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Cablegate: Scenesetter for the July 9-11 Visit Of

VZCZCXRO1445
RR RUEHRG
DE RUEHBR #1242/01 1831922
ZNY SSSSS ZZH
R 021922Z JUL 07
FM AMEMBASSY BRASILIA
TO RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHC/SECSTATE WASHDC 9390
RUEHAC/AMEMBASSY ASUNCION 6196
RUEHMN/AMEMBASSY MONTEVIDEO 6954
RUEHSG/AMEMBASSY SANTIAGO 6339
RUEHBU/AMEMBASSY BUENOS AIRES 4892
RUEHRI/AMCONSUL RIO DE JANEIRO 4700
RUEHRG/AMCONSUL RECIFE 6882
RUEHSO/AMCONSUL SAO PAULO 0269

S E C R E T SECTION 01 OF 04 BRASILIA 001242

SIPDIS

SIPDIS

TREASURY FOR SECRETARY PAULSON
TREASURY FOR OASIA - DAS LEE AND J.HOEK
STATE PASS USTR

E.O. 12958: DECL: 06/28/2017
TAGS: ECON PGOV EFIN BR
SUBJECT: SCENESETTER FOR THE JULY 9-11 VISIT OF
SECRETARY PAULSON TO BRAZIL

SIPDIS

Classified By: Acting Economic Counselor J. Andrew Plowman,
reasons 1.4 (B) & (D)

1. (C) Summary: The U.S. and Brazil share the basic goals of
fostering hemispheric stability, promoting democracy, achieving
a mutually satisfactory conclusion to the Doha round of WTO
negotiations, preventing terrorist and drug transit activity and
strengthening international non-proliferation regimes, but
U.S.-Brazil cooperation is sometimes limited by the GOB's
unwillingness to speak out against anti-democratic actions by
the Venezuelan regime, engage in free trade or defense
cooperation negotiations, or take proactive steps to address
proliferation and counterterrorist concerns. Brazil has
maintained its leadership role in the Haiti peacekeeping force
but has not yet used that as a launching pad to greater
international leadership on democracy promotion or security
issues.

2. (C) All too often, Brazil confines itself to South-South
platitudes, or lets others take the lead, as in the recent
takeover of the Mercosul agenda by Venezuela's Hugo Chavez.
Brazil's status as a leader in biofuels, combined with the March
2007 signing our bilateral MOU on biofuels cooperation, offer a
potential avenue for increasing bilateral cooperation in a
strategically important area. The two presidential summits in
March 2007 (Sao Paulo and Camp David), combined with several
instances of reckless overreaching by Chavez, including Chavez's
criticism of Brazil's ethanol policies and the signature of our
MOU, have created a positive change of tone in our bilateral
conversation. Despite their growing concern over Chavez's
regional role, the Lula Administration clearly believes that it
must maintain its distance from the USG in order not to
compromise its perceived ability to work with Venezuela and its
regional allies, including Bolivia.

3. (C) On the economic front, Lula's cabinet choices, which saw
all three key economic ministers -- Finance Minister Mantega,
Planning Minister Bernardo and Central Bank President Meirelles
- keep their jobs, has confirmed Lula's intent to maintain
policy continuity. In January, Lula unveiled his Growth
Acceleration Program (PAC), a mish-mash 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 fails to
seize the opportunity presented by the current benign economic
environment to tackle some of the growth-limiting distortions in
the economy, such as the spendthrift fiscal system, burdensome
tax structure and onerous labor 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. More needs to be done to increase
economic growth, however, to lift the masses out of poverty.
End Summary.

4. (C) While 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, Brazil has
largely failed to assume the international leadership role that
would make it a strong candidate for such a position.
Unfortunately, the GOB has not used its laudable contribution to
stability in Haiti as a first step along the road to becoming a
champion of international peace, security and stability.
Brazil's latest two-year stint on the UNSC, which ended in
January 2006, was characterized by caution and equivocation
rather than vision and leadership. Its foreign policy in
general has often been dominated by symbolic steps to burnish
its South-South credentials rather than by resolute attention to
its core political and economic interests, including
strengthening bilateral political and trade relations with The
United States. 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; some group members recently presented their own
alternative proposal on Non-Agricultural Market Access (NAMA),
in an implicit slap at Brazil and India's leadership.

--------------------------------------------- --
Friendly Cooperation, But Not Strong Friendship

BRASILIA 00001242 002 OF 004


--------------------------------------------- --

5. (C) Brazil's democratic institutions are generally strong
and stable, and the military dictatorship that ended over 20
years ago is not likely to reappear, as Brazil's armed forces
today pursue a professional non-political identity. With steady
(though not spectacular) 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. It has a strong
interest in hemispheric security issues that largely mirrors our
own, and actively cooperates with us on the operational level in
the fight against terrorism and drug trafficking.

6. (C) However, while the GOB has pursued generally friendly
relations with the U.S., the current left-of-center
administration has studiously avoided close cooperation with us
on broad strategic issues important to us, and has kept us at
arms length on most security-related issues. Specifically, the
GOB has refused to negotiate a Defense Cooperation Agreement or
Article 98 agreement, or to agree to broad protections for
servicemembers participating in joint exercises. In addition,
despite President Lula's active pursuit of high-level U.S.
cooperation on achieving a successful result in the ongoing WTO
trade talks, he has publicly said that the Free Trade Agreement
of the Americas (FTAA) is not on his agenda. While Brazil would
like to gain greater effective access to the U.S. agricultural
market, it stubbornly refuses to recognize that it would need to
reduce its industrial tariffs (its average MFN tariff is 11
percent) and barriers to service exports to obtain this. Small
and medium size producers here continue to fear competition from
the U.S.

7. (C) Our bilateral dialogue with the GOB on development
assistance to Brazil and in third countries contains positive
elements, including promising potential in biofuels, but 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 -- receives technical assistance from the World Bank and
IDB, but USG budget constraints and the fact that it is a cash
transfer program (albeit with conditions) keep us out of the
initiative. USAID, for its part, has sought to target its
efforts in Brazil towards promoting sustainable livelihoods
through working on issues such as health, the environment and
small and medium-sized enterprises. The Embassy was recently
informed of plans to decrease USAID's budget in FY08 to USD two
million, from its current level of USD eight million. Such a
decrease in funding would severely impact our ability to
continue an effective USAID mission. The GoB also has reacted
poorly to our flagship environmental program, the Amazon Basin
Cooperation Initiative.

----------------------------------------
Lula's Re-Election Won't Change Policies
----------------------------------------

8. (C) Having survived a nearly year-long investigation of
several scandals impinging on his administration, President Luiz
Inacio Lula da Silva was handily re-elected to a second term in
October 2006. We expect that his second term, which began
officially on January 1, 2007, will look much like the first.
We expect him to continue the conservative monetary and fiscal
policies that characterized his first term, while taking some
steps (notably his recently announced accelerated growth
program) to try to bring Brazil's growth rate above the 3
percent level where it has been stuck for the past five years.
Achievement of the GOB's goal of sustained five percent growth,
however, will require the Lula Administration to take steps that
it is otherwise loathe to do, i.e., moving forward on fiscal,
labor and tax reform, revamping its social security system and
giving the Central Bank true independence. In foreign policy,
the GOB appears poised to favor building ties with developing
nations over improving relations with the United States and
other developed nations. The foreign policy team of FM Amorim,
Vice Minister Pinheiro Guimaraes and Presidential Adviser Marco
Aurelio Garcia will likely remain in place.

9. (C) It is worth noting that the caution and legalistic

BRASILIA 00001242 003 OF 004


approach which has characterized Brazil's approach to
international issues predates the Lula administration and will
outlive it. We should not expect a significant shift in
Brazil's traditional reluctance to work closely with us on those
issues most critical to our interests. In addition, while Lula
has occasionally made comments to indicate he would be open to
finding creative ways to increase bilateral trade with the U.S.,
Brazil remains constrained by Mercosul in any commercial
dealings with the United States. Venezuelan President Chavez's
current participation in the group will make it impossible for
Mercosul to engage itself seriously with the United States
anytime soon.

-------------------------------------------
Not Speaking out on CT or Non-Proliferation
-------------------------------------------

10. (S) Brazil's general desire not to be too closely
identified with the U.S. is borne out in the GOB's approach to
counterterrorism and non-proliferation. Cooperation remains
good at the operational level, and we regularly obtain valuable
information from GOB sources on terrorism. However, the GOB
political leadership has refused to publicly endorse U.S.
counterterrorism initiatives and has insisted that official
communiques of the 3 plus 1 mechanism note that there is no
evidence of terrorist operations in the Tri-Border area, where
Brazil, Paraguay and Argentina meet. Wary of its large,
prosperous and influential Arab population, the GOB makes every
effort to downplay in public even the possibility of terrorist
fund-raising going on inside Brazil. The Brazilian Foreign
Ministry was sharply critical of U.S. designations of several
Brazilian residents and individual nationals as terrorist
fund-raisers around the time of last December's 3 plus 1
plenary. Indeed, the Minister of Justice told visiting Attorney
General Gonzalez that the GoB would react very poorly should the
U.S. designate additional Brazilian residents without first
sharing with the GoB evidence to support U.S. claims. The GOB
has been outspoken in its criticism of Israel's 2006 invasion of
Lebanon, which claimed the lives of at least seven Brazilian
citizens of Lebanese descent, and U.S. support for same
exacerbated Brazil's reluctance to publicly support the global
war on terrorism.

11. (C) The GOB is very cautious about taking an active role in
some high-profile non-proliferation efforts, questioning the
effort to refer Iran to the Security Council until the vote in
the IAEA had become a foregone conclusion. Brazil has also not
yet signed the NPT Additional Protocol, although it has not
ruled out signing it in the near future. Brazil remains an
active partner in the DHS's Container Security Initiative and
has expressed approval of the Proliferation Security Initiative
(PSI). However, the GOB has not yet endorsed the PSI statement
of principles. A March 2006 DVC with experts in Washington
addressed all the issues the GOB has with PSI, and those same
concerns were addressed during the November 2006 bilateral
Pol-Mil talks in Washington. We are still waiting to hear
whether the GOB will now endorse the PSI principles.

--------------------------------------------- --
Biofuels -- Potential for Strategic Cooperation
--------------------------------------------- --

12. (U) 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 inexpensively produce ethanol from sugarcane, which has the
highest starch content of any plant stock. Cane requires less
processing than ethanol produced from corn -- which is the
method used in the U.S. to manufacture 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 1.5 per gallon for gasoline.

13. (SBU) Since the 1980's Brazil has attempted, without great
success, to promote ethanol fuel exports to the United States.
U.S. tariffs and charges make Brazilian imports uncompetitive.
In addition to import tariffs of 1.9 to 2.5 percent, the U.S.
imposes a 54 cents-per-gallon charge on ethanol imported for use
as fuel. These charges must be paid by countries not covered by

BRASILIA 00001242 004 OF 004


free trade agreements or other trade preference arrangements.
Given the requirements of its fast-growing domestic market, it
is unclear whether Brazil could produce enough ethanol to supply
international markets. Some estimates indicate that Brazil
could increase its sugarcane acreage by no more than twenty
percent over the next three to four years. The GoB is eager to
implement the bilateral MOU on biofuels, signed on the margins
of President Bush's March 2007 Sao Paulo visit. The MOU
envisions promoting biofuels production and use in certain
Caribbean and Central American Countries, scientific cooperation
and promotion of a worldwide trade in biofuels as commodities

CHICOLA

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