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Cablegate: Brazil:Investment and Services Director Costa

VZCZCXRO1894
RR RUEHRG
DE RUEHBR #2206/01 3341042
ZNR UUUUU ZZH
R 301042Z NOV 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0559
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 5511
RUEHSO/AMCONSUL SAO PAULO 1251
RUEHRG/AMCONSUL RECIFE 7442
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 002206

SIPDIS

DEPT PASS USTR FOR KATE DUCKWORTH
DEPT PASS DOC/ITA/MAC/OLAC ANNE DRISCOLL
DEPT PASS TREASURY LUYEN TRAN

SENSITIVE
SIPDIS

E.O. 12958:N/A
TAGS: EINV ETRD ECON EFIN PREL BR
SUBJECT: BRAZIL:INVESTMENT AND SERVICES DIRECTOR COSTA

Ref A: Brasilia 2174 Ref B: Brasilia 2177

1. (U) Ronaldo Costa Filho, division head for Services and
Investment, discussed bilateral and intra-Mercosul investment
negotiations, as well as WTO services negotiations in a recent
meeting with EconCouns. CAMEX (External Trade Chamber) has recently
approved a new BIT parameters proposal intended to address
Congressional concerns. Negotiators are instructed to attempt to
re-negotiate the Mercosul investment protocol and seek new bilateral
investment agreements. However, Ministers expressed a strong
preference that investment agreements should be negotiated within
the framework of a full FTA. END SUMMARY

-----------------------------
Bilateral Investment Treaties
-----------------------------

2. (U) Costa noted that, in 2002, the executive branch withdrew the
signed BITs it had sent forward for Congressional ratification.
(NOTE: over the period 1994-1999, Brazil signed BITs with
Belgium/Luxembourg, Chile, Cuba, Denmark, Finland, France, Germany,
Italy, Korea, Netherlands, Portugal, Switzerland, United Kingdom and
Venezuela. Not all were ever sent to Congress. Brazil was also the
only Mercosul member that never ratified the intra-Mercosul
investment protocol it had signed). The government took this action
when it became clear that Congress would never approve the BITs, as
key members believed they violate the Brazilian constitution and
treated foreign investors better than Brazilian investors.

3. (U) Congressional members' concerns included: 1) Dispute
resolution between an investor and the State: strong concerns
regarding clauses allowing an investor to seek resolution of
investment disputes via international arbitration. Congressmen have
argued that international arbitration would undermine the principle
of sovereignty of the State. (Note: a 2001 Federal Supreme Court
ruling established that the 1996 Brazilian Arbitration Act, which
permits international arbitration subject to Federal Supreme Court
ratification of arbitration decisions, is not unconstitutional).
They also argued that, since no domestic investors can challenge the
Brazilian State in an international court, giving that right to
foreign investors would give them an unfair advantage over domestic
investors; and 2) Clauses mandating that compensation for
expropriations should be paid directly in convertible currencies:
This clause is considered to be in violation of Article 184 of the
Brazilian Constitution, which says that the State can expropriate
rural properties for agrarian reform and pay compensation with
"agrarian reform bonds" redeemed over a period of 20 years. (Note:
other sources have mentioned Congressional concerns regarding lack
of capital movement controls and also concerns that, as a developing
country Brazil should not have to grant national treatment to
foreign investors. However, Costa did not mention these as key
current concerns).

----------------------------
NEW BRAZILIAN BIT PRINCIPLES
----------------------------

4. (SBU) Subsequently, according to Costa, in consultation with
Congress, three interministerial working groups have been working
over the past year to develop an investment agreement proposal that
would satisfy Congressional concerns. The final proposal was
submitted to CAMEX - a Minister-level body, including MDIC, MRE,
Finance, Planning, Agriculture, and Casa Civil (Dilma Rousseff),
responsible for the formulation of external trade policy - a couple
of months ago. CAMEX has now approved this proposal and instructed
negotiators to attempt to re-negotiate the internal Mercosul
investment protocol on this basis (Costa noted that investment tends
to be a fraught conversation intra-Mercosul, as Paraguay and Uruguay
are convinced that Argentina and Brazil unfairly court investment
via incentives, to their disadvantage). In addition, CAMEX
instructed negotiators to consider other countries as potential
partners for bilateral investment agreement negotiations under the
newly approved parameters. However, CAMEX guidance issued a strong
preference to negotiate investment agreements only/only as part of a
full FTA rather than as stand-alone agreements, according to Costa.


5. (SBU) Saying the document was internal, Costa declined to share
either the CAMEX-approved investment negotiating principles or to
articulate orally the provisions that now would satisfy Congress.
Post will continue efforts to obtain the text or a detailed
explanation of its provisions (Post notes, per Ref B and septel on
recent Mercosul Department head meeting, Brazil intends to offer
Mexico FTA negotiations that are anticipated to include an
investment chapter. We may in the near future be able to obtain

BRASILIA 00002206 002 OF 002


details via this channel as well).

----
FTAs
----

6. (U) Following Lula's recent trip to South Africa, Itamaraty is
now in the internal planning stages of a proposal to merge the India
and the SACU "FTA" negotiations into one combined Mercosul FTA
negotiation that would include services and investment chapters (see
ref A). Costa noted that under the Mercosul/Chile agreement, "98%"
of trade is moving duty-free, services negotiations are at an
advanced stage, but no investment negotiations have begun ("but we
are talking about it."). He noted that the stalled EU and GCC FTA
negotiations include services and investment.

------------
WTO Services
------------

7. (SBU) Costa reiterated that Brazil does not believe a Chairman's
text is needed for services and offers can be tabled without a new
text. While Brazil is willing to work from a text "within certain
parameters," Brazil's concern is "our perception that the US and EU
are trying to add new objectives to Hong Kong. It is not
constructive to reopen this debate." He asserted Brazil is not a
major demandeur in services and indicated frustration in trying to
motivate the Brazilian business community to engage in the
negotiations; "particularly disappointing is construction, because
we are competitive, but the private sector is not interested in the
WTO." He noted his IT services sector is just starting to become
interested in the WTO. Costa said the CNC (national confederation of
services associations) has not been very active. He indicated that
Brazil is simply waiting to see what it will have to give on
services to help close a good agriculture package. He added, "If
you (USG) were happy, I'd be worried I had gone too far, too early.
Happiness should come at the end."

8. (SBU) COMMENT: Costa is a lively and engaging interlocutor,
clearly expert in his subject and a canny MRE player. In December,
he defends his required thesis (which concludes that preferential
trade agreements are too important politically for countries ever to
agree to banish them) in order to qualify for promotion to the
Brazilian Senior Foreign Service. He recently lost the Financial
Affairs segment of his office with the creation of a new Financial
Coordination Office (Luis Antonio Balduino - no staff yet)
responsible for World Bank, IMF and tax treaty issues. We will seek
specifics of the new Brazilian investment negotiation parameters.
We note the upcoming Economic Dialogue may also provide an
opportunity to encourage Brazil to articulate its revised goals for
investment agreements. END COMMENT

SOBEL

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