Even without the presence of President Luiz Inácio Lula da Silva (PT), who was recovering from pneumonia and only traveled to the Asian country this Tuesday (11), the Brazilian delegation in China reached an agreement at the end of March that will allow bilateral transactions between the two countries take place directly in reais and in the Chinese currency, the yuan, without having to use the dollar.
Announced on March 29, during the Brazil-China Economic Seminar, in Beijing, the agreement still lacks details (which should be made official during Lula’s trip to the Asian country), but promises to facilitate business between the two countries.
According to Leonardo Paz, a researcher at the Center for Prospecting and International Intelligence at the Getúlio Vargas Foundation (FGV), “this type of mechanism is only minimally efficient when you have a robust bilateral trade flow, coming and going”, in the billions of dollars. dollars, and over many years.
The professor of international relations at the Brazilian Institute of Capital Markets (Ibmec) Carlo Cauti recalled that an agreement like this “has already been tried in the past and it didn’t work out”. He recalled that, in 2009, Lula himself, in his second term, tried to reach a similar agreement.
“We are in 2023 and transactions are still in dollars”, highlighted the expert. For him, what happened in the past can be a preview of what will happen with this new agreement. As Brazil is the only “big country that has a trade surplus” with China, it would have to convince exporters to accept Chinese currency as payment.
As it “is not a convertible currency” and there would be no certainty of maintaining the stability of the yuan exchange rate, “since it has been manipulated for decades, ever since, by the Chinese government”, “it is very difficult to convince these companies to accept the payment in yuan”.
For the professor, Brazilian export companies “will want dollars, not least because they will have to buy international inputs, which are fundamental for their production, from fertilizer to vaccine for cattle, to Petrobras instruments to produce oil, and they are quoted in dollars”. As this also has an exchange cost, the professor believes that “it is very difficult for this agreement to be implemented”.
Advantages of the agreement
Since 2009, China has been Brazil’s largest trading partner and one of the main sources of investment in the country. According to figures from the Brazilian Trade and Investment Promotion Agency (ApexBrasil), in 2022, the volume of transactions was a record, reaching US$ 150 billion, of which US$ 89.7 billion in Brazilian exports and US$ 60.7 billion in imports .
In business with China, Brazil therefore has a surplus of US$ 29 billion, especially selling commodities to the Asian country. In 2021, China was the world’s eighth largest investor in Brazil and the first in Asia, ahead of Japan, South Korea and India.
The clearest advantage for Brazil, at the moment, refers to the exchange rate. The more currency exchanges there are in a transaction, the greater the fee payments and exchange losses.
“If you manage to link your payments to another currency, you avoid making these conversions. You lose less money in these various frictions”, said researcher Leonardo Paz. “In the case of Brazil gradually getting closer to China, by making this type of agreement, it creates institutional goodwill so that you can go deeper into other areas, eventually, this process.”
In his view, there would still be a possibility of “creating a series of policies to support exports and imports” because “one of the public policies to support exports is to create bands, or to create mechanisms for differentiated exchange rates”, giving the possibility, for example, of the Brazilian government favoring a sector that it wants to leverage, offering it a cheaper exchange rate to import cheaper parts.
For Cauti, China gains in influence in the world with this type of agreement. “If Brazil starts to have international reserves no longer in dollars, but in yuan, it is obvious that everything that happens in China and with China will have a direct influence on Brazil”, he warned, citing the possibility of a “direct dependence on of China”, “much more than today”.
Reasons for the agreement
For both specialists, two factors would have motivated China to make agreements like the one it is making with Brazil as well as with other countries: the possibility of an invasion of Taiwan (according to forecasts, within a period of five to 15 years) and to reduce its dependence on of dollars.
In the event of a conflict with Taiwan, relying less on US currency would mean that China would not be as vulnerable to international sanctions as Russia has been experiencing since it invaded Ukraine. “It is becoming armored both economically and politically, a dependence on a currency that today, supposedly, is the currency of the country that is its main strategic rival,” said Leonardo Paz.
Another factor that may have motivated China to seek these agreements was that the nation’s trade was greatly impacted by the international crisis of 2008, having difficulty accessing the dollar in the international market, via its companies, in order to carry out transactions. By not needing the US currency so much (which has been a global trend, according to Paz), the Asian country “is gaining protection from the international shortage in certain sectors that it considers strategic for the country”.
The United States would be harmed, according to Carlo Cauti. “The Americans would lose a little more power, in terms of influence, because they are not the ones who decide where the dollar goes, where it doesn’t. They simply print the dollar. But surely this would reduce the influence of the United States. Also, for example, this could avoid international sanctions against companies that do business with countries that are under US sanctions.” There would also be a reduction in “American influence and the ability of Americans to have the so-called ‘soft power,’” he added.
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