From lipsticks and handbags to plastic figures of Buzz Lightyear, almost everything Priscila is selling in her small shop in São Paulo’s Paraisópolis favela, or slum, has been made in China.
“It’s just so much cheaper,” the shop owner says, pointing out items that would cost over five times as much if they had been manufactured in Brazil. “It has to be; otherwise lots of people here couldn’t afford it.”
Further down the hill from Priscila’s shop in Paraisópolis’s only chain store – Casas Bahia, a household goods retailer – it is the same story. Here most of the cheaper appliances, such as the electric drills, are “Made in China”.
As inflation rises in Brazil – it hit 6.44 per cent as of mid-April, only a fraction short of the upper end of the central bank’s upper limit of 6.5 per cent – the government of President Dilma Rousseff is facing a dilemma.
Cheap imports from Asia help to reduce the price of household goods but they are also accused of undermining domestic manufacturers. The government is being forced to choose between local industry and protecting the poor from inflation.
“Imports have a deflationary impact; they act as a brake on rising prices,” said Hugo Bethlem, vice-president of Pão de Açúcar, Brazil’s biggest retailer.
Fuelled by rapid credit growth in the lead-up to last year’s presidential election, Brazil’s economy expanded 7.5 per cent in 2010.
The government is forecasting that it will grow about 4.5 per cent this year, but the slowdown has not been enough to reduce the overheating in the economy.
Economists expect inflation to breach the central bank’s target level this month and to peak in August at about 7 per cent. Meanwhile, the central bank has responded by raising interest rates – it was expected to increase the benchmark Selic rate of 11.75 per cent late on Wednesday by another 25-50 basis points.
But Brazil’s interest rates are already the highest of any large economy. Further increases are only attracting more hot money inflows from abroad, worsening what Brazil calls the “currency war”, the steady appreciation of its currency, the real, against the US dollar.
In recent weeks, the real has appreciated from a level of about R$1.65 against the dollar to between R$1.55 and R$1.60.
To augment the interest rates increases, the government is implementing capital controls that seek to dampen consumer credit growth – one of the sources of overheating in the economy.
It is also introducing taxes that aim to discourage companies from borrowing dollars abroad at low interest rates and then repatriating the proceeds to Brazil, a trend that is strengthening the real.
In the meantime, it is trying to protect domestic manufacturers from the stronger real, which is leading to a flood of cheap imports, by raising tariffs, particularly on Chinese goods.
Only a few days before Ms Rousseff left on a five-day trip to China this month, Brazil slapped an anti-dumping tariff of $4.1 per kilogramme on Chinese-made synthetic fibres, in response to growing pressure from domestic industry lobby groups. Economists say, however, that these trade protection measures run counter to the government’s main battle, which is against inflation. “They are not making the calculus that ‘we are going to use cheap imports to fight inflation’,” said Christopher Garman of Eurasia Group.
“Essentially, the government has multiple strategies – they don’t want to compromise growth, they don’t want currency appreciation and they don’t want high inflation but it’s hard to have your cake and eat it too,” Mr Garman added.
Ultimately, the government may be fighting a losing battle against cheap imports. While China accounted for about 14 per cent of total imports to Brazil last month by value, according to the industry and trade ministry, Chinese goods already dominate certain Brazilian industries, such as textiles made of synthetic yarn.
Meanwhile, Brazilian importers of textiles from China insist that they will keep buying in spite of higher tariffs. “Brazilian industry just doesn’t produce enough to meet demand,” said Jonatan Schmidt, president of the country’s Association of Textile Importers.
“We will just keep on importing and it will be the consumers who end up footing the bill,” he said.