* Brazil trade balance worsens as industry loses ground
* Currency war unveils “fat” such as red tape, taxes
* Concern over Chinese import flood could trigger reforms
By Raymond Colitt
BRASILIA, Jan 18 (Reuters) - The label “Made in China” is stirring an ever-greater backlash in Brazil as cheap imports ravage local manufacturers, putting pressure on new President Dilma Rousseff to fight back.
While Brazil boasts one of the world’s few pockets of robust growth, its emergence as an economic power masks deep, fundamental imbalances, especially in manufacturing industry.
From car parts to shoes and textiles, imports are flooding Brazilian factory floors and supermarket shelves.
Finance Minister Guido Mantega says Brazilian industry is being hurt by a global “currency war” with China, the United States and others pushing down the value of their currencies to boost exports.
Novelis, a unit of India’s Hindalco Industries (HALC.BO), last month shut down its factory in the northeastern coastal city of Salvador, blaming the closure on rising costs and Brazil’s strengthening currency.
“If this is a war, we’re the soldiers taking the hits,” said Maria Chagas, one of hundreds of metalworkers made redundant by Novelis.
Brazil's real BRBYBRL= has gained more than a third against the dollar in just over two years and imports from China have surged, climbing 60 percent last year.
“The Chinese are killing us. If we don’t do something fast, our industrial power will gradually crumble,” said Raul Klein, vice-president of Brazilian shoe industry group Abicalcados.
Graphic on forex measures: r.reuters.com/mez94r
Graphic on economic growth: link.reuters.com/huf64p
Political risks in Brazil: [ID:nRISKBR]
Brazil’s problems highlight how this week’s meeting between U.S. President Barack Obama and Chinese President Hu Jintao -- at which the issue of the yuan will be front and center -- has reverberations well beyond those two countries’ borders.
Worried by Chinese policies, Rousseff is moving away from the stance of her predecessor and mentor Luiz Inacio Lula da Silva, who saw Beijing as more of an ally than an enemy in his effort to stem U.S. and European influence in Latin America.
A career technocrat who took office on Jan. 1, Rousseff has pledged to raise the sensitive issue of the yuan during an April summit of the BRIC group of emerging economic powers -- Brazil, Russia, India and China.
Rousseff could even seek closer ties to Washington to pressure Beijing on the issue, one cabinet minister said.
Economic growth of around 7.5 percent last year, due in part to high prices for Brazilian commodities, has partially masked the fallout from the overvalued real and the currency war, a termed coined by Mantega last year.
“This has been a silent war, hard to discern because of the overall growth. But once you look at the numbers, it’s alarming,” said Rogerio Cesar de Souza with Iedi, an industry-financed think tank in Sao Paulo.
Industrial production has largely been flat since August of last year, and the trade balance in manufactured goods has swung from a surplus of $5 billion in 2006 to a deficit of $71 billion last year.
Chinese imports jumped to $25.6 billion last year, up from $16 billion in 2009 and $5.3 billion in 2005. China is now the second-largest supplier to Brazil after the United States with around 80 percent of its sales made up of manufactured goods.
A main culprit is clearly the real, which according to Goldman Sachs is the world’s most overvalued currency.
Yet, it also reflects Brazil’s apparent inability to tackle many of the long-term issues that make it an expensive and unwieldy country in which to operate.
Double-digit interest rates, a rigid labor market, disincentives to export value-added products, and a total tax burden of around 38 percent of gross domestic product are among the biggest obstacles that Brazilian businesses face.
“We haven’t been doing our homework. It’s a Brazilian problem, not Chinese or American,” said Augusto de Castro, vice-president of the Brazilian Foreign Trade Association.
Brazil ranks 127th in a World Bank study of the business operating environment in 183 countries.
“This is a big red flag of inefficiency. Brazil may be a waking giant but it’s too fat and clumsy for this international race,” said Humberto Barbato, head of Abinee, an electronics industry group.
The problems could get even worse in the short run. Looking to tame inflationary pressures, Brazil’s central bank is set to raise interest rates. That will attract more capital and further buoy the currency.
The overall trade surplus is expected to plummet to $8 billion this year and $5 billion in 2012 from $20 billion last year, already its lowest in eight years. If prices on key Brazilian exports such as soy, beef and iron ore were to ease, the trade balance could even turn negative for the first time in over a decade, says Iedi’s Souza.
Rousseff, like her predecessor Lula, is taking mostly palliative measures to provide short-term relief rather than adopting deeper structural reforms to tackle the root causes of the currency’s strength.
The government has hiked taxes on foreign capital inflows and banks’ currency deposit requirements to restrict speculation on the real. It also granted targeted tax breaks and increased import tariffs in struggling industries.
“The government won’t remain passive or inert as our currency appreciates and harms our industry,” Trade and Industry Minister Fernando Pimentel said when he took office earlier this month [ID:nN03181487].
Rousseff has said she will prioritize some kind of tax reform and adopt large spending cuts to reduce government borrowing needs and help lower interest rates.
But with much of her political support linked to public sector unions, Rousseff has expressed little interest in structural reforms such as cutting generous labor and pension benefits. She also defends a big state apparatus and is unlikely to lower the overall tax burden.
Still, with only slim chances of obtaining significant concessions from Beijing, Rousseff may be forced to give in to industry demands for higher import tariffs and measures to boost the economy’s competitiveness.
“This is probably Rousseff’s biggest challenge. Like it or not, she will have to embrace structural reforms and step up trade protection,” said Andre Nassar at Icone, a Sao Paulo-based think tank on trade. “The currency is the cause of the war but not its solution.” (Editing by Brian Winter and Kieran Murray)