How the Rise of China Affects the Brazilian Manufacturing Industry?

Research Project ESRC/UEA/CEBRAP

Alexandre de Freitas BarbosaProfessor de Economic History and Development Economics –

University of São Paulo, Brazil

Pretoria, July 27th 2012

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

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

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

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.

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

Basic and Manufacturing Goods’ Exports

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.

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?

Manufacturing Industry Main Indicators (1996=100)

Performance Indicators for Sectors of Manufacturing Industry by Production Factor Intensity – Annual Average, 2003-2007 (in %)

INDICATORSScience-Based

Natural Resources-

BasedDifferentiated

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%

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.

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;

Brazilian Trade with the World and China

Brazilian Manufacutring Trade with the World and China

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

Brazilian Trade Deficit with China by Category of Use

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

Manufacturing Subsectors with the Largest Trade Deficits with China (in US$ millions)

Manufacturing industry sets 1996 2004 2008 2010

Prod. of tv, radio, dvd and dvr sets -126 -368 -1.236 -2.151Prod. 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 use 4 -44 -628 -1.309

Steel 72 363 -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

Coefficients of Import Penetration in Brazil: World and Chinese

Coefficients of Import Penetration by – Chinese and World

1,250,18

3,12

0,290,94

2,15

0,15

10,16

0,83

2,9

Science-Based Resource-Based Differentiated Scale-Intensive Labour-Intensive

2003 200733,4

5,3

40,83

11,878,1

35,75

5,11

37,01

12,379,27

2003 2007

Coefficients of Chinese Import Penetration by Subsectors

SECTOR 2007 Prod. of office machines 62,94 Prod. of optical, photografic and movie instruments 31,15 Prod. of travelling articles and leather goods 18,31 Prod. of batteries and electrical acumulators 17,81 Prod. of lamps and lighting equipment 15,50

Prod. of tv, radio, dvd and dvr sets 14,62 Prod. of different goods 12,82 Prod. of machines and equipments of electronic systems for data processing 12,77 Prod. of basic eletronic material 12,70Prod. of radio and tv aparels and equipment 12,47 Prod. of weaving goods 10,19 Prod. of electric engines, generators and transformers 8,56 Prod. of syntetic fiber and knitting 7,37 Prod. of watches and cronometers 6,91 Knitting and weaving goods 4,84 Prod. of house appliances 4,59 Prod. of machine tools 4,02 Prod. of machines and equipments of general use 3,53 Prod. of garment accessories and professional security clothes 3,45 Prod. of metal goods and hand tools 3,44Prod. of other equipment and electric aparels 3,40Total Manufacturing 3,36

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

Commodities 2005 2005 2010 2010 World 11.278.919 100,0 50.003.063 100,0China 4.506.918 40,0 25.232.638 50,5EU 8.728.442 77,4 16.106.062 32,2Latin America -1.705.531 -15,1 486.833 1,0Sub-Saharan Africa -2.623.700 -23,3 (6.211.189) -12,4USA 1.168.743 10,4 4.050.729 8,1Others 1.204.048 10,7 10.337.990 20,7Manufacturing 2005 2005 2010 2010 World 31.322.744 100,0 -34.070.149 100,0China -3.029.528 -9,7 -20.049.906 58,8EU -64.164 -0,2 -11.575.496 34,0Latin America 17.472.333 55,8 13.803.198 -40,5Sub-Saharan Africa 3.492.393 11,1 3.781.105 -11,1USA 8.766.430 28,0 -12.041.788 35,3Others 4.685.280 15,0 -7.987.262 23,4

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

ARGENTINA

0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%

Sh

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Ind

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Imp

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0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%

Sh

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Ind

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Imp

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MEXICO

0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%18.0%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010S

hare

in

In

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Imp

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VENEZUELA

0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%

Sh

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of

Ind

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Im

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Brazil China

Impacts on Industrial Employment

1996-2001 2001-2004 2004-2007

Loss of jobs due to Chinese imports -6.312 -9.168 -32.726Overall net jobs 320.111 867.210 767.703Loss/gain of jobs due to exports to China 8.121 12.813 -4.870

Chinese Import Penetration Coefficient

Other Strategic Variables not Directly Related to China

Employment a 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% .

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;

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;

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!