Brazil and China economic relations: analysis of bilateral flows of trade and direct investment and challenges for the Brazilian industrial development Célio Hiratuka * Section Name Section Chair Session Title ASIA AND THE AMERICAS ENRIQUE DUSSEL PETERS CHINA S TRADE AND INVESTMENT IN LATIN AMERICA Abstract The bilateral economic relations between Brazil and China grew very fast in recent years. In terms of international trade, in 2010 China became the main destination of Brazilian exports and the second source of imports. Regarding foreign direct investment (FDI), China also turned into a major investor in the country, from a position almost nonexistent in early 2000. In these two dimensions, the rise of China in the global landscape certainly caused deep impact and placed several challenges on the Brazilian economic development. In this context, the paper aims to characterize the bilateral relations on trade and foreign direct investment between the two countries and analyze the main challenges posed by the intensification of these relations on the Brazilian economy, with special emphasis on the Brazilian industrial development. 1 - Introduction One of the most important phenomena in the world economy in recent years is the rise of China as an emerging economic power. In addition to having become the world's largest exporter in 2009, China's economy managed to keep fast economy growth, unlike the majority of developed countries, which are still suffering the negative impacts of the subprime crisis. In fact, the influence of Chinese growth on the world economy had been occurring since the late twentieth century, but has exacerbated since the beginning of the XXI century. In the specific case of Brazil, the growth of Chinese demand for primary commodities (agricultural, minerals and fuels) and its effects on the prices and quantities of exports was one of the factors that help to explain the better performance of the country in recent years compared to previous periods. * Assistant Professor at State Univerisity of Campinas (UNICAMP). celio@eco.unicamp.br
On the one hand the growth of Chinese demand and its effects on international prices exerted a positive impact on Brazilian exports. On the other hand, the emergence of China as a major producer of manufactured goods has caused concerns about competition with locally produced goods. This paper seeks to argue that the way the Brazilian economy has been linked with the Chinese economy, mainly through trade flows, but also through foreign investment flows, on the one hand has offered better prospects for macroeconomic growth. But at the same time, creates obstacles to the manufacturing industry, due to a potential displacement of domestic production in several sectors by Chinese competition. The paper is organized in three sections. In section 2, the paper provides a brief description of bilateral trade flows and try to assess the extent to which China has occupied space in the Brazilian consumption of manufactured goods. In section 3, the bilateral foreign direct investment (FDI) are analyzed, emphasizing the asymmetry in terms of amounts invested and the fact that investment flows tends to reinforce the commercial position established between the two countries. Finally the last section draws some conclusions of the papers. 2 - Brazil's foreign trade and bilateral relations with China The Brazilian economy in recent years experienced a period of extraordinary exports growth, driven by extremely favorable international scenario in force between 2003 and 2008. Besides the increase in the demand for various agricultural and mineral commodities, motivated by China strong economic growth, the rise in international prices of major Brazilian exports products also had positive impacts. While in the period 1990-2002 the average annual growth of Brazilian exports was 5.6%, between 2003 and 2008 this rate rose to 22%. The record volume of over $ 190 billion reached in 2008 exceeded 2003 exports by about US$ 120 billion, resulting in high reserves and reduced external vulnerability. This context lead to more favorable macroeconomic conditions, and was crucial for the resumption of a higher economic growth. The effects of international crisis, however, caused a significant fall in Brazilian exports in 2009, but recovery occurred in 2010 and 2011 leading the country to a new exports record (Chart 1) Chart 1. Brazilian exports and imports. In US$ billion. 1990 to 2011.
300 250 200 150 100 50 0 Exports Imports Source: MDIC/Secex Imports, in turn, also showed significant growth, especially in 2007 and 2008, when the Brazilian domestic market growth and currency appreciation resulted on rise of imports at a rate faster than export growth. The international crisis briefly interrupted this process, but it s possible to see a path of recovery from 2010. Interestingly, when analyzing the overall performance of Brazilian foreign trade, it is possible to note the direct and indirect influence of the Chinese growth in both exports and imports flows. For exports, the effect of Chinese growth caused both an increase in export quantities and prices of a wide range of commodities (Jenkins, 2011). Indirectly, the accumulation of reserves resulting from the exports boom allowed the adoption of economic policies more favorable to economic growth as credit expansion and reduction of interest rate, although the latter variable has been maintained at a level still well above the international levels. But at the same time, exports growth and the entry of capital portfolio investment attracted by the interest rate differential, and both market seeking FDI attracted by the expanding domestic market and resource seeking, aimed to explore the favorable commodities production conditions, resulted in a process of exchange rate appreciation, especially from 2004. The combination of sound internal market growth with over valuated exchange rate, in turn stimulated the imports growth, particularly of manufactured goods. In the post-crisis, rescue policies from central countries turned to increase international liquidity, putting further appreciation of the Brazilian currency. Thus, in 2010 and 2011, the recovery of the Brazilian economy was marked by increased imports. The bilateral trade relations between Brazil and China must therefore be analyzed within this context. From the point of view of exports, it was dominated by the favorable effect of quantity and terms of trade on the commodities. On the other hand, on imports, there is a sharp increase
in imports of manufactured products, with growing competition in the Brazilian domestic market with products originating in China. Looking at the overall bilateral trade data between Brazil and China, as shown in Figure 2, both exports and imports grew at rates much higher than the Brazilian total trade, resulting in an increase in China s relative importance throughout the period. In 2011, China was the main country of destination for Brazilian exports, representing 17.3% of the total and the second largest source of Brazilian imports, with a share of 14.5%. Graph 2. Brazil-China bilateral trade. In US$ billion and % of total. 2000 to 2011. 50 45 40 35 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Exports Imports % exports % imports 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: MDIC/Secex The growing significance of China as a destination market was accompanied by increased importance of other non-traditional markets such as India, Russia, the Middle East and Africa, in the midst of a process of increased market diversification of Brazilian exports. On the other hand, the gains in China s share contrasts with the loss of space of the United States and the European Union, which together represented more than 50% of total Brazilian exports in 2000 and reached about 30% in 2011. Regarding the pattern of origin of imports, there is also a rapid increase in the market-share of China, from 2.2% in 2000 to 14.5% in 2011. Individually, the country became the second largest supplier to Brazil, following only the United States. In the case of imports, China has also gained share mainly at the expense of more developed regions, although the countries of South America also had a small reduction in participation. However, as noted by several authors (Hiratuka et. all, 2012), there is a huge disparity between the profile of Brazilian exports to China and the profile of the imports. The data in Table 1 show that this profile had intensified during the analyzed period. The primary products reach 83% of the total in 2011, reducing the share of the other categories. Moreover, regarding the relative importance of exports to China within each product group, the primary product exports had already reached 18.3% in 2008, and rise further in the post-crisis to
nearly a third of the total in 2011. Also there is an increase in the share in other product categories, such as natural resources-intensive products and manufactured R&D intensive products (mainly aircraft), although at a level far below that seen in primary products. Table 1. Brazilian exports to China by product category. In%. Selected years Share of categories in total exports to China (%) Share in total of each category Categories 2000 2004 2008 2011 2000 2004 2008 2011 Primary Products 66.7 60.0 77.3 83.7 6.5 12.9 18.3 31.7 Natural Rec. Intensive 13.8 19.3 12.2 10.3 1.0 4.2 4.2 7.7 Manuf. Labor Intensive 5.1 4.4 2.8 1.8 0.8 2.4 2.9 4.7 Manuf. Scale Intensive 5.9 10.7 3.6 1.8 0.6 2.8 1.6 2.2 Manuf. Specialized Suppliers 3.2 4.0 2.0 0.7 0.7 2.5 2.1 1.8 Manuf. R&D Intensive 5.4 1.6 2.1 1.8 0.9 1.3 2.8 7.6 Total 100.0 100.0 100.0 100.0 2.0 5.6 8.3 17.3 Source: Secex / MDIC. It s also worth mentioning some important changes in the structure of products purchased from China. Besides the reduction in the share of primary products and resource-intensive products, is also observed a significant loss of share of manufactured intensive in R&D products. On the other hand, the share of labor-intensive manufactured products has risen (especially in postcrisis period), but also scale-intensive products and specialized suppliers (Table 2). Regarding the share in total imports of each category, it s worth to note the increase observed in labor-intensive products, where China accounted for 11.4% of Brazilian imports in 2000 and reached about 30% in 2011. But it also noted a substantial increase in the relative importance of specialized suppliers and scale intensive products. The increase in Chinese exports in these two categories shows the Chinese diversification of manufactured exports towards products such as machinery and automotive products, displacing other traditional exporters to the Brazilian economy. Finally the share in R&D intensive products reflects a position of recognized advantage in electronic complex, which, however, grew more robust until 2008. Table 2. Brazilian imports from China by product category. In%. Selected years Share of categories in total exports to China (%) Share in total of each category Categories 2000 2004 2008 2011 2000 2004 2008 2011 Primary Products 8.0 10.4 4.2 2.5 1.3 3.1 2.6 2.4 Natural Rec. Intensive 13.6 9.9 10.8 9.6 1.3 2.7 5.4 6.0 Manuf. Labor Intensive 18.5 14.9 16.0 19.4 4.9 11.4 23.7 30.6 Manuf. Scale Intensive 14.1 15.4 19.1 21.7 2.2 6.7 13.5 16.2 Manuf. Specialized Suppliers 20.7 18.7 24.2 26.4 2.2 5.9 15.7 20.7 Manuf. R&D Intensive 25.0 30.8 25.6 20.4 2.7 9.6 18.5 20.0
Total 100.0 100.0 100.0 100.0 2.2 5.9 11.6 14.5 Source: Secex / MDIC. The impact of rising imports on the Brazilian industrial production, however, can be better evaluated by the indicator of import penetration. The overall coefficient is measured by the ratio between imports and apparent consumption. In the case of the indicator for Chinese imports, total imports are replaced by imports from China. The analysis of this indicator shows that, considering the whole manufacturing industry, Chinese contribution in apparent consumption in Brazil grew very rapidly over the 2000s, reaching 3% in 2011, which represented about 16% of the overall coefficient of 18, 5%. That is, from the total consumption of manufactured goods in Brazil for use in final consumption or as intermediate inputs, 3% were imported from China (Graph 3). Graph 3. Coefficient of Imports of Chinese products. In%, from 2000 to 2011. 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: CNI and Secex / MDIC. Although still relatively low for total manufacturing, the data by manufacturing sector available from 2007 show that in some industries, the Chinese imports already represents a much larger share of the Brazilian apparent consumption. In the electronics and optical sector, products imported from China accounted for 19.4% of apparent consumption. In this branch, imports from China accounted for 55% of the total import growth between 2007 and 2011 (Table 3). Labor-intensive sectors, such miscellaneous industries (including toys), textiles, clothing and footwear also showed significant growth in the Chinese penetration, especially in 2010 and 2011. Also in these sectors, the contribution of Chinese imports to the total growth was very significant. In addition, should also be highlighted the sectors of mechanical machinery and electrical machinery, with rapid growth of the coefficients and significant levels in 2011. In the case of
mechanical machinery, however, the contribution of Chinese imports was slightly lower than in the other sectors analyzed. Table 3. Coefficient of Imports from China by sector of industry. In%, from 2007 to 2011. Sector Penetration of imports 2007 2008 2009 2010 2011 Cotribution to Imp. Growth. 2007 a 2011 Food 0,1 0,1 0,1 0,2 0,3 12% Beverages 0,0 0,1 0,1 0,0 0,0 0% Tobacco 0,0 0,0 0,0 0,0 0,0 0% Textile 4,3 5,6 5,3 6,8 8,2 54% Clothing 2,2 2,7 3,1 3,5 5,1 63% Footwear 3,6 4,4 4,6 3,8 4,8 47% Wood Products. 0,3 0,3 0,3 0,3 0,5 59% Pulp and Paper 0,2 0,3 0,3 0,5 0,7 18% Print and Edition 0,2 0,4 0,4 0,5 0,6 42% Petroleum Refining 0,3 0,8 0,2 0,3 0,4 1% Chemical 1,6 1,9 1,8 1,8 2,3 11% Pharmaceutical 1,3 1,9 1,5 1,7 1,8 8% Rubber and Plastics 1,1 1,6 1,3 1,7 2,2 23% Nonmetallic minerals 1,0 1,1 1,0 1,6 2,1 44% Metallurgy 1,1 1,6 1,4 2,7 2,7 27% Metal products 1,3 1,4 1,5 1,7 2,3 34% Electronic and Optical 12,8 14,6 15,1 16,8 19,4 55% Electrical Machinery 5,8 6,4 6,4 7,3 8,0 38% Mechanical Machinery 2,6 3,4 3,8 5,1 5,9 23% Automotive Vehicles 0,2 0,4 0,4 0,5 1,0 9% Other Vehicles 1,5 2,1 1,5 1,6 2,4 10% Furniture 0,4 0,6 0,6 1,1 1,3 52% Miscellaneous Prod. 8,3 9,2 9,3 9,6 11,0 42% Source: CNI and Secex / MDIC. It is possible to conclude from the information analyzed, that the increased Chinese competition is relatively widespread in all Brazilian industrial sectors. Moreover, in a relatively large number of sectors, the Chinese competition is already quite high, accounting for considerable portion of Brazilian apparent consumption. It is also noteworthy that, besides a number of cost advantages, such as labor and various government incentives available from various government levels, the gap in exchange rates also extends the advantages of Chinese products. As noted by ABDI (2011) by 2008, largely imports had a complementary role to the domestic industrial production, which had been growing at a rapid pace. However, the increased competition in the post-crisis increased the displacement of domestic production by imports, complicating the resumption of growth in economic activity. 3. Brazil-China bilateral direct investments
Brazil-China bilateral FDI in recent years largely reflect the characteristics of the bilateral trade and differences in competitiveness and corporate strategies between the two economies. The participation of Brazilian as investors in China is still insignificant, concentrated in a few industrial companies. On the other hand, Chinese investment in Brazil had a significant jump in recent years and now represents a significant portion of total foreign investment in Brazil. Although diverse in terms of business and industry sectors, there is a concentration on the amounts invested in primary sectors and services as a strategy to ensure sources of supply of basic and intermediate goods, but also with the participation of relevant manufacturing sectors, especially in the most recent period. As noted in the previous section, the Brazilian trade integration with China has widened significantly in 2000 and was characterized by strong asymmetries. Brazil has concentrated its exports in primary products, agricultural and mineral commodities, while imports are mainly manufactured goods with greater technological content. These characteristics of the trade pattern between Brazil and China explain in part the pattern of productive integration through FDI between the two countries. As widely known, China and Brazil were in the last two decades, major recipients of FDI. In contrast, the two economies were characterized by reduced flows of Outward Foreign Direct Investment (OFDI), especially Brazil, which focused its strategy of international insertion much more on trade than in producing abroad. More recently, the national companies of both countries have intensified their internationalization process, which reduced the asymmetry between FDI and OFDI. But the internationalization strategy was much more aggressive in the case of Chinese firms from the early 2000s. In a ranking comprises the 100 largest companies in developing countries in 2009, 13 Chinese companies were present among different sectors of activities (UNCTAD, WIR, 2010). It should also be highlighted the scale of many of these Chinese companies, most with total sales exceeding $ 20 billion. In the case of China National Petroleum sales exceeded $ 165 billion in 2009. The growing company scale strengthened by the internationalization process helps explain the fact that China is entering the international scene increasingly as a buyer than a seller of companies. In the 2008-09 biennium, Chinese companies have acquired companies in the world totaling $ 59.4 billion, while Chinese companies were sold for U.S. $ 16.3 billion (Table 4). Table 4. Brazil and China, Mergers and Acquisitions Trans - Sales and Purchases. In billions of dollars and percentage of total Sales US$ bilion % Country 2005 2006 2007 2008 2009 2010* 2005 2006 2007 2008 2009 2010* Brazil 3.0 2.6 6.5 7.6-1.4 1.5 0.6 0.4 0.6 1.1-0.5 1.2 China 7.2 11.3 9.3 5.4 10.9 2.0 1.6 1.8 0.9 0.8 4.4 1.6 Purchases 2005 2006 2007 2008 2009 2010* 2005 2006 2007 2008 2009 2010* Brazil 2.5 18.6 10.8 5.2 2.5 4.1 0.5 3.0 1.1 0.7 1.0 3.3 China 3.7 12.1-2.3 37.9 21.5 5.6 0.8 1.9-0.2 5.4 8.6 4.5 Source: UNCTAD - WIR 2010.
(*) Accumulated from January to May. In terms of investment destinations, based on information from MOFCOM of China, it is possible to observe a concentration of Chinese investment in Asia, reflecting a regional division of labor and the establishment of a regional production chain, and the new frontier for Chinese expansion in Africa. Investments in Latin America also have great importance, although it is concentrated in tax havens. Investments in Brazil are of limited importance, albeit rising, and have reached $ 487 million in 2010 Table 5. China's outward FDI by Country of Destination, 2008-2010. In US$ million and% Values (US$ million) 2004 2005 2006 2007 2008 2009 2010 Total 5,498 12,261 17,634 26,506 55,907 56,528 68,811 Asia 3,013 4,484 7,663 16,593 43,547 40,407 44,890 Africa 317 392 520 1,574 5,490 1,439 2,111 Europe 2,046 2,166 597 1,540 875 3,352 6,760 Latin America 1,762 6,466 8,468 4,902 3,677 7,327 10,538 Brazil 6 15 10 51 22 116 487 North America 126 320 258 1,125 364 1,521 2,621 Oceania 120 202 126 770 1,951 2,479 1,888 2004 2005 2006 2007 2008 2009 2010 Share (%) Total 100,0 100,0 100,0 100,0 100,0 100,0 100,0 Asia 54,8 36,6 43,5 62,6 77,9 71,5 65,2 Africa 5,8 3,2 2,9 5,9 9,8 2,5 3,1 Europe 37,2 17,7 3,4 5,8 1,6 5,9 9,8 Latin America 32,0 52,7 48,0 18,5 6,6 13,0 15,3 Brazil 0,1 0,1 0,1 0,2 0,0 0,2 0,7 North America 2,3 2,6 1,5 4,2 0,7 2,7 3,8 Oceania 2,2 1,6 0,7 2,9 3,5 4,4 2,7 Source: MOFCON of China. On the other hand, if we use compute the announced investments of Chinese companies in Brazil, from various sources of information, the amounts invested were much higher: $ 8.5 billion in the period 2003-08 (ECLAC, 2010). In 2009, Chinese companies announced new investments of $ 5.1 billion, which jumped to $ 18.9 billion in 2010 (Table 6). Table 6. Investments Announced by Chinese Enterprises in Brazil. In US$ million. 2003-08 2009 2010 Announced Investments 8.548 5.136 18.940 Source: ECLAC, Sobeet, Economic Value and Bradesco. Table 7. Announced investments of Chinese companies in Brazil in 2010
Company Sector Value (US$ million) Mode Wisco Minning 400 Acquisition Honbridge Minning 400 Acquisition Honbridge Minning 113 Acquisition ECE Minning 1,200 Acquisition Noble Group Agrobusiness 150 Greenfield Chongqing Grain Group Agrobusiness 180 Land Wisco Steel 3,500 greenfield State Grid Eletrictricity 1,700 Acquisition Zhejiang Insigma Eletrictricity 72 greenfield East Stan Holding Cosmetics 24 greenfield Sinopec Oil 7,100 Acquisition Sinochem Oil 3,000 Acquisition Sany Heavy Industries Machinery 200 greenfield XCMG Machinery 22 greenfield Jurong Transport Equipment 300 greenfield Chery Automotive 400 greenfield Miza Motos Automotive 7 greenfield Kasinsky Automotive 145 greenfield and expansion Shineray Automotive 24 greenfield Dayun Automotive 6 greenfield Total 18,942.6 Source: Valor Econômico, Bradesco and Sobeet Therefore, unlike the trade structure, which is growing exponentially but relatively balanced between the two countries, with a small trade surplus in favor of Brazil, in the case of bilateral flows of FDI, there was also substantial growth, but strongly asymmetrical. This asymmetry is evident when looking at the Brazilian investment made in China. Information on the stock of Brazilian investments in China registered in thebrazilian Central Bank show an increasing share by 2006, with a tendency to decrease in 2007 and 2008. It is noteworthy that much of this reduction may be related to methodological changes made by the Central Bank to calculate the stock of OFDI. Between 2001 and 2005, data provided by reporting companies could be related to the value of the last negotiation, the last reported book value, or in case of impossibility of using these two criteria, the acquisition value. In 2006, the reported value has to be the assets value at 31/12. From 2007, the investment has to be considered for listing value on the stock exchange on 31/12, and the value of acquisitions for companies not listed on the stock exchange. Thus, the value of stock OFDI came under the influence of fluctuations in the existing stock exchanges of the countries where the investment was registered, which may help explain the fluctuation in values between 2006 and 2008. Still, it is noteworthy that in any year the volume recorded has come to represent even 1% of the total stock of Brazilian investment abroad. Table 8 -Brazilian Direct Investment Stock in China. 2001 to 2008. In US$ million.
2001 2002 2003 2004 2005 2006 2007 2008 Total 15.2 14.0 15.4 27.8 77.2 95.5 86.0 56.8 Equity 15.1 13.3 15.3 27.7 75.9 93.1 83.5 48.1 Intercompany Loans 0.1 0.7 0.1 0.1 1.3 2.4 2.5 8.7 Source: Central Bank of Brazil Also when considering the Brazilian investments flows in China, the values are very low compared to the total flows. Likewise there is no tendency to increase investment in recent years. Table 9 - Brazilian Direct Investment in China. 2006 to 2010. In US$ million. Year 2006 2007 2008 2009 2010 Value 13 14 15 3 9 Source: Central Bank of Brazil In fact, information on operations of Brazilian companies in China are scarce, reflecting the fact that, unlike the Chinese companies, which in recent years has been increasing its investments in Brazil, Brazilian companies has not considered China as a relevant market in their internationalization process. On the other hand, qualitative research conducted by Sobeet with Brazilian companies with a higher degree of internationalization, indicated that 7.5% of the companies pointed China as a priority market for new investments, behind only Argentina and India, and together with the U.S. South Africa and Colombia (Sobeet, 2010). Still, while for Chinese companies, data from official records contrast with the information sources and business press, in the case of Brazilian companies, the small number of information found on alternative sources shows that the official figures reflect the small amount of Brazilian investment in China, despite plans for future investments. Among the companies that carry out activities in China, can be highlighted: Embraer, Vale, Marcopolo, JBS, Sabo and Fras-le. The large Brazilian companies with a higher degree of internationalization and concentrated in the sectors of agricultural commodities, minerals and metal don t have major investments in China. Vale, for example, operates in joint venture with Zhuahi YPM a 25% stake in the pelletizing unit. The JBS group in turn has only one leather processing unit, formerly belonging to the Bertin Group, acquired by JBS. The other companies, concentrated in the mechanical sector, made investments seeking access to the promising Chinese market. However, the example of companies like Embraer and Marcopolo show that the policy for foreign investors is still very restrictive, being guided primarily by the strategic interests of the Chinese government. Embraer in China produces the 50 passengers jet ERJ 145, together with its partner, China Aviation Industry Corporation (Avic). The two companies have invested $ 25 million and Embraer has 51% of the joint venture. Due to the increased demand for larger regional jets in China, Embraer had plans to manufacture the model 190. However, the projects of local producers (including the Avic) to manufacture aircraft of similar size to the 190 plans made it impossible to carry out new investments. Similarly Marcopolo, which opened in 2008 a components factory in China, has found it difficult to start producing buses, because of the need to have a Chinese partner.
It is clear, therefore, that while Brazil has a very liberal policy, with little strategic guidance on foreign investment, China seeks to maximize local benefits from foreign investment, with strong demand for compensation. Therefore the investment data tend to reinforce the perceived challenges in the trade field, once the majority of Chinese investment in Brazil are directed towards sectors intensive in natural resources, strengthen trade integration on commodity exports. On the other the difficulty of entering the Chinese market as investor makes it difficult to increase exports of manufactures from Brazil. Final Remarks The rapid growth of China and its inclusion as a major commodity buyer and as a major producer of manufactured goods has caused severe effects on the global economy. Brazil has been one of the countries that have felt this double impact of the Chinese economy. However, in Brazil the situation is more complex, since the growth of recent years has been achieved mainly by domestic market growth. Exports of commodities played a key role to enable the reserves accumulation and reduction of macroeconomic restriction. From the demand side, however, growth was driven by increased domestic consumption and investment. The growth of domestic demand has resulted in increased industrial production and employment, reinforcing the cycle of Brazilian economic recovery. But the currency appreciation due to the influx of dollars, and the post-crisis intense international competition have transformed complementarity into displacement of domestic industrial production, as noted in section 2. In this case, Chinese competition has indeed caused concern about the speed of the substitution of domestic production in some sectors. This fact makes it more urgent to adopt industrial and technological policies that strengthen the structural competitiveness of Brazilian industry, and that make it able to withstand Chinese competitive pressure. However confront this challenge is immense. It should be remembered that the size and dynamism of the Chinese market has shifted the scales of production to extremely high levels. This fact provides cost advantages, besides the cost of labor. At the same time, the policy of encouraging the formation of large state and private national groups, has resulted in rapid increase of business scales, leading companies to rapidly expand in the international market. There is, therefore, the challenge of facing a very tough competition in cost, with increasing barriers to entry for participation in global oligopolies. In addition to sectorial policies aimed at increasing the degree of complementarity between the sectors producing commodities and other manufacturing sectors, it is fundamental change the level of the exchange rate so as to change the current relative profitability, clearly unfavorable to the industry.
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