VZCZCXRO7612
RR RUEHCD
DE RUEHBR #2242/01 3412116
ZNR UUUUU ZZH (CCY ADX039CA3B MSI7695 611)
R 072116Z DEC 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0597
INFO RUEHRG/AMCONSUL RECIFE 7462
RUEHSO/AMCONSUL SAO PAULO 1283
RUEHRI/AMCONSUL RIO DE JANEIRO 5533

UNCLAS SECTION 01 OF 04 BRASILIA 002242 
 
SIPDIS 
 
C O R R E C T E D COPY - PARAGRAPH NUMBERING CORRECTED 
 
SENSITIVE 
SIPDIS 
 
E.0. 12958: N/A 
TAGS: ECON ETRD EINV EFIN PREL SENV BR
SUBJECT: SCENESETTER FOR THE ECONOMIC DIALOGUE VISIT OF WHA A/S 
SHANNON AND EB A/S SULLIVAN 
 
BRASILIA 00002242  001.2 OF 004 
 
 
REFTEL: A) BRASILIA 1819; B) BRASILIA 1813; C) BRASILIA 1826 D) 
BRASILIA 2064 E) BRASILIA 2066 F) BRASILIA 2067 G) BRASILIA 2087 H) 
BRASILIA 2174 I) BRASILIA 2206 J) BRASILIA 2234 K) BRASILIA 2082 L) 
BRASILIA 2124 
 
¶1. (SBU) Summary:  Your visit for the economic dialogue will expand 
and develop economic cooperation themes discussed during the Under 
Secretary for Economic, Energy and Agricultural Affairs Reuben 
 
SIPDIS 
Jeffery's August visit (REFTELS A, B, C). We hope to use the 
dialogue to focus on areas where we can deepen our partnership.  We 
hope the upcoming interaction will communicate clearly that we 
intend to work with Brazil based on mutual respect and in 
recognition that Brazil is now a global player on economic issues 
and that with this engagement comes responsibility that Brazil needs 
to assume.  While relations between the U.S. and Brazil are 
friendly, the USG often encounters significant difficulties in 
gaining buy-in from senior policymakers on issues of global and 
bilateral interest to the United States.  Eager to assert its own 
influence, the Brazilian government resists cooperation with the USG 
unless it can clearly be characterized as a partnership among 
equals. 
 
¶2. (SBU) From the nascent regional infrastructure initiative USG is 
developing with the Planning Ministry, to excellent cooperation 
under the March 2007 US/Brazil biofuels MOU, Brazil is eager to work 
with us in areas perceived as in its own self-interest. In areas 
such as proposals to negotiate a Bilateral Tax Treaty or a Bilateral 
Investment Treaty, while these accords would be in the long-term 
growth interests of Brazil, short-term domestic tax loss revenue 
fears and constitutional issues impede progress. In aviation, recent 
leadership shake-ups have delayed Brazil's short-term ability to 
engage sufficiently productively in negotiations.  In other areas, 
inter-Ministerial differences in views can result in opaque 
interactions.  For example, on IPR issues, the Justice and Trade 
Ministries tend to be more receptive to enhancing enforcement and to 
streamlining regulatory approval processes, while the Health 
Ministry and the FDA-equivalent ANVISA have advocated publicly (for 
example at WHO and WIPO) that IPR is in direct contradiction to the 
global public good. Agricultural biotechnology is another challenge, 
given that the Agricultural Ministry supports the technology while 
the Environment Minister is passionately against. Finding areas of 
mutually beneficial cooperation and identifying where Brazilian 
self-interest lies will be key to the success of our economic policy 
partnership.  END SUMMARY 
 
ECONOMIC BACKGROUND INFORMATION (see also reftels): 
 
--------------------------- 
MACRO-ECONOMIC DEVELOPMENTS 
--------------------------- 
 
¶3. (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.  For 
2007, Brazil's Central Bank is forecasting 4.7 percent growth and 
the IMF predicts 4.4 percent. The Central Bank predicts 2007 
inflation will be 3.96 percent. The IMF predicts 3.6 percent 
inflation for 2007. 
 
¶4. (SBU) Buoyed by exports and investment inflows, the real has 
remained strong for most of the year, allowing the government and 
businesses to pay down external debt and invest in capital 
equipment.  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 long-term debt in May 2007, to BB+. 
 
¶5. (SBU) Key challenges remain.  The net public sector debt-to-GDP 
ratio is on a downward trend but remains high, at about 44%.  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. 
 
¶6. (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 00002242  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 also include a cumbersome regulatory system) 
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. 
 
-------------- 
CIVIL AVIATION 
-------------- 
 
¶9. (SBU) Brazil is facing deficiencies in infrastructure, the 
collapse of flagship national carrier Varig in 2006, and two major 
airline crashes resulting in the loss of hundreds of lives in less 
than one year.  A complete overhaul of civil aviation authority 
ANAC's leadership is in progress, with three of five new directors 
confirmed in the last weeks now officially in place and two more 
nominees scheduled for confirmation hearings in the coming weeks. 
Bilateral aviation talks planned for Dec. 5-7 were cut short by a 
day when it became clear that key U.S. outcomes could not be 
achieved, and what few concessions that were being offered by the 
GOB would only be desirable if tied to other US objectives which the 
Brazilian team was not able to fulfill.  Specifically, the 
opportunity for new third-country code-sharing for airlines to test 
the markets in the north/northeast region was denied, and all 
markets below Brasilia (including Sao Paulo, Rio, Belo Horizonte, 
Porto Alegre, etc.) were all deemed off the table for new 
frequencies.  Brazil's head of delegation admitted that ANAC was not 
ready to fully engage on these issues.  That said, this meeting was 
the first bilateral consultation in 10 years and as such, was an 
important first step for future negotiations.  A Memorandum of 
Consultations was signed on December 6 recapping the discussion and 
indicating the two countries' intent to meet again before the end of 
¶2008. 
 
----------------- 
DOHA AGENDA - WTO 
----------------- 
 
¶10. (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. 
 
¶11. (SBU) Brazil's objections to US agricultural programs have 
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 
winding its way through the Brazilian congress. 
 
-------- 
BIOFUELS 
-------- 
 
¶12.  (U) Brazil's ethanol program is a model for alternative energy, 
based on inexpensive production from sugarcane.  Ethanol 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. 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 
 
BRASILIA 00002242  003 OF 004 
 
 
eliminate it.  (Comment:  Brazil is able 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.)   Under the March 7 
DOS/MRE MOU, joint participation in third party biofuels initiatives 
in St. Kitts, El Salvador and in the Dominican Republic has begun, 
NIST-led standards work is on-going, and DOE/USDA hosted a 
delegation of Brazilian scientists. 
 
----------- 
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. 
 
---------------------------------- 
Intellectual Property Rights (IPR) 
---------------------------------- 
 
¶14. (U) On April 30, 2007, the Office of the U.S. Trade 
Representative (USTR) moved 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. 
 
-------------- 
FOREIGN POLICY 
-------------- 
 
¶15. (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.  Lula 
has consistently praised the Venezuelan President's democratic 
credentials and continues strongly to support Venezuelan membership 
in Mercosul, despite opposition in Brazil's congress.   Lula has 
gone to great lengths to mend rifts that appeared recently over 
Venezuela's apparent involvement in Bolivia's decision to 
nationalize its oil and gas industry and over 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 
UNGA this year, 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 
------------------------------ 
 
¶16.  (SBU) Brazil is a major player on international environmental 
issues and strongly supports the Kyoto Protocol with its "common, 
but differentiated responsibilities" principle.  The GoB is actively 
engaged in international climate negotiations under the United 
Nations Framework on Climate Change (UNFCCC).  Brazil is a leading 
emitter of greenhouse gases due to the substantial amount of 
deforestation in the Amazon region.  In recent years, the rate of 
deforestation has dropped by over 50 percent, though it remains 
 
BRASILIA 00002242  004 OF 004 
 
 
significant and there are signs that the rate may go up in 2008.  At 
the UNFCCC, Brazil in late 2006 proposed creating financial 
incentives for avoiding deforestation, but which would be outside 
the carbon credit system and would not include any obligations on 
Brazil to protect the forest.  The proposal has interesting points 
to it, however, it is not consistent with USG policy on climate 
change. 
 
¶17.  (SBU) 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 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) Brazil's Foreign Minister Celso Amorim in Bali criticized 
the U.S. and EU proposal on lowering tariffs on environmental goods 
because it did not include reducing or eliminating tariffs on 
ethanol (which both the United States and the EU have) and 
addressing agricultural subsidies.  He accused the developed 
countries of being "two-faced" by cloaking efforts to promote their 
commercial exports under the "green" label while maintaining 
protectionists barriers on products from other countries, 
particularly ethanol.  He told reporters that "Bali is a point of 
departure between the developed and developing countries], not one 
of arrival." 
 
¶19. (SBU) Brazil has been a leader on access and benefit-sharing of 
genetic resources.  This includes the issue of the overlap of the 
Convention on Biological Diversity (CBD) and other international 
environmental agreements and the WTO.  Brazil supports efforts at 
WIPO and the WTO to revise patent regimes in order to include 
mandatory requirements on disclosure of the origin of genetic 
resources used and any use of traditional knowledge. 
 
CHICOLA