VZCZCXRO4169
PP RUEHRG
DE RUEHBR #0206/01 0271115
ZNR UUUUU ZZH
P 271115Z JAN 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 4365
INFO RUEHSO/AMCONSUL SAO PAULO 6222
RUEHRG/AMCONSUL RECIFE 4250
RUEHRI/AMCONSUL RIO DE JANEIRO 1425
RUEHBU/AMEMBASSY BUENOS AIRES 3743
RUEHMN/AMEMBASSY MONTEVIDEO 6007
RUEHAC/AMEMBASSY ASUNCION 5179
RUEHSG/AMEMBASSY SANTIAGO 5287
RUEHLP/AMEMBASSY LA PAZ 4343
RUEHCV/AMEMBASSY CARACAS 3108
RUEHPE/AMEMBASSY LIMA 2829
RUCPDO/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 05 BRASILIA 000206 
 
SIPDIS 
 
STATE PLEASE PASS TO USTR 
NSC FOR CRONIN 
TREASURY FOR FPARODI 
USDOC FOR 3134/USFCS/OIO/WH/EOLSON 
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD PGOV KIPR ECON PREL PINR BR
SUBJECT:  CHARGE ENGAGES SAO PAULO PRIVATE SECTOR ON TRADE 
LIBERALIZATION, THE MACROECONOMY, AND BOLIVIA/VENEZUELA 
 
REF: BRASILIA 0141 
 
¶1. (U)  This cable contains business proprietary data. 
 
¶2. (SBU)  Summary.  During his January 16-18 economic theme meetings 
in Sao Paulo, Charge discussed a wide variety of trade, financial 
and investment issues with key private sector officials.  Embassy 
and Consulate representatives met with leaders at FIESP (the Sao 
Paulo Industrial Federation, CIESP (FIESP's sister organization), 
AmCham, Ford Motor Company, Interfarma, and U.S. air carriers to get 
their views on how best to reinvigorate commercial ties between the 
two countries.  (Civair and pharmaceutical sector discussions 
reported septel.)  Overall, our interlocutors emphasized the 
following themes:  the need to promote greater business-to-business 
relations given the expected congressional lull in advance of the 
October 2006 Brazilian elections, ongoing private sector efforts to 
influence the post-election agenda of the various candidates, 
preoccupation with the current stalemate on FTAA talks and the 
limited results of the Doha Round Hong Kong Ministerial, and 
Brazil's relief that the USG terminated the pending GSP petition on 
copyright piracy. 
 
¶3. (SBU)  For his part, Charge noted that the FTAA impasse only 
worked to disadvantage Brazil and that Mercosul, with the addition 
of Venezuela and the potential entry of Bolivia, risked losing 
coherence.  He made the point that Brazilian industry needed to do a 
better job of lobbying GOB policymakers as too often the Foreign 
Ministry sacrificed the country's commercial interests to support 
the government's pro-third world overseas agenda.  End Summary. 
 
Growing Optimism regarding the Brazilian Economy 
--------------------------------------------- --- 
 
¶4. (SBU)  Our Brazilian private sector interlocutors expressed 
increasing confidence with respect to the health of the domestic 
economy.  FIESP and AmCham officials declared that after 10 years of 
sound economic policies the country was reaping the benefits in 
terms of low inflation and a positive current account.  Attendees at 
a dinner of local CEOs all noted that 2005 was a good year for big 
business as exports, combined with awakening internal demand, had 
lifted sales.  Separately, United and American Airlines reported 
growing passenger volume and high load factors (the latter with 
83%), although high fuel costs made the profit picture iffy. 
 
¶5.  (SBU) Meanwhile, Ford Brasil President Barry Engel stated that 
his operations have been in the black for seven consecutive 
quarters, with market share, unit sales, production-line efficiency 
and exports reaching eight-year highs in 2005.  Indeed, increased 
exports (US$ 9 billion last year) had buoyed the entire Brazilian 
auto industry, he said, with domestically produced vehicles headed 
to such diverse locations as Mexico, Argentina, Turkey, and Syria. 
Thirty-seven percent of the vehicles sold in Mexico were actually 
made in Brazil.  Nevertheless, Engel admitted, the company faced 
significant challenges, including excessive taxes (with respect to 
the auto industry, the highest in the world), high labor costs, and 
skyrocketing steel prices worldwide. 
 
Dissatisfaction over Exchange and Interest Rates 
--------------------------------------------- --- 
 
¶6.  (SBU)  Nearly all our contacts expressed concern over the high 
prevailing level of interest rates and the continuing strength of 
the Real.  Echoing past statements he has made to the press, FIESP 
President Paulo Skaf took to task the Lula government for the high 
SELIC baseline interest rate (currently 17.25 percent) and called 
for changes in the GOB's economic team.  Finance Minister Palocci, 
he said, had fallen under the spell of interest rate hawks at the 
Central Bank and, given his lack of formal economic training, had 
proven unable to resist.  Former Sao Paulo state Secretary for 
Science and Technology Emerson Kapaz, however, noted that in view of 
the confidence the market placed in Palocci, he did not expect the 
Finance Minister to depart the government prior to the October 2006 
election.  Separately, Charles Wortman, President of J.P. Morgan 
 
BRASILIA 00000206  002 OF 005 
 
 
Brasil forecast that the SELIC would drop to approximately 15 
percent by the fourth quarter, a prediction roughly in line with the 
market consensus. 
 
¶7. (SBU)  The strength of the Brazilian Real versus the U.S. dollar 
provoked even greater concern.  Ford's Barry Engel said that the 
strong Real complicated his company's exports, which in 2005 
represented 42 percent of total production.  While the company would 
do what it could to maintain its hard-won overseas markets, it much 
preferred the Real to trade at the 2.5 to 2.6 range - as opposed to 
its current 2.2 to 2.3 level.  Suzano Paper executive Boris Tabacof 
stated that his company, along with a number of other firms as well, 
was suffering, as 2.8 was the equilibrium point. 
 
¶8. (SBU)  CIESP President Claudio Vaz worried that the strong real 
could make the country's US$44 billion trade surplus disappear as 
quickly as it appeared.  While the products Brazil sold abroad were 
varied, its export base was narrow:  40 companies were responsible 
for 45% of exports while 60 companies accounted for 65% of exports. 
Big business dominated the export sector, he noted, with the 
country's many small and medium-sized enterprises focusing on the 
domestic market.  Caterpillar's exports, for instance, had risen 
from US$150 million several years ago to US$1 billion today.  Both 
Vaz and Tabacof called for the Central Bank to intervene in the 
foreign exchange market to establish some type of floor for the 
value of the real. 
 
FTAA and WTO 
------------ 
 
¶9.  (SBU)  The industry leaders we spoke to were of two minds on the 
trade agenda.  While they felt that the Lula government's policy of 
seeking to expand South-South trade had resulted in the neglect of 
the bilateral trade relationship with the U.S., they blamed the 
USG's "failure to move on agriculture" for the impasse.  Ford 
Mercosul President Antonio Maciel declared that given that 
three-fifths of those in the Brazilian congress had links to the 
farm industry, if the U.S. were to make concessions on agriculture 
the FTAA would be a done deal.  In a separate conversation, FIESP 
International Affairs Director Roberto Gianetti da Fonseca opined 
that an agreement on agriculture in the Doha Round could pave the 
way for resumption of FTAA talks, but argued that within the WTO the 
USG still needed to do more on domestic subsidies.  Former Amb. to 
the U.S. Rubens Barbosa agreed that the USG was recalcitrant on the 
subsidies issue, and added that the close U.S. Senate vote on CAFTA 
ratification demonstrated that the United States did not have the 
requisite political will to make the concessions necessary to make 
an FTAA possible.  Both Barbosa and Emerson Kapaz worried that any 
FTAA agreed to would be unbalanced in the USG's favor. 
 
¶10. (SBU)  In response, the Charge recounted the President's offer 
to do away with U.S. agriculture subsidies, provided that our WTO 
trading partners made concessions of similar magnitude.  In 
addition, Charge noted Chile's experiences in the wake of the 
conclusion of the U.S.-Chilean FTA:  both exports and GDP 
skyrocketed, while poverty rates declined.  Trade liberalization, he 
declared, was the key to robust economic growth.  Charge further 
observed that while within the FTAA context Brazil wanted greater 
access to the U.S. agricultural market and the U.S. wanted rigorous 
commitments in sectors such as services and IPR, it was up to each 
side's negotiators to hammer out a mutually-beneficial accord. 
Brazil's Foreign Ministry (Itamaraty) would have to advocate the 
GOB's interests while USTR would advance those of the USG. 
 
¶11. (SBU)  Gianetti, Barbosa, and former GOB Ambassador to France 
Sergio Amaral replied that under the current government Itamarty was 
too apt to subordinate the business community's interests to the 
GOB's political agenda.  The Charge agreed, observing that perhaps 
Brazil might consider breaking the Foreign Ministry's monopoly on 
trade negotiations and establishing an interagency unit, analogous 
to USTR.  In a separate conversation, CIESP's Claudio Vaz endorsed 
the idea of a Brazilian USTR, calling for greater heat and less 
light in GOB trade policy.  However, he cautioned that the USTR 
 
BRASILIA 00000206  003 OF 005 
 
 
concept likely would only come to fruition under a government led by 
the more business-friendly PSDB party.  AmCham Advocacy Committee 
Director Geraldo Barbosa told us (privately) that in view of the 
limited results of the Doha Round Hong Kong meeting, Finance 
Minister Palocci was seeking to find a way to promote a "U.S.-Brazil 
FTA."  Barbosa will meet with Palocci in May to follow up. 
 
¶12. (SBU)  Comment.  In December 2005, AmCham had recounted to us 
similar statements by Palocci.  Its unclear to us how serious the 
Minister is about his offer, although we will continue to track 
this.  The good news from the Charge's overall discussions on trade 
liberalization is, however, that none of our interlocutors saw the 
idea of a Mercosul-U.S. 4+1 agreement as a panacea.  Each recognized 
that the same issues (IPR, agriculture, services, etc.) which impede 
progress on the FTAA, would also make the negotiation of a 
comprehensive 4+1 accord difficult.  End comment. 
 
Bolivia, Venezuela, and Peru 
---------------------------- 
 
¶13.  (SBU)  Views with respect to how best to promote regional 
stability were varied.  Ford's Antonio Maciel opined that the entry 
of Venezuela into Mercosul would in the end have only political, as 
opposed to economic, significance.  For Venezuela to become 
economically integrated into Mercosul, he said, it would have to 
depart the Andean Pact - a step it could not take given that the 
Andean Pact was its "natural cultural bloc."  In a separate 
conversation, Roberto Teixeira da Costa, a prominent Sao Paulo-based 
businessman, fretted that the USG pays too little attention to Latin 
America, adding that if Lula were to be reelected, Chavez would 
likely try to exert greater leverage over Brazil through "checkbook 
diplomacy."  Emerson Kapaz reiterated this point, noting that PDVSA 
is two and a half times the size of Brazil's Petrobras and was 
certainly capable of using its petrodollars to influence domestic 
policies. 
 
¶14.  (SBU)  Charge stated the USG's disputes with Chavez principally 
stemmed from the fact that he meddled in the affairs of his 
neighbors through support for "anti-systemic" political groups. 
Such actions undermined democratic institutions both in Venezuela 
and the region.  In addition, Charge noted, Chavez was a notoriously 
weak administrator.  The country's oil wealth was not filtering down 
to the masses, which were only growing poorer.  Chavez put greater 
priority on assisting Cuba and buying Argentine bonds, than he did 
on the welfare of the Venezuelan people or the maintenance of the 
country's infrastructure (inter alia, the failing highway bridge 
between Caracas and the coast). 
 
¶15.  (SBU) Both Roberto Teixeira da Costa and Sergio Amaral averred 
that the U.S. and Brazil needed to cooperate more on regional 
stability issues.  Bolivia President-elect Evo Morales was 
"unsophisticated," Amaral said, and Peruvian presidential candidate 
Ollanta Humala could be a danger as well.  As for Chavez, Amaral 
continued, he was the greatest threat as he not only took the 
populist line in his public statements but in his actions as well. 
Separately, Claudio Vaz opined that now that Argentina President 
Kirchner's party had made legislative gains, Kirchner would be less 
confrontational vis-`-vis both the United States and Brazil.  Now 
that Kirchner had strengthened his hand internally, Vaz thought, he 
would not need to continue to blame the country's problems on 
foreigners. 
 
Serra, Alckmin, and Lula 
------------------------ 
 
¶16. (SBU)  In the upcoming presidential race, our private sector 
interlocutors preferred Sao Paulo Governor Geraldo Alckmin over his 
fellow Tucano Jose Serra (currently Mayor of Sao Paulo city). 
(Note: PSDB party members are nicknamed Tucanos).  AmCham officials 
recounted that they had surveyed businessmen at various recent 
Chamber meetings throughout the country.  Although, admittedly, 
their poll was not necessarily representative, they stated that 97 
percent of the respondents saw Alckmin as the best candidate. 
 
BRASILIA 00000206  004 OF 005 
 
 
AmCham Executive Director Artur Vasconcellos said that the private 
sector was impressed with the way Alckmin had promoted growth and 
economic development in the state.  Alckmin was viewed as a talented 
manager, willing to sit down with all concerned to seek the best 
solution. 
 
¶17.  (SBU)  In contrast, Gianetti described Serra as "voluntarioso" 
(rough translation:  my way or the highway), i.e., he does not like 
to listen to contrary opinions.  FIESP and CIESP officials exhibited 
a similar lean towards Alckmin, with Claudio Vaz echoing AmCham's 
praise of Alckmin's management skills and describing Serra as 
someone who believes that positive results flow from his policies 
rather than negotiated solutions.  Kapaz and Amaral were more 
guarded in their assessments of the two, noting that both would make 
excellent candidates and the challenge for the PSDB would be to find 
a way to choose the nominee without splitting the party. 
 
¶18. (SBU)  The prospect of a Lula second term excited no one. 
Teixeira da Costa observed that given the ongoing political 
scandals, if reelected Lula would enter office with no honeymoon. 
This meant that it would be difficult for him to move forward on the 
wide range of difficult initiatives that both PT and opposition 
leaders recognized would have to be broached -- fiscal reform, 
social security reform, political party reform, tax reform, etc. -- 
during the next president's first 100 days in office.  (In a 
separate conversation, Ford President Maciel opined that the next 
government also would need to quickly engage in additional trade 
opening, with increased imports helping to check inflation and 
further integrating Brazil into the world economy.)  Both AmCham and 
FIESP officials noted that they were already raising these issues 
with political leaders so that once in office any new government 
could hit the ground running. 
 
¶19. (SBU) Vaz was even more pessimistic about the prospect of Lula 
being reelected, stating that a Lula second term would be an 
"economic disaster."  In the wake of the scandal, the PT bancada 
would likely fall from 90 to 50 or so, he said, thus forcing Lula to 
rely upon Chavez-style populism to garner support for his policies. 
Brazil's institutions would survive the cold bath, he concluded, but 
the country would be worse for the wear. 
 
Way Forward for 2006 
-------------------- 
 
¶20.  (SBU)  The consensus among our contacts was that with the 
election set for October 2006, this would be a lost year in terms of 
the government's micro-reform agenda and the FTAA.  Accordingly, 
FIESP and AmCham officials agreed that business to business dialogue 
would be the best way to make use of the time remaining before the 
election.  Both FIESP and AmCham commented that the mutual goodwill 
created by the USG's decision to terminate the copyright piracy GSP 
review and the GOB's decision to refrain from compulsory licensing 
of anti-AIDs retrovirals created the climate for successful talks. 
The two organizations mapped out an array of upcoming events that 
they might (separately) pursue, including inter alia: 
 
--  intensified FIESP dialogue with the National Association of 
Manufacturers, 
--  organizing lobbying trips to Washington, 
--  scheduling an AmCham-U.S. Embassy Coordination Summit to discuss 
advocacy issues, 
--  continuing the industry sectoral discussions that AUSTR 
Broadbent initiated in December 2004, possibly in connection with 
any future visit to Sao Paulo by DUSTR Schwab, 
--  combined AmCham/CIESP matchmaking U.S. and Brazilian 
medium-sized firms, and 
--  discussion at the June 9-13 AACCLA Mid-year meeting in Rio de 
Janeiro. 
 
¶21.  (SBU)  Finally, FCS Chief noted that the 
government-to-government Informal Commercial Exchange (ICE) talks 
contemplated for June 2006, possibly in connection with a visit by 
Commerce Secretary Gutierrez, also would be a step forward. 
 
BRASILIA 00000206  005 OF 005 
 
 
 
CHICOLA