Cablegate: Scenesetter for Codel Markey

DE RUEHBR #0210/01 0441508
R 131508Z FEB 08





E.O. 12958: N/A

REF: STATE 13602

1. (SBU) Summary: Brazil's democratic institutions are
generally strong and stable, and President Luiz Inacio Lula
da Silva remains popular because of his orthodox economic
policies and expanded social programs. Export-led economic
growth has been the norm in the recent past, while Brazil has
supported reasoned foreign policy goals and has steadfastly
supported democracy in the hemisphere. In the bilateral
relationship, the U.S. and Brazil share many basic goals,
although Lula seeks to balance good relations with the
developed world with South-South foreign policy initiatives.
Brazil's ethanol program has made it a global model for
alternative energy and offers potential for bilateral
cooperation on an important strategic issue. On the
environment, Brazil has long been on the defensive about the
ongoing, extensive deforestation of the Amazon, which has
made Brazil one of the leading producers of greenhouse gases.

End summary.

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Latin America's Democratic and Economic Powerhouse
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2. (SBU) Brazil's democratic institutions are generally
strong and stable, and the military dictatorship that ended
over 20 years ago is consigned to the dustbin of history, as
Brazil's armed forces today pursue a professional
non-political identity. A year following his re-election to
a second term, and despite prosecution of high-level members
of his administration on corruption charges, President Luiz
Inacio Lula da Silva remains a personally popular president
as a result of his orthodox economic policies and expanded
social programs. Ongoing and public scandals involving the
leadership of the Senate and various members of congress have
led to low ratings for the institution among the Brazilian
public. Increasingly, the court system has taken steps to
curb impunity among public officials, which have been well
received by a public accustomed to abuses by authorities.

3. (SBU) On the economic front, Lula's Finance Minister
Mantega, Planning Minister Bernardo, and Central Bank
President Meirelles have maintained broadly orthodox
policies. In January, Lula unveiled his Growth Acceleration
Program (PAC), consisting of public investment promises and
targeted tax breaks aimed primarily at construction and
certain high tech sectors, which has become the economic
policy centerpiece of his second administration. Although
the PAC contains many measures of incremental merit, it does
not address some of the growth-limiting distortions in the
economy, burdensome tax and fiscal structure and onerous
labor and business regulations. Lula's social programs,
combined with formal sector job growth and real increases in
the minimum wage, have reduced income inequalities each year
since 2004. Higher economic growth will be required,
however, to lift the masses out of poverty.

4. (SBU) With steady export-led economic growth having
become the norm in the recent past, Brazil has been a
supporter of reasoned foreign policy goals and has been
steadfast in its support of democracy in the hemisphere. The
attainment of a permanent seat on the UN Security Council has
been a central tenet of Brazil's foreign policy under
President Lula da Silva's government. More generally, Brazil
seeks to play a leadership role on the global stage by, among
other things, playing a central role in the G-20 at the WTO,
and leading the UN peacekeeping force in Haiti, which could
serve as a springboard to greater international leadership on
democracy promotion and security issues. Brazil's efforts to
build South-South relations continue to dominate its foreign
policy, sometimes to the detriment of core political and
economic interests. The GoB, along with India, has led the
G-20, a group of developing nations coordinating negotiating
positions for the WTO Doha Round. The group's widely varying
membership has made it difficult for them to reach consensus
on negotiating positions. Brazil has not yet signed an IAEA
Additional Protocol, although it has not ruled out signing it
in the near future. Most recently, Brazil has announced its
desire to join OPEC following the discovery of massive
offshore reserves of oil and gas.

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The Bilateral Relationship
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5. (SBU) The U.S. and Brazil share the basic goals of
fostering hemispheric stability, promoting democracy,

BRASILIA 00000210 002 OF 003

achieving a mutually satisfactory conclusion to the Doha
round of WTO negotiations, preventing terrorist and drug
transit activity, and supporting international
non-proliferation regimes. U.S.-Brazil cooperation is often
limited by the GoB's unwillingness to take action regarding
threats to democracy in specific countries and to support
aggressive action in multilateral forums on such issues as
non-proliferation, human rights, and democracy.

6. (SBU) Although under President Lula Brazil has stressed
South-South relations, Brazil's status as a leader in
biofuels, combined with the March 2007 signing our bilateral
MOU on biofuels cooperation, offers a potential avenue for
increasing bilateral cooperation in a strategically important
area. The two presidential summits in March 2007 (Sao Paulo
and Camp David) have helped create a positive tone in our
bilateral conversation.

7. (SBU) Our bilateral dialogue with the GoB on development
assistance to Brazil and in third countries contains positive
elements, including promising potential in biofuels. It is
constrained by differences in approach to anti-poverty
efforts, with the GoB focusing on cash transfers, while the
USG prefers more finely targeted assistance. The Brazilian
Government's multi-billion dollar poverty alleviation program
-- Bolsa Familia (Family Stipend) -- receives technical
assistance from the World Bank and IDB. USG budget
constraints and the fact that it is a cash transfer program
(albeit with conditions) keep the USG from actively
cooperating with the initiative. USAID has sought to target
its USD 8 million in programs for Brazil towards promoting
sustainable livelihoods through working on issues such as
health, the environment, and small and medium-sized

8. (SBU) The GoB has a strong interest in hemispheric
security issues, and cooperates with the USG on the
operational level in the fight against terrorism and drug
trafficking. Brazil has been cautious about taking an active
role in recent high-profile non-proliferation efforts.
Brazil remains an active partner in the DHS's Container
Security Initiative (CSI) and has expressed approval of the
Proliferation Security Initiative (PSI). However, the GoB
has not yet endorsed the PSI statement of principles.

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Biofuels -- Potential for Strategic Cooperation
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9. (U) Brazil has transformed a 1970s program to bolster its
large sugar-cane sector into a remarkable showcase for
biofuels. The success of Brazil's ethanol program has made
it a model for the world in terms of alternative energy and
presents the potential for bilateral cooperation on an
important strategic issue. Brazil's comparative advantage is
its ability to produce huge quantities of sugarcane, which is
currently the most efficient feedstock for ethanol. Cane
requires far less processing than corn to produce ethanol.
According to the World Bank, at current prices, Brazil can
make ethanol for about one US dollar per gallon, compared
with the international price of about USD 1.50 per gallon for
gasoline. On the demand side, Brazil's use of modest tax
breaks have led new car purchasers to opt overwhelmingly for
"flex-fuel" cars that can run on either gasoline, ethanol, or
any combination of the two.

10. (SBU) Following the signing of the MOU in March, Brazil
and the United States have been seeking ways to increase our
collaboration in order to develop the next generation of
biofuels, as well as in developing international standards on
biofuels which should facilitate greater international
acceptance and use of biofuels.

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Agriculture Trade Disputes
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11. (U) Brazil, like Canada, made a first request to
establish a WTO Dispute Settlement panel on November 19,
2007, to challenge US agricultural domestic support, claiming
the US exceeded support caps 1999-2002 plus 2004-2005. A
second panel request and the establishment of the panel are
expected on December 18. In 2004, the WTO found mainly in
Brazil's favor in the challenge against US cotton programs.
Brazil challenged US compliance with the Panel report and the
Panel found again primarily in Brazil's favor in October 2007
(although the report remains WTO-confidential until formally
released in December). Some in the Brazilian congress
threatened cross-retaliation against IPR in the cotton case,

BRASILIA 00000210 003 OF 003

but to date legislative proposals have not moved forward.
News reports have indicated that the Foreign Ministry is
preparing such cross-retaliation measures should the WTO find
in their favor.

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Deforestation and Climate Change
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12. (SBU) On the environment, Brazil has long been on the
defensive about the ongoing, extensive deforestation of the
Amazon, which has made Brazil one of the leading producers of
greenhouse gases. Over the last three years, the rate of
deforestation has dropped sharply. Brazil now views the
debate over climate change as an opportunity. It proposes
that the international community provide financial incentives
for avoiding deforestation and vigorously promotes the use of
biofuels. In the last five months of 2007, however, the rate
of deforestation has risen dramatically. The Environment
Minister and independent experts attribute the increase in
deforestation largely to the substantial increase in
agriculture commodity prices.

12. (SBU) Brazil pursues two sometimes conflicting goals
with regard to the Amazon region. On the one hand, it seeks
to preserve much of the natural resources and biodiversity
found in the region. The Forest Code requires the landowner
to maintain 80 percent of the forests on the land. Further,
the GoB has placed large amounts of the forest into protected
areas, such as national parks and indigenous reserves. At
the same time, the GoB seeks economic growth and
redistribution of land. Thus, since the 1970s it has built a
network of roads through the Amazon, which has opened the
region to timber and agriculture (mainly soybean) interests.
The GoB has resettled many of the poor into settlements along
the roads, and as a result, in 2004 the deforestation rate
shot up to a high of 27 thousand square kilometers per year.
High demand for charcoal to support a rapidly growing pig
iron industry has also contributed to significant
deforestation. Nonetheless, a combination of market forces
and government actions has led to an almost 50 percent
reduction in the deforestation rate.

13. (SBU) The GoB created a Forest Service in 2006 and is
seeking to obtain a stronger grip on forest management. It
also has ratcheted up somewhat the enforcement of existing
rules against deforestation. These measures are aimed at
avoiding a return to the very high deforestation rates
earlier in the decade.

14. (SBU) With respect to climate change, the GoB has
proposed that the international community providing financial
incentives for avoiding deforestation. In addition, it uses
the focus on renewable energy to promote greater use of
biofuels. The GoB, however, is adamantly opposed ) as a
developing country - to accepting international, binding
obligations that would impede economic growth, such as
restrictions on the use of its natural resources. Brazil is
sensitive about any suggestions on how it should manage the


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