Brazil is flexing its muscles in international trade, muscles fueled by an oil and gas bonanza that promises to change north-south power relations in the 21st century.

 

For the past seven years Brazil has chafed at the $3 billion in U.S. subsidies handed out to American cotton farmers, subsidies that undercut Brazilian trade and violate World Trade Organization (WTO) rules. In 2005 the WTO ruled that the subsidies did indeed distort the international price of cotton and contravened trade agreements.

 

For more than three years Brazil tried to negotiate the issue with Washington, reluctant to pick a fight with its number one trading partner. But this past March China became Brazil’s and Latin America’s number one trading partner, and suddenly north-south chemistry changed.

 

In late August, Brazil announced it would retaliate for the subsidies by allowing Brazilian pharmaceutical companies to break U.S. patents and produce cheaper generic drugs. The move will not only shake up the Americans, it will end up delivering reasonably priced medicines to Brazilians.

 

Brazilian exports to China jumped 65 percent in 2008 to reach $5.6 billion, and both countries just negotiated a $800 million credit loan between Brazil’s National Bank for Social Development and China’s Development Bank. The latter also agreed to loan $10 billion to Brazil’s state-owned oil company, Petrobras.

 

In return, China got an agreement from Brazil to supply it with 200,000 barrels of oil a day. The $10 billion will go toward developing the huge “pre-salt” oil fields, an enormous off shore find estimated to be as large as the North Sea oil discovery. Brazil currently has about 12 billion barrels in reserves. The new discovery could boost that to between 60 to 100 billion barrels, matching Venezuela’s massive Orinoco Basin reserves.

 

Extracting the oil will be a daunting task, however, because the fields are more than 100 miles at sea and at depths of up to 20,000 feet. Once developed, Brazil will join Venezuela as a major gas and oil exporter.

 

And the government of Lula da Silva is developing plans to make sure the benefits go to the average Brazilian, not the international energy cartels. Rather than handing out concessions to huge multinationals, like ExxonMobil, ConocoPhilips, Royal Dutch Shell, BP, Spain’s Reposal, Portugal’s Galp, and Total Eni, da Silva has put four bills before the Brazilian congress, one of which will create a “shared production” relationship with foreign oil companies.

 

The bills would also form a fully state-owned oil company, Petrosal. The government controls Petrobras, but the latter is a publicly traded company. Petrobras would also be strengthened with $50 billion in new capital.

 

Most importantly, the government would set up a fund to direct revenues into social spending, including poverty relief, education and infrastructure. The Lula government has already raised national income by handing out small cash payments to the poor, which has done a great deal to close what was formally the hemisphere’s widest wealth divide. The “pre-salt” fields would allow an enormous expansion of that program.

 

The off shore fields are one reason that Brazil is unhappy about Washington’s reactivation of its Latin American Fourth Fleet. The Brazilian Navy recently carried out Operation Aderex, which simulated a defense of the country’s offshore energy resources.

 

“Now, with 85 percent of the oil being taken from the ocean, protection of the continental shelf requires a greater presence of the navy,” said the commander of the Brazilian fleet, Vice-Admiral Fernando Eduardo Studart Wiemer.

 

Brazil currently has five submarines, is purchasing another seven, and will eventually go nuclear. “It is essential to develop the nuclear sub,” Wiemer said, “We already know how to build a sub and we are developing a nuclear reactor.”