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Cablegate: Scenesetter for the Visit of Nec Director Al Hubbard

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RR RUEHRG
DE RUEHBR #1897/01 2771038
ZNR UUUUU ZZH
R 041038Z OCT 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0104
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
INFO RUEHRG/AMCONSUL RECIFE 7193
RUEHSO/AMCONSUL SAO PAULO 0910
RUEHRI/AMCONSUL RIO DE JANEIRO 5200

UNCLAS SECTION 01 OF 04 BRASILIA 001897

SIPDIS

SENSITIVE
SIPDIS

NSC PLEASE PASS TO DIRECTOR AL HUBBARD AND JOHN COBAU

E.0. 12958: N/A
TAGS: PGOV ECON SENV BR
SUBJECT: SCENESETTER FOR THE VISIT OF NEC DIRECTOR AL HUBBARD

REFTEL: A) BRASILIA 1819; B) BRASILIA 1813; C) BRASILIA 1826

1. (SBU) Summary: Your visit comes on the heels of an August visit
to Brazil by State Under Secretary for Economic, Energy and
Agricultural Affairs Reuben Jeffery III. During his visit, the
Under Secretary's discussions with GOB officials included biofuels
and infrastructure (REFTELS A, B,C). Also at the forefront of the
Brazilians' agenda is the Doha Development Round (DDR) negotiations,
which were set back in June when talks between the U.S., the EU,
Brazil, and India stalled over disagreements concerning tariff cuts
for goods and services and over agricultural subsidies. The
Brazilians are also interested in a climate change agenda, although
their vision of the approach may differ considerably from ours.

2. (SBU) While relations between the U.S. and Brazil are friendly,
the USG often encounters major difficulties in gaining the
cooperation of senior policymakers on issues of significant interest
to the United States. Eager to assert its own influence, the
Brazilian government shies away from cooperation with the USG -
unless it can clearly be characterized as a reciprocal exchange
among equals. In contrast, on issues involving matters perceived as
technical in nature - law enforcement, science and biofuels - the
GoB is eager to engage. End Summary.

---------
CEO Forum
---------

3. (U) The launch of the upcoming CEO Forum will provide a new
avenue for both the Brazilian and American private sector to examine
the problems that hinder the trading relationship and
competitiveness at large, and to make recommendations to both our
governments for steps to improve. We expect that concerns about
infrastructure, taxation, intellectual property rights and slow
movement toward a conclusion of the Doha Round may surface in the
meeting, and that the CEOs will present some specific
recommendations in these, or other, areas. Maintaining the momentum
and helping create movement based upon the recommendations will be
an ongoing challenge for both sides.

---------------------------
MACRO-ECONOMIC DEVELOPMENTS
---------------------------

4. (U) President Lula and his economic team have implemented prudent
fiscal and monetary policies and pursued reform. Brazil's external
accounts have improved substantially over the last three years.
Nevertheless, initially reported 2006 GDP growth was only 2.9%
(third worst in the hemisphere). In 2007, Brazil revised its
methodology for calculating GDP and restated its 2006 GDP as 3.7%.
For 2007, Brazil's Central Bank is forecasting 4.7% growth (slightly
higher than most private sector forecasts). Inflation over the next
three years is forecast to be in line with the central bank's annual
target (4.5%).

5. (SBU) Buoyed by exports and investment inflows, the real has
remained at appreciated levels for most of the year, allowing the
government and businesses to pay down external debt. Last year, the
government eliminated the last of its restructured debt from
Brazil's late-1980's default. Based upon the improving external
debt dynamics, Fitch IBCA upgraded its credit rating on Brazil's
sovereign debt in February 2006, to BB-.

6. (SBU) Key challenges remain. The public sector debt-to-GDP ratio
is on a downward trend but remains high, at about 50%. Real
interest rates are among the highest in the world; reducing them
will require both reductions in the government's borrowing
requirement and reform of the financial sector. Income and land
distribution remain skewed. Investment and domestic savings are
low, but growing. The informal sector constitutes over 40 percent
of the economy, in part due to the tax burden (nearly 38 percent of
GDP), one of the highest among large developing economies.

7. (SBU) Sustaining and expanding growth rates in the longer term
depends on further structural reform efforts and concrete steps to
create a more welcoming climate for investment, both domestic and
foreign. A bill allowing Public-Private Partnerships, a key effort
to attract private investment to infrastructure, passed in 2004,
although implementation of this initiative still awaits promulgation
of the necessary regulations. Labor reform, additional tax reform
and autonomy for the Central Bank were on the agenda for 2005 to
2006, but appear unlikely to be addressed at in the near term. The
government still needs to improve the regulatory climate for
investment; to simplify torturous tax systems at the state and
federal levels; and to further reform the pension system.


BRASILIA 00001897 002 OF 004


--------------
Infrastructure
--------------

8. (SBU) Poor infrastructure issues have long been cited as part of
the "Custo Brasil" or "Brazil Cost," a term used to refer to the
systemic problems that hinder Brazil's competitiveness. For
example, the interior of the country depends on a series of
ill-maintained roads for transportation of goods to its aging ports.
Brazilian officials have signaled that the GOB is interested in
working with the USG to explore ways to maximize funds, technology
and managerial skills in infrastructure projects around the country,
or possibly for the two countries' entities to invest in third
countries. GoB officials have proposed that both governments work
together on implementation as well as financing using a possible
"tripod format" (a partnership between the GoB, a Brazilian company,
and a US company) for infrastructure projects. (REFTELS A, B)

-----------------
DOHA AGENDA - WTO
-----------------

9. (SBU) Brazil has used the Doha Development Agenda (DDA)
negotiations as the main forum for engaging with developed country
partners. Brazil leads the G-20 group of developing countries in
pressing for agricultural trade desires in the DDA. Brazilian
industry leaders and GoB officials have underlined that concern over
the impact of Chinese imports on domestic manufacturers is one root
cause behind their unwillingness to agree to the non-agricultural
tariff cuts proposed by both the USG and the EU during the Doha
Round. To date, Brazilian proposals do not provide real market
access. China has increased in importance as an export market for
Brazilian soy, iron ore, and steel, becoming Brazil's fourth largest
trading partner. Impelled by a stronger real, this year China is
set to become the second largest exporter to Brazil, passing
Argentina and second only to the U.S. Low-priced Chinese imports,
particularly in the textile, footwear, and toy sectors, are now
threatening to displace domestic Brazilian production.

10. (SBU) Brazil's objections to US agricultural programs has
sparked initiation of a WTO case. In the cotton dispute, some in
the Brazilian congress have introduced an IPR "cross-retaliation"
bill - a proposal that has some executive branch support and is
slowly winding its way through the Brazilian congress.

-------------------------
TRADE POLICY AND MERCOSUL
-------------------------

11. (SBU) The GoB is seeking expanded trade ties with developing
countries and seeks to strengthen the Mercosul customs union with
Uruguay, Paraguay, and Argentina. Still, the Brazil-Argentine
relationship is rife with trade disputes and Uruguay and Paraguay
regularly complain that Brazil and Argentina reap a disproportionate
share of benefits from the block. The bloc has moved toward an
increasingly political form, it remains engaged in external trade
negotiations. Mercosul has free trade agreements with Colombia,
Ecuador, Venezuela, Peru, Chile and Bolivia. In addition to Cuba,
the bloc has explored free trade talks with Israel, the Dominican
Republic, Panama and states of the Gulf Cooperation Council.
Mercosul has also tried to build on partial trade liberalization
agreements concluded with India and South Africa in 2004. Brazil has
not yet ratified Venezuela's full membership in Mercosul. In an
August 2007 visit to Mexico, President Lula made overtures on
improving the countries' bilateral trade relationship.

--------
BIOFUELS
--------

12. (U) Brazil's ethanol program is a model for alternative energy.
Brazil's comparative advantage is its ability to inexpensively
produce ethanol from sugarcane. At the pump, ethanol receives
favorable tax treatment from the Brazilian government. It is
exempted from the largest federal tax on gasoline (CIDE) and is
subject to lower rates on two other federal levies (PIS and COFINS).
Nevertheless, ethanol prices can vary substantially from state to
state. In contrast, gasoline prices vary less and are controlled by
the government.

13. (SBU) Since the 1980s, Brazil has attempted to promote ethanol
fuel exports to the United States. U.S. tariffs and charges make
Brazilian imports less competitive. In addition to import tariffs
of 1.9 to 2.5 percent, the U.S. imposes a 54 cents/gallon surcharge
on ethanol imported for use as fuel, which has led to a strong
Brazilian push to lower or eliminate it. (Comment: Brazil is able

BRASILIA 00001897 003 OF 004


to sidestep in part the surcharge by exporting a large volume of
ethanol to Caribbean countries, which then do some processing and
ship the finished product to the United States under favorable
treatment established by the Caribbean Basin Initiative. End
Comment.) Given the requirements of its fast-growing domestic
market, Brazil may not be able to produce enough ethanol to supply
international markets. Some estimate that over the next one to two
years, the maximum percentage of Brazil's cane crop that could be
devoted to ethanol production is 54%. If so, this would mean that
Brazilian ethanol production is already running at 95 percent of
capacity; and the country's ability to expand its sugarcane acreage
is limited to perhaps 20 percent over the next 3-4 years.

14. (SBU) In the first (August 20, 2007) meeting of the USG-GoB
Biofuels Steering Committee established under the March 7 DOS/MRE
MOU, officials from both countries emphasized the need to move
quickly in the area of standardization to enable future
collaboration and make biofuels a global commodity. Representatives
also agreed on the need for private sector involvement to spur
momentum and keep pace with the market in the biofuels race. Under
the MOU, joint participation in third party biofuels initiatives in
St. Kitts (August), El Salvador (September) and in the Dominican
Republic (tentatively planned for November) has begun, NIST-led
standards work is on-going, and DOE/USDA hosted a delegation of
Brazilian scientists.

-----------
AGRICULTURE
-----------

15. (U) Agriculture is a major sector of the Brazilian economy, and
accounts for 13% of GDP (and 30% when including agribusiness) and
33% of Brazilian exports. Brazil is the world's largest producer of
sugar cane, coffee, tropical fruits, frozen concentrated orange
juice (FCOJ), and has the world's largest commercial cattle herd
(50% larger than the U.S.) at 180 million head. Brazil is also an
important producer of soybeans (second to the United States), corn,
cotton, cocoa, tobacco, and forest products. The remainder of
agricultural output is in the livestock sector, mainly the
production of beef and poultry (second to the U.S.), pork, milk, and
seafood.

--------------
FOREIGN POLICY
--------------

16. (SBU) Brazil has long seen itself as the natural leader of the
region and covets a permanent UN Security Council (UNSC) seat.
President Lula has run an activist foreign policy with a focus on
South America and the Third World, seeking to forge alliances with
other mid-sized powers (South Africa, India, etc.)- the 'South-South
Policy.' Lula has refused to condemn Cuba for human rights
violations and, in fact, has pushed for Cuban membership in the Rio
Group and a Cuba-Mercosul trade pact. The GoB has worked to
increase both its economic and political ties with Venezuela.
Enhanced integration of the two countries' energy sectors is high on
its agenda. Lula has been especially solicitous of Chavez. In the
past, Lula has praised the Venezuelan President's democratic
credentials and declared that the Chavez government had been
demonized by its foes. Recently, rifts have appeared over
Venezuela's apparent involvement in Bolivia's decision to
nationalize its oil and gas industry and Chavez's biting remarks to
Brazilian Congress members who condemned the GoV's decision to close
an independent television station. President Lula and President
Bush have spoken favorably of trilateral assistance, though so far
this has only resulted in a joint health mission to Sao Tome and
Principe. Further activities may take place in other
Portuguese-speaking countries (Mozambique and Angola). At the UNGA
on September 25, President Lula spoke of Iran's right to enrich
uranium and its peaceful nuclear program, which undercut efforts to
keep the pressure on Iran to suspend enrichment.

------------------------------
ENVIRONMENT AND CLIMATE CHANGE
------------------------------

17. (SBU) Internationally, Brazil is an energetic advocate on
environmental issues and strongly supports the Kyoto Protocol.
The GoB is actively involved in international climate negotiations
and strongly supports the United Nations Framework on Climate Change
(UNFCCC), for which Brazil has taken an active role in the
discussion of reducing emissions from deforestation. Brazil has
proposed a "results-oriented" fund, which is not consistent with USG
policy on climate change. Thus far, Brazilian reaction to President
Bush's Global Climate Change (GCC) initiative has been lukewarm -
they fear it will undermine the work of the UNFCCC. GoB officials

BRASILIA 00001897 004 OF 004


have said previously that the U.S., as a non-signatory to the Kyoto
Protocol, places more emphasis on energy efficiency and expense than
the environment (REFTEL B). After the September 27 - 28 Major
Economies Meeting (MEM) on climate change, the head of the Brazilian
delegation to the MEM, Ministry of Exterior Relations Under
Secretary Everton Vargas told the press, "We see only a reiteration

SIPDIS
of what he [Bush] has said in the past. We don't want this focus on
voluntary controls." . . . Bush tried to convince the participants
that now he is taking seriously the problem of global warming. But
in practice, he only defended his obstinate position."

18. (SBU) The Brazilians also hosted a ministerial meeting that
took place in Rio de Janeiro, September 3-4, which addressed
strengthening international governance of sustainable development,
including a discussion of the French proposal to transform the UN
Environmental Program (UNEP) into a World Environment Organization
akin to the WTO. The Brazilians have revised their position and now
are calling for a new "umbrella" international organization, though
focused not just on environment, but also on sustainable
development.

----------------------------------
Intellectual Property Rights (IPR)
----------------------------------

19. (u) On April 30, 2007, the Office of the U.S. Trade
Representative (USTR) elevated Brazil to "Watch List" status in its
Special 301 Annual Report as a result of the country's progress,
particularly in copyright protection and IPR enforcement. Included
in the USTR announcement was notice that Brazil will be subject to
an Out-of-Cycle Review to monitor its progress on outstanding IPR
concerns and to evaluate the sustainability of recent enforcement
progress. On May 4, 2007, the GoB announced the issuance of a
compulsory license for Merck Pharmaceutical's HIV/AIDS medicine
Stocrin. GoB officials cited cost reduction for their free HIV/AIDS
public health program as the motivation for this action. In
contrast, some pharmaceutical industry representatives feel new
Minister of Health Jose Gomes Temporao was driven more by ideology
than by concern about future damage to Brazil's investment climate
as a result of this action.


CHICOLA

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