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

UNCLAS SECTION 01 OF 05 BRASILIA 000212 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR FOR SCRONIN, KLEZNY 
NSC FOR MIKE DEMPSEY 
DEPT OF TREASURY FOR FPARODI 
USDOC FOR 3134/USFCS/OIO/WH/DDEVITO/DANDERSON/EOLSON 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDA FOR JB PENN, U/S, FFAS 
 
E.O. 12958: N/A 
TAGS: ETRD BR WTRO
SUBJECT: BRAZIL'S 2005 TRADE AGENDA: MORE OF THE SAME 
 
REF: A) BRASILIA 94 B) SAO PAULO 89 C) 04 BRASILIA 
 
     3100 D) 04 BRASILIA 2882 E) 04 SAO PAULO 1659 
 
¶1.   (U)  This cable has been coordinated with AmConsulate 
Sao Paulo. 
 
¶2.  (SBU)  Summary and Introduction.  Changing the "geography 
of trade" has become a Lula administration hallmark.  Over 
the past two years, the GoB has aggressively used Brazilian 
and Mercosul trade policy to strengthen economic and 
political ties with other developing countries, in part to 
diversify Brazil's export markets, but more pointedly to 
develop strategic partnerships with countries that can help 
Brazil realize various geopolitical objectives.  Private 
sector critics claim the GoB's focus on developing country 
partners has diverted its attention from securing more 
lucrative economic opportunities through trade agreements 
with the EU or with the United States (See Ref A). 
Dissension within the government over trade policy is also 
still evident with Ministers Furlan (Development and Trade) 
and Rodrigues (Agriculture), who support the private sector 
perspective, at odds with the Foreign Ministry, whose trade 
strategy continues to enjoy the backing of President Lula. 
Recent criticism of GoB trade policy by Minister Furlan 
prompted a rebuttal by President Lula on January 18 in which 
he justified a continuation of current policy in order to 
further reduce the "dependence" of Brazil on the EU and the 
United States.  While there is widespread domestic support 
for the priority the GoB has assigned to the global WTO trade 
negotiations, substantial benefits from the Doha Round are 
only expected over the long-term.   A brief overview of 
Brazil's trade agenda for 2005 is presented below.  End 
Summary and Introduction. 
 
WTO - Doha Development Agenda 
 
¶3.   (SBU) In public comments laying out GoB trade priorities 
for the coming year, Foreign Minister Amorim has stated 
explicitly that the WTO Doha Round is Brazil's top priority. 
In Amorim's view, the Doha Round represents an opportunity 
for Brazil to press for elimination or reduction of the worst 
trade distorting practices affecting global agricultural 
trade -- the key demand for Brazil given that agriculture 
accounted for about 42 percent of its exports, 34 percent of 
its GDP, and 37 percent of its employment in 2004. 
 
¶4.   (SBU)  In the WTO, the GoB will continue to actively 
utilize its strategic partnerships with other developing 
countries.  The GoB is expected to maintain an assertive 
stance in Geneva on agriculture reform; Brazil's sometimes 
strident leadership of the G-20, even the failure of the 
Cancun Ministerial in 2003, are seen here as having paid off 
in Brazil's inclusion in the Five Interested Parties (FIPs) 
process and in the eventual substance of the July negotiating 
framework package. 
 
¶5.   (SBU)  Amorim has acknowledged that negotiations on 
market access for industrial products and services must also 
proceed for a final package to emerge, suggesting that Brazil 
may negotiate on these issues as part of strategic coalitions 
formed around specific issues.  He has also warned that 
Brazil's posture in these and other areas may not always be 
defensive, pointing to GoB formulation of proposals relating 
to export credits and investment (local content 
requirements).  According to Ambassador Clodoaldo Hugueney, 
Brazil's top WTO negotiator, the GoB hopes the Doha 
negotiations can be wrapped up before the 2007 expiration of 
an extended TPA either undermines an ambitious outcome or 
causes an indeterminate delay in concluding the Round (Ref 
C).   (Note: Hugueney will soon be leaving his current post 
to replace Luiz Felipe de Seixas Correa as Ambassador to the 
WTO.)  While the nomination of Seixas Correa as WTO Director 
General may have been largely prompted by Brazil's interest 
in spoiling the candidacy of Uruguayan Carlos Perez del 
Castillo, the GoB would relish having a Brazilian diplomat in 
this key position during the final phase of the negotiations. 
 
Mercosul-EU 
¶6.   (SBU) Amorim continues to list free trade talks with the 
European Union as a GoB priority.  The EU is Brazil's largest 
export market, absorbing $24 billion worth of its goods in 
2004, 25 percent of Brazil's total exports.  While Amorim 
conveys confidence that progress in the negotiations can be 
made in 2005, he has also suggested that the talks may 
proceed in tandem with the Doha negotiations.  Bilateral 
technical-level meetings were held December 2 last year in 
Rio de Janeiro and are expected again in February.  A meeting 
between Minister Amorim and UE Trade Commissioner Peter 
Mandelson in Davos at the end of January is meant to give 
impulse to a Ministerial slated for March that will set a 
work program for future discussions. 
 
¶7.   (SBU) Many Brazilian analysts are skeptical that the two 
sides' differences can be bridged in 2005.  Negotiations 
broke down in October 2004 over inadequate offers put forward 
by both sides.  Mercosul's last offer was a retrenchment, 
expanding product coverage to 90 percent, but reducing the 
percentage receiving duty-free status from 87.5 percent to 82 
percent.  Mercosul offerings in government procurement, IPR 
(geographic indicators), and investment were also deemed 
insufficient by the EU, whose own offer capped certain 
Mercosul agricultural exports at a level below current trade 
flows.  Agricultural products, which account for roughly 70 
percent of Brazil's exports to the EU, have figured 
prominently in the negotiations.  While questioning the EU's 
commitment to substantial agricultural trade liberalization, 
Brazil's private sector, particularly those represented by 
Sao Paulo's FIESP industrial federation (whose companies 
generate 70 percent of the country's GDP) also fault Foreign 
Ministry inflexibility and Mercosul internal disarray for the 
breakdown in negotiations. 
 
Free Trade Area of the Americas 
 
¶8.   (SBU) After FTAA negotiations went into abeyance in June 
of last year, the FTAA at times was absent from listings by 
Foreign Ministry officials of GoB trade priorities.  However, 
with the exchange of letters between out-going USTR Zoellick 
and Minister Amorim at the end of 2004, the FTAA has again 
crept onto the GoB trade agenda.  Official GoB remarks state 
a willingness to work in good faith with the U.S. as 
co-chairs to identify a way forward for the negotiations; 
Itamaraty highlights efforts for Amorim and Zoellick as well 
as for DUSTR Allgeier and his counterpart Ambassador Bahadian 
to meet to chart a course forward. 
 
¶9.  (SBU)  However, this is less than a full embrace.  In 
recent interviews Amorim has again clarified that while an 
FTAA is desirable, it is not essential for Brazil. 
Describing the current FTAA impasse as caused by the USG's 
insistence in negotiating rules for IPR, services and 
investment without adequately addressing Brazil's demands on 
agricultural subsidies, Amorim has emphasized that improved 
access to the U.S. market is key for Brazil, and that a focus 
on market access for goods would facilitate the negotiations. 
 Amorim also has reiterated that from Brazil's perspective, 
market access discussions with the U.S. need not be within 
the FTAA, but could also be pursued within a Mercosul-U.S. 
FTA.  The GoB position may have in fact hardened since last 
June, if, as top daily Folha suggests, President Lula 
believes he can prevail upon President Bush in a 
post-election environment to show greater flexibility on 
market access for key products, such as orange juice, sugar, 
steel and beef, if the U.S. is serious about moving the FTAA 
forward. 
 
¶10.  (SBU) Further complicating the public FTAA debate is the 
reemergence of a (in our view, flawed) December 2003 Ministry 
of Planning study which concludes that under an FTAA the 
bilateral U.S.-Brazil trade balance would swing to $1 billion 
in the USG's favor (Ref B).  Although publicly Amorim claimed 
the study supports his reticent stance toward the FTAA, 
Antonio Simoes (the ForMin's Economic Advisor) admitted to 
Ecouns in a January 12 converstaion, that no study, no matter 
how well-designed, could accurately predict the impact of an 
FTAA upon trade flows.   Simoes, former head of Itamaraty's 
FTAA Office, added that sensationalist press reporting of 
items such as this only make it more difficult for the two 
sides to reach consensus. 
 
¶11.  (SBU) While many economic analysts are not optimistic 
about near-term prospects for the FTAA, they argue that the 
FTAA is crucial for Brazil to avoid an erosion of 1) its 
relative level of competitiveness in the U.S. market 
vis-a-vis hemispheric competitors, and in other Latin markets 
vis-a-vis U.S. producers, and 2) its attractiveness as an FDI 
destination.  Export growth to the United States has not kept 
pace with the expansion of Brazil's exports overall; in 2004, 
Brazil's exports to the world grew by 32 percent to reach 
$96.5 billion, compared with a 20 percent increase in exports 
headed to the United States to total $20.0 billion.  In a 
study released November 4, 2004, former ambassador to the 
U.S. Rubens Barbosa and researchers from FIESP and the 
Institute of Studies of Trade and International Negotiations 
(Icone) claim Brazil's competitive position in the U.S. 
market vis-a-vis other regional partners is eroding and urge 
the GoB to address the issue in resumed FTAA negotiations 
(Ref B).  Some companies, including Dixie-Toga, whose 
president is head of Sao Paulo's AmCham, have made public 
their intention to consider investments in countries having 
trade agreements with the U.S., rather than expand domestic 
production. 
 
Canada 
 
¶12.   (SBU) The substantive scope of soon to be launched 
trade talks with Canada, and their relation to the FTAA, are 
unclear.  A joint communique issued during the visit of 
Canada's Prime Minister, Paul Martin, in November last year 
stated that he and President Lula "agreed to promote the 
expansion of commercial relations between Mercosul and Canada 
by means of market access negotiation in the areas of goods, 
services and investments, in the context of the configuration 
of a future FTAA."  In a subsequent conversation with 
Econoff, Canada's trade officer in Brasilia said the visit 
had caused a stir in Ottawa resulting in conflicting 
interpretations of what the "talks" would entail.  Despite 
Canada's uncertainty, its trade officer said there is no 
doubt that Minister Amorim believes Canada and Mercosul will 
be moving ahead with market access negotiations in the three 
areas.  Initial discussions may take place as early as 
February. 
 
South-South 
 
¶13.    (SBU) On December 20, Ambassador Regis Arslanian, 
Itamaraty's Director of International Negotiations, outlined 
prospects for 2005 for other trade negotiations.  Although 
Arslanian's list was lengthy, Ronaldo Costa Filho, who heads 
up the European Union and Extra-Regional Negotiations 
division for Arslanian, and Gilberto Goncalves de Siqueira, 
deputy in Itamaraty's Regional Integration Division, told 
Econoff that Mercosul's current plans include launching 
negotiations in 2005 with only three additional countries: 
Morocco, Egypt, and Mexico. 
 
¶14.   (SBU) Tariff preference negotiations, covering a 
limited number of products, will proceed with Morocco and 
Egypt based on relatively standard framework agreements 
signed November 26 and December 16, 2004, respectively. 
Indicative of Brazil's driving force behind Mercosul trade 
policy, according to Costa, the negotiations with Morocco are 
the result of intense lobbying by Brazil's Ambassador to 
Morocco, former FTAA negotiator Carlos Alberto Simas 
Magalhaes, while discussions between Minister Amorim and 
Boutros Boutros-Ghali during a G-20 meeting in December 2003 
have led to the negotiations with Egypt.  Two-way trade 
between Brazil and Morocco totaled only $560 million between 
January and November 2004; with Egypt only $593 million over 
the same period. 
 
¶15.   (SBU) The negotiations with Mexico follow up on the 
GoM's stated intention of seeking Mercosul associate 
membership, which requires a free trade agreement with the 
bloc.  The aim is to consolidate the trade agreements Mexico 
has with individual Mercosul partners, which vary in terms of 
coverage, to form a comprehensive Mercosul-Mexico FTA. 
Brazil currently has an Economic Complementary Agreement with 
Mexico, which covers only about 790 products, largely auto 
parts, chemicals, and some agricultural products, and an 
automotive agreement.  Two-way Brazil-Mexico trade reached 
$4.7 billion in 2004, dominated by Brazilian exports of $3.9 
billion.  Talk are expected to begin in the first semester of 
¶2005. 
 
Potential Negotiations 
 
¶16.   (SBU) Mercosul has established work programs for 
exploratory talks both with countries of the Central American 
Integration System (SICA) and with CARICOM.  Sessions with 
both groups are slated to take place in February and April, 
¶2005.  According to Siqueira, only after these sessions will 
Mercosul determine if there is an adequate convergence of 
interests to proceed with negotiations. 
 
¶17.  (SBU) According to Costa, Mercosul hopes to complete a 
feasibility study on negotiations with South Korea by the end 
of 2005.  Nonetheless, he did not expect trade negotiations 
to commence soon thereafter due to Brazilian private sector 
concerns with Korean protectionism, particularly in 
agriculture.  Pakistan and Israel have recently notified 
Mercosul of their interest in initiating trade negotiations. 
Other countries that have conveyed an interest in developing 
closer commercial relations with Brazil/Mercosul include: the 
EFTA countries, Australia, New Zealand, the Gulf Cooperation 
Council, and Japan. 
 
China 
 
¶18.   (SBU) As Brazil's largest market for soybeans and third 
largest individual export destination, the GoB views China as 
a key trading and geopolitical partner.  In 2003, Brazilian 
exports to China almost doubled totaling $4.5 billion.  With 
continued growth, exports reached $5.4 billion, and imports 
$3.7 billion in 2004.  The importance of the relationship was 
evident in the state visits paid by both leaders in 2004. 
However, Brazil's industrial sector is terrified of the 
competitive giant, particularly following Lula's decision to 
grant China "market economy" status (Refs D and E).  Despite 
an agreement during Lula's trip to China in May 2004 to 
conduct a feasibility study on launching Mercosul-China trade 
negotiations, Costa admitted to Econoff that work is not 
proceeding even on terms of reference for the study.  Even 
without formal trade negotiations, China will remain one of 
Brazil's more important commercial partners for the 
foreseeable future, not only as a market for its primary 
commodities, but also as source of infrastructure investment 
and collaboration in certain technology-related areas, 
including satellites and development of open-source software. 
 
Russia 
 
¶19.   (SBU) There are no plans by Mercosul at this time to 
negotiate a trade agreement with Russia.  References by GoB 
officials to trade talks typically refer to discussions on 
resolving specific impediments to trade, such as Russia's ban 
on imports of Brazilian beef stemming from foot and mouth 
disease outbreaks.  The two countries are also trying to 
stimulate bilateral trade through export promotion activities. 
Danilovich