BRAZIL'S FINANCE MINISTRY MAKES PITCH FOR

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E.O. 12958: N/A
TAGS: ETRD ECON WTO
SUBJECT: BRAZIL'S FINANCE MINISTRY MAKES PITCH FOR
AGGRESSIVE TARIFF REDUCTIONS IN NAMA NEGOTIATIONS


1. (U) Summary. An aggressive tariff cutting proposal for
WTO Doha Development Agenda (DDA) non-agricultural market
access negotiations (NAMA),put forward internally by
Brazil's Finance Ministry, has generated a storm of protest
by the country's private sector and largest labor union, and
angst for Brazilian negotiators who are concerned that
public discussion of the proposal has exposed Brazil's
bottom line. In government deliberations, the Finance
Ministry has proposed the GoB advocate a simple Swiss
formula approach to tariff reduction for industrial products
utilizing 15 as the formula coefficient; the Finance
Ministry proposal is in line with USG calls for adoption of
a Swiss formula in the NAMA negotiations with two different
coefficients, one for developed countries, the other for
developing countries. However, Finance's proposal is at
odds with the approach Brazil previously formulated with
Argentina and India and which continues to define the GoB's
official position. On September 19, Brazil's inter-
ministerial trade chamber, CAMEX, decided to continue
deliberation on four tariff reduction proposals, including
Finance's, in order to analyze new studies, expand
consultations with the private sector and interested social
groups, and assess prospects for significant advances in the
WTO agricultural negotiations. Even if not adopted by the
GoB as is, Finance's proposal may give some glimpse into
Brazil's potential market opening for industrial products.
End Summary.


2. (U) On September 6, the coordinating committee for
Brazil's inter-ministerial Trade Chamber (CAMEX) received
four proposals on the level of market opening Brazil would
be willing to provide for non-agricultural products in the
NAMA negotiations should adequate advances be made in the
agriculture talks. An aggressive tariff cutting proposal
put forward by the Finance Ministry sparked substantial
criticism from other ministries and the private sector.
Finance's proposal differed significantly from the three
proposals put forward by the Ministry of Development,
Industry and Trade (MDIC),the Foreign Ministry, and the
Coalizao Empresarial (Business Coalition) not only in the
level of market opening recommended, but also in that it was
based on a simple Swiss formula; the other proposals were
premised on the April 2005 Argentina-Brazil-India (ABI) NAMA
tariff cutting proposal, which links a country's item-
specific tariff cuts, and establishment of bindings, to its
existing overall level of tariff protection.


3. (SBU) According to Maria Elisa Maia (please protect),of
the Foreign Ministry's Market Access Division, the Finance
Ministry had not been active in internal discussions on the
NAMA negotiations until April of this year, at which point,
as it searched for new policy tools, it seized on the idea
of reducing Brazil's import tariffs as a means of inducing
economic growth. Maia told Econoff that sharp differences
then emerged between Finance and MDIC, industry's principal
advocate. Finally in an attempt to overcome the internal
impasse, the Foreign Ministry and MDIC asked Finance to
produce something in writing to give better definition to
their vision. The result was the September 6 Finance
proposal, unexpected in its form (simple Swiss formula) and
aggressiveness.


4. (U) According to press reports, Finance used 15 as the
formula coefficient, which would reduce Brazil's maximum
consolidated tariff rate from 35 percent to 10.5 percent;
its average consolidated tariff rate from 30 percent to 9.78
percent; and its average applied tariff rate from 10.5
percent to 7.4 percent (some reports cited a drop from 10.77
percent to 7.39 percent in the Mercosul bloc average applied
tariff). As a result, final tariff levels would be below
current applied tariff rates for 62 percent of the 8,822
tariff lines Brazil has registered with the WTO. In arguing
that its proposal is not too aggressive, Finance said it had
proposed flexibility for 5 percent of the tariff lines and
implementation would be over 10 years.


5. (U) On September 8, daily Folha de Sao Paulo published
the following table with eighteen examples of how the
Finance Ministry'S tariff cutting formula would affect
certain groups of products:

Average Effective
Bound Applied Proposed
Rate Rate Tariff
Autos, tractors, auto parts 33.31 24.44 10.31
Clothes and accessories 35.00 20.00 10.50
Cotton 35.00 16.30 10.50
Shoes and gaiters 35.00 19.64 10.50
Toys and Games 35.00 20.00 10.50
Arms and munitions 34.52 20.00 10.45
Umbrellas, walking sticks 35.00 19.25 10.50
Organic chemical prods 23.39 12.55 8.92
Pharmaceutical prods 34.78 13.79 10.47
Electronics - TVs, stereos 32.65 16.18 10.14
Glass 34.79 14.64 10.48
Pearls, precious and
semiprecious stones 35.00 15.24 10.50
Perfumes and essential oils 24.42 17.46 9.28
Instruments/apparatus, optical,
photo, med-surgical,
cinematographic 33.02 15.22 10.18
Iron, cast iron, and steel 35.00 12.77 10.50
Books, periodicals, engravings 35.00 16.00 10.50
Paper, cartons, other
cellulose products 33.74 13.66 10.17
Furniture, lamps, mattresses,
furnishings 32.73 17.65 10.02



6. (SBU) Much to the consternation of Foreign Ministry
negotiators, details of Finance's proposal were leaked to
the press and widely reported. Maia claimed the leaked
proposal was not the final, but implied there was not much
difference between the two versions.


7. (U) The Finance Ministry has publicly defended its
proposal on macroeconomic grounds. While acknowledging that
NAMA tariff concessions constitute part of Brazil's mix for
trade-offs in the DDA negotiations, the Finance Ministry
argues that aggressive tariff reductions would have the
further benefit of enhancing Brazil's overall
competitiveness and thereby helping to spur economic growth.
Not surprisingly, the Ministry of Agriculture was mentioned
as supporting Finance's proposal, arguing that the country
should be more forward leaning in the NAMA negotiations to
obtain desired concessions in agriculture.


8. (U) Opponents to Finance's proposal mobilized quickly.
MDIC Minister Furlan publicly opposed Finance's proposal as
too aggressive as did Paulo Skaf, president of Sao Paulo's
Federation of Industries (FIESP). Ministers in a September
19 CAMEX meeting, used in part to prepare for the WTO quad
(US, EU, Brazil, India) meeting in Paris September 22-23,
listened to criticism of the proposal from representatives
of the private sector, and received studies done by the
Institute of Applied Economic Research (Ipea) and the
Brazilian Agency for Industrial Development (Abdi),which
predict decimation of certain industrial sectors under
Finance's proposal. The powerful CUT labor union argued for
slower liberalization citing a study by Unicamp (University
Campinas) that links protection, with government support for
modernization, to increased productivity. However, while
not supporting such an aggressive opening as advocated in
Finance's proposal, Soraya Rosar of the National
Confederation of Industries (CNI) told reporters that her
organization could accept use of a simple Swiss formula,
depending on the coefficient used.


9. (U) Despite the outcry over Finance's proposal, CAMEX
ministers did not discard it; a final decision has been
postponed to allow for further analysis of the proposals and
consultation with the private sector, as well as to enable
Ministers to better assess the overall DDA negotiating
environment. Brazil would have to consult with its Mercosul
partners before offering specific tariff concessions and
would likely consult with its G-20 partners as well.


10. (SBU) While some local commentators argue that Brazil
needs to make a bold gesture in NAMA negotiations in order
to pressure the EU and US into wanted concessions in
agriculture, statements by Foreign Ministry officials
suggest an entrenched reluctance to signal any flexibility
in NAMA without first obtaining sufficient concrete advances
in agriculture. Maia confirmed as much, saying the Foreign
Ministry had prevailed in maintaining instructions for its
NAMA negotiators on both support for the ABI proposal and
for conditioning movement in NAMA on advances in
agriculture.


11. (SBU) In discussing the predicament of a limbo in which
all sides are waiting for others to expose their potential
for concessions, Maia implied, what negotiators had feared,
that the Finance proposal provides some insight into
Brazil's bottom line. Maia phrased it as follows: it's
reasonable to conclude that the powerful and technically
competent Finance Ministry would not have produced a
proposal without having a good idea of what is possible.
But, according to Maia, the proposal generated such a strong
reaction because it is too extreme in applying an aggressive
formula across the entire range of industrial products
without incorporating sufficient flexibilities. She added,
however, that one very positive outcome of the debate over
Finance's proposal had been a clarification of the country's
sensitivities.

Comment


12. (SBU) Although it is unlikely the Finance Ministry's
market access proposal will be adopted as is, it may at
least pull Brazil's final position toward one of greater
market opening. By providing the GoB with a ready analysis
of the implications of using a simple Swiss formula (with at
least with one coefficient),the Finance Ministry proposal
also may prove useful in lowering the barrier to an eventual
acceptance by the GoB of this methodology.

CHICOLA