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March 8, 2012

China Reducing Dependence of Brazilian Commodities

China and Brazil have developed many economic ties with each other the years, but it appears that the relationship between the two countries has now entered into a transitional period. Until recently, China was relatively comfortable in relying on Brazil to furnish some it's most important raw products such as soybeans, iron ore, and petroleum, while at the same time, restricting the amount of Brazilian manufactured goods that are allowed to be imported into China. In fact, when President Rousseff visited China, she made a point of emphasizing that she did not want Brazil to just supply raw materials to China while China sent manufactured goods to Brazil.

As a result of those meetings, China made a half-hearted effort to allow more Brazilian goods into the country, but it appears that their main response to her visit has been to reduce their dependency on commodities from Brazil. What probably convinced them that they needed to diversify their sources of commodities have been the sustained high commodity prices of the last few years. China apparently made the decision that it needed to diversify its sources of some of these commodities in order to reduce their risk exposure and to lower prices. They are doing just that by broadening the base of countries from which they purchase commodities and also purchasing land and mines in foreign countries to produce their own agricultural commodities and minerals.

The effects of this policy on iron ore imports into China are quite evident. Brazil is the largest producer of iron ore and in 2007, iron ore from Brazil accounted for 27% of China's imports. That figure fell to 21% in 2011 and it's not just Brazil that is being impacted. China has reduced its imports of iron ore from its three main suppliers, Brazil, Australia, and India while at the same time it has diversified its source of iron ore by importing the mineral from 44 different countries. In 2011, China imported 686 million tons of iron ore, or approximately 50% of the world's consumption

For soybeans, Brazil is the source for 38% of China's imports passing the U.S. for the first time last year. China imported 19.8 million tons of soybeans from Brazil, but in total, they imported 52 million from all sources. China is now producing soybeans themselves outside the country in order to reduce their dependence on foreign suppliers, hold down prices, and reducing the influence of the international grain companies which are the traditional middlemen in such transactions.

China has adopted similar practices for petroleum as well as other commodities.

The end result is that Brazil is now much more dependent on China than China is dependent on Brazil. Economists in Brazil are worried that the country's heavy dependence of commodity exports could led to deindustrialization in Brazil, which would be a detriment to the country. The salaries and benefits associated manufacturing jobs in Brazil are much better than the jobs associated with traditional agriculture. There are also more taxes paid to the federal government from the manufacturing sector, so it is vital to the country to grow the manufacturing sector and not just rely on the agricultural sector.