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Cablegate: South Africa-Brazil Trade: The Weakest Link In

VZCZCXRO1856
RR RUEHDU RUEHMR RUEHRN
DE RUEHSA #0908/01 1211119
ZNY CCCCC ZZH
R 301119Z APR 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4298
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 PRETORIA 000908

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/24/2018
TAGS: ECON ETRD EINV BR SF
SUBJECT: SOUTH AFRICA-BRAZIL TRADE: THE WEAKEST LINK IN
IBSA?

REF: A. 08 PRETORIA 589
B. 07 PRETORIA 3772
C. 08 PRETORIA 774
D. 07 PRETORIA 554
E. 07 PRETORIA 569

Classified By: Economic Counselor Perry Ball for reasons 1.4(b) and (d)

1. (U) Summary. Brazil and South Africa's economic
relations, although growing, are still comparatively small.
South Africa and Brazil have already formed the trilateral
India-Brazil-South Africa (IBSA) Forum, established closer
trade ties through the Southern African Customs Union
(SACU)-Mercosur preferential tQe agreement, and conducted
negotiations for years on a more comprehensive free trade
agreement. However, statistics reveal that South Africa and
Brazil's trade relations remain rather static and follow an
unchanging pattern. Trade with Brazil constituted 1.3 percent
of South Africa's total exports and 1.8 percent of total
imports. The recent trade growth can be partially attributed
to increasing prices in commodities, which constitute a large
portion of South Africa's exports, rather than increased
volume or diversity of products. Foreign investment is
impeded by cultural differences with only 12 South Africa
companies residing in Brazil and one major Brazilian company
in South Africa. While Brazil is considered one of the key
countries for South-South Cooperation, until South Africa
concludes free trade agreement negotiations with Mercosur and
develops stronger and more diversified trade ties under IBSA,
its economic relations with Brazil will continue to trail its
other southern partners, such as India and China. End
Summary.

----------------------------
TRADE PATTERN REMAINS STATIC
----------------------------

2. (C) To date, Brazil and South Africa's economic
relations, although growing, are still comparatively small.
The rhetoric from the heads of state during the
India-Brazil-South Africa (IBSA) Forum's Joint Declaration
made in October 2007 could lead to the belief that the three
countries were experiencing record-breaking trade relations
and were ready to embark towards the next step of their
envisaged trade relations: trilateral trade negotiations.
South Africa and Brazil have already formed the trilateral
IBSA, established trade ties through the SACU-Mercosur
preferential trade agreement, and conducted negotiations for
years on a more comprehensive free trade agreement. However,
trade statistics reveal that while India-South Africa trade
is expanding at exponential rates (Ref A), South Africa and
Brazil's trade relations remain rather static and follow an
unchanging pattern.

3. (U) According to Department of Trade and Industry (DTI)
data, Brazil was ranked 21st for exports and 13th for imports
in 2007. Trade with Brazil constituted 1.3 percent of South
Africa's total exports and 1.8 percent of total imports.
Trade between the two countries over the last four years was
as follows (in millions USD):

South Africa/Brazil Trade
2004 2005 2006 2007
SA Exports 242 320 406 526
SA Imports 994 1312 1386 1662
Total Trade 1236 1632 1792 2188
Trade balance -752 -992 -980 -1135

4. (U) Trade growth in recent years can be partially
attributable to increasing prices in commodities, which
constitute a large portion of South Africa's exports. Trade
data shows that in 2007 South Africa's exports grew 25.9
percent and imports 19.9 percent. Exports to Brazil are
dominated by base metals (44 percent), mineral products (30
percent), chemicals (12 percent) and machinery (12 percent).
Qpercent), chemicals (12 percent) and machinery (12 percent).
As with exports, imports from Brazil have remained the same
over the last four years with the majority consisting of
original equipment components (26 percent), machinery and
mechanical appliances (16 percent), animal products (14
percent), and automobiles and automobile parts (11 percent).


5. (C) DTI Americas Manager Cobs Pillay told Trade and
Investment Officer that the South African government was
first focusing on the Indian market before it expanded into
Brazil, despite SACU's preferential trade agreement with the
Mercosur countries. DTI Deputy Director Iqbal Sharma said
that South Africa was dedicated to finalizing a free trade
agreement with India before it embarked on trilateral
negotiations or further enhanced its trade relations with
Brazil. Sharma noted that South Africa, poised equidistantly
between Brazil and India, was hoping to cash in on this

PRETORIA 00000908 002 OF 002


geographical position as India-Brazil trade grew stronger.
Southern African Institute of International Affairs (SAIIA)
researcher Phil Alves previously informed Trade and
Investment Officer that the preferential trade agreement was
limited to tariff reductions on inconsequential product lines
that did not impact either countries' current trade. Because
of this, the agreement had failed to develop greater and more
varied trade relations. According to Alves, a more robust
free trade agreement was required to enhance the bilateral
trade relations. SACU and Mercosur held their the 12th
negotiating session on the free trade agreement in April
2008. SACU is experiencing the same difficulties in
finalizing this agreement as it did with the U.S. Free Trade
Agreement and, more recently, the European Union Economic
Partnership Agreement. The Mercosur agreement still has not
been concluded.

6. (C) According to SAIIA's report "South-South Economic
Co-operation: The India-Brazil-South Africa Case," which was
based on a survey of South African businesses trading or
investing in Brazil, additional constraints to trade that
still need to be remedied include tariff peaks and tariff
escalation on finished goods, restrictions on importation of
a variety of machinery and clothing, red tape, anti-dumping
regulations, and high import costs. DTI's internal report on
Brazilian trade relations also cites high import costs, along
with numerous non-tariff measures, such as registration
requirements for foreign products. The import costs include
a 25 percent tax on the cost of freight if transported by
sea, and an average import duty of 17 percent, as well as
expensive clearing, port and handling costs. Pillay noted
that cultural and linguistic difference have stymied both
trade and investment. Lastly, DTI's report cites
diversification of export sectors as "crucial to overcome the
inert growth of beneficiated products."

-------------------------------------------
INVESTMENT HAMPERED BY CULTURAL DIFFERENCES
-------------------------------------------

7. (C) Based on figures supplied to DTI by the Brazilian
Central Bank, South Africa currently has 3.69 million USD in
foreign investment stock in Brazil. There are 12 known South
African companies with operations in Brazil mainly in mining,
finances, IT, steel, chemicals, and beverages. SA companies
operating in Brazil include Banco Standard de Investimentos
SA, AngloGold, Alexander Forbes Financial Services, Dex
Brasil, Barham Financial Services, Macsteel International,
NOSA, and Volcano Agroscience. According to Pillay, DTI is
only aware of one major Brazilian company operating in South
Africa: the Marco Polo Bus Company. A major Brazilian mining
group, Vale, according to press reports, is preparing an
offer of up to 90 billion USD for the world's sixth largest
mining operation, Xstrata of South Africa.

8. (C) Pillay commented that cultural differences are the
greatest impediment to investment. SAIIA reported that
"forty percent of the spokespersons of SA companies active in
Brazil noted they had been overwhelmed by the "completely
alien and different" Brazilian business culture, compounded
by the wide linguistic divide." Despite these differences,
both countries are looking for avenues to enhance investment.
For example, Pillay, following a trade mission to Brazil in
2007, was courting Brazilian sugar cane growers to expand
their operations to the KwaZuluNatal area of South Africa.

-------
COMMENT
-------

9. (U) This is one cable among a series on South Africa's
Q9. (U) This is one cable among a series on South Africa's
relations with the BRIC countries and IBSA. As reported
reftels, South Africa has shifted its policies to actively
pursue stronger economic relations with its southern partners
as part of its promotion of South-South Cooperation. While
Brazil is considered one of the key countries for South-South
Cooperation, until South Africa concludes the free trade
agreement with Mercosur and develops stronger and more
diversified trade ties under IBSA, its economic relations
with Brazil will continue to trail other southern partners,
such as India and China.
BALL

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