In the Midst of Downturn, Brazil Looks to U.S. for Trade
By Erica DeMond '17
Economic challenges in Brazil, one of the world’s largest emerging markets, have forced the country to reconsider its foreign trade relationships. A combination of domestic and foreign economic trends has created a prime environment for these changes. The depreciating Brazilian Real, slowing growth in China, and a strengthening United States economy lead to the possibility of the U.S. overtaking China as Brazil’s largest trade partner, which will have political and economic implications for the United States.
This potential change is facilitated by Brazil’s persistent stagflation. For the first time since the Great Depression, the Latin American country may experience two consecutive years of contraction. In 2014, Brazil’s central bank reported that GDP fell 0.12%. This GDP decline is forecasted to reach 0.5% in 2015. Despite these estimated drops in GDP, inflation in the country remains high at 7.7%, decreasing consumer purchasing power and feeding back into Brazil’s unfavorable GDP trends. A number of factors have led to these conditions. Past government decisions to expand social programs and consumer credit have played a role in the country’s continued inflation. In addition, record-breaking droughts in the country have constricted water and energy sources necessary for production, decreasing growth.
Economic changes in China have only aggravated Brazil’s economic state. China’s growth slowdown has decreased its demand for major Brazilian commodity imports such as iron ore and soybeans. With the U.S.’s economy strengthening and the dollar appreciating 11% against the Brazilian Real, Brazil sees the U.S. as a favorable target for increased exports. This would lead to major changes to the political relationship between Brazil and the U.S., which has been strained in the past due to spying conflicts, among other issues. The U.S. could also benefit from strengthened ties with Brazil, which could lead to better relations with Latin America as a whole.
A closer relationship with Brazil would also have economic implications in the United States. Currently, Brazilian imports to the U.S. consist of industrial goods such as aircraft and machinery rather than commodity goods such as sugar. Last year, when Brazil saw a decrease in trade with all other countries, U.S. purchases of Brazilian aircraft drove an 8.9% increase in trade between the two nations. However, if Brazil succeeds in further strengthening its trade relationship with the United States, commodity imports may become more attractive. The weakening of the Real has already led to decreased commodity prices in the U.S, specifically in sugar, coffee, and orange juice. An increase in imports of commodities will only drive prices lower by increasing sales volume.
Opinions differ on the best approach to improving the Brazilian economy. Some believe that an upturn can be best achieved by strengthening investor confidence through austerity measures. Others have suggested that increasing productivity would give the necessary boost to growth. Despite divergent opinions in the optimal method of revitalizing the Brazilian economy, there is a general consensus that it is not likely to be achieved in the short term. In the interim, Brazil’s economic relationships will continue to transform in line with both the country’s actions and general changes in the global economy.
Sources:
http://www.wsj.com/articles/in-the-doldrums-brazil-looks-to-u-s-1425866454?KEYWORDS=doldrums+brazil
http://www.wsj.com/articles/brazil-experts-fear-a-two-year-downturn-1424737136
http://www.reuters.com/article/2015/03/10/brazil-economy-levy-idUSL1N0WC0OB20150310
http://www.forbes.com/sites/michaellingenheld/2015/03/05/getting-real-in-brazil/