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

UNCLAS SECTION 01 OF 04 BRASILIA 001142 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR FOR SCRONIN 
DEPT OF TREASURY FOR FPARODI 
USDOC FOR 3134/USFCS/OIO/WH/EOLSON 
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD 
USDA FOR FAS/ITP AND FAS/FAA/WH 
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE 
STATE PASS EXIM FOR NATALIE WEISS, COCONNER 
STATE PASS USTDA FOR AMCKINNEY 
 
E.O. 12958: N/A 
TAGS: BEXP ECON ETRD EAGR BR
SUBJECT: SLOW GROWTH IN US EXPORTS TO BRAZIL 
 
REF:  BRASILIA 682 
 
¶1. (U) THIS IS A JOINT STATE/FCS MESSAGE; IT INCLUDES INPUT 
FROM AMCONSULATES SAO PAULO AND RIO DE JANEIRO.  UNLESS 
OTHERWISE SPECIFIED, DISCUSSION OF U.S. EXPORT TOTALS IS 
BASED UPON USDOC, NOT GOB, DATA. 
 
¶2. (SBU) SUMMARY AND INTRODUCTION.  OVER THE PAST DECADE 
GROWTH IN U.S. EXPORTS TO BRAZIL HAS STAGNATED, WITH THE 
TOTAL OSCILLATING AROUND THE USD 11 TO 13 BILLION LEVEL. 
THE GOOD NEWS, HOWEVER, IS THAT, AT LEAST FROM 1992-2001, 
EXPORTS TO BRAZIL FROM U.S. SMALL AND MEDIUM-SIZED 
ENTERPRISES HAVE INCREASED IN VALUE SUBSTANTIALLY (242 
PERCENT).  BASED UPON OUR CONTACTS WITH POTENTIAL EXPORTERS 
AND A REVIEW OF THE DATA, POST BELIEVES THAT THE SPOTTY 
PERFORMANCE OF U.S. EXPORTS OVERALL REFLECTS:  A) THE 
INABILITY OF THE BRAZILIAN ECONOMY TO EXPAND IN A 
SUSTAINABLE FASHION, B) THE TEN-YEAR DECLINE IN THE VALUE 
OF THE BRAZILIAN REAL VERSUS THE USD, AND C) THE 
DIFFICULTIES U.S. EXPORTERS FACE (I.E., LACK OF KNOWLEDGE, 
ARCANE IMPORT REGULATORY REGIME, AND INADEQUATE PORT 
INFRASTRUCTURE) IN ENTERING THE BRAZILIAN MARKET.  MORE 
WORRISOME, WHILE IN 2004 U.S. EXPORTS TO BRAZIL INCREASED 
23.6 PERCENT, THE U.S. MARKET SHARE OF BRAZILIAN IMPORTS 
DECLINED TO 18 PERCENT, INDICATING THAT THE U.S. IS LOSING 
GROUND COMPARED TO OTHER COUNTRIES. 
 
¶3. (U) ALL THIS IS AGAINST THE BACKGROUND OF DECLINING GOB 
NORMAL-TRADE-RELATIONS (NTR) TARIFFS OVER THE PAST TEN 
YEARS.  RECENT STATEMENTS BY PRESIDENT LULA THAT HE IS 
CONSIDERING PROMOTING GREATER IMPORTS TO BRAZIL PROBABLY 
ARE INTENDED MORE TO PRESSURE DOMESTIC INDUSTRY TO KEEP 
PRICES IN CHECK RATHER THAN TO SIGNAL ANY UPCOMING IMPORT- 
FRIENDLY POLICY.  INDEED, ONE OF THE DRIVING FORCES BEHIND 
BRAZIL'S RECENT RESURGENCE IN INTERNATIONAL FINANCIAL 
MARKETS HAS BEEN ITS ABILITY TO POST STRONG TRADE AND 
CURRENT ACCOUNT SURPLUSES.  END SUMMARY AND INTRODUCTION. 
 
¶4. (U) WITH A GROSS DOMESTIC PRODUCT OF NEARLY US$600 
BILLION, BRAZIL REPRESENTS ABOUT HALF OF SOUTH AMERICA'S 
POPULATION, TERRITORY, AND ECONOMY.  IN 2004, BRAZIL 
IMPORTED US$62.8 BILLION IN PRODUCTS, THE VAST MAJORITY OF 
WHICH WERE INDUSTRIAL AND MANUFACTURED GOODS.  (BRAZIL IS A 
HIGHLY COMPETITIVE PRODUCER OF AGRICULTURAL COMMODITIES AND 
A MAJOR FORCE IN THE AG EXPORT MARKET.)  LAST YEAR, 
ESTIMATED U.S. EXPORTS TO BRAZIL WERE US$13.86 BILLION AND 
BRAZILIAN EXPORTS TO THE UNITED STATES REACHED US$20 
BILLION.  THIS US$13.86 BILLION FIGURE REPRESENTS A 23.6 
PERCENT INCREASE OVER THE U.S. EXPORT TOTAL FOR 2003 - US$ 
11.218 BILLION - BUT IS SUBSTANTIALLY LOWER THAN THE PEAK 
LEVEL OF US$15.928 BILLION IN 2001 AMD MORE OR LESS 
EQUIVALENT TO THE EXPORT TOTAL FOR 1999, US$13.249 BILLION. 
SEE TABLE 1 BELOW. 
 
               TABLE 1 
 
US EXPORTS TO BRASIL, 1994 TO 2004 
         (IN BILLIONS OF US$) 
---------------------------------------- 
1994     1995    1996     1997    1998 
8.118   11.443  12.699   15.912  15.157 
 
 1999    2000    2001     2002    2003     2004 
13.249  15.359  15.928   12.408  11.218   13.863 
 
 
ALTHOUGH DISCERNING A CLEAR TREND FROM THE ABOVE FIGURES IS 
DIFFICULT, IT WOULD APPEAR THAT BOTH STRONG GDP GROWTH AND 
A STABLE EXCHANGE RATE -- AS WAS THE CASE IN 1995, 1997, 
2000 AND 2004 -- ARE ESSENTIAL TO U.S. EXPORT GROWTH. 
(TABLE 2 BELOW SETS FORTH EXCHANGE RATE AND GDP GROWTH DATA 
OVER THE SAME PERIOD.) 
 
                          TABLE 2 
 
BRAZIL GDP AND AVERAGE ANNUAL EXCHANGE RATES, 1994 TO 2004 
--------------------------------------------- -------------- 
                    1994     1995     1996     1997    1998 
GDP GROWTH          5.9%     4.2%     2.7%     3.3%    0.1% 
E/R VERSUS USD      .85      .97      1.04     1.12    1.21 
1999      2000      2001     2002     2003     2004 
0.8%      4.4%      1.3%     1.9%     0.5%     5.2% 
1.79      1.96      2.32     3.53     2.89     2.93 
 
¶5. (U) THIS UP-AND-DOWN PERFORMANCE ON EXPORTS COMES 
AGAINST A BACKGROUND OF STEADILY DECLINING IMPORT TARIFFS. 
BETWEEN 1994 AND 2003, AVERAGE BRAZILIAN N-T-R TARIFFS 
DECLINED FROM 14.38 PERCENT (MEDIAN 20 PERCENT) TO 10.83 
PERCENT (MEDIAN 13 PERCENT).  MEANWHILE, PER TABLES 3 AND 4 
BELOW, IN 2004 THE U.S. MARKET SHARE OF BRAZILIAN IMPORTS 
HAS DECLINED TO 18 PERCENT (GOB MINISTRY OF DEVELOPMENT 
INDUSTRY AND COMMERCE FIGURES), INDICATING THAT THE OVERALL 
LEVEL OF U.S. EXPORTS IS NOT ONLY LEVELING OFF BUT THAT THE 
U.S. IS LOSING GROUND COMPARED TO FOREIGN COMPETITORS, 
PRINCIPALLY, ASIA. 
 
                            TABLE 3 
 
        PERCENTAGE MARKET SHARE OF U.S. IMPORTS (FOB) 
--------------------------------------------- -------- 
1994      1995      1996      1997      1998 
 20%       21%       22%       23%       23% 
 
1999      2000      2001      2002      2003      2004 
 24%       23%       23%       22%       20%       18% 
 
                           TABLE 4 
 
  INROADS INTO IMPORT MARKET BY FOREIGN COMPETITORS* (FOB) 
--------------------------------------------- ------------- 
             1998   1999   2000   2001   2002   2003   2004 
ASIA          13%    13%    15%    16%    17%    18%    20% 
AFRICA         3%     5%     5%     6%     6%     7%     9% 
 
*PERCENTAGE MARKET SHARE 
 
¶6. (U) A REVIEW OF THE MINISTRY'S IMPORT STATISTICS FOR 
2004 PROVIDES A FEW SNAPSHOTS OF THE DEGREE TO WHICH 
FOREIGN COUNTRIES ARE GAINING GROUND IN THE BRAZILIAN 
MARKET.  FOR EXAMPLE, IN 2004 THE U.S. WAS THE FOURTH 
LEADING SUPPLIER OF AUTO PARTS, TRAILING GERMANY, 
ARGENTINA, AND JAPAN.  HOWEVER, WHILE U.S. EXPORTS FOR 2004 
INCREASED A HEALTHY 32 PERCENT, THOSE OF ARGENTINA (65.56%) 
AND JAPAN (42.8%) INCREASED EVEN MORE.  THE SAME PHENOMENON 
OCCURRED WITH INTEGRATED CIRCUITS, WHERE THE UNITED STATES 
IS THE SECOND LEADING SUPPLIER, BEHIND SOUTH KOREA BUT 
AHEAD OF TAIWAN.  YET, SOUTH KOREAN EXPORTS ROSE 64.72%, 
TAIWANESE EXPORTS 96.94 PERCENT, AND U.S. EXPORTS ONLY 
18.22%.  PHARMACEUTICALS TELL A SIMILAR STORY.  THE U.S. 
LEADS SWITZERLAND IN THIS CATEGORY, THOUGH U.S. EXPORTS 
ROSE 12.46% WHILE SWISS EXPORTS ROSE 16.16%.  THE GOOD 
NEWS, HOWEVER, IS THAT IN THOSE CATEGORIES IN WHICH THE 
U.S. HELD A COMMANDING MARKET SHARE, INTER ALIA, AVIATION 
MOTORS AND AVIATION PARTS, U.S. EXPORTERS WERE ABLE TO 
OUTDO THEIR FOREIGN RIVALS IN TERMS OF INCREASING SALES. 
 
¶7. (U) IN REVIEWING THE DATA, IT IS IMPORTANT TO BE AWARE 
THAT THE OCCURRENCE (OR NON-OCCURRENCE) OF SEVERAL HIGH- 
VALUE ADDED SALES IN A SPECIFIC YEAR COULD DISTORT THE 
EXPORT TOTALS FOR THAT YEAR.  FOR INSTANCE, TURNING BACK TO 
USDOC FIGURES, ONE HTS CATEGORY WHERE THIS MIGHT TAKE 
PLACE, MIGHT BE "AIRCRAFT, SPACECRAFT AND PARTS THEREOF." 
HOWEVER, LOOKING AT THE FIVE BEST YEARS FOR U.S. EXPORTS 
UNDER THIS LINE ITEM (2001 - $1.569 BILLION, 2002 - $1.236 
BILLION, 2004 - $1.274 BILLION, 1999 - $.954821 BILLION, 
AND 1998 - $.910094 BILLION), IN THREE OF THOSE YEARS TOTAL 
U.S. EXPORTS DECLINED AS COMPARED TO THE YEAR BEFORE. 
 
¶8. (SBU) THE DIFFICULTY OF DOING BUSINESS IN BRAZIL MAY BE 
ONE REASON BEHIND THE SPOTTY PERFORMANCE OF U.S. EXPORTS. 
FOR INSTANCE, A RECENT STUDY PREPARED BY THE MINISTRY OF 
DEVELOPMENT, INDUSTRY, AND COMMERCE CONCLUDES THAT BRAZIL'S 
PORTS ARE OPERATING AT VERY NEAR THE SATURATION POINT. 
EVEN AT BRAZIL'S MOST EFFICIENT PORTS, THE COSTS OF MOVING 
CARGO ARE SIGNIFICANTLY HIGHER THAN THOSE IN MANY 
INDUSTRIAL COUNTRIES.  MEANWHILE, A DIZZYING ARRAY OF 
TAXES, FEES, AND OTHER SURCHARGES (A NUMBER OF THEM 
CASCADING, I.E., INCLUDING OTHER TAXES IN THE CALCULATION 
BASE) CAN MAKE FINAL PORT COSTS UP TO 70 PERCENT HIGHER 
THAN FREE ON BOARD PRICES.  SOMETIMES IT TAKES LOCAL LEGAL 
REPRESENTATION TO MANEUVER THROUGH THE INTRICATE MAZE OF 
REGULATIONS, WHICH, OF COURSE, ONLY DRIVES UP IMPORT COSTS 
EVEN MORE.  NOTWITHSTANDING THE DIFFICULTIES INHERENT IN 
EXPORTING TO BRAZIL, THIS CANNOT FULLY EXPLAIN THE LAGGING 
U.S. EXPORTS - AFTER ALL, ASIAN AND AFRICAN EXPORTERS FACE 
THESE SAME PROBLEMS AND THEIR SALES TO THE BRAZILIAN MARKET 
ARE INCREASING. 
 
¶9. (U) THE SILVER LINING TO THIS CLOUD IS THE PERFORMANCE 
OF U.S. EXPORTS FROM SMALL AND MEDIUM-SIZED ENTERPRISES 
(SME), WHICH OVER A TEN-YEAR TIME PERIOD HAVE REGISTERED 
SOLID GROWTH.  SPECIFICALLY: 
 
--  U.S SME EXPORTS TO BRAZIL INCREASED IN VALUE BY 242 
PERCENT FROM 1992 TO 2001.  IN US DOLLAR TERMS, THE 
INCREASE VALUE WAS NEARLY US$2.65 BILLION. 
 
--  OVER THIS SAME TIME-PERIOD, THIS 242 PERCENT GROWTH 
MADE BRAZIL THE FASTEST GROWING MARKET FOR U.S. SME EXPORTS 
IN THE WORLD.  MEASURED BY THE US DOLLAR GAIN (US$2.65 
BILLION), BRAZIL RANKED SEVENTH IN THE WORLD. 
 
--  MEANWHILE, IN 2001, 26 PERCENT OF U.S. EXPORTS TO 
BRAZIL CAME FROM SMES. 
 
THE EFFORTS EXERTED BY THE U.S. COMMERCIAL SERVICE OF THE 
DEPARTMENT OF COMMERCE ON BEHALF OF U.S. SMES ARE ONE OF 
THE CHIEF REASONS BEHIND THIS INCREASE IN SME EXPORTS TO 
BRAZIL.  IT IS ESTIMATED THAT THE U.S. COMMERCIAL SERVICE 
HAS ASSISTED OVER 200 COMPANIES PER YEAR FOR THE LAST TEN 
YEARS IN ENTERING THE BRAZILIAN MARKET (INCLUDING 281 IN 
2003 AND 171 IN 2004.)  THIS IS IN ADDITION TO HELPING 
COMPANIES ALREADY EXPORTING TO BRAZIL TO INCREASE THEIR 
SALES (I.E., 272 IN 2003 AND 371 IN 2004.)  OTHER U.S. SMES 
COME TO MARKET THEIR WARES AT THE DOZENS OF REPUTABLE 
INTERNATIONAL SHOWS IN SAO PAULO AND OTHER BRAZILIAN 
BUSINESS CENTERS. 
 
¶10. (SBU) RECENTLY PRESIDENT LULA HAS THREATENED TO 
ENCOURAGE GREATER IMPORTS IF LOCAL BUSINESS DOES NOT HOLD 
THE LINE ON PRICE INCREASES.  WHILE, IN OUR VIEW, THE GOB 
IS PRINCIPALLY USING THE PRESIDENT'S STATEMENTS AS A DEVICE 
TO JAWBONE THE BUSINESS COMMUNITY INTO HELPING HOLD THE 
LINE ON INFLATION, IT WOULD BE A MISTAKE TO ASSUME THAT HE 
WILL NOT ACT IF HE HAS TO.  INDEED, ON MARCH 4, AT FINANCE 
MINISTER PALOCCI'S REQUEST, LULA ZEROED OUT TARIFFS ON 
IMPORTS OF 15 TYPES OF STEEL PRODUCTS, GIVEN THE RECENT 
SERIES OF PRICE INCREASES SPARKED BY SURGING WELL DEMAND. 
(REFTEL A). 
 
¶11. (SBU) HAVING MADE CLEAR THAT, IN SPECIFIC CASES WHERE 
NECESSARY, HE WILL MAKE GOOD ON HIS THREAT, LULA IS NOW 
FREE TO RELENT ON THE IDEA OF SLASHING TARIFFS ACROSS-THE- 
BOARD -- ESPECIALLY SINCE DOING SO MIGHT ERODE THE BALANCE 
OF TRADE AND CURRENT ACCOUNTS SURPLUSES THAT THE GOB HAS 
WORKED SO HARD TO ACHIEVE.  THE 2004 CURRENT ACCOUNT (US$11 
BILLION) AND TRADE (US$33.6 BILLION) SURPLUSES HAVE HELPED 
IMPROVE BRAZIL'S REPUTATION WITH BOTH INTERNATIONAL MARKETS 
AND THE CREDIT RATING AGENCIES, AND HAVE PROVED A READY 
SOURCE FOR FINANCING DOLLAR-BASED LOANS.  IT IS UNLIKELY 
THAT THE GOB WILL END UP BITING THE HAND THAT FEEDS IT. 
 
DANILOVICH