A/S REICH'S MEETING WITH LULA

C O N F I D E N T I A L SECTION 01 OF 04 BRASILIA 004227

SIPDIS

DEPT FOR WHA/BSC

E.O. 12958: DECL: 11/22/2012
TAGS: PGOV PREL ECON BR
SUBJECT: A/S REICH'S MEETING WITH LULA

Classified By: POLOFF RICHARD REITER FOR REASONS 1.5(b) AND (d).

1.(C) SUMMARY. Assistant Secretary Reich had warm and
productive meetings in Brasilia November 20-21 with
President-elect Lula da Silva, his senior advisors in the PT,
and Brazilian congressional leaders. Both Ambassador Reich
and Lula expressed great interest in working together across
a range of issues, particularly trade. The PT team floated
the idea of concluding a bilateral trade pact with the US,
but will first consult with their Mercosul partners and then
likely raise some proposals during Lula's December 10 visit
to Washington. Lula is eager to meet President Bush, sure
that "two politicians like us will understand each other when
we meet face to face." In keeping with efforts by Lula to
distance himself from Castro and Hugo Chavez, PT leader
Aloizio Mercadante sought to downplay his participation in
the "Sao Paulo Forum" as an attempt to set a democratic
example for other Latin American leftists. Ambassador Reich
also met with Brazilian congressional leaders, who similarly
expressed eagerness to strengthen ties with the US in order
to help address pressing economic and social needs. END
SUMMARY.

RELATIONSHIP OFF ON THE RIGHT FOOT
--------------

2. (C) WHA Assistant Secretary Otto Reich led a delegation to
Brasilia November 20-21 that included WHA/BSC Director James
Carragher, Special Advisor William Perry, and Michael Zarin
of S/P. The group, accompanied by Ambassador Hrinak and
Poloff (notetaker),met November 21 with President-elect Lula
da Silva and his three senior advisors: Jose Dirceu, Workers'
Party (PT) President and Federal Deputy from Sao Paulo;
Aloizio Mercadante, PT Federal Deputy and Senator-elect from
Sao Paulo; and Antonio Palocci, who resigned this week as
mayor of Riberao Preto (SP) to devote full time to leading
Lula's transition team. All three will have high profile
positions in the new government.


3. (C) The messages on both sides were extremely positive.
Before Lula joined the meeting, Jose Dirceu expressed the
interest of the incoming government in strengthening
Brazil/US ties. He said the December 10 visit by Lula to
Washington should focus on items on both countries' agendas,
including FTAA and free trade, protectionism, terrorism, and
the possibility of war in Iraq, which would have economic
consequences for Brazil.

LET'S GET BEYOND THE HEADLINES
--------------

4. (C) Assistant Secretary Reich commented that even after
9/11 the US will continue to pursue a range of interests
(commercial, economic, political, security) in the
hemisphere. President Bush's phone call to Lula after the
Brazilian elections and invitation to the White House are
strong signals of the USG's desire to strengthen ties to
Brazil under Lula. The message, Reich emphasized, is that
the US and the incoming Brazilian government need to get
beyond any preconceptions we may have had about each other
and focus on things that bring us together. The media often
highlight policy differences, he added, but it is President
Bush who sets the USG's direction, and he wants to strengthen
the US/Brazil relationship. Reich also reviewed the US
position on Iraq, noting that there would not have been the
current need to force compliance if Saddam Hussein had
complied with the sixteen UN resolutions since 1991.

BILATERAL TRADE PACT ON THE HORIZON?
--------------

5. (C) Commenting on Mercadante's remark to D/USTR Peter
Allgeier the day before that the US seems unwilling to
negotiate a bilateral trade agreement with Brazil, Reich said
the US was flexible on the best approach to free trade but
that his impression was that Brazil was not interested in
such a bilateral pact. Mercadante noted that Mercosul
partners Argentina and Uruguay are currently in crisis, which
has scared foreign investors throughout South America. Thus
Brazil's two highest priorities with the US are: obtaining US
support in gaining increased access to commercial credit (and
demonstrating that Brazil is a better risk than Argentina);
and secondly, to increase foreign trade, and particularly to
double trade with the US in the next four years. How,
Mercadante asked, can the US/Brazilian trade total only $30
billion per year?


6. (C) Mercadante urged that the US and Brazil sit down to
discuss a range of bilateral trade issues, for example, IPR
and music piracy, ethanol sales, and aircraft exports. He
added that FTAA ("ALCA" in Portuguese) will be a much more
difficult project, but that the bilateral talks could start
immediately. Reflecting the PT's dedication to regional
partners, Mercadante urged that the US seek a trade pact with
Mercosul. Ambassador Reich said he was pleased to hear of
Mercadante's interest in such talks, noting that the US is
open to bilateral pacts (e.g., Chile) as well as pacts with
sub-regional groups (e.g. the Central American states).


7. (C) Ambassador Hrinak asked Mercadante if Lula would be
extending an invitation to bilateral talks during the
Washington visit. Jose Dirceu answered before Mercadante
could, saying that the bilateral talks were important but
would have to be approached in the context of Brazil's
regional commitments. Dirceu admitted that the incoming
government would like to conclude a bilateral pact quickly,
but as Brazil is the only stable economic force in South
America, they would have to proceed cautiously and in concert
with regional partners. Mercadante said that Lula will
travel to Argentina on December 3, and then there will be a
December 5-6 meeting of Mercosul presidents in Brasilia.
Lula would use these opportunities to sound out the Mercosul
partners on future negotiating mechanisms --for example a
Mercosul 4 1 with the US. After these talks, Mercadante
said, it is possible Lula would arrive in Washington with
"some initiatives". Dirceu summed up by noting that while
Brazil must consult its regional partners, it "does not want
to be held hostage by them."

LULA WANTS STRONG TIES AND TOUGH NEGOTIATING
--------------

8. (C) President-elect Lula then joined the meeting and
enthusiastically stated his interest in strong bilateral
relations across the range of issues. That, he said, is what
is motivating him to travel to Washington on December 10.
Appearing upbeat, smartly-dressed and rested, Lula expressed
hope that after his visit, US officials will no longer
misunderstand the PT. Looking forward to meeting President
Bush, he said "I think two politicians like us will
understand each other when we meet face to face." Brazil's
image has suffered in recent years, he said, and the PT wants
to consolidate its democracy and rescue it from the
perception that Brazilian officials are a "bunch of
irresponsible thieves" and "Brazil is another Colombia."


9. (C) The PT has the sense that Brazil can play an important
role but can only reach its potential in cooperation with the
US. In a left jab at the Brazilian Foreign Ministry, Lula
echoed remarks that he has made in public: "I want to do for
Brazilians what you US diplomats do for your citizens --fight
for their interests. But I think Brazilian diplomacy has not
been tough enough, not like yours. We have sometimes made
bad deals." Dirceu added that the Brazilian government is
committed to abiding by all agreements that it inherits, "We
do not need any more headaches" that we would get by breaking
deals, he said. The PT team has emphasized its interest in
negotiating FTAA with the US, but doing so by vigorously
defending Brazil's interests. After the meeting, Mercadante
told the press. "The Americans always played tough, and now
they have a Brazilian administration that is going to play as
tough as they do."

"WE ARE NOT AFRAID OF THE PT"
--------------

10. (C) Ambassador Reich congratulated Lula on his election
victory, adding that his own visit was designed to follow up
on President Bush's post-election phone call and lay the
groundwork for the December 10 visit. Ambassador Reich
expressed support for Lula's social agenda ("Your commitment
to three meals a day for every Brazilian is something that
all Americans will want to support."),adding that
democratization, human rights, economic progress, and
transparency are key issues for the US public and policy
makers. Reich concluded, "We are not afraid of the PT and
its social agenda".

PALOCCI'S ECONOMIC MESSAGE: CREDIT, CREDIT, CREDIT
-------------- --------------

11. (C) After Lula was called away, Transition Director
Antonio Palocci picked up on the economic themes. He stated
unequivocally that the PT government will focus on combating
inflation and working smoothly with the IFIs. Modifying
Mercadante's two priorities a bit, Palocci said Lula would
take two messages to Washington. First, that Brazil really
has three short-term priorities: credit, credit, and credit;
and second, that Brazil will seek clear understandings and
strong relations with the US in order to develop and grow.


12. (C) Ambassador Reich observed that the USG does not
direct banks to extend credit, but that the Brazilians
themselves were doing the right things to gain access to
loans. Reich noted that "since the elections you have been
sending the right messages", adding that Brazilian/US
cooperation will reinforce these messages by conveying to the
financial markets US confidence in Brazil's economy.

"THE PT IS A MODEL FOR LATIN AMERICAN LEFTISTS"
-------------- --


13. (C) Ambassador Reich asked Mercadante about the "Sao
Paulo Forum", which Mercadante has addressed and which has
included FARC and CUBAn participants, among others.
Mercadante downplayed the PT's work in the Forum, explaining
that his primary interest is in developing the left in Latin
America, and that many of the participants in the Forum are
unreconstructed "outdated" leftists who can learn a lot from
the PT's democratic model and emphasis on economic
development. He added that the Forum had issued a
declaration after 9/11 condemning the terrorist attacks and
defending the right of the US to respond in self-defense.
"We are democratic," Mercadante assured us, "Washington needs
to hear our ideas and our arguments."


14. (C) On Colombia, Dirceu said that the FARC needs to
understand that if they cross into Brazilian territory,
Lula's government will use the military and "treat them as
enemies." He added that groups such as the FARC that operate
outside of democratic processes "do not interest us". After
Ambassador Reich outlined the range of human rights concerns
in CUBA, Dirceu responded that "the strongest force in the
world for changing CUBA is US trade", but he concluded that
"we will simply have to agree to disagree" on CUBA policy.

WASHINGTON AGENDA
--------------

15. (C) Mercadante said that he will accompany Lula to
Washington. The rest of the travel team has not been
decided, and the agenda will be finalized only after
consultations with the Brazilian embassy in Washington,
though Ambassador Barbosa has been consulting in Brasilia
this week.

INAUGURATION LIKELY JANUARY 1
--------------

16. (C) In response to a question from Ambassador Reich,
Dirceu stated that the inauguration will be on January 1.
(N.b., Dirceu himself was a big proponent of moving the date
to January 6 and had been urging his congressional colleagues
to take quick action on the required constitutional
amendment, so his statement on the January 1 date may well be
the last word.) Minister Pedro Parente, head of the outgoing
administration's transition team, also told us November 21
that the inauguration would be January 1.

CONGRESSIONAL MEETINGS
--------------

17. (C) Earlier, Ambassador Reich's group met with outgoing
Chamber Speaker and PSDB leader Aecio Neves and separately
with PT Senate leader Eduardo Suplicy from Sao Paulo and PT
Deputy Waldir Pires from Bahia. Neves, who will take over as
Governor of Minas Gerais in January, focused his remarks on
Brazil's economic plight. He noted that he had supported the
economic plan of President Cardoso, which had prevented
Brazil from suffering the same fate as Argentina. He also
stressed that the PSDB and other opposition parties expect to
support many of Lula's initiatives. Suplicy stressed the
importance of President Bush's understanding the Brazilian
democratic process and the fact that Lula's 61% electoral
support demonstrated that he has overwhelming legitimacy to
address social and economic issues. Both Suplicy and Pires
spoke at length on the importance of addressing Brazil's deep
social inequities. Suplicy added that Lula may be a useful
bridge in improving US relations with CUBA, to which
Ambassador Reich replied that relations will improve as soon
as Castro holds free elections.

COMMENT
--------------

18. (C) Lula and the senior PT officials are clearly eager
to get down to work with us, and this visit went a long way
toward reassuring them that the feeling is mutual. Though
they have not yet thought through their floater for bilateral
trade talks, we can expect some sort of proposal in
Washington, after they have consulted more deeply with their
Mercosul partners as well as internally.


19. (C) The PT leaders have contrasting and complementary
personalities. Mercadante's former radicalism lies not far
from the surface. He speaks to convince rather than explain,
often pointing a finger at his listeners. Yet he is
courteous and clearly focused on specific bilateral projects.
Dirceu is much smoother. He never corrected Mercadante but
sometimes stepped in to qualify his remarks. Dirceu seems to
be the first among equals and is rumored to become Lula's
Chief-of-Staff if he does not stay in Congress to become the
Speaker of the Chamber. Palocci, whose star has risen
rapidly in recent months, is perhaps the most pragmatic of
the group. He speaks slowly and calmly --often about
economic issues-- clearly aware of the effect of his words.
His is a voice seemingly designed to reassure the markets.
In a November 21 meeting with U/S Larson (septel),Cardoso
administration minister Parente expressed great admiration
for Palocci and hoped that we would become Minister of
Finance. END COMMENT.


20. (U) AMBASSADOR REICH CLEARED THIS CABLE.