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C O N F I D E N T I A L SECTION 01 OF 04 SAO PAULO 000130 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/BSC,WHA/PDA AND INL 
NSC FOR TOMASULO 
SOUTHCOM ALSO FOR POLAD 
USAID FOR LAC/AA 
 
E.O. 12958: DECL: 03/14/2018 
TAGS: ETRD PREL EINV ECON CH BR
SUBJECT: CHINA'S BUSINESS INTERESTS IN BRAZIL RECEIVE MIXED 
REVIEWS 
 
REF: 07 SAO PAULO 718 
 
Classified By: Charge de Affairs James Story; reasons 1.4 (b) and (d). 
 
Summary 
------- 
 
¶1.  (C) Although bilateral trade between China and Brazil 
continues to grow, there are increasing frustrations on both 
sides regarding access to each others' markets.  For 
Brazilian business, China represents the largest 
opportunities for growth, but also the greatest economic 
risks, and many point to the first ever trade deficit with 
China, (USD 1.9 billion in 2007), as proof of these risks. 
Clearly, China plays a much more important economic role for 
Brazil than Brazil does for China.  A recent conference 
regarding China-Brazil relations and subsequent conversations 
with Chinese business interests suggest an increasing 
wariness of this reality and of the PRC in general. 
Brazilian contacts state that China is not keeping its 
promise to import more from Brazil, and may in fact be making 
trade more difficult.  In turn, Chinese businessmen in Brazil 
complain that corruption and bureaucracy are preventing 
greater investment in Brazil.  To understand more fully the 
important and growing bilateral trade relationship, the 
Brazilian business and academic community is paying greater 
attention to the PRC's foreign policy and international trade 
movements.  End Summary. 
 
Bilateral Trade Expanding 
------------------------- 
 
¶2.  (U) Trade relations between Brazil and China began to 
intensify in 2001 when China began seeking Brazil's natural 
resources to support its expanding economy and expanded 
rapidly in 2004 when Brazil identified China as a market 
economy for the first time.  The PRC then quickly became an 
important player for both Brazilian exports and imports; 
providing Brazil's second highest source of imports and third 
largest export destination last year.  According to the 
Federation of Industries of Sao Paulo (FIESP), Brazilian 
exports to China rose from USD 1.9 billion in 2001 to USD 
10.8 billion last year, and Chinese imports in Brazil went 
from USD 1.3 billion to USD 12.6 billion during the same 
period.  While Brazilian exports to China continue to grow 
rapidly, Chinese exports to Brazil are growing at an even 
faster rate.  Brazilian exports to China were up 28 percent 
from 2006; however, imports from China were up 57 percent. 
Until last year, Brazil had maintained a trade surplus 
(although declining in recent years) with China.  In 2007, 
Brazil's appreciating currency combined with growing domestic 
consumption reversed the trade surplus of USD 500 million in 
2006 to a deficit of USD 1.9 billion in 2007. 
 
Trade Flows Concentrated 
------------------------ 
 
¶3. (SBU) Carlos Cavalcanti, FIESP's Senior Director for 
International Affairs, told Econoff that FIESP classifies the 
Brazil-China relationship as one of "master and colony" 
because Brazil exports mostly commodity products while China 
exports manufactured goods.  Although China has become 
Brazil's second and fastest growing export market, 75 percent 
of these exports are concentrated in just five commodities: 
soy beans, iron ore, steel, soy oil, and wood.  Similarly, 97 
percent of Chinese imports in Brazil are manufactured 
products, mainly capital goods, machinery and equipment, and 
 
SAO PAULO 00000130  002.2 OF 004 
 
 
other manufactured household goods.  Cavalcanti indicated 
that in the long run, FIESP and other business organizations 
would need to work closely with the GOB to create a greater 
focus on exports of finished goods instead of just 
commodities. 
 
Chinese Threat...Or Is It? 
------------------------- 
 
¶4.  (SBU) Octavio de Barros, Director of Economic Research at 
Bradesco Bank, told Econoffs that China represents both the 
biggest opportunities and risks for Brazilian business. 
China offers an untapped resource of consumers and investment 
opportunities; however, cheaper Chinese labor and an 
artificially low currency make Chinese goods less expensive 
than their Brazilian equivalents.  Brazilian industries in 
recent years had faced stiff Chinese competition.  Julia 
Silveira, an economist with the Federation of Commerce of Sao 
Paulo (FECOMERCIO) told Econoff that China's lower production 
costs and higher utilization of technology in the production 
cycle make Chinese products less expensive than their 
Brazilian counterparts in the textile, footwear, furniture, 
and auto parts industries.  Brazilian industries have 
countered Chinese imports by reducing their production costs 
(either by implementing new technology, moving production 
facilities to the Northeast where labor costs are lower, or 
making the production chain more efficient) to become more 
competitive against the influx of cheaper Chinese products. 
Miguel Holzbach, a footwear exporter in Brazil's southern 
state of Rio Grande do Sul, reported to Econoff that the 
industry has stabilized.  Echoing Silveira's comments, 
Holzbach noted that several production facilities had 
relocated to Brazil's Northeast and that skilled laborers had 
also transferred to China to train the Chinese labor force. 
 
 
Bilateral Relationship 
---------------------- 
 
¶5.  (SBU) During a FIESP-sponsored seminar entitled "China: 
Challenges and Opportunities," several renowned academics and 
retired policymakers discussed the future of bilateral 
relations between the PRC and Brazil.  Ambassador Sergio 
Amaral, Coordinator of FIESP's Superior Council and former 
Minister of Development, Industry, and Commerce, stated that 
Brazil's fascination with China continues to grow among 
political decision-makers, business leaders, and scholars. 
He noted that nearly every week Brazilian China specialists 
or visitors from China participate in seminars, talks, or 
speeches regarding China-Brazil relations.  According to 
Amaral, one of the principal areas of interest in Brazil is 
whether the U.S.-Soviet rivalry of the Cold War will morph 
into a U.S.-PRC phenomenon and what impact this new tension 
would have on Brazil. 
 
¶6.  (SBU) Rubens Barbosa, former Brazilian Ambassador to the 
U.S. and current President of the FIESP Superior Council on 
Foreign Trade, claimed that while political relations between 
Beijing and Brasilia are "excellent", characterized by 
frequent high-level visits from both sides, there is a strong 
sentiment of disappointment in bilateral trade.  According to 
Barbosa, Brazilian officials and business leaders believed 
that Brasilia's 2004 recognition of China as a market economy 
would lead to booming trade between the two countries. 
Recalling that FIESP lobbied strongly against granting China 
market economy status, Barbosa noted that there is now 
increasing concern that Brazilian jobs will migrate to China 
 
SAO PAULO 00000130  003.2 OF 004 
 
 
where labor is cheaper.  Already several major businesses 
have opened up factories in China, and this may be the 
beginning of a trend mirroring the experience of many U.S. 
companies that have moved their operations to China, Barbosa 
said. 
 
Access to the Chinese Market 
---------------------------- 
 
¶7.  (U) George Washington University International Relations 
Professor - and one of the world's leading academic experts 
on the PRC - Harry Harding said that Brazilian analysts are 
starting to grow wary of China's rocketing international 
commercial standing.  The PRC, which initially welcomed 
foreign investment following Deng Xiaoping's opening-up 
policies, is beginning to show increasing signs of 
protectionism, Harding stated.  While Brazilians are 
enthusiastic that China is a vast consumer of Brazil's raw 
materials, the PRC's support for "national champion" firms is 
increasingly closing off opportunities to Brazilian business 
interests.  According to Harding, in order to prop up these 
growing companies and encourage their growth against non-PRC 
competitors, Beijing gives them tax incentives and access to 
inexpensive capital, and lobbies and advocates vigorously on 
their behalf during official visits.  (Comment:  While the 
methodology for supporting national firms in China may be 
different from the Brazilian experience, analysts have 
historically considered Brazil's economy "closed" to imports 
in an attempt to support domestic industry.  These import 
duties are one of the most onerous barriers to entry in 
Brazil for many industrial goods.  End Comment.) 
 
Chinese Concerns about Brazilian Market 
--------------------------------------- 
 
¶8.  (C) Chinese businessmen also highlighted the difficulties 
they face in operating in Brazil.  SVA da Amazonia, Ltd. 
Director General Martin Wang (please protect), head of a 
major seller of electronics and digital products, told Poloff 
that opening a company in Brazil requires pay-offs to 
Brazilian customs and trade officials, as well as paying 
buyers under the table for initial contracts and follow-on 
purchases.  Gree Electric Appliances of Brazil Director 
General Yue Haiping (please protect) said that bureaucratic 
hurdles prevent small foreign businesses from opening in 
Brazil.  Yue said that his company, a major international air 
conditioning firm, needed a whole team of lawyers and 
specialists to break down the barriers of Brazil's government 
entities involved in approving all the licenses to operate in 
Brazil.  Tang Wei (please protect), an attorney specializing 
in helping PRC firms launch in Brazil, said that Brazil's 
myriad of regulations and legal codes discourage Chinese 
investment in Brazil.  (Comment: The World Bank report Doing 
Business in Brazil corroborates these claims.  Their 2008 
report shows that Brazil ranked 122 out of 178 countries for 
overall ease of doing business.  It takes an average of 152 
days to open a business and 411 days to build a warehouse 
(including obtaining licenses).  End Comment.) 
 
¶9.  (SBU) Indeed, Brazilian firms have invested more money 
into China than Chinese firms have put into the Brazilian 
private sector.  Pedro Pedrossian, Manager of FIESP's 
International Relations, Foreign Trade, and Trade Remedies 
Department, told Econoff that Brazilian investments span 
several industries including energy and mining (Petrobras, 
Vale do Rio Doce, Coteminas), aviation (Embraer), banking 
(Itau and Banco do Brasil), and the footwear and textiles 
 
SAO PAULO 00000130  004.2 OF 004 
 
 
industries.  However, Pedrossian said that Chinese 
investments were limited to ethanol, lumber, and more 
recently steel industries.  He underscored that Chinese 
investments were aimed at exporting production to China while 
Brazilian investments in China were designed to gain access 
to the Chinese domestic market. 
 
Comment 
------- 
 
¶10.  (C) Business between China and Brazil is continuing to 
grow (ref), but neither the Chinese nor Brazilians seem to 
believe that it is achieving its potential.  Clearly, Brazil 
cannot ignore the Chinese market opportunities as well as the 
competition Chinese businesses represent.  Bilateral trade 
will continue to grow in volume and value in the coming 
years, even though Brazilian views on business links with 
China are mixed.  While it is evident that there are some 
sectors who view booming trade with China as a positive, 
there are some Brazilian businesses who continue to see 
China's economic growth as a possible threat. Brazil will 
need to reassess its own trade policy and decide whether it 
will continue to focus heavily on selling commodities 
overseas or shift towards a more PRC-like export plan 
centering on industrial and finished goods.  The Brazilian 
business community seems to understand that the PRC's trade 
policies, while cutthroat in appearance, are business as 
usual for many nations.  More importantly, these 
organizations understand the need to work with the government 
on the regulatory framework and public policies that will 
shift Brazil's export focus, with China as well as the rest 
of the world, towards value-added manufactured goods.  End 
Comment. 
 
¶11.  (U) This cable was coordinated with and cleared by 
Embassy Brasilia. 
STORY