CHINA'S ONE NOTE SAMBA WITH BRAZIL

C O N F I D E N T I A L SECTION 01 OF 05 BRASILIA 002885

SIPDIS

WHA/BSC, WHA/EPSC, EB FOR EB/TRA
USDA FOR JB PENN, U/S FAS
USDOC FOR 4332/ITA/MAC/WH/OLAC/
JANDERSEN/ADRISCOLL/MWARD
USDOC FOR 3134/ITA/ESCS/OIO/
WH/RD/DDEVITO/DANDERSON/EOLSON
NSC FOR DEMPSEY
STATE PLEASE PASS TO USTR FOR SCRONIN

E.O. 12958: DECL: 11/22/2014
TAGS: ETRD PREL ECON PHUM BEXP TSPL EAGR
SUBJECT: CHINA'S ONE NOTE SAMBA WITH BRAZIL

REF: (A) BRASILIA 1185 (B) BRASILIA 9600 (C) BEIJING
18406

Classified By: Economic Officer Janice Fair,
Reasons 1.4 (b) and (d)


1. (SBU) Summary and Introduction: On November 11
Brazil rolled out the red carpet for Chinese President Hu
Jintao, in country for a five-day state visit. Commercial
issues dominated the bilateral discussions. In its demand
that Brazil recognize its "market economy" status in
exchange for trade and investment concessions, China
played hardball -- and won. Many in Brazil's private sector
fear -- with reason -- that Brazil was out-negotiated and
Brazilian manufacturers will ultimately pay the price.
Although eleven official agreements and six commercial
agreements were signed, many in Brazil are skeptical about
the promised commercial pay-off. The Chinese avoided
making explicit political concessions to Brazil over its bid
for a permanent seat on the U.N. Security Council and
Brazil's candidate for the WTO Director General job,
Ambassador Seixas Correa, although in closed talks the
PRC gave the GOB implicit support on the former issue.
Brazil indicated it remained behind the "one China" policy
but refused to press Paraguay, a fellow member of
Mercosul, to drop its recognition of Taiwan. Human rights
were not addressed and for all intents and purposes, the
Sino-Brazilian Human Rights Commission is dead. End
Summary.

A One-Note Samba
--------------


2. (C) Over 200 government officials and business people
accompanied President Hu Jintao to Brazil November 11-
15 in a follow-up to President Lula's own five-day state
visit to Beijing less than six months earlier (refs a and b).
While the development of a bilateral strategic partnership
served as the principal theme for Lula's trip to Beijing,
Hu's
visit took a narrower, largely trade and commercial focus.
According to Brazilian Minister of Development, Industry,
and Trade Luiz Furlan, the Chinese came to Brazil "with a
one-note samba." The simple song paid off. After
negotiations lasting 20 hours, described by an experienced
Ministry of External Relations (MRE) observer to poloffs
as the most difficult he had ever witnessed, President Lula
agreed to the Chinese President's sole demand -- Brazilian
recognition of China as a market economy. (Note: During
its WTO accession in 2001, China agreed to designation as
a non-market economy. Since then, China has aggressively
pursued a campaign to convince WTO members to
designate it as a "market economy," a concession that
would constrain implementation of safeguard actions and
anti-dumping cases against its products. End note)


3. (C) According to MRE's Head of Asia and Oceania
Division and former DCM in Beijing, Edsen Montero, prior
to Hu's arrival, the GOB was determined stay with a policy
of not granting market economy status. As a fallback
position, it was decided internally the GOB would follow
the EU position: not designate China a "market economy"
but allow the issue to advance by treating it at a technical
level. However, when face-to-face, the Chinese insisted
that market economy recognition preceded any commercial
concessions. After exhaustive talks, political
considerations eventually trumped commercial ones when
President Lula -- going against the advice from his
technical staff in the Ministry of Development, Industry
and Trade and MRE, both of which argued that Brazilian
industry would be prejudiced -- decided to make a
sweeping gesture to Brazil's "strategic partner." The
Brazilians were not unaware of the risks, Montero affirmed,
and made clear to the Chinese that this was not a license to
dump products on the Brazilian market. On the trade side
of the house, Brazilian officials were chagrined by Lula's
decision, with Montero noting that Chinese shirts were for
sale for as little as two reais ($0.70) in local markets.

Commercial Trade-Offs
--------------


4. (U) For its trouble, Brazil was rewarded with the
promise of a "privileged status" and of greater market
access for Brazilian products. Even though as an export
destination China is still a distant second to the United
States, which absorbed $16.3 billion in Brazilian exports
through October 2004, growth in trade with China figures
prominently in Brazil's plan's for export expansion and
diversification. Bilateral trade is up over 330% in just
five
years and climbing steeply; China is now Brazil's largest
market for soybeans and other primary products. In 2003
Brazilian exports to China more than doubled reaching $4.5
billion with two-way trade valued at around $6.7 billion;
already through October 2004, two-way trade for the year
has reached $7.7 billion.


5. (C) However, a more dramatic trade opening between
the two countries appears unlikely in the near-term.
Ronaldo Costa Filho, Head of Itamaraty's European Union
and Extra-Regional Negotiations Division told econoff that
despite talk of a possible FTA during Lula's trip to China in
May, it was not on the agenda for President Hu's visit.
Neither side was pushing to resume discussions on terms of
reference for an FTA feasibility study that had lapsed since
July; Costa explained that Brazilian private sector's
extremely, negative reaction to a potential opening to the
Asian giant had caused the GoB to back-off. During Hu's
visit, the GoB wanted to pursue more specific trade
interests and had hoped to advance prospects for higher-
value added products. However, only agreements covering
Brazilian exports of fresh beef and chicken were signed;
these sanitary agreements will purportedly result in exports
worth $150 million next year and potentially
$800 million over the next three years.


6. (U) A more compelling commercial enticement for
Brazil was likely China's promise to consider investing as
much as $10 billion in Brazilian infrastructure projects over
the next couple years. The GoB has yet to get its public-
Private Partnership (PPP) legislation through Congress and
is desperate for infrastructure investment to ease
bottlenecks that threaten to constrain exports. The lack of
a
set PPP framework has held up Chinese commitment on
around $2 billion in projects to revamp a North-South rail-
line and expand the port of Itaqui in Maranhao, projects
geared toward facilitating exports to China of Brazilian
soybeans, iron ore and wood. The Hu visit did produce an
agreement for construction of a $1.3 billion gas pipeline
running from Rio Janeiro state to Bahia.

Chinese Mum on Support for Brazilian Seat on UNSC
-------------- --------------


7. (C) Montero noted that while the Chinese government
privately backed Brazil's bid for a permanent seat on the
UNSC, the PRC continued its refusal to offer a public
statement of support. Instead, he said, China kept to its
clever "incomplete syllogism," used first during Lula's
Beijing visit in May -- "the UNSC should be expanded, the
developing world needs representation on the UNSC, and
Brazil is a developing nation." A senior Japanese diplomat
in Brasilia had opined to poloffs that political
tensions between Japan and China (and to a lesser
extent, tensions with India) complicated any Chinese
endorsement of a seat for Brazil. Montero fully agreed with
this assessment. China's endorsement of any one of the
self-proclaimed candidates for a permanent UNSC seat, he
believed, would run the risk of alienating non-endorsed
candidates.
Comment: One wonders whether the GOB leadership
adequately analyzed this paradigm from the PRC
perspective before conceding on the market economy
question. End comment

Backlash
--------------


8. (SBU) With the concession on market economy status,
Brazil became the first Latin American country to accede to
China's demand, as well as the largest anywhere to date.
Montero agreed that Brazil's action could have
repercussions within Mercosul and elsewhere
on the continent. Given Brazil's economic size
and regional dominance, the designation is perceived
here as a major victory for PRC trade policy and a big
gamble by the GOB. Despite his earlier remarks that
China was clearly not a market economy, Minister Furlan
publicly downplayed the impact of the decision on
Brazilian industry and claimed Brazil, in return,
had won significant concessions. But privately, the
Minister could not have been happy. Meanwhile,
negative reaction from Brazil's industrial sector
to the market economy decision was swift. Sao Paulo's
powerful Federation of Industries (FIESP) issued an
official note opposing the GOB concession to China,
arguing that it leaves Brazilian industry highly
vulnerable. Sao Paulo will provide more details on
private sector reaction septel.


9. (U) Conceding market economy status to China will now
require application of stricter rules in antidumping and
safeguard cases. For instance, under rules for antidumping
investigations, Chinese export prices will be compared with
its domestic prices, which, FIESP pointed out, do not result
from market forces. Brazil currently has 13 anti-dumping
orders in place against Chinese products, with one more
pending -- far more than with any other country. The cases
cover a variety of products such as small appliances and
equipment, chemicals, bike tires, etc. Brazil also has a
safeguard action against toys from China. Formally, the
market economy concession will be reviewed by CAMEX,
the Brazilian Foreign Trade Board, a process that could
take several weeks. Montero agreed it is unlikely that
CAMEX will reject or overrule the President.

Signed Agreements
--------------


10. (U) Officials agreements:
1) MOU on trade and investment in which Brazil grants
"market economy" status to China;
2) Quarantine protocol and sanitary conditions
for export of beef from Brazil to China;
3) Quarantine protocol and sanitary conditions
for export of chicken from Brazil to China;
4) Quarantine protocol and sanitary conditions
for export of thermally treated pork from China to Brazil;
5) Quarantine protocol and sanitary conditions
for export of thermally treated poultry from China
to Brazil;
6) Extradition treaty;
7) Cooperation agreement on fighting organized crime;
8) MOU for cooperation in the industrial area, including on
ethanol;
9) Complementary agreement for the construction of the
China-Brazil Earth Resources Satellite (CBERS 2B);
10) Cooperation protocol for marketing images produced
by the CBERS 2B satellite; and
11) MOU to facilitate tourism from China to Brazil.

Additional commercial agreements:

1) Cooperation agreement between China's Eximbank and
China Petrochemical Corporation (SINOPEC),and BNDES
and Petrobras in the $1.3 billion Gasene project to
run a gas pipeline from Rio de Janeiro to Bahia;
2) Agreement between Vale do Rio Doce and Yongcheng
Coal and Electricity and Shanghai Baosteel;
3) Joint venture to produce alumina between Vale do Rio
Doce and Aluminum Corporation of China;
4) Joint venture between ZhuZhou Rolling Stock Works
and Mitsui and the Metal-Mechanic Consortium of Espirito
Santo to produce rail cars;
5) A basic accord between Eletrobras, Companhia de
Geracao Termica de Energia Electrica, Citic Group, and
China Development Bank; and
6) Purchase of Chinese equipment by Cosipar, financed by
the Import Bank of China.

Brazil Stands By "One China" Policy
--------------


11. (C) On the perennial topic of Taiwan, the GOB
continued to support a one China policy and reaffirmed this
position with the Chinese. during the talks, Montero
pointed out, the PRC kept subtle pressure on the GOB to
persuade fellow Mercosul partner Paraguay to drop its
recognition of Taiwan. The Chinese effort was a non-
starter, Montero said. Brazil was not prepared
to lobby another country on China's behalf.

Human Rights, Dead in the Water
--------------


12. (C) On the subject of China's human rights record and
the moribund Sino-Brazilian Human Rights Commission,
Montero conceded that the commission was all but dead
and Brazil's ability to influence China non-existent. The
topic did not receive attention during President Hu's visit.
The GOB did offer China expert assistance in penal and
judicial reform and other areas that could help improve
human rights practices, but the PRC rebuffed all efforts and
even ignored proposed exchange visits. In the interest of
the "strategic partnership" and, of course, Brazil's UNSC
bid, Montero could not conceive of Brazil voting in favor
of a China human rights resolution. Instead, Brazil will
continue its policy of abstention on any UN effort to
criticize China's approach to human rights. Montero agreed
it was ironic that it took a mistaken GOB human rights vote
against China in 1997 to launch the bilateral commission in
the first place, and he wryly smiled when asked whether a
change in Brazil's future votes could actually
improve GOB leverage over China.

Comment
--------------


13. (C) What swayed the GOB to concede market
economy status? And did Brazil get enough concessions to
justify it? On the positive side of the commercial ledger,
proposed Chinese investment is concentrated in
transportation infrastructure projects and easing
transportation bottlenecks is crucial for Brazil to continue
its export drive. The GoB expects China to keep its
promises, since to further its global lobbying effort on
market economy status it will not want to be seen as
stabbing Brazil in the back. Nonetheless, local analysts are
skeptical that the promised mega-investments will
materialize and are wary of Chinese claims of market
opening. The Brazilian agricultural community is still
smarting over China's refusal to accept shipments of
Brazilian soybeans due to alleged fungicide contamination
just before President Lula's visit to that country in May.
Brazil reportedly lost $1 billion in trade due to that
episode.
Agriculture Minister Roberto Rodrigues described the new
agreements on beef and chicken as advances, but as with
soybeans, trade in these commodities will be subject to the
vagaries of China's sanitary and phytosanitary regime.

14. (C) But there was obviously more at stake in the final
political analysis. China is a critical partner in President
Lula's drive to "change the geography of trade" and to
realign agendas within a range of international institutions
to reflect developing countries' interests. The President
felt
that giving in to China on the market economy issue could
cement the political relationship, seen as vital for
obtaining
these and other strategic objectives, such as a permanent
seat for Brazil on the UNSC. Yet, if the GOB decision to
give in to China on market economy status was seen as a
quid pro quo for public Chinese support for
a permanent Brazilian seat on the UNSC, the
strategy did not pan out.

CHICOLA