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DE RUEHSO #0436/01 1151818
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P 251818Z APR 06
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 4914
INFO RUEHBR/AMEMBASSY BRASILIA 6058
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RUEHBU/AMEMBASSY BUENOS AIRES 2176
RUEHCV/AMEMBASSY CARACAS 0253
RUEHBO/AMEMBASSY BOGOTA 1346
RUEHPE/AMEMBASSY LIMA 0936
RUEHAC/AMEMBASSY ASUNCION 2519
RUEHMN/AMEMBASSY MONTEVIDEO 1926
RUEHSG/AMEMBASSY SANTIAGO 1668
RUEHLP/AMEMBASSY LA PAZ 2730
RUCPDOC/USDOC WASHDC 2382
RUCLRFA/USDA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
RHMFISS/CDR USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 06 SAO PAULO 000436 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC, WHA/PDA, EB/MTA 
STATE PASS USTR FOR AUSTR EISSENSTAT AND SULLIVAN/LEZNY 
H PASS SENATORS GRASSLEY, CRAPO, ALLARD 
H ALSO PASS REPS KING, ENGLISH, CARNAHAN, PETERSON, ISSA 
NSC FOR CRONIN 
TREASURY FOR OASIA, DAS LEE AND FPARODI 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC ALSO FOR 3134/USFCS/OIO/SHUPKA 
AID/W FOR LAC/AA 
SOUTHCOM FOR POLAD 
 
TAGS: OREP PGOV PREL ETRD EAGR ECON ENRG BR
SUBJECT: CODEL GRASSLEY: FRANK DISCUSSIONS ON TRADE IN SAO PAULO 
 
 
A)  SAO PAULO 360; B)  SAO PAULO 352; C) BRASILIA 628 
 
¶1.  (SBU) SUMMARY:  During its recent visit to Sao Paulo, CODEL 
Grassley engaged in vigorous and sometimes contentious discussions 
with representatives of Brazil's private sector over U.S. and 
Brazilian trade policies and different approaches to bilateral and 
multilateral trade negotiations.  Brazil's most powerful industrial 
association, which officially supports free trade but has many 
protectionist members, urged greater leadership from the United 
States in international trade negotiations and a more generous US 
offer to reduce agricultural subsidies.  The Sao Paulo business 
sector in general wants closer ties to the U.S., is frustrated with 
the Lula administration's excessive focus on South-South trade at 
the expense of expanding trade with the U.S. and other developed 
countries, and overwhelmingly supports (in private) opposition 
presidential candidate Geraldo Alckmin over the reelection of 
President Lula.  The visit offered an excellent opportunity for the 
CODEL to hear directly from important private sector leaders on a 
number of issues, as well as to expose the Brazilians to the 
perspective of key members of the U.S. Congress. END SUMMARY. 
 
¶2.  (U) Senator Charles Grassley (IA) - Chairman of the Senate 
Finance Committee - and his delegation visited Maringa, Parana state 
and Sao Paulo, March 22-23.  Other members of the delegation 
included Senators Mike Crapo (ID) and Wayne Allard (CO); 
Representatives Collin Peterson (MN), Phil English (PA), Steve King 
(IA), Darrell Issa (CA), and Russ Carnahan (MO); and, Assistant U.S. 
Trade Representative for the Americas Everett Eissenstat.  In 
Maringa the delegation toured a sugar mill and ethanol plant.  In 
Sao Paulo, it met with the leadership of the Federation of 
Industries of Sao Paulo State (FIESP) and the American Chamber of 
Commerce (AMCHAM), and visited a General Motors facility where 
members learned about the manufacture and operation of flex-fuel 
automobiles.  They also received a briefing on Brazilian agriculture 
from a representative of the industry-funded think tank Institute 
for International Trade Negotiations (ICONE).  This cable addresses 
the trade aspects of the Codel visit.  The ethanol and 
FlexFuel-engine automobile aspects, and Rep. Issa's separate meeting 
with the Brazilian-Lebanese community, were reported in refs A-B. 
 
----------------------------------------- 
Very Frank Discussion on Trade with FIESP 
----------------------------------------- 
 
¶3.  (SBU) During a discussion that was unusually frank, 
representatives of the Federation of Industries of Sao Paulo State 
(FIESP) used their time with CODEL Grassley mostly to lecture the 
Members of Congress and their staff on the pitfalls of current U.S. 
tactics and positions regarding multilateral and bilateral trade 
negotiations.  Using a very Brazilian modus operandi, FIESP speakers 
acknowledged the importance of Brazil's trade relationship with the 
United States, while trying hard to appear fiercely independent - 
but not belligerent - with respect to USG positions. 
 
¶4.  (SBU) In an encouraging introduction to an open and frank 
discussion of business issues between U.S. lawmakers and leaders of 
Brazil's industrial sectors, FIESP President Paulo Skaf noted the 
historic ties between the United States and Brazil, and his 
country's love of such things American as music and technology.  He 
reviewed highlights of Brazilian trade statistics and the basics of 
trade relations between Brazil and the United States, noting that 
the United States remains Brazil's number one single-country trading 
partner. 
 
¶5.  (SBU) Skaf then turned the microphone over to his chief economic 
 
SAO PAULO 00000436  002 OF 006 
 
 
and trade advisor, former Ambassador to the United States Rubens 
Barbosa, who challenged the U.S. lawmakers regarding U.S. trade 
positions on agriculture and implored the United States to take a 
leadership role to revive the stalled WTO Doha Round and FTAA 
negotiations.  He began by suggesting that the FTAA should not be 
considered failed.  Barbosa said a sound framework for the FTAA is 
already in place due to Brazilian and U.S. leadership, and that with 
a commitment to the process by our two leader nations, negotiations 
need only be restarted in order to move the agreement forward.  He 
noted that he often needed to remind GOB representatives that 68 
percent of imports to the United States face no tariffs, and he 
proudly pointed out that Brazilian (applied) tariff have fallen in 
recent years from an average of 55 percent to the current 11 percent 
average.  Barbosa then went on to describe how key Brazilian sectors 
were affected by trade restrictions, and both he and several of the 
other FIESP panelists said the United States is in the best position 
to jump-start the FTAA negotiations by offering concessions, 
particularly in the area of agricultural supports.  He said 
"balanced negotiations" were needed, and FIESP leaders also accused 
the United States of abandoning multilateral trade agreements in 
favor of bilateral agreements that hold little value in terms of 
creating free trade and building regional relations. 
 
Brazil Wants to Be Both Developed and Developing 
--------------------------------------------- --- 
 
¶6.  (SBU) In his response, Sen. Grassley led the Members in 
suggesting the Brazilians were disingenuous by touting their 
country's strong export figures but insisting that the United States 
is in the best position to offer concessions in order to facilitate 
multilateral trade pacts.  The Members noted that Brazil wants to be 
seen as a developed nation when it comes to negotiations regarding 
agricultural exports, but simultaneously as a developing nation when 
it comes to reducing its own tariffs on goods and services.  One 
Member said that dozens of small developing countries with nothing 
to gain are "lining up" to negotiate free trade agreements with the 
United States simply for the prestige of it, and that given Brazil's 
desire to be a leading regional and global player, it should be more 
willing to make serious concessions if it really wants WTO and FTAA 
negotiations to resume in substance. 
 
¶7.  (SBU) Chairman Grassley pointed to continued reductions in 
agricultural supports, as evidenced by Congress's recent budget 
proposals, as proof that the United States remains committed to Doha 
and FTAA.  Refuting the charge that the United States has abandoned 
the multilateral arena in favor of bilateral trade agreements, 
Chairman Grassley said that while the United States also prefers 
multilateral agreements, given the logjams in both the Doha Round 
and FTAA negotiations, the United States will continue to negotiate 
bilaterally wherever it can in order to continue facilitating free 
trade in general. 
 
Plea to Eliminate US Tariffs on Ethanol Imports 
--------------------------------------------- -- 
 
¶8.  (SBU) Focusing on the popular issue of ethanol production, 
Roberto Giannetti da Fonseca, Managing Director of FIESP's 
International Affairs and Trade Department, pointed out that Brazil 
and the United States are the world's leaders in ethanol production, 
and together cannot meet the world's demand.  He noted that 
Brazilian producers recently met with California Governor Arnold 
Schwarzenegger to discuss the use of Brazilian ethanol as an 
additive to gasoline.  Fonseca suggested Brazil and the United 
States could use ethanol as a development tool, exporting technology 
and know-how to Africa, for example, so countries there could use 
 
SAO PAULO 00000436  003 OF 006 
 
 
cassava as a means of producing fuel.  Fonseca closed on a familiar 
theme, calling on the Members of Congress to eliminate the current 
U.S. tariff on ethanol imports as a means of ensuring free trade in 
the product.  Ref B provides fuller discussions of the CODEL's 
discussions on the ethanol issue. 
 
"Brazil Cost" Makes Brazilian Industry Less Competitive 
--------------------------------------------- ---------- 
 
¶9.  (SBU) On a less policy-oriented and more practical note, Mario 
Marconini, a FIESP industrial sector consultant, offered that most 
industrialists in Brazil were adamant free traders, but pointed to 
the high cost of doing business in Brazil as a key factor inhibiting 
true competitiveness for the country.  He lamented that Brazil's 
businesses find themselves with an overall tax rate comparable to 
that of Western Europe but without the corresponding benefits of 
good infrastructure and government services.  Thus, he said, even if 
a WTO agreement is reached, Brazil will face significant trade 
challenges from its competitors. 
 
An Agriculture-Heavy List of Complaints 
--------------------------------------- 
 
¶10.  (SBU) A document distributed during the meeting entitled 
"Statement by FIESP Regarding US-Brazil Relations" echoed the themes 
raised in discussion, acknowledging the importance of the 
relationship, lamenting the lack of an agenda, urging US leadership, 
and complaining about FTAs the US is signing in the region.  The 
document also listed a number of trade concerns about which FIESP 
seeks US Congressional support, including: 
 
--  Generalized System of Preferences:  15 percent of Brazilian 
exports to the US benefit from GSP and Brazil wants to maintain that 
benefit. 
--  Intellectual Property:  FIESP supports rigorous IPR enforcement 
in Brazil. 
--  Aircraft Sales:  Embraer should be allowed to sell 36 military 
aircraft to Venezuela, a sale blocked by the USG. 
--  Services:  The US has many restrictions at state and federal 
levels (such as citizenship and residency requirements) to the 
practice of professional services such as law, engineering, and 
architecture. 
--  Double Taxation Agreement:  Needed with increasing number of 
Brazilian firms investing in the US, such as Embraer (aircraft), 
Gerdau (steel), and Cutrale (orange juice). 
--  Ethanol Subsidies:  Reduction of US subsidies for ethanol (13 
percent corn production subsidy, 13.5 cents credit per liter of 
ethanol produced, import tariff of 13.8 cents per liter) will enable 
Brazil to become a strategic partner to help the US' energy policy. 
--  Soybean Subsidies:  Brazil has considered challenging the US in 
the WTO over the USD 1.5-3.2 billion in subsidies annually. 
--  Anti-Dumping:  15 of the 278 anti-dumping measures in place in 
the United States are against Brazil (orange juice, shrimp, and 
steel), with the perception they exist for protectionist purposes. 
Constraints faced by Brazilian producers (e.g., high taxes and 
interest rates) hinder the adoption of sustained artificially low 
prices. 
--  Market Access:   Although the US economy is open, there are key 
markets in which Brazil is competitive that are restricted by quotas 
(sugar, tobacco, beef), tariff peaks (footwear and textiles and 
clothing), and sanitary barriers (chicken and beef). 
--  WTO Panel Compliance:  The US "has not complied" with the cotton 
case deadline, and Brazil is considering requesting another WTO 
panel because, while two offending subsidy programs have been 
eliminated, certain other programs remain unchanged.  The Byrd 
 
SAO PAULO 00000436  004 OF 006 
 
 
Amendment "should have been ended" in 2005, but will only be ended 
in Jan. 2007; Brazil has the right to retaliate but has chosen not 
to do so. 
 
Comment:  Behind FIESP's Positions 
---------------------------------- 
 
¶11.  (SBU) FIESP is Brazil's most powerful industrial federation 
encompassing 122 industrial sectors and thousands of businesses. 
The current leadership under President Paulo Skaf, a textile 
manufacturer with political ambitions who campaigned for the job 
promising a closer relationship with the Lula administration, is 
pro-free trade, despite the protectionist tendencies of many of its 
members.  Industrial leaders have confided to us that Brazil does 
indeed have a handful of competitive industries that could withstand 
a reduction of import tariffs that would be negotiated in the Doha 
Round.  FIESP's seemingly excessive advocacy of agriculture, an area 
largely outside its membership, could well be hiding behind the 
skirts of knotty agricultural issues to protect its inefficient 
sectoral members as long as possible.  At the same time, FIESP may 
simply be taking an inherently Brazilian stand on trade issues it 
believes are in the country's national interest.  While FIESP has 
tried to come closer to the current GOB, it has been frustrated by a 
series of GOB decisions that are diametrically opposed to FIESP's 
interests, such as the decision to grant market economy recognition 
to China. 
 
¶12.  (SBU) Comment Continued:  It is no secret that the overwhelming 
majority of business people in Sao Paulo support opposition 
presidential candidate Geraldo Alckmin. 
Regarding Amb. Barbosa, who heads FIESP's economic council but does 
not have a direct leadership position in the federation itself, it 
seems Skaf wanted someone of Barbosa's experience and prestige in 
international trade matters.  However, Barbosa is strong-willed and 
retains a certain compulsion to defend MFA policies, as he had to do 
as ambassador to the US, even if his organization does not 
necessarily agree with everything he says.  In fact, a senior FIESP 
leader confided to us well after the Codel meeting that Barbosa had 
gone too far and did not accurately reflect FIESP's official views. 
END COMMENT. 
 
---------------------------------------- 
Breakfast at AMCHAM - Trade Negotiations 
---------------------------------------- 
 
¶13.  (SBU) Senator Grassley led off the cordial but spirited 
breakfast meeting at AMCHAM by describing the purpose of the CODEL's 
visit. The group wanted to encourage AMCHAM to continue its dialogue 
with the GoB; learn more about the similarities between the two 
countries in the agricultural sector, particularly in its approaches 
to ethanol and addressing energy crises; and seek ways to move 
forward with WTO Doha Round negotiations.  This last issue was 
particularly critical because the President's Trade Promotion 
Authority (TPA) is due to expire in July 2007; thus it is incumbent 
on Brazil and the United States to move forward quickly on trade 
negotiations.  Senator Grassley said he supports renewing TPA, but 
there is resistance in Congress to liberalizing trade, as 
demonstrated by the difficulty in ratifying the Central 
American/Dominican Republic Free Trade Agreement (CAFTA/DR). 
 
¶14.  (SBU) AMCHAM Board Member Joseph Tutundjian (Chairman of 
International Negotiations Task Force) said AMCHAM sees itself as 
"lobbying" on behalf of both USG and U.S. private sector interests, 
but is looking for more good-faith measures from U.S. to make its 
task easier.  At the same time, AMCHAM does not agree with the GoB's 
 
SAO PAULO 00000436  005 OF 006 
 
 
FTAA negotiating strategy.  Members of the delegation noted that the 
U.S. cannot make more substantive concessions on agriculture without 
a comprehensive agreement.  At the same time, the U.S.-Brazil Caucus 
in the House is working to create awareness of the issues and 
promote mutual interests. 
 
¶15.  (SBU) The AMCHAM leaders noted that in trade negotiations 
involving Brazil, private actors and industry representatives do not 
have the prominent role their counterparts did in other free trade 
agreement (FTA) negotiations such as NAFTA.  The Brazilian private 
sector has been excluded from the debate on agriculture, which was 
not the case in the NAFTA talks.  The lack of strong private-sector 
input has impeded progress.  They also argued that the U.S. pursuit 
of bilateral FTAs in Latin America is viewed as a threat and a means 
of isolating Brazil.  Senator Grassley rejoined that a comprehensive 
WTO or FTAA agreement is needed to help establish rule of law and 
facilitate private initiatives.  It is Brazil that is isolating 
itself through the deadlocks in WTO and FTAA negotiations with its 
intransigent negotiating position.  Despite the debacle at the 
September 2003 Cancun WTO Ministerial, some progress was made at 
December 2005 Hong Kong WTO Ministerial. 
 
¶16.  (SBU) AMCHAM members acknowledged that both the U.S. and Brazil 
recognize that the EU is the greatest impediment to reducing 
subsidies and resolving the agricultural disputes that have stymied 
WTO negotiations.  Both countries share an interest in persuading 
the EU to make greater concessions.  However, Brazil sees the EU as 
less of an obstacle than the U.S., because the EU imports far more 
agricultural products than the U.S. does.  Senator Grassley and 
other members of the delegation noted that agriculture is a 
particularly difficult issue because it is a strategic pillar for 
all parties.  Grassley reiterated that the U.S. cannot make more 
substantive concessions on agriculture without a comprehensive 
agreement.  The 2002 Farm Bill, which contains many agricultural 
subsidies, remains in effect and will not be dismantled without such 
an agreement.  Congress would need grounds to replace it, such as 
greater access to the Brazilian market in manufacturing and 
services. 
 
------------------------- 
Roundtable on Agriculture 
------------------------- 
 
¶17.  (U) Later in the day, CODEL Grassley attended a 45-minute 
presentation and discussion on agricultural trade negotiations. 
Scheduled speakers were Marcos Sawaya Jank, President of ICONE, a 
think tank that advises Brazilian industry and government on trade 
policy matters, and Joao Sampaio, President of the Brazilian Rural 
Society (SRB), the Brazilian equivalent of the American Farm Bureau. 
 In this event, Sampaio deferred to Jank and indicated that Jank was 
advocating SRB's position as well. 
 
¶18.  (SBU) Jank gave a presentation outlining Brazilian views on 
agriculture in the WTO.  He stressed that Brazil and the U.S. have 
areas of significant common interest, especially on market access, 
export competition, and sanitary/phytosanitary and genetically 
modified organism (GMO) issues.  Jank pointed out that we have 
significant divergence of interests on the issue of agricultural 
supports, and began a detailed examination of agricultural supports 
for selected U.S. products.  Jank's critique of U.S. policy provoked 
a spirited exchange with several of the delegation members, 
principally with Senator Grassley and Representatives Issa and 
Peterson.  The CODEL members clearly stated that Brazilian 
flexibility on access for goods and services is inadequate, and its 
willingness to fight for market access for agriculture was likewise 
 
SAO PAULO 00000436  006 OF 006 
 
 
inadequate in light of Brazil's fixation on American agricultural 
support levels.  (Comment:  Jank is a longstanding Consulate contact 
who is one of Brazil's most knowledgeable and articulate experts on 
agricultural trade issues.  He has been critical of the current 
GOB's trade negotiating strategy and could end up in some 
influential GOB position should opposition candidate Geraldo Alckmin 
win the October presidential elections.  That said, he also reflects 
the broadly supported Brazilian position that the U.S. needs to 
offer even more substantial cuts in agricultural subsidies if the 
Doha Round is to have any chance of success.  End Comment). 
 
------- 
Comment 
------- 
 
¶19.  (SBU) This visit provided members of the delegation with 
exposure to Brazilian views on trade issues, especially in the area 
of agriculture.  At the same time, it gave some of our key Brazilian 
private-sector interlocutors a chance to hear what the trade 
negotiations look like from the perspective of key members of the 
U.S. Congress.  The fact that real differences of opinion were aired 
in several of the meetings, and that the debates were at times 
pointed and even heated, is a healthy sign.  Overall, the Sao Paulo 
business sector wants closer trade relations with the U.S. and is 
critical of the Lula administration's foreign policy of focusing on 
South-South relations.  We will continue to work toward closer 
cooperation on trade and other issues with FIESP, AMCHAM and other 
business organizations.  End Comment. 
 
¶20.  (U) This cable was coordinated/cleared with Embassy Brasilia. 
 
MCMULLEN