Not just waiting around for higher tariffs, China looks to BRICS

Donald Trump’s cabinet appointments and policy pronouncements have been dominating the headlines and many of these appointments and pronouncements have dire implications for China. The Chinese have noticed.

They’re signaling some of the ways they will react if Trump tries to shut China out of the US market. You might even say they’re reacting pre-emptively.

Trump has chosen China hawks for his secretary of state (Marco Rubio), national security advisor (Mike Walz) and ambassador to China (David Perdue). He has repeated his promises to impose 60% tariffs on Chinese products. The other day, he threatened the nine members of the BRICS bloc, which include China, with 100% tariffs if they attempt to replace the US dollar as the world’s reserve currency.

The BRICS countries aren’t seriously threatening to do that – any time soon, at least. For the Chinese yuan – the obvious candidate – to play the reserve-currency role, China would have to liberate its controls on flows of capital. It doesn’t want to do that.

But BRICS is an important part of China’s reaction to the risk of severe limitations on its access to the US market. The idea is diversification – relying more on other trading partners for both imports and exports. As US farmers can easily imagine, Brazil – the B in BRICS – is near the top of China’s dance card.

The other reaction China is signaling is retaliation. When the Biden administration added new restrictions on chip technology exports to China in early December, it took China less than 24 hours to respond with a ban on exports to the US of four critical minerals that China mainly supplies.

Diversification, though, may prove a particularly important part of the strategy. China is already the largest trading partner of more than 100 nations. What it needs to compensate for the loss of the US market is more trade with countries that have relatively large economies. Some of the BRICS nations are in that category.

The bloc members are Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates. Turkey, Azerbaijan and Malaysia are applying to join and other countries may well follow.

India would be the big prize for China. It has the world’s largest population and, by one measure, the fifth largest gross domestic product. But India and China are rivals.

India is wooing many of the foreign investors that are leaving China. The two countries have a long-running border dispute. Although they’ve made progress recently in de-escalating tensions, their diplomatic relationship has been described as “frosty.”

Brazil has a population over 200 million and the world’s ninth largest economy, bigger even than Russia’s. China has been its largest trade partner since 2009. According to the Economist, Brazil is one of the few countries running a trade surplus with China.

During Trump’s first term, the Economist calculates, Brazil’s exports to China nearly doubled. Ag exports played a leading role as China reacted to Trump’s tariffs by switching more of its ag-product purchases from the US to Brazil.

That switch could become even more pronounced in Trump’s second term. A study by the American Soybean Association and National Corn Growers Association predicts aggressive new US tariffs against Chinese products would cost American soybean farmers $8 billion in lost value and corn farmers $5 billion.

China also hopes to export more to Brazil. Its car makers are already selling electric vehicles there and two of them, BYD and Great Wall, are planning to open electric-car factories in Brazil next year. Those factories will doubtless import a lot of parts from China. SpaceSail, a Chinese challenger to Elon Musk’s Starlink in satellite telecommunications, recently signed an agreement to do business in Brazil.

China and Brazil are drawing closer diplomatically, too. China recently upgraded the status of its relationship with Brazil. Brazil’s left-wing president, Luiz Inacio Lula da Silva, joins Chinese President Xi Jinping in supporting the BRICS’ aspirations for what one expert delicately calls “a world order independent of US hegemony.”

Last year, China and Brazil experimented with trading in their own currencies rather than in dollars. The value of the transaction was tiny but others could follow. If they do, they’ll test whether Trump is serious about those 100% tariffs for countries that reject the dollar.

Brazil isn’t the whole answer for China, to be sure. But it would go some ways toward making up for lost market opportunities in the US.

American farmers and ranchers must hope the US will find a market of similar size to compensate for what they could lose in China in the years ahead. (Asia Times)