VZCZCXRO2299
RR RUEHRG
DE RUEHBR #1581/01 2281604
ZNR UUUUU ZZH
R 161604Z AUG 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 9762
INFO RUEHRG/AMCONSUL RECIFE 7050
RUEHSO/AMCONSUL SAO PAULO 0631
RUEHRI/AMCONSUL RIO DE JANEIRO 4960

UNCLAS SECTION 01 OF 03 BRASILIA 001581 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E FOR UNDERSECRETARY REUBEN JEFFERY AND TOM PIERCE 
 
E.0. 12958: N/A 
TAGS: EAID ECON ETRD OTRA OVIP PGOV PREL BR
SUBJECT: SCENESETTER FOR VISIT OF U/S REUBEN JEFFERY, 
AUGUST 19-22, 2007 
 
REF: 07 Bogota 5894 
 
¶1. (SBU) Summary:  Your visit comes on the heels of a June setback 
to the Doha Round discussions, in which talks between the U.S., the 
EU, Brazil, and India stalled over disagreements concerning tariff 
cuts for goods and services and over agricultural subsidies.  The 
Brazilian delegation, led by Foreign Minister Celso Amorim, left the 
talks early accusing the U.S. and the EU of collaborating in advance 
on an agricultural position.  All sides have not given up on the 
talks, which will continue at a multilateral WTO forum in September. 
 On other trade issues, President Luiz Incio Lula da Silva has 
privately characterized the Free Trade Area of the Americas (FTAA) 
as "off his agenda." 
 
¶2.  (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.  In contrast, on issues involving matters perceived as 
technical in nature - law enforcement, science and biofuels - the 
GoB is eager to engage.  End Summary. 
 
--------------------------- 
MACRO-ECONOMIC DEVELOPMENTS 
--------------------------- 
 
¶3. (SBU) President Lula and his economic team have implemented 
prudent fiscal and monetary policies and pursued reform.  Brazil's 
external accounts have improved substantially over the last three 
years.  Nevertheless, initially reported 2006 GDP growth was only 
2.9% (third worst in the hemisphere).  In 2007, Brazil revised its 
methodology for calculating GDP and restated its 2006 GDP as 3.7%. 
For 2007, Brazil's Central Bank is forecasting 4.7% growth (slightly 
higher than most private sector forecasts).  Inflation over the next 
three years is forecast to be in line with the central bank's annual 
target (4.5%). 
 
¶4. (SBU) Buoyed by exports and investment inflows, the real has 
remained at appreciated levels for most of the year, allowing the 
government and businesses to pay down external debt.  Last year, the 
government eliminated the last of its restructured debt from 
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-. 
 
¶5. (SBU) Nonetheless, 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.  Income 
and land distribution remain skewed.  Investment and domestic 
savings are low, but growing.  The informal sector constitutes over 
40 percent of the economy, in part because the tax burden (nearly 38 
percent of GDP) remains one of the highest among large developing 
economies. 
 
¶6. (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.  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 appear unlikely to be addressed at in the near term.  The 
government still needs to improve the investment regulatory climate; 
to simplify torturous tax systems at the state and federal levels; 
and to further reform the pension system. 
 
------------------------- 
TRADE POLICY AND MERCOSUL 
------------------------- 
 
¶7. (SBU) The GoB is seeking expanded trade ties with developing 
countries and seeks to strengthen the Mercosul customs union with 
Uruguay, Paraguay, and Argentina.  Still, the Brazil-Argentine 
relationship is rife with trade disputes and Uruguay and Paraguay 
regularly complain that Brazil and Argentina reap a disproportionate 
share of benefits from the block. 
 
¶8. (SBU) Yet the bloc remains engaged in 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.  Mercosul is 
 
BRASILIA 00001581  002 OF 003 
 
 
in the process of upgrading Venezuela's status from associate to 
full membership (Venezuela has yet to commit to the Mercosul common 
trade policy).  The block has been drawn into the orbit of Chavez's 
suggestion to form a Bank of the South.  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 as trying to build on partial trade liberalization 
agreements concluded with India and South Africa in 2004. In an 
August 2007 visit to Mexico, President Lula made overtures on 
improving the countries' bilateral trade relationship. 
 
¶9. (SBU) China has increased in importance as an export market for 
Brazilian soy, iron ore and steel becoming Brazil's fourth largest 
trading partner.  Impelled by a stronger real, China is set to 
become in 2007, the second largest exporter to Brazil, passing 
Argentina and second only to the U.S.  Low-priced Chinese imports, 
particularly in the textile, footwear, and toy sectors, are now 
threatening to displace domestic Brazilian production.  Brazilian 
industry leaders and GoB officials have underlined that concern over 
the impact of Chinese imports on domestic manufacturers is one root 
cause behind their unwillingness to agree to the non-agricultural 
tariff cuts proposed by both the USG and the EU during the Doha 
Round. 
 
----------------- 
DOHA AGENDA - WTO 
----------------- 
 
¶10. (SBU) While Brazil emphasizes South-South trade through 
Mercosul's bilateral negotiations; it has used the Doha Development 
Agenda (DDA) negotiations as the main forum for engaging with 
developed country partners.  Brazil leads the G-20 group of 
developing countries in pressing for agricultural trade reform in 
the DDA.  Even before the June 2007 G-4 meetings failed to reach an 
agreement on agricultural subsidies and non-agricultural market 
access, Brazil appeared to be hedging its bets by seeking out 
bilateral and regional trade agreements, working through the 
Mercosul framework. 
 
-------- 
BIOFUELS 
-------- 
 
¶11.  (U) Brazil's ethanol program is 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 are used to 
power the conversion process.  Cane also requires less processing 
than ethanol produced from corn.  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 vary less and are controlled by 
the government. 
 
¶12.  (SBU) Since the 1980s, Brazil has attempted to promote ethanol 
fuel exports to the United States.  U.S. tariffs and charges make 
Brazilian imports less competitive.  In addition to import tariffs 
of 1.9 to 2.5 percent, the U.S. imposes a 54 cents/gallon surcharge 
on ethanol imported for use as fuel, which has led to a strong 
Brazilian push to lower or eliminate it.  Given the requirements of 
its fast-growing domestic market, Brazil may not be able to produce 
enough ethanol to supply international markets.  Some estimate that 
over the next one to two years, the maximum percentage of Brazil's 
cane crop that could 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. 
 
----------- 
AGRICULTURE 
----------- 
 
¶13. (U) Agriculture is a major sector of the Brazilian economy, and 
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 U.S.), pork, milk, and 
seafood. 
 
BRASILIA 00001581  003 OF 003 
 
 
 
-------------- 
FOREIGN POLICY 
-------------- 
 
¶14. (SBU) Brazil has long seen itself as the natural leader of the 
region and covets a permanent UN Security Council (UNSC) seat. 
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.)- the 'South-South 
Policy.'  Lula has refused to condemn Cuba for human rights 
violations and, in fact, has pushed for Cuban membership in the Rio 
Group and a Cuba-Mercosul trade pact.  The GoB has worked to 
increase both its economic and political ties with Venezuela. 
Enhanced integration of the two countries' energy sectors is high on 
its agenda.  Lula has been especially solicitous of Chavez.  In the 
past, Lula has praised the Venezuelan President's democratic 
credentials and declared that the Chavez government had been 
demonized by its foes.  Recently, rifts have appeared over 
Venezuela's apparent involvement in Bolivia's decision to 
nationalize its oil and gas industry and Chavez's biting remarks to 
Brazilian Congress members who condemned the GoV's decision to close 
an independent television station. 
 
----------- 
ENVIRONMENT 
----------- 
 
¶15.  Internationally, Brazil is an energetic advocate on 
environmental issues and strongly supports the Kyoto Protocol. 
The GoB is actively involved in international climate negotiations 
and strongly supports the United Nations Framework on Climate Change 
(UNFCCC) where Brazil has taken an active role in the discussion of 
reducing emissions from deforestation.  Brazil has proposed a 
"results oriented" fund, which is not consistent with USG policy on 
climate change.  Thus far, Brazilian reaction to President Bush's 
Global Climate Change (GCC) initiative has been lukewarm - they fear 
it will undermine the work of the UNFCCC. 
 
---------------------------------- 
Intellectual Property Rights (IPR) 
---------------------------------- 
 
¶16.  On April 30, 2007, the Office of the U.S. Trade Representative 
(USTR) elevated Brazil to "Watch List" status in its Special 301 
Annual Report as a result of the country's progress, particularly in 
copyright protection and IPR enforcement.  Included in the USTR 
announcement was notice that Brazil will be subject to an 
Out-of-Cycle Review to monitor its progress on outstanding IPR 
concerns and to evaluate the sustainability of recent enforcement 
progress. 
 
--Compulsory Licensing 
 
¶17.  (SBU) On May 4, 2007 the GoB announced the issuance of a 
compulsory license for Merck Pharmaceutical's HIV/AIDS medicine 
Stocrin.  GOB officials cited cost reduction for their free HIV/AIDS 
public health program as the motivation for this action.  In 
contrast, some pharmaceutical Industry representatives feel new 
Minister of Health Jose Gomes Temporao was driven more by ideology 
than by concern of future damage to Brazil's investment climate as a 
result of this action.  The current situation between Merck and the 
GoB is extremely tense, with bad feelings on both sides. 
 
SOBEL