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Cablegate: Brazil: Scenesetter - Economic Partnership Dialogue October

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OO RUEHRG
DE RUEHBR #1418/01 3030949
ZNY CCCCC ZZH
O 290949Z OCT 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2752
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 6806
RUEHSO/AMCONSUL SAO PAULO 2981
RUEHRG/AMCONSUL RECIFE 8639
RUEHGV/USMISSION GENEVA 1559

C O N F I D E N T I A L SECTION 01 OF 05 BRASILIA 001418

SIPDIS

STATE FOR EEB A/S SULLIVAN AND WHA A/S SHANNON

E.O. 12958: N/A
TAGS: ECON ETRD EINV EAGR BR
SUBJECT: Brazil: Scenesetter - Economic Partnership Dialogue October
30, 2008

REFS: selected recent reftels: A) Brasilia 1122 B) Brasilia 1254
C)Brasilia 1265 D) Brasilia 1267 E) Brasilia 1267 F) Brasilia 1271 G)
Brasilia 1299 H) Brasilia 1302 I) Brasilia 1325 J) Brasilia 1335 K)
Brasilia 1366 L) Brasilia 1407 M) Sao Paulo 268 N) Sao Paulo 454 O)
Sao Paulo 486 P) Sao Paulo 497 Q) Sao Paulo 548 R) Rio 236

1. (SBU) SUMMARY: The third meeting of the Economic Partnership
Dialogue (EPD) provides an excellent opportunity to reinforce the
importance USG attaches to deepening and expanding the positive
economic agenda between the United States and Brazil now, through the
transition, and into a new Administration. This Dialogue is an
opportunity to lay out our vision for the US-Brazil economic
relationship as Brazil continues to develop as a significant regional
and global economic player, potentially laying the foundation for
expanded positive cooperation in other policy areas over time. The
meeting will permit the two sides to cement a broader partnership
under the Dialogue, expanding into areas such as development
cooperation in Africa and a new sectoral initiative to support
aeronautics industry cooperation. Participants will welcome progress
on initiatives such as the June civil aviation agreement expanding
passenger and cargo services including to the under-developed
north/northeast of Brazil, the October CPSC-IMETRO Memorandum of
Understanding expanding information sharing and cooperation on
consumer product safety issues, and roadshows in the United States
showcasing infrastructure trade and investment opportunities in
Brazil. We also seek to continue dialogue on issues such as
investment/tax agreements and OECD membership. END SUMMARY

STRATEGIC OVERVIEW
- - - - - - - - -

2. (C) Recalling the original EPD theme "Rising to the Challenge of
Globalization," this third session, and the first with new MRE
Economics U/S Mendonca, provides an important opportunity to lay out
our vision for deeper and broader cooperation with Brazil on economic
themes and, over time, increasingly in other policy areas. Brazil is
undergoing a transition, moving from a sense of itself as the
inward-looking, beleaguered and put-upon poor relative to significant
and constructive engagement on the world stage in certain areas.
Most notable has been Brazil's engagement on multilateral trade and
finance issues. Brazil has moved from a debtor to a creditor nation,
to a country that gives development assistance rather than only a
recipient, from a country relying on an import substitution model to
a country that recognizes it is a global player in the agricultural
sector while continuing to struggle to manage protectionist interests
on the manufactured goods side. Brazil achieved investment grade this
year. Two-way FDI has increased considerably with the United States,
and Brazil's significant investments abroad have begun to spark some
interest in investor protections in riskier markets like Ecuador
where Brazilian investors have experienced problems. Brazil's sound
fundamentals have allowed GOB to react to the global financial crisis
without the sense of meltdown that marked previous crises.

3. (C) This transition in self-perception and in defining itself on
the global stage is not yet complete. Mission sees this internal
struggle play out across Ministries, inside Ministries, and even
within specific Ministers. For example, MDIC (Commerce Ministry)
supports intellectual property rights protection as a spur to
innovation, while the Health Ministry believes the best approach to
pharmaceutical cost control is spurning these protections in the
short-sighted hope this will foster development of local generics
production. MRE includes officials lobbying for global engagement
and others with more parochial, "anti-Western" instincts. Even
specific key individuals, including at Planalto, struggle with hearts
drawn to socialist, anti-Western and anti-private sector models and
minds that know engagement and openness to cooperation with the
private sector are the path toward Brazil's continued growth. This
evolution plays itself out even more publicly in the Congress, where
members range from those that object to debt relief for Africa, not
seeing the strategic value, to those actively lobbying for increased
competitiveness, openness and global engagement. Brazil's
non-governmental "elite" is similarly evolving, with some key
opinion-makers stuck in the past and others, particularly among the
business sector, actively urging a new model for increased global
engagement.

4. (C) We see Brazil evolving toward a new definition of national
interest as opinion-makers' perceptions of Brazil's place in the
world, its importance, and its ability to influence evolve. Brazil
wants to be the best of the BRICS, they want to be a leader among
developing countries, and they want to engage with powers like the
United States and the European Union in areas of mutual interest
(such as 4+1 trade talks or an EU "FTA") as well as advance their
bilateral interests in fora such as the WTO. We should not view this
evolving strategy as inherently inconsistent.

5. (C) Regional integration and loyalty to regional groupings and

BRASILIA 00001418 002 OF 005


mechanisms remain a policy priority, and Brazil's work to build
consensus in these fora serve to enhance its status as a regional
leader. Brazil is sensitive to its role in the region as a stable
democracy with the tenth largest global economy in a neighborhood
that includes partners making far less predictable and positive
choices. Brazil defines its national interest as requiring
constructive dialogue with all governments, including ones that
openly criticize the United States. This has also led Brazil to
emphasize development assistance and economic cooperation that may
make more political than economic sense in the short-term, but that
is hoped will deepen longer-term integration based on a more stable
model. This economic cooperation ranges from inducing its
state-controlled companies to invest in markets that make less sense
from a profit perspective, to signing numerous bilateral pledges to
increase trade and investment ties that are not necessarily
implemented but serve an important political objective. Consistent
with the priority it places on maintaining good relations with
unstable neighbors and influencing from the inside, Brazil is
sensitive to any perceived USG attempts to deliberately exclude these
unpalatable partners while including Brazil and other USG-defined
"good guys" in Latin American-specific conversations. Interlocutors
cite this reasoning in declining, for example, USG invitations to
attend "Latin American" side meetings at the IDB and Bank/Fund annual
meetings. Brazil's initiative to host a Latin American regional
summit is intended to signal the nation's leadership and commitment
to the integration of the region.

6. (C) Brazil places great importance on its role as a leader of the
G20 and on demonstrating its commitment to Mercosul (an economic
mechanism developed for political reasons). It played a significant,
and constructive, role in attempting to build G20 consensus for WTO
liberalization and cajoled Argentina heavily for flexibility while
staunching supporting their interests with negotiating partners. At
the same time, Brazil is defining its interests in a broader context,
particularly in the economic area. At the end of the day, Brazil
defined its own national interest by breaking away from the
inflexibilities demonstrated by partners such as India and Argentina
and built a consensus with other trade partners for increased trade
liberalization. This decision to recognize that Brazil stood to gain
enormously under a Doha agreement and needed to prioritize concluding
an agreement, while simultaneously managing the political fall-out
from its G20 and Mercosul partners, was not taken in a policy vacuum
and was carefully coordinated internally. It was no accident that,
immediately following Brazil's participation in the so-called "G7"
consensus, the government arranged an enormous delegation, including
300 private sector participants, to Argentina to demonstrate the
political as well as economic importance Brazil continued to place on
that relationship. It was not by chance that Amorim responded in a
published op-ed, to aspersions cast in a press article, strongly
asserting his G20 credentials and support for G20 positions in WTO
negotiations. USG engagement with Brazil must continue to recognize
the government's need, and ability, to manage these interests as one
policy whole as it defines its national interest.

7. (C) On global issues, Brazil does not yet consistently see itself
as having a constructive role to play, yet Brazil welcomes bilateral
dialogue with the United States where it is treated as an equal
partner. Brazil retains sensitivities as a developing country that it
not automatically fall in line with US positions where it perceives
no direct national interest. In fact, Brazil often perceives its own
national interest as not sitting in judgment on other nations as it
manages its own very real internal sovereignty sensitivities. Brazil
has begun limited engagement via its lead of the UN mandate in Haiti,
attractive as a UN-blessed mission in a country in the region that
welcomed their presence, and its desire to participate in the
Annapolis conference. While Brazil is not yet convinced it could or
should engage across global political issues, Brazil sees engagement
on global economic issues as more tangibly in its national interest.
GOB has responded responsibly and capably to the global financial
crisis. Recognizing policy choices in other countries can directly
affect its own economic growth, Brazil has been eager to engage
developed country partners in finding a way forward. As chair of the
G20, Brazil has recognized the need to bring that grouping together
in addressing the crisis.

8. (C) We have similarly found Brazil defining its national interest
as intersecting the United States' more consistently on the economic
agenda. The biofuels MOU has proven an excellent forum for
cooperation which has produced tangible results and an increased
sense of the value of working together. This success can potentially
be expanded to other areas of the economic relationship, such as
broader energy cooperation and possibly a 4+1 trade discussion. The
energy agenda holds enormous potential for a new Administration as
Brazil becomes a significant player in oil and alternative fuels.
Trade discussions could be fruitful to explore. Similarly, as we
build successes over time demonstrating bilateral cooperation yields
mutual benefit, this economic cooperation may encourage bilateral

BRASILIA 00001418 003.2 OF 005


cooperation on broader global issues, including political and
security questions.

9. (C) Brazil is an emerging nation still feeling its way internally
toward a new sense of itself and its place on the global stage. As
such, its definition of national interest will not always coincide
with our own. Mission suggestion would be to treat Brazil more as a
"Japan" or a "France" - a partner that can be frustrating and that we
may not always agree with, but one we can work with constructively
with a shared assumption that areas of positive engagement and
cooperation can be found. Brazil is not yet a Japan or a France, but
engaging with Brazil seriously will foster its growth into that role.
Brazil's competition group is the BRICS, its neighborhood is Latin
America, and it will evolve as a significant global presence
eventually. It would be a mistake to treat Brazil as a third-tier
country or to assume that the GOB is not focused on its national
interest. We should commit deeply to engagement with this large
democracy and growing economy, recognizing our common interests and
the potential to deepen cooperation in an gradually expanding range
of policy topics where our respective national interests coincide.

10. (SBU) EPD AGENDA TOPICS

- SOCIAL INCLUSION/DEVELOPMENT COOPERATION: Following up USAID Fore's
visit in August and earlier EPD discussions on the US MCC and the
Brazilian Bolsa Familia, cooperation in third countries provides an
excellent opportunity for us to benefit from each other's expertise
and experience in complementary assistance projects in countries of
common interest. AID and ABC have agreed to further expand existing
cooperation and initialized technical level meetings to enhance each
others' knowledge of existing and planned USAID and ABC projects in
Haiti and Mozambique and to seek further trilateral cooperation
initiatives in African countries belonging to the Community of
Portuguese-Speaking Countries. USAID agreed that it would pursue
Brazil's participation in donor coordination meetings where they
provide development assistance, similar to Brazil's current
participation in Haiti. These steps represent the first tangible
progress on social inclusion in the EPD.

- AGRICULTURE: MRE understands that USDA has the lead in USG on
CODEX and on the CCA. Regardless, the Brazilians desire and intend to
discuss their concerns regarding developing country participation in
CODEX for State to hear. MRE understands that FAS will respond on
this agenda item.

- INFRASTRUCTURE: Infrastructure investment under the PAC remains an
enormous political priority for the Lula government, both
domestically and in terms of the regional integration agenda. In the
context of the global financial crisis, the President and Ministers
have repeatedly emphasized that, whatever the government's response,
commitment to the PAC will remain staunch. This commitment is both a
political priority as the PT maneuvers toward the 2010 elections, and
a policy priority based on lessons learned in past economic crises.
In the past 20 years, Brazil chose to abandon infrastructure
investment as it struggled to impose fiscal discipline, resulting in
poorly maintained or in many cases non-existent infrastructure for
roads, rail, ports, the electrical grid, and other examples.
Recognizing profoundly inadequate infrastructure is constraining
Brazil's potential growth prospects, policymakers are determined not
to make this mistake in future. This area has been cited as one
where Brazil can offer valuable "lessons learned" to other developing
countries working with IMF and other institutions. To date, MRE's
role has been limited to coordinating the infrastructure "roadshows"
to the United States.

- CIVIL AVIATION: The EPD will welcome the agreement negotiated with
ANAC in June. You may wish to note our hope that expanded flight
possibilities into the north/northeast of Brazil will further social
inclusion objectives, as potential increased American tourism and
other business opportunities could also benefit development
objectives in that region.

- HOPE II: In addition to underlining Brazilian business interest in
taking advantage of HOPE II, MRE will present preliminary ideas for
possibly designing a Brazilian equivalent of the HOPE program. This
would probably require new legislation in Brazil (rather than
regulatory change). MRE also needs to sort out internally whether it
can act unilaterally or, more probably, would have to negotiate
within Mercosul. At the EPD, MRE will principally be looking for
feedback whether US textile producers would have any interest in an
eventual potential Brazilian HOPE program for Haiti.

- SECTORS: In addition to proposing a sectoral event on aeronautics,
MRE has invited MDIC to come to the EPD to present a proposal on
cooperation in the software/IT sector. The sectoral discussion
presents a good opening to introduce IPR discussion into the
conversation and its links to innovation and competitiveness in these

BRASILIA 00001418 004 OF 005


specific sectors.

- IMPORT SAFETY: The EPD will welcome the October 22 MOU between
CPSC and IMETRO. FCS understands there was MDIC sensitivity to MRE's
proposal to sign at the EPD - Mission is grateful to avoid getting in
the middle of that issue and believes simply welcoming the signed
agreement will be acceptable to all parties. If Ministry of
Justice's proposal on product recall cooperation is ready, MRE may
invite them to present at the EPD.

- DISTINCTIVE PRODUCTS: According to MRE, the question of Brazilian
treatment of bourbon, bourbon whiskey, and Tennessee whiskey may be
nearing a solution. The technical experts at the agriculture
ministry (MAPA) have indicated that two of the requests made via
demarche are doable: retracting the current bourbon definition and
including the products on the distinctive products list. The
suggested U.S. definition of bourbon however presents some technical
problems that MAPA will discuss in detail at a bilateral meeting with
Tobacco, Tax, and Trade Bureau's Bill Foster the day prior to the EPD
meeting.

- INNOVATION: MRE/Economics has struggled internally to find its
value-added in work already underway via MDIC, ABDI, the Science
Ministry, and other parts of GOB. MRE rejects IPR as a positive area
of engagement on the innovation agenda. MRE will welcome OES'
presentation and innovation work under the Joint Commission Meeting
on Science and Technology process, which another part of MRE leads in
conjunction with the Science Ministry and State/OES leads for the
USG.

- TELECOMMUNICATIONS/INTERNET: We understand that in addition to
resource concerns involved in negotiating a highly technical Mutual
Recognition Agreement (MRA), ANATEL and other parts of GOB may be
reluctant to negotiate on product categories where domestic
production exists. Brazil will ask where USG thinking is on ICANN
renewal and continues to believe internet governance should be
further internationalized.

- OECD: MRE found the technical sessions in Washington and their
diplomat's visit to USOECD extremely helpful in understanding how the
USG organizes its staff and interagency work. MRE prefers not to be
pressed to accept more extensive offers of technical assistance. You
may wish to proactively seek Brazil's input and expertise in a
specific work area of the OECD, such as biofuels, as a way to further
draw Brazil into the OECD's work and as a signal that USG values the
contribution and expertise Brazil can offer. While opinions vary
within both Ministries, the Finance Ministry at higher levels is
generally more enthusiastic about eventual OECD membership as a way
Brazil can gain more influence on global economic issues. The upper
levels of MRE, however, remain skeptical of the institution as a
perceived rich country club imposing its will on developing
economies.

- INVESTMENT/TAX: GOB remains uninterested in pursuing a BIT-style
agreement, signaled again clearly even in MRE edits to the proposed
agenda for the October 29 technical session. GOB remains unwilling
to consider the investor protections a BIT includes, and is not
convinced that resources should be prioritized toward negotiating
with the United States in any case given unprecedented levels of
two-way FDI. MRE has not been moved by arguments that a BIT would
attract deeper small and medium sized investment that form the
backbone of a strong two-way investment relationship. With Brazilian
business concern focused more on major investment disputes in
countries like Argentina and Ecuador and a thwarted experience in the
Congress that failed to ratify MRE's 1990s BITs, MRE, Finance and
MDIC are reluctant to spend the political capital a BIT would
require despite a CEO Forum recommendation to explore an arbitration
mechanism. As opinion in the Congress and among the business
community continues to evolve, we should continue to press MRE on
this issue. US-Brazil tax treaty discussions September 30-October 2
confirmed most issues are resolvable through negotiation. However,
GOB indicated it would not be possible to change its legislative
system to permit transfer pricing and dispute settlement. USG is
seeking business feedback whether a BTT that does not include these
elements would be of value.

11. (SBU) Congressional Lunch, October 29

This diverse group of Senators and Deputies will give a good flavor
of the diversity of opinion on economic issues and the appropriate
role of government. Opinions range from PT Deputy Tatto, chair of
the House Economics committee, who speaks with admiration and envy of
the Chinese government's perceived ability to "control" its economy
and who is highly protectionist, to Pedro Eugenio, Chair of House
Finance, who is economically liberal and interested in increased ties
with the United States. The group will be interested in an exchange
of views on the global financial crisis and response, the Doha Round,

BRASILIA 00001418 005 OF 005


and potential areas of bilateral cooperation. You may wish to
initiate dialogue on other areas of US interest such as investment
and tax agreements. This group will have a diversity of views on
regulatory reform in Brazil. You should ask for their perspectives
on the feasibility of the government getting particular initiatives
through Congress by 2010 (from domestic tax reform to bilateral
agreements).

12. (SBU) MDB/CNI/Central Bank dinner, October 29

This group brings together MDB representatives who help Brazil
address its development needs, a business community representative
who can speak to Brazil's current environment and the impact of the
financial crisis, and Finance Ministry who plays a key role in
addressing the crisis. The conversation could range from Brazil's
infrastructure needs and US cooperation to address, the global
financial crisis' impact, political and economic views on Brazil's
evolution, and regional topics of interest. The IDB and CAF
representatives are Bolivian, adding additional perspectives to this
conversation.

SOBEL

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