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RR RUEHRG
DE RUEHBR #1897/01 2771038
ZNR UUUUU ZZH
R 041038Z OCT 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0104
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
INFO RUEHRG/AMCONSUL RECIFE 7193
RUEHSO/AMCONSUL SAO PAULO 0910
RUEHRI/AMCONSUL RIO DE JANEIRO 5200

UNCLAS SECTION 01 OF 04 BRASILIA 001897 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NSC PLEASE PASS TO DIRECTOR AL HUBBARD AND JOHN COBAU 
 
E.0. 12958: N/A 
TAGS: PGOV ECON SENV BR
SUBJECT: SCENESETTER FOR THE VISIT OF NEC DIRECTOR AL HUBBARD 
 
REFTEL: A) BRASILIA 1819; B) BRASILIA 1813; C) BRASILIA 1826 
 
¶1. (SBU) Summary:  Your visit comes on the heels of an August visit 
to Brazil by State Under Secretary for Economic, Energy and 
Agricultural Affairs Reuben Jeffery III.  During his visit, the 
Under Secretary's discussions with GOB officials included biofuels 
and infrastructure (REFTELS A, B,C).  Also at the forefront of the 
Brazilians' agenda is the Doha Development Round (DDR) negotiations, 
which were set back in June when 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 
Brazilians are also interested in a climate change agenda, although 
their vision of the approach may differ considerably from ours. 
 
¶2.  (SBU) While relations between the U.S. and Brazil are friendly, 
the USG often 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. 
 
--------- 
CEO Forum 
--------- 
 
¶3. (U) The launch of the upcoming CEO Forum will provide a new 
avenue for both the Brazilian and American private sector to examine 
the problems that hinder the trading relationship and 
competitiveness at large, and to make recommendations to both our 
governments for steps to improve.  We expect that concerns about 
infrastructure, taxation, intellectual property rights and slow 
movement toward a conclusion of the Doha Round may surface in the 
meeting, and that the CEOs will present some specific 
recommendations in these, or other, areas.  Maintaining the momentum 
and helping create movement based upon the recommendations will be 
an ongoing challenge for both sides. 
 
--------------------------- 
MACRO-ECONOMIC DEVELOPMENTS 
--------------------------- 
 
¶4. (U) 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%). 
 
¶5. (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-. 
 
¶6. (SBU) 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 due to the tax burden (nearly 38 percent of 
GDP), one of the highest among large developing economies. 
 
¶7. (SBU) Sustaining and expanding growth rates in the longer term 
depends on further structural reform efforts and concrete steps to 
create a more welcoming climate for investment, both domestic and 
foreign.  A bill allowing Public-Private Partnerships, a key effort 
to attract private investment to infrastructure, 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 regulatory climate for 
investment; to simplify torturous tax systems at the state and 
federal levels; and to further reform the pension system. 
 
 
BRASILIA 00001897  002 OF 004 
 
 
-------------- 
Infrastructure 
-------------- 
 
¶8.  (SBU) Poor infrastructure issues have long been cited as part of 
the "Custo Brasil" or "Brazil Cost," a term used to refer to the 
systemic problems that hinder Brazil's competitiveness.  For 
example, the interior of the country depends on a series of 
ill-maintained roads for transportation of goods to its aging ports. 
 Brazilian officials have signaled that the GOB is interested in 
working with the USG to explore ways to maximize funds, technology 
and managerial skills in infrastructure projects around the country, 
or possibly for the two countries' entities to invest in third 
countries.  GoB officials have proposed that both governments work 
together on implementation as well as financing using a possible 
"tripod format" (a partnership between the GoB, a Brazilian company, 
and a US company) for infrastructure projects. (REFTELS A, B) 
 
----------------- 
DOHA AGENDA - WTO 
----------------- 
 
¶9. (SBU) Brazil 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 desires in the DDA.  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. To date, Brazilian proposals do not provide real market 
access.  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, this year China is 
set to become 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. 
 
¶10. (SBU) Brazil's objections to US agricultural programs has 
sparked initiation of a WTO case.  In the cotton dispute, some in 
the Brazilian congress have introduced an IPR "cross-retaliation" 
bill - a proposal that has some executive branch support and is 
slowly winding its way through the Brazilian congress. 
 
------------------------- 
TRADE POLICY AND MERCOSUL 
------------------------- 
 
¶11. (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.  The bloc has moved toward an 
increasingly political form, it remains engaged in external trade 
negotiations.  Mercosul has free trade agreements with Colombia, 
Ecuador, Venezuela, Peru, Chile and Bolivia. In addition to Cuba, 
the bloc has explored free trade talks with Israel, the Dominican 
Republic, Panama and states of the Gulf Cooperation Council. 
Mercosul has also tried to build on partial trade liberalization 
agreements concluded with India and South Africa in 2004. Brazil has 
not yet ratified Venezuela's full membership in Mercosul. In an 
August 2007 visit to Mexico, President Lula made overtures on 
improving the countries' bilateral trade relationship. 
 
-------- 
BIOFUELS 
-------- 
 
¶12.  (U) Brazil's ethanol program is a model for alternative energy. 
 Brazil's comparative advantage is its ability to inexpensively 
produce ethanol from sugarcane.  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. 
 
¶13.  (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.  (Comment:  Brazil is able 
 
BRASILIA 00001897  003 OF 004 
 
 
to sidestep in part the surcharge by exporting a large volume of 
ethanol to Caribbean countries, which then do some processing and 
ship the finished product to the United States under favorable 
treatment established by the Caribbean Basin Initiative. End 
Comment.)  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. 
 
¶14.  (SBU) In the first (August 20, 2007) meeting of the USG-GoB 
Biofuels Steering Committee established under the March 7 DOS/MRE 
MOU, officials from both countries emphasized the need to move 
quickly in the area of standardization to enable future 
collaboration and make biofuels a global commodity.  Representatives 
also agreed on the need for private sector involvement to spur 
momentum and keep pace with the market in the biofuels race.  Under 
the MOU, joint participation in third party biofuels initiatives in 
St. Kitts (August), El Salvador (September) and in the Dominican 
Republic (tentatively planned for November) has begun, NIST-led 
standards work is on-going, and DOE/USDA hosted a delegation of 
Brazilian scientists. 
 
----------- 
AGRICULTURE 
----------- 
 
¶15. (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. 
 
-------------- 
FOREIGN POLICY 
-------------- 
 
¶16. (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.   President Lula and President 
Bush have spoken favorably of trilateral assistance, though so far 
this has only resulted in a joint health mission to Sao Tome and 
Principe.  Further activities may take place in other 
Portuguese-speaking countries (Mozambique and Angola).  At the UNGA 
on September 25, President Lula spoke of Iran's right to enrich 
uranium and its peaceful nuclear program, which undercut efforts to 
keep the pressure on Iran to suspend enrichment. 
 
------------------------------ 
ENVIRONMENT AND CLIMATE CHANGE 
------------------------------ 
 
¶17.  (SBU) 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), for which 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. GoB officials 
 
BRASILIA 00001897  004 OF 004 
 
 
have said previously that the U.S., as a non-signatory to the Kyoto 
Protocol, places more emphasis on energy efficiency and expense than 
the environment (REFTEL B). After the September 27 - 28 Major 
Economies Meeting (MEM) on climate change, the head of the Brazilian 
delegation to the MEM, Ministry of Exterior Relations Under 
Secretary Everton Vargas told the press, "We see only a reiteration 
 
SIPDIS 
of what he [Bush] has said in the past.  We don't want this focus on 
voluntary controls." . . .  Bush tried to convince the participants 
that now he is taking seriously the problem of global warming.  But 
in practice, he only defended his obstinate position." 
 
¶18.  (SBU) The Brazilians also hosted a ministerial meeting that 
took place in Rio de Janeiro, September 3-4, which addressed 
strengthening international governance of sustainable development, 
including a discussion of the French proposal to transform the UN 
Environmental Program (UNEP) into a World Environment Organization 
akin to the WTO.  The Brazilians have revised their position and now 
are calling for a new "umbrella" international organization, though 
focused not just on environment, but also on sustainable 
development. 
 
---------------------------------- 
Intellectual Property Rights (IPR) 
---------------------------------- 
 
¶19.  (u) 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. 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 about future damage to Brazil's investment climate 
as a result of this action. 
 
 
CHICOLA