BRAZIL'S 2005 TRADE AGENDA: MORE OF THE SAME

UNCLAS SECTION 01 OF 05 BRASILIA 000212 SIPDIS SENSITIVE STATE PLEASE PASS TO USTR FOR SCRONIN, KLEZNY NSC FOR MIKE DEMPSEY DEPT OF TREASURY FOR FPARODI USDOC FOR 3134/USFCS/OIO/WH/DDEVITO/DANDERSON/EOLSON USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D USDA FOR JB PENN, U/S, FFAS E.O. 12958: N/A TAGS: ETRD BR WTRO SUBJECT: BRAZIL'S 2005 TRADE AGENDA: MORE OF THE SAME REF: A) BRASILIA 94 B) SAO PAULO 89 C) 04 BRASILIA 3100 D) 04 BRASILIA 2882 E) 04 SAO PAULO 1659 ¶1. (U) This cable has been coordinated with AmConsulate Sao Paulo. ¶2. (SBU) Summary and Introduction. Changing the "geography of trade" has become a Lula administration hallmark. Over the past two years, the GoB has aggressively used Brazilian and Mercosul trade policy to strengthen economic and political ties with other developing countries, in part to diversify Brazil's export markets, but more pointedly to develop strategic partnerships with countries that can help Brazil realize various geopolitical objectives. Private sector critics claim the GoB's focus on developing country partners has diverted its attention from securing more lucrative economic opportunities through trade agreements with the EU or with the United States (See Ref A). Dissension within the government over trade policy is also still evident with Ministers Furlan (Development and Trade) and Rodrigues (Agriculture),who support the private sector perspective, at odds with the Foreign Ministry, whose trade strategy continues to enjoy the backing of President Lula. Recent criticism of GoB trade policy by Minister Furlan prompted a rebuttal by President Lula on January 18 in which he justified a continuation of current policy in order to further reduce the "dependence" of Brazil on the EU and the United States. While there is widespread domestic support for the priority the GoB has assigned to the global WTO trade negotiations, substantial benefits from the Doha Round are only expected over the long-term. A brief overview of Brazil's trade agenda for 2005 is presented below. End Summary and Introduction. WTO - Doha Development Agenda ¶3. (SBU) In public comments laying out GoB trade priorities for the coming year, Foreign Minister Amorim has stated explicitly that the WTO Doha Round is Brazil's top priority. In Amorim's view, the Doha Round represents an opportunity for Brazil to press for elimination or reduction of the worst trade distorting practices affecting global agricultural trade -- the key demand for Brazil given that agriculture accounted for about 42 percent of its exports, 34 percent of its GDP, and 37 percent of its employment in 2004. ¶4. (SBU) In the WTO, the GoB will continue to actively utilize its strategic partnerships with other developing countries. The GoB is expected to maintain an assertive stance in Geneva on agriculture reform; Brazil's sometimes strident leadership of the G-20, even the failure of the Cancun Ministerial in 2003, are seen here as having paid off in Brazil's inclusion in the Five Interested Parties (FIPs) process and in the eventual substance of the July negotiating framework package. ¶5. (SBU) Amorim has acknowledged that negotiations on market access for industrial products and services must also proceed for a final package to emerge, suggesting that Brazil may negotiate on these issues as part of strategic coalitions formed around specific issues. He has also warned that Brazil's posture in these and other areas may not always be defensive, pointing to GoB formulation of proposals relating to export credits and investment (local content requirements). According to Ambassador Clodoaldo Hugueney, Brazil's top WTO negotiator, the GoB hopes the Doha negotiations can be wrapped up before the 2007 expiration of an extended TPA either undermines an ambitious outcome or causes an indeterminate delay in concluding the Round (Ref C). (Note: Hugueney will soon be leaving his current post to replace Luiz Felipe de Seixas Correa as Ambassador to the WTO.) While the nomination of Seixas Correa as WTO Director General may have been largely prompted by Brazil's interest in spoiling the candidacy of Uruguayan Carlos Perez del Castillo, the GoB would relish having a Brazilian diplomat in this key position during the final phase of the negotiations. Mercosul-EU ¶6. (SBU) Amorim continues to list free trade talks with the European Union as a GoB priority. The EU is Brazil's largest export market, absorbing $24 billion worth of its goods in 2004, 25 percent of Brazil's total exports. While Amorim conveys confidence that progress in the negotiations can be made in 2005, he has also suggested that the talks may proceed in tandem with the Doha negotiations. Bilateral technical-level meetings were held December 2 last year in Rio de Janeiro and are expected again in February. A meeting between Minister Amorim and UE Trade Commissioner Peter Mandelson in Davos at the end of January is meant to give impulse to a Ministerial slated for March that will set a work program for future discussions. ¶7. (SBU) Many Brazilian analysts are skeptical that the two sides' differences can be bridged in 2005. Negotiations broke down in October 2004 over inadequate offers put forward by both sides. Mercosul's last offer was a retrenchment, expanding product coverage to 90 percent, but reducing the percentage receiving duty-free status from 87.5 percent to 82 percent. Mercosul offerings in government procurement, IPR (geographic indicators),and investment were also deemed insufficient by the EU, whose own offer capped certain Mercosul agricultural exports at a level below current trade flows. Agricultural products, which account for roughly 70 percent of Brazil's exports to the EU, have figured prominently in the negotiations. While questioning the EU's commitment to substantial agricultural trade liberalization, Brazil's private sector, particularly those represented by Sao Paulo's FIESP industrial federation (whose companies generate 70 percent of the country's GDP) also fault Foreign Ministry inflexibility and Mercosul internal disarray for the breakdown in negotiations. Free Trade Area of the Americas ¶8. (SBU) After FTAA negotiations went into abeyance in June of last year, the FTAA at times was absent from listings by Foreign Ministry officials of GoB trade priorities. However, with the exchange of letters between out-going USTR Zoellick and Minister Amorim at the end of 2004, the FTAA has again crept onto the GoB trade agenda. Official GoB remarks state a willingness to work in good faith with the U.S. as co-chairs to identify a way forward for the negotiations; Itamaraty highlights efforts for Amorim and Zoellick as well as for DUSTR Allgeier and his counterpart Ambassador Bahadian to meet to chart a course forward. ¶9. (SBU) However, this is less than a full embrace. In recent interviews Amorim has again clarified that while an FTAA is desirable, it is not essential for Brazil. Describing the current FTAA impasse as caused by the USG's insistence in negotiating rules for IPR, services and investment without adequately addressing Brazil's demands on agricultural subsidies, Amorim has emphasized that improved access to the U.S. market is key for Brazil, and that a focus on market access for goods would facilitate the negotiations. Amorim also has reiterated that from Brazil's perspective, market access discussions with the U.S. need not be within the FTAA, but could also be pursued within a Mercosul-U.S. FTA. The GoB position may have in fact hardened since last June, if, as top daily Folha suggests, President Lula believes he can prevail upon President Bush in a post-election environment to show greater flexibility on market access for key products, such as orange juice, sugar, steel and beef, if the U.S. is serious about moving the FTAA forward. ¶10. (SBU) Further complicating the public FTAA debate is the reemergence of a (in our view, flawed) December 2003 Ministry of Planning study which concludes that under an FTAA the bilateral U.S.-Brazil trade balance would swing to $1 billion in the USG's favor (Ref B). Although publicly Amorim claimed the study supports his reticent stance toward the FTAA, Antonio Simoes (the ForMin's Economic Advisor) admitted to Ecouns in a January 12 converstaion, that no study, no matter how well-designed, could accurately predict the impact of an FTAA upon trade flows. Simoes, former head of Itamaraty's FTAA Office, added that sensationalist press reporting of items such as this only make it more difficult for the two sides to reach consensus. ¶11. (SBU) While many economic analysts are not optimistic about near-term prospects for the FTAA, they argue that the FTAA is crucial for Brazil to avoid an erosion of 1) its relative level of competitiveness in the U.S. market vis-a-vis hemispheric competitors, and in other Latin markets vis-a-vis U.S. producers, and 2) its attractiveness as an FDI destination. Export growth to the United States has not kept pace with the expansion of Brazil's exports overall; in 2004, Brazil's exports to the world grew by 32 percent to reach $96.5 billion, compared with a 20 percent increase in exports headed to the United States to total $20.0 billion. In a study released November 4, 2004, former ambassador to the U.S. Rubens Barbosa and researchers from FIESP and the Institute of Studies of Trade and International Negotiations (Icone) claim Brazil's competitive position in the U.S. market vis-a-vis other regional partners is eroding and urge the GoB to address the issue in resumed FTAA negotiations (Ref B). Some companies, including Dixie-Toga, whose president is head of Sao Paulo's AmCham, have made public their intention to consider investments in countries having trade agreements with the U.S., rather than expand domestic production. Canada ¶12. (SBU) The substantive scope of soon to be launched trade talks with Canada, and their relation to the FTAA, are unclear. A joint communique issued during the visit of Canada's Prime Minister, Paul Martin, in November last year stated that he and President Lula "agreed to promote the expansion of commercial relations between Mercosul and Canada by means of market access negotiation in the areas of goods, services and investments, in the context of the configuration of a future FTAA." In a subsequent conversation with Econoff, Canada's trade officer in Brasilia said the visit had caused a stir in Ottawa resulting in conflicting interpretations of what the "talks" would entail. Despite Canada's uncertainty, its trade officer said there is no doubt that Minister Amorim believes Canada and Mercosul will be moving ahead with market access negotiations in the three areas. Initial discussions may take place as early as February. South-South ¶13. (SBU) On December 20, Ambassador Regis Arslanian, Itamaraty's Director of International Negotiations, outlined prospects for 2005 for other trade negotiations. Although Arslanian's list was lengthy, Ronaldo Costa Filho, who heads up the European Union and Extra-Regional Negotiations division for Arslanian, and Gilberto Goncalves de Siqueira, deputy in Itamaraty's Regional Integration Division, told Econoff that Mercosul's current plans include launching negotiations in 2005 with only three additional countries: Morocco, Egypt, and Mexico. ¶14. (SBU) Tariff preference negotiations, covering a limited number of products, will proceed with Morocco and Egypt based on relatively standard framework agreements signed November 26 and December 16, 2004, respectively. Indicative of Brazil's driving force behind Mercosul trade policy, according to Costa, the negotiations with Morocco are the result of intense lobbying by Brazil's Ambassador to Morocco, former FTAA negotiator Carlos Alberto Simas Magalhaes, while discussions between Minister Amorim and Boutros Boutros-Ghali during a G-20 meeting in December 2003 have led to the negotiations with Egypt. Two-way trade between Brazil and Morocco totaled only $560 million between January and November 2004; with Egypt only $593 million over the same period. ¶15. (SBU) The negotiations with Mexico follow up on the GoM's stated intention of seeking Mercosul associate membership, which requires a free trade agreement with the bloc. The aim is to consolidate the trade agreements Mexico has with individual Mercosul partners, which vary in terms of coverage, to form a comprehensive Mercosul-Mexico FTA. Brazil currently has an Economic Complementary Agreement with Mexico, which covers only about 790 products, largely auto parts, chemicals, and some agricultural products, and an automotive agreement. Two-way Brazil-Mexico trade reached $4.7 billion in 2004, dominated by Brazilian exports of $3.9 billion. Talk are expected to begin in the first semester of ¶2005. Potential Negotiations ¶16. (SBU) Mercosul has established work programs for exploratory talks both with countries of the Central American Integration System (SICA) and with CARICOM. Sessions with both groups are slated to take place in February and April, ¶2005. According to Siqueira, only after these sessions will Mercosul determine if there is an adequate convergence of interests to proceed with negotiations. ¶17. (SBU) According to Costa, Mercosul hopes to complete a feasibility study on negotiations with South Korea by the end of 2005. Nonetheless, he did not expect trade negotiations to commence soon thereafter due to Brazilian private sector concerns with Korean protectionism, particularly in agriculture. Pakistan and Israel have recently notified Mercosul of their interest in initiating trade negotiations. Other countries that have conveyed an interest in developing closer commercial relations with Brazil/Mercosul include: the EFTA countries, Australia, New Zealand, the Gulf Cooperation Council, and Japan. China ¶18. (SBU) As Brazil's largest market for soybeans and third largest individual export destination, the GoB views China as a key trading and geopolitical partner. In 2003, Brazilian exports to China almost doubled totaling $4.5 billion. With continued growth, exports reached $5.4 billion, and imports $3.7 billion in 2004. The importance of the relationship was evident in the state visits paid by both leaders in 2004. However, Brazil's industrial sector is terrified of the competitive giant, particularly following Lula's decision to grant China "market economy" status (Refs D and E). Despite an agreement during Lula's trip to China in May 2004 to conduct a feasibility study on launching Mercosul-China trade negotiations, Costa admitted to Econoff that work is not proceeding even on terms of reference for the study. Even without formal trade negotiations, China will remain one of Brazil's more important commercial partners for the foreseeable future, not only as a market for its primary commodities, but also as source of infrastructure investment and collaboration in certain technology-related areas, including satellites and development of open-source software. Russia ¶19. (SBU) There are no plans by Mercosul at this time to negotiate a trade agreement with Russia. References by GoB officials to trade talks typically refer to discussions on resolving specific impediments to trade, such as Russia's ban on imports of Brazilian beef stemming from foot and mouth disease outbreaks. The two countries are also trying to stimulate bilateral trade through export promotion activities. Danilovich