UNCLAS SECTION 01 OF 07 BRASILIA 001185

SIPDIS

SENSITIVE

STATE FOR WHA/BSC AND EAP/CM
USDA FOR U/S JB PENN AND FAS ADMINISTRATOR TERPSTRA
SEOUL FOR AGCOUNS GRANT PETTRIE
COMMERCE FOR
4332/ITA/MAC/WH/OLAC/WBASTIAN/JANDERSEN/DMCDO UGALL

E.O. 12958: N/A
TAGS: BR BTIO EAGR ECON EFIN EINV EMIN ENRG EPET ETRD KIPR PGOV PREL CH UNSC WTRO
SUBJECT: SCENE SETTER: PRESIDENT LULA'S VISIT TO CHINA

REF: A) BRASILIA 1087 B) 2003 BRASILIA 3814 C) 2003
BRASILIA 3416

Sensitive but unclassified; please protect accordingly.


1. (U) Summary: Brazil's President Luis Inacio Lula da
Silva visits China May 22 - 27, accompanied by a huge
entourage of Ministers and business leaders, determined to
put Brazil-China relations at the center of his quest for
strategic alliances. Trade and investment may be the most
visible items on the agenda, but China figures prominently in
the Lula administration's campaign to tighten relations with
other like-minded regional heavyweights (i.e., India, South
Africa), diversifying its foreign policy alliances and
augmenting its own reputation on the world stage.
Cooperative activities in science and technology, defense,
tourism, environment, and agriculture, invigorated by the
higher-profile exchanges within the last year, will likely
benefit from a flurry of MOUs and agreements signed during
the visit. While the U.S. was Brazil's largest
single-country export market in 2003, China came in third,
nearly edging out neighbor Argentina, and has been buying
even more this year. The GoB seeks deeper trade ties with
China, hopes to get its share of China's excess investment
capital and would have more to lose from a cooling of China's
economy than would many other countries. At the same time,

Mercosul and the PRC are discussing the initial phases of a
free-trade agreement. While Sino-Brazilian relations,
political and commercial, are relatively young, there appears
to be no shortage of Brazilian enthusiasm for overcoming the
obstacles of inexperience in forging a stronger partnership.
The question is whether the PRC shares Brazil's vision of an
important strategic relationship, or prefers a marriage of
convenience based on short-term interests. End summary.

The Trip of the Century
--------------


2. (SBU) President Lula, who visited China once before
becoming President, has characterized this trip as perhaps
the most important of his government. The sheer size of the
delegation supports this assessment. Lula will reportedly
bring nine Ministers, at least five governors, and a business
delegation of over 400. The trip includes stops in Shanghai
and Beijing. In recent remarks to the press, Lula said he
wants a "relationship of equals without dependency" with
China and, in reference to the bilateral trade relationship,
that Brazil needs to do more than just sell. While
expectations for greater trade and investment gains are high,
the political optic for Brazil is not to be underestimated.
Lula views his administration's foreign policy, and perhaps
much of his personal legacy, in the context of
coalition-building among developing nations. In particular,
the GoB considers China a partner in counter-balancing the
influence of wealthier nations in multilateral institutions.
In the lead-up to the trip, the administration has
characterized Brazil and China as nations with much in
common.


Common Political Ground?
--------------


3. (SBU) Perhaps no other non-western-hemisphere country
figures more prominently in the GoB strategic calculus than
China. President Lula's visit to Beijing, following
high-profile travel to India, South Africa and the Middle
East last year, provides ample evidence of the
administration's aims to build a formidable bloc of
developing countries. A key GoB focus is consensus building
among like-minded countries for UN reform that would expand
permanent membership of the UN Security Council - presumably
to include regional powers such as Brazil. Brazil's Foreign
Ministry (MRE) perceives China, already a permanent UNSC
member, as sympathetic to this GoB objective. The MRE also
believes the two countries share a "political understanding"
concerning an emphasis on "multilateralism" and the need to
counterbalance U.S. hegemony.


4. (SBU) President Lula's Workers' Party (PT) has also
discovered its own "China card." On April 23 in Beijing, PT
President Jose Genoino signed a protocol of collaboration
between the Chinese Communist Party and the PT. According to
press reports, Genoino affirmed that the GoB sought to
construct a "diplomatic, political, and economic axis" among
India, South Africa, Brazil and China. He praised China's
integrated public administration and said it was important
for the PT to study what has occurred in China over the last
twenty years. Comment: Genoino's visit should not just be
viewed as a precursor to the President's upcoming trip. The
PT is likely also seeking to score points with Brazil's
leftists, including those within the PT itself. End comment.


5. (SBU) During recent UN Commission on Human Rights (UNCHR)
meetings in Geneva, Brazil was careful not to favor
resolutions critical of China's human rights record, a
position criticized by some editorials in the Brazilian
press. Brazilian diplomats claim they are not ignorant of
the human rights situation in China. The Chief of MRE's Asia
and Oceania Division Oswaldo Biato indicated to poloff the
GoB perceived China's human rights situation as "serious but
improving." In any case, Biato noted, President Lula
preferred to deal with this topic directly with his Chinese
counterpart. (In a side comment, he said the MRE would
welcome any specific human rights information the USG could
provide to be placed within the President's brief.) However,
other observers doubted very much whether in the swirl of
excitement in the Great Hall, Lula would bring up the topic
of human rights or whether, if he did, the Chinese would even
deign to discuss the matter.


6. (U) Despite Brazil's multi-ethnic makeup, citizens of
Chinese descent represent a tiny fraction of Brazil's
population, compared, for example, to Brazilians of Japanese
ancestry. Illegal immigration and extradition may yet become
an issue between the two countries. The majority of the
estimated 50,000 Chinese in Brazil, mostly residing in Sao
Paulo, are believed to be in-country illegally.


7. (U) The GoB has also identified China as a major source
of pirated goods entering the country. To address Brazilian
concerns about illegal immigrations and IPR, a legal
cooperation agreement will reportedly be discussed during the
visit. A Brazilian Congressional investigation of IPR
piracy, underway since June 2003, has highlighted the growing
influence of the "Chinese mafia" in Sao Paulo's criminal
network of contraband and pirated goods peddlers.


8. (SBU) Escola Euro-Americana Professor Ricardo Caichiolo,
an expert on Chinese-Brazil relations, bemoaned to poloff the
lack of understanding among Brazilians, even among so-called
experts, of China. Within the Foreign Ministry, Caichiolo
believed that not one official can speak passable Mandarin
(Caichiolo himself does not speak Chinese.) Within Brazilian
academia, he pointed to a paucity of Chinese Studies
programs, although the University of Sao Paulo's and National
University of Brasilia's own programs, he commented, were
notable exceptions. Academic exchanges are very few, due in
part to the strong desire among the youth in both countries
to seek English-speaking programs, according to MRE's Biato.
However, he expects the development of exchange programs to
increase following the visit.
Trade and Investment
--------------


9. (U) Despite poor communication, weak historic links, and
divergent policy orientations, Brazil and China have recently
made significant strides in expanding trade. Commercial
linkages which progressed slowly following the first
bilateral accord in 1978 have boomed over the last three
years. China advanced from 12th place among Brazil's
single-country export markets in 2000 to its third largest in
2003, and its expansion continued in the first months of

2004. (Note: The EU, counted as a single market, is
Brazil's biggest trading partner, accounting for over U.S.
$30 billion in 2003 trade compared to U.S. $26 billion with
the United States.) Brazil's trade with China in the first
trimester of 2004 is already over 25 percent of Brazil's
trade with the U.S. during the same period.


10. (U) Note: While Brazil does not recognize Taiwan as a
sovereign nation, trade is up approximately 20 percent with
the island so far this year; total trade in 2003 was U.S.
$676 million. Brazil's trade data identifies Macao and Hong
Kong as separate markets from China, as each has separate
customs and tariff arrangements, although politically Brazil
recognizes the two territories as falling under Chinese
sovereignty. Trade with Hong Kong totaled U.S. $944 million
in 2003; trade with Macao was U.S. $7 million. Brazilian
exports to Hong Kong are up over 30 percent from last year.
End note.


11. (U) The PRC is now Brazil's biggest trading partner in
Asia, a bilateral relationship worth US $6.7 billion in 2003
and projected by the GoB to rise to US $10 billion this year,
not including Hong Kong and Macao. Brazil enjoyed a US $456
million trade surplus with China for the first trimester of
2004, up from US $330 million during the same period in 2003.
Emphasizing the mutual benefits of the growing trade
relationship, Minister of Development, Industry, and Foreign
Trade, Luis Furlan, confirmed to Chinese and Brazilian
business audiences last month that both imports and exports
have increased approximately 60 percent in the last trimester
over the same period in 2003. China's top exports to Brazil
include transmitter parts, electronics, textiles, liquid
crystal displays, computers, coal, electric motors and stereo
equipment.


12. (U) Soybeans, iron ore and steel products accounted for
approximately 75 percent of the value of 2003 Brazilian
exports to China. China is the largest buyer of Brazilian
soy and iron ore, and the second largest importer of
Brazilian steel. Other top exports include cellulose and
other wood products, laminated iron or steel sheets, leather,
and automobile motors and parts. While seeking to export
higher value-added, manufactured goods to the Chinese, the
GoB recognizes that China's demand for primary products like
soy and steel currently drive the relationship. The desire
for uninterrupted supply of these primary-product exports
will fuel the GoB-estimated US $5 billion of Chinese
investment during the next three years in Brazilian mining,
steel, transport infrastructure, energy and agribusiness.
The Lula administration has launched an ambitious
Public-Private Partnership (PPP) initiative to help improve
the country's woefully inadequate infrastructure using mostly
private capital (ref A). While the implementing PPP
legislation still awaits final Congressional approval, the
GoB would like to see PPPs used as the vehicle for some of
the hoped-for Chinese investment.


13. (U) MRE's Biato told econoff of Chinese interest in
further joint venture projects with Companhia Vale do Rio
Dolce (CVRD), which could duplicate the success of Harbin
Aircraft/Hafei Aviation's joint venture with Embraer to build
regional jets. CVRD plans to inaugurate a steel mill in the
state of Maranhao in the coming months, the result of a
Chinese joint venture with Baosteel Group. CVRD is also
discussing with Chinese investors exploration of a recently
discovered copper mine in the same state. CVRD
representatives announced plans to build the world's largest
solid cargo transport ship at a trade seminar last month, to
deliver iron ore to China. Brazil is a partner in the
construction of the world's largest hydropower project at
Three Gorges, and recent press reports have speculated on
joint ventures in the farming and processing of soybeans as
well as exploration of uranium deposits in Brazil.


14. (U) Citing economic complementarities between the two
countries, MDIC trade promotion officials interpret China's
growing energy needs as offering great potential for
innovative Brazilian technology -- flex-fuel technology,
ethanol production and sales, hydroelectric machinery, as
well as deepwater oil and gas sector know-how and equipment.
Petrobras and the China National Petroleum Corp. have
reportedly held talks on forming an oil exploration venture.
The complementarity projections extend to China's need to
invest its excess capital and Brazil's cash-starved
infrastructure projects as well as the growing Chinese middle
class's expected desire for increasing amounts of Brazilian
meats, frozen chicken, orange juice, furniture, medical
equipment and shoes. The Brazilian Ministry of Agriculture
announced in February that Chinese officials had expressed
interest in building railways, roads and other infrastructure
in exchange for Brazilian soy, cotton and ethanol. While the
mechanics of such a barter arrangement would likely present
problems for Brazil's private growers, the idea of investing
in infrastructure projects linked to transporting commodities
persists. The Chinese Ambassador to Brazil recently told
participants at a Brazil-China investment conference that
China is studying the possibility of investing in road
networks through Brazil to Pacific ports.


15. (U) In advance of the trip, both GoB and Chinese
diplomats here are downplaying the decreased growth
expectations of the Chinese economy, despite the significant
effect that dampened demand for commodities like soy and iron
ore would have on Brazil in particular. Chinese officials
prefer to spotlight the 2008 Olympics and the government's
promise to raise the median income level and double GDP by
2020, longer-term goals that a temporary economic slowdown
will not heavily impact. The Brazilians, in turn, do not
appear concerned that the investment they seek might
diminish, secure in their belief that Chinese financial
authorities acting early will prevent a crisis.


16. (U) Since few academics or public servants, let alone
business people, are knowledgeable about China, the GoB
argues that expanded bilateral trade, tourism, and cultural
promotion efforts are the keys to solidifying and expanding
mutually enriching exchanges. In the run-up to Lula's visit,
several high-level exchanges of trade and investment missions
have laid the ground-work for the official inauguration of
the Brazil-China Business Council (CEBC), an entity
comprising representatives of China's and Brazil's largest
and most successful companies. The CEBC Co-Presidency will
be shared between CVRD's President Roger Agnelli and China's
Minmetal's President Miao Gengshu. President Lula will
inaugurate the CEBC during his visit.


17. (U) In addition to the CEBC being an effective tool of
business promotion, the GoB views it as the embodiment of
both countries' highest-level dedication to exploiting the
other's untapped potential, ending a period of unintended
benign neglect. Along with the CEBC's inauguration, two
match-making business seminars are slated for the
accompanying 400-member business delegation: one in Beijing,
the other in Shanghai. While this business delegation is
organized by the MRE's Trade Promotion Department, Biato
explained that the CEBC will undertake activities across the
two countries that official trade promotion agencies are too
small and inexperienced to handle.


18. (U) APEX, Brazil's export promotion agency linked to the
Ministry of Development, Industry and Foreign Trade, plans a
mid-June trade mission to Shanghai focused on sectors
identified by a private consultant as having the greatest
export potential to China, including specialty coffees,
software, cosmetics, gemstones, sports equipment, wine and
biotechnology products. A Chinese business delegation from
Shanghai Sugar, Cigarettes and Wine plans to visit Brazil
next week for meetings with over 50 Brazilian makers of
retail items of interest to China's wealthy, a reverse trade
mission organized by APEX.


19. (U) In March, Brazilian news outlets reported that
China's WTO Ambassador, Sun Zhenyu, had announced the
country's desire to explore the possibility of a free trade
agreement with Mercosul, as well as with South Africa, Chile,
Australia and New Zealand. He highlighted China's ongoing
trade agreement discussions with ASEAN and several individual
Asia nations. After a visit to Beijing in April, Brazilian
Foreign Minister Amorim announced that Mercosul and China
would initiate the project of a free trade agreement in May.
Mercosul is currently pursuing a wide-ranging FTA with the
EU, but has initiated limited preferential trade agreements
(PTA) with India and South Africa as precursors to broader
future agreements. The agreement with China would also
likely start as a PTA focused on gradual tariff reductions
for negotiated sets of products of interest to each party.
The Lula administration's emphasis on strengthening
Mercosul's global reach complements its designs to lead the
block of developing nations in the multilateral trade arena.
Brazil counts China among the founding members of the G-20
and expects high-level Chinese participation at the June 2004
UNCTAD meeting to be held in Sao Paulo.

Bilateral Cooperation Efforts
--------------


20. (SBU) Science and Technology: Brazil's cooperation with
China in science and technology fields (ref C) has expanded
in recent years, most notably with the China-Brazil Earth
Resources Satellite program (CBERS). In October 2003, the
second of a series of 4 satellites was launched from a base
in northern China. The satellites are equipped with cameras
to monitor environmental and natural resource indicators.
CBERS has paved the way for partnerships in space research.
Further discussions regarding energy cooperation, including
renewable and nuclear, are likely during the visit. (Note:
Brazil's nuclear program has been the focus of recent
attention due to pending issues regarding the Additional
Protocol of the NPT and the yet-to-be agreed safeguards at
one Brazilian nuclear facility. End note.) In April, the two
countries inaugurated a Sino-Brazilian software center in the
northeastern Brazilian state of Paraiba. The TecOut center
will provide specialized services for the creation and
international marketing of software products, including
market studies and product adaptations. The visit will
likely spawn similar joint initiatives.


21. (SBU) Defense: The Brazilians will explore opportunities
to expand mil-mil cooperation. Military contacts indicate
that while the military relationship is growing via
familiarization visits and training exchanges, military sales
between the two countries are unlikely, insisting that
defense is not a driving force in the relationship. Defense
Minister Viegas visited China in November 2003, but he is not
expected to accompany the President on this trip.


22. (U) Tourism: MRE officials portray tourism cooperation
as contributing to expanded trade and investment, citing the
fact that Chinese tourism is on the rise worldwide,
accounting for the third largest number of non-European
tourists to visit Europe last year. According to Brazilian
press reports, the Chinese government will soon announce a
change in its visa policy to encourage more tourism --
Chinese will be able to travel to Brazil without obtaining an
exit visa.

Agricultural Trade and Cooperation
--------------


23. (U) Minister of Agriculture Rodrigues' visit to China
last November and Chinese Vice Agriculture Minister Fan
Xiaojian's visit to Brazil that same month produced import
certifications for Brazilian beef, phytosanitary protocols,
and technical exchanges designed to ease difficulties in
certifying the sanitary suitability of a range of
agricultural products including citrus, chicken, and pork.
Last month President Lula and Chinese Vice Premier Hui Langyu
signed a preliminary agricultural commodities accord aimed at
eliminating tariff and non-tariff barriers. Despite the
professed goodwill, Chinese soy concerns over properly
identified biotech varieties and quality issues like
excessive humidity, aflatoxin, damaged grains, and impurities
continue to occasionally hamper Brazilian soy exports. Only
after considerable negotiation did China accept Brazil's
export certificates regarding biotech content, as the GoB had
not approved the use or safety of biotech soy for its own
consumers but expected the Chinese to accept the GoB safety
certification based on the claim that the Brazilian variety
is the same as those grown in Argentina and the U.S., which
have both been accepted by China.


24. (U) While these obstacles may in part mask broader
Chinese concerns over food security and an over-reliance on
imports, GoB officials expect progress on more binding
farm-commodity agreements during the visit. Representatives
of the Brazilian meat exporters association, ABIEC, will join
the business delegation to China seeking direct sales to
mainland China to augment established relationships with
importers in Hong Kong. ABIEC's current President is former
Agriculture Minister Pratini de Moreas. Cooperation
agreements on biotech and fisheries research are under
discussion, and there is reportedly Chinese interest in
Brazil's booming farmed shrimp industry. (Note: Both Brazil
and China, along with four other shrimp exporting nations,
are currently the targets of an on-going U.S. anti-dumping
investigation.)

Comment: Too Much Hype?
--------------


25. (SBU) The number of Chinese high-level visits to Latin
America, along with growing trade, suggest that China is not
discounting the region as it continues to open its markets
and expand its own influence, even if economic growth cools.
Brazil, with the region's largest economy and biggest
population, figures prominently in that context. There is,
however, a lot of ground to cover before achieving the kind
of strategic partnership that the GoB envisions. Does
China's current administration seek to change the geopolitics
of trade with a formula compatible with the GoB's? In a
relationship among equals, disagreements are aired, but it
seems unlikely that trade irritants, not to mention weightier
topics such as democratization and human rights, will figure
prominently during this visit. Perhaps social issues
affecting both countries, such as HIV/AIDS, social
inequalities, and poor income distribution will figure on the
agenda. Even if the political bond is immature, there are
sufficient financial interests to move the relationship
forward and this visit should showcase them. For the
Brazilians, even a marriage of convenience (as opposed to
commitment) is preferable to a perpetual date.

HRINAK