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RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 06 BRASILIA 002314 
 
SIPDIS 
 
STATE PASS USTR:EISSENSTAT/BROADBENT/SCRONIN 
USDOC FOR 3134/USFCS/OIO/WH/SHUPKA 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC ALSO FOR USPTO 
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE 
STATE PASS EXIM FOR NATALIE WEISS, COCONNER 
STATE PASS USTDA FOR AMCKINNEY 
AID/W FOR LAC/AA 
TREASURY FOR OASIA - JHOEK 
DOE FOR GWARD/SLADISLAW 
DOJ FOR CMERRIAM 
DHS FOR CBP 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD KIPR EINV ENRG WTRO BEXP BR
SUBJECT: The October 17 Meeting of the U.S.-Brazil Bilateral 
Commercial Mechanism 
 
 
¶1.  (SBU)  Summary and Introduction.   On October 17, a USG 
delegation met with the Brazilian interagency economic players in a 
session of the two countries' Bilateral Consultative Mechanism (BCM) 
meeting.  The wide-ranging agenda covered a variety of issues, 
including WTO matters (the Doha Round, current and potential future 
disputes, anti-dumping methodology, etc.), agriculture (subsidies, 
the Farm Bill), prospects for renewal of the USG's GSP program, 
possible cooperation on biofuels, current U.S. and GOB international 
trade negotiations, and intellectual property rights.  The USG 
delegation, chaired by A/USTR Everett Eissenstat emphasized that 
many of the items on the agenda were long-standing controversies and 
could not be resolved in a single meeting.  For its part, the GOB 
side, chaired by Acting Ministry of External Relations (MRE) U/S for 
Economic Affairs Roberto Azevedo, made the point that it was 
worthwhile taking stock where we were bilaterally. 
 
¶2.  (SBU)  A/USTR Meredith Broadbent, USTR Southern Cone Director 
Sue Cronin, WHA/EPSC Economist Joseph Salazar, and Embassy/Sao Paulo 
Consulate officers rounded out the USG delegation.  Over 40 
officials attended for the GOB, including representatives from the 
MRE; the Ministry of Development, Industry, and Commerce; the 
Ministry of Agriculture; the Ministry of Finance; the Ministry of 
Health; the Ministry of Justice; the Ministry of Culture; ANVISA 
(Brazil's FDA-equivalent); INPI (Brazil's Patent/Trademark agency), 
the Federal Police; and the Federal Highway Police.  End Summary and 
Introduction. 
 
Multilateral Trade Talks 
------------------------ 
¶3.  (SBU)  In addition to the October 17 Bilateral Consultative 
Mechanism discussions with Azevedo et. al., Eissenstat, Broadbent, 
and Cronin met the previous day with the MRE's Chief of 
International Trade Negotiations, Amb. Regis Arslanian.  In the 
meeting Arslanian painted a positive picture of the Mercosul's 
ongoing trade talks.  Arslanian said that the Mercosul/Israel and 
Mercosul/South Africa Customs Union (SACU) negotiations were well 
advanced and that the final goods-only agreement would cover 100% of 
products traded. (Note: it is unclear whether Arslanian was 
including agriculture in his calculation of product coverage or 
not.)  With respect to talks with Mexico, he stated that discussions 
on a Mercosul-Mexico FTA were in the very preliminary stages and 
that, despite press reports to the contrary, Brazil had absolutely 
no intention of seeking a bilateral agreement with Mexico -- as 
opposed to the pact contemplated under the aegis of Mercosul. 
 
¶4.  (SBU)  Arslanian was similarly hopeful regarding the Mercosul/EU 
FTA talks, stating that what was currently on the table reached 88% 
of goods traded.  (Excluded were machines, chemicals, electronics, 
and certain auto parts; agriculture was included in the 88% although 
the EU contemplated that sensitive products would be subject to 
quotas.)  Besides the phase-in period, where the EU sought 10 years 
and Brazil 18 years, the principal areas in contention, he said, 
were services (where Brazil was on the defensive) and agriculture 
(where the EU was on the defensive).  Brazil had offered 100% 
national treatment to the EU and, on investment, was willing to open 
almost all areas to the EU, including manufacturing and agriculture. 
 Arslanian argued that the GOB was similarly forthcoming on 
services, although, in general, it much preferred mode 1 over mode 
¶3.  If the EU could be more flexible on agriculture, Arslanian 
declared, the upcoming November 6-7 talks in Rio could bring an 
agreement within reach.  He cited the EU's offer on beef as an 
 
BRASILIA 00002314  002 OF 006 
 
 
example of its intransigence.  Currently, under an onerous 175% 
tariff Brazil exports 222,000 tons of beef per year to the EU. 
However, the EU's present offer would establish a quota system under 
which Brazil would only be able to export 116,000 tons per year. 
Indeed, Arslanian said, the EU would have to improve its offer on 
12-13 agricultural items, including sugar, poultry, wheat, ethanol 
and dairy. 
 
¶5.  (SBU)  Finally, Arslanian expounded on Brazil's current 
situation regarding Bilateral Investment Treaties (BITs).   While 
the GOB has signed 14 such agreements with countries such as 
Germany, Spain, Belgium, Italy, Chile, and Korea, the Brazilian 
Congress has either rejected them or put them on hold - principally 
because of provisions subjecting parastatals to binding 
international arbitration.  To get the investment agenda moving 
again, Arslanian reported that the GOB was now consulting with the 
legislature on a new model BIT (which excluded controversial items 
such as transfer of royalties, expropriation, and, of course, 
binding international arbitration for state-owned enterprises). 
A/USTR noted that in any BIT protection for investors in disputes 
with state parties would be of critical importance to the USG. 
 
¶6.  (SBU)  The next day U.S. del explored Brazil's international 
trade scenario with Azevedo as well.  With respect to the 
EU-Mercosul talks, Azevedo echoed many of Arslanian's statements, 
noting that the two sides were testing to see if progress could be 
made on agriculture, services, and flexibilities.  Notwithstanding 
the expectations of some, he said, non agricultural market access 
(NAMA) had not proven to be a great stumbling block nor had the 
imminent accession of Venezuela to Mercosul.  What had proven to be 
a problem, he continued, was the EU's insistence on the concept of 
Doha Round "downpayments" in the context of the agriculture 
discussions.  Under this concept, if whatever the EU offered under 
an eventual Doha Round agreement was greater than what Brazil 
received under the Mercosul-EU FTA, then Brazil would have to make 
further concessions to pay for the difference.  Azevedo 
characterized this as negotiating twice for the same benefit, adding 
that this was unfair.  Azevedo also noted that Mercosul was 
discussing a trilateral agreement with India and the SACU (a 
long-term goal), looking at broadening its bilateral goods-only pact 
with India to include greater product coverage, and moving forward 
on bilaterals with Pakistan and India. 
 
¶7.  (SBU)  Finally, both Arslanian and Azevedo (the latter in 
informal remarks on the margins) stated that in Brazil's 
multilateral and Mercosul trade negotiations the country was doing 
all that it could to be forward-leaning.  Doing more on services, 
Arslanian noted, would require the GOB to amend up to 33 statutory 
and constitutional provisions.  For his part, Azevedo opined that 
opening up Brazil's manufacturing sector to greater competition 
could end up knocking the country's macro-economic adjustment 
off-track.  Brazil would do what it could, he continued, but would 
be careful not to sign up to commitments that politically it could 
not deliver. 
 
WTO Issues 
---------- 
¶8. (SBU)  AUSTR Eissenstat's emphasized the rationale for the 
creation of the Bilateral Consultative Mechanism, that is to work 
towards solution of problems.  The agenda proposed by Brazil did not 
provide many opportunities to find solutions, as most issues raised 
 
BRASILIA 00002314  003 OF 006 
 
 
were being dealt with in the WTO or were beyond the scope of USTR to 
resolve. 
 
¶9.  (SBU)  Leading off the discussion on WTO, Azevedo raised issues 
which the GOB has broached with the USG a number of different times 
during the past year.  He stated that the GOB was concerned about 
the need to make progress on the Doha Round, and saw several 
critical events upcoming:  i.e., both the U.S. and Brazilian 
elections, expiration of TPA in mid-2007, and U.S. congressional 
consideration of the Farm Bill.  He declared that for Brazil, it was 
essential that the USG improve its offer on agricultural subsidies 
and ensure that our Doha commitments included compliance with the 
WTO cotton panel ruling.  A/USTR Broadbent noted that to date, the 
USG felt that it had been unable to get substantive commitments from 
Brazil on NAMA and services and that in the end a balanced package 
would be necessary.  Azevedo said that a successful Doha Round would 
allow the U.S. and EU to lock in lower Brazilian tariffs and that we 
should not underestimate the value of binding Brazilian tariffs at a 
particular level.  While during the recent 20 years Brazil tariffs 
had fallen, he observed, it could well be that in the wake of a 
failed Doha Round protectionist elements within the country managed 
to reverse this trend.  A/USTR Eissenstat replied that the USG has 
consistently embraced the concept of an ambitious Doha Round and 
that we would need something beyond binding lower tariffs to be 
successful.   He noted the frustrations in Congress regarding 
movement on tariffs, in particular bills that would raise tariffs. 
AUSTR Broadbent noted that U.S. industry does not view percent cuts 
in bound tariff rates that do not penetrate applied tariffs as a 
significant tariff concession in the NAMA negotiations.  To earn the 
support of U.S. manufacturers for the Doha Round, Brazil will need 
to offer cuts in real tariffs paid at the border, cuts that are 
large enough to increase trade flows.  Cuts in bound tariffs are not 
enough. 
 
¶10.  (SBU)  Turning to the issue of trade remedies, Azevedo stated 
that the GOB had concerns about the methodology the ITC used in 
anti-dumping cases.  In one recent case, he said, in calculating 
anti-dumping margins the ITC had not acknowledged the possibility of 
the exporter recouping the value added (ICMS) tax paid.  While he 
did not definitively state that the GOB would challenge this in the 
WTO, he characterized this agenda item as "early warning" for the 
USG.  Azevedo went on to complain about the continued used by the 
USG of "zeroing" methodology after it had been outlawed by the WTO. 
Eissentat noted that WTO rulings on zeroing were complex and that 
under certain circumstances zeroing was permissible.  On the issue 
of USG pre-privatization subsidies, Azevedo stated that as time 
passed this was becoming much less of a problem in countervailing 
duty cases.  On orange juice, Azevedo observed that next year the 
GOB might seek to argue that Hurricane Katrina had changed 
circumstances with respect to past USG anti-dumping determinations. 
On shrimp, he said that the GOB had a number of complaints about the 
USG methodology in its anti-dumping determinations (zeroing, 
definition of injury, definition of domestic industry, etc.) and 
would participate in the India/Thailand/Ecuador WTO case as a third 
party.  And on cotton, Azevedo opined that the USG had not complied 
with the previous WTO panel decision and if the Doha Round remains 
stalled, the GOB "could not sweep this under the rug."  Finally, 
Azevedo declared the rules negotiations in the Doha Round were "not 
a minor issue" for the GOB.  Part and parcel of its desire for gains 
on market access, he said, was the need to protect these gains 
through a good package on rules. 
 
BRASILIA 00002314  004 OF 006 
 
 
 
¶11.  (SBU)  Responding to the concerns on GOB's trade remedies, 
Eissenstat noted that all these matters had been in dispute for some 
time and it was clear that the USG viewed the rights and obligations 
on rules differently from the GOB.  Specifically, that the United 
States would reserve that right to use its trade remedy law to 
ensure fair trade practices.  On the rules negotiations he made the 
point that this was an important area for the USG as well.  He also 
noted that the U.S. and Brazil have found areas where their 
interests converge in the rules negotiations and that we shared 
Brazil's desire for a balanced package.  On cotton, Eissenstat noted 
that the United States had taken significant steps to comply with 
the WTO ruling.  Eissentat went on to observe that the USG was 
concerned that recently someone had leaked to the press the story 
that the U.S. had objected to one of the proposed judges on the WTO 
cotton compliance panel.  Such a leak was counter to long-standing 
WTO norms.  After consulting with his colleagues, Azevedo replied 
that the GOB also was concerned that such a leak had occurred but 
assured the U.S. side that no one in Brasilia was responsible for 
it. 
 
Agriculture/GSP 
--------------- 
¶12.  (SBU)  Leading on agenda item of agriculture, Eissenstat stated 
that while some had focused on the impending expiration of TPA, both 
the GSP and the Farm Bill would soon expire as well.  The USG has 
recognized that given the upcoming review of the Farm Bill, some 
reform of U.S. programs was in order.  In response to Azevedo's 
query as to how Doha Round talks could proceed without TPA in place 
-- i.e., foreign negotiating partners could not be sure that the 
U.S. Congress wouldn't change any deal agreed to --, both Eissenstat 
and Broadbent reiterated that for Doha to succeed, all parties must 
move together.  Eissenstat emphasized that it would not make sense 
to put something on the table in the negotiation if the other side 
could simply pocket it and move on.  Broadbent added that we were 
looking for reciprocal progress, that U.S. industry does not feel 
that it has much to gain at this juncture. Azevedo replied that 
based upon his reading of the consensus of analysts, it did not 
appear that the U.S. was ready to move on agriculture. 
 
¶13.  (SBU)   With respect to GSP renewal, Broadbent explained that 
the U.S. was conducting the first review of this program in 20 
years.  In 2005 the USG had completed its first stage review, she 
said, and the second stage review (focusing on 13 large GSP 
beneficiary countries, including Brazil) was now ongoing and looking 
at, inter alia, the 83 current competitive need limit waivers 
(CNLs).  During this process over 800 parties had submitted public 
comments, including nearly 200 from, or associated with, Brazil. 
Broadbent noted that the results of USTR's review would soon go to 
Congress and that we hoped to persuade the legislature to extend the 
program.  Azevedo stated the Brazilian Ambassador Abdenur was 
following the GSP debate closely.  The GOB would take it very badly, 
he declared, if it appeared that the country had lost GSP 
eligibility because of: 1) a misperception in Congress that it had 
not been helpful on WTO, 2) discrimination on the part of the USG, 
or 3) some sort of WTO-inconsistent act.   A/USTR Broadbent assured 
the Brazilians that the USG decision on GSP would be 
non-discriminatory and consistent with WTO rules. 
 
¶14.  (SBU) Closing out the discussion of GSP, Azevedo stated that 
the GOB had an ongoing issue with the USG's import classification of 
 
BRASILIA 00002314  005 OF 006 
 
 
Brazilian cachaca - which was being treated the same as rum even 
though its taste was "distinctively different."  USTR Southern Cone 
Director Cronin replied that the United States was aware of Brazil's 
interest in getting cachaca designated as a beverage typical of 
Brazil (i.e., a designation similar to that done for Irish whiskey) 
but  that under the CFR this required a 60-day public comment 
period.  She noted that domestic spirits manufacturers would 
certainly submit comments, and that it was not clear that they would 
support such a designation. 
 
Ethanol 
------- 
¶15.  (SBU)  Azevedo turned to Claudia Vieira Santos, Deputy Chief of 
the MRE's Energy Department, to brief on the GOB's efforts on 
ethanol.  Santos stated that Brazil saw ethanol as a strategic issue 
on which it could cooperate with both the developing and the 
developed countries.  Joint initiatives on ethanol could have a 
positive effect on bilateral relations in general, she continued, 
with increased trade represent just one possible impact.  (Santos 
promised to provide the U.S. del - through the Brazilian Embassy in 
Washington - a list of areas on which the Brazilian government was 
moving forward on bilateral international cooperation.)  Santos 
pointed to President Bush's early October speech to the Renewable 
Energy Conference in St. Louis as evidence that other countries 
shared this vision.  Azevedo seconded this assessment, noting that 
biofuels cooperation could possibly be a major element in Brazil's 
agenda with the U.S.   Still, he characterized the USG's imposition 
of a 54 cent per gallon tariff on imported ethanol as an area of 
concern for Brazil.  In addition, he made clear that Brazil would 
oppose any efforts by the USG to exclude this levy from any general 
tariff reduction formulas agreed to in the Doha Round.  Such a move 
would set a dangerous precedent, he said, which Brazil would 
"forcefully seek to correct." 
 
¶16.  (SBU)  A/USTR Eissenstat made it clear that the USG viewed the 
54 cent per gallon tariff as a national security measure and had no 
intention of making this issue part of any tariff-cutting 
discussions in the Doha Round or that it was subject to discussion 
in the biofuels initiative. 
 
The Commercial Dialogue 
----------------------- 
¶17.  (SBU)  Embassy Commercial Attache Dinah McDougall briefed the 
group on the progress made to date in the bilateral Commercial 
Dialogue initiated in June 2006 by Secretary Gutierrez and Minister 
of Development, Industry, and Commerce Luiz Fernando Furlan. 
McDougall noted that the Dialogue and its four Working Groups 
(Business Facilitation, Investment Promotion, IPR, and Standards) 
did not overlap with the BCM process as the Dialogue focused on 
doing business issues not trade negotiations.  She stated that the 
two ministers - Gutierrez and Furlan - were set to meet in early 
November in Washington; thereafter, a Brazilian delegation planned 
to travel to the United States pursuant to a U.S. Customs-related 
program on "Moving Goods Efficiently."  MDIC staffer Mauricio do Val 
echoed McDougall's remarks, declaring that the GOB was happy with 
how the Dialogue was evolving. 
 
Intellectual Property Rights 
---------------------------- 
¶18.  (SBU)  On IPR, the Brazilian side had its MRE IPR Office 
Director brief on the status of the GOB's efforts.  In addition, 
 
BRASILIA 00002314  006 OF 006 
 
 
officials from the public-private Anti-piracy Council, the Federal 
Police, and the Federal Highway Police spoke on their individual 
agency's workplans.  Eissenstat stated that the USG applauded the 
progress that Brazil had made over the past year on copyright 
piracy.  He asked whether the Brazilian government would be willing 
to receive a USTR delegation later this year to look at IPR issues 
in greater depth.  Azevedo responded that the GOB felt that the U.S. 
was unwilling to recognize what Brazil had done on IPR.  It was 
extremely frustrating, he said, for Brazil to constantly be subject 
to scrutiny from the USG but not receive any credit for its 
achievements.  Typical of this, he stated, was the USG's 
unwillingness to downgrade Brazil's Special 301 status from Priority 
Watch List to Watch List in the wake of the January 2005 dismissal 
of industry's copyright piracy petition.  Eissenstat noted that 
copyright piracy was an important issue for the USG and that 
notwithstanding the GOB's efforts the size of the problem remained 
immense.   In the end, Azevedo appear to acquiesce to the travel of 
the proposed USTR IPR delegation. 
 
USTR Comment 
------------ 
¶19.  (SBU)  Brazil asked for this meeting of the BCM.  Given the 
offensive nature of its proposed agenda, it is not clear what Brazil 
hoped to achieve, other than to rehash issues that trouble the 
bilateral and multilateral trade relationship.  At the lunch that 
followed the meeting, Azevedo made it clear that he did not expect 
to chair subsequent meetings of the BCM, so it does not seem the 
meeting was called in order to establish Azevedo as AUSTR 
Eissenstat's new counterpart.  In terms of Brazil's trade policy, 
the meeting with Arslanian, the BCM, and the lunch all pointed to a 
continuation of a trade policy that does not lend itself to finding 
solutions to bilateral problems or additional, significant common 
ground in the multilateral negotiations.  USTR will, of course, 
continue to engage - but is not overly optimistic. End USTR Comment 
 
¶20.  (U)  This cable was cleared by USTR prior to transmission. 
 
SOBEL