By Xavier Cirera
While the emergence of the Rising Powers has proved critical in rescuing the world economy during hard times for OECD countries, potential tensions in the future between the Rising Powers may jeopardise their future hegemony as drivers of the world economy.
Growth in Brazil and China has been mainly driven by exports. However, significant tensions have developed in recent times, especially in Brazil regarding Chinese imports. While trade flows between both countries have increased dramatically during the 2000s, 95% of Brazilian exports to China are primary commodities, whereas 95% of Chinese exports to Brazil are manufacturing products and capital goods. This, together, with the long term appreciation of the Brazilian Real, has encouraged manufacturing sectors in Brazil to successfully lobby the government to adopt protectionist measures against Chinese imports (article available by subscription only). In addition to specific taxes, there has been an increase in anti-dumping investigations, requests to MERCOSUR to increase the list of Brazilian sensitive sectors or to increase the share of domestic firms in government procurement. The concern of some Brazilian firms is not only related to competition in the Brazilian market but also to the loss of market share in neighbouring Latin American countries.
It is worth noting that the adjustment in Brazilian manufacturing firms had already started during the late 1980s and the 1990s with the gradual liberalisation of its economy. The key challenge for Brazilian firms is the adoption of innovation and quality policies in order to increase their productivity and diversify exports. In addition, imports of Chinese goods allow manufacturing firms to use cheaper inputs. As a result, the adoption of protectionist measures will not succeed in addressing the main competitiveness issues that the manufacturing sector faces. On the contrary, it is likely to exacerbate them.
But more important is the impact of any trade tensions on global trade policy issues. An escalation of these tensions may have an impact at the global scale, further threatening the already vulnerable world economy.