VZCZCXRO1445
RR RUEHRG
DE RUEHBR #1242/01 1831922
ZNY SSSSS ZZH
R 021922Z JUL 07
FM AMEMBASSY BRASILIA
TO RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHC/SECSTATE WASHDC 9390
RUEHAC/AMEMBASSY ASUNCION 6196
RUEHMN/AMEMBASSY MONTEVIDEO 6954
RUEHSG/AMEMBASSY SANTIAGO 6339
RUEHBU/AMEMBASSY BUENOS AIRES 4892
RUEHRI/AMCONSUL RIO DE JANEIRO 4700
RUEHRG/AMCONSUL RECIFE 6882
RUEHSO/AMCONSUL SAO PAULO 0269

S E C R E T SECTION 01 OF 04 BRASILIA 001242 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR SECRETARY PAULSON 
TREASURY FOR OASIA - DAS LEE AND J.HOEK 
STATE PASS USTR 
 
E.O. 12958: DECL: 06/28/2017 
TAGS: ECON PGOV EFIN BR
SUBJECT: SCENESETTER FOR THE JULY 9-11 VISIT OF 
SECRETARY PAULSON TO BRAZIL 
 
SIPDIS 
 
Classified By: Acting Economic Counselor J. Andrew Plowman, 
reasons 1.4 (B) & (D) 
 
¶1.  (C) Summary:  The U.S. and Brazil share the basic goals of 
fostering hemispheric stability, promoting democracy, achieving 
a mutually satisfactory conclusion to the Doha round of WTO 
negotiations, preventing terrorist and drug transit activity and 
strengthening international non-proliferation regimes, but 
U.S.-Brazil cooperation is sometimes limited by the GOB's 
unwillingness to speak out against anti-democratic actions by 
the Venezuelan regime, engage in free trade or defense 
cooperation negotiations, or take proactive steps to address 
proliferation and counterterrorist concerns.  Brazil has 
maintained its leadership role in the Haiti peacekeeping force 
but has not yet used that as a launching pad to greater 
international leadership on democracy promotion or security 
issues. 
 
¶2. (C) All too often, Brazil confines itself to South-South 
platitudes, or lets others take the lead, as in the recent 
takeover of the Mercosul agenda by Venezuela's Hugo Chavez. 
Brazil's status as a leader in biofuels, combined with the March 
2007 signing our bilateral MOU on biofuels cooperation, offer a 
potential avenue for increasing bilateral cooperation in a 
strategically important area.  The two presidential summits in 
March 2007 (Sao Paulo and Camp David), combined with several 
instances of reckless overreaching by Chavez, including Chavez's 
criticism of Brazil's ethanol policies and the signature of our 
MOU, have created a positive change of tone in our bilateral 
conversation.  Despite their growing concern over Chavez's 
regional role, the Lula Administration clearly believes that it 
must maintain its distance from the USG in order not to 
compromise its perceived ability to work with Venezuela and its 
regional allies, including Bolivia. 
 
¶3. (C) On the economic front, Lula's cabinet choices, which saw 
all three key economic ministers -- Finance Minister Mantega, 
Planning Minister Bernardo and Central Bank President Meirelles 
- keep their jobs, has confirmed Lula's intent to maintain 
policy continuity.  In January, Lula unveiled his Growth 
Acceleration Program (PAC), a mish-mash of public investment 
promises and targeted tax breaks aimed primarily at construction 
and certain high tech sectors, which has become the economic 
policy centerpiece of his second administration.  Although the 
PAC contains many measures of incremental merit, it fails to 
seize the opportunity presented by the current benign economic 
environment to tackle some of the growth-limiting distortions in 
the economy, such as the spendthrift fiscal system, burdensome 
tax structure and onerous labor regulations.  Lula's social 
programs, combined with formal sector job growth and real 
increases in the minimum wage, have reduced income inequalities 
each year since 2004.  More needs to be done to increase 
economic growth, however, to lift the masses out of poverty. 
End Summary. 
 
¶4.  (C) While the attainment of a permanent seat on the UN 
Security Council has been a central tenet of Brazil's foreign 
policy under President Lula da Silva's government, Brazil has 
largely failed to assume the international leadership role that 
would make it a strong candidate for such a position. 
Unfortunately, the GOB has not used its laudable contribution to 
stability in Haiti as a first step along the road to becoming a 
champion of international peace, security and stability. 
Brazil's latest two-year stint on the UNSC, which ended in 
January 2006, was characterized by caution and equivocation 
rather than vision and leadership.  Its foreign policy in 
general has often been dominated by symbolic steps to burnish 
its South-South credentials rather than by resolute attention to 
its core political and economic interests, including 
strengthening bilateral political and trade relations with The 
United States.  The GoB, along with India, has led the G-20, a 
group of developing nations coordinating negotiating positions 
for the WTO Doha Round.  The group's widely varying membership 
has made it difficult for them to reach consensus on negotiating 
positions; some group members recently presented their own 
alternative proposal on Non-Agricultural Market Access (NAMA), 
in an implicit slap at Brazil and India's leadership. 
 
--------------------------------------------- -- 
Friendly Cooperation, But Not Strong Friendship 
 
BRASILIA 00001242  002 OF 004 
 
 
--------------------------------------------- -- 
 
¶5.  (C) Brazil's democratic institutions are generally strong 
and stable, and the military dictatorship that ended over 20 
years ago is not likely to reappear, as Brazil's armed forces 
today pursue a professional non-political identity.  With steady 
(though not spectacular) export-led economic growth having 
become the norm in the recent past, Brazil has been a supporter 
of reasoned foreign policy goals and has been steadfast in its 
support of democracy in the hemisphere.  It has a strong 
interest in hemispheric security issues that largely mirrors our 
own, and actively cooperates with us on the operational level in 
the fight against terrorism and drug trafficking. 
 
¶6.  (C) However, while the GOB has pursued generally friendly 
relations with the U.S., the current left-of-center 
administration has studiously avoided close cooperation with us 
on broad strategic issues important to us, and has kept us at 
arms length on most security-related issues.  Specifically, the 
GOB has refused to negotiate a Defense Cooperation Agreement or 
Article 98 agreement, or to agree to broad protections for 
servicemembers participating in joint exercises.  In addition, 
despite President Lula's active pursuit of high-level U.S. 
cooperation on achieving a successful result in the ongoing WTO 
trade talks, he has publicly said that the Free Trade Agreement 
of the Americas (FTAA) is not on his agenda.  While Brazil would 
like to gain greater effective access to the U.S. agricultural 
market, it stubbornly refuses to recognize that it would need to 
reduce its industrial tariffs (its average MFN tariff is 11 
percent) and barriers to service exports to obtain this.  Small 
and medium size producers here continue to fear competition from 
the U.S. 
 
¶7.  (C) Our bilateral dialogue with the GOB on development 
assistance to Brazil and in third countries contains positive 
elements, including promising potential in biofuels, but is 
constrained by differences in approach to anti-poverty efforts, 
with the GOB focusing on cash transfers, while the USG prefers 
more finely targeted assistance.  The Brazilian Government's 
multi-billion dollar poverty alleviation program -- Bolsa 
Familia -- receives technical assistance from the World Bank and 
IDB, but USG budget constraints and the fact that it is a cash 
transfer program (albeit with conditions) keep us out of the 
initiative.  USAID, for its part, has sought to target its 
efforts in Brazil towards promoting sustainable livelihoods 
through working on issues such as health, the environment and 
small and medium-sized enterprises.  The Embassy was recently 
informed of plans to decrease USAID's budget in FY08 to USD two 
million, from its current level of USD eight million.  Such a 
decrease in funding would severely impact our ability to 
continue an effective USAID mission.  The GoB also has reacted 
poorly to our flagship environmental program, the Amazon Basin 
Cooperation Initiative. 
 
---------------------------------------- 
Lula's Re-Election Won't Change Policies 
---------------------------------------- 
 
¶8.  (C) Having survived a nearly year-long investigation of 
several scandals impinging on his administration, President Luiz 
Inacio Lula da Silva was handily re-elected to a second term in 
October 2006.  We expect that his second term, which began 
officially on January 1, 2007, will look much like the first. 
We expect him to continue the conservative monetary and fiscal 
policies that characterized his first term, while taking some 
steps (notably his recently announced accelerated growth 
program) to try to bring Brazil's growth rate above the 3 
percent level where it has been stuck for the past five years. 
Achievement of the GOB's goal of sustained five percent growth, 
however, will require the Lula Administration to take steps that 
it is otherwise loathe to do, i.e., moving forward on fiscal, 
labor and tax reform, revamping its social security system and 
giving the Central Bank true independence. In foreign policy, 
the GOB appears poised to favor building ties with developing 
nations over improving relations with the United States and 
other developed nations.  The foreign policy team of FM Amorim, 
Vice Minister Pinheiro Guimaraes and Presidential Adviser Marco 
Aurelio Garcia will likely remain in place. 
 
¶9.  (C) It is worth noting that the caution and legalistic 
 
BRASILIA 00001242  003 OF 004 
 
 
approach which has characterized Brazil's approach to 
international issues predates the Lula administration and will 
outlive it.  We should not expect a significant shift in 
Brazil's traditional reluctance to work closely with us on those 
issues most critical to our interests.  In addition, while Lula 
has occasionally made comments to indicate he would be open to 
finding creative ways to increase bilateral trade with the U.S., 
Brazil remains constrained by Mercosul in any commercial 
dealings with the United States.  Venezuelan President Chavez's 
current participation in the group will make it impossible for 
Mercosul to engage itself seriously with the United States 
anytime soon. 
 
------------------------------------------- 
Not Speaking out on CT or Non-Proliferation 
------------------------------------------- 
 
¶10.  (S) Brazil's general desire not to be too closely 
identified with the U.S. is borne out in the GOB's approach to 
counterterrorism and non-proliferation.  Cooperation remains 
good at the operational level, and we regularly obtain valuable 
information from GOB sources on terrorism.  However, the GOB 
political leadership has refused to publicly endorse U.S. 
counterterrorism initiatives and has insisted that official 
communiques of the 3 plus 1 mechanism note that there is no 
evidence of terrorist operations in the Tri-Border area, where 
Brazil, Paraguay and Argentina meet.  Wary of its large, 
prosperous and influential Arab population, the GOB makes every 
effort to downplay in public even the possibility of terrorist 
fund-raising going on inside Brazil.  The Brazilian Foreign 
Ministry was sharply critical of U.S. designations of several 
Brazilian residents and individual nationals as terrorist 
fund-raisers around the time of last December's 3 plus 1 
plenary.  Indeed, the Minister of Justice told visiting Attorney 
General Gonzalez that the GoB would react very poorly should the 
U.S. designate additional Brazilian residents without first 
sharing with the GoB evidence to support U.S. claims.  The GOB 
has been outspoken in its criticism of Israel's 2006 invasion of 
Lebanon, which claimed the lives of at least seven Brazilian 
citizens of Lebanese descent, and U.S. support for same 
exacerbated Brazil's reluctance to publicly support the global 
war on terrorism. 
 
¶11.  (C) The GOB is very cautious about taking an active role in 
some high-profile non-proliferation efforts, questioning the 
effort to refer Iran to the Security Council until the vote in 
the IAEA had become a foregone conclusion. Brazil has also not 
yet signed the NPT Additional Protocol, although it has not 
ruled out signing it in the near future. Brazil remains an 
active partner in the DHS's Container Security Initiative and 
has expressed approval of the Proliferation Security Initiative 
(PSI).  However, the GOB has not yet endorsed the PSI statement 
of principles.  A March 2006 DVC with experts in Washington 
addressed all the issues the GOB has with PSI, and those same 
concerns were addressed during the November 2006 bilateral 
Pol-Mil talks in Washington.  We are still waiting to hear 
whether the GOB will now endorse the PSI principles. 
 
--------------------------------------------- -- 
Biofuels -- Potential for Strategic Cooperation 
--------------------------------------------- -- 
 
¶12.  (U) The success of Brazil's ethanol program has made it a 
model for the world in terms of alternative energy and presents 
the potential for bilateral cooperation on an important 
strategic issue.  Brazil's comparative advantage is its ability 
to inexpensively produce ethanol from sugarcane, which has the 
highest starch content of any plant stock. Cane 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 one US Dollar per gallon, compared with the international 
price of about USD 1.5 per gallon for gasoline. 
 
¶13.  (SBU) Since the 1980's 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-per-gallon charge on ethanol imported for use 
as fuel.  These charges must be paid by countries not covered by 
 
BRASILIA 00001242  004 OF 004 
 
 
free trade agreements or other trade preference arrangements. 
Given the requirements of its fast-growing domestic market, it 
is unclear whether Brazil could produce enough ethanol to supply 
international markets.  Some estimates indicate that Brazil 
could increase its sugarcane acreage by no more than twenty 
percent over the next three to four years.  The GoB is eager to 
implement the bilateral MOU on biofuels, signed on the margins 
of President Bush's March 2007 Sao Paulo visit.  The MOU 
envisions promoting biofuels production and use in certain 
Caribbean and Central American Countries, scientific cooperation 
and promotion of a worldwide trade in biofuels as commodities 
 
CHICOLA