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R 141554Z MAY 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 8909
INFO RUEHSO/AMCONSUL SAO PAULO 9849
RUEHRG/AMCONSUL RECIFE 6634
RUEHRI/AMCONSUL RIO DE JANEIRO 4365
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUEHBU/AMEMBASSY BUENOS AIRES 4762
RUEHAC/AMEMBASSY ASUNCION 6081
RUEHMN/AMEMBASSY MONTEVIDEO 6874
RUEHSG/AMEMBASSY SANTIAGO 6225
RUEHLP/AMEMBASSY LA PAZ 5344

UNCLAS SECTION 01 OF 02 BRASILIA 000855 
 
SIPDIS 
 
DEPT PLEASE PASS TO USTR SCRONIN 
USDOC FOR 3134/USFCS/OIO/WH 
USDOC FOR 4332/ITA/MAC/WH/OLAC/MCAMPOS 
AID/W FOR LAC/AA 
TREASURY FOR OASIA 
DEPT PLEASE PASS TO HHS:WSTEIGER 
USTDA FOR AMCKINNEY 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD KIPR EIND BR
SUBJECT:  U.S. COMPANIES PRESS TRADE MINISTER ON COMPULSORY 
LICENSING, TAXES, AND INFRASTRUCTURE 
 
¶1.  (SBU)  Summary.  In a May 9 meeting with newly-appointed 
Minister of Trade Miguel Jorge, representatives from the Brazil-U.S. 
Business Council outlined their thoughts regarding the direction of 
bilateral trade trends.  Chief on their mind was the damage to 
Brazil's investment climate done by the GOB's May 4 decision to 
issue a compulsory license for Merck's anti-AIDS retroviral Stocrin 
(Efavirenz).  Council officials also lobbied for changes in Brazil's 
byzantine tax regime (including signature of a bilateral tax treaty) 
as well as improvements in port and customs infrastructure.  The 
Minister and his team stated that intransigence on the part of Merck 
had given the GOB no other option than to issue the compulsory 
license.  They added that the GOB efforts to upgrade the tax system 
and import/export infrastructure were already in-train.  End 
Summary. 
 
¶2.   (SBU)  On May 8-9, a delegation from the Brazil-U.S. Business 
Council made the rounds in Brasilia, calling upon inter alia, 
Vice-President Alencar, the Ministry of External Relations 
(Itamaraty), congressional deputies, and the Ministry of 
Development, Industry and Commerce (MDIC).  An industry association 
composed of 75 U.S. and Brazilian firms which do business locally, 
Council companies generate over 220,000 jobs in Brazil.  Mission 
participants represented such diverse firms as Whirlpool, General 
Motors, Caterpillar, Guardian Industries, Embraer, Cummins, and 
Abbott Laboratories. 
 
Compulsory Licensing 
-------------------- 
¶3.  (SBU)  The Chairman of the Council, Tom Catania (representing 
Whirlpool) and Mark Smith (the Council's Director) led off the May 9 
meeting with Minister Jorge and his team by noting their concerns 
about the GOB's recent decision to issue a compulsory license for 
Stocrin (efavirenz), an AIDs anti-retroviral drug produced by the 
U.S. pharmaceutical maker Merck.  (Merck had planned to send a 
representative on the trip but cancelled in the wake of the GOB's 
May 4 license announcement).  Catania and Smith stated that while 
they recognized Brazil's right to proceed down that path, they 
thought that a negotiated settlement would have been the best 
solution, particularly in terms of preserving Brazil's reputation as 
a country with a positive investment climate. 
 
¶4.  (SBU)  Minister Jorge replied that he had personally 
participated in the latter part of the negotiations with Merck and 
could attest that the atmosphere of trust between both parties had 
broken down between both parties.  The talks began badly, developed 
badly, and ended badly, he said.  While neither side showed any real 
flexibility, he observed, the climate worsened after Merck's former 
Brazil chief departed and his replacement arrived three months ago. 
Given Merck's stance, he said, the GOB felt that it had no choice 
but to issue the license.  Jorge opined that as a former industry 
labor negotiator - during his tenure at Volkswagen, he conducted 
contract talks with Lula (at that time a union leader) - it is 
always a shame when two parties cannot come to terms.  This case was 
especially tragic because the amount the GOB was saving was only 
US$30 million, a pittance given the potential ramifications for 
future foreign investment.  However, he concluded, Merck 
"precipitated this situation" and while the GOB was always willing 
to reopen discussions "the ball was in Merck's court."  For his 
part, Embraer's Henrique Rzezinski (the Chair of the Brazilian 
counterpart to the Council) stated that his side of the Council 
stood ready to help facilitate further talks.  In closing, Jorge 
praised the conducted of Abbott Laboratories, which, he said, in the 
2005 round of talks with the GOB on retroviral pricing had been much 
more accommodating. 
 
¶5.  (SBU)  Comment.  It appears that both Abbott and Glaxo are both 
close to finalizing deals with the Brazilians on their respective 
anti-retrovirals, contracts which would afford the GOB substantial 
price reductions.  Meanwhile, Merck is mulling whether to test the 
waters with Presidential Chief of Staff Dilma Rousseff, arguing 
that, properly analyzed, its previous offer would be just as 
cost-effective for the GOB as the compulsory licensing route.  End 
Comment. 
 
BRASILIA 00000855  002 OF 002 
 
 
 
Customs and Taxes 
----------------- 
¶6.  (SBU)  Catania and Smith also urged the GOB to simplify its 
complicated tax system and streamline its clogged import-export 
system to stimulate greater trade and economic growth.  In response, 
Mario Mugnaini, head of Brazil's Foreign Trade arm, noted that a lot 
of work had already been done on this score.  Imports into Brazil 
had increased from US$50 billion several years ago to US$100 billion 
today, something which could not have been achieved had not 
improvements been made to the country's ports.   Mugnaini stated 
that Brazil was working on its just-in-time "green zones," and that 
the time goods spent in these areas had declined from an average of 
24 hours to 12 hours - and had dropped to 4 hours at the Campinas 
airport in Sao Paulo.  GOB officials were now seeking to expand the 
"green zone" model in the country's smaller ports.  Advances had 
been made in port security as well, he noted, as it was projected 
that 98 percent of Brazilian ports would be in compliance with ISPS 
standards by the end of the year.  US Customs and officials at the 
Port of Santos were collaborating on the Container Security 
Initiative, he added, with U.S.-bound containers being scanned and 
pre-cleared prior to departing Brazil.  Still, both Mugnaini and 
Jorge admitted that more work needed to be done to improve port 
infrastructure, with the latter wryly noting that European and 
Japanese companies often came in with the same complaints. 
 
¶7. (SBU)  On taxes, Catania lamented the fact that Brazil's 
Byzantine rules and regulations imposed excessive administrative 
costs on businesses, both foreign and domestic.  Many of the 
companies within the Council would like to use Brazil as a base to 
manufacture exports destined to other countries, he said, but 
Brazil's high cost structure sometimes made that goal problematic. 
Mugnaini and Jorge stated that the Lula administration was working 
on a tax reform package, but that this legislation would deal mainly 
with the allocation of VAT tax revenues/responsibilities between the 
federal and state governments. 
 
¶8. (SBU) Smith made a pitch for increased emphasis on conclusion of 
a bilateral tax treaty, noting that the signature of a Tax 
Information and Exchange Agreement during the March 8-9 POTUS visit 
to Sao Paulo was a good first step.  Jorge replied that if it were 
up to him, he would sign a bilateral tax treaty "in a minute." 
However, the person with in the GOB who had the lead on this issue 
was the Secretary of the Treasury within the Ministry of Finance, he 
said, and that official was reluctant to agree to any measure which 
might diminish tax revenues, no matter how small the reduction. 
Jorge committed to speaking to the Secretary of the Treasury to see 
whether he could be persuaded to prioritize conclusion of a 
bilateral tax treaty with the USG. 
 
Comment 
------- 
¶9. (SBU) On the issues of compulsory licensing, taxes, and 
infrastructure/customs, the concerns of Council representatives are 
congruent with those of the USG.  As such, it is extremely useful to 
have private sector voices echoing the points made by both the 
Ambassador and various high-level USG visitors.   Embassy shall 
continue to coordinate with the Council and other U.S. business 
advocacy organizations as we seek to expand our trade and investment 
relations with Brazil. 
 
Sobel