Cablegate: Brazil: Draft National Trade Estimate

DE RUEHBR #2193/01 3311724
P 271724Z NOV 07





E.O. 12958: N/A
SUBJECT: Brazil: Draft National Trade Estimate

REF: STATE 119763

1. (U) Per reftel, set forth in paragraph 2 below is the text of
post's draft of the National Trade Estimate. Post notes a new
industrial policy is expected to be announced before the holidays,
which may affect the subsidiaries and investment sections.

2. (SBU) Begin Text.


The U.S. goods trade deficit with Brazil was $1.636 billion through
September 2007, a decrease of $4.579 billion from the same time
period in 2006. U.S. goods exports through September 2007 were
approximately $17.564 billion, up 28.75 percent from the same time
the previous year. Corresponding U.S. imports from Brazil through
September 2007 were approximately 19.2 billion, down 3.3 percent
from the same period in 2006. Brazil is currently the 13th largest
export market for U.S. goods (as of September). (Data most
up-to-date available from U.S.
Census, 3510.html.

U.S. exports of private commercial services (i.e., excluding
military and government) to Brazil were $7.6 billion in 2006, and
U.S. imports were $2.8 billion. Sales of services in Brazil by
majority U.S.-owned affiliates were $10.7 billion in 2005 (latest
data available), while sales of services in the United States by
majority Brazilian-owned firms were $540 million.

The stock position (on a historical cost basis) of U.S. foreign
direct investment (FDI) in Brazil in 2006 was $32.6 billion, up from
$29.6 billion in 2005. U.S. FDI in Brazil is concentrated largely
in the manufacturing, finance, and banking sectors.


Brazil's average applied tariff rate was 11.46 percent as of
September 2007, an increase from the November 2006 average applied
tariff of 10.59 percent, caused in large measure by increases in
tariffs on textiles
(from 18 percent to 26 percent) and on footwear and apparel
(from 20 percent to 35 percent). Brazil is a member of Mercosul, a
customs union formed in 1991 and comprised of Argentina, Brazil,
Paraguay, and Uruguay. Bolivia, Chile, Colombia, Ecuador, and Peru
have individually become affiliated with Mercosul as Associate
Members between 1996 and 2004. Venezuela was proposed as a full
member in 2005, although the process of completely integrating the
Caracas regime into the bloc will take time, if its accession is
approved by all Mercosul members. Full common external tariff (CET)
product coverage scheduled for implementation in 2006 has been
delayed. CETs range from zero percent to 35 percent ad valorem,
with a number of country-specific exceptions. Currently, Brazil
maintains its maximum allowable 100 exceptions to the CET.

High CETs significantly impede increased imports of U.S.
agricultural products, distilled spirits, and computer and
telecommunications equipment. Brazil applies additional federal and
state taxes and charges that can effectively double the actual cost
of importing products into Brazil. One safeguard measure is in
place against grated coconut. A number of imports are prohibited,
including foreign blood products, all used consumer goods such as
machinery, automobiles, clothing, refurbished medical equipment and
tires. A 25 percent merchant marine tax on long-distance freight at
Brazilian ports puts U.S. agricultural products at a competitive
disadvantage to Mercosul products. Brazil applies a 60 percent flat
import tax on most manufactured retail goods imported via mail and
express shipment by individuals that go through a simplified customs
clearance procedure called RTS (simplified tax regime). Goods with
a value of over US $3000 cannot be imported using this regime.

Import Licensing/Customs Valuation

All importers must register with the Secretariat of Foreign Trade
(SECEX) to access Brazil's "SISCOMEX" computerized trade
documentation system. SISCOMEX registration requirements are
onerous, including a minimum capital requirement. The new updated
SISCOMEX system, installed in early 2007, cut the wait time for
import-export license processing almost in half. In addition, fees
are assessed for each import statement submitted through SISCOMEX.
Most imports into Brazil are covered by an "automatic import
license" regime. Brazil's non-automatic import licensing system
includes imports of products that require authorization from
specific ministries or agencies such as beverages (Ministry of
Agriculture), pharmaceuticals (Ministry of Health), and arms and
munitions (National Defense Ministry). Although a list of products
subject to non-automatic import licensing procedures is published on
the Brazilian Ministry of Development, Industry and Trade website,

BRASILIA 00002193 002 OF 007

/arquivo/secex/conPorImportacao/AnuentesLInao Auto.pdf), specific
information related to non-automatic import license requirements and
explanations for rejections of non-automatic import license
applications are lacking. These measures have made importing into
Brazil less transparent and more cumbersome for U.S. exporters.

U.S. companies continue to complain of onerous and burdensome
documentation requirements, which are required before certain types
of goods can enter Brazil - even on a temporary basis. For example,
the Ministry of Health's regulatory agency, ANVISA, must approve
product registrations for imported pharmaceuticals, medical devices,
health and fitness equipment, cosmetics, and processed food
products. Currently, the registration process at ANVISA takes about
three to six months for new versions of existing products, but can
take over six months to register products new to the market.
Registration of pharmaceutical products can take over one year,
since ANVISA requires that a full battery of clinical testing be
performed in Brazil, regardless of whether or not the drug already
has FDA approval.

ANVISA implemented regulations late last year (regulation 185) to
comply with federal legislation (Law 10742, which came in force in
October 2003). This regulation now requires companies to submit
economic information (some of it proprietary) including projected
worldwide pricing intentions, in order to register medical devices.
Attempts by industry representatives to challenge this new
requirement have been unsuccessful thus far, and no new devices have
been registered since it was established. Implementation of such
import measures not only delays entry of state-of-the-art U.S.
pharmaceutical and medical products into the Brazilian market; it
also renders it impossible for U.S. companies to demonstrate
new-to-market goods at industry trade shows.

The United States has raised a concern with Brazil that the state of
Rio de Janeiro administers the ICMS tax (a value-added tax collected
by individual states) in a way that provides a preferential tax
advantage to a Brazilian soda ash supplier located within the state.
Although the tax is designed to be refunded upon export of goods
outside of the country, exporters in many states have had difficulty
receiving rebates of the ICMS, if at all. Similarly, some U.S.
companies have raised concerns about the arbitrary application of
various quotas and non-automatic import licensing procedures, such
as authorizations from the Federal Police and the Nuclear Regulatory
Agency. For example, Brazil maintains extremely restrictive import
quotas and requires non-automatic import license approval for
imports of lithium compounds, including lithium carbonate and
lithium hydroxide, citing the potential nuclear applications of
these products. These products, however, are widely available
without restriction in global markets. The United States has raised
this issue with Brazil on several occasions, both bilaterally and in
the WTO.


Sanitary and Phytosanitary Measures

While some progress has been made in the area of sanitary and
phytosanitary measures, significant issues remain that restrict U.S.
agricultural and food exports. For example, due to concerns about
bovine spongiform encephalopathy (BSE), Brazil restricts U.S.
exports of low-risk beef without scientific justification and
contrary to the World Animal Health Organization (OIE). Brazil
continues to prohibit the import of poultry and poultry products
from the entire United States. Sound scientific justifications for
these restrictions have not been provided. Brazil's ban on wheat
from the states of Washington, Oregon, Idaho, California, Nevada,
and Arizona due to phytosanitary concerns remains in place. While
the United States understands that some of these SPS measures are
being rewritten, the ban continues to adversely affect U.S.
agricultural exports.


Brazil's President signed into law the country's first Biosafety
Bill (Law 11105) on March 24, 2005, replacing the previous legal
framework in use since 1995 under which agricultural biotechnology
was developed in Brazil. This law, which also includes provisions
for stem cell research, became effective on March 28, 2005 after its
publication in Brazil's official registry (Diario Oficial).
Implementing regulations for the law were issued by presidential
decree on November 23, 2005.

President Lula signed Law Number 11460 on March 21, 2007 which
altered provisions of the Biotech Law Number 11105. The main change
involves reduction of the number of votes needed on the 27 member
National Technical Commission of Biosafety (CTNBio) board (from

BRASILIA 00002193 003 OF 007

two-thirds to a simple majority) to approve individual biotech
proposals. No biotech events had been approved since CTNBio became
operational in 2006, creating a backlog of over 500 events, due to
the use of administrative maneuvers and red tape by board members
who are environmentalists or members of anti-biotech groups. The
CTNBio has approved 3 biotech events since May 2007, but the
decisions are currently blocked by a court injunction.


Brazil is not a signatory to the WTO Agreement on Government
Procurement, and transparency in Brazil's procurement processes is
at times lacking. The United States government has received
complaints concerning lack of transparency and preferences for
Brazilian products in tenders for government and hospitals,
including for domestically produced medical equipment. Limitations
on foreign capital participation in procurement bids reportedly
impair access for potential service providers in the energy,
construction, security and defense sectors. Brazilian federal,
state and municipal governments, as well as related agencies and
companies, in general follow a "buy national" policy. Law 8666
(1993), which covers most government procurement other than
informatics and telecommunications, requires non-discriminatory
treatment for all bidders regardless of the nationality or origin of
the product or service. However, the law's implementing regulations
allow consideration of non-price factors, giving preferences to
certain goods produced in Brazil and stipulating local content
requirements for eligibility for fiscal benefits.

Decree 1070 (1994), which regulates the procurement of information
technology goods and services, requires federal agencies and
parastatal entities to give preferences to locally produced computer
products based on a complicated and nontransparent price/technology
matrix. However, Brazil permits foreign companies with legal
entities in the country to compete for procurement-related
multilateral development bank loans and opens selected procurements
to international tenders.


The Government of Brazil offers a variety of tax, tariff, and
financing incentives to encourage production for export and the use
of Brazilian-made inputs in domestic production. For example,
Brazil's National Bank for Economic and Social Development (BNDES)
provides long-term financing to Brazilian industries through several
different programs. The interest rates charged on this financing
are customarily lower than the prevailing market interest rates for
domestic financing. One BNDES program, FINAME, provides capital
financing to Brazilian companies for, among other things, expansion
and modernization projects as well as acquisition or leasing of new
machinery and equipment. One goal of this program is to support the
purchase of domestic over imported equipment and machinery. These
programs can be used for financing capacity expansions and equipment
purchases in industries such as steel and agriculture.

On November 21, 2005, Brazil's President signed Law 11196 which
contains provisions originally included in Provisional Measures (MP)
255/2005 and 252/2005 (commonly referred to as MP do Bem) that
provide tax benefits to qualifying exporters. The law's Special
Regime for the Information Technology Exportation Platform (REPES)
suspends PIS/PASEP and COFINS (social security) taxes on goods and
services imported by companies that commit to export software and
information technology services to the extent that those exports
account for over 80 percent of annual gross income. The MP's
Special Regime for the Acquisition of Capital Goods by Exporting
Enterprises (RECAP) suspends these same taxes on new machines,
instruments and equipment imported by companies that commit for a
period of at least three years to exports goods and services such
that they account for at least 80 percent of overall gross income.

Brazil restored tax breaks to exporters with the enactment of Law
11529, which went into effect on October 22. This measure attempts
to help industries hurt by the strengthening real. This law allows
certain Brazilian industrial sectors (textiles, furniture,
ornamental stones, woodworking, leatherworking, shoes, leather
goods, heavy and agricultural machinery manufacturers, apparel and
automotive - including parts) to apply PIS (social integration
program)-COFINS tax credits to the purchase of capital goods, both
domestic and imported, to be used for manufacturing finished
products. The law also expands the government's program for
exporting companies purchasing capital goods. To be exempt from
paying the 9.25 percent PIS-Cofins tax on these purchases, companies
must prove they derive at least 70 percent of their revenues from
exportation. This benchmark was lowered to 60 percent for companies
in the sectors covered by the legislation.


BRASILIA 00002193 004 OF 007

Patents and Trademarks

Law 10196 (2001) includes some problematic provisions, including a
requirement that National Health Surveillance Agency (ANVISA)
approval be obtained prior to the issuance of a pharmaceutical
patent. This raises concerns with respect to transparency and
compliance with Article 27 of the TRIPS agreement, which U.S.
officials have communicated to Brazilian counterparts, and has
contributed to a backlog in patent issuance.

Invoking TRIPS provisions, on May 4 Brazil issued a compulsory
license for Merck Sharp & Dohme's anti-retroviral drug efavirenz
(brand name: Stocrin), used in treating HIV/AIDS after a breakdown
in negotiations with the company. The Brazilian government cited
the need for cost savings in its free public treatment program for
HIV victims.

Although Brazil's patent backlog remains high, estimated at between
130,000 and 150,000 applications, the GoB has taken concrete steps
to streamline processing, including an upgrade of its outdated
computer system. Over the past two years it has increased the
number of patent and trademark examiners over 155% from 180 to 460
and increased median salaries 50% to retain experienced employees.
In mid-2006, the National Institute of Industrial Property (INPI)
instituted a new system of streamlined, paperless processing for
trademarks. By the end of 2007, the GoB estimates that new patent
applications will be adjudicated within five years of submission; by
the end of 2009 the goal is within four years.

The GoB has also raised trademark approvals almost six-fold since
2003 and expects to shorten processing time to less than a year by
the end of 2007, down from the current 18 month wait. The U.S.
Patent and Trademark Office (USPTO) is working with INPI to help
that agency in its modernization efforts. A group of INPI
biotechnology patent examiners is expected to return from an
eight-month training course at USPTO facilities in January 2007.
This year, at its General Assembly meeting, WIPO appointed INPI an
International Searching Authority (ISA) and International
Preliminary Examining Authorities (IPEAs) under the Patent
Cooperation Treaty (PCT) for international patent applications.

In 2006, Brazil announced plans to join the Madrid Agreement
Concerning the International Registration of Mark ("Madrid
Protocol"), but the executive branch yet to submit this proposal the
Brazilian Congress for approval. Should this plan be realized,
rightsholders who seek trademark protection in Brazil would then be
able to take advantage of a streamlined international trademark
registration system, making Brazil the first country in South
America where this system is available.

The United States government has also received complaints that
unauthorized copies of pharmaceutical products have received
sanitary registrations that rely on undisclosed tests and other
confidential data, raising concerns of consistency with TRIPS

Article 39.3. Law 10603 (2002) on data confidentiality covers
pharmaceuticals for veterinary use, fertilizers, agrotoxins, and
their components and related products. The law does not cover
pharmaceuticals for human use. If the product is not commercialized
within two years of the date of sanitary registration, third parties
may request use of the data for registration purposes.


Brazil's Law 9610 (1998) on copyrights included changes intended to
bring Brazil into compliance with the Berne Convention and TRIPS. A
1998 software law protects computer programs for 50 years as
"literary works," and makes software infringement a fiscal and an
intellectual property crime. Brazil is not a party to the World
Intellectual Property Organization Treaties on Copyright, and
Performances and Phonograms.

Piracy remains a serious problem. The International Intellectual
Property Alliance (IIPA) estimated losses due to piracy of
copyrighted materials in Brazil totaled at least $927.8 million in
2006. The U.S. government has engaged intensively with the
Brazilian government on copyright enforcement in recent years. IPR
enforcement efforts by the government of Brazil led to a substantial
increase in 2006 seizures of counterfeit goods over the previous
year. In recognition of its improved anti-piracy enforcement
efforts, USTR upgraded Brazil's status to "Watch List" in its
Special 301 Report in 2007 with an "Out-of-Cycle Review" to monitor
continued improvement of the intellectual property enforcement in
the country.


BRASILIA 00002193 005 OF 007


The telecommunications sector was privatized following the passage
of the 1997 General Telecommunications Law, but has presented some
regulatory challenges. In the fixed-line sector, for example,
interconnection charges and other incumbency advantages have
provided strong barriers to entry, and the companies created during
a transitional duopoly stage have not fared well.

Brazil has not yet ratified its original WTO basic
telecommunications commitments. In 2001, Brazil withdrew its
schedule of commitments due to concerns raised by certain WTO
Members that it maintained the legal prerogative of the Executive
Branch to limit foreign participation in this sector, thereby
creating significant uncertainty for investors. This legal
prerogative is contained in Brazil's 1997 General Law on
Telecommunications and is inscribed in Brazil's constitution. While
Brazil has not pursued the constitutional change required to allow a
revision of its offer to open up this sector, the current regulatory
environment generally reflects the obligations contained in the WTO
Basic Telecommunications Reference Paper.

Audio Visual Services

Brazil limits foreign ownership of cable and media companies, and
has some restrictions on foreign programming contents. Foreign
ownership of cable companies is limited to 49 percent, and the
foreign owner must have a headquarters in Brazil and have had a
presence in the country for the prior ten years. Foreign cable and
satellite television programmers are subject to an eleven percent
remittance tax. The tax, however, can be avoided if the programmer
invests three percent of its remittances in co-production of
Brazilian audio-visual services. National cable and satellite
operators are subject to a fixed title levy on foreign content and
foreign advertising released on their channels. Law 10610 (2002)
limits foreign ownership in media outlets to 30 percent, including
the print and "open broadcast" (non-cable) television sectors.
Brazil's legislature is considering extension of this restriction to
cover Internet Service Providers, pay TV channels and operators, and
content producers and distributors. Such a change would pose a
serious threat to a number of U.S. companies operating in Brazil as
content producers/distributors. Open television companies are also
subject to a regulation requiring that 80 percent of their
programming content be domestic in origin.

Law 10454 (2002) aims to promote the national film industry through
creation of the National Film Agency (ANCINE) and through various
regulatory measures. The law imposes a fixed title levy on the
release of foreign films in theaters, foreign home entertainment
products, and foreign programming for broadcast television.

Remittances to foreign producers of audiovisual works are subject to
a 25 percent income withholding tax. Brazilian distributors of
foreign films are subject to a levy equal to 11 percent of their
withholding taxes. This tax, called the CONDECINE (Contribution to
the Development of a National Film Industry), is waived for the
Brazilian distributor if the producer of the foreign audiovisual
work agrees to invest an amount equal to 70 percent of the income
withholding tax on their remittances in co-productions with
Brazilian film companies. The CONDECINE tax is also levied on any
foreign cinematographic or video phonographic advertisement. The
fee may vary according to the advertising content and the
transmission segment.

Brazil also requires that 100 percent of all films and television
shows be printed locally. Importation of color prints for the
theatrical and television markets is prohibited. Theatrical screen
quotas for local films exist. Quotas on domestic titles for home
video distributors, while not currently enforced, present another
potential hindrance to commerce.

Express Delivery Services

A bill (PL 1491/99) that would reorganize the National Postal
System, thought to be a potential threat to U.S. express delivery
businesses, has been under consideration in the Brazilian Congress
since 1999. The proposal, as it stands now, would create a
regulatory agency for postal services as well as a new Postal
Company of Brazil, owned and operated by the federal government.
Although the bill would end the government monopoly over postal
services after a ten-year period, it would also create a monopoly on
the delivery of certain types of correspondence and parcels that are
not now subject to regulation, such as express delivery packages,
thereby significantly inhibiting market access by U.S. firms.

The Lula Administration has sent a message to the Brazilian Congress
requesting that the bill be withdrawn, but to date the Brazilian

BRASILIA 00002193 006 OF 007

Congress has not acted on this request. Brazil applies a 60 percent
flat import tax on most manufactured retail goods imported by
individuals that go through a simplified customs clearance procedure
called RTS (simplified tax regime) that is used by express delivery
services and prohibits commercial imports via the express channel.
This flat tax substantially increases the cost to consumers of using
express delivery services. Brazilian Customs is in the process of
switching to an automated express delivery clearance system, which
will significantly reduce customs clearance times for express
packages once it is implemented. Customs originally expected to
complete implementation of the system by the end of 2007, however a
revised schedule now calls for completion in the first quarter of
2008. After implementation of this system is complete, Customs has
plans to redraft express delivery regulations to remove some current
of the restrictions on express delivery.

The U.S. Government is engaging the Brazilian government on use of
ATA Carnets. The ATA Carnet will ease the temporary importation of
commercial samples, professional equipment, and goods for
exhibitions and fairs.

Financial Services

Brazil has not yet ratified its commitments from the 1997 Financial
Services negotiations (known as the Fifth Protocol) or taken the
necessary steps to make them binding under the General Agreement on
Trade in Services (GATS). Brazil is South America's largest
insurance market and earnings from premiums have grown rapidly in
recent years. In 1996, Brazil eliminated the distinction between
foreign and domestic capital, and many major U.S. firms have since
entered the market mainly via joint ventures with established
companies. Article 192 of the Brazilian Federal Constitution, along
with Article 52 of the Transitory Provisions, requires a
presidential decree to permit foreign investments in domestic
financial institutions. Additionally, Article 18 of Law 4595/64
determines how authorizations may be obtained for foreign
institutions to operate in the Brazilian markets. In practice, a
number of these presidential decrees have been granted based on a
determination that the investment is in the national interest.
On January 15, 2007, Complementary Law 126 was published in Brazil,
eliminating the previous state monopoly on reinsurance, which had
been in place since 1939. Previously the domain of the government
controlled Brazilian Institute of Reinsurance (IRB), the regulation
of co-insurance, reinsurance and retrocession (the practice of one
reinsurance company essentially insuring another reinsurance company
by accepting business that the other company had agreed to
underwrite) transactions and their intermediation will be handled by
the National Private Insurance Council (CNSP) with oversight from
the insurance supervisory body, the Brazilian Private Insurance
Superintendence (SUSEP). The IRB will continue operating in the
market only as a local reinsurer.
The new law authorizes three different types of reinsurance
companies to operate in Brazil:
-- local reinsurers: reinsurers with registered offices in Brazil
and incorporated for the sole purpose of conducting reinsurance and
retrocession transactions;
-- "admitted" reinsurers: reinsurers with registered offices abroad
and with a representative office in Brazil, which, in compliance
with the requirements of the Complementary Law and the rules
applicable to reinsurance and retrocession activities, has
registered as such with SUSEP for the conduct of reinsurance and
retrocession transactions; and
-- "eventual" reinsurers: foreign reinsurance companies with
registered offices abroad that do not have a representative office
in Brazil, which, upon compliance with the requirements established
in the Complementary Law and with the rules applicable to
reinsurance and retrocession activities, has registered as such with
SUSEP to conduct reinsurance and retrocession transactions.
Service trade opportunities in some sectors have been affected by
limitations on foreign capital participation. Brazil's constitution
precludes the expansion of foreign-owned banks until new financial
sector legislation is issued. For practical reasons, the required
legislation has not been issued, but Brazil's President has the
authority to authorize new foreign participants on a case-by-case
basis. In practice, Brazil has approved the great majority of
foreign service suppliers to enter the market or expand existing
operations. United States financial service suppliers have
established significant operations in Brazil. As of December 2006,
Central Bank records indicate that foreign-owned or controlled
assets accounted for 24.8 percent of Brazil's total banking sector

In addition to restrictions discussed above, Law 7565 (1986)
restricts foreign investment in domestic airline companies to a
maximum of 20 percent. Foreign ownership of land adjacent to
national borders remains prohibited under Law 6634 (1979), unless

BRASILIA 00002193 007 OF 007

approved by Brazil's National Security Council. U.S. and other
foreign firms have major investments in Brazil, with the U.S.
accounting for around one-fifth of total foreign investment, per
Central Bank statistics. There is neither a bilateral investment
treaty nor a treaty on the avoidance of double taxation between the
United States and Brazil. (Note: A new industrial policy is due to
be announced before Christmas. End Note.)


In 2004, Brazil began implementing new energy legislation to
restructure the power generation and distribution sector. The new
legislation gives the state a leading role in determining, for
example, how much new power capacity is needed based on forecasts by
an independent Energy Research Institute (IPE), which was created in
2005. The new model separates into two different competition groups
power generators that have not yet amortized their investments (new
energy) and those that have (old energy), based on whether a
facility had been built by a certain cut-off date. This dual-pool
structure has disadvantaged some U.S. companies that invested in the
sector during privatization in the late 1990s and whose investments
have not been amortized, but which are nevertheless included in the
old energy pool. The Brazilian government is still in the midst of
implementing the new model.

This year the Government of Brazil plans to open bids for new
hydroelectric power plants in an attempt to avoid projected power
shortages that private industry estimates forecast to occur as soon
as 2009. In contrast, government officials have projected that
electrical energy shortages will not begin until 2015 at the current
rate of growth in energy consumption, particularly in the electrical
and natural gas sectors, by both industrial and residential
consumers. Industry sources and media reports predict an earlier
date, claiming that measures taken by the Brazilian government to
avoid an energy shortage will be insufficient largely due to
environmental restrictions that delay the implementation of new
hydroelectric and other power sources.

End Text.


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