BY: RICHARD SMITH
The financial crisis which hit world trade in September 2008 has prompted China and Brazil to search for other ways of consolidating and firming up their bilateral trade.This involves cutting the US dollar out of their two-way trade and accepting reals and yuan for transactions.
Trade has grown significantly between Brazil and China in the last five years and in the leather sector the Brazilian Center for the Tanning Industry (CICB) is present at APLF MM&T and ACLE which they use as sales and marketing platforms to promote their products to China and Asia.
Since 2005 Brazilian leather exports to China have boomed. In dollar terms leather of all types sold to China(including Hong Kong) increased from US$484.05 million in 2005 to US$602 million (source CICB) in 2008.This represents an increase of24.37%, despite the decline in exports in the final quarter of last year due to the international financial crisis.
Background
After Brazil’s President Lula da Silva’s visit to China in May 2004, bilateral trade between these two countries began to grow significantly. Lula’s visit was followed by President Néstor Kirchner of Argentina in June of that year and then President Chávez of Venezuela followed suit in October.South America was making a conscious effort to penetrate China’s huge market and also open the door for reciprocal Chinese investments.
From Brazil and Argentina, the world’s second and third producers of soybeans after the US,China needed to import hundreds of thousands of tons of this high protein grain to supplement the Chinese diet, as well as wheat from Argentina. Venezuela’s Chávez went to sell crude oil and import Chinese technicians to build railroads and agricultural irrigation systems.
Brazil also exports iron ore, meat products and oil to China and two-way trade opened upt he Chinese market for Brazilian manufactured goods such as footwear as well as Embraer airplanes. Ties were consolidated when, in 2005 Vice Premier Hui Liangyu, undertook a tour of Latin America visiting Brazil, Argentina and Venezuela.
Market penetration and consolidating links with China
After President Lula’s initial success to open the door for increased Brazilian exports to China,it was up to the Brazilian Tannery Center (CICB) to take the bull by the horns and market itself aggressively. This was aided by generous government subsidies from the Brazilian Export Agency (APEX) subsidizing the CICB pavilions at Asian leather fairs.
For example, in the CICB pavilion at APLF MM&T2007, 55% of all Brazilian leather production was represented, according to the CICB President Luiz Augusto Siqueira Bittencourt in an interview with APLF News. The same number of leading Brazilian tanners participated in the 2008 and 2009f airs. This is a massive commitment to APLF MM&T and a sign of the excellent commercial results Brazil has in this world leading trade fair.
Effectively the major selling platforms for Brazilian leather in Asia are APLF MM&T held in March/April in Hong Kong and the All China Leather Exhibition (ACLE) held in Shanghai in September. Brazil’s strategy is based on a strong united presence before the major Chinese and Asian buyers which visit both APLF and ACLE. The events also have to market themselves to key buyers in order to make Brazil’s investment in these fairs cost-effective. Even in dire circumstances APLF’s experience has paid off by holding a very successful APLF2009 in the context of a sharp economic downturn.
Figure #1 Exports recover
Despite a sharp fall in exports to China from November to February, just before the world stock markets started to rally in March, as well as the proposal by China to challenge the US dollar as the de facto reserve currency, there aresigns of recovery in demand for all Brazilian exports to China (See: Figure #1).
This recovery includes leather exports, and the CICB will once again be present in Shanghai to continue consolidating its leading role as leather supplier to the giant Chinese manufacturing machine, using the most effective marketing platform available in Mainland China, ACLE.
Excluding the US dollar
The question is, can this work? Brazil can accept yuan but if it needs to pay the exporters, it is highly likely that the yuan will be converted into US dollars, after the transaction is completed. This means that the demand for US dollars is still present in the market place.
Only if other countries join in this trade which excludes the dollar canthis system prosper. Example: if I have yuan and know that Venezuela is buying goods from China, then I could buy Venezuelan oil in yuan which could in turn be used to pay for Chinese goods. The currency gradually recycles itself and establishes itself as a trusted medium of exchange.
Another drawback is how do you calculate the exchange rate between Brazilian reals, Chinese yuan and Venezuelan bolivares? It’s all done by referencing each individual currency to the US dollar. (Dollar cross-rates in technical jargon).Thus the dollar’s influence is still present even in transactions which exclude it.
To exclude the dollar completely, a great number of nations would have to agree to participate using the yuan, the euro or IMFSDR’s and thus scuttle the concept of the 1944 Bretton Woods Agreement, which made the US dollar the international reserve and trade currency.
