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XPnomics: Brazil’s economy through the XP’s eyes 4Q19 – Lasting Trade War
XPnomics:Brazil’s economy
through the XP’s eyes
4Q19 – Lasting Trade War
Executive Summary
Marcos RossSenior Economist
XPnomics 4Q19
▪ The year 2019 was marked by numerous episodes of trade disputes between various countries, notably the imposition and postponement of trade tariffs by the United States and China. The hostile climate has not gone unnoticed by either the financial market or entrepreneurs, resulting in considerable losses to financial assets and global trade.
▪ We do not expect 2020 to be different, despite the current cool-down of trade tensions. Asian and Western countries have been waging a (lasting) battle for technological hegemony and the US lost 2.7 percentage points of total world exports of high-tech goods in the last decade (mostly) to Asian countries. This is the main backdrop behind the current Trade War and we believe the US will not give up easily.
▪ Trump’s strategy against Brazil is not entirely clear. First, because Brazil imports more high-tech goods from US relative to China (when including non-electronics) and second because the proposed tariffs harm several US manufacturing sectors that import these goods from Brazil (even companies in the steel sector).
▪ In any event, we see two main reasons why Trump´s administration decided to target Brazil: 1) 5G Technology dispute and increasing trade partnership high-tech US competitors and 2) Brazil´s exports harm Trump´s interest groups.
▪ While the economic effects of tariffs on Brazil's steel and aluminum are potentially limited, rising trade tensions have had a considerable negative effect on global trade volume and we believe this effect to be more detrimental to Brazil´s economy.
▪ Looking ahead, we do not see a wide range of products that could be targeted by US tariffs, but we list some of them based on Brazil´s market share in US imports and trade volume.
Trade War and its backdrop
XPnomics 4Q19
The ongoing high-tech battle
The past decade has been marked by the
remarkable loss of US share in the high-tech
manufactures world trade. While maintaining its
second position with approximately 8.8% (T.1.)
of total US exports of high-tech products, the US
lost 2.7 percentage points in the last decade to
Asian countries, more specifically to China, Hong
Kong, Vietnam and South Korea (F.1.).
• 2019 was marked by numerous episodes of trade disputes between various countries, notably
the imposition and postponement of trade tariffs by the United States and China. The hostile
climate has not gone unnoticed by either the financial market or entrepreneurs, resulting in
considerable losses to financial assets and global trade.
• The current cool-down of trade tensions along with a little more clarity about some
geopolitical risks (e.g. Brexit) brought some relief after a full year of uncertainty. However, we
do not expect 2020 to be any different.
• On a structural point of view, Asian and Western countries have been waging a (lasting) battle
for technological hegemony. This battle that has been won by China and other Asian countries
is the backdrop of the trade war that began in 2018 and culminated in 2019. Therefore, is likely
that US will keep heading the dispute until it regains some share in this market.
T.1. Participation in high-tech products world exports (%)
Selected countries 2008 2018 Diff.
China 12.6 16.1 3.5
USA 11.5 8.8 -2.7
Germany 9.2 8.0 -1.2
Hong Kong 4.7 6.5 1.8
South Korea 3.9 5.0 1.1
Netherlands 4.6 4.3 -0.3
Singapore 4.1 3.9 -0.2
Taiwan 3.1 3.6 0.6
France 4.5 3.6 -0.9
Japan 5.3 3.5 -1.8-4.0 -2.0 0.0 2.0 4.0
United States
Japan
Germany
France
Belgium
United Kingdom
Canada
Finland
Sweden
Netherlands
Hungary
Brazil
Italy
Singapore
Poland
Kuwait
Switzerland
Saudi Arabia
Malaysia
India
Taiwan
United Arab Emirates
South Korea
Vietnam
Hong Kong
China
F.1. Winners and Losers: high tech exports electronic and electrical products
%, change in total share of high-tech world exports in the last decade (2008 - 2018)
Win
ne
rsLo
sers
XPnomics 4Q19
The wide(ning) high-tech exports gap
In 2007, China and US were on an equal footing in the high-tech manufacturing export market.
Since then things have changed considerably. By 2018, China's exports reached the US$ 496
billion mark, while Chinese exports totaled US$ 905 billion (1.8 times greater than US, see F.2).
This gap has widened rapidly over the last years and was largely driven by the rapid expansion
of Chinese electronics exports (F.3). Moreover, as per 2018 data, approximately 67% of all
countries (134 out of 201) imports more high-tech manufactures from China relative to US,
showing the Chinese leadership in this market.
Nominal GDP at stake?
In addition to the dispute for hegemony in the world trade of high-tech manufactures, China and
the US are also waging a long dispute for economic hegemony. If we consider GDP at current
values, the US still win this dispute. However, if we consider the GDP adjusted for the
purchasing power of currencies, China surpassed the US in 2014. Even though this issue may
be secondary from a trade war perspective, it certainly does not help.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
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F.3.China exports to US exports ratio(TYPES: High-skill and technology-intensive manufactures)
Electronics (excluding parts and components)
Parts and components for electrical and electronic goods
Other, excluding electronics
0.0
0.3
0.5
0.8
1.0
1.3
1.5
1.8
2.0
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F.2.China exports to US exports ratio(TOTAL: High-skill and technology-intensive manufactures)
High-skill and technology-intensive manufactures
0.0
5.0
10.0
15.0
20.0
25.0
1990 1994 1998 2002 2006 2010 2014 2018
F.5.GDP(PPP, constant 2011 international US$ trillion)
China European Union United States Euro area
2010
2014
2015
0.0
5.0
10.0
15.0
20.0
25.0
1990 1994 1998 2002 2006 2010 2014 2018
F.4.GDP(current US$ trillion)
China European Union United States Euro area
Brazil in this context: no country is an island
XPnomics 4Q19
China and US are Brazil's two largest trading
partners. Over the past decades, Brazilian
exports to China have grown exponentially and
the country became Brazil's main trading
partner. In 1998, China represented only 1.8%
of our exports, while in 2018 it reached 26.8%.
In the same period, Brazilian exports to the US
went from 18.9% to 12.2%. Despite the loss of
representativeness, the US is still our second
largest trading partner. Together, the exports
to these two countries together amount to
38.9% of our total exports.
Regarding the export schedule by product groups, Brazil exports mainly food and manufactured
products, with China and Netherlands being the main buyer of the former and the US and
Argentina of the latter.
Main products and partners
34.3
33.7
12.4
12.2
5.3
1.3 0.9
Manufactured goods
Food, beverages andtobacco
Fuels
Ores and metals
Agricultural rawmaterials
Pearls, precious stonesand non-monetary gold
Other
Rest of World; 44.9
USA; 22.9
Argentina; 15.5
Netherlands; 8.3
Mexico; 4.4Chile;
4.0
Rest of World; 48.6
China; 38.1
Netherlands; 4.3
USA; 3.6 Iran; 2.7Hong Kong;
2.6
Products breakdown
Destination
F.7 Brazil´s export breakdown, 2018
0.0
5.0
10.0
15.0
20.0
25.0
30.0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
F.6. Brazil´s main trade partners(% of total exports)
China USA
XPnomics 4Q19
The recent US attack
• 2018: The American animosity toward Brazil began in March 2018 when the US President
Donald Trump announced that he intended to impose tariffs of 25% on steel imports and
10% on aluminum imports. In May of that year, after imposing steel and aluminum quotas,
the United States maintained the tariff exemption of steel and aluminum from Brazil,
Argentina and Australia, on the grounds that the three countries agreed to take measures to
reduce the volume of exports to the United States.
• 2019: On December 2nd, 2019, Donald Trump tweeted that the US would reinstate tariffs on
all steel and aluminum from Brazil and Argentina under the assumption that both countries
were presiding a “massive devaluation of their currencies”. On December 20th, 2019,
following a telephone conversation with Jair Bolsonaro, the American president withdrew
the punitive measure (see Appendix A for the social media unfolding).
• Likely foundations: Trump’s strategy against Brazil is not entirely clear. First, because both
Brazil and Argentina import more high-tech goods from US relative to China (when including
non-electronics), and, besides that, even when restricting the analysis to high-tech goods
only (electric and electronics), both countries show a lower exposure to China for
international standards; second, because the proposed tariffs harm several US
manufacturing sectors that import these goods from Brazil (around 80% of steel exports
from Brazil to the US are intermediary products) and even companies in the steel sector
(e.g. Nucor that use cheaper, more efficient electric-arc furnaces);
In any event, we see two main reasons why Trump´s administration decided to target Brazil.
a) 5G Technology and increasing trade partnership high-tech competitors: in a meeting with
Bolsonaro held in November, Huawei's president made clear the company's interest in
Brazil's 5G networks. Brazil still remains neutral regarding this subject, but the subject is
being closely monitored by the US. Besides that, Brazil has increased its trade relation with
several Eastern countries too, but mainly with Asian ones. This greater partnership with
direct high-tech US competitors is probably not well taken by US.
b) Brazil´s exports harm Trump´s constituents: US Steel and Aluminium industries are a key
priority for the Trump administration. Therefore, imposing a tariff on such products was a
way to strengthen relations and raise votes. This is in line with Trump´s recent policy which
mandated a greater use of US made steel and iron in federal infrastructure projects.
XPnomics 4Q19
Regarding China, demographic and urban pressures and the search for economic protagonism
are factors that limit Chinese protectionist measures against Brazil and all other countries.
Despite being only China's 20th largest trading partner, Brazil exports a significant volume of
food products to the country and its relative importance for China has been increasing steadily
over the last decades. Thus, the focus of tension in 2020 should remain the US and its
protectionist stance.
Finally, while the first-order economic effects of
tariffs on Brazil's steel and aluminum are limited,
rising trade tensions have had a considerable
negative effect on global trade volume. Tweets
with promises to impose tariffs on new products
and new countries and little clarity about the
conduct and content of trade negotiations
between countries imposed a great discomfort
on the financial market and the real economy in
2019. As a consequence, global trade
experienced a pronounced slowdown in the last
two years (F.10). Thus, we believe this second-
order effect to be more detrimental to Brazil´s
economy than the direct effects of tariffs on
steel and aluminum products.
• Impacts: Brazil’s Steel and Aluminum exports to US amount to USD 4.15 billion approximately
and this represents only 1.7% of our total exports. (F.8 below, source: UNCTAD, 2018). Despite
the low range of the suggested tariff, these products have been gaining share in the overall
exports to US over the years and currently reached the all time high of 14.2% of Brazil´s exports
to US (F.9).
0.0
0.5
1.0
1.5
2.0
2.5
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
F.8. Brazil's steel and aluminum exports to US(% of total exports)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
F.9. Brazil´s steel and aluminum exports to US(% of total exports to US)
-54.0%
-36.0%
-18.0%
0.0%
18.0%
36.0%
54.0%
72.0%
90.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Oct
-11
Oct
-12
Oct
-13
Oct
-14
Oct
-15
Oct
-16
Oct
-17
Oct
-18
Oct
-19
F.10 World Trade vs Global Economic Policy Uncertainty
(%, trailing 12-months)
World trade (LHA) GEPU (RHA)
Looking ahead: potentially targeted products
XPnomics 4Q19
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30.0
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D. High trade volume
Coffee and coffee substitutes
Lime, cement, fabrica. constr. mat. (excludingglass, clay)
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B. Low trade volume
Aluminium ores and concentrates (incl. alumina)
Meat, edible meat offal, prepared, preserved, n.e.s.
Leather
0.0
10.0
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30.0
40.0
50.0
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C. Medium trade volume
Ingots, primary forms, of iron or steel; semi-finis.
Pulp and waste paper
Fruit and vegetable juices, unfermented, no spirit
Alcohols, phenols, halogenat., sulfonat., nitrat. der.
Tractors
Sugar, molasses and honey
0.0
12.0
24.0
36.0
48.0
60.0
72.0
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A. Very low trade volume
Iron ore and concentrates
Tobacco, unmanufactured; tobacco refuse
Furskins, tanned or dressed
F. 11. U.S. imports from Brazil as percentage of total U.S. imports (%)
Note: Data from UNCTAD. Elaboration by XP Investimentos. Only products whose participation were higher
than 10% in 2018.
While it is difficult to specify over which goods the US has strategic interest (and therefore
impose tariffs), we believe that an alternative way of doing so is to look for which Brazilian
goods had a sizeable market share (greater than 10%) in 2018. This can be measured by the US
imports from Brazil to US total imports ratio.
In addition, this classification may be split by import volumes, i.e. from very low to very high (see
Appendix C for classifications), to verify the relevance of each market share.
We understand this is an imperfect metric, but we believe it can serve as a first assessment on
what goods could be targeted by the US in the event of the escalating trade war with Brazil. The
Figure 11 below displays the goods that fall into these categories.
Appendix AList of products and latest Social Media developments
XPnomics 4Q19
Aluminium and steel (+iron) products
Ingots, primary forms, of iron or steel; semi-finis.
Aluminium ores and concentrates (incl. alumina)
Flat-rolled prod., iron, non-alloy steel, coated, clad
Iron & steel bars, rods, angles, shapes & sections
Tubes, pipes & hollow profiles, fittings, iron, steel
Aluminium
Flat-rolled products of alloy steel
Wire of iron or steel
Rails & railway track construction mat., iron, steel
Ferrous waste, scrape; remelting ingots, iron, steel
Structures & parts, n.e.s., of iron, steel, aluminium
Flat-rolled prod., iron, non-alloy steel, not coated
Source: UNCTAD.
The social media series
“Brazil and Argentina have been presiding over a massive devaluation of their
currencies. which is not good for our farmers. Therefore, effective immediately,
I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S.
from those countries.“ (Trump´s Twitter, Dec 2nd 2019)
"I had a phone conversation a few moments ago with Donald Trump. ... He was
convinced by my arguments and decided to tell all Brazilians that our steel and
aluminum will not be hit by additional tariffs.“ (Bolsonaro´s Facebook, Dec 20th
2019)
“Just had a great call with the President of Brazil, @JairBolsonaro. We
discussed many subjects including Trade. The relationship between the United
States and Brazil has never been Stronger!” (Trump´s Twitter, Dec 20th 2019)
List of Aluminium and Steel products
Appendix BGreater partnership with Asian countries
XPnomics 4Q19
2008
2018
Brazil´s main trade partners (% of total exports). Selected countries.
Brazil´s exports of Aluminium (Quantum)
XPnomics 4Q19
2008
2017
Appendix BGreater partnership with Asian countries
XPnomics 4Q19
2008
2017
Brazil´s exports of Steel and Iron (Quantum)
Appendix BGreater partnership with Asian countries
XPnomics 4Q19
Appendix CUS imports distribution: classification according topercentiles 20%, 40%, 60% and 80%
Classification Brackets (US$ th.)
Very Low [ 0 ; 725 [
Low ] 725 ; 2,346 ]
Medium ] 2.346 ; 4,892 ]
High ] 4.892 ; 11.769 ]
Very High above 11.769
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XPnomics 4Q19
Zeina LatifChief Economist
Marcos RossSenior Economist
Lisandra BarberoEconomist
ECONOMIC TEAM
