How China hurts Brazil

OP-ED: Brazil's China headache, By Sebastian Mallaby, Washington Post, December 14, 2009

Mallaby's argument for Brazil to step up and confront China directly over its dollar peg. Brazil is being screwed over by Beijing's ploy much like the EU and SE Asia.

The core of the logic:

If economic logic prevailed, the real would fall against the Chinese yuan: China has a vast current account surplus, while Brazil has a deficit. But last year China re-pegged its currency to the dollar, so the yuan has followed the dollar down, hammering Brazil's ability to compete against Chinese producers. Meanwhile, the illogically weak yuan hurts producers in other countries, encouraging central banks to keep interest rates low and driving yet more capital into Brazil. This pressure from China is likely to grow along with China's economy.

What can Brazil do about its rearing currency? It could cut interest rates to deter money from coming in, but Brazil's economy is hot and lower rates would risk inflation. It could fight capital inflows with taxes -- it has already experimented with this option -- but such restrictions tend to leak like umbrellas made of icing. It could intervene in the foreign-exchange market, selling reals and buying dollars, but then scarce Brazilian savings would get tied up in the depreciating greenback. Or Brazil could protect its industry with tariffs. But protectionism could spark a cycle of retaliation.

The grim truth is that Brazil's domestic tools aren't powerful enough to stop its currency from threatening its success. So what about diplomacy? Asking the United States to raise its interest rates and take pressure off the real is a non-starter. With U.S. unemployment around 10 percent and an additional 7 percent of the U.S. workforce obliged to get by on part-time jobs, there is no way the Fed can raise interest rates to rescue Brazil from its predicament.

That leaves the option of talking to China.

It has been an interesting byproduct of this crisis--beyond the whole China-saves-capitalism headline--that China's currency peg and the damage it does to the rest of the global economy is finally being revealed. The old hushed story about the China model was that it could not be replicated because China itself blocked the path of any other nation that might seek to emulate it, and yet that reality seemed decidedly unclear to most emerging markets. Now, with China free-riding the dollar's decline in such an obvious way, Beijing's willingness to dismiss the rest of the world's concerns that it's unfairly hoarding the recovery's growth opportunities is coming under increasing fire.

Obviously, it's not an easy thing to confront the nation who's commodity purchases help drive your nation's economic growth, and yet, the longer you resist doing so, don't you simply become more and more its raw materials vassal?

As always, there is no such thing as deepening connectivity and "non-interference." All connectivity is interference.

(Via WPR's Media Roundup)