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Cablegate: Brazil: Launch of Economic Partnership Dialogue

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RR RUEHRG
DE RUEHBR #0089/01 0151555
ZNR UUUUU ZZH
R 151555Z JAN 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0855
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 5692
RUEHSO/AMCONSUL SAO PAULO 1478
RUEHRG/AMCONSUL RECIFE 7606
RUCPDOC/USDOC WASHDC
RUEHBU/AMEMBASSY BUENOS AIRES 5255
RUEHME/AMEMBASSY MEXICO 2108
RUEHAC/AMEMBASSY ASUNCION 6533
RUEHMN/AMEMBASSY MONTEVIDEO 7191
RUEHLP/AMEMBASSY LA PAZ 5895
RUEHCV/AMEMBASSY CARACAS 3936

UNCLAS SECTION 01 OF 05 BRASILIA 000089

SIPDIS

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

SENSITIVE
SIPDIS

E.O. 12958:N/A
TAGS: ECON ETRD EINV EFIN BR
SUBJECT: BRAZIL: LAUNCH OF ECONOMIC PARTNERSHIP DIALOGUE

1. (SBU) SUMMARY: WHA Assistant Secretary Tom Shannon and EB
Assistant Secretary Dan Sullivan, joined by Treasury Deputy
Assistant Secretary for Latin America Brian O'Neill, led the US
delegation to the successful December 13 Economic Partnership
Dialogue (EPD) with Brazil's Ministry of External Affairs.
Undersecretary for Economic and Technological Affairs Roberto
Azevedo headed the Brazilian delegation. The discussion focused
largely on positive, forward-looking areas for potential expanded
economic cooperation, including OECD, innovation (for example,
scientific cooperation and IPR), infrastructure and investment,
agriculture, import safety, civil aviation, telecommunications, and
social inclusion. Outcomes included: agreement to exchange
information on respective US and Brazilian bilateral investment
treaty (BIT) principles, and compare similarities and differences at
the next meeting, with the possibility of future BIT negotiations; a
US offer to host a Brazilian official at USOECD to see how we manage
the range of OECD issues; agreement to pursue with relevant agencies
setting a date for the next Consultative Committee on Agriculture
meeting; agreement to pursue a MCC visit to Brazil to explore
further cooperation on social inclusion issues; agreement to
exchange information on import safety regulations and processes and
to work together on this issue in the future; and a welcoming of
further discussions by relevant agencies of issues such as air
services and telecommunications equipment standards mutual
recognition. Brazil pressed for government action to bring our
textile sectors into contact and was asked to develop a specific
proposal for consideration. The exchange overall was productive,
setting the stage for enhanced cooperation with MRE on bilateral,
regional, and global economy policy issues. The public EPD joint
statement is available on our website:
http://www.embaixada-americana.org.br/ and on Itamaraty's site:
www.mre.gov.br. END SUMMARY

--------
Overview
--------

2. (U) U/S Azevedo welcomed the first meeting of the EPD, noting
that avoiding difficult issues or leaving them at the technical
level ensures they are not resolved. He added that more "problems"
between Brazil and US is a sign of the increasing substantive
breadth and importance of the relationship. A/S Shannon and A/S
Sullivan noted that the EPD builds on the successful partnership
between the US and Brazil on biofuels, and that the key will be to
remain open and flexible as the discussions progress. All agreed
the EPD will focus on results, and A/S Shannon emphasized in
particular that the EPD should impart a strategic vision that our
broader economic dialogue should achieve greater social inclusion.

----
OECD
----

3. (SBU) Azevedo noted that Itamaraty is still at the beginning of a
process to understand how the OECD works in practice. The real
extent of the OECD "acquis" is not clear, for example, with
different OECD commentators offering different answers regarding the
extent of accession requirements. MRE finds disconcerting that OECD
Secretariat officials seem to reach out to specific technical

SIPDIS
ministries in capitals, which is counter to MRE's desire in general
to oversee and coordinate international interactions across
portfolios. In addition, Azevedo sought US feedback on his
perception that OECD seems to be a group of countries that already
think similarly and have similar backgrounds, and could usefully
change to a "more representative, diverse perspective" by
incorporating developing country viewpoints. As an example, Azevedo
noted OECD export credit discussions, saying there are other ways to
mitigate risks based on other countries' experiences that could be a
useful part of the conversation. That said, he noted the value of
OECD in this area, saying OECD was able to accomplish what would
have taken ten years in the WTO.

4. (U) A/S Sullivan noted the United States welcomes Brazil's
interest in learning more about the OECD and is ready to engage at
whatever pace Brazil desires. He underlined that USG goals include
broadening OECD participation beyond mainly European membership.
A/S Shannon noted international economic institutions must
incorporate new powerful global economies. A/S Sullivan provided an

BRASILIA 00000089 002 OF 005


overview of the US OECD budget process and the internal USG
coordination process. A/S Sullivan offered to host a Brazilian
official at USOECD and to design a productive program for the
official to meet OECD Ambassadors and observe how USOECD manages
issues for a few weeks. Azevedo expressed a strong interest in
accepting the U.S. offer.

----------
INNOVATION
----------

5. (SBU) Participants highlighted the importance of initiatives
like the Innovation Summit and the CEO Forum and agreed to encourage
follow-up and new ideas in this area. A/S Sullivan also noted
productive scientific exchanges and also pressed on the need for
increased intellectual property rights protection, noting the
critical link between IPR and innovation and investment. He was
struck in his IP meeting with Brazilian industry in Sao Paulo
(septel) that the Brazilian business community cared deeply about
IPR, both domestically and because they are now competing
internationally. Azevedo acknowledged new inventions will not
happen absent IPR protection and stated that Brazil and the US do
not diverge on the need to protect IP. Instead, the two countries
diverge on penalties, where the US wants strict penalties and Brazil
still has issues in its developing court system that go far beyond
IPR protection issues, in Azevedo's view. Azevedo underlined that
the concept of economic sanctions in international agreements is
frightening to Brazil because the country does not know if it can
meet such standards. He emphasized that Brazil is not going to
agree to international standards it knows it can not meet if
agreements also contain sanctions provisions. A/S Shannon noted DOS
is working with OSTP on using funding to spur innovation, such as
linking academic and research centers, and USG hopes to release a
proposal soon.

-----------------------------
INFRASTRUCTURE AND INVESTMENT
-----------------------------

6. (SBU) Treasury DAS O'Neill noted three phases are needed for
infrastructure investment to occur: (1) project identification, (2)
project execution, and (3) financing. The second area is Brazil's
challenge. Projects can be executed by the public sector only (for
socially necessary projects that may not be commercially viable), by
the private sector only, and as public-private projects. Public
sector projects may need an initial infusion of capital or operating
subsidies. For public-private projects, the subsidies need to be
explicit. O'Neill noted that Brazil's constraints are institutional
weaknesses in project assessment and development within the sectoral
ministries, as well as risks associated with the regulatory
structure and the judicial system. Some of these challenges are
greater on transnational projects. Azevedo accepted this assessment
and was open to ideas to ameliorate the situation.

7. (SBU) O'Neill described technical assistance offered by USG
agencies as well as the World Bank and IDB to increase capacity in
project assessment and design. In the short-term, expertise can be
contracted while in-house expertise is developed. "We (USG) have
thought of offering countries in the region a task force of experts
who can reside in a ministry for a while to help with bringing
projects to fruition." For the longer-term, the World Bank and IDB
can create a sector-focused loan aimed at strengthening
institutional capacity. The loan could be used for training and
payment of expenses related to pre-feasibility, engineering, and
environment impact studies. Azevedo proposed possibly working
together on a pilot project under the Dialogue. MRE would try to
develop and to engage other ministries who, while probably not
receptive to admitting any deficiency, would probably welcome
technical assistance. O'Neill cautioned convincing the private
sector to participate would remain a challenge due to institutional
risk and that risk is even higher if cross-border projects are under
consideration.

8. (SBU) Regarding investment in general, Azevedo noted Brazilian
outbound investment exceeded inbound for the first time in 2007 and
is projected to do so again in 2008. Recognizing the executive's
previous poor experience with BITs not ratified by the Brazilian
Congress, Azevedo said the government is proceeding with caution,

BRASILIA 00000089 003 OF 005


but looking to negotiate new investment agreements based on
Brazilian interagency agreed principles, "particularly on our
continent." A/S Sullivan noted USG had also in recent years worked
through an interagency process to design a new US model BIT and
suggested Brazil and US exchange and compare their respective BIT
principles and at the next EPD meeting discuss where the US and
Brazil BIT principles are the same and where they differ. A/S
Sullivan also noted that given the extent of Brazilian outward FDI
that Brazil now had many offensive interests that should make BITs
more compelling for Brazil, both as a spur to inbound FDI and as a
way to protect Brazilian outbound investment. Azevedo emphasized
Brazil was cautious regarding arbitration, having seen decisions go
the wrong way on pipeline investments in the past. While new
Brazilian investment negotiations may better balance offensive and
defensive interests than in the past, Azevedo stated,
"realistically, from BITs I have seen [the US] recently do, I think
there really could be insurmountable issues." Azevedo suggested
perhaps US and Brazil could approach future BIT negotiations by
breaking down the issues and agreeing in parts gradually.

----------------------
Cooperation on Sectors
----------------------

9. (SBU) Azevedo explained that MRE would like to work with USG to
bring our textile sectors together so they could discuss ways to
exploit third-country markets and design joint investments. A/S
Sullivan cautioned the issue was sensitive. Azevedo explained the
textile sector was selected because the companies already talk to
each other. The Brazilian delegation members proposed to send DoS
an expanded description of their proposal. A/S Sullivan emphasized
the importance of having the US Department of Commerce play the lead
role in responding to such an initiative given its expertise and
knowledge of the US textile industry.

-----------
Agriculture
-----------

10. (SBU) Azevedo urged the Consultative Committee on Agriculture
meet soon to discuss working together to develop third country
markets and on promoting a deeper dialogue on SPS issues both
countries face in third markets. A/S Sullivan noted USDA is engaged
on finding a date for the next CCA. He raised the importance of
working together on agricultural biotechnology and noted the joint
2005 World Food Prize award to Brazilian and American scientists.
Given Brazilian inter-agency battles on this issue, Azevedo
cautioned that Brazil was unlikely to play a high-profile role in
promoting acceptance of GMO crops internationally. He welcomed
further discussion of this topic in future EPD discussions but
suggested moving it to the "innovation" section to lower its
profile.

-------------
IMPORT SAFETY
-------------

11. (SBU) A/S Sullivan briefed on the September 10 import safety
recommendations to President Bush and expressed interest in
expanding cooperation with Brazil on import safety issues to ensure
consumer protection while preserving trade flows. Azevedo noted
consumer safety is an area that has developed enormously in Brazil
in recent years, and remains a growing concern. He stated that
Brazil has stricter standards than its neighbors, making regional
negotiations more difficult. He welcomed further information on US
initiatives and suggested perhaps eventually Brazil and the US could
adopt some common standards and develop cooperation with third
countries.

--------------
CIVIL AVIATION
--------------

12. (U) Commenting on the recently launched US-Brazil civil aviation
services negotiations, Azevedo indicated Brazilian-US civil aviation
negotiations are a step-by-step process, given that Brazilian
companies need time to adapt and respond to market opportunities.
A/S Sullivan noted, at the same time, neither side would want to

BRASILIA 00000089 004 OF 005


lose the momentum of the potentially promising negotiations. The
Ambassador urged -- and participants agreed -- there would be
another negotiating session well before the end of 2008 as indicated
in the Memorandum of Conversation signed by both parties at the
conclusion of December 5-6 discussions in Rio.

------------------
TELECOMMUNICATIONS
------------------

13. (U) A/S Sullivan reviewed the potential for bilateral
cooperation, particularly in Africa. MRE Office Director for
Services and Investment Ronaldo Costa Filho noted the Brazilian
regulatory agency (ANATEL) had experience assisting developing
countries interested in setting up their own regulatory agencies.
A/S Sullivan indicated potential US-Brazil mutual recognition
agreements on telecommunication equipment held great promise.
Azevedo agreed.

----------------
Social Inclusion
----------------
14. (U) Azevedo promoted further dialogue between experts in
Brazil's Bolsa Familia and in US MCC in the future, characterizing
the proposal as a win-win exchange of views, experiences,
short-comings and lessons learned that would help both sides address
flaws and maximize opportunities in learning from one another. A/S
Shannon agreed and noted this initiative could be a concrete success
under the Dialogue. A/S Shannon stressed that both sides need to
highlight that economic growth is about social inclusion and is all
about allowing people to access their own economy. He underlined
this is a new and useful way to think about economic growth. A/S
Sullivan noted the possibility of coordination in third-country
assistance. Using Mozambique as an example where MCC is engaged,
A/S Sullivan suggested different donors can look at ways to
complement each other's assistance. Azevedo agreed and noted that
Haiti would be an obvious example in Brazil's view.
-------------------
INTERNET GOVERNANCE
-------------------

15. (U) Jose Hansem, a staff member of the MRE Science and
Technology office, provided a lengthy review of Brazil's
disagreements with the United States regarding internet governance.
A/S Sullivan thanked Brazil for hosting the November Internet
Governance Forum. He noted US focus on the security of the internet
and the internet's potential as a force for democracy and economic
growth. The internet has functioned well to date. USG is open to
receiving other countries' feedback. Azevedo proposed perhaps a
Brazilian team could travel to the United States to discuss these
issues further and A/S Sullivan stated USG would be happy to
receive.

-------
CACHACA
-------

16. (U) Philip Fox Drummond Gough of MRE's Market Access office
reviewed Brazil's request to change cachaca (a sugar-based alcoholic
beverage) from "rum" to "cachaca." A/S Sullivan noted the Federal
Register Notice with the proposed change would be published in early
January, followed by a comment period. Azevedo was pleased to hear
of this progress.

----------
ASSESSMENT
----------

17. (SBU) The EPD meeting was a successful step in expanding and
deepening cooperation with MRE on economic policy issues. The group
agreed to meet again within six months. Progress on specific action
items identified in the Dialogue will go far to ensure the next
session is equally productive.
18. (U) DELEGATION LISTS:
MRE:

Emb. Roberto Azevedo -U/S Economic and Technology Affairs
Min. Carlos Marcio Cozendey - A/S Economic Affairs

BRASILIA 00000089 005 OF 005


Min. Carlos Henrique Moojen de Abreu - Brazil Embassy, Washington
Min. Susan Kleebank - OffDir Economic Organizations
Min. Flavio Damico - OffDir Agriculture and Commodities
Min. Ronaldo Costa Filho - OffDir Services and Investment
Cons. Joco Tabajara de Oliveira Jr- OffDir US/Canada desk
Sec. Philip Fox Drummond Gough - Market Access
Sec. Ricardo Jos Lustosa Leal - Trade Promotion Programs
Sec. Marcelo Salum - Economic Organizations
Sec. Jos Victor Hansem - Science and Technology
Sec. Joco Carlos Storti - Intellectual Property
Sec. Matheus Carvalho - Social Themes

US:

Thomas A. Shannon, A/S WHA
Daniel S. Sullivan, A/S EEB
Brian D. O'Neill, DAS, Western Hemisphere, Treasury Department
William E. Craft, DAS, EEB/TPP
Lisa Kubiske, Director, WHA/EPSC
Alexei Monsarrat, Senior Advisor to Assistant Secretary Sullivan
Matthew Rooney, Deputy Director, WHA/EPSC
David Schnier, Brazil Desk Officer

Ambassador Clifford M. Sobel
Tara Feret Erath, EconCouns
Rebecca Armand, Principal Commercial Officer, FCS

Delegation has cleared this message.
SOBEL

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