China and Brazil are becoming BFFs. Should we be worried?

RIO DE JANEIRO — The big question after the announcement of a potential $53 billion investment agreement between Brazil and China on Tuesday is whether it should be a cause for concern, especially as the deal includes discussions about defense, plans for a ‘bi-oceanic’ railway to connect Brazil’s Atlantic coast to Peru’s Pacific rim, and talk of a “new global order.”

The answer: Not too much, at least not yet, because the 36 agreements — in mining, oil, infrastructure, technology and agriculture — that the countries signed as Chinese Prime Minister Li Keqiang began a South America tour in Brasilia on Tuesday were really about business, not geopolitics.

“It’s the story that’s been playing out for several years of a more intense relationship between Latin America and China,” said João Augusto de Castro Neves, Latin America director in the Washington office of the Eurasia Group, a political risk consulting outfit. “There are converging interests on both sides to follow through on all these promises,” he said, but he added:, “It’s always good to take the numbers they announce… with a grain of salt.”

With Li in Rio de Janeiro on Wednesday, Brazilians began digesting the grandiose numbers and promises. “We constructed, by means of principles of equality and mutual trust, the basis for a global strategic partnership between China and Brazil,” President Dilma Rousseff said in a speech. Trade between both countries was worth almost $80 billion in 2014 alone, she said.

“China and Brazil are, respectively, the biggest developing countries in the East and West hemispheres,” Li said in his speech. “The intensification of the cooperation between China and Brazil… will help the recuperation of the world economy.”

Yes, Brazil, China and Peru did agree to studies on a possible railway across the continent just months after it emerged that a Chinese billionaire is planning a canal across Nicaragua. The Chinese will deliver a feasibility study by next May. But how likely is it?

“From a logistical point of view, it makes sense. Brazil needs to create shortcuts to the Pacific,” de Castro Neves said. But he cautioned: “I would be surprised to see this project come to fruition anytime soon.”

On defense, the two countries agreed to “strengthen dialogue” and increase cooperation in information technology, telecommunications and “remote sensing.”

“This partnership is particularly important in 2015, when the United Nations celebrates 70 years,” said Rousseff, raising the issue of Security Council reform. (Brazil has been angling unsuccessfully for a permanent seat for years.) While the United States might want to know more about the defense cooperation plans when Rousseff visits in June, it is unclear just how much political influence China is likely to be able to exert over independent-minded Brazil, above and beyond business projects.

What was clear is that Brazil will continue to export raw materials to China and that China will keep selling manufactured goods and equipment to Brazil. Rousseff said the initiatives and new opportunities totaled $53 billion and that the Chinese would put up to $30 billion into a bilateral investment fund to which Brazil would also contribute. Li said $27 billion in deals were signed.

This is crucial to Brazil, which rode a long commodities boom driven by exports to China that has since slowed with declining Chinese growth. Now China wants to export its excess capacity — steel, more machinery, know-how, workers.

“We have good-quality equipment. We would like to cooperate with the Brazilian part to reduce the cost of constructing infrastructure in Brazil and create jobs for the local population,” Li said.

Brazil has strict ‘local content’ regulations on the proportion of goods and services that need to be produced domestically and tight labor laws. But its economy is struggling and needs to build more infrastructure to get back to growth. Inflation is about 8 percent. The Folha de S.Paulo newspaper said the government is betting that Chinese money could reactivate investment in Brazil, affected by the $23 billion to $26 billion in cuts the country seeks to make to meet its financial targets.

Rousseff’s popularity is so low that she even canceled the traditional May Day speech in fear of another of the saucepan-bashing protests that rattled around middle-class metropolitan areas the last time she appeared on mainstream television.

So billions more in Chinese investments for major infrastructure projects are very welcome. Even if Brazil must loosen some protectionist rules to get them. More oil platform construction is already shifting to Chinese yards.

“Given that there’s an increasing need for this money, I think there could be some room on the receiving end for some flexibility,” de Castro Neves said.

Both leaders celebrated the laying of the founding stone for a 1,300-mile transmission line to be jointly built from the enormous Belo Monte power plant in the Amazon jungle to the power-hungry southeast. Eight beef producers were immediately freed up to export to China, which had frozen imports from Brazil in 2012. Sales of the first 22 of 60 airplanes being sold by Brazil’s Embraer, a deal made when Chinese President Xi Jinping visited last year, were confirmed.

But perhaps the most important deal was symbolic: as much as $7 billion in credit for Brazil’s embattled state-run oil company, Petrobras, struggling from the fallout of a sleaze scandal. The company, $132 billion in debt, urgently needs more cash.

If the Chinese can help drag Petrobras out of the mud, Brazil will be really grateful.