VZCZCXRO8401
RR RUEHRG
DE RUEHBR #1412/01 3382222
ZNR UUUUU ZZH
R 042220Z DEC 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0018
INFO RUEHBR/AMEMBASSY BRASILIA
RUEHRG/AMCONSUL RECIFE 0011
RUEHRI/AMCONSUL RIO DE JANEIRO
RUEHSO/AMCONSUL SAO PAULO

UNCLAS SECTION 01 OF 06 BRASILIA 001412 
 
SENSITIVE 
SIPDIS 
DEPARTMENT PASS E U/S HORMATS, EEB A/S FERNANDEZ, WHA PDAS KELLY 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EAGR EFIN BR
SUBJECT: Brazil: Scenesetter - Economic Partnership Dialogue December 
14 
 
SENSITIVE BUT UNCLASSIFIED 
 
 
 
1.(SBU)  SUMMARY: The fourth meeting of the Economic Partnership 
Dialogue (EPD) provides an excellent opportunity to reinforce the 
importance the USG attaches to deepening and expanding the positive 
economic agenda between the United States and Brazil.  This meeting 
will permit the two sides to cement a broader partnership under the 
Dialogue created to launch new economic cooperation opportunities 
between State and the Ministry of External Relations (MRE) and to 
provide impetus and support to initiatives developed in other 
channels.  Our economic interests in engaging with Brazil are 
bilateral, including increasing trade and investment opportunities 
through addressing regulatory barriers and liberalizing civil 
aviation; regional, including promoting labor standards; and 
global, including development cooperation as well as engagement in 
fora including G20 and the WTO.   The December 14 meeting will 
further cement our expanding development cooperation partnership in 
Africa and Haiti and deepen our dialogue on the regulatory and 
business climate issues that support innovation and 
competitiveness.  This Dialogue is an opportunity to lay out our 
vision for the U.S.-Brazil economic relationship as Brazil 
continues to develop as a significant regional and global economic 
player, potentially laying the foundation for expanded positive 
cooperation in other policy areas over time.  END SUMMARY 
 
 
 
OVERVIEW 
 
 
 
2.(SBU)  Brazil is a developing country moving onto the global 
stage.  The tenth largest world economy, Brazil has evolved from 
IMF creditor to donor, from development assistance recipient to 
provider, and from a country that suffered extreme economic shocks 
to a country emerging early from the global crisis and confident in 
its macroeconomic policy.  New offshore pre-salt finds could 
eventually lead to Brazil becoming a significant oil and gas 
exporter.  The Mission continues to seek opportunities to deepen 
investment and trade ties with Brazil bilaterally in order to 
increase business opportunities, job growth, and economic 
development. We are building partnerships with Brazil to promote 
regional and global economic and social inclusion goals, including 
addressing the global financial crisis, trade liberalization, and 
economic development cooperation.  We continue to work with Brazil 
to build consensus for World Trade Organization trade 
liberalization; to promote enhanced cooperation in fora such as 
Organization for Economic Cooperation and Development, World Health 
Organization and International Civil Aviation Organization; and to 
create the conditions for global development and prosperity.  At 
the same time, we are cooperating with Brazil to address the 
regulatory, legal and infrastructure challenges that constrain 
Brazil's growth and social inclusion goals and hurt U.S. exporters 
and investors. 
 
 
 
3.(SBU)  Economic issues are proving to be the pathway to 
increasingly productive GOB engagement - both because as a large 
emerging economy it is beginning to have a natural seat at the 
table and because GOB most easily sees how global economic issues 
directly impact its own well-being and national security. 
Constructive engagement in the G20 has given Brazil increased 
confidence that it can and should engage in issues outside its own 
borders.   Brazil's interest in taking on the leadership mantle 
economically offers numerous opportunities for engagement, 
encouraging Brazil to take on increasingly responsible roles 
globally.  It is important to frame approaches to GOB as a partner, 
and not a junior partner.  GOB takes particular pride that, having 
been through many developing country experiences (previous 
financial crises, addressing GINI inequalities, infrastructure 
impact on growth, etc), it is uniquely placed to help developing 
countries tackle their own challenges, drawing on Brazilian 
"lessons learned."  GOB has been receptive to partnering with us on 
development cooperation, including a newly developing initiative in 
Mozambique and Haiti on agriculture, health and infrastructure 
development.   Cooperation on political and security issues remains 
more difficult to navigate, where GOB is less persuaded that 
playing an active role on issues beyond its borders has 
implications for its own domestic and global security and tends 
sometimes to stress a "no judgment" approach on many issues that 
reflect in part its own sovereignty sensitivities.  This, too, is 
evolving, though more slowly than on the economic side. 
 
BRASILIA 00001412  002 OF 006 
 
 
3.(SBU)  Brazil is a country where personal relationships matter a 
great deal.   President Lula and POTUS' positive interactions have 
translated into tangible follow-on action, such as Finance Minister 
Mantega's (not previously notable for an eagerness to engage the 
United States) recent travel to the United States to meet Treasury 
Secretary Geithner and urge resumption of a bilateral MOF/Treasury 
dialogue.  MRE contacts have stressed that FM Amorim is personally 
committed to the success of the EPD.  MRE is delighted that U/S 
Hormats will lead the Dialogue on the United States side.  The 
Brazilian chair, Undersecretary for Economic Affairs Pedro 
Mendonca, is an experienced diplomat responsible for the WTO 
negotiations and is Brazil's G20 Sherpa. 
 
 
 
POLITICAL CONTEXT 
 
 
 
4.(SBU)  The Brazilian political elite and media are already 
focused on the October 2010 national elections for president, 
governors of all 26 states and the federal district, two-thirds of 
the senate, and all federal deputies.  Ministers who intend to run 
for any of these offices must, under Brazilian law, resign by April 
2010 (six months before elections), and some will leave in March or 
earlier.  Although many Ministers are expected to leave, FM Amorim 
is expected to remain in place for the duration of the Lula 
Administration.  Lula is constitutionally barred from seeking a 
third term and has supported Civil Household Minister (Prime 
Minister-equivalent) Dilma Rousseff as his party's candidate. 
Rousseff is currently a distant second in the polls to likely 
opposition candidate Sao Paulo Governor Jose Serra, but the race 
remains unpredictable this early in the process. 
 
 
 
5.(SBU)  The United States and Brazil share the basic goals of 
fostering hemispheric stability and integration, promoting 
democracy and human rights, and preventing transnational illicit 
activity.  The attainment of a permanent seat on the UN Security 
Council has been a central goal of Brazil's foreign policy under 
President Lula's government.  Regionally, Lula has maintained 
Brazil's historic focus on stability, seeing good relations with 
all parties as the best way to achieve this goal.  As a result, 
Brazil maintains an active dialogue with Venezuela and Cuba, has 
worked to foster good relations with Bolivia and Ecuador, and has 
stood firmly on the principle of respect for sovereignty in the 
region.  In line with Lula's demonstrated interest in Brazil 
playing a larger role in global issues, as well as expanding 
Brazil's commercial ties, Lula hosted separate visits from Iranian 
President Ahmadinejad, Israeli President Peres, and Palestinian 
President Abbas, among others, in November. 
 
 
 
ECONOMIC CONTEXT 
 
 
 
6.(SBU)  Brazil's annual Gross Domestic Product (GDP) grew 5.1 
percent in 2008, and inflation was 5.8 percent.  The global 
economic crisis eroded previous predictions for annual GDP growth 
for 2009 from four per cent to essentially flat or slightly 
negative.  Despite this decline in immediate prospects, Brazil has 
weathered the crisis better than most major economies and shows 
signs of a recovery, led by strong domestic demand and a growing 
middle class.  Conservative macroeconomic policies in the years 
prior to the crisis, and targeted responses during the crisis -- 
including credit injections in the financial system and tax cuts on 
automobiles and consumer durables -- played a role in lessening the 
impact of the global crisis on Brazil.  Growth in 2010 is expected 
to return to approximately 5%.  That said, Brazil's growth 
potential is constrained by factors including its tax code (2600 
hours/year to pay taxes), its rigid labor law, and its obtuse 
licensing procedures (126 days to start a business).  Brazil ranks 
129 on the World Bank's Ease of Doing Business list. 
 
 
 
7.(SBU) Brazil is a major producer and exporter.  Agriculture makes 
up 36 percent of exports, and the agribusiness sector accounts for 
25 percent of Brazil's GDP.  Brazil is a leading exporter of 
 
BRASILIA 00001412  003 OF 006 
 
 
soybeans, beef, sugar, coffee, and orange juice.  Brazil also 
distinguishes itself as a major exporter of civilian aircraft, 
steel, and petrochemicals.  The United States is Brazil's top 
trading partner overall, although in March China became Brazil's 
primary export destination.  Prior to the current financial crisis, 
U.S.-Brazil trade experienced significant annual growth, surpassing 
USD 60 billion in 2008.  Brazil typically experiences a slight 
positive balance in the trade relationship.  However, in the first 
three quarters of 2009, Brazilian exports to the United States 
totaled USD 11.4 billion, while imports from the United States 
totaled USD 14.8 billion, resulting in a slightly negative trade 
balance. 
 
 
 
8.(SBU)  In recent years, U.S. Foreign Direct Investment (FDI) in 
Brazil has averaged around USD 4 billion per year.  In the second 
quarter of 2009 (the most recent available data), the Bureau of 
Economic Analysis reported U.S. FDI into Brazil of USD 1.2 billion. 
The Economist noted recently that FDI into Brazil from all sources 
increased 30% last year, while overall FDI worldwide contracted 
14%.  At the same time, Brazil has significant offensive investment 
interests.  Illustrating a trend of increasing external investment, 
Brazilian Central Bank figures show that the stock of Brazilian FDI 
in the United States increased from USD 3.9 billion in 2006 to USD 
6.025 billion in 2007 (the last year for which figures are 
available).  Brazil holds investment grade status from the major 
rating entities. 
 
 
 
ANNOTATED EPD AGENDA TOPICS 
 
 
 
9.(SBU) The topics below follow the order of the EPD agenda: 
 
 
 
CIVIL AVIATION:  The EPD will welcome the continued implementation 
of the June 2008 civair agreement. You may wish to note our hope 
that expanded flight possibilities into the north/northeast of 
Brazil will further social inclusion objectives, as potential 
increased American tourism and other business opportunities could 
also benefit development objectives in that region.  We are 
exploring with ANAC whether further liberalization in air cargo is 
possible in the near term and can welcome MRE confirmation that the 
civair authority, ANAC, is prepared to meet again in 2010 to 
discuss Open Skies possibilities. 
 
 
 
COMPETITIVENESS:  The last EPD session agreed the Joint Commission 
on Science and Technology (JCM) would discuss innovation and report 
to the EPD.  The November 19-20 JCM in Washington discussed United 
States' and Brazil's efforts to promote innovation and means of 
governmental cooperation. Members of the U.S. Delegation pointed to 
the importance of certain institutional features, including an 
effective intellectual property rights regime and a tradition of 
venture and "angel" investing to foster innovation and therefore 
competitiveness.  They recognized that not all countries will or 
should follow the same innovation model as the United States, but 
underlined the importance of the government 'not getting in the 
way' of private sector innovation.  Commerce Department 
representatives noted the creation of the Office of Innovation and 
Entrepreneurship and the National Advisory Council on Innovation 
and Entrepreneurship, designed to bring a whole of government 
approach to fostering innovation.  The Brazilian Delegation pointed 
out that Brazil is still a developing nation and therefore has a 
different perspective than developed nations on a variety of topics 
related to innovation.  These include differences in opinion about 
the role of intellectual property rights and a strong view that the 
government must play an active role, e.g., through providing 
incentives, in fostering innovation.  Despite these differences, 
the Brazilian Delegation was very interested in working with the 
USG to find ways to better foster innovation in Brazil. Possible 
next steps include a workshop to identify common areas of interest, 
a workshop or white paper to begin tackling the idea of how to 
benchmark public-private partnerships and public sector innovation 
incentives, and a workshop to identify new models of cooperation; 
to include financial, political and other aspects to support 
innovation and competitiveness. On-going efforts under the DOC-MDIC 
(Trade Ministry) Commercial Dialogue include cooperation on venture 
capital. 
 
BRASILIA 00001412  004 OF 006 
 
 
OECD:  MRE has indicated that the OECD Secretariat has suggested 
increased Brazilian participation in OECD labor and health under 
Brazil's Enhanced Engagement program.  MRE is interested in hearing 
our experiences working in these areas with the OECD, from how 
effective and useful we have found the OECD role in these topics to 
how the USG organizes to cover these committees.  The discussion 
provides an opportunity to continue to encourage GOB movement 
toward eventual OECD membership. 
 
 
 
AGRICULTURE:  MRE understands that USDA has the lead in USG on 
CODEX and on the Consultative Committee on Agriculture (CCA). 
Regardless, the Brazilians wish to emphasize again their concerns 
regarding developing country participation in CODEX and to press 
State to urge a meeting in the near term for the USDA-Ministry of 
Agriculture (MAPA) CCA.  A technical level meeting rather than a 
CCA may be the appropriate next engagement on the issues MAPA 
wishes to discuss. 
 
 
 
REGULATORY DIALOGUE:  MRE has expressed a new interest in 
supporting and fostering further regulator to regulator cooperation 
and exchange. Regulatory reform is critical to improving the 
business climate in Brazil for U.S. exporters and investors.  MRE 
support could be helpful in encouraging Brazilian regulatory 
agencies to engage further, and MRE buy-in ensures regulator to 
regulator initiatives come to fruition.  Current cooperation, at 
differing levels of engagement, includes FCC/ANATEL, FAA/ANAC, 
TSA/ANAC, NIST/INMETRO, FED/CADE, FDA/ANVISA and FERC/ANEEL 
(details e-mailed to WHA and EEB).  Deeper and broader cooperation 
could, for example, help address TBT and SPS barriers, make 
progress toward mutual recognition agreements, and expand bilateral 
cooperation on regulatory issues in third countries. 
 
 
 
TRADE FACILITIATION:  Already an active area of cooperation, GOB 
and Brazilian industry have provided significant feedback that 
intensified cooperation on trade facilitation would be welcome. 
USDOC and CAMEX have sponsored two week-long trips this year for 
GOB agencies to learn how customs clearance and inter-agency 
coordination works in the United States.  Other activities include 
seminars held by CBP in Brazil for Brazilian Customs and the 
Federal Police, and a Commercial Dialogue Trade Facilitation 
meeting held in Manaus in November 2009.  The CEO Forum has also 
prioritized trade facilitation.  There is some sensitivity 
regarding the CBP Trade Facilitation and Supply Chain Security 
Program within MRE.  While CAMEX, MDIC and the trade promotion 
department within MRE support and welcome the program, the MRE 
transnational crimes office is not familiar with the program and 
has been less inclined to support.  MRE will benefit from the EPD 
briefing explaining the advantages to Brazil in participating.  MRE 
also requested to add this topic to the December 9 U.S.-Brazil 
Bilateral Consultative Mechanism with USTR in Brasilia. 
 
 
 
SECTORAL DIALOGUE:  MRE intends to propose a sectoral event on 
aeronautics (including parts and services) and ask for USG support 
for this Brazilian-United States industry event. 
 
 
 
TELECOMMUNICATIONS: We understand that in addition to resource 
concerns involved in negotiating a highly technical Mutual 
Recognition Agreement (MRA), GOB may be reluctant to negotiate on 
product categories where domestic production exists or where 
Brazilian labs currently have certification capacity.  MRE is 
likely to propose an extremely limited MRA model covering only 
products not produced domestically and where no certification 
capability exists domestically.  A MRA would facilitate bilateral 
exports and provide a model for Latin America as a whole.  Brazil 
will raise internet governance to urge further 
internationalization. 
 
 
 
DISTINCTIVE PRODUCTS:  GOB has indicated that it will move its 
rule-making on whiskey/bourbon forward when USG moves the cachaca 
rule-making forward.  MRE put this topic on the first EPD agenda 
and continues to raise the issue. 
 
BRASILIA 00001412  005 OF 006 
 
 
DEVELOPMENT COOPERATION:  The U.S. and Brazil development 
cooperation in 3rd countries has been a positive story.   MRE's 
Brazilian Cooperation Agency (ABC) head Farani has been an active 
partner, traveling to the United States and Mozambique with USG 
officials to foster and develop that cooperation.  USAID and ABC 
have negotiated an MOU which outlines our continued desire for 
development cooperation in 3rd countries.  Brazil would like to 
discuss the timing of when to sign this MOU.  The U.S. and Brazil 
are working on two joint projects in Mozambique: 1) agriculture and 
2) HIV\AIDs.  The U.S. and Brazil led a joint mission to Mozambique 
in June 2009 and in August 2009, a Brazilian delegation from ABC 
and Embrapa traveled to Washington to advance discussions on the 
agriculture project designed to develop an agricultural research 
platform in Mozambique.  In April 2009, at the invitation of USAID, 
a delegation from the Brazilian Ministry of Health (MOH) visited 
Mozambique to become familiar with the USAID/Mozambique HIV/AIDS 
portfolio and to identify ways to strengthen the Mozambican 
response to the HIV/AIDS epidemic through trilateral cooperation. 
A Mozambican delegation visited Brazil from June 29 to July 2, 2009 
to become familiar with the Brazilian response to the HIV/AIDS 
epidemic and to define the principles that will guide further 
trilateral cooperation among the three countries.  Four areas for 
trilateral cooperation have been identified: improving the 
visibility, advocacy, and leadership of persons living with AIDS; 
improving communication strategies; improving Supply Chain 
Management; and institutionalizing monitoring and evaluation 
systems.  Project documents for both the agriculture and HIV/AIDS 
trilateral cooperation are expected to be finalized in time for 
implementation to start January 2010.  In addition, CDC is working 
with the Brazilian Ministry of Health on a program to build 
epidemiological capacity in Mozambique.  ABC and USAID are also 
working with Sao Tome and Principe on a program to support malaria 
control activities, focusing support in three primary areas: 1) 
capacity building, 2) strengthening malaria surveillance and 3) 
strengthening communications and behavior change.  The Oswaldo Cruz 
Institute, Brazil's premier medical research facility and the 
headquarters of their National School of Public Health, is in the 
very initial phases of exploring a partnership with State, NIH, 
CDC, and other USG partners to develop a National Public Health 
Institute in El Salvador.  Trilateral development cooperation is a 
win-win in encouraging broader GOB commitment as a donor, deepening 
our engagement with Brazil bilaterally, and benefiting recipient 
developing countries. 
 
 
 
HAITI:  USAID/Brazil and ABC visited Port-au-Prince November 22-26 
to identify opportunities for trilateral cooperation in Haiti. 
Areas identified for potential cooperation include joint technical 
assistance to train garment sector workers; a jobs program that 
would promote recycling and advance Haiti's alternative energy 
development opportunities; bringing Brazilian artist and musician 
Carlinhos Brown and Haitian musician Wyclef Jean together to 
collaborate with Brazil and the United States on a 
cultural/community center that would serve as a driver for 
community development; an infrastructure project bringing 
USSOUTHCOM/ USACE and MINUSTAH engineers together to improve roads, 
including reconstructing the approach roads to the USAID funded 
Ennery bridge project between Gonaives and Cap Haitien and the 
creation/improvement of a number of rural farm-to-market roads. 
USSOUTHCOM also expressed interest in conducting any environmental 
assessments that may be necessary for the 4C dam project in 
Artibonite and in working with the Brazilians to do joint 
assessments of existing power plants in the country to identify 
ways to increase capacity.  The joint USAID/Brazil-ABC trip to 
Haiti continues the close working relationship that has developed 
between the two organizations and is a first step towards jointly 
undertaking projects with a significant development impact in 
Haiti.  MRE will also raise Brazilian access to the HOPE program. 
MRE must consult with Mercosul partners and pass legislation in 
order to provide reciprocal HOPE access.  MRE has indicated that 
MERCOSUL partners, particularly Paraguay, have raised objections. 
No legislation has been forwarded to the Brazilian congress for 
formal consideration. 
 
 
 
"DECENT LABOR":  MRE has proposed expanding cooperation in Latin 
America on "decent labor," possibly with a focus on child and/or 
forced labor.  While some cooperation in this area already exists, 
MRE is interested in exploring the possibility of further joint 
work in the region.  We are encouraged that Brazil is reaching out 
 
BRASILIA 00001412  006 OF 006 
 
 
to deepen regional cooperation on a specific initiative. 
 
 
 
FURTHER FOOD SECURITY COOPERATION IDEAS:  On November 13, FM Amorim 
responded to Secretary Clinton's letter on this issue.  MRE will be 
receptive to further ideas offered at the EPD. 
 
 
 
INVESTMENT:  The USG and the Brazilian government have had 
productive consultations on Bilateral Investment Treaty (BIT) 
elements on the margins of previous EPDS, although Brazil is still 
cautious about negotiating BITs given historical congressional 
opposition.  The Brazilian Coalition of Industries (CNI) has 
traditionally been non-supportive of BITs, seeing them as a 
constraint on industrial policy, but has recently begun 
re-examining this position as Brazilian companies' overseas FDI 
increases.  A side session on the margins of the December 14 EPD 
will further discuss investment agreement elements, with MRE 
interest particularly in CFIUS and indirect expropriation.  GOB has 
previously indicated a preference to start investment agreement 
negotiations with a smaller country in the region rather than 
tackle the topic with USG, and Mission has heard informally that 
MRE has begun an investment agreement conversation with Chile.  The 
EPD discussion provides an opportunity for forward momentum toward 
an eventual BIT with the United States. 
 
 
 
TAX:  Progress toward a Bilateral Tax Treaty has been slow.  Issues 
including OECD-standard transfer pricing and the information 
exchange requirements under a BTT remain difficult to bridge.  GOB 
also fears revenue losses under a potential BTT.  Meanwhile the 
more limited 2007 United States-Brazil Tax Information Exchange 
Agreement (TIEA) continues to move slowly through the ratification 
process in the Brazilian Congress.  Eventual ratification is 
expected. 
 
 
 
TRADE:  While trade cooperation is not on the EPD agenda, the 
December 9 Bilateral Consultative Mechanism between USTR and MRE 
will explore this topic in depth.  GOB has been keen to conclude 
Doha, and has carefully balanced protectionist instincts on the 
NAMA side with offensive agricultural interests.  The Brazilian 
private sector has generally acknowledged Amorim did a fairly good 
job in balancing these interests and resists giving more on the 
NAMA side (e.g., sectoral agreements).   Amorim is increasingly 
characterizing the fate of Doha as being in U.S. hands.  At the 
same time, GOB is expressing interest in exploring what we can do 
together bilaterally on trade cooperation.  While tariffs must be 
negotiated in 4+1 (Mercosul plus United States) format, other areas 
could be discussed bilaterally, with a possibility to build out to 
4+1 cooperation if mutual interest exists.  The cotton case 
rankles, and Amorim has talked tough in the press, but MRE (and 
MDIC) are well aware the issue is not black and white - GOB wants 
to see USG comply with the ruling, but is aware of the effect on 
the investment climate of further signaling a lack of commitment to 
IPR protection. 
 
 
 
KUBISKE 
KUBISKE