International trade wars: how do they impact Brazil?

  • 25/02/2020
  • 8 minutes

Have you ever wondered in what ways does the impact of international trade wars affect Brazil? After all, what changes can they actually cause in the foreign trade scenario?

In order to answer these and other pertinent questions, we have prepared this content. Throughout the text, we will explain what these disputes consist of and why they are so relevant. Enjoy the information!

What factors characterize an international trade war?

To address this matter with the necessary expertise, we spoke with Pedro Caitete Martins and the market intelligence team of the Wilson Sons Group, the largest integrated port and maritime logistics operator in the domestic market.

According to the experts consulted, we can define international trade wars as economic disputes between countries. Most of the time, they are the consequence of eventual breaches of trade agreements due to political objectives, often on the grounds of protecting national products and creating jobs for the local population.

That is, such disputes are reflected in the use of mechanisms of protectionism, with the imposition of customs barriers, such as quotas and limits of imported products and tariffs — practices that cause a chain reaction in all economic partners of a given country.

“The scenario of international trade wars is nothing new,” Pedro contextualizes, “there are many examples of economic sanctions being used as tools in political and military conflicts throughout history.” Historically important examples include the US embargo on Cuba and the sanctions against South Africa due to apartheid in 1987. Among recent facts, it is worth mentioning the economic sanctions on Iran and Venezuela.

What makes the trade conflict between China and the US — one of the most striking in recent years — different from previous examples is the bilateral nature, as both are imposing tariffs on specific products. In addition, the level of integration of the two economies and the economic importance of both countries to the rest of the world must be highlighted.

In this case, a significant impact on several production chains is expected, leading to a slowdown in trade and, probably, in global economic growth.

How has Brazil been facing the international trade wars?

“Brazil has strong trade and investment ties with both China and the United States — these two nations are Brazil’s largest trading partners,” explains Pedro. Despite having benefited briefly at first, the country has remained neutral in the midst of this conflict.

As pointed out by the market intelligence team, the main short-term impact that the conflict will bring to Brazil is increased exports of agricultural commodities such as soybeans. That is because, until 2017, the USA was a major source of soybean for China. However, from 2018 onwards, much of the volume previously supplied by the United States was replaced by Brazilian soybeans, setting export records for this commodity in recent months.

Nevertheless, it is necessary to emphasize that any gain to Brazil can be considered as something exceptional. After all, in a context of economic uncertainty and a slowdown in foreign trade, foreign investment and Brazilian exports should be negatively impacted over the longer term. To get an idea, the WTO recently reduced its projections of world trade flow growth from 2.6% per year to 1.2% in 2019, as reported by Folha. 

The projected consequences on economic growth cannot be overlooked either. Uncertainty about trade could reduce world Gross Domestic Product (GDP) by 0.6% by 2021, according to a Bloomberg Economics report. China would be hit harder by this factor: its GDP would be 1% lower compared with portion to be subtracted from United States economic activity.

What is the impact on the shipping market?

“The shipping scenario is greatly influenced by the world economic growth and the international trade movements. Thus, with the projected reduction of the growth rate of trade, a negative impact is expected over the next few years in this market”, explains Pedro.

US restrictions greatly affect the transportation of containers of some of China’s goods — manufactured goods, generally. On the other hand, bulk goods imported by China from the United States, such as grains and oil, may be replaced by products from other countries. In this sense, China is already the main destination of several Brazilian exported products, such as soybeans, crude oil and iron ore.

In the case of Brazilian maritime transport, in the short term, there is a trend that indicates an increase in the volume of products destined for China. Should the trade dispute continue, the economic slowdown would become even greater, reducing demand for oil and ore, which would hurt Brazilian exports.

How does this scenario affect the Brazilian economy?

As mentioned, the immediate consequence is increase in commodity exports to China. However, even this short-term gain may be reversed due to the large grain stocks held by the United States.

On a longer projection, transactions with the main Brazilian trading partners and the world economy as a whole are likely to slow down. “Such factors would negatively affect our country, reducing exports and the possibility of growth of the national economy,” explain Pedro and his team.

Moreover, the scenario of uncertainty in the world economy is negative for the attraction of foreign investments to Brazil, limiting the potential for expansion of the national economy.

“Broadly speaking, the best way for Brazil to prepare for such external shocks is to organize its own finances, reducing the public deficit. Increasing the overall productivity of the economy through microeconomic reforms is also critical,” experts suggest.

Finally, it is undeniable that the international trade wars can generate a series of changes for the Brazilian economy and for the global economic context. Therefore, those who work with foreign trade need to follow the news related to the topic.

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