Cablegate: Scenesetter for the Economic Dialogue Visit of Wha a/S

DE RUEHBR #2242/01 3412116
R 072116Z DEC 07





E.0. 12958: N/A

BRASILIA 00002242 001.2 OF 004


1. (SBU) Summary: Your visit for the economic dialogue will expand
and develop economic cooperation themes discussed during the Under
Secretary for Economic, Energy and Agricultural Affairs Reuben

Jeffery's August visit (REFTELS A, B, C). We hope to use the
dialogue to focus on areas where we can deepen our partnership. We
hope the upcoming interaction will communicate clearly that we
intend to work with Brazil based on mutual respect and in
recognition that Brazil is now a global player on economic issues
and that with this engagement comes responsibility that Brazil needs
to assume. While relations between the U.S. and Brazil are
friendly, the USG often encounters significant difficulties in
gaining buy-in from senior policymakers on issues of global and
bilateral interest to the United States. Eager to assert its own
influence, the Brazilian government resists cooperation with the USG
unless it can clearly be characterized as a partnership among

2. (SBU) From the nascent regional infrastructure initiative USG is
developing with the Planning Ministry, to excellent cooperation
under the March 2007 US/Brazil biofuels MOU, Brazil is eager to work
with us in areas perceived as in its own self-interest. In areas
such as proposals to negotiate a Bilateral Tax Treaty or a Bilateral
Investment Treaty, while these accords would be in the long-term
growth interests of Brazil, short-term domestic tax loss revenue
fears and constitutional issues impede progress. In aviation, recent
leadership shake-ups have delayed Brazil's short-term ability to
engage sufficiently productively in negotiations. In other areas,
inter-Ministerial differences in views can result in opaque
interactions. For example, on IPR issues, the Justice and Trade
Ministries tend to be more receptive to enhancing enforcement and to
streamlining regulatory approval processes, while the Health
Ministry and the FDA-equivalent ANVISA have advocated publicly (for
example at WHO and WIPO) that IPR is in direct contradiction to the
global public good. Agricultural biotechnology is another challenge,
given that the Agricultural Ministry supports the technology while
the Environment Minister is passionately against. Finding areas of
mutually beneficial cooperation and identifying where Brazilian
self-interest lies will be key to the success of our economic policy
partnership. END SUMMARY



3. (U) President Lula and his economic team have implemented prudent
fiscal and monetary policies and pursued reform. Brazil's external
accounts have improved substantially over the last three years. For
2007, Brazil's Central Bank is forecasting 4.7 percent growth and
the IMF predicts 4.4 percent. The Central Bank predicts 2007
inflation will be 3.96 percent. The IMF predicts 3.6 percent
inflation for 2007.

4. (SBU) Buoyed by exports and investment inflows, the real has
remained strong for most of the year, allowing the government and
businesses to pay down external debt and invest in capital
equipment. Last year, the government eliminated the last of its
restructured debt from Brazil's late-1980's default. Based upon the
improving external debt dynamics, Fitch IBCA upgraded its credit
rating on Brazil's long-term debt in May 2007, to BB+.

5. (SBU) Key challenges remain. The net public sector debt-to-GDP
ratio is on a downward trend but remains high, at about 44%. Real
interest rates are among the highest in the world; reducing them
will require both reductions in the government's borrowing
requirement and reform of the financial sector. Income and land
distribution remain skewed. Investment and domestic savings are
low, but growing. The informal sector constitutes over 40 percent
of the economy, in part due to the tax burden (nearly 38 percent of
GDP), one of the highest among large developing economies.

6. (SBU) Sustaining and expanding growth rates in the longer term
depends on further structural reform efforts and concrete steps to
create a more welcoming climate for investment, both domestic and
foreign. A bill allowing Public-Private Partnerships, a key effort
to attract private investment to infrastructure, passed in 2004,
although implementation of this initiative still awaits promulgation
of the necessary regulations. Labor reform, additional tax reform
and autonomy for the Central Bank were on the agenda for 2005 to
2006, but appear unlikely to be addressed at in the near term. The
government still needs to improve the regulatory climate for
investment; to simplify torturous tax systems at the state and
federal levels; and to further reform the pension system.

BRASILIA 00002242 002 OF 004


8.(SBU) Poor infrastructure issues have long been cited as part of
the "Custo Brasil" or "Brazil Cost," a term used to refer to the
systemic problems (that also include a cumbersome regulatory system)
that hinder Brazil's competitiveness. For example, the interior of
the country depends on a series of ill-maintained roads for
transportation of goods to its aging ports. Brazilian officials
have signaled that the GOB is interested in working with the USG to
explore ways to maximize funds, technology and managerial skills in
infrastructure projects around the country, or possibly for the two
countries' entities to invest in third countries. GoB officials
have proposed that both governments work together on implementation
as well as financing using a possible "tripod format" (a partnership
between the GoB, a Brazilian company, and a US company) for
infrastructure projects.


9. (SBU) Brazil is facing deficiencies in infrastructure, the
collapse of flagship national carrier Varig in 2006, and two major
airline crashes resulting in the loss of hundreds of lives in less
than one year. A complete overhaul of civil aviation authority
ANAC's leadership is in progress, with three of five new directors
confirmed in the last weeks now officially in place and two more
nominees scheduled for confirmation hearings in the coming weeks.
Bilateral aviation talks planned for Dec. 5-7 were cut short by a
day when it became clear that key U.S. outcomes could not be
achieved, and what few concessions that were being offered by the
GOB would only be desirable if tied to other US objectives which the
Brazilian team was not able to fulfill. Specifically, the
opportunity for new third-country code-sharing for airlines to test
the markets in the north/northeast region was denied, and all
markets below Brasilia (including Sao Paulo, Rio, Belo Horizonte,
Porto Alegre, etc.) were all deemed off the table for new
frequencies. Brazil's head of delegation admitted that ANAC was not
ready to fully engage on these issues. That said, this meeting was
the first bilateral consultation in 10 years and as such, was an
important first step for future negotiations. A Memorandum of
Consultations was signed on December 6 recapping the discussion and
indicating the two countries' intent to meet again before the end of


10. (SBU) Brazil has used the Doha Development Agenda (DDA)
negotiations as the main forum for engaging with developed country
partners. Brazil leads the G-20 group of developing countries in
pressing for agricultural trade desires in the DDA. Brazilian
industry leaders and GoB officials have underlined that concern over
the impact of Chinese imports on domestic manufacturers is one root
cause behind their unwillingness to agree to the non-agricultural
tariff cuts proposed by both the USG and the EU during the Doha
Round. To date, Brazilian proposals do not provide real market
access. China has increased in importance as an export market for
Brazilian soy, iron ore, and steel, becoming Brazil's fourth largest
trading partner. Impelled by a stronger real, this year China is
set to become the second largest exporter to Brazil, passing
Argentina and second only to the U.S. Low-priced Chinese imports,
particularly in the textile, footwear, and toy sectors, are now
threatening to displace domestic Brazilian production.

11. (SBU) Brazil's objections to US agricultural programs have
sparked initiation of a WTO case. In the cotton dispute, some in
the Brazilian congress have introduced an IPR "cross-retaliation"
bill - a proposal that has some executive branch support and is
winding its way through the Brazilian congress.


12. (U) Brazil's ethanol program is a model for alternative energy,
based on inexpensive production from sugarcane. Ethanol is exempted
from the largest federal tax on gasoline (CIDE) and is subject to
lower rates on two other federal levies (PIS and COFINS).
Nevertheless, ethanol prices can vary substantially from state to
state. In contrast, gasoline prices vary less and are controlled by
the government. U.S. tariffs and charges make Brazilian imports less
competitive. In addition to import tariffs of 1.9 to 2.5 percent,
the U.S. imposes a 54 cents/gallon surcharge on ethanol imported for
use as fuel, which has led to a strong Brazilian push to lower or

BRASILIA 00002242 003 OF 004

eliminate it. (Comment: Brazil is able to sidestep in part the
surcharge by exporting a large volume of ethanol to Caribbean
countries, which then do some processing and ship the finished
product to the United States under favorable treatment established
by the Caribbean Basin Initiative. End Comment.) Under the March 7
DOS/MRE MOU, joint participation in third party biofuels initiatives
in St. Kitts, El Salvador and in the Dominican Republic has begun,
NIST-led standards work is on-going, and DOE/USDA hosted a
delegation of Brazilian scientists.


13. (U) Agriculture is a major sector of the Brazilian economy, and
accounts for 13% of GDP (and 30% when including agribusiness) and
33% of Brazilian exports. Brazil is the world's largest producer of
sugar cane, coffee, tropical fruits, frozen concentrated orange
juice (FCOJ), and has the world's largest commercial cattle herd
(50% larger than the U.S.) at 180 million head. Brazil is also an
important producer of soybeans (second to the United States), corn,
cotton, cocoa, tobacco, and forest products. The remainder of
agricultural output is in the livestock sector, mainly the
production of beef and poultry (second to the U.S.), pork, milk, and

Intellectual Property Rights (IPR)

14. (U) On April 30, 2007, the Office of the U.S. Trade
Representative (USTR) moved Brazil to "Watch List" status in its
Special 301 Annual Report as a result of the country's progress,
particularly in copyright protection and IPR enforcement. Included
in the USTR announcement was notice that Brazil will be subject to
an Out-of-Cycle Review to monitor its progress on outstanding IPR
concerns and to evaluate the sustainability of recent enforcement
progress. On May 4, 2007, the GoB announced the issuance of a
compulsory license for Merck Pharmaceutical's HIV/AIDS medicine
Stocrin. GoB officials cited cost reduction for their free HIV/AIDS
public health program as the motivation for this action. In
contrast, some pharmaceutical industry representatives feel new
Minister of Health Jose Gomes Temporao was driven more by ideology
than by concern about future damage to Brazil's investment climate
as a result of this action.


15. (SBU) Brazil has long seen itself as the natural leader of the
region and covets a permanent UN Security Council (UNSC) seat.
President Lula has run an activist foreign policy with a focus on
South America and the Third World, seeking to forge alliances with
other mid-sized powers (South Africa, India, etc.)- the 'South-South
Policy.' Lula has refused to condemn Cuba for human rights
violations and, in fact, has pushed for Cuban membership in the Rio
Group and a Cuba-Mercosul trade pact. The GoB has worked to
increase both its economic and political ties with Venezuela.
Enhanced integration of the two countries' energy sectors is high on
its agenda. Lula has been especially solicitous of Chavez. Lula
has consistently praised the Venezuelan President's democratic
credentials and continues strongly to support Venezuelan membership
in Mercosul, despite opposition in Brazil's congress. Lula has
gone to great lengths to mend rifts that appeared recently over
Venezuela's apparent involvement in Bolivia's decision to
nationalize its oil and gas industry and over Chavez's biting
remarks to Brazilian Congress members who condemned the GoV's
decision to close an independent television station. President
Lula and President Bush have spoken favorably of trilateral
assistance, though so far this has only resulted in a joint health
mission to Sao Tome and Principe. Further activities may take place
in other Portuguese-speaking countries (Mozambique and Angola). At
UNGA this year, President Lula spoke of Iran's right to enrich
uranium and its peaceful nuclear program, which undercut efforts to
keep the pressure on Iran to suspend enrichment.


16. (SBU) Brazil is a major player on international environmental
issues and strongly supports the Kyoto Protocol with its "common,
but differentiated responsibilities" principle. The GoB is actively
engaged in international climate negotiations under the United
Nations Framework on Climate Change (UNFCCC). Brazil is a leading
emitter of greenhouse gases due to the substantial amount of
deforestation in the Amazon region. In recent years, the rate of
deforestation has dropped by over 50 percent, though it remains

BRASILIA 00002242 004 OF 004

significant and there are signs that the rate may go up in 2008. At
the UNFCCC, Brazil in late 2006 proposed creating financial
incentives for avoiding deforestation, but which would be outside
the carbon credit system and would not include any obligations on
Brazil to protect the forest. The proposal has interesting points
to it, however, it is not consistent with USG policy on climate

17. (SBU) Thus far, Brazilian reaction to President Bush's Global
Climate Change (GCC) initiative has been lukewarm - they fear it
will undermine the work of the UNFCCC. GoB officials have said
previously that the U.S., as a non-signatory to the Kyoto Protocol,
places more emphasis on energy efficiency and expense than the
environment (REFTEL B). After the September 27 - 28 Major Economies
Meeting (MEM) on climate change, the head of the Brazilian
delegation to the MEM, Ministry of Exterior Relations Under
Secretary Everton Vargas told the press, "We see only a reiteration

of what he [Bush] has said in the past. We don't want this focus on
voluntary controls." . . . Bush tried to convince the participants
that now he is taking seriously the problem of global warming. But
in practice, he only defended his obstinate position."

18. (SBU) Brazil's Foreign Minister Celso Amorim in Bali criticized
the U.S. and EU proposal on lowering tariffs on environmental goods
because it did not include reducing or eliminating tariffs on
ethanol (which both the United States and the EU have) and
addressing agricultural subsidies. He accused the developed
countries of being "two-faced" by cloaking efforts to promote their
commercial exports under the "green" label while maintaining
protectionists barriers on products from other countries,
particularly ethanol. He told reporters that "Bali is a point of
departure between the developed and developing countries], not one
of arrival."

19. (SBU) Brazil has been a leader on access and benefit-sharing of
genetic resources. This includes the issue of the overlap of the
Convention on Biological Diversity (CBD) and other international
environmental agreements and the WTO. Brazil supports efforts at
WIPO and the WTO to revise patent regimes in order to include
mandatory requirements on disclosure of the origin of genetic
resources used and any use of traditional knowledge.


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