A series of events since early 2018 has exposed the risky dependence of the European Union and the United States on China for imports. With $1.2 trillion worth of goods flowing in from China annually, both economies have become vulnerable to disruptions. This over-reliance has been highlighted by several key events:
- COVID-19 pandemic: Supply chain bottlenecks, particularly affecting the automotive industry, exposed the fragility of relying heavily on Chinese manufacturing.
- Russia’s invasion of Ukraine: This conflict triggered global inflation and economic instability, especially in Europe, which is heavily reliant on Russian energy.
- Growing concerns about China: Beyond these specific events, broader concerns about China’s political and economic ambitions have further fueled the desire to diversify supply chains.
- Risk of a Taiwan Invasion by China: If this occurs, we can assume severe supply chain disruptions where store shelves in the United States will go empty. The best opportunity is to de-risk out of China today.
Essentially, the EU and the US have realized that putting all their eggs in the China basket poses a significant economic and strategic risk.
The world is changing, and Brazil must seize the emerging opportunities. With political unity, Brazil could become the “country of the future” today. The prize is a share of the $600 billion market for goods currently imported by the United States and Europe. These goods can now be competitively produced in countries like Brazil and Argentina.
At the G7 summit in Hiroshima in May 2023, member countries expressed their intention to “de-risk” their supply chains from China. “De-risking” essentially means establishing a “Plan B” for manufacturing.
For example, if a company currently relies on China to manufacture microwaves for the European market, the G7 initiative encourages finding another country to produce the same microwaves outside of China. This strategy aims to mitigate potential disruptions caused by an escalating conflict between China and Taiwan, which experts predict could occur between 2025 and 2027.
Anticipating this geopolitical shift, many companies are already proactively diversifying their production and supply chains.
The exodus of manufacturing from China is a tangible reality. This shift is evident in the export growth of several countries:
- Vietnam: Exports to the United States surged from $50 billion in 2018 to over $150 billion in 2023.
- Indonesia: Demonstrating rapid growth, Indonesia’s exports to the US rose from $21 billion in 2020 to $37 billion in 2022, an increase of $8 billion per year. At this pace, Indonesia could reach $100 billion in annual exports to the US by 2027 or even sooner.
- India: Exports to the US have climbed by $40 billion over the past three years.
- Mexico: Between 2016 and 2022, Mexico significantly expanded its exports to the US, with an increase of nearly $160 billion.
Meanwhile, imports from China to the USA have stagnated, remaining at roughly the same level as in 2018. This data clearly illustrates how companies are diversifying their production away from China.
Brazil is failing to capitalize on a momentous global economic shift. While other countries are experiencing significant export growth, Brazil’s exports to the United States have increased by a mere $10 billion since 2019, averaging only $2.5 billion per year. Brazil has the potential to increase this growth by $20 billion annually, but it needs to act decisively to seize this opportunity.
Fortunes are made during the times of Crisis. Brazil must step up.
While China has outcompeted Brazil in manufacturing over the past 35 years, the landscape is shifting. Labor costs in China have risen significantly, with average monthly wages now at $400, exceeding those in Brazil.
This wage advantage, combined with Brazil’s existing infrastructure near ports and a large pool of underemployed workers, creates a prime opportunity for Brazil to regain its competitive edge in various manufacturing sectors.
China’s economic rise was fueled by its export-oriented manufacturing sector. Now, a similar opportunity presents itself to Brazil. Vietnam, Mexico, Indonesia, and India are already capitalizing on the shifting global landscape. Brazil needs to awaken to this potential and actively pursue its own export-led growth strategy.
To achieve this, Brazil needs a monumental shift in industrial and tax policy. While Brazil has advantages, it must still compete with countries like Indonesia and India, which have lower wages.
However, Brazil possesses key strengths:
- Proximity to major markets: Brazil is closer to Europe and the United States, reducing shipping times and costs.
- Established infrastructure: Existing ports and organizational structures facilitate smoother operations.
- Strong labor laws: Brazil’s labor laws align with the standards of Europe and the United States, which is crucial for many companies.
- Cultural affinity: Shared cultural elements with the US and Europe can ease communication and collaboration.
- Favorable time zones: Similar time zones minimize the need for inconvenient late-night or early-morning meetings.
These factors position Brazil as an attractive alternative to Asia for companies seeking to diversify their manufacturing.
Here is what needs to be done:
Brazil should establish Special Economic Zones with business-focused tax breaks specifically designed to boost exports. These zones should be strategically located near all major Brazilian ports. Even existing industrial centers like Sao Paulo, with areas such as Caraguatatuba, offer significant potential:
- Caraguatatuba: This area boasts 1,000 hectares available for factory development, a newly built road network, a planned container port in nearby Sao Sebastiao, and a large pool of underemployed workers.
The availability of flat land near ports is ideal for manufacturing and export operations.
Furthermore, existing businesses that generate net dollar gains through exports should have their tax burdens reviewed and potentially reduced to incentivize further export growth.
To incentivize this manufacturing shift, Brazil needs a comprehensive and aggressive strategy with the following key elements:
Infrastructure and Land:
- Dedicated Industrial Zones: Designate 1,000 hectares near each of Brazil’s 40 major ports specifically for export-oriented manufacturing.
- Free Land: Give land away for free for real manufacturing commitments.
Financial Incentives:
- “$1 Factories”: Construct factory shells near ports that are offered to foreign and domestic companies for a nominal $1 fee, with the requirement that they generate a specific net dollar gain for Brazil. Companies would then install their own equipment.
- Get out the word: Launch marketing campaigns to promote these “$1 factories” internationally.
- BNDES Support: The Brazilian Development Bank (BNDES) should provide subsidized loans with interest rates of 0-1% to:
- Build factories and purchase equipment.
- Refinance existing manufacturers to facilitate expansion.
- Finance new equipment purchases and factory start-up costs.
- Loan Forgiveness: Offer loan forgiveness programs based on:
- Job creation targets.
- Export value milestones.(net dollars received)
- Sourcing 100% of factory inputs from within Brazil.
Taxation:
- Tax Exemptions: Eliminate property taxes, ICMS (tax on the circulation of goods and services), and state/local taxes within the zones.
- Profit-Based Taxation: Levy taxes on profits only if they exceed 15% of revenue.
- Accelerated Depreciation: Allow factories to deduct capital expenditures as operating expenses.
- Capped Profit Tax: Cap profit taxes at 15%.
- Tax Breaks for Foreign Workers: Exempt skilled foreign workers and executives from income tax.
International Collaboration and Promotion:
- Trade Agreements: Collaborate with the US and European governments to establish trade policies favoring Brazil and Latin America.
Regulatory Framework:
- Simplified Company Registration: Streamline the process for US and European companies to obtain a CNPJ (Brazilian company registration number). Online only applications in “English”
- Predictable Currency Policy: Implement a long-term currency policy managed by the Central Bank to ensure a gradual weakening of the Real by 1-3% per year, enhancing export competitiveness.
- Guaranteed Policy Stability: Guarantee a 30-year period of policy stability with no changes to laws or the addition of new regulations within the zones. The goal is to minimize bureaucracy over time, which has greatly afflicted the Manaus free trade zone, where now it is harder to do business in Manaus than in other parts of Brazil.
- Utilities and Permitting:
- Provide free water and sewage services.
- Offer subsidized electricity costs.
- Eliminate permitting and licensing requirements for manufacturing by pre-approving all construction within the zones.
Environmental and Labor Regulations:
- Clear Environmental Standards: Establish clear and enforceable environmental regulations, including:
- Prohibitions on dumping waste in rivers.
- Mandatory waste treatment and emissions controls.
- Enforced recycling programs.
- Specialized Labor Zones: Create special labor zones with regulations designed to minimize labor lawsuits and provide a more predictable environment for businesses.
- Training Centers: Establish government-funded training centers in each free trade zone to equip Brazilian workers with the necessary skills.
Partnerships and Incentives:
- Joint Venture Incentives: Offer additional incentives, such as reduced tariffs on goods sold in the Brazilian market, to foreign companies that form 50/50 partnerships with Brazilian companies.
- Tariff Exemptions: Eliminate tariffs on imported components and unfinished goods to support the assembly of complex, high-value products like smartphones and computers in Brazil.
These are indeed robust and extensive measures, involving significant subsidies. However, for this program to succeed, Brazil must fully commit. There’s no middle ground: the project will either fail completely or become a resounding success, potentially generating $200 billion in new exports for Brazil annually.
How can Brazil afford it?
China’s wealth wasn’t built on taxing its factories. Instead, it focused on generating revenue through exports, effectively treating the dollar itself as a form of “tax collection.” Just like a store in Sao Paulo aims to sell products to earn reais, China recognized the power of earning dollars. They subsidized production in Yuan, minimized taxes in Yuan, and prioritized generating export revenue in dollars.
By implementing a similar strategy, Brazil could potentially capture $200 billion per year in new exports from Europe and the United States. This influx of dollars would have a transformative impact on the Brazilian economy, potentially doubling its GDP and elevating it to the position of the 6th largest economy globally.
With increased revenue, BNDES could expand its lending capacity into the trillions of reais, financing infrastructure projects, housing development, and other initiatives that would propel Brazil towards first-world standards.
With dollar reserves in the hundreds of billions, inflation pressures subside, and interest rates will drop.
Given President Lula’s strong relationship with China, he is in a unique position to negotiate with the US and secure substantial funding for Brazil’s manufacturing expansion plan. This presents a win-win scenario for both countries: the US gains a reliable partner to diversify its supply chains, and Brazil receives the necessary investment to boost its economy.
Brazil holds significant leverage in this situation. The US is about to tariff China and will need to find countries willing to invest in themselves to become wealthy.
To achieve this, Brazilian politicians and industry leaders must unite and present a comprehensive proposal to the US and Europe. This is a pivotal moment for Brazil to seize this opportunity and transform its economic future.
