VZCZCXRO1941
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DE RUEHBR #2583/01 3451734
ZNR UUUUU ZZH
R 111734Z DEC 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 7618
INFO RUEHRG/AMCONSUL RECIFE 5999
RUEHSO/AMCONSUL SAO PAULO 8839
RUEHRI/AMCONSUL RIO DE JANEIRO 3531

UNCLAS SECTION 01 OF 05 BRASILIA 002583 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
FOR ASSISTANT SECRETARY CLAUDIA MCMURRAY 
 
E.0. 12958: N/A 
TAGS: PGOV ECON SENV BR
SUBJECT: SCENESETTER FOR THE VISIT OF ASSISTANT SECRETARY MCMURRAY 
 
¶1. (SBU) The United States Mission in Brazil warmly welcomes your 
planned December 12-13, 2006, visit to Brasilia. Counselor for 
Environment, Science, Technology and Health Patricia Norman and OES 
Advisor Lawrence Sperling will greet you upon your arrival in 
Brasilia December 12. You are scheduled to hold preliminary meetings 
for the U.S.-Brazil Common Agenda for the Environment on December 13 
and meet with Brazilian officials. In addition, we have scheduled a 
Country Team meeting shortly after your arrival on Dec. 12 here at 
the U.S. Embassy to brief you on the current state of affairs in 
Brazil. 
 
¶2. (SBU) Your visit, scheduled right after President Lula's 
reelection, 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 former Chief of Staff (who was 
also expelled from Congress).  Another scandal that was revealed in 
September 2006 caused the resignations of several top Lula campaign 
officials and the head of the PT. 
 
¶3. (SBU)  However, Lula was able to surmount all this and win 
reelection with 61 percent of the vote.  He is now mulling his 
options with regard to which parties his PT banner should ally with 
in Congress and who to include in his cabinet. 
 
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, 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."  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 pursue 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 
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.  Brazil's Ministry of Health has expressed its desire 
to expand the collaboration it has with the U.S. Centers for Disease 
Control and the National Institutes of Health as these agencies work 
within the Brazilian medical community to bring newer treatments and 
technologies. The Brazilian Ministry for the Environment has asked 
the United States for technical support in several key environmental 
areas that offer us an important opportunity for closer bilateral 
cooperation. 
 
¶7. (SBU) On development assistance issues, our dialogue is positive 
- but constrained.  Notwithstanding lackluster results to date, the 
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 
 
BRASILIA 00002583  002 OF 005 
 
 
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. 
 
FOREIGN POLICY 
-------------- 
 
¶8. (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.  The GOB has worked to increase both its 
economic and political ties with Venezuela. It has agreed to upgrade 
Venezuela from associate membership to full membership status in 
Mercosul and enhanced integration of the two countries' energy 
sectors is high on its agenda.  Lula has been especially solicitous 
of Chavez.  Lula has 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.  However, Venezuela's apparent involvement in Bolivia's recent 
decision to nationalize that country's oil and gas industry has 
dulled the luster on this relationship. 
 
¶9. (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).  Brazil's reaction to 
Bolivia's May 2006 nationalization of foreign petroleum 
installations in that country is a case in point.  Shocked that the 
Bolivians viewed the Brazilian oil parastatal Petrobras as a "boss, 
not a partner,"  government policymakers have vacillated in response 
to President Morales' threats. 
 
¶10. (SBU) 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." 
 
¶11. (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." 
 
AGRICULTURE 
----------- 
 
¶12. (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 
33% 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 180 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 
----------- 
 
¶13. (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.  Brazil's Minister for the Environment, 
Marina Silva, has secured passage of legislation protecting 20 
million hectares of land during her administration and she has 
indicated that Brazil would like to follow the U.S. model and 
establish public parks on the protected land.  Minister Silva has 
also passed legislation establishing the first Brazilian forest 
 
BRASILIA 00002583  003 OF 005 
 
 
service. The U.S. agencies that work with parks in the U.S. are 
poised to collaborate with Brazil on these issues. Brazil and the 
United States are also discussing collaboration on the 
U.S.-sponsored Coalition Against Wildlife Trafficking. Amazon 
deforestation rates for the period August 2004 to August 2005 
reflect a 31% drop, and the GOB is predicting another 11% drop this 
year. These figures are still affected, however, by the strong 
expansion in Brazilian agriculture, particularly the drive for land 
by the cattle and soy industries. 
 
¶14. (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.  As in other 
policy areas, the Lula Administration is more centrist on 
environmental issues than much of its devoted, leftist political 
base expected. 
 
ETHANOL 
------- 
 
¶15.  (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. 
 
¶16.  (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.  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.  These 
charges 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. 
 
 
PRESIDENT LULA 
-------------- 
 
¶17. (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 was reelected with a comfortable margin of 
victory 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. 
 
¶18. (SBU) As noted above, in the run-up to the October 2006 
election, the Lula Administration was beset by a grave political 
crisis as interlocking influence peddling/vote-buying scandals 
plagued elements of Lula's PT party.  Indeed, 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 were the 
subjects of investigations and expulsion proceedings owing to 
bribery allegations.  In April 2006, the President's influential 
Finance Minister was forced to resign (and remains under criminal 
investigation) because of unrelated abuse of power allegations.  The 
revelation of a new scandal shortly before the presidential election 
 
BRASILIA 00002583  004 OF 005 
 
 
involving accusations against members of Lula's campaign who were 
his long-time associates briefly seemed to threaten his reelection 
prospects, and sent the contest into a second round. But Lula 
survived the crisis and, supported by millions of poor voters who 
benefit from federal social spending programs, Lula was reelected. 
 
MACRO-ECONOMIC DEVELOPMENTS 
--------------------------- 
 
¶19. (SBU) President Lula and his economic team have implemented 
prudent fiscal and monetary policies and pursued necessary reforms. 
Brazil's external accounts, aided by a benign international 
environment, have improved substantially over the last three years. 
Although GDP growth dropped to 2.3% in 2005, down from a strong 
performance (4.9%) in 2004, Brazil has experienced booming exports, 
healthy external accounts, inflation under control, decreasing 
unemployment and reductions in the debt-to-GDP ratio.  Economic 
activity should pick up in 2006; the markets expect GDP growth of 
about 3.0%.  Buoyed by exports and investment inflows, the Real has 
remained at appreciated levels, allowing the government and 
businesses to pay down external debt.  The government pre-paid its 
IMF obligations, its last remaining rescheduled Paris Club 
obligations, and in April 2006 announced it had retired the last of 
its Brady bonds.  This removes from the books all restructured debt 
associated with Brazil's late-1980's default.  Based upon the 
improving external debt dynamics, Fitch IBCA upgraded its credit 
rating on Brazil's sovereign debt in February 2006, to BB (two 
notches below investment grade).  The economy also has shown 
resilience, remaining for the most part unaffected by a major 
political scandal and the replacement of the finance minister. 
 
¶20. (SBU) Despite this considerable progress, key challenges remain. 
 The public sector-debt-to-GDP ratio is on a downward trend but 
remains high, at about 50%.  Real interest rates are among the 
highest in the world; reducing them will require both reductions in 
the government's borrowing requirement and reform of the financial 
sector and the judiciary.  Income and land distribution remain 
skewed.  Investment and domestic savings are low, although growing. 
 The informal sector constitutes between 35 to 40 percent of the 
economy, in part because the tax burden (nearly 38 percent of GDP) 
is high. 
 
¶21. (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. 
 
¶22. (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, additional tax reform and 
autonomy for the Central Bank were on the agenda for 2005 to 2006, 
but now are unlikely to be addressed at least until the new year 
begins.  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. 
 
TRADE POLICY 
------------ 
 
¶23. (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 discussions with the United States 
regarding a possible FTA (which would contravene Mercosul rules). 
 
¶24. (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 
 
BRASILIA 00002583  005 OF 005 
 
 
as trying to build on partial trade liberalization agreements 
concluded with India and South Africa in 2004. 
 
¶25. (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 
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 
----------------- 
 
¶26. (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 
--------------------------------- 
 
¶27. (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. 
 
WILLIAMSON