Trade war looming, warns Brazil

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.

Guido Mantega, finance minister, told the Financial Times that Brazil was preparing new 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. He said the US and China were among the worst offenders.

"This is a currency war that is turning into a trade war," Mr Mantega said in his first exclusive interview since Dilma Rousseff, Brazil's new president, took office on January 1. His comments follow interventions in currency markets by Brazil, Chile and Peru last week and recent sharp rises in the Australian dollar, the Swiss franc and other currencies amid an exodus of investment from the sluggish economies of the US and Europe.

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

Mr Mantega, finance minister since 2006, coined the term "currency war" in September before launching controls on foreign portfolio investments in Brazil aimed at stemming an increase of 39 per cent in the real against the dollar over the past two years. He said that 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.

On Thursday, Brazil's central bank launched a surprise measure to curb short selling of the dollar against the real by onshore banks. "You can expect more measures on the futures market," he said.

He said currency manipulation would be on the G20 agenda this year. Brazil would also lobby to have the WTO define exchange-rate manipulation as a form of veiled export subsidy.

Any attempt to change WTO rules to incorporate exchange rates would be difficult, however, as China could be expected to veto it, analysts said.

Mr Mantega said that Brazil's trade with the US had slipped from an annual surplus of about $15bn (£9.6bn) in Brazil's favour to a deficit of $6bn since the US began trying to reflate its economy through loose monetary policy.

He said China's overvalued currency was also distorting world trade. "We have excellent trade relations with China ... But there are some problems ... Of course we would like to see a revaluation of the renminbi."

(Published by Financial Times - January 10, 2011)

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