VZCZCXRO5555
RR RUEHRG
DE RUEHBR #0478/01 0692007
ZNR UUUUU ZZH
R 102007Z MAR 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 4768
INFO RUEHRG/AMCONSUL RECIFE 4451
RUEHSO/AMCONSUL SAO PAULO 6530
RUEHRI/AMCONSUL RIO DE JANEIRO 1677
RUEHBU/AMEMBASSY BUENOS AIRES 3850
RUEHRC/USDA WASHDC

UNCLAS SECTION 01 OF 05 BRASILIA 000478 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
FROM CHARGE CHICOLA FOR CODEL GRASSLEY 
 
E.0. 12958: N/A 
TAGS: OREP PGOV ECON BR
SUBJECT: SCENESETTER FOR THE VISIT OF CODEL GRASSLEY 
 
¶1. (SBU) The United States Mission in Brazil warmly welcomes your 
planned March 19-26 visit to Manaus, Santarem, Brasilia, Maringa, 
and Sao Paulo.  I will, unfortunately, be out of the country at that 
time, but the Acting Deputy Chief of Mission will greet you in 
Manaus on Sunday evening, March 19 prior to your active schedule of 
events.  During your stay in-country, we have arranged sessions for 
you with Minister of Foreign Affairs Celso Amorim, Minister of 
Agriculture Roberto Rodrigues, Vice-Minister of Trade Ivan Ramalho, 
and various members of Brazil's Senate and Chamber of Deputies.  In 
addition, you will meet with private sector agricultural figures and 
tour soybean, sugar/ethanol, and flex-fuel vehicle assembly 
facilities. 
 
¶2. (SBU)  Your trip, arriving soon after the Carnaval holiday, comes 
at a transition point on the political scene.  During the second 
semester of 2005, congressional deputies from Lula's governing 
coalition were accused of accepting bribes, while officials from the 
President's party (the PT) were alleged to have engaged in influence 
peddling and illegal campaign fund-raising.  These revelations 
forced the resignation of several members of Lula's inner circle, 
including his Chief of Staff (who was also expelled from Congress). 
 
¶3. (SBU)  However, "scandal fatigue" has set in, and President Lula 
has successfully used the slack time over the Brazilian holidays to 
recover lost political ground.  Recent polls show Lula regaining the 
lead in the presidential race, and he is currently engaged in a busy 
schedule of visits around the country - campaigning in all but name 
- while the leading opposition candidates from the PSDB party have 
stalled in the polls as their party decides who to field against 
Lula. As we get closer to the October presidential elections, Lula 
will likely expand anti-poverty programs and increase pork-barrel 
spending, to cement his standing among working class voters. 
 
THE BILATERAL RELATIONSHIP 
-------------------------- 
 
¶4. (SBU) While relations between the U.S. and Brazil are friendly, 
often the USG encounters major difficulties in gaining the 
cooperation of senior policymakers on issues of significant interest 
to the United States.  Eager to assert its own influence, the 
Brazilian government shies away from cooperation with the USG - 
unless it can clearly be characterized as a reciprocal exchange 
among equals.  Indeed, hyper-sensitivity on issues viewed as 
infringing on Brazil's sovereignty can get out of hand and may be 
seen as signs of political immaturity.  Many Brazilians believe the 
U.S. has designs on the Amazon.  Our fingerprinting of visitors to 
the U.S. drew reciprocal treatment for Americans here; visa and 
immigration issues remain sensitive points. 
 
¶5. (SBU) During recent months, our ongoing dialogue with the 
Brazilians has focused on a variety of potentially useful projects 
for both sides.  We sought to interest the GOB in a Defense 
Cooperation Accord, but the Foreign Ministry rejected the proposal 
even though the Defense Ministry was supportive.  Gaining agreement 
on privileges and immunities to be granted U.S. servicemen engaging 
in military exercises has been just as tough sledding, as the 
Foreign Ministry saw it as "a foot in the door" and linked it with 
Brazil's strong opposition to Article 98 agreements.  We are 
receptive to renegotiation of a stalled bilateral agreement 
governing space launches at the country's equatorial base at 
Alcantara, but the GOB has moved glacially to re-engage, even though 
the agreement clearly serves Brazilian interests.  On trade issues, 
when unscripted, President Lula has characterized the FTAA as "off 
his agenda."  In addition, in the wake of its WTO victory against 
the USG on cotton subsidies, Brazil has been vocal in seeking to get 
the USG to enact remedies immediately, notwithstanding the fact that 
our Congress is still working on the Farm Bill.  IPR is another sore 
point, as it has become clear that the USG and the Brazilian 
government have different views on the degree of protection to be 
afforded to intellectual property.  Only after much lobbying have we 
gotten the GOB to: a) turn the corner on copyright piracy, and b) 
persuaded policymakers to seek negotiated solutions rather than 
compulsory licensing of AIDS anti-retrovirals. 
 
¶6. (SBU) However, not all our conversations are difficult.  At the 
personal level, Lula has met President Bush several times and the 
two have a good rapport.  On issues involving matters perceived as 
technical in nature - i.e., law enforcement and science (but not the 
environment or counter-terrorism) - the GOB is eager to engage.  For 
example, from 2003 to 2004, the GOB worked quietly with us on the 
timing and details of its shoot-down program to accommodate our 
statutory requirements (although now a new crop of GOB bureaucrats 
appears to be unaware of the government's past promises). 
 
¶7. (SBU) On development assistance issues, our dialogue is positive 
- but constrained.  Notwithstanding lackluster results to date, the 
 
BRASILIA 00000478  002 OF 005 
 
 
Brazilian government's multi-billion dollar poverty alleviation 
program -Zero Hunger - receives substantial funding from the World 
Bank and IDB.  Given USG budget constraints and the fact that Zero 
Hunger is, in essence, a cash transfer program (albeit with 
conditions), USAID support has been limited.  Instead of focusing on 
cash transfers to the poor, USAID has sought to target its efforts 
towards promoting sustainable livelihoods - inter alia, through 
working with small and medium-sized enterprises.  The Embassy's 
Public Affairs programs aimed at promoting young leaders take a 
similar targeted approach.  This difference in focus, broad cash 
transfers versus targeted assistance, ends up putting the USG at the 
margins of Brazil's overall anti-poverty efforts. 
 
AGRICULTURE 
----------- 
 
¶8. (U) Agriculture is a major sector of the Brazilian economy, and 
is key for economic growth and foreign exchange.  Agriculture 
accounts for 13% of GDP (and 30% when including agribusiness) and 
36% 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 170 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 United States), pork, 
milk, and seafood. 
 
ENVIRONMENT 
----------- 
 
¶9. (U) As one of the world's "megadiverse" countries, environmental 
issues loom large in Brazil.  Of the world's known plant species, 
22% exist in Brazil, and the figures for birds (17%), mammals (11%), 
and fish (11%) are also significant.  The Amazon basin holds 20% of 
the world's fresh water.  Presently, approximately 22% of the 
Brazilian Amazon is set aside as official indigenous reserves and an 
additional 12% of the Amazon should be protected in parks over the 
next ten years.  Amazon deforestation rates, however, have been very 
high the last two years, driven by strong expansion in Brazilian 
agriculture, particularly the drive for land by the cattle and soy 
industries. 
 
¶10. (U) Internationally, Brazil is an energetic advocate on 
environmental issues and treaties including the Kyoto Protocol. 
Yet, for many, the Brazilian government has not met the high and 
largely exaggerated expectations of many environmentalists during 
the first years of the Lula Administration.  The early 2005 passage 
of a Biosafety law, representing an opportunity to legalize GMO 
crops, drew especially strong criticism from environmentalists.  The 
agricultural industry's lobbying for expansion of the transportation 
network in the Amazon has raised additional concern.  Meanwhile, the 
Ministry of Environment and others in the government have launched 
several policy initiatives focused on sustainable development and 
conservation in the Amazon and Atlantic Forests, hoping to broaden 
the policymaking base for environmental protection.  As in other 
policy areas, the Lula Administration is more centrist on 
environmental issues than much of its devoted, leftist political 
base expected. 
 
ETHANOL 
------- 
¶11.  (U) The success of Brazil's ethanol program has made it a model 
for the world in terms of alternative energy.  Brazil's comparative 
advantage is its ability to inexpensively produce ethanol from 
sugarcane, which has the highest starch content of any plant stock. 
In addition to obtaining five harvests from one planting, cane hulls 
(bagasse) are used to produce the thermal energy necessary to power 
the conversion process.  Cane also requires less processing than 
ethanol produced from corn --  which is the method used in the U.S. 
to manufacture ethanol.  According to the World Bank, at current 
prices, Brazil can make ethanol for about US$1 a gallon, compared 
with the international price of about US$1.50 a gallon for gasoline. 
  At the pump ethanol receives favorable tax treatment from the 
Brazilian government.  It 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 tend to vary less and are controlled by the government. 
 
¶12.  (U) Since the 1980s, Brazil has attempted, without great 
success, to promote ethanol fuel exports to the United States.  U.S. 
tariffs and charges make Brazilian imports uncompetitive here.  In 
addition to import tariffs of 1.9 to 2.5 percent, the U.S. imposes a 
54 cents/gallon charge on ethanol imported for use as fuel.  This 
 
BRASILIA 00000478  003 OF 005 
 
 
charge must be paid by countries not covered by FTAs or other trade 
preference arrangements.  Given the requirements of its fast-growing 
domestic market, whether Brazil will indeed be able to produce 
enough ethanol to supply international markets is an open question. 
Some estimate that over the next one to two years, the maximum 
percentage of Brazil's cane crop which can be devoted to ethanol 
production is 54%.  If so, this would mean that Brazilian ethanol 
production is already running at 95 percent of capacity; and the 
country's ability to expand its sugarcane acreage is limited to 
perhaps 20 percent over the next 3-4 years. 
 
FOREIGN POLICY 
-------------- 
 
¶13. (SBU) Reflecting Brazil's ambivalence towards the United States, 
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.).  He has traveled 
extensively in pursuit of a higher international profile for Brazil. 
 Despite prodding from the USG and others, Lula has refused to 
condemn Cuba for human rights violations and, in fact, has pushed 
for Cuban membership in the Rio Group.  Brazil has also advocated a 
Cuba-Mercosul trade pact, and has now agreed to upgrade Venezuela 
from associate membership to full membership status in Mercosul. 
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.  During the September 29-30, 2005 South American 
Community of Nations Summit in Brasilia, Lula praised the Venezuelan 
President's democratic credentials ("if anything, Venezuela has an 
excess of democracy") and declared that the Chavez government had 
been demonized by its foes.  Lula reiterated these themes during an 
early December visit by Chavez to the Northeastern state of 
Pernambuco. 
 
¶14. (SBU) Given its size and natural resources, Brazil has long seen 
itself as the natural leader of the region (even though that 
perception is not shared by its neighbors). 
Emblematic of Brazil's efforts to gain greater standing on the world 
stage is its tenacious pursuit of a permanent UN Security Council 
(UNSC) seat.  In fact, many observers point out that Brazil has 
"subordinated" other economic and political interests with such 
countries as China and Russia in exchange for support (which has not 
been forthcoming) for its UNSC aspirations.  Brazil and other G4 
states (India, Germany, Japan) are, despite recent setbacks, 
continuing to press their campaign for a vote on a resolution on 
UNSC reform.  This stance is at odds with the position of many Latin 
American countries, including those which Brazil believes should 
follow its "natural leadership." 
 
¶15. (SBU) Brazil has long seen international fora as a way to 
enhance its international stature.  Reflecting this, in 2005 it 
launched failed national candidates for the top jobs at both the WTO 
and the IDB.  The failure of both, together with the unlikely 
prospects for a permanent seat in the UNSC, has widely been seen in 
Brazil as a "political disaster. 
 
PRESIDENT LULA 
-------------- 
 
¶16. (SBU) President Luiz Inacio Lula da Silva was inaugurated in 
January 2003 after a career as a Sao Paulo metalworker and labor 
leader.  He founded the left-of-center Workers' Party (PT) in 1980 
and lost three presidential campaigns before winning in the October 
2002 elections.  Lula is eligible to run for reelection in October 
¶2006.  Elected in large part on promises of promoting an ambitious 
social agenda, including a "Zero Hunger" program, Lula's government 
has failed to deliver much in this area, as managerial shortcomings 
and the public's top concern - crime and public security - have not 
improved under this administration. 
 
¶17. (SBU) As noted above, in recent months the Lula Administration 
has been beset by a grave political crisis as interlocking influence 
peddling/vote-buying scandals have plagued elements of Lula's PT 
party.  During the second half of 2005, the crisis placed Lula on 
the defensive and politics were dominated by investigations, 
accusations and revelations.  The President's Chief of Staff 
resigned his post and was later expelled from Congress.  Meanwhile, 
several other congressmen are the subjects of investigations and 
expulsion proceedings owing to bribery allegations.  However, 
influential Finance Minister Palocci remains on the job, 
notwithstanding corruption allegations against him - which he has 
forcefully denied.  Thus far, Brazilian society - including the 
opposition - seems disinclined to hold Lula personally responsible 
for the scandals, and he is recovering lost ground in public 
opinion. 
 
BRASILIA 00000478  004 OF 005 
 
 
 
MACRO-ECONOMIC DEVELOPMENTS 
--------------------------- 
 
¶18. (SBU) President Lula and his economic team have implemented 
prudent fiscal and monetary policies and pursued necessary 
microeconomic reforms.  As a result, Brazil's economy, aided by a 
benign international environment, has flourished.  GDP growth of 
4.9% in 2004 has coupled with booming exports, healthy external 
accounts, tame inflation, decreasing unemployment and reductions in 
the debt-to-GDP ratio.  While GDP growth in 2005 registered 2.3% -- 
with third quarter growth coming in at negative .08% -- economic 
activity should pick up in early 2006.  In recent months the real 
has risen sharply against the dollar while the Sao Paulo Stock 
Exchange (BOVESPA) has hit record levels.  In March 2005, the 
Brazilian government declined to renew its Stand-By Agreement with 
the IMF and in mid-December 2005 it announced it would prepay both 
its remaining IMF and Paris Club obligations. 
 
¶19. (SBU) Overall, while Brazil has made considerable progress, 
problems remain.  Despite registering its first year-on-year decline 
in 2004, Brazil's (largely domestic) government debt remains high, 
at 51% of GDP.  Real interest rates (at nearly 12 percent) are among 
the highest in the world.  Income and land distribution remain 
skewed.  Investment (including FDI) is low.  The country's sovereign 
risk ratings are two to three levels below investment grade.  And 
the informal sector constitutes between 35 to 40 percent of the 
economy, in part because the tax burden (nearly 38 percent of GDP) 
is so high.  The good news is that the uncertainty surrounding the 
political scandal has not frightened away foreign investors. 
 
¶20. (SBU) Sustaining high growth rates in the longer term depends on 
the impact of President Lula's structural reform program and efforts 
to build a more welcoming climate for investment, both domestic and 
foreign.  In its first year, the Lula administration passed key tax 
and pension reforms to improve the government fiscal accounts. 
Judicial reform and an overhaul of the bankruptcy law, which should 
improve the functioning of credit markets, were passed in late 2004, 
along with tax measures to create incentives for long-term savings 
and investments. 
 
¶21. (SBU) Public-Private Partnerships, a key effort to attract 
private investment to infrastructure, also passed in 2004, although 
implementation of this initiative still awaits promulgation of the 
necessary regulations.  Labor reform and autonomy for the Central 
Bank were on the agenda for 2005, but now look unlikely to be 
addressed until after the the October 2006 elections.  Despite this 
well-considered reform agenda, much remains to be done.  The 
government needs to improve the regulatory climate for investment, 
particularly in the energy sector; to simplify torturous tax systems 
at the state and federal levels; and to further reform the pension 
system.  Given the proximity of the October elections, prospects for 
much of this reform agenda are dim for the remainder of Lula's 
term. 
 
TRADE POLICY 
------------ 
 
¶22. (SBU) To increase its international profile(both economically 
and politically), the Foreign Ministry (Itamaraty) is seeking 
expanded trade ties with developing countries, as well as 
strengthening the Mercosul customs union with Uruguay, Paraguay and 
Argentina.  Arguably the GoB has fallen short on this latter 
objective.  The Brazil-Argentine relationship is rife with trade 
disputes, recently leading to adoption of a safeguard mechanism for 
bilateral trade.  Meanwhile, Uruguay and Paraguay regularly complain 
that Brazil and Argentina reap a disproportionate share of benefits 
from the bloc, and threaten the group's solidarity in various ways 
-- for instance, Uruguay's recent open discussion of a possible FTA 
with the United States, which would contravene Mercosul rules. 
 
¶23. (SBU)  Nonetheless, the bloc remains engaged in certain external 
trade negotiations.  In 2004, Mercosul concluded free trade 
agreements with Colombia, Ecuador, Venezuela and Peru, adding to its 
existing agreements with Chile and Bolivia to establish a commercial 
base for the newly-launched South American Community of Nations.  As 
noted earlier, Mercosul is upgrading Venezuela's status from 
associate to full membership.  In addition to Cuba, the bloc is 
currently exploring free trade talks with Israel, the Dominican 
Republic, Panama and states of the Gulf Cooperation Council, as well 
as trying to build on partial trade liberalization agreements 
concluded with India and South Africa in 2004. 
 
¶24. (SBU) China, which was offered market economy status by Brazil 
as a part of Lula's effort to secure PRC support for Brazil's bid 
for a USNC seat, has increased its importance as an export market 
 
BRASILIA 00000478  005 OF 005 
 
 
for Brazilian soy, iron ore and steel, becoming Brazil's fourth 
largest trading partner and a potential source of investment. 
However, low-priced Chinese imports, particularly in the textile, 
footwear, and toy sectors, are now threatening to displace domestic 
Brazilian production.  As many Brazilian observers have indicated, 
all this effort is aimed at countries which together represent less 
than a third of Brazil's foreign trade. Free trade negotiations with 
the EU continue to languish. 
 
DOHA AGENDA - WTO 
----------------- 
 
¶25. (SBU) While Brazil emphasizes South-South trade through 
Mercosul's bilateral negotiations, it uses that Doha Development 
Agenda (DDA) negotiations as the main forum for engaging with 
developed country partners.  The DDA is Brazil's top trade priority, 
viewed as the last chance for perhaps 15-20 years to secure 
fundamental changes in international trade rules, in particular, for 
international agricultural trade.  Brazil leads the G-20 group of 
developing countries that is pressing for agricultural trade reform 
in the DDA.  Brazil's assertive leadership of the G-20 was blamed in 
some quarters for causing the failure of the WTO Cancun Ministerial 
in September 2003.  Since then, Brazil has been more constructively 
engaged in the Doha Round, initially as a member of the "Five 
Interested Parties" and more recently G-6 informal group, although 
many of its positions are still at odds with U.S. interests.  At the 
December 2005 Hong Kong Ministerial meeting, Brazil was key to 
brokering the deal - albeit one of limited ambition - coming out of 
that session.  Brazil can be expected to maintain its assertive 
stance in the Doha Round on agricultural trade reform while taking 
more defensive postures in the discussions covering industrial 
products and services. 
 
FREE TRADE OF THE AMERICAS - FTAA 
--------------------------------- 
 
¶26. (SBU) As indicated above, the Lula Administration shows no 
serious interest in pursuing the FTAA.  Despite serving as co-chair 
and having secured in the November 2003 Miami meeting a new 
framework for negotiation, Brazil has shown no inclination to move 
the process along and has so far declined to convoke the next FTAA 
Ministerial - which is now overdue. 
 
CHICOLA