Rousseff impeachment won’t sour China-Brazil relations

Change of government will not affect China's trade-based partnership with Brazil, experts say

Brazil’s relations with China will not be impacted by the removal of President Dilma Rousseff if she is found guilty of breaking a national law on fiscal responsibility. If the Brazilian senate agrees to move forward with the impeachment proceedings brought by three independent lawyers, the president will be removed from office for a period of up to 180 days while the indictment is reviewed, as is written in the country’s constitution. On April 17, Brazil’s lower house voted overwhelmingly to impeach Rousseff. Vice president Michel Temer would assume the presidency in Rousseff’s absence.

“Brazil’s relations with China are state relations, not government relations. It does not matter which government is in power,” Luiz Augusto de Castro Neves, president of the Brazil-China Business Council (CEBC), told Diálogo Chino. Castro Neves, who was Brazil’s ambassador to Beijing from 2004 to 2008, emphatically stated there was no reason for the partnership to change: “Brazil’s trade with China is greater than all of South America’s trade with China.”

Since 2009, China has been Brazil’s main trading partner. In 2015, trade between the two countries was worth US$66.3 billion. Brazil’s exports to China were worth US$35.6 billion, while imports from China were valued at US$30.7 billion. The Chinese have invested heavily in Brazil, mainly in energy, mining, steel, and agribusiness. According to data from the Brazil’s Ministry of Foreign Affairs, China has also begun to diversify into telecommunications, automobiles, machinery, banking services, and infrastructure.

Economist José Roberto Mendonça de Barros of consulting group MB Associados is even more optimistic than Castro Neves. “With reduced risk, and considering the depreciated level of Brazilian assets, the country will become more attractive for international capital, a scenario in which China can expand its interest in Brazil,” the former secretary of economic policy at Brazil’s Ministry of Finance told Diálogo Chino.

Cautious change

Despite agreeing that the Brazilian crisis can be an opportunity for Chinese investors, José Francisco de Lima Gonçalves, chief economist at Banco Fator, thinks Brazil’s relations with China would undergo a “cautious change” under a government led by Michel Temer.

“Even though the intensification of political, financial, and commercial contact with China is inevitable, this pragmatic stance must become more aligned with North-South relations,” says Lima Gonçalves, who is also a professor of economic history at the University of São Paulo (USP). “There must be a realignment of preferred partnerships, and this includes a new, more open position with relation to the United States and Europe, in terms of both trade and investment,” he said in an interview with Diálogo Chino.

“The foreign policy of a future Temer government should be guided by the pursuit of bilateral and regional agreements, while maintaining and benefiting from major partners such as China,” Mendonça de Barros said. The former ambassador made a point of mentioning that Michel Temer is president of the China-Brazil High-Level Coordination and Cooperation Committee, which is the “highest forum for permanent dialogue and bilateral cooperation” between the two countries. According to Brazil’s Ministry of Foreign Affairs, the committee deals with “economic, financial and political relations, agriculture, energy and mining, scientific, technological, and space cooperation, and cultural and educational exchanges”.

The three economists believe Brazil will continue to export commodities to China, particularly agricultural commodities. “It seems clear that over time, China has decided to increase its food imports. We expect not only continued strong demand for soybeans, but also for corn and meat,” said Mendonça de Barros.

Lima Gonçalves says that even with China growing slower, exports there are still very important to balance external accounts.

Castro Neves stressed Brazil’s role as an important and long-term food supplier to China, since the Asian country is increasingly dependent on food imports.

Unlike Argentina or Venezuela, however, Brazil’s troubled economy does not suffer from a shortage of dollars, meaning China will not have to step in as a lender of last resort. Chinese financial flows are more associated with investment projects or financing companies, as in the case of Petrobras, Mendonça de Barros said.

“What matters to the Chinese are assets that can produce energy, minerals, and food. Not reais, not dollars. Being a creditor would mean that the Chinese government purchased bonds issued by the Brazilian government. I don’t see why they would do that,” Lima Gonçalves said.

The crises

Brazil is experiencing one of the worst political and economic crisis in its history. For the second time in 24 years, a head of state faces impeachment. In 1992, then-President Fernando Collor de Mello was removed from his post after being indicted on corruption charges. Today, it seems President Dilma Rousseff will meet the same fate owing to her involvement in the Brazilian treasury’s deliberate delay in transferring money to banks in order to hide levels of public spending.

Despite being a presidential regime, the Brazilian government has traditionally relied on parliamentary support to function. With 513 federal deputies and 81 senators, the National Congress is currently composed of 35 political parties. Elected to her second term in October 2014, President Dilma Rousseff received only 130 of the 513 votes cast when the Chamber of Deputies voted to open impeachment proceedings. Rousseff, who was imprisoned by the Brazilian military dictatorship, lacks popular support with only a 10% approval rating.

After 12 years in power, the Workers Party (PT) founded by former metalworker-turned-president Luís Inácio Lula da Silva, is mired in allegations of corruption. Several of its leaders are involved in the largest embezzlement scandal involving public funds in the country’s history, known as operation “car wash”, with some already in prison. Member of the opposition are also under investigation. Under the scheme, politicians and civil servants awarded contractors public works contracts handled by state-run oil company Petrobras at inflated costs and siphoned-off the proceeds.

Unlike Lula, who preceded Rousseff and named her as his successor, the current president was not lucky enough to enjoy an extremely favorable international economic environment. Brazil is the seventh-largest economy in the world but currently finds itself in a recession that saw its US$1.7 trillion GDP shrink by 3.8% last year. Inflation was 10.7% in 2015. Unemployment reached 10.9% in the first quarter of the year, according to the Brazilian Institute of Geography and Statistics (IBGE), up 3% on the corresponding period last year (7.9%).

Despite the small 0.4% increase in industrial production in January, there was an accumulated loss of 8.7% in the seven preceding months. This was reflected in the Brazilian retail trade, which recorded a 4.3% drop last year; its worst levels in the last 14 years. The population also faces high interest rates and consequently a lack of credit and a loss of purchasing power because of inflation.

The national perception of politicians in Brazil is also far from positive, not only with regards to Rousseff, but politicians in general. Latest surveys show that 62% of the population wants new elections held immediately, but they will have to wait until 2018.