VZCZCXRO8963
RR RUEHRG
DE RUEHSO #0391/01 1881318
ZNR UUUUU ZZH
R 071318Z JUL 09
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 9326
INFO RUEHBR/AMEMBASSY BRASILIA 0480
RUEHRG/AMCONSUL RECIFE 4394
RUEHRI/AMCONSUL RIO DE JANEIRO 9188
RUEHBU/AMEMBASSY BUENOS AIRES 3544
RUEHAC/AMEMBASSY ASUNCION 3791
RUEHMN/AMEMBASSY MONTEVIDEO 2935
RUEHSG/AMEMBASSY SANTIAGO 2791
RUEHLP/AMEMBASSY LA PAZ 4128
RUEHME/AMEMBASSY MEXICO 0880
RUEHBJ/AMEMBASSY BEIJING 0483
RUEHUL/AMEMBASSY SEOUL 0215
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RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SECTION 01 OF 03 SAO PAULO 000391 
 
SIPDIS 
SENSITIVE 
 
STATE PASS USTR FOR KDKALUTKIEWICZ 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
STATE PASS NSC FOR ROSSELLO 
DEPT OF TREASURY FOR SENICH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: BRAZILIAN PRIVATE SECTOR VIEWS ON FREE TRADE AND 
U.S.-BRAZIL COOPERATION 
 
SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY 
 
¶1.  (SBU) Summary: Private sector leaders from the powerful Sao 
Paulo Federation of Industries (FIESP) emphasized their growing 
interest in negotiating a Bilateral Investment Treaty (BIT), a 
Bilateral Tax Treaty (BTT), as well as liberalizing trade with 
Mexico and the United States, during meetings with USTR General 
Counsel Timothy Reif on June 18.  FIESP's leaders candidly discussed 
their relationship with their Mercosul neighbors and clarified their 
support for Venezuelan accession.  They expressed concern about 
Brazil's increasing trade relationship with China, fearful that 
Brazil is becoming merely a supplier of raw materials for that 
country.  The Sugar Cane Growers Association (UNICA) also expressed 
hope that the United States and Brazil could increase cooperation on 
climate change.  End Summary. 
 
¶2.  (SBU) FIESP Director of International negotiations Mario 
Marconini hosted a roundtable for USTR General Counsel Timothy Reif 
on June 18.  Other attendees included Fernando Pimentel (President 
of the Brazilian Textile and Apparel Industry Association), Gabriel 
Rico (President of the American Chamber of Commerce in Sao Paulo), 
and Carolina Costa (UNICA). 
 
------------------ 
BIT, BTT, and Doha 
------------------ 
 
¶3.  (SBU) Marconini said that FIESP is interested in a Bilateral 
Investment Treaty (BIT) and a Bilateral Tax Treaty (BTT).  He added 
that many of FIESP's members who do business in the United States 
have complained about double taxation.  Although the tax treaty has 
been under negotiation for 40 years without conclusion, Marconini 
believes that there is hope for both agreements.  While Mexico is 
FIESP's top target for trade liberalization, Marconini said the U.S. 
remains FIESP's second priority.  The GoB has already signed a 
customs agreement for auto parts and negotiated a 20 percent 
reduction in textile duties with Mexico.  FIESP hopes the GoB will 
sign a comprehensive trade agreement with Mexico soon. 
 
¶4. (SBU) Marconini noted that Brazil is increasingly ready to accept 
labor and environmental provisions as part of trade agreements. 
China, in his view, attempted to hide behind Brazil in the last Doha 
round and was surprised by Brazil's willingness to negotiate. 
Marconini called Doha the "crown jewel of trade deals" and responded 
positively to expressions of U.S. interest in furthering 
negotiations.  He said, however, that the industrial sector is 
cynical about the U.S. commitment to free trade, given the financial 
crisis and statements made during the U.S. presidential election. 
Implementing the FTA with South Korea would enhance U.S. 
credibility, in Marconini's view.  Further progress on the Doha 
Round will be challenging politically, according to Marconini. 
Brazilian industry already has made concessions, and could only be 
pressed to do more if further agricultural offers are forthcoming. 
 
 
¶6.  (SBU) FIESP believes that the high cost of doing business in 
Brazil creates an uneven playing field for Brazilian firms. 
Marconini cited the high cost of hiring an employee as an example. 
According to FIESP, employers pay twice an employee's salary in 
taxes.  He expressed disappointment that President Lula, despite his 
immense popularity, had been unable to pass significant regulatory 
reform, especially for banks.  Everyone at the roundtable meeting 
complained bitterly about the enormously profitable banking sector 
and their tight credit restrictions. 
 
------------------- 
Trouble in Mercosul 
------------------- 
 
¶7.  (SBU) FIESP leaders also criticized Argentina's trade policies. 
 
SAO PAULO 00000391  002 OF 003 
 
 
They alleged that the country has erected a number of obstacles to 
trade, including non-tariff barriers (NTBs).  At the same time, they 
advocated caution in moving against the country.  When Argentine 
President Cristina Kirchner visited FIESP earlier this year, she 
said that Argentina, unlike Brazil, had not developed its 
industries; it had destroyed them.  She asserted that that her 
country needed more time to develop industry, implying the need for 
import-substitution tariffs.  Marconini stated that Brazil should 
remain cautious in its approach with Argentina, but admitted that 
FIESP, despite being unhappy with the country's NTBs, was generally 
understanding of Argentina's position. 
 
¶8.  (SBU) FIESP does not oppose Venezuelan accession to Mercosul, 
but does insist that Venezuela join the trade bloc on Brazilian 
terms.  Venezuela exports very little to Brazil, according to 
Marconini, so the economic impact of having a customs agreement with 
the country would be minimal.  On the other hand, FIESP reps 
maintain that Venezuelan accession could either encourage reform in 
Venezuela or institutionally destroy Mercosul.  (Comment: In light 
of Argentine NTBs and other obstacles within Mercosul affecting 
Brazilian products, it is unlikely FIESP's leaders would mourn 
Mercosul, should it end.  End Comment.) 
 
¶9.  (SBU) Marconini said that Brazil could, "nail Venezuela in the 
WTO if it wanted," but FIESP and the GoB do not want to offend Hugo 
Chavez.  FIESP cited numerous Venezuelan NTBs, highlighting 
restrictions on currency exchange as the most serious.  Marconini 
said that Chavez wants to launch a "vendetta against another big 
country," and that Brazil is treading softly in the region to avoid 
becoming his next target. 
 
----- 
China 
----- 
 
¶10.  (SBU) The GoB was disappointed with Lula's visit to China, 
according to FIESP reps.  Lula failed to win any concessions on pork 
exports or stem the flood of Chinese-origin textiles to Brazil.  The 
long-planned US$10 billion deal with oil giant Petrobras was the 
only significant announcement.  Pimentel said China's recent rise to 
Brazil's top trading partner is cyclical, especially since 73 
percent of their trade is in commodities, while Marconini insisted 
the Chinese view Brazil merely as a source of raw materials, to be 
manufactured and sold back to the Brazilians.  FIESP reps cited a 
Chinese partnership with Brazilian mid-size aircraft builder Embraer 
as an indication that China intends to develop its own finished 
products in as many sectors as possible. 
 
¶11.  (SBU) Pimentel also observed that due to an ill-conceived 
agreement between the GOB and the Government of Bolivia, 
Chinese-origin textiles have inundated Brazil.  Because of the U.S. 
removal of certain Bolivian textile incentives, Brazil granted 
Bolivia the right to export to Brazil textiles of any origin duty 
free, up to the level of lost trade with the United States (in this 
case, US$21 million).  As a result, Bolivia now imports large 
amounts of Chinese textiles from China and then exports them into 
Brazil for a substantial profit, duty free and with little to no 
value added. 
 
-------------- 
Climate Change 
-------------- 
 
¶12.  (SBU) UNICA rep Carolina Costa proposed climate change as an 
area for increased Brazil-U.S. cooperation.  She cited a scientific 
study, which showed that sugarcane-based ethanol emitted 90 percent 
less greenhouse gas (GHG) than oil.  She said that lack of 
infrastructure in Caribbean Basin Initiative countries prevented 
UNICA from reaching the quota of tariff-free exports into the United 
States via these countries.  Costa promised to look into ways to 
 
SAO PAULO 00000391  003 OF 003 
 
 
increase development in these countries, but said that it sometimes 
more profitable to sell ethanol directly to the United States, even 
with the tariff.  She hoped the United States will join UNICA in 
promoting a worldwide gasoline standard of at least E-10 (10 percent 
ethanol, 90 percent gasoline). 
 
¶13.  (SBU) Marconini feared that the Copenhagen environmental 
conference in December would unjustly penalize FIESP's member 
companies for the destruction of the Amazon.  FIESP would oppose any 
treaty that led to Brazilian industry paying for GHG emissions for 
which they did not bear responsibility. 
 
------- 
Comment 
------- 
 
¶14.  (SBU) FIESP's outlook on Mercosul shows that the organization 
is not prepared to publically criticize the growth of protectionism 
in Argentina and Venezuela.  FIESP's views on China focus on export 
competition concerns and inequality in the relationship.  Other 
ConGen interlocutors have echoed the fear that Brazil has become 
simply a market for Chinese goods manufactured with Brazilian raw 
materials.  In searching for common ground among trading partners, 
FIESP leaders seemed more comfortable with their counterparts in the 
United States and Mexico than those in China and Argentina, although 
the negotiation of any trade agreement would have to be amidst the 
complexities of Brazil's Mercosul commitments.  End Comment. 
 
¶15.  (U) This cable was coordinated with and cleared by Embassy 
Brasilia. 
 
WHITE