90-491-668 Prod. of optical, photografic and movie instruments-40-198-876-580 Prod. of house appliances-34-37-339-485 Prod. of inorganic chemical goods-8-64-743-406

20. Coefficients of Import Penetration in Brazil: World and Chinese

21. Coefficients of Import Penetration by – Chinese and World

22. Coefficients of Chinese Import Penetration by Subsectors SECTOR2007 Prod. of office machines62,94 Prod. of optical, photografic and movie instruments31,15 Prod. of travelling articles and leather goods18,31 Prod. of batteries and electrical acumulators17,81 Prod. of lamps and lighting equipment15,50 Prod. of tv, radio, dvd and dvr sets14,62 Prod. of different goods12,82 Prod. of machines and equipments of electronic systems for data processing12,77 Prod. of basic eletronic material12,70 Prod. of radio and tv aparels and equipment12,47 Prod. of weaving goods10,19 Prod. of electric engines, generators and transformers8,56 Prod. of syntetic fiber and knitting7,37 Prod. of watches and cronometers6,91 Knitting and weaving goods4,84 Prod. of house appliances4,59 Prod. of machine tools4,02 Prod. of machines and equipments of general use3,53 Prod. of garment accessories and professional security clothes3,45 Prod. of metal goods and hand tools3,44 Prod. of other equipment and electric aparels3,40 Total Manufacturing3,36

23. Brazilian Trade Deficit in Commodities and Manufacturing Goods by Region (in US$ billions)

24. Brazil and China’s Shares on Industrial Imports of Some Latin American Countries

25. Impacts on Industrial Employment 1996-20012001-20042004-2007 Loss of jobs due to Chinese imports -6.312-9.168-32.726 Overall net jobs 320.111867.210767.703 Loss/gain of jobs due to exports to China 8.12112.813-4.870 Chinese Import Penetration Coefficient Other Strategic Variables not Directly Related to China Employmenta growth of 1% in the Chinese import penetration coefficient brings about a fall of 0,02% in the overal industrial employment. a growth of 1% in the industrial value added leads to an expansion of 0,59% in the industrial employment. Average Wages a growth of in the Chinese import penetration coefficient brings about a fall of 0,01% in the average wage of manufacturing industry. a growth of 1% in productivity allows for na increase of the average industrial by 0,47%.

26. Main Findings  The Chinese presence in the Brazilian internal market has grown substantially. It is still low in aggregated terms, but high in some sectors;  Brazil increasingly depends on the Chinese supply of industrial goods, usually the ones located at the beginning of the productive chain (capital and intermediate goods).  Very differentiated impacts for industrial sectors does not allow extreme views such as “China deindustrializes Brazil”, or “China modernizes Brazilian industry”;  There is, indeed, a trend towards greater specialization and less density of Brazilian industrial structure; However, the game is not over yet!  Up to the moment, the displacement of Brazilian domestic production is concentrated in some sectors, even though it might have spread out during 2011;  Need of a coherent set of macroeconomic, industrial and technological policies;

27. China and Brasil: A Complex Relationship  China sees Brazil as strategic within the Latin American region: large internal market and a basis for exports, technological power, geopolitical status (BRICS) and regional leadership;  Brazil: larger commodities’ supplier in the region;  Brasil: only nation with a diversified and integrated manufacturing industry with strong presence in the regional markets;  Brasil invests in China before it goes to Brazil;  The country with more bargaining power in the region, needing to use it more coherently.  Brazil loses market to China in Latin America, but it is the only alternative engine of growth for the region, capable of reducing the China dependency;

28. Brasil/China Negotiations  From the strategic partnership to a pragmatic relationship;  No overlapping of bilateral and multilateral negotiations;  Bilateral arena: trade defense plus productive and technological partnerships aiming at attracting Chinese FDI in high technology sectors with requirements of local content (State-State negotiations important);  Political negotiation: adding more value to exported commodities;  Multilateral arena: consensus on issues at IMF, World Bank, WTO; and some differences on G-20 and Climate Change negotiations;  Regional arena: need to improve the linkages among Latin American productive systems; That depends mostly on Brazil!