VZCZCXRO1894
RR RUEHRG
DE RUEHBR #2206/01 3341042
ZNR UUUUU ZZH
R 301042Z NOV 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0559
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 5511
RUEHSO/AMCONSUL SAO PAULO 1251
RUEHRG/AMCONSUL RECIFE 7442
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 002206 
 
SIPDIS 
 
DEPT PASS USTR FOR KATE DUCKWORTH 
DEPT PASS DOC/ITA/MAC/OLAC ANNE DRISCOLL 
DEPT PASS TREASURY LUYEN TRAN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:N/A 
TAGS: EINV ETRD ECON EFIN PREL BR
SUBJECT: BRAZIL:INVESTMENT AND SERVICES DIRECTOR COSTA 
 
Ref A: Brasilia 2174  Ref B:  Brasilia 2177 
 
¶1. (U) Ronaldo Costa Filho, division head for Services and 
Investment, discussed bilateral and intra-Mercosul investment 
negotiations, as well as WTO services negotiations in a recent 
meeting with EconCouns. CAMEX (External Trade Chamber) has recently 
approved a new BIT parameters proposal intended to address 
Congressional concerns. Negotiators are instructed to attempt to 
re-negotiate the Mercosul investment protocol and seek new bilateral 
investment agreements. However, Ministers expressed a strong 
preference that investment agreements should be negotiated within 
the framework of a full FTA.  END SUMMARY 
 
----------------------------- 
Bilateral Investment Treaties 
----------------------------- 
 
¶2. (U) Costa noted that, in 2002, the executive branch withdrew the 
signed BITs it had sent forward for Congressional ratification. 
(NOTE:  over the period 1994-1999, Brazil signed BITs with 
Belgium/Luxembourg, Chile, Cuba, Denmark, Finland, France, Germany, 
Italy, Korea, Netherlands, Portugal, Switzerland, United Kingdom and 
Venezuela.  Not all were ever sent to Congress.  Brazil was also the 
only Mercosul member that never ratified the intra-Mercosul 
investment protocol it had signed).  The government took this action 
when it became clear that Congress would never approve the BITs, as 
key members believed they violate the Brazilian constitution and 
treated foreign investors better than Brazilian investors. 
 
¶3. (U) Congressional members' concerns included: 1) Dispute 
resolution between an investor and the State: strong concerns 
regarding clauses allowing an investor to seek resolution of 
investment disputes via international arbitration. Congressmen have 
argued that international arbitration would undermine the principle 
of sovereignty of the State. (Note: a 2001 Federal Supreme Court 
ruling established that the 1996 Brazilian Arbitration Act, which 
permits international arbitration subject to Federal Supreme Court 
ratification of arbitration decisions, is not unconstitutional). 
They also argued that, since no domestic investors can challenge the 
Brazilian State in an international court, giving that right to 
foreign investors would give them an unfair advantage over domestic 
investors; and 2) Clauses mandating that compensation for 
expropriations should be paid directly in convertible currencies: 
This clause is considered to be in violation of Article 184 of the 
Brazilian Constitution, which says that the State can expropriate 
rural properties for agrarian reform and pay compensation with 
"agrarian reform bonds" redeemed over a period of 20 years. (Note: 
other sources have mentioned Congressional concerns regarding lack 
of capital movement controls and also concerns that, as a developing 
country Brazil should not have to grant national treatment to 
foreign investors.  However, Costa did not mention these as key 
current concerns). 
 
---------------------------- 
NEW BRAZILIAN BIT PRINCIPLES 
---------------------------- 
 
¶4. (SBU) Subsequently, according to Costa, in consultation with 
Congress, three interministerial working groups have been working 
over the past year to develop an investment agreement proposal that 
would satisfy Congressional concerns.  The final proposal was 
submitted to CAMEX - a Minister-level body, including MDIC, MRE, 
Finance, Planning, Agriculture, and Casa Civil (Dilma Rousseff), 
responsible for the formulation of external trade policy - a couple 
of months ago.  CAMEX has now approved this proposal and instructed 
negotiators to attempt to re-negotiate the internal Mercosul 
investment protocol on this basis (Costa noted that investment tends 
to be a fraught conversation intra-Mercosul, as Paraguay and Uruguay 
are convinced that Argentina and Brazil unfairly court investment 
via incentives, to their disadvantage).  In addition, CAMEX 
instructed negotiators to consider other countries as potential 
partners for bilateral investment agreement negotiations under the 
newly approved parameters.  However, CAMEX guidance issued a strong 
preference to negotiate investment agreements only/only as part of a 
full FTA rather than as stand-alone agreements, according to Costa. 
 
 
¶5. (SBU) Saying the document was internal, Costa declined to share 
either the CAMEX-approved investment negotiating principles or to 
articulate orally the provisions that now would satisfy Congress. 
Post will continue efforts to obtain the text or a detailed 
explanation of its provisions (Post notes, per Ref B and septel on 
recent Mercosul Department head meeting, Brazil intends to offer 
Mexico FTA negotiations that are anticipated to include an 
investment chapter.  We may in the near future be able to obtain 
 
BRASILIA 00002206  002 OF 002 
 
 
details via this channel as well). 
 
---- 
FTAs 
---- 
 
¶6. (U) Following Lula's recent trip to South Africa, Itamaraty is 
now in the internal planning stages of a proposal to merge the India 
and the SACU "FTA" negotiations into one combined Mercosul FTA 
negotiation that would include services and investment chapters (see 
ref A).  Costa noted that under the Mercosul/Chile agreement, "98%" 
of trade is moving duty-free, services negotiations are at an 
advanced stage, but no investment negotiations have begun ("but we 
are talking about it."). He noted that the stalled EU and GCC FTA 
negotiations include services and investment. 
 
------------ 
WTO Services 
------------ 
 
¶7. (SBU) Costa reiterated that Brazil does not believe a Chairman's 
text is needed for services and offers can be tabled without a new 
text.  While Brazil is willing to work from a text "within certain 
parameters," Brazil's concern is "our perception that the US and EU 
are trying to add new objectives to Hong Kong. It is not 
constructive to reopen this debate."  He asserted Brazil is not a 
major demandeur in services and indicated frustration in trying to 
motivate the Brazilian business community to engage in the 
negotiations; "particularly disappointing is construction, because 
we are competitive, but the private sector is not interested in the 
WTO."  He noted his IT services sector is just starting to become 
interested in the WTO. Costa said the CNC (national confederation of 
services associations) has not been very active.  He indicated that 
Brazil is simply waiting to see what it will have to give on 
services to help close a good agriculture package.  He added, "If 
you (USG) were happy, I'd be worried I had gone too far, too early. 
Happiness should come at the end." 
 
¶8. (SBU) COMMENT:  Costa is a lively and engaging interlocutor, 
clearly expert in his subject and a canny MRE player. In December, 
he defends his required thesis (which concludes that preferential 
trade agreements are too important politically for countries ever to 
agree to banish them) in order to qualify for promotion to the 
Brazilian Senior Foreign Service.  He recently lost the Financial 
Affairs segment of his office with the creation of a new Financial 
Coordination Office (Luis Antonio Balduino - no staff yet) 
responsible for World Bank, IMF and tax treaty issues.  We will seek 
specifics of the new Brazilian investment negotiation parameters. 
We note the upcoming Economic Dialogue may also provide an 
opportunity to encourage Brazil to articulate its revised goals for 
investment agreements.  END COMMENT 
 
SOBEL