Letter IEDI n. 1054—Complexity of Brazilian exports and competition from China
Today's Letter IEDI analyzes the level of complexity of Brazilian manufacturing exports, as well as the competitive pressure exerted by China in the main markets for our industrial goods—namely, Mercosur (Argentina, Uruguay, Paraguay), LAIA (Bolivia, Chile, Colombia, Ecuador, Peru, Venezuela) and NAFTA (United States, Canada and Mexico).
The most recent data refer to 2018 and show that there was an interruption in the continuous downward trend of Brazilian exports in the ranking of economic complexity observed between 1995 and 2008. After occupying the 25th position in this ranking in 1995, we fell to 48th in 2008 and to 50th in 2014. Since then, there has been little change: we moved to 49th in 2018.
In addition to this virtual stabilization of our position between 2014 and 2018, the economic complexity index (ECI) of our exports also remained steady during the period, at the level of 0.21. This performance is in line with the country's evolution in the global ranking of manufacturing exports, in which Brazil continued in the same position: 32nd in 2014 and 2018.
In the period analyzed in this letter (2014 and 2018), Brazil was expected to do a little better due to two factors. On the one hand, the seriousness of the 2015–2016 economic crisis and the low domestic growth in the 2017–2018 biennium put pressure on Brazilian companies to seek some mitigation of losses through the foreign market.
On the other hand, there was a considerable depreciation of the real (18.5% in real effective terms in 2018 compared to 2014), increasing the competitiveness of the Brazilian product abroad. The greater export momentum, however, was dampened by the lack of acceleration in external demand. As shown in Letter IEDI n. 1040, the growth rate of the volume of international trade was 3.4% in 2014 and 3.6% in 2018.
This illustrates the importance of leveraging the competitiveness of the Brazilian productive structure, which requires not only macroeconomic prices (interest and exchange rates) at stable and favorable levels for exports, but also structural reforms, such as a tax revamping, and industrial, technological and environmental policies that respond to the challenges posed by new technologies and climate change. Wider instruments for financing our exports and integration with other markets through trade agreements would allow for a horizontal, transparent and gradual opening.
In contrast to the Brazilian performance, China, a global leader in exports of manufactured goods, registered an uninterrupted advance in the complexity ranking between 1995 and 2014, going from 46th to 18th place, where it remained in 2018, even though its ECI increased slightly (1.29 in 2014 and 1.34 in 2018). That is, while in 1995 China would need to climb 21 positions to reach Brazil, in 2018 it was Brazil that would need to move up 31 places to reach China.
Although China's ECI rose very little in the period we are studying, the “product space,” elaborated from the Atlas of Complexity data, indicates that the probability of China increasing its economic complexity in the coming years is much higher than Brazil's.
And how did Brazilian and Chinese exports evolve in the main markets for our industry (Mercosur, LAIA and Nafta)?
Between 2014 and 2017, the IEDI study shows that, in some cases, the Brazilian export basket became slightly more complex. It seems that, in a context of economic slowdown in Latin America and low domestic economic dynamism, Brazil sought to adapt to the rise of Chinese competition not only by increasing external sales of commodities (products of low complexity), but also of manufacturing goods with relatively higher levels of complexity, especially in the automotive sector (such as "cars" and "vehicle parts") and, to a lesser extent, in the machinery sector (such as "bulldozers, angledozers, levelers, etc.", which appeared on the list of main products exported in 2018).
Considering the three regions, this strategy was more successful in Mercosur. Although foreign sales to the bloc grew only 2.4% (the lowest among the three if we exclude Venezuela from LAIA's total—as its economic crisis resulted in an 87.5% drop in Brazilian exports), the composition of the basket sold to Argentina improved, mainly due to the higher participation of automotive products.
The trade agreement between Brazil and Argentina certainly contributed to this performance, but this same positive evolution occurred in countries with which Brazil does not have this type of deal, such as Uruguay in Mercosur and Chile, Colombia and Peru in LAIA.
In the case of LAIA, when considering the changes in participation in the countries' total between 2014 and 2018, there was also an improvement in our export basket, since the share of Venezuela (whose purchases were the most unfavorable in terms of complexity in both years) plummeted from 28.5% in 2014 to 4% in 2018.
On the other hand, the shares of Colombia and Peru increased and their import baskets improved in the period analyzed (due, largely, to a rise in the participation of “cars”). The increase in the share of chemical products (such as polyethylene, polyacetals and medicines), with slightly higher product complexity indexes (PCIs in an intermediate range between 0.50 and 1.00) also contributed to this favorable performance.
In the case of NAFTA, the profile of exports in terms of complexity—which was already low due to sales to the United States and Canada being concentrated in commodities—deteriorated further in the period in question. This is because the export basket to Mexico, with a greater share of machinery and, above all, vehicles (associated with a commercial agreement in the automotive sector), has become less complex due to a fall in the share of "cars".
In contrast, in China's foreign sales to NAFTA, we saw a rise in the participation of more complex products from the electronics and machinery sectors, sold to the three countries in the region, together with a more general trend of improvement in the degree of complexity.
As the set of goods produced by different countries change over time, the PCIs also vary. For example, when a good becomes less complex, it means that more countries have started to manufacture it or that exporting countries have suffered a reduction in economic complexity.
These changes also contributed to an improvement in the performance of Brazilian exports by the criterion of economic complexity, since the PCI of some important products on our basket for the countries considered (such as "cars") increased in the period. At the same time, the index for products in the electronics and machinery sectors with a greater degree of complexity (such as “TV and radio transmitters” and “computers”)—whose share in Chinese exports to the three regions is high—suffered a reduction.
However, in the face of competition from China (whose basket is more diversified and has a greater presence of relatively high PCI products), Brazil's progress between 2014 and 2017 remains limited, especially if we consider the important influence of the cyclical economic factors mentioned above.
The results in this Letter reinforce the vision that the IEDI presented in the document “For a world-standard industry,” in which we argue that Brazil should adopt an industrial strategy to strengthen the production of more complex goods, associated with a foreign trade policy to stimulate exports of products with higher PCIs. Our skills in sectors such as automotive vehicles and parts, electronics and machinery could thus be extended towards goods similar to those we already produce, but of greater complexity.
Trade relations with Mercosur, LAIA and Nafta, which import manufacturing products of greater economic complexity from Brazil (with emphasis on Mexico and Argentina), remain strategic for us, although the country should establish commercial ties with as many countries as possible.