TRADE WAR LOOMING, WARNS BRAZIL / THE FINANCIAL TIMES ( HIGHLY RECOMMENDED READING )

Trade war looming, warns Brazil

By Jonathan Wheatley and Joe Leahy in São Paulo

Published: January 9 2011 21:30

Brazil has warned that the world is on course for a full-blown “trade war” as it stepped up its rhetoric against exchange rate manipulation as a form of veiled export subsidy.


Guido Mantega, finance minister, said Brazil was preparing measures to prevent further appreciation of its currency, the real, and would raise the issue of exchange rate manipulation at the World Trade Organisation and other global bodies.


The US and China were among the worst offenders, he said. “This is a currency war that’s turning into a trade war.”


Mr Mantega’s comments follow interventions in currency markets by Brazil, Chile and Peru last week and sharp rises in the Australian dollar, Swiss franc and other currencies.


The actions have renewed interest in how to manage destabilising flows of speculative money, with the IMF suggesting last week that the world needed rules to govern the use of capital controls.


Mr Mantega in September launched controls on foreign portfolio investments in Brazil aimed at stemming a 39 per cent rise in the real against the dollar in the past two years.


He said most of Brazil’s measures last year were directed at the spot market but the focus had switched to the futures markets, which he said were now behind the upward pressure on the currency.


Following Thursday’s surprise measure to curb short selling of the dollar against the real by onshore banks, he said: “You can expect more measures on the futures market.”


However, analysts said China would be expected to veto any attempt to change WTO rules to incorporate exchange rates.


Mr Mantega said Brazil’s trade with the US had slipped from an annual surplus of about $15bn in Brazil’s favour to a deficit of $6bn since quantitative easing in the US. He said China’s overvalued currency was also distorting world trade. “We have excellent trade relations with China ... But there are some problems as China is a big competitor in manufactured goods.  . . . Of course we would like to see a revaluation of the renminbi.”


He said that even if the US began to recover and to tighten its monetary policy, the real would be unlikely to weaken.


“As the situation in the US improves, there will be less risk in the global economy so investors will become more daring,” he said, adding they would seek greater returns in high-growth markets.


“The weak dollar is not only a question of liquidity, it’s also about risk aversion.”


Additional reporting by Alan Beattie in Washington

Copyright The Financial Times Limited 2011