UNCLAS SECTION 01 OF 04 BRASILIA 002066

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: AORC KNNP PARM PREL BR CWC US
SUBJECT: SCENESETTER CABLE FOR VISIT OF A/S DESUTTER

REF: STATE 141086


1. (U) The United States Mission in Brazil warmly welcomes
your visit to Brasilia, August 14-16. We are currently
working with your staff on the logistical arrangements for
your travel. In Brasilia, we have confirmed meetings for you
with Foreign Ministry Officials for compliance diplomacy
discussions, led by Ambassador Antonio Guerreiro, Assistant
Secretary of International Organization Affairs. In

SIPDIS
addition, there will be a working lunch with GOB officials.
We are planning a media event on compliance diplomacy and a
possible meeting with Brazilian legislators.


2. (SBU) Your staff has briefed you on key
verification/compliance, NP and AC positions of the GOB.
Below is some additional background on other aspects of the
political and economic situation in Brazil.

FOREIGN POLICY
--------------


4. (SBU) President Lula has run an activist foreign policy
with a focus on South America, forging alliances with other
mid-sized powers (South Africa, India) as well as other
third world countries. He has moved to revitalize Mercosul
as a trading bloc and has sought a regional approach to the
FTAA talks. Indeed, given its size and natural resources,
Brazil has long seen itself as the natural leader of the
region (even if that perception is not shared by many of its
neighbors). In February 2005, Lula signed a "strategic
alliance" with Venezuela's Hugo Chavez to promote joint
energy and infrastructure projects, as well as possible
purchases by Venezuela of Brazilian defense articles.


5. (SBU) Emblematic of Brazil's rising self-confidence on
the world stage is its tenacious pursuit of a permanent UN
Security council (UNSC) seat. Brazil and other G4 states
(India, Germany, Japan) are pressing now for votes on a
resolution on UNSC reform. This stance is at odds with the
USG position, which wishes to defer UNSC reform until after
other changes in the UN systems, and which currently
endorses Japan's UNSC bid. Brazil leads the UN peacekeeping
force in Haiti with 1,200 troops on the ground there, and is
also spearheading a "G-20" group of developing nations.
Br

azil has a long tradition of commitment to the UN and other
multilateral institutions. Many Brazilians are therefore
deeply concerned by the war in Iraq, viewing it as a sign of
U.S. unilateralism. President Lula voiced public opposition
to the war, although this opposition never jeopardized
bilateral relations and both sides continue to work on the
broader bilateral agenda. Finally, Brazil is a player in
high-profile global issues such as health (AIDS,
pharmaceuticals) and the environment. However, its stances
on these issues (such as the possible compulsory licensing
of anti-AIDS drugs) has at times not been welcome to USG
policymakers.


6. (SBU) Brazil's self-confidence has changed the tone of
its relationship with the U.S., sometimes in ways to our
liking, sometimes not. It helped keep issues like our
requirements that Brazilian airlines furnish passenger data
or our insistence on stronger IPR enforcement from blowing
up into political food fights. The GOB worked quietly with
us on the timing and details of its shoot-down program to
accommodate our statutory requirements. Nevertheless,
hyper-sensitivity on issues viewed as infringing on Brazil's
sovereignty can get out of hand and may be seen as signs of
political immaturity. Many Brazilians believe the U.S. has
designs on the Amazon. Our fingerprinting of visitors to the
U.S. drew reciprocal treatment for Americans here; visa and
immigration issues remain sensitive points.

PRESIDENT LULA
--------------


7. (U) President Luiz Inacio Lula da Silva was inaugurated
in January 2003 after a career as a Sao Paulo metalworker
and labor leader. He founded the left-of-center Workers'
Party (PT) in 1980 and lost three presidential campaigns
before winning in the October 2002 elections. Lula can run
again in October 2006, and recent polls give him a sizeable
lead over potential challengers. He has traveled
extensively in pursuit of a higher international profile for
Brazil. He has met President Bush several times and the two
have a good rapport. Despite the common perception that
Lula's social agenda, including his trademark "Zero Hunger"
program, has not delivered much, Lula's popularity remains
high and remarkably detached from that of his government. He
is seen as honest, optimistic and inclusive, particularly
towards the lower classes and marginalized sectors. Lula
often seeks a range of opinions on policy, making a point of
consulting labor, civil society, business leaders, and state
governors. Since the mid-1990s, the PT party has steadily
moderated its leftist positions and moved towards the center,
forming alliances with parties from the left to the right.
This has caused some grumbling from the PT's left wing but
made the party far more electable.


8. (SBU) During recent months the Lula Administration has
been beset by a political crisis as interlocking influencing
peddling/vote-buying scandals continue to unfold. The
President's Chief of Staff has resigned his post, Lula has
embarked upon a series of cabinet shuffles, and a number of
high-level officials in Lula's party and his party's
coalition have departed. Central Bank President Meirelles
may depart the government soon (due to unrelated allegations
against him) though Finance Minister Palocci appears
well-entrenched. Still, a July 2005 poll shows that Lula's
approval rating stands at 60%, and, so far, the scandals have
not punished Brazil in the international markets. Lula's
popularity reached a nadir of 54% in June 2004, when the
public seemed to lose confidence in his fiscal austerity
program and in the face of weak 2003 GDP growth and
stubbornly high unemployment. Overall, confidence in the
administration has rebounded as the economy improved,
although the recent corruption scandals still may take a
toll. The public's top concern -- crime and public security
-- has not notably improved under this administration. The
opposition will use these shortcomings and scandals to try to
deny Lula any legislative victories in hopes of eroding
Lula's popularity prior to the October 2006 elections.

ECONOMIC DEVELOPMENTS
--------------


9. (U) Brazil's economy, aided by a benign international
environment, should have another solid year in 2005. GDP
growth of 5% in 2004 has coupled with booming exports,
healthy external accounts, inflation under control,
decreasing unemployment and reductions in the debt-to-GDP
ratio. President Lula and his economic team have
implemented prudent fiscal and monetary policies and pursued
necessary microeconomic reforms. In March 2005, the
Brazilian government declined to renew its Stand-by
Agreement with the IMF and in mid-July it announced that it
would pay early US$5.12 billion in Standard Reserve Facility
payments due by March 2006.


10. (U) Brazil has made progress but significant
vulnerabilities remain. Despite registering its first
year-on-year decline in 2004, Brazil's (largely domestic)
government debt remains high, at 52% of GDP. Total foreign
debt, while falling, is still large in relation to Brazil's
modest export base. Over time this concern will be reduced
by healthy export growth, which has anchored the positive
trade and current accounts. Personal incomes improved in
2004 after a significant decline over the previous decade.
Income and land distribution remains skewed.


11. (U) Sustaining high growth rates in the longer term
depends on the impact of President Lula's structural reform
program and efforts to build a more welcoming climate for
investment, both domestic and foreign. In its first year,
the Lula administration passed key tax and pension reforms
to improve the government fiscal accounts. Judicial reform
and an overhaul of the bankruptcy law, which should improve
the functioning of credit markets, were passed in late 2004,
along with tax measures to create incentives for long-term
savings and investments.


12. (U) Public-Private-Partnerships, a key effort to
attract private investment to infrastructure, also passed in

2004. Labor reform and autonomy for the Central Bank are on
the agenda for 2005. Despite this well-considered reform
agenda, much remains to be done to improve the regulatory
climate for investments, particularly in the energy sector;
to simplify tortuous tax systems at the state and federal
levels; and to further reform the pension system. Prospects
for much of this reform agenda are dim for the remainder of
Lula's term.

TRADE POLICY
--------------


13. (U) President Lula has made economic growth and poverty
alleviation top priorities. Export growth figures
prominently in plans to generate growth and reduce what is
seen as a vulnerability to international financial market
gyrations. To increase exports, the government is seeking
access to foreign markets through trade negotiations and
increased export promotion as well as government financing
for exports.


14. (U) To increase its international profile (both
economically and politically), the Lula administration is
seeking expanded trade ties with developing countries, as
well as a strengthening the Mercosul customs union with
Uruguay, Paraguay and Argentina. In 2004, Mercosul
concluded free trade agreements with Colombia, Ecuador,
Venezuela and Peru, adding to its existing agreements with
Chile and Bolivia to establish a commercial base for the
newly-launched South American Community of Nations. This
year Mercosul is pursuing free trade negotiations with
Mexico and Canada and hopes to be able to resume trade
negotiations with the EU. The trade bloc also plans to
launch trilateral free trade negotiations with India and
South Africa, building on partial trade liberalization
agreements concluded with these countries in 2004. China
has increased its importance as an export market for
Brazilian soy, iron ore and steel, becoming Brazil's fourth
largest trading partner and a potential source of
investment.
DOHA AGENDA - WTO
--------------


15. (SBU) Brazil leads the G-20 group of developing
countries that is pressing for agricultural trade reform in
the WTO Doha Development Agenda negotiations. Brazil's
assertive leadership of the G-20 was blamed in some quarters
for causing the failure of the WTO Cancun Ministerial in
September 2003. Since then, Brazil has been more
constructively engaged in the Doha Round as a member of the
"Five Interested Parties" informal group, although many of
its positions are still at odds with U.S. interests. In May
2005, Brazil's current representative to the WTO, Ambassador
Luiz Seixas Correa, was defeated by former EU Trade
Commissioner Pascal Lamy for the position of WTO Director
General; Seixas Correa will be replaced by Ambassador
Clodoaldo Hugueney in September. Brazil is expected to
maintain its assertive stance in the Doha Round on
agricultural trade reform while taking more defensive
postures in the discussions covering industrial products and
services.

FREE TRADE OF THE AMERICAS - FTAA
--------------


16. (SBU) The U.S. and Brazil have been co-chairs of the
FTAA ("ALCA" in Portuguese) talks since 2002. It has been a
difficult period, rife with uncertainty over Brazil's
commitment to the talks. While the Lula administration shed
the extreme anti-FTAA rhetoric of the 2002 presidential
campaign, it has not embraced the FTAA as a priority. Strong
Brazilian commercial interests have yet to overcome these
ideological hurdles to what is viewed as a "U.S.-led
initiative."


17. (U) During the FTAA Ministerial in Miami in November
2003, the U.S. and others agreed to a new framework for
negotiations to accommodate the sensitivities of Mercosul
countries, principally Brazil. The compromise allowed
countries to assume different levels of commitments, but
guaranteed that there would be a common set of rights and
obligations covering all the original areas of negotiation.
Following the Miami Ministerial, negotiations to define the
"common set" have not been successful. U.S. and Brazilian
negotiators met in January and in February 2005 to explore
prospects for resuming negotiations, but the process has not
moved forward, in part due to Mercosul's continued interest
in pressing for U.S.-Mercosul negotiations. Brazil is
slated to host the next FTAA ministerial meeting, but no
date has yet been set.

REFORM AGENDA
--------------


18. (U) In 2003, Congress passed Lula's key reforms to the
public sector pension system and the tax code. The 2004
legislative season was not very productive, in part because
of a political scandal early in the year followed by
campaigning for the October municipal elections. In
December 2004, several key bills passed into law, including
a reform of the judicial system, a modern bankruptcy law,
and Public Private Partnerships to fund infrastructure
projects. In March 2005, a law to legalize biotechnology
crops and stem cell research passed. The Lula
administration has been less successful in combating crime,
poverty, and decaying infrastructure. The flagship "Zero
Hunger" program has reached only a fraction of the estimated
50 million Brazilians living in poverty. The administration
was also slow to make progress on agrarian reform. Other
bills awaiting attention this session include: further
judicial reforms, Central Bank autonomy, and a reform of
political parties and campaign funding.

AGRICULTURE
--------------


19. (U) Agriculture is a major sector of the Brazilian
economy, and is key for economic growth and foreign
exchange. Agriculture accounts for 13% of GDP (and 30% when
including agribusiness) and 40% of Brazilian exports.
Brazil enjoyed a positive agricultural trade balance of
US$34 billion in 2004. Brazil is the world's largest
producer of sugar cane, coffee, tropical fruits, frozen
concentrated orange juice (FCOJ), and has the world's
largest commercial cattle herd (50% larger than the U.S.) at
170 million head. Brazil is also an important producer of
soybeans (second to the United States), corn, cotton, cocoa,
tobacco, and forest products. The remainder of agricultural
output is in the livestock sector, mainly the production of
beef and poultry (second to the United States), pork, milk,
and seafood.

CHICOLA