Double Handshake

You may remember my sneering at the phrase describing Latin America as “the US’s backyard” a year ago. Well, now, courtesy of a recent Bloomberg article, there’s now some competition. The story is officially about Hu Jintao’s current visit to Brazil, but it’s really a News Story that we shall undoubtedly come to loathe in the coming years: BRIC-clashes. The story has some truly venomous interview quotes describing the high-level meeting as “sleeping with the enemy” and comparing China’s trade with Brazil to Portuguese colonialism in the 17th and 18th centuries. Most importantly, we get lots of territorializing.

When Brazilian President Luiz Inacio Lula da Silva hosts his Chinese counterpart today, he will welcome a leader whose economy is growing faster than his own — and whose exporters are outstripping Brazil in its own backyard.

So, Latin America is Brazil’s backyard. Well, that’s a nice twist on the usual “US’s backyard” at least. Then again, if  you’re being “outstripped” in your own backyard how long can it really stay yours? I wondered. This was cleared up later in the article:

“The world is China’s backyard and Brazilians shouldn’t be so hyped up about it,” Jim O’Neill, London-based chief global economist for Goldman Sachs Group Inc, said in an interview. “There’s a natural symbiosis in trade between the two countries despite Brazil’s legitimate desire to be a manufacturing powerhouse.”

I read this. Then, I read it again. It still doesn’t make total sense to me. I’m not sure if this is a case of sloppy editing, if he was quoted out of context or if Jim O’Neil (who coined the term BRIC in 2001, the article points out) was just speaking bombastically without meaning. I’m guessing O’Neil was arguing that since China exports more goods to other Latin American countries, Brazil “shouldn’t be so hyped about it” because it is no different than any other country whose exporters are being undermined by the Chinese.

Trouble is, the paragraphs leading up to the quote are about China-Brazil trade and investment. Also, the “symbiosis” second half of the quote seems to be about the dynamic only between the two countries – ie. Brazil produces oil and China consumes it, etc. This reading makes sense if you remove the bit about “the world is China’s backyard” first. In other words, “Don’t get worked up Brazil, in fact your trade relationship with China is largely symbiotic.”

But, what about the message: “Relax, Brazil, because the world is China’s backyard and you have a symbiotic trade relationship with it,” makes any sense – logically, geographically or economically? What am I missing?

The China-Brazil trade connection has made headlines this past month as China became the South American country’s top trade partner for the month for April, and the two countries said they were looking into making some trade deals with yuan and reals instead of US dollars. Then, Brazilian President Luiz Inacio Lula da Silva visited Beijing it what was being billed as a meeting between players in the “new economic order.” So, did meeting live up to expectations? Not quite. A reality check on the flurry of China-Brazilian news comes our way from the Global Post (via the Huffington Post) Wednesday.

Seth Kugal notes that though trade volumes are indeed increasing, the variety is not. Raw commodities like iron ore and soya are still far and away the most important facet of the relationship. And this doesn’t look to change anytime soon, despite Lula’s best efforts. A major priority for Lula on his recent trip to Beijing was to diversify his country’s exports beyond raw resources.

Lula’s visit to China was in part portrayed here as a meeting of giants. “No economic discussion is possible that does not take into account China, Brazil, India and Russia,” he boasted while there, and upon his return declared it the most successful of his foreign trips. But all signs pointed to the visit not meeting expectations, at least in the short term. It broke little new ground and largely saw the signing of deals that had been virtually concluded, most notably a $10 billion loan from China to the Brazilian state oil company, Petrobras, and an agreement to allow Brazilian chicken into China.

Other efforts failed: pork exports are still halted, and Brazilian textile industry leaders were unable to squeeze any voluntary reductions in exports out of the Chinese, whose imports have flooded the Brazilian market this year. Efforts to jump-start a stalled 45 plane contract between Embraer and the Chinese were unsuccessful. The trip was shortened to three from five days, and several events were canceled.

“Lula comes home empty-handed from Beijing,” according to a Folha de Sao Paulo newspaper editorial, “without having advanced the objected to diversify bilateral trade.”

And his thorn in Lula’s side raises a very important point for most Latin American economies’ trade with China: What can they offer China in addition to natural resources? Given China’s manufacturing competitiveness, is Latin America doomed to the same role it played for the Spanish, British and US throughout history, to export their resources (and lion’s share of the profits) to be processed abroad?

Brazilian President Luiz Inácio Lula da Silva arrives in Beijing today for a three-day visit that will include face time with Chinese President Hu Jintao. A number of trade issues are expected to be discussed ranging from oil contracts to biofuel technology. China overtook the US as Brazil’s top trading partner in April. Brazilian soya products and iron ore constitute a major portion of the trade relationship. This week, Lula is expected to push to expand this, seeking to open the Chinese market to more Brazilian meat exports and negotiate the sale of Brazilian-manufactured Embraer aircraft as well.

Oil deals, however, will likely see most of the limelight. Brazil’s oil industry has found itself in a unique position: having massive reserves (much of it underwater) but without the resources to exploit it. Petrobras, the country’s state-owned oil giant, said it wants to spend US$174 billion over the next five years to become one of the world’s major oil producers, but it lacks the funding. And this is where China – a country with massive energy needs and flush with cash – can help. From Bloomberg:

If Lula’s plans pan out, he’ll return with a $10 billion credit for Petroleo Brasileiro SA, an $800 million loan for the state development bank, and financing for ports and waterways. He expects he’ll be able to open China to Brazilian poultry, (Brazilian Trade Secretary Welber) Barral said.

For the loans, Brazil, in turn, will ensure China a steady supply of oil (as much as 200,000 barrels/day) for the foreseeable future. This is one of the reasons some people describe China’s trade relationship with Brazil’s as “more complementary than with any other Latin American country.”

The Wall Street Journal’s preview of Lula’s Beijing visit raises another fascinating point about the Brazil-China oil dynamic: how state-owned enterprises are changing the world’s energy landscape.

“The U.S. has a problem,” Sergio Gabrielli, chief executive of Petrobras, said recently when asked about the loan talks. “There isn’t someone in the U.S. government that we can sit down with and have the kinds of discussions we’re having with the Chinese.”

Mr. Gabrielli was referring to the fact that Chinese government banks are willing to extend huge foreign loans to further China’s long-term energy-security goals: ensuring diverse global supplies and winning entree into competitive regions for its oil companies. A string of recent oil loans to Russia, Kazakhstan and others has pushed China’s total commitments to more than $45 billion.

Such direct government lending is an increasingly powerful tool in an era when three-quarters of the world’s oil reserves are in the hands of state-controlled oil companies. By dealing directly with governments in oil-supplier nations, China can use its wealth to reduce the role of big oil companies — the traditional intermediaries between oil producers and oil consumers.

“What you are seeing is the new geopolitics of oil, where deals start from a political understanding and cut out the international oil companies,” says Roger Diwan, a partner at PFC Energy, a Houston-based consultancy.

In fairness, the article goes on to describe how privately held international oil companies still have technological and managerial advantages over SOEs. I for one am not ready to declare the privately held oil company extinct. In addition, many SOEs everywhere operate under more free-market capitalism conditions than is popularly believed.

Still, the above WSJ selection rings true to me; how can US oil companies like Exxon and Shell compete with the financial resources, political influence and sheer magnitude of Sinopec and PetroChina, and their de facto trade representative Hu Jintao?

Image: Wall Street Journal