Why is Brazil doing so well in the current geopolitical climate?

Since 1980, the Brazilian economy has consistently underperformed compared to other LatAm markets, but the end of July may be showing promise of returning to the glory days. With workers often striking and a questionably inefficient public sector – Brazil often struggles to keep afloat financially. It seems that 2018 has been the year of buoyancy for the brasileros. In the rubble of the current trade conflict – Brazil may re-establish itself as the captain of Latin American markets.

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Since Trump declared a trade war with China, Brazil has found itself in a strong position. Seeking alternatives, the Chinese have begun trading with Brazil to fill the gap left by sanctioned American supplies, which have been taxed by up to 25%. Should they continue to build this trade relationship, Latin American emerging markets could profit significantly – with Brazil at the spearhead.

Brazilian stocks have been rallying as their domestic political environment improves and they take the mantle as a primary beneficiary for the U.S.A.’s trade war with China. The Bovespa Index has since jumped 12% during the past month while the iShares MSCI Brazil Index ETF has also risen by 12%.

As exportation makes up a mere 13% of the Brazilian GDP, they are relatively unaffected by external events. However, they still remain the largest exporter of food, soft commodities, and minerals – coincidentally, the same exports that China previously bought from America. These two aspects should be seen as the reason China would turn to Brazil – a somewhat stoic economy with expertise in exports that the Chinese have been deprived of. Because of this, should the Chinese decide to continue trading with Latin America, the Brazilian GDP will most likely prosper.

Peter Donisanu, an investment strategy analyst at Wells Fargo Institution, has claimed that there is an improvement in risk sentiment across emerging markets and Brazil is piggybacking off of that. He continues arguing that recent easing of trade tensions between the U.S. and some of its key partners has improved sentiments around emerging markets, and consequently, Brazil.

While there has been an improvement in risk sentiment, as Donisanu claims, LatAms sudden boost seems to be directly correlated to recent political events, and it would be a large coincidence to say otherwise. While Brazil most definitely is piggy backing off attitudes towards emerging markets, their disproportionate boom should be attributed to the Chinese interest – not a general interest.

Who Will Be Affected by China’s Trade War?

After sitting on the cusp of a financial war with China, the U.S.A. has finally unleashed their tariffs on Chinese goods after accusing them of stealing intellectual property in March. This back-and-forth disrepute of imposing tariffs on certain items will have a backlash on the citizens of both countries as China seek to reprimand the U.S. The Chinese have since stated has since stated that although they did not start this conflict, they will fight back.

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Chinese technology is receiving a 25% tariff due to accusations by the Trump administration that the Chinese stole intellectual property which optimizes semi-conductor chips. These chips are found in most electronics, ranging from televisions, personal computers, iPhones, and cars. Unfortunately, it seems that the U.S. consumer will most likely be footing the bill as China’s production pricing will remain the same, but the cost to American citizens will increase by 25%, and the Chinese will not be covering these expenses.

China will not take a hit to its economy lightly and have already planned their retaliation by focusing their own tariffs on a wide variety of U.S. exports. This ranges from plastics, to nuclear reactors, to even dairy making equipment. China must be vigilant and handle these tariffs sensibly as Chinese brokerages are sitting on more than £240 billion of loans that grow riskier by the day as China’s equity market tumbles. Losses on the debt could wipe out 11pc of the industry’s net capital, the U.S. bank reported in July; and we suspect this is something U.S. Administration is aware of.

The reality could be more than fist wagging as this tariff war is the biggest economic attack in history. Although undoubtedly better than boots on the ground, this conflict still poses a threat to Americans and Chinese citizens. Firstly, American citizens have a lot to lose beginning with the aforementioned 25% tax they are going to need to pay on certain goods. Further issues include a shrinking market from Chinese buyers, and even rotting livestock due to smaller demand which will heavily affect farmers in the red Mid-West as they lose access to China’s market and are left with excess goods.

It seems likely that the war will not take place in the open, and the real battle will be “on the flanks in the form of unnecessary inspections, product quarantines, and heightened regulatory scrutiny” says James Zimmerman, a partner in the Beijing Office of International Law.

But in reality, this war affects everyone across the globe. With reduced access to the U.S. market, China’s growth may come to a halt which would have a knock-on effect to all world economies. Increased caution and confidence for business will cause uncertainty within China’s market and puts expansion plans on ice. With the two biggest economies grinding themselves against each other, could there be space for a third party to intervene?