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UNCLAS SECTION 01 OF 03 SAO PAULO 000802 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC 
STATE PASS USTR FOR KATE DUCKWORTH 
STATE PASS FED BOARD OF GOVERNORS FOR ROBITAILLE 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DEMROSE, NRIVERA, CMERVENNE 
NSC FOR TOMASULO 
TREASURY FOR JHOEK 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC ALSO FOR 3134/USFCS 
 
E.O. 12958: N/A 
TAGS: ETRD ECON BR
SUBJECT: BRAZILIAN FIRMS LOBBY TO HOLD ONTO GSP BENEFITS 
 
 
Summary 
------- 
 
¶1.  (U) The American Chamber of Commerce (Amcham) and Sao Paulo 
Federation of Industries (FIESP) met with representatives of the 
U.S. Government Accountability Office (GAO) on September 13 and 14 
to discuss Brazil's inclusion in the Generalized System of 
Preferences (GSP) trade program.  Amcham and FIESP underscored that 
U.S. companies and consumers benefit from Brazil's inclusion in the 
program, and that without GSP benefits, many of the items on the 
list would be replaced by Chinese products.  Although there are 
clear financial benefits of the GSP program for Brazilian producers, 
both organizations noted that many companies are not taking 
advantage of GSP.  A lack of information from the Brazilian 
government regarding the program as well as a focus on the Brazilian 
domestic market have resulted in less than 100 percent utilization 
of the program.  According to both groups, keeping GSP in Brazil 
would provide clear benefits for U.S. consumers as well as U.S. 
foreign policy in the region.  End Summary. 
 
GSP Important for Brazil and the U.S. 
------------------------------------- 
 
¶2.  (U) The GAO Director and Assistant Director for the 
International Affairs and Trade team visited Brazil to review the 
Generalized System of Preferences as part of a larger 
congressionally mandated review of five U.S. trade preferences 
programs.  Both Amcham and FIESP emphasized the importance of GSP 
benefits for their member businesses in Brazil; Brazil is the fourth 
largest beneficiary of GSP, behind Angola, India, and Thailand. 
(Note: Angola is the largest recipient of GSP benefits almost 
exclusively due to its petroleum exports to the U.S.  End Note.) 
According to FIESP, companies in Brazil employ more than 400,000 
Brazilians as a result of the export of Brazilian goods via GSP to 
the U.S., and Brazil exported US$3.7 billion in goods covered by 
GSP, which is about 15 percent of Brazilian exports to the U.S. 
 
¶3.  (U) The Sao Paulo Amcham made three trips to Washington in 2006 
to underscore the benefits that U.S. consumers and companies receive 
from Brazil's inclusion in the GSP program.  U.S. companies in 
Brazil enjoy tariff free access for intra-company goods and for 
other U.S. trade partners and they have made significant capital 
investments in Brazil to maximize these benefits.  Rejane Darold 
from Eaton Corporation told GAO that the GSP program allows the 
company to diversify its production line.  For instance, Eaton's 
Brazilian subsidiary makes several items on a single production 
line, but on a much smaller scale than the company could produce in 
the U.S.  Thus Eaton is able to fill orders from its subsidiary in 
Brazil that would be uneconomical in its U.S. facilities that tend 
to focus on large volumes of one, single product.  In addition, the 
Brazilian subsidiary imports used equipment from its U.S. partners, 
helping to provide lower-cost goods to their U.S. customers while 
creating a market for U.S. exports. 
 
¶4.  (U) Brazilian firms impressed upon the GAO that U.S. companies 
and consumers are equally benefiting from Brazilian firms' use of 
GSP, and the loss of GSP for Brazil would mean the loss of U.S. jobs 
in many industries that use Brazilian intermediate inputs.  Roughly 
75 percent of Brazilian exports in 2006 were raw materials and 
intermediate products that undergo further assembly and processing 
in the U.S.  Tariff-free access for those goods lowers prices of end 
products to U.S. consumers and provides manufacturing and assembly 
employment opportunities within the U.S.  As an example, 
representatives of Duratex, a wood products company, told the GAO 
that Brazilian companies ship wood for doors, which are then 
assembled in the U.S. while their closest competitor, China, ships 
finished products.  Removing these types of wood products from GSP 
could potentially lead them to ship their partially finished wood to 
 
SAO PAULO 00000802  002 OF 003 
 
 
China for final assembly thus removing U.S. manufacturers from the 
value chain. 
 
GSP Reaching Most Impoverished Areas 
------------------------------------ 
 
¶5.  (U) The Amcham President underscored that among the 
organization's chief priorities is clarifying that Brazil's 
inclusion in the GSP program fulfills the program's mission of 
helping less developed countries become more active in trade.  He 
noted there are "many Brazils" and evaluating Brazil's GSP 
eligibility based on average socio-economic indicators does not give 
a real indication of Brazil's extreme poverty, especially in the 
northeast where nearly one-fifth of goods exported under GSP in 2006 
originated.  In fact, as a percentage, the impoverished northeast 
benefited the most from GSP exports.  He emphasized that a careful 
review of the GSP program should look closely at individual products 
and their impact on the local economy instead of focusing on the 
country as a whole.  Stating that Brazil has a large economy and 
therefore shouldn't benefit from GSP, he opined, really loses sight 
of the vast benefits the program is bringing to under-developed 
areas of Brazil. 
 
Without GSP, China Would Dominate 
--------------------------------- 
 
¶6.  (U) Both FIESP and Amcham roundtable participants noted that 
other developing countries would be unlikely to replace the majority 
of Brazilian exports eligible under GSP if Brazilian suppliers were 
excluded from the program.  To emphasize this point, FIESP 
representatives stated that China is the only competitor for 75 
percent of Brazilian products receiving GSP benefits. 
 
¶7.  (U) Several companies noted that their products would become 
uncompetitive without the tariff benefits, especially for products 
and sectors where their profit margins would not cover the tariffs. 
In fact, several companies complained that their products already 
had been excluded when they reached the program's competitive need 
limitations (CNL).  Carlos Monnerat, the Export and Chartering 
Manager of Caraiba Metals (a subsidiary of Grupo Paranapema that 
sells copper products) told the GAO directors on a visit to their 
plant that Caraiba had to cut 40 jobs at its northeast factory 
because the company lost GSP benefits last year, making the export 
of copper wire rods to the U.S. market no longer profitable.  In 
2006 half of Caraiba's exports and a quarter of the company's 
overall sales were to the U.S.; however, Caraiba exceeded the CNL of 
$120 million because it operates on long-term contracts, and could 
not decrease its export volume of copper wire rods to compensate for 
the higher international copper index price.  (Note: Caraiba's price 
point is based on the international copper price plus a small margin 
to cover production, logistics and business costs.  End Note.) 
 
GSP Benefits Big, But Not Meeting Full Potential 
--------------------------------------------- --- 
 
¶8.  (U) Brazilian exports to the U.S. under the GSP have steadily 
increased in the last few years, however many Brazilian companies 
are not taking full advantage of the benefits.  More than 3,000 
Brazilian products are eligible under GSP, but because of a lack of 
awareness either of the existence of the program or of the 
procedures for application to the program, many U.S. importers are 
paying unnecessary import tariffs on eligible items.  In total, some 
80% of eligible products are being covered, but FIESP estimates this 
still represents an economic waste of $870 million USD in tariffs. 
Amcham members also noted that the companies that have the most to 
benefit from GSP are the least prepared to deal with the 
administrative steps to qualifying for GSP.  A representative from 
the chemicals sector cited two reasons that many Brazilian companies 
 
SAO PAULO 00000802  003 OF 003 
 
 
don't take advantage of the GSP benefits--ignorance about the 
program and the temporary nature of the program, which limits the 
incentives to make large up-front investments.  Eaton said US 
brokers often bear the administrative burden and are unaware of the 
procedures for the GSP program thus creating a substantial 
transaction cost for the company. 
 
¶9.  (U) The Amcham members also expressed disappointment at the lack 
of interest and action on the Brazilian government's part to inform 
potential beneficiaries about GSP and other trade preference 
programs.  In 2004, Amcham began a campaign to increase private 
sector awareness about GSP and has been proactively contacting 
potential beneficiaries about the program.  Amcham also publishes a 
yearly guide to filing for GSP benefits and a substantial yearly 
evaluation of GSP in Brazil.  Three years ago, Amcham requested that 
USTR supply a list of eligible products, and both Amcham and USTR 
publish a guide to qualifying for GSP benefits. 
 
Comment 
------- 
 
¶10.  (U) In spite of the size of its economy, Brazil still harbors 
many of the conditions that GSP was designed to ameliorate.  The 
impoverished northeast in particular has enjoyed substantial gains 
from GSP.  U.S. consumers also benefit from the lower prices of many 
of the intermediate goods which Brazil supplies to U.S. producers. 
There appears to be a negative impact on investment in GSP eligible 
products in Brazil due to the annual reviews which the business 
community says keeps investors skittish on taking a long-term view. 
Fear of losing GSP and having to compete directly with China in many 
of these items has resulted in a lower focus on GSP than otherwise 
would be expected.  While Brazil has a long way to go to become an 
export driven economy, GSP has obvious tangible benefits for both 
producers in Brazil and U.S. consumers.  End Comment.