A version of this article was published in Business Day on March 13th.
On March 29th BRICS Heads of State will gather in Delhi. They represent diverse countries. So what are the prospects for sustained cooperation on trade and investment?
Brazil, Russia, and SA are major resource exporters. China is a key demandeur of those resources, and increasingly their major source of manufactured imports, including India’s. India is an increasingly dynamic source of services exports and investment, including to its BRICS partners. Brazil is a significant agricultural exporter, while SA engages in agricultural exports.
Trade economists would approve of these complementary relationships. However, each government’s economic strategy, state capitalist if you wish, particularly with respect to promoting manufacturing, undermines this cohesion.
Brazil’s Dilma government is very keen to boost manufactured exports, but faces a strong structural constraint in the form of currency appreciation. Whilst the US and EU are the current targets of Brazil’s ire, China’s undervalued currency and associated flood of cheap manufactures into Brazilian markets are a growing source of bilateral tension.
SA’s structural relationship to the world economy, and China in particular, mirrors Brazils almost precisely. As in Brazil import-competing manufacturing interests and the trade union movement are sharply critical of the Chinese government’s currency peg.
Russia and India are also very keen to diversify their economies into manufacturing, in Russia’s case to reduce dependence on resource exports, in India’s to enable a transfer of masses of subsistence farmers into the urban economy. China’s manufacturing dominance and currency peg constrains their options too.
In the WTO Brazil’s primary objective remains to open markets for processed agricultural exports; an objective very much in question given the failure of the Doha round to deliver anything. Brazil’s large domestic market and reasonable economic growth remain attractive to domestic and international investors, and demand for Brazilian resources is strong, so the country at least has a safety valve for the foreseeable future. However, major infrastructure bottlenecks and a structural savings constraint inhibit the growth of that market, while the strong currency inhibits exports.
Like its BRIC peers, SA seems to be pursuing a ‘state capitalist’ development path with South African characteristics. The country remains relatively open to trade and investment, but the fallout from government’s intervention in Walmart’s entry into the South African market, and associated moves to tighten controls over foreign investment into South Africa, mean the country is increasingly regarded as risky. On the trade strategy front much emphasis is being placed on regional integration. Whilst this undoubtedly has a role to play in promoting exports of value-added goods the main issue remains anaemic growth in Europe, still the country’s main trading partner.
Russia’s recent entry into the WTO is widely regarded as a positive move that will promote investment into and trade with Russia, not least through reducing risks of policy changes or reversals associated with Russia’s brand of state capitalism. However, it is not clear what Russia’s WTO objectives will be, since its economy is relatively undiversified.
India’s democracy remains capable of pursuing further market reforms in certain areas such as trade liberalization at the margins. But the political economy as a whole renders substantial market openings on either the trade or investment fronts unlikely. The most interesting venture to watch in this regard is the EU-India preferential trade agreement, since it will encompass more than just trade in goods. Yet progress has been predictably slow, and it is unlikely a major liberalizing agreement will be the end result owing primarily to agricultural sensitivities on both sides.
China’s dynamism is driven by the country’s central role in global value chains. However challenges are looming on the horizon. At the geopolitical level major trade frictions are building up with the country’s key trading partners owing to the Renminbi’s peg to the US dollar. Furthermore, the ‘China cost’ is rising inexorably prompted by growing shortages of skilled labour in the coastal areas; increasing minimum wages; rising land, property and energy costs; and infrastructure bottlenecks inhibiting the coastal regions access to the labour supply in the interior.
Consequently the Chinese leadership, itself undergoing a transition, is promoting an historic shift in China’s economic model from export-led to consumption-led. It remains to be seen how this transition will play out, but assuming it does it will have major implications for China’s trade and investment relations, and for global trade and investment patterns.
Clearly forging a BRICS trade and investment platform is a challenging proposition. It is probably easier for the leaders to focus on what unites them in international economic negotiations, rather than what divides them in bilateral relations. However, some attention will have to be paid to those differences if their cooperation on the international stage is to be fruitful.
Accordingly, the BRICS leaders could consider the following broad elements of a trade and investment agenda.
First, India, Brazil, and SA have shown that whilst their agricultural interests diverge tremendously, they can collaborate on a common agenda in the WTO and thereby shift the locus of negotiations. This was achieved through the agriculture G20, established at the early stages of the Doha round. A broader discussion, now including Russia and China, should be pursued with its core focus being on providing emerging market leadership to resuscitate the round. Furthermore, the future of the WTO should be an issue of core interest. All five have expanding global trade and investment footprints, and therefore an interest in exploring small group negotiations, or plurilaterals, to advance WTO rules.
Second, China’s 12th Five year Plan should be explicitly engaged. Since China is embarking on this historic transformation, encompassing currency reform, the implications and how it will affect China’s BRIC partners should be on the table.
Third, this issue also features strongly on the G20 heads of state agenda. A common BRICS position on currency reforms, the associated unwinding of global economic imbalances, and how to revive global trade talks would help substantially to address the impasse on these issues at the G20 level, thereby reducing growing protectionist pressures.