Brazil Gets Protective Vis A Vis China

One of the priorities of the newly elected President of Brazil, Dilma Rousseff, is to reign in the rise of the Brazilian Real. As can be seen in the first chart, the real has been appreciating for almost two years from February 2009, when the rate was 2.3750 Reias to the Dollar to the end of 2010 when the rate was 1.6593 Reias to the Dollar, an appreciation of almost 40%. Not only has the Real appreciated against the dollar, but it has also appreciated against the Chinese Yuan. The cross rate between the Real to the Dollar and the Yuan to the Dollar is shown in the second chart. Since May, 2010 when the Chinese government allowed the Yuan to appreciate, the Yuan has appreciated 3.6% relative to the Dollar, but has appreciated 10.2% relative to the Real. The second chart shows the Real/ Yuan cross rate and the spot rate of the Yuan relative to the Dollar.

The appreciation of the Real has led to a serious deterioration in Brazil's current account as can be seen in the third chart. Much of the deterioration can be attributed to a shift in the pattern of trade to increased trade with China and reduced trade with the United States. Chinese increasing demands for raw material to fuel its growing economy have led to greatly increased exports from Brazil. With the greater appreciation of the Real relative to the Yuan than that of the Dollar to the Yuan, Brazilian imports from China are cheaper and have risen rapidly, prompting the Brazilian government to take protective measures--Brazil recently raised tariffs on Chinese toys. The third quarter of 2010 saw a marked narrowing of the difference between imports from China and imports from the United States. In fact, September imports from China exceeded those from the United States, Brazil's long time major supplier of imports.