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Cablegate: Brazilian Firms Lobby to Hold Onto Gsp Benefits

VZCZCXRO1474
PP RUEHRG
DE RUEHSO #0802/01 2711913
ZNR UUUUU ZZH
P 281913Z SEP 07
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 7526
INFO RUEHBR/AMEMBASSY BRASILIA 8639
RUEHRG/AMCONSUL RECIFE 3815
RUEHRI/AMCONSUL RIO DE JANEIRO 8361
RUEHBU/AMEMBASSY BUENOS AIRES 2889
RUEHAC/AMEMBASSY ASUNCION 3128
RUEHME/AMEMBASSY MEXICO 0814
RUEHMN/AMEMBASSY MONTEVIDEO 2457
RUEHSG/AMEMBASSY SANTIAGO 2159
RUEHLP/AMEMBASSY LA PAZ 3506
RUCPDOC/USDOC WASHDC 2914
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEHRC/USDA FAS WASHDC 0694

UNCLAS SECTION 01 OF 03 SAO PAULO 000802

SIPDIS

SIPDIS

STATE FOR WHA/BSC, WHA/EPSC
STATE PASS USTR FOR KATE DUCKWORTH
STATE PASS FED BOARD OF GOVERNORS FOR ROBITAILLE
STATE PASS EXIMBANK
STATE PASS OPIC FOR DEMROSE, NRIVERA, CMERVENNE
NSC FOR TOMASULO
TREASURY FOR JHOEK
USDOC FOR 4332/ITA/MAC/WH/OLAC
USDOC ALSO FOR 3134/USFCS

E.O. 12958: N/A
TAGS: ETRD ECON BR
SUBJECT: BRAZILIAN FIRMS LOBBY TO HOLD ONTO GSP BENEFITS


Summary
-------

1. (U) The American Chamber of Commerce (Amcham) and Sao Paulo
Federation of Industries (FIESP) met with representatives of the
U.S. Government Accountability Office (GAO) on September 13 and 14
to discuss Brazil's inclusion in the Generalized System of
Preferences (GSP) trade program. Amcham and FIESP underscored that
U.S. companies and consumers benefit from Brazil's inclusion in the
program, and that without GSP benefits, many of the items on the
list would be replaced by Chinese products. Although there are
clear financial benefits of the GSP program for Brazilian producers,
both organizations noted that many companies are not taking
advantage of GSP. A lack of information from the Brazilian
government regarding the program as well as a focus on the Brazilian
domestic market have resulted in less than 100 percent utilization
of the program. According to both groups, keeping GSP in Brazil
would provide clear benefits for U.S. consumers as well as U.S.
foreign policy in the region. End Summary.

GSP Important for Brazil and the U.S.
-------------------------------------

2. (U) The GAO Director and Assistant Director for the
International Affairs and Trade team visited Brazil to review the
Generalized System of Preferences as part of a larger
congressionally mandated review of five U.S. trade preferences
programs. Both Amcham and FIESP emphasized the importance of GSP
benefits for their member businesses in Brazil; Brazil is the fourth
largest beneficiary of GSP, behind Angola, India, and Thailand.
(Note: Angola is the largest recipient of GSP benefits almost
exclusively due to its petroleum exports to the U.S. End Note.)
According to FIESP, companies in Brazil employ more than 400,000
Brazilians as a result of the export of Brazilian goods via GSP to
the U.S., and Brazil exported US$3.7 billion in goods covered by
GSP, which is about 15 percent of Brazilian exports to the U.S.

3. (U) The Sao Paulo Amcham made three trips to Washington in 2006
to underscore the benefits that U.S. consumers and companies receive
from Brazil's inclusion in the GSP program. U.S. companies in
Brazil enjoy tariff free access for intra-company goods and for
other U.S. trade partners and they have made significant capital
investments in Brazil to maximize these benefits. Rejane Darold
from Eaton Corporation told GAO that the GSP program allows the
company to diversify its production line. For instance, Eaton's
Brazilian subsidiary makes several items on a single production
line, but on a much smaller scale than the company could produce in
the U.S. Thus Eaton is able to fill orders from its subsidiary in
Brazil that would be uneconomical in its U.S. facilities that tend
to focus on large volumes of one, single product. In addition, the
Brazilian subsidiary imports used equipment from its U.S. partners,
helping to provide lower-cost goods to their U.S. customers while
creating a market for U.S. exports.

4. (U) Brazilian firms impressed upon the GAO that U.S. companies
and consumers are equally benefiting from Brazilian firms' use of
GSP, and the loss of GSP for Brazil would mean the loss of U.S. jobs
in many industries that use Brazilian intermediate inputs. Roughly
75 percent of Brazilian exports in 2006 were raw materials and
intermediate products that undergo further assembly and processing
in the U.S. Tariff-free access for those goods lowers prices of end
products to U.S. consumers and provides manufacturing and assembly
employment opportunities within the U.S. As an example,
representatives of Duratex, a wood products company, told the GAO
that Brazilian companies ship wood for doors, which are then
assembled in the U.S. while their closest competitor, China, ships
finished products. Removing these types of wood products from GSP
could potentially lead them to ship their partially finished wood to

SAO PAULO 00000802 002 OF 003


China for final assembly thus removing U.S. manufacturers from the
value chain.

GSP Reaching Most Impoverished Areas
------------------------------------

5. (U) The Amcham President underscored that among the
organization's chief priorities is clarifying that Brazil's
inclusion in the GSP program fulfills the program's mission of
helping less developed countries become more active in trade. He
noted there are "many Brazils" and evaluating Brazil's GSP
eligibility based on average socio-economic indicators does not give
a real indication of Brazil's extreme poverty, especially in the
northeast where nearly one-fifth of goods exported under GSP in 2006
originated. In fact, as a percentage, the impoverished northeast
benefited the most from GSP exports. He emphasized that a careful
review of the GSP program should look closely at individual products
and their impact on the local economy instead of focusing on the
country as a whole. Stating that Brazil has a large economy and
therefore shouldn't benefit from GSP, he opined, really loses sight
of the vast benefits the program is bringing to under-developed
areas of Brazil.

Without GSP, China Would Dominate
---------------------------------

6. (U) Both FIESP and Amcham roundtable participants noted that
other developing countries would be unlikely to replace the majority
of Brazilian exports eligible under GSP if Brazilian suppliers were
excluded from the program. To emphasize this point, FIESP
representatives stated that China is the only competitor for 75
percent of Brazilian products receiving GSP benefits.

7. (U) Several companies noted that their products would become
uncompetitive without the tariff benefits, especially for products
and sectors where their profit margins would not cover the tariffs.
In fact, several companies complained that their products already
had been excluded when they reached the program's competitive need
limitations (CNL). Carlos Monnerat, the Export and Chartering
Manager of Caraiba Metals (a subsidiary of Grupo Paranapema that
sells copper products) told the GAO directors on a visit to their
plant that Caraiba had to cut 40 jobs at its northeast factory
because the company lost GSP benefits last year, making the export
of copper wire rods to the U.S. market no longer profitable. In
2006 half of Caraiba's exports and a quarter of the company's
overall sales were to the U.S.; however, Caraiba exceeded the CNL of
$120 million because it operates on long-term contracts, and could
not decrease its export volume of copper wire rods to compensate for
the higher international copper index price. (Note: Caraiba's price
point is based on the international copper price plus a small margin
to cover production, logistics and business costs. End Note.)

GSP Benefits Big, But Not Meeting Full Potential
--------------------------------------------- ---

8. (U) Brazilian exports to the U.S. under the GSP have steadily
increased in the last few years, however many Brazilian companies
are not taking full advantage of the benefits. More than 3,000
Brazilian products are eligible under GSP, but because of a lack of
awareness either of the existence of the program or of the
procedures for application to the program, many U.S. importers are
paying unnecessary import tariffs on eligible items. In total, some
80% of eligible products are being covered, but FIESP estimates this
still represents an economic waste of $870 million USD in tariffs.
Amcham members also noted that the companies that have the most to
benefit from GSP are the least prepared to deal with the
administrative steps to qualifying for GSP. A representative from
the chemicals sector cited two reasons that many Brazilian companies

SAO PAULO 00000802 003 OF 003


don't take advantage of the GSP benefits--ignorance about the
program and the temporary nature of the program, which limits the
incentives to make large up-front investments. Eaton said US
brokers often bear the administrative burden and are unaware of the
procedures for the GSP program thus creating a substantial
transaction cost for the company.

9. (U) The Amcham members also expressed disappointment at the lack
of interest and action on the Brazilian government's part to inform
potential beneficiaries about GSP and other trade preference
programs. In 2004, Amcham began a campaign to increase private
sector awareness about GSP and has been proactively contacting
potential beneficiaries about the program. Amcham also publishes a
yearly guide to filing for GSP benefits and a substantial yearly
evaluation of GSP in Brazil. Three years ago, Amcham requested that
USTR supply a list of eligible products, and both Amcham and USTR
publish a guide to qualifying for GSP benefits.

Comment
-------

10. (U) In spite of the size of its economy, Brazil still harbors
many of the conditions that GSP was designed to ameliorate. The
impoverished northeast in particular has enjoyed substantial gains
from GSP. U.S. consumers also benefit from the lower prices of many
of the intermediate goods which Brazil supplies to U.S. producers.
There appears to be a negative impact on investment in GSP eligible
products in Brazil due to the annual reviews which the business
community says keeps investors skittish on taking a long-term view.
Fear of losing GSP and having to compete directly with China in many
of these items has resulted in a lower focus on GSP than otherwise
would be expected. While Brazil has a long way to go to become an
export driven economy, GSP has obvious tangible benefits for both
producers in Brazil and U.S. consumers. End Comment.

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