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China's Trade Minister Chen Deming, left, and Brazil's Foreign Minister Antonio Patriota talk during a meeting at Itamaraty Palace in Brasilia this week. (EVARISTO SA/AFP/Getty Images)
China's Trade Minister Chen Deming, left, and Brazil's Foreign Minister Antonio Patriota talk during a meeting at Itamaraty Palace in Brasilia this week. (EVARISTO SA/AFP/Getty Images)

Brazil, China drawn into ever closer embrace Add to ...

This month the vessel that will come to define early 21st-century trade between Latin America and Asia arrived in Guanabara Bay, the picturesque harbour of Rio de Janeiro.

The Vale Brasil, commissioned by Vale SA, the Brazilian miner and the world's largest exporter of iron ore, is the first of a new breed of bulk carrier, known as the Chinamax. With a capacity of 400,000 tonnes and measuring 362 metres in length and 65 metres in width, this goliath can carry twice as much iron ore as most vessels now plying the route between Brazil and China.

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Just as the caravel symbolized the age of discovery and early colonial trade between Portugal and Brazil, the Chinamax encapsulates China's growing hunger for the natural resources of Latin America's largest economy.

As these two leading emerging economies draw each other into an ever closer embrace - one of the first overseas trips by Brazil's new president, Dilma Rousseff, was to China - few doubt that the world is witnessing the birth of one of the great commercial relationships of the future.

"Brazil will export a lot of the strategic commodities that China needs and China will export manufactured goods and invest in assembly plans in Brazil," says Charles Tang, head of the Brazil-China chamber of trade and industry.

But far from being a smooth passage, it is a relationship that will be fraught with challenges and misunderstandings along the way. It would be difficult to find two large countries in the modern world that are less familiar with each other than China and Brazil or that are more different socially, politically and culturally. Already there are growing tensions, with most of them originating from the Brazilian side.

While Brazil welcomes Chinese demand for its commodities, it is angry at an influx of cheap Chinese manufactured imports that it says undermine Brazilian industry. Brasilia also accuses Beijing of closing its market to imports from Brazil and of maintaining an artificially cheap currency to make its exports more competitive.

"China has a clear position on what it wants from Brazil," says Geert Albers, general manager for Brazil of Control Risks, a consultancy. "But Brazil needs to clarify somehow what it wants from China."

The speed with which this relationship has developed has meant that most potential flashpoints are only emerging now.

Between 2000 and 2009, Brazil's exports to China rose 18-fold, driven by commodities such as iron ore and soya beans. In 2009, China surpassed the U.S. as Brazil's biggest trading partner, accounting for 12.5 per cent of the Latin American country's exports.

Bilateral trade rose a further 53 per cent last year to $56-billion (U.S.), while Brazil's trade with the U.S. increased 30 per cent to $45-billion.

When it comes to commodities, Beijing has discovered that Brazil offers something of a one-stop shop. Latin America's biggest economy is the world's largest exporter of iron ore and of a host of agricultural products, including coffee, sugar and - of special interest to China - the "soya complex" of beans, oil and meal.

Brazil's discovery of vast offshore oilfields, which are set to catapult it into the top ranks of the world's oil producers, are also of increasing interest to China.

"The economic benefits of Brazil's and China's trade relationship remain high," wrote Standard & Poor's, the credit rating agency, in a paper late last year.

The trading relationship is rapidly being duplicated in investment. Last year, China became Brazil's largest foreign direct investor for the first time.

China accounted for about $17-billion of Brazil's total foreign direct investment inflows of $48.46-billion in 2010, up from less than $300-million in 2009, according to Sobeet, a Brazilian think-tank on transnational companies.

This FDI, much of which was channelled through tax havens such as Luxembourg, was related to commodities and energy. The biggest transaction was Chinese oil major Sinopec's $7.1-billion purchase of a 40 per cent stake in Repsol Brazil.

The growing commercial relationship with China was fostered by Brazil's previous president, Luiz Inácio Lula da Silva, a proponent of the rise of the so-called BRIC nations, which aside from Brazil and China comprise India and Russia.

For Mr. da Silva, the rise of trade with China provided the economic tailwind that helped him win re-election in 2006 after this first four-year term and then to propel his protégée, Ms. Rousseff, to office last year.

With billions of dollars rolling in from commodities exports and Chinese investments, Mr. da Silva was able to start a credit-fuelled economic boom in 2009 and 2010 without having to worry about the current account deficit.

For the first time, the lower middle classes had money to spend. At the same time, they could suddenly afford to buy household goods thanks to a flood of cheap imports from China. For Mr. da Silva's Workers Party, trade with China provided a seductive formula for staying in power.

"The long Chinese boom has affected virtually every part of the world. But Brazil is arguably the country where it has made the greatest difference," wrote Perry Anderson in an essay, Lula's Brazil, in the London Review of Books.

Today, there are growing signs that the honeymoon is over. While Brazil reported a trade surplus with China of $5.2-billion last year, this was because of commodity exports, according to industry lobby Fiesp.

On the industrial front, imports of manufactured goods from China rose by what Fiesp called a "devastating" 60 per cent last year. The deficit in manufactured goods was a record $23.5-billion, up from only $600-million seven years ago.

Today, it can be hard to find something made in Brazil. About 80 per cent of costumes used at Brazil's carnival festival this year were imported, nearly all of them from China: from the more traditional creations flaunted by competing samba schools to the less traditional Osama bin Laden masks. And it is not only textiles that are being made in China. Brazilian steel producers suffered a sharp fall in prices last year, which they blamed on a sharp rise in cheap imports, mainly from China.

Brazilian manufacturers warn the country faces "deindustrialization" if it does not introduce more protection measures in the face of what they call the dumping of artificially cheap Chinese products in Latin America. Of 144 anti-dumping investigations started by Brazil in the fourth quarter of last year, 50 were against China.

During her recent trip to China, Ms. Rousseff urged Beijing to accept more Brazilian industrial goods. Beijing agreed to buy more regional jets from Brazil's Embraer, while a Taiwanese company with extensive operations in China, Foxconn, said it would invest $12-billion in a manufacturing complex in Brazil to make iPods.

Like the U.S. before it, which became addicted to Chinese credit and cheap manufactured goods, some are arguing that Brazil is on course for a full-blown economic crisis if it does not rein in an excessive spending spree driven by its new-found commodity wealth. The IMF calculates that if commodity prices were to moderate to 2005 levels, Brazil's current account deficit could double from a comfortable 2.3 per cent today to a worrying 5 per cent.

China also represents other challenges for Brazil. The people of both countries are painfully ignorant of each others' customs. Unlike most cities in Europe and North America, it is difficult to find one Chinese restaurant on the streets of São Paulo.

While Brazil and China often see eye-to-eye in international forums on issues such as the unrest in the Middle East, it is unclear how long this will last. Brazil is a liberal democracy that increasingly wants to uphold human rights, while China is authoritarian and brutally repressive of dissent. Brazil wants to be the dominant power in Latin America, while China's increasing trade with the region is turning it into a competitor. But others say it may be too soon for Brazil to press the panic button on its relationship with China. While trade between the two has grown fast, it has been from a minimal base. Today, it comprises 15 per cent of Brazil's international trade.

"Brazil has diversified its exports - it is also a big supplier to Europe. It isn't as if it's only dependent on China," says Pamela Cox, vice-president for Latin America and the Caribbean at the World Bank.

That may be so, but with every new shipload of resources that leaves Brazil for China, this dependence is set to increase.

Vale says that, while its first seven Chinamaxes will come from South Korea, it has ordered the next 12 from China. The vessel of early 21st century trade will carry Brazilian natural resources, but the ship itself will be made in China.

For Brazil, the message from the metaphor is clear. China is at the helm of the global economic supertanker of the future. It is up to Brazil to decide what role it will play in the voyage and how it wants to pay for the ride.

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