BRAZIL: AMBASSADOR'S MEETING WITH FINANCE MINISTER MANTEGA

UNCLAS SECTION 01 OF 02 BRASILIA 001865 SIPDIS SENSITIVE SIPDIS NSC FOR FEARS TREASURY FOR OASIA - DAS LEE, D.DOUGLASS, J.HOEK STATE PASS USTR FOR S.CRONIN/M.SULLIVAN STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA STATE PASS USAID FOR LAC E.O. 12958: N/A TAGS: ECON ETRD PGOV PREL EFIN EINV BR SUBJECT: BRAZIL: AMBASSADOR'S MEETING WITH FINANCE MINISTER MANTEGA REF: A) STATE 128359 B) BRASILIA 1709 This cable is sensitive but unclassified, please protect accordingly. ¶1. (SBU) Summary: In the Ambassador's August 18 initial call on Finance Minister Guido Mantega, the two discussed Brazil's economy, ethanol, and mechanisms for bilateral economic engagement, including the Treasury-Fazenda Group for Growth meetings. Mantega raised the USG's review of Generalized System of Preferences (GSP). He said the exclusion of Brazil from GSP would be a "serious blow" to the trading relationship given multiple points of friction such as the WTO cotton case, ethanol duties, orange juice barriers, anti-dumping cases and the suspension of the Doha Round (DDA) negotiations over the issue of agricultural subsidies. The Ambassador shared a copy of ref A demarche points with Mantega, explained the history of the GSP program and the need for a review. Mantega hopes to meet with Secretary Paulson on the margins of the Singapore IMF meetings. End SIPDIS Summary. Economy Solid -------------- ¶2. (SBU) The Ambassador congratulated the Finance Minister on the GoB's economic achievements of the course of the Lula Administration. Paying down external debt, the solid external accounts, the reduction in Brazil risk and the emergence of Brazil as a great trading nation were accomplishments of which to be proud. The USG wants to support Brazil's economic transformation with a solid trade and investment relationship, he said. Mantega welcomed the sentiment, noting that Brazil has a great interest in increasing its trade relationship with the United States. Although the political discourse might at times make it seem that the GoB gives greater emphasis to ties with other countries, Mantega noted, President Lula is a pragmatist who realizes the importance of the relationship with the U.S. Brazil's economy, moreover, has undergone a structural shift, from one with perennial trade and current account deficits to one with an overwhelmingly positive trade balance and a desire to further integrate into the world economy. Today Brazil has become a force for stability in the region, Mantega averred, leading by the example of its sound policies. Trade -------------- ¶3. (SBU) Brazil works to increase trade with the United States even when U.S. policy works against it, Mantega affirmed, singling out U.S. agricultural subsidies as a barrier. Brazil doesn't subsidize agriculture, he claimed. "It's hard to compete with Brazilian agriculture," the Ambassador noted. "It's hard to compete with U.S. services and high technology goods," Mantega replied. The Ambassador reminded Mantega that USTR Susan Schwab's first stop after the suspension of the WTO DDA negotiations in Geneva had been in Brazil. This was because of the important role the USG believes Brazil can play in bringing along some of the less flexible members of the G-20, the Ambassador reminded Mantega. Finance Ministry International Secretary Luiz Pereira noted the importance of the DDA. Trade has been a great engine for growth for developing countries, he said, and Brazil needs this to continue. Although the tenor of offers on the agricultural side of the negotiations was insufficient, Brazil, Pereira affirmed, was willing to put more on the table in terms of improved non-agricultural market access (NAMA). GSP Review Could be "Serious Blow" to Relationship -------------- -------------- BRASILIA 00001865 002 OF 002 ¶4. (SBU) The GoB is concerned, Mantega said, by talk in Washington of Brazil's possible exclusion from U.S. GSP benefits. The Ambassador explained the history of the GSP as a program originally intended to help young democracies prosper. The U.S. Administration, independently of any Congressional action, had undertaken to review the system and was inviting comments from foreign governments and industry, the Ambassador explained. The results of that review could not be predicted, he said. The Ambassador also shared a copy of ref A talking points with Mantega. ¶5. (SBU) Mantega acknowledged the Ambassador's explanation but argued forcefully that any USG decision to remove GSP benefits would be viewed as a "serious blow" within the context of a sometimes troubled trading relationship. Brazilian exports to the United States, such as orange juice, sugar, shrimp, and ethanol, Mantega noted, are hit by high tariff rates and a series of non-tariff barriers including quotas, state-level barriers (Florida for orange juice),a series of anti-dumping orders and subsidized domestic production. Combined with what the GoB has termed USG reluctance to comply fully with the WTO dispute board cotton ruling and the suspension of WTO DDA negotiations over agriculture subsidies/market access issues, removing GSP would be very "uncomfortable" from the point of view of the bilateral relationship. The $1.5 billion in Brazilian exports (comment: his figure, we understand it's closer to $3.6 billion) to the U.S. that benefit from inclusion in GSP are a drop in the bucket to the U.S. but would be a significant loss for Brazilian producers, Mantega concluded. The Ambassador again urged the GoB make formal comments to USTR as part of the review process. Group for Growth -------------- ¶6. (SBU) Mantega said he hopes to meet new U.S. Treasury Secretary Paulson on the margins of the Singapore IMF meetings. The Ambassador noted that the Secretary had been to Brazil fairly frequently in his prior private sector jobs, and he hoped that trend would continue. The Ambassador also stated his interest in working with the Treasury and Fazenda to develop the agenda for the next Group for Growth meeting. ¶7. (SBU) Comment: The GSP review and the potential for the withdrawal of Brazil's GSP benefits have elicited very strong negative reactions from government and industry here. Foreign Minister Amorim told the press August 20 that Brazil would consider taking the USG to WTO dispute resolution were GSP benefits removed. The forcefulness of Mantega's comments on GSP was nevertheless surprising given that he does not oversee the trade portfolio. With the influential State of Sao Paulo Industry Federation (FIESP) hiring Washington lobbyists and mounting a media campaign in which it claims that graduation from GSP would cost Brazil "at least" 20,000 jobs, it's clear that the issue has resonance well beyond the foreign and trade ministries. SOBEL