This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 06 BRASILIA 002233 
 
SIPDIS 
 
USTR FOR SCRONIN, KLEZNY 
DEPT FOR E:ALARSON; WHA:CSTRUBLE, SPINKHAM; EB:BMANOGUE 
NSC FOR JOANNA WALLACE 
USDA FOR JBPENN 
 
E.O. 12958: DECL: 07/16/2013 
TAGS: ETRD BR FTAA
SUBJECT: WHAT'S BEHIND BRAZIL'S FTAA POLICY 
 
 
Classified By: Janice Fair, Economic Officer for Reason Section 1.5 (b) 
 and (d) 
 
¶1. (U) The description that follows of the political and 
economic factors helping to shape Brazil's trade policy, and 
specifically its approach to the FTAA negotiations, is 
offered to assist U.S. policymakers in determining whether 
and how enough common ground can be found to conclude the 
FTAA process successfully. 
 
¶2. (C) Summary and introduction.  A number of concurrent 
forces are moving Brazil along its present FTAA trajectory. 
These forces, or considerations for formulating policy, are 
sometimes contradictory and may have led to some GOB 
miscalculation on how best to achieve Brazil's interests 
within the FTAA as well as the degree of hemispheric support 
it would receive for its ideas to restructure the 
negotiations.   Brazil's political goals, which include a 
leadership role in South America along with a strong focus on 
development and the social agenda, sometimes clash in its 
pursuit of certain national economic interests.  However, the 
GOB's vision of a reformulated FTAA is solidly rooted in its 
perception of national interest and of the outcome required 
for Brazil to benefit from the FTAA.  The newly-elaborated 
three-track approach is not simply a negotiating ploy. 
Brazil's FTAA calculation has always differed from that of 
other countries in the hemisphere.  For Brazil, the bottom 
line is improved access to the U.S. market for its 
agricultural and industrial goods, not regional rules for 
attracting foreign direct investment. 
 
¶3. (C) Despite Brazil's strong desire to secure improved 
access to the U.S. market, the rigid perspective of Itamaraty 
officials in charge of FTAA policy inclines us to take at 
face value the GOB claim that it will not continue with the 
across the board FTAA negotiations as originally envisioned 
and currently structured.  We also suspect that the GOB is 
currently in a vulnerable stage in its FTAA policy, given the 
substantial general rebuff of the Mercosul three-track 
proposal that occurred during the Trade Negotiating Committee 
(TNC) meeting in San Salvador July 8-11. 
 
¶4. (C) Regis Arslanian, unofficially Itamaraty's new policy 
director for the FTAA and Mercosul-EU negotiations, has 
suggested privately that a compromise would be possible 
between Mercosul's three-track proposal and a baseline 
agreement that he understood the USG to have contemplated 
(septel).  According to Arslanian, a bilateral structure for 
all market access negotiations is the key element for Brazil. 
 End Summary. 
 
¶5. (C) As the GOB evaluates potential benefits of an FTAA, 
assesses the current status of negotiations, and develops 
proposals to move the negotiations more in line with its 
perceived interests, we believe the following chief factors 
impact its deliberations: 
 
* Brazil's desire to be a regional political leader and, in 
particular, to be the driving force behind Mercosul's 
reinvigoration. 
 
* The belief that some Brazilian producers are not 
sufficiently competitive to benefit from and in fact could 
lose through a free trade agreement at this time. 
 
* The recognition that Brazil needs substantial expansion of 
exports to attain the economic growth necessary to address 
its social agenda. 
 
*The belief that exports to the United States will continue 
to grow anyway. 
 
* The concern that rules within comprehensive trade 
agreements may constrain the GOB's ability to design its own 
preferred economic development policies. 
 
* The difficulty in convincing the public and Congress that 
an FTAA agreement would be a net positive for Brazil. 
 
* The existence of divisions and opposition within society 
and government alike on the direction of Brazil's FTAA policy. 
 
LEADER OF SOUTH AMERICAN INTEGRATION 
 
¶6. (C) The dominant theme in President Lula's foreign policy 
has been Brazil's role as the natural leader of South 
American integration, with Mercosul as the cornerstone.  Lula 
has met almost every South American counterpart at least once 
in the six months since taking office.  Press reports that 
follow such meetings are replete with declarations of 
solidarity, including references to the need to forge common 
positions within the FTAA and WTO against developed country 
protectionism.  Brazil has used the granting of BNDES credit 
lines to Argentina, Venezuela, Bolivia, Colombia and Peru to 
reinforce these regional ties and fidelity to Brazil. 
However, the GOB may have taken the rhetoric too seriously, 
confusing no-cost statements of support in public 
declarations with substantive positions within negotiations. 
Despite Brazil's efforts to forge closer alliances with 
countries in the region, it appears that Mercosul's 
(Brazil's) proposal to reformulate the FTAA was roundly 
rebuffed in the San Salvador TNC meeting. 
 
¶7. (C) President Kirchner's election in Argentina has 
apparently provided Brazil with a like-minded partner to make 
Mercosul a priority.  However, Mercosul remains more 
important as a political project than an economic one, and at 
times Brazil's political interests regarding Mercosul appear 
to blind it to its own economic interests.  Virtually all 
Brazilians now recognize that the Mercosul market is 
insufficient to provide the export growth Brazil needs. 
 
BRAZIL COST - LACK OF COMPETITIVENESS 
 
¶8. (C) Rather than drawing attention to the new opportunities 
that a hemisphere-wide trade agreement could present, the 
FTAA generates fear in Brazil: the widespread perception that 
many Brazilian industries cannot compete effectively, at 
least not yet.  Although developed country protectionism is 
always cited as a major problem undermining Brazil's 
competitiveness, so are internal problems sometimes called 
the "Brazil cost,"  i.e., high costs associated with Brazil's 
tax structure, outdated social security system, labor code, 
poor education, and, in general, bureaucratic obstacles to 
commerce.  While the GOB is committed to social security and 
tax reform, it seems to lack faith it can lower the "Brazil 
cost" sufficiently in the near term to guarantee Brazilian 
competitiveness in the free trade environment an FTAA 
agreement would create. 
 
EXPORTS ARE ESSENTIAL 
 
¶9. (C) The GOB sees export growth as essential for economic 
growth and job creation.  The GOB is still following tight 
fiscal and monetary policies designed to control the 
inflation that started to accelerate following last year's 30 
percent devaluation of the Real.  Foreign direct investment 
has fallen off and capital in-flows have not recouped 
following last year's financial uncertainties.  Exports grew 
at a record pace at the beginning of this year, but are 
expected to taper off somewhat with a strengthened currency. 
Although the FTAA is a trade negotiation among 34 countries, 
the GOB has stated clearly that its primary interest is 
access to the U.S. market for goods.  Thus there is a strong 
incentive for Brazil-led Mercosul to stick with the FTAA if 
it is clear that achieving a trade agreement with the United 
States outside the FTAA is highly unlikely. 
 
EXPORTS HAVE BEEN GROWING 
 
¶10. (C) Although seeking improved access to the U.S. market 
is a high GOB priority, some Brazilians note that exports to 
the United States continue to grow anyway, even without a 
trade agreement.  The United States is Brazil's largest 
export market, and officials cite growth in exports to the 
United States in each of the last seven years as evidence of 
a trend.  Although the GOB wants to negotiate increased 
access to the U.S. market through the FTAA, it is unlikely 
that Brazil would choose to do so at any cost. 
 
FREEDOM TO PURSUE DEVELOPMENT POLICIES 
 
¶11. (C)  While aggressively seeking increased access to 
foreign markets to allow for economic development through 
export growth, the GOB is hesitant to enter into 
comprehensive trade negotiations -- for example, those that 
include rules on services, investment and government 
procurement -- due to fear that these might constrain its 
ability to develop new economic development policies.  Such 
thinking was reflected in the GOB proposals in late 2002 to 
changes the WTO TRIMS agreement to, among others, allow 
performance requirements for investors, and again in 
Brazil/Mercosul's FTAA goods market access offer that 
included provisions to protect infant industries.  Although 
not wishing to go all the way back to the inward-looking 
policies of the sixties, the GOB does appear more concerned 
about maintaining its freedom of action than about 
establishing better hemispheric-wide rules for economic 
activity. 
 
FTAA A HARD SELL 
 
¶12. (C) Hand-wringing about the FTAA is a daily staple in the 
Brazilian press, creating a constant sense of pressure and 
urgency.  There isn't a single day when articles speculating 
about FTAA policy do not appear in the major Brazilian 
dailies, and reporting in smaller newspapers and magazines on 
the subject is also prolific.  Past rhetoric by Lula and his 
PT party helped create this hostile climate, and the GOB has 
increased public doubt and confusion through its own 
often-conflicting statements.  The result has limited the 
GOB's maneuverability and intensified the leadership 
challenge it faces in winning domestic approval for any 
agreement. 
 
¶13. (C) Opposition to the FTAA is not new in Brazil. 
Although industries worry about the "Brazil cost" and their 
own specific competitive aspects, and labor organizations are 
fearful about employment repercussions and loss of union 
leadership, the arguments of the most vocal opponents are 
usually ideological.  The emphasis that Lula and Itamaraty 
have given under the Lula administration to communication 
with civil society, both domestically and through FTAA 
hemisphere-wide fora, underscores the GOB's real concern 
about garnering public support for the FTAA. 
 
¶14. (C) We believe that concern about deep-seated domestic 
opposition to an FTAA deal is behind Mercosul's recent 
proposal to allow participation of private sector and 
legislative representatives in its official FTAA delegations. 
 In contrast to other countries' concerns about 
confidentiality and the inflexibility that an expanded 
 
SIPDIS 
delegation composition might introduce into the negotiations, 
Brazil apparently sees direct participation by these groups 
as a means of gaining their approval for any eventual 
agreement. The GOB may also be pushing for a bilateral 
structure for market access because it would be simpler to 
explain the trade-offs that were made to reach agreement. 
Similarly, for Itamaraty a "positive list"  approach for 
services and investment market access makes it easier to 
convey details on concessions to labor leaders and other 
social and political leaders. 
 
NOT EVERYONE AGREES WITH ITAMARATY POLICY 
 
¶15. (C) There has been a recent consolidation of power within 
Itamaraty, first with the replacement of Ambassador Hugueney 
and now with the replacement of Ambassador Simas, of a group 
that has viewed the FTAA skeptically for years.  By all 
accounts, the driving force behind current Itamaraty policy 
is the Secretary-General, Pinheiro Guimaraes.  He has been 
among the Brazilian observers who have for years portrayed an 
FTAA deal as at worst as a project of the United States to 
take over the Brazilian economy and at best as a necessary 
evil. 
 
¶16. (C)  However, not everyone within the diplomatic corps 
nor within the government agrees with Itamaraty's current 
FTAA policy.  Within other ministries, including the 
ministries of Agriculture, Development and Finance, there is 
concern that Itamaraty's minimalist approach does not take 
proper account of the potential economic benefits to be 
gained through the FTAA.  Nonetheless, Itamaraty has been put 
in charge of coordinating FTAA policymaking, and we do not 
believe efforts to exploit differences among ministers would 
be successful.  Attempts to stir the pot in this way would 
likely only stiffen hardliners and undermine like-minded 
ministers. 
 
COMMENT 
 
¶17.  (C) As the GOB reflects on its next step(s) given the 
lack of support for Mercosul's three-track proposal, we 
believe it will see its scope for movement as very limited. 
After so publicly arguing for this approach, the GOB will 
have a hard time abandoning it.  Some in the GOB may harbor a 
sense of being misled, since they took Ambassador Zoellick's 
presentations in Brasilia in May as an invitation to engage 
in a dialog about reformulation of the FTAA.  Arslanian, for 
example, said the Brazilian delegation in El Salvador was 
disappointed that the U.S. side made no mention there of a 
"baseline" approach. 
 
¶18. (C) There are intense political and social pressures for 
Brazil to step back from the broad-based FTAA negotiations as 
currently configured.  Should the GOB fail to obtain 
structural changes in the negotiations, Brazil is likely to 
simply go through the motions with the FTAA, refraining from 
constructive participation.  Eventually it might even feel 
compelled to suspend participation in the negotiations, 
reluctant as it might be as a regional leader to be seen as 
the villain who killed the golden egg. 
 
¶19.  (C) The present moment could be an opportune time should 
the USG decide to explore potential modifications to the FTAA 
negotiations that would give Brazil some of the political 
backing it is seeking.  As noted above, Regis Arslanian 
seemed to suggest to econoff that Mercosul could be flexible 
on a number of areas important to the United States -- 
services and investment rules, IPR and government procurement 
within the FTAA -- as long as market access could be 
negotiated bilaterally.  In future discussions the USG may 
have with the GOB on this issue, we would of course be 
leaving Brazil in no doubt that it, not the USG, is the 
demandeur for change in FTAA scope.  End Comment. 
HRINAK