Analysis: Brazil and China: A young marriage on the rocks

At least once a week during her young presidency, Dilma Rousseff has met with trusted advisers to try to solve an intractable problem -- China.

Only a few months ago, Brazil and China seemed destined to enjoy one of the defining alliances of the early 21st century -- two fast-growing emerging market economies seeking ever-greater opportunities for business together and standing side by side on key global issues such as trade negotiations.

It's not quite working out that way.

Rousseff's regular meetings are just one sign of how she is steering Brazil toward a more confrontational stance with China. She is trying to address what she sees as an increasingly lopsided relationship while also bringing Brazil's strategic alliances in line with her dream of turning it into a middle-class country by the end of the decade.

The core problem is a torrent of Chinese imports that has quintupled in size since 2005, with disastrous effects for Brazilian manufacturers and the well-paying, highly skilled jobs that Rousseff is so focused on creating.

While the weekly session of ministers and finance ministry officials is ostensibly about how to improve Brazil's competitiveness in global trade, it's basically a China meeting, said one high-level official who takes part.

Relations between the two countries are not hostile, the official said. But we are going to take measures to protect ourselves ... and push for a more equal relationship.

In the short term, senior government sources say that will mean more targeted tariffs on manufactured goods coming from China and tighter supervision by customs officials, as well as more anti-dumping complaints against Beijing.

New restrictions on foreign mining companies are also likely, officials say, reflecting concerns that China wants to consolidate its grip on Brazil's commodities wealth while offering insufficient access to its own market.

In a break from her predecessor, Luiz Inacio Lula da Silva, Rousseff will push for a stronger yuan currency and more access to the Chinese market for Brazilian companies like airplane maker Embraer when she visits China in April.

In the long run, Brazil and China are likely to retain relatively warm ties and continue to expand bilateral trade. Yet the shift evolving since Rousseff took office on January 1 could affect everything from Brazil's relationship with the United States to the future of so-called south-south ties among emerging market countries.

It's surprising that the relationship is changing so fast, said Mauricio Cardenas, director of the Latin America program at the Brookings Institution, a Washington think tank.

Brazil is clearly seeking major changes ... That could have consequences for all of Latin America as many other countries, who are experiencing the same problems (with China), follow the example of Brazil, Cardenas said.

BRAZIL NAIVE IN CHINA RELATIONSHIP

Redefining a relationship with China is easier said than done. Just as the United States has struggled to balance its demands for a stronger yuan against its desire for cheap Chinese imports and financing, Brazil must also untangle a web of dependence that has grown rapidly in the last decade.

Bilateral trade soared from just over $2 billion in 2000 to $56.2 billion in 2010. China has surpassed the United States as Brazil's main trading partner and was the biggest single source of foreign direct investment last year, at about $17 billion.

The robust trade growth helped Brazil's economy expand last year at its fastest pace in two decades. It also means that any efforts by Rousseff to pass new protectionist measures may be fruitless, said Qiu Xiaoqi, China's ambassador to Brazil.

Trade between China and Brazil grew so fast because of a reciprocal need. When that need exists, nobody can get in the way, Qiu told Reuters in a rare interview.

Qiu, who prides himself on his Brazilian cultural knowledge and insisted on conducting the interview in Portuguese, attributed anti-China rumblings to a minority of officials on Rousseff's team. He also pointed out that Brazil had a large trade surplus with China last year -- about $5 billion.

A closer look, however, shows that it would have been a deficit if not for an extraordinary increase in the price of iron ore, which accounted for 40 percent of exports to China.

Brazilian exports to China as measured by weight -- thus, controlling for increases in commodities prices -- fell 3 percent in 2010, while Chinese imports rose 89 percent.

Brazil has been naive in its management of the China relationship in recent years. It's far more uneven than most people think, said Fernando Henrique Cardoso, an opposition party leader who was president of Brazil from 1995-2003.

SEEKING CLOSER TIES WITH WASHINGTON

Despite Brazil's strong economic growth last year, its manufacturers are reeling. Industrial production has been flat or shrinking since April, and the damage in areas like textiles and shoes has been so severe that the National Industry Confederation, or CNI, has warned of deindustrialization.

The shift under Rousseff reflects her emphasis on nurturing local industries while Lula's trade policy was in part dictated by his dream of a grand alliance among developing nations.

Still, some who do business in both countries worry that China is being used as a scapegoat for Brazil's own problems.

Brazil's lack of competitiveness has nothing to do with the Chinese, said Charles Tang, president of the Brazil-China Chamber of Commerce and Industry in Rio de Janeiro.

He attributed Brazil's problems to high taxes, labor costs and infrastructure bottlenecks that, along with an overvalued currency, make local goods comparatively expensive to produce.

He also said that Brazilian companies, which for decades focused primarily on their own large domestic market, have missed several opportunities to do more business in China.

Soraya Rosar, a trade expert at the CNI, agrees but says Rousseff needs to push for greater access to China's market.

Frustration with Chinese policies, especially over its slow appreciation of the yuan, has convinced Rousseff's team that Brazil must strengthen ties with the United States if it is to negotiate on anything approaching an equal footing with China.

Brazil alone will accomplish little, said one official close to Rousseff. With the United States by our side, maybe they'll listen to us.

The U.S.-Brazil relationship, which suffered under Lula, has changed rapidly under Rousseff. President Barack Obama will travel to Brazil in March, and China will be a subject ripe for discussion when Treasury Secretary Timothy Geithner visits next week, a source with knowledge of the talks said.

Cardoso says Rousseff appears to be recasting Brazil's foreign policy with China as both a threat and an ally.

China for many years cleverly tried to frame the relationship as 'south-south' ... that its interest was the same as Brazil's interest. But China's not the south. China is China, with its own set of interests, Cardoso said.

Cardenas, of the Brookings Institution, says Brazil's policy shift could have profound implications if other countries follow its lead.

The Chinese were confident that they could count on the south-south relationship for support, but now they're seeing these voices of criticism are not just coming from the U.S., he said. When your friends start to turn against you, maybe it's time to reexamine things.