China's decision makes it possible for Brazil's basic industry to recover.

In a decision that could help make Brazil's largest investment program in basic industries since the Second National Development Plan viable, the Chinese State Council announced a policy supporting direct overseas investment by the steel and non-ferrous metals industries, as well as construction and transportation. This is the Chinese cue for the Transul Project, focused on steel and metallurgy, which a group of experts from Coppe/UFRJ, the Intersul Institute, and the Engineering Club have been proposing since last year in discussions with industry entrepreneurs and government officials.
 
The Transul Project emerged within the framework of the BRICS Conference in the 21st Century, in Rio de Janeiro last May, based on the observation that South America, and Brazil in particular, is suffering from the downward trend in economic growth rates which, in the Brazilian case, reflected the exhaustion of a consumption cycle that seriously affected aggregate demand and investment. With the reduction in prices and quantities exported of mineral and agricultural commodities, previously surplus positions in the trade balance decreased drastically and in many cases turned into deficits, which significantly aggravated the current account deficits with the rest of the world, reducing the room for maneuver of macroeconomic policy.
 
Our alternative is to intensify export efforts. However, we are limited, in terms of mineral and agricultural commodities, by the international scenario of recession or low growth in all advanced industrialized countries. China has been the exception, but it itself feels the effects of the economic slowdown. The production and export of manufactured goods by the country, in turn, is hampered by Chinese competition and the deflationary situation in Europe and Japan. Therefore, Brazil has no choice but to intensify the exploration and industrialization of natural and agricultural resources, on a self-sustainable basis, in order to leverage its development.
 
China has managed to maintain an enviable rate of economic growth, thus contributing to alleviating the global economic crisis. However, based on reliable Chinese sources, we know that the country faces serious pollution problems, especially in its metropolises, and acute water scarcity. The Chinese government's concern with this situation is reflected in an environmental recovery and preservation program of over $600 billion over five years. The recent agreement with the US also demonstrates the sense of responsibility that the Chinese leadership has regarding environmental issues.
 
Our only initial doubt regarding the Project was the Chinese reaction to a potential Brazilian proposal for its implementation. This doubt has now been dispelled by the State Council, paving the way for concrete negotiations that I hope will be immediately proposed by the Brazilian Government. Essentially, the Transul Project aims to articulate a strategic alliance between Brazil and China, to be opportunely extended to other South American and BRICS countries, in order to link the resumption of Brazilian industrial development to Chinese export and environmental control programs. Its specific objective is to propose to China the partial outsourcing of metals, so that the increase in Chinese consumption of metals in the future, considering the announced construction of 30 megacities by 2030, will be met by the production of these metals in Brazil by Brazilian or Sino-Brazilian companies. The State Council, as seen, has opened this possibility.
 
The advantages for China in terms of pollution control and water conservation would be evident. Job losses would be negligible, considering that production in Brazil (or South America) would only replace one link in the production and use of steel and other metals, leaving the upper manufacturing chain untouched and virtually free of polluting activity. Brazil, in turn, would benefit from job creation, added value to raw materials (including oil), and, above all, the contribution of metal production and exports to stabilizing its balance of payments.
 
Productive investment in Brazil could be structured on the basis of project finance. This would involve long-term future sales contracts with China for the metals to be produced by each company, exclusively for export. These contracts would serve as collateral for financing by Chinese banks or the future BRICS Bank. Brazil and China would commit to providing state-of-the-art environmental control technology for the companies to be built, as well as promoting the best social policies linked to the project. Brazil would be responsible for ensuring the logistical infrastructure of the system, with financing guaranteed, for example, through the CIDE fuel tax.  
 
If the Chinese program for environmental control and preservation includes the decommissioning of technologically obsolete steel and other metallurgical plants, a compensatory mechanism could be established whereby the decommissioning of a plant in China would correspond to the construction of a plant with equivalent production capacity, without pollution, in Brazil. Consequently, the environmental balance would be highly positive in global terms. The fact that the steel market is currently oversupplied does not affect the logic of the program, unless China drastically reduces its growth, which is unlikely. On the contrary, the State Council's decision is to expand production abroad.
 
The construction, with Chinese support, of a cluster of steel and metallurgical plants, especially in the North and Central-West regions where water is readily available and energy supply can be easily secured, would represent an opportunity for the recovery of the Brazilian economy at high rates. It should be noted that these would be ventures with guaranteed demand, i.e., without market risk. The main part of the financing would come from China itself, bypassing our fiscal difficulties. On the contrary, as the financing inflows, there would be a permanent positive effect on the balance of payments, initially through financial resources, and soon after through export revenue, contributing in the medium term to a significant reduction in the current account deficit – our biggest economic bottleneck.