just in in-tray, per stratfor whisling, believing that brazil, after spending fruitless decades close to washington, will spend a few more decades to do same with same
Brazil: U.S.-Chinese Competition in Latin America
Stratfor Today » August 12, 2009 | 1711 GMT
Summary
The Export-Import Bank of the United States is interested in going beyond its $2 billion preliminary agreement with Brazilian state-owned energy company Petroleos Brasilieros. It is clear that Washington is positioning itself to take a more active role in boosting U.S. investment and exports to Brazil, where China is doing the same. Competition between the United States and China will give Brazil more options as it seeks to become a global energy player.
Analysis
The Export-Import Bank of the United States (Ex-Im Bank), a government-run financing bank for U.S. exporters, has set its sights on Brazil. Ex-Im Bank officers have shuttled back and forth to Brazil over the past few months, and in late July, the bank’s president made his first official trip abroad to Rio de Janeiro with a group of technocrats to make known his optimism toward investing in Brazil. The bank approved a $2 billion preliminary agreement with Brazilian state-owned energy company Petroleos Brasilieros (Petrobras), first proposed in May, and signaled that there was more to come if Brasilia was interested. Subsequently, in early August, U.S. National Security Adviser Gen. James Jones discussed U.S. investment plans with Brazilian officials, one of whom claimed afterward that the U.S. loans to Brazil could eventually reach $10 billion or higher. While the $10 billion sum is not technically true at present, the Ex-Im bank has expressed its eagerness to go beyond the initial $2 billion with its Brazilian partners. The terms and specifics of the agreement have not yet been decided, nor are any particular U.S. companies associated with the initial deal.
What is clear is that the U.S. government is positioning itself to take a more aggressive role in promoting U.S. goods and services as a means of meeting surging demand in Brazil for large-scale development and infrastructure projects in energy production (both renewable and non-renewable), mining and agriculture. Energy production is of course a high priority as the United States attempts to diversify and secure its energy sources. But as the United States turns to aid Brazil’s energy sector, it will come into competition with another major player with the same idea: China.
The Ex-Im Bank was created in 1934, in the midst of the Great Depression, to provide credit for American export businesses. At the time, the world was consumed in layers of protectionism that had been installed by governments in a vain attempt to shield their economies from a brutal depression, and the government bank was set up to provide credit on terms that the private sector could not provide. Throughout the decades, the bank has also provided funds for U.S. strategic interests (such as the Burma Road to supply Chinese nationalists in 1938, the Marshall Plan to rebuild Europe after World War II, and loans to Poland and then-Czechoslovakia in the immediate aftermath of the Soviet collapse). The bank’s primary purpose today is to provide U.S. exporters with pre-export capital guarantees, trade credit and insurance, loan guarantees and even direct loans, with an emphasis on developing countries. In 2008, the Ex-Im Bank approved $14.4 billion in financing to support $19.6 billion-worth of domestically produced U.S. exports.
Mexico is currently the Ex-Im bank’s biggest customer. In 1982, the bank teamed up with the International Monetary Fund to bail the Mexican government out of the Latin American debt crisis, to the tune of $10 billion. In recent years, it has committed $5 billion to supporting Mexican state-owned energy company Petroleos Mexicanos (Pemex), despite the company’s decline due to mismanagement and unpredictable government intervention discouraging investment.
But the Ex-Im bank’s focus is shifting, not only towards politically attuned projects like promoting U.S. small businesses, environmentally friendly projects, and development in Sub-Saharan Africa, but also toward places where the United States sees expanding markets, most notably India and Brazil.
Brazil is developing rapidly and needs outside investment for a number of projects. Brazil is not chronically short of capital like many Latin American countries, but instead has considerable stores of domestic capital from which to draw. Over the years, beginning with massive trade surpluses from exports, it has developed a diversified range of sectors, including banking and energy, preventing it from becoming too dependent on other countries.
Nevertheless, there remain areas where Brazil needs outside investment because the projects are capital intensive and because they require advanced technology and extensive expertise. These projects include the deep-sea petroleum reserves that Petrobras has uncovered in recent years, such as the estimated 80 billion barrels of hydrocarbon reserves in the pre-salt area that lie about 4 miles beneath the ocean. Petrobras needs deep-water drilling platforms, equipment and machinery, transportation infrastructure and a long chain of suppliers, plus engineers and skilled workers, thus requiring foreign investment.
Enter China. China has been on a foreign investment and acquisitions spree throughout the global crisis, realizing the inherent value of having state-controlled banks flush with cash while the rest of the world’s banks were cracking apart. The Chinese invest abroad for a number of reasons, all driven by the need to maintain economic growth. This also means trying to secure energy, mineral and food supplies that are critical, but that are subject to global pricing fluctuations, which have a powerful effect on China’s delicate economic and social balance. The Chinese are looking to Central Asia, Southeast Asia, Africa and Latin America especially as places where their cash can get them access to resources that are critical to their future.
The Chinese also carry a fat wad of cash and have shown increasing interest in Latin America. Earlier this year Beijing ponied up $10 billion for Petrobras, among a spate of other huge investments. For the United States, this means that the Chinese are bringing to bear their economic might to make a bigger footprint in the United States’ backyard. Of course, the United States has a strong economic relationship with Brazil, with exports reaching $32.3 billion, mostly for machinery and aircraft; U.S. direct investment into Brazil rose to $42 billion in 2007 (the most recent data). But as the Brazilians were sure to stress to U.S. officials, for several months in early 2009 the total value of Brazil-China trade exceeded total U.S.-Brazilian trade, making China — at least for the time being — Brazil’s biggest trading partner.
With the Ex-Im Bank’s eagerness to work with Brasilia, it is clear that the United States does not intend to let Beijing outpace U.S. influence in Brazil so quickly. The Ex-Im Bank has committed $2 billion just for starters, and the overall proposition is essentially a running line of credit that the Brazilians will be able to draw on repeatedly for a wide range of projects. These range from oil and gas to renewable fuels like wind and solar, ethanol production, plus all the attendant infrastructural and supply components of these industries like the highways and vehicles. All they need is approval from the U.S. bank, which has signaled its optimism about reviewing whatever projects the Brazilians submit — and believes it has the liquidity to support.
Another factor behind Washington’s move is that the U.S. economy is shifting in ways that could spur domestic companies to seek more business abroad. Until now, they have simply been able to live high on the hog with America’s robust domestic demand — the United States has the world’s largest consumer market by a factor of three — and not worry too much about external markets. This has allowed competitors like China to swoop in and grab market share. If Washington can facilitate the outward moves of U.S. companies, then they will have an easier time making deals with the Brazilians — but they will also come into direct competition with China.
From Brazil’s point of view, both China and the United States have a lot to offer. Petrobras has set a goal of raising $174 billion over the next five years for the capital projects needed to develop its extensive offshore reserves, but to do so it will need funds from a variety of investors, and as such, competition between the United States and China will further its aims. Moreover, Brazil is in the process of drafting a new energy law to attract foreign investment, rather than attempting to do everything itself. Both China and the United States have massive consumer markets and the will and capacity to invest in Brazil. While the Chinese can bring large amounts of ready cash, so can the Americans, and U.S. companies also bring technology and expertise that cannot be found elsewhere. At the same time, the objections to inviting China and the United States into Brazil’s strategic sectors are also similar. In Brazilian domestic politics, there is plenty of anti-Americanism to complicate making big deals. But while U.S. corporations are often reviled in Latin America for exploiting resources and sending profits back home, the Chinese come with their own complications — they tend to import their own labor, thus not contributing to local employment or incomes.
Ultimately, Brazil’s specific set of needs might align better with the United States. Brazil as a whole has grander ambitions than to merely supply others with commodities — its manufacturing prowess is also developing rapidly, potentially putting it in competition with the Chinese, especially for market share in the United States. Moreover, the advantage for Brazil of gaining access to U.S. technology and skilled labor cannot be overstated both because of the technical difficulties associated with the specific pre-salt deposits in question, and because Petrobras’ ultimate goal is to become a global energy supermajor. In this sense, Petrobras will compete with Chinese energy companies, especially those seeking to become major players in global offshore production.
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