Brazilian exports could sustain $10bn hit from US-China trade truce
Latin American country had been a big beneficiary of Sino-American economic conflict
Minutes after the US and China revealed their 86-page trade truce this week, Brazilian diplomats on three continents scrambled to parse the agreement and answer a pressing question: were the good times over?
Since the beginning of the US-Sino trade hostilities, the Latin American nation has surfed a surge of demand from Beijing for agricultural produce, particularly soyabeans, which are used to fatten Chinese livestock.
Now, however, the pledge by China, the dominant importer of the oilseed, to buy $200bn in US goods and services over the next two years — one of several concessions to Washington in their “phase one” trade deal — has stoked concerns that demand for Brazilian produce could collapse, with some analysts forecasting a $10bn hit to exports and a fourfold increase in excess stocks.
“If — again, if — the volumes agreed to in the deal do indeed come to fruition, yes, it will have an effect on Brazil’s exports. The second half of 2020 could be a major problem for Brazil,” said Pedro Dejneka, partner at MD Commodities.
“If the US and China live up to the deal and China likely buys heavy volumes of US beans, it could be Brazil that is left standing in this game of musical chairs, with potentially more than 10m metric tonnes of beans left over by year end.”
The sentiment was echoed by Marcos Casarin, chief Latam economist at Oxford Economics, who said a $10bn surge in Brazilian exports to China last year could be in jeopardy.
“I think it’s safe we assume that these are agriculture imports. Assuming China reduces imports from Brazil by the entire $10bn — which may be a worst-case scenario — then we could see a negative shock of 4 per cent to Brazil’s [total] exports.”
With a combined population of more than 1.6bn, the trade relationship between Brazil and China is among the world’s most important. China is Brazil’s largest trading partner, with Beijing reliant on the Latin American country for the agricultural goods, iron ore and crude oil to fuel its economy.
Despite analysts’ fears, Brazilian officials have adopted a more sanguine attitude to the deal brokered in Washington, acknowledging that while it was likely to face stiffer competition, the US-China trade war had not been expected to last for ever.
“We still have to keep in mind the impact on the main products exported by Brazil depends not only on the volume of Chinese imports, but also on the ability of the US to effectively supply them,” said Flávio Bettarello, deputy secretary of commerce and international relations at the Ministry of Agriculture.
“Eventually, Brazil may occupy third markets that will no longer be served by US products redirected to China,” he added.
Welber Barral, a former foreign trade secretary, agreed, saying Brazil will now “sell to other destinations at a little lower price”, without the high demand from China to help support prices.
“It will not change production at all. Last year Brazil exported at a premium and the US exported to other destinations with more logistical difficulties and at a lower price,” he said.
According to MD Commodities, soyabean exports to China accounted for 83 per cent of Brazil’s total soyabean exports in 2018, up from 74 per cent in 2016. By contrast, Spain and Thailand, respectively the second- and third-largest buyers of Brazilian soyabeans, accounted for less than 3 per cent each.
Brazil is expected in the coming months to overtake the US as the world’s largest soyabean producer thanks to the impact that extreme weather and the trade war have had on American agriculture. Brazil’s soya crop is expected to reach 120m tonnes, up from less than 100m tonnes in 2015.
The agricultural lobby, particularly Brazil’s soyabean farmers, also remains a powerful political force and a crucial part of President Jair Bolsonaro’s electoral base.
More broadly, Brazilian officials hope the US-China deal can aid the nation by soothing the nerves of international investors and traders, who had shied away from emerging markets like Brazil because of global trade tensions.
“The agreement provides greater stability, which, even indirectly, favours Brazil. We expect a reduction in volatility and an improvement in the business environment in the coming months,” said Mr Bettarello.
“From a systemic point of view, we see the deal with good eyes, as a hostile climate between two of the world's leading players undermines the predictability of international trade and is undesirable for the sustainable growth of the world economy.”