Bridges Weekly Trade News DigestVolume 16Number 14 • 11th April 2012

Brazilian President Cites Currency Concerns in White House Visit


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Monetary policies in rich countries are putting emerging economies at risk, Brazilian President Dilma Rousseff told US President Barack Obama on Monday. The comments at the high-profile White House meeting come amid growing tension between developed and emerging economies over the impact of exchange rate policies on trade, which has led Brazilian officials to recently renew warnings of a global “currency war.”

“Expansionist monetary policies …ultimately lead to a depreciation in the value of the currency of developed countries, thus impairing growth outlooks in emerging countries,” Rousseff said after meeting with Obama, while acknowledging the role of the European Central Bank and others in preventing a liquidity crisis “of substantial proportions” that would have been detrimental to all countries.

For his part, Obama did not address the monetary policy issue in his remarks on Monday, emphasising instead the “record levels” of trade and investment between the US and the world’s sixth largest economy. The relationship between Washington and Brasilia “has never been stronger,” he said.

Monday marked Rousseff’s first visit to the White House since taking office in January 2011. The meeting between the leaders of the Western Hemisphere’s two largest economies comes just weeks after Rousseff renewed earlier warnings of a “currency war,” arguing that a “tsunami” of cheap money from countries such as the US and the 27-member EU bloc is flooding emerging markets and damaging their export competitiveness (see Bridges Weekly, 7 March 2012).

Speaking to US university students the next day, the Brazilian President argued that developed countries should invest more to recover from the crisis, rather than rely excessively on monetary policy. She also dismissed concerns that Brazil is pursuing protectionist measures in response to its currency problems.

“We are not a protectionist country nor do we believe that it provides results in terms of an increase in competitiveness,” she said.

Rousseff’s comments echoed similar remarks made in March when meeting with German Chancellor Angela Merkel, during which the Brazilian leader criticised efforts by European countries to stimulate their struggling economies via low-interest loans as tantamount to “artificial forms of protectionism.” (See Bridges Weekly, 7 March 2012)

“We have a currency war that is based on an expansionary monetary policy that creates unequal conditions for competition,” Rousseff said at the time.

Brazil, Russia, India, China, and South Africa, meeting on 29 March for their annual BRICS summit, similarly criticised rich countries for their monetary policy, despite initial hesitation by Beijing, which was reportedly concerned that including language on monetary policy in the BRICS communiqué could be seen as Brasilia indirectly targeting China’s own currency policies (See Bridges Weekly, 4 April 2012).

The currency issue has also been a source of contention at times within the five-country grouping, with tensions simmering between Brazil and China over the impact of the latter’s rigid valuation of the renminbi on Brazil’s export competitiveness.

However, Brazilian Trade Minister Fernando Pimentel sought to dispel concerns that Beijing and Brasilia are still at odds over currency policy, telling Reuters prior to the BRICS summit that “today’s [problem] doesn’t have to do with China,” but rather with the dollar and the euro.

The relationship between currency and trade also came to the fore at a WTO seminar last month, an initiative that was spearheaded by Brazil (See Bridges Weekly, 4 April 2012). The symposium was primarily limited to developing a better understanding of the issues involved and their implications, leaving the touchy subject of members’ rights and obligations under the WTO agreements for future discussions.

Brazil was the US’ eighth largest goods trading partner last year, with US$74 billion in total bilateral goods trade. The US goods trade surplus with Brazil was $12 billion in 2011, according to figures from the Office of the US Trade Representative.

Real continues to struggle

The Brazilian economy has been struggling in recent years to weather the effects of the real’s appreciation, particularly with regards to its manufacturing sector. Growth slowed to a disappointing 2.7 percent last year, down from 7.5 percent in 2010.

In response, the South American country has adopted various measures to protect its domestic industries, such as the extension last month of an existing six percent financial transactions tax to overseas loans maturing in up to five years, among others.

In an interview with Brazilian newspaper O Estado de São Paulo published earlier this week, Fernando Pimentel - the country’s trade minister - said that Brazil will not generalise the financial transactions tax to all foreign capital, adding that Brazil would have to get used to a strong real.

However, Brasilia could step up defensive measures to shield its agrochemical and pharmaceutical industries from foreign competition, he said.

While Brazil’s efforts to stem the flow of imports from abroad - including a recent quota imposed on auto imports from Mexico - have been criticised by some of its trading partners, Pimentel rebuffed speculation that its measures were WTO-incompatible. “There are always going to be people complaining and gritting their teeth… but nobody is going to set a panel against us,” Pimentel told the newspaper.

Rousseff and Obama are next scheduled to meet at the Summit of the Americas in Colombia on 14-15 April, where the Brazilian President promised to bring up the currency issue once more in a broader discussion on regional integration and boosting economic growth.

ICTSD reporting; “Brazil President Urges Healthy Developed Countries To Spend More,” DOW JONES NEWSWIRES, 10 April 2012; “Rousseff seeks US support in ‘currency war’,” FINANCIAL TIMES, 9 April 2012; “UPDATE 2-Brazil complains to Obama about monetary policy,” REUTERS, 9 April 2012; “Brazil will not levy taxes on all foreign capital-Minister,” REUTERS, 8 April 2012; “Brazil Leader Slams U.S. Money Policy,” WALL STREET JOURNAL, 9 April 2012.

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