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Cablegate: China's Business Interests in Brazil Receive Mixed

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FM AMCONSUL SAO PAULO
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INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 3345
RUEHBR/AMEMBASSY BRASILIA PRIORITY 9148
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C O N F I D E N T I A L SECTION 01 OF 04 SAO PAULO 000130

SIPDIS

SIPDIS

STATE FOR WHA/BSC,WHA/PDA AND INL
NSC FOR TOMASULO
SOUTHCOM ALSO FOR POLAD
USAID FOR LAC/AA

E.O. 12958: DECL: 03/14/2018
TAGS: ETRD PREL EINV ECON CH BR
SUBJECT: CHINA'S BUSINESS INTERESTS IN BRAZIL RECEIVE MIXED
REVIEWS

REF: 07 SAO PAULO 718

Classified By: Charge de Affairs James Story; reasons 1.4 (b) and (d).

Summary
-------

1. (C) Although bilateral trade between China and Brazil
continues to grow, there are increasing frustrations on both
sides regarding access to each others' markets. For
Brazilian business, China represents the largest
opportunities for growth, but also the greatest economic
risks, and many point to the first ever trade deficit with
China, (USD 1.9 billion in 2007), as proof of these risks.
Clearly, China plays a much more important economic role for
Brazil than Brazil does for China. A recent conference
regarding China-Brazil relations and subsequent conversations
with Chinese business interests suggest an increasing
wariness of this reality and of the PRC in general.
Brazilian contacts state that China is not keeping its
promise to import more from Brazil, and may in fact be making
trade more difficult. In turn, Chinese businessmen in Brazil
complain that corruption and bureaucracy are preventing
greater investment in Brazil. To understand more fully the
important and growing bilateral trade relationship, the
Brazilian business and academic community is paying greater
attention to the PRC's foreign policy and international trade
movements. End Summary.

Bilateral Trade Expanding
-------------------------

2. (U) Trade relations between Brazil and China began to
intensify in 2001 when China began seeking Brazil's natural
resources to support its expanding economy and expanded
rapidly in 2004 when Brazil identified China as a market
economy for the first time. The PRC then quickly became an
important player for both Brazilian exports and imports;
providing Brazil's second highest source of imports and third
largest export destination last year. According to the
Federation of Industries of Sao Paulo (FIESP), Brazilian
exports to China rose from USD 1.9 billion in 2001 to USD
10.8 billion last year, and Chinese imports in Brazil went
from USD 1.3 billion to USD 12.6 billion during the same
period. While Brazilian exports to China continue to grow
rapidly, Chinese exports to Brazil are growing at an even
faster rate. Brazilian exports to China were up 28 percent
from 2006; however, imports from China were up 57 percent.
Until last year, Brazil had maintained a trade surplus
(although declining in recent years) with China. In 2007,
Brazil's appreciating currency combined with growing domestic
consumption reversed the trade surplus of USD 500 million in
2006 to a deficit of USD 1.9 billion in 2007.

Trade Flows Concentrated
------------------------

3. (SBU) Carlos Cavalcanti, FIESP's Senior Director for
International Affairs, told Econoff that FIESP classifies the
Brazil-China relationship as one of "master and colony"
because Brazil exports mostly commodity products while China
exports manufactured goods. Although China has become
Brazil's second and fastest growing export market, 75 percent
of these exports are concentrated in just five commodities:
soy beans, iron ore, steel, soy oil, and wood. Similarly, 97
percent of Chinese imports in Brazil are manufactured
products, mainly capital goods, machinery and equipment, and

SAO PAULO 00000130 002.2 OF 004


other manufactured household goods. Cavalcanti indicated
that in the long run, FIESP and other business organizations
would need to work closely with the GOB to create a greater
focus on exports of finished goods instead of just
commodities.

Chinese Threat...Or Is It?
-------------------------

4. (SBU) Octavio de Barros, Director of Economic Research at
Bradesco Bank, told Econoffs that China represents both the
biggest opportunities and risks for Brazilian business.
China offers an untapped resource of consumers and investment
opportunities; however, cheaper Chinese labor and an
artificially low currency make Chinese goods less expensive
than their Brazilian equivalents. Brazilian industries in
recent years had faced stiff Chinese competition. Julia
Silveira, an economist with the Federation of Commerce of Sao
Paulo (FECOMERCIO) told Econoff that China's lower production
costs and higher utilization of technology in the production
cycle make Chinese products less expensive than their
Brazilian counterparts in the textile, footwear, furniture,
and auto parts industries. Brazilian industries have
countered Chinese imports by reducing their production costs
(either by implementing new technology, moving production
facilities to the Northeast where labor costs are lower, or
making the production chain more efficient) to become more
competitive against the influx of cheaper Chinese products.
Miguel Holzbach, a footwear exporter in Brazil's southern
state of Rio Grande do Sul, reported to Econoff that the
industry has stabilized. Echoing Silveira's comments,
Holzbach noted that several production facilities had
relocated to Brazil's Northeast and that skilled laborers had
also transferred to China to train the Chinese labor force.


Bilateral Relationship
----------------------

5. (SBU) During a FIESP-sponsored seminar entitled "China:
Challenges and Opportunities," several renowned academics and
retired policymakers discussed the future of bilateral
relations between the PRC and Brazil. Ambassador Sergio
Amaral, Coordinator of FIESP's Superior Council and former
Minister of Development, Industry, and Commerce, stated that
Brazil's fascination with China continues to grow among
political decision-makers, business leaders, and scholars.
He noted that nearly every week Brazilian China specialists
or visitors from China participate in seminars, talks, or
speeches regarding China-Brazil relations. According to
Amaral, one of the principal areas of interest in Brazil is
whether the U.S.-Soviet rivalry of the Cold War will morph
into a U.S.-PRC phenomenon and what impact this new tension
would have on Brazil.

6. (SBU) Rubens Barbosa, former Brazilian Ambassador to the
U.S. and current President of the FIESP Superior Council on
Foreign Trade, claimed that while political relations between
Beijing and Brasilia are "excellent", characterized by
frequent high-level visits from both sides, there is a strong
sentiment of disappointment in bilateral trade. According to
Barbosa, Brazilian officials and business leaders believed
that Brasilia's 2004 recognition of China as a market economy
would lead to booming trade between the two countries.
Recalling that FIESP lobbied strongly against granting China
market economy status, Barbosa noted that there is now
increasing concern that Brazilian jobs will migrate to China

SAO PAULO 00000130 003.2 OF 004


where labor is cheaper. Already several major businesses
have opened up factories in China, and this may be the
beginning of a trend mirroring the experience of many U.S.
companies that have moved their operations to China, Barbosa
said.

Access to the Chinese Market
----------------------------

7. (U) George Washington University International Relations
Professor - and one of the world's leading academic experts
on the PRC - Harry Harding said that Brazilian analysts are
starting to grow wary of China's rocketing international
commercial standing. The PRC, which initially welcomed
foreign investment following Deng Xiaoping's opening-up
policies, is beginning to show increasing signs of
protectionism, Harding stated. While Brazilians are
enthusiastic that China is a vast consumer of Brazil's raw
materials, the PRC's support for "national champion" firms is
increasingly closing off opportunities to Brazilian business
interests. According to Harding, in order to prop up these
growing companies and encourage their growth against non-PRC
competitors, Beijing gives them tax incentives and access to
inexpensive capital, and lobbies and advocates vigorously on
their behalf during official visits. (Comment: While the
methodology for supporting national firms in China may be
different from the Brazilian experience, analysts have
historically considered Brazil's economy "closed" to imports
in an attempt to support domestic industry. These import
duties are one of the most onerous barriers to entry in
Brazil for many industrial goods. End Comment.)

Chinese Concerns about Brazilian Market
---------------------------------------

8. (C) Chinese businessmen also highlighted the difficulties
they face in operating in Brazil. SVA da Amazonia, Ltd.
Director General Martin Wang (please protect), head of a
major seller of electronics and digital products, told Poloff
that opening a company in Brazil requires pay-offs to
Brazilian customs and trade officials, as well as paying
buyers under the table for initial contracts and follow-on
purchases. Gree Electric Appliances of Brazil Director
General Yue Haiping (please protect) said that bureaucratic
hurdles prevent small foreign businesses from opening in
Brazil. Yue said that his company, a major international air
conditioning firm, needed a whole team of lawyers and
specialists to break down the barriers of Brazil's government
entities involved in approving all the licenses to operate in
Brazil. Tang Wei (please protect), an attorney specializing
in helping PRC firms launch in Brazil, said that Brazil's
myriad of regulations and legal codes discourage Chinese
investment in Brazil. (Comment: The World Bank report Doing
Business in Brazil corroborates these claims. Their 2008
report shows that Brazil ranked 122 out of 178 countries for
overall ease of doing business. It takes an average of 152
days to open a business and 411 days to build a warehouse
(including obtaining licenses). End Comment.)

9. (SBU) Indeed, Brazilian firms have invested more money
into China than Chinese firms have put into the Brazilian
private sector. Pedro Pedrossian, Manager of FIESP's
International Relations, Foreign Trade, and Trade Remedies
Department, told Econoff that Brazilian investments span
several industries including energy and mining (Petrobras,
Vale do Rio Doce, Coteminas), aviation (Embraer), banking
(Itau and Banco do Brasil), and the footwear and textiles

SAO PAULO 00000130 004.2 OF 004


industries. However, Pedrossian said that Chinese
investments were limited to ethanol, lumber, and more
recently steel industries. He underscored that Chinese
investments were aimed at exporting production to China while
Brazilian investments in China were designed to gain access
to the Chinese domestic market.

Comment
-------

10. (C) Business between China and Brazil is continuing to
grow (ref), but neither the Chinese nor Brazilians seem to
believe that it is achieving its potential. Clearly, Brazil
cannot ignore the Chinese market opportunities as well as the
competition Chinese businesses represent. Bilateral trade
will continue to grow in volume and value in the coming
years, even though Brazilian views on business links with
China are mixed. While it is evident that there are some
sectors who view booming trade with China as a positive,
there are some Brazilian businesses who continue to see
China's economic growth as a possible threat. Brazil will
need to reassess its own trade policy and decide whether it
will continue to focus heavily on selling commodities
overseas or shift towards a more PRC-like export plan
centering on industrial and finished goods. The Brazilian
business community seems to understand that the PRC's trade
policies, while cutthroat in appearance, are business as
usual for many nations. More importantly, these
organizations understand the need to work with the government
on the regulatory framework and public policies that will
shift Brazil's export focus, with China as well as the rest
of the world, towards value-added manufactured goods. End
Comment.

11. (U) This cable was coordinated with and cleared by
Embassy Brasilia.
STORY

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