CHARGE ENGAGES SAO PAULO PRIVATE SECTOR ON TRADE

UNCLAS SECTION 01 OF 05 BRASILIA 000206

SIPDIS

STATE PLEASE PASS TO USTR
NSC FOR CRONIN
TREASURY FOR FPARODI
USDOC FOR 3134/USFCS/OIO/WH/EOLSON
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD PGOV KIPR ECON PREL PINR BR
SUBJECT: CHARGE ENGAGES SAO PAULO PRIVATE SECTOR ON TRADE
LIBERALIZATION, THE MACROECONOMY, AND BOLIVIA/VENEZUELA

REF: BRASILIA 0141


1. (U) This cable contains business proprietary data.


2. (SBU) Summary. During his January 16-18 economic theme meetings
in Sao Paulo, Charge discussed a wide variety of trade, financial
and investment issues with key private sector officials. Embassy
and Consulate representatives met with leaders at FIESP (the Sao
Paulo Industrial Federation, CIESP (FIESP's sister organization),
AmCham, Ford Motor Company, Interfarma, and U.S. air carriers to get
their views on how best to reinvigorate commercial ties between the
two countries. (Civair and pharmaceutical sector discussions
reported septel.) Overall, our interlocutors emphasized the
following themes: the need to promote greater business-to-business
relations given the expected congressional lull in advance of the
October 2006 Brazilian elections, ongoing private sector efforts to
influence the post-election agenda of the various candidates,
preoccupation with the current stalemate on FTAA talks and the
limited results of the Doha Round Hong Kong Ministerial, and
Brazil's relief that the USG terminated the pending GSP petition on
copyright piracy.


3. (SBU) For his part, Charge noted that the FTAA impasse only
worked to disadvantage Brazil and that Mercosul, with the addition
of Venezuela and the potential entry of Bolivia, risked losing
coherence. He made the point that Brazilian industry needed to do a
better job of lobbying GOB policymakers as too often the Foreign
Ministry sacrificed the country's commercial interests to support
the government's pro-third world overseas agenda. End Summary.

Growing Optimism regarding the Brazilian Economy
-------------- ---


4. (SBU) Our Brazilian private sector interlocutors expressed
increasing confidence with respect to the health of the domestic
economy. FIESP and AmCham officials declared that after 10 years of
sound economic policies the country was reaping the benefits in
terms of low inflation and a positive current account. Attendees at
a dinner of local CEOs all noted that 2005 was a good year for big
business as exports, combined with awakening internal demand, had
lifted sales. Separately, United and American Airlines reported
growing passenger volume and high load factors (the latter with
83%),although high fuel costs made the profit picture iffy.


5. (SBU) Meanwhile, Ford Brasil President Barry Engel stated that
his operations have been in the black for seven consecutive
quarters, with market share, unit sales, production-line efficiency
and exports reaching eight-year highs in 2005. Indeed, increased
exports (US$ 9 billion last year) had buoyed the entire Brazilian
auto industry, he said, with domestically produced vehicles headed
to such diverse locations as Mexico, Argentina, Turkey, and Syria.
Thirty-seven percent of the vehicles sold in Mexico were actually
made in Brazil. Nevertheless, Engel admitted, the company faced
significant challenges, including excessive taxes (with respect to
the auto industry, the highest in the world),high labor costs, and
skyrocketing steel prices worldwide.

Dissatisfaction over Exchange and Interest Rates
-------------- ---


6. (SBU) Nearly all our contacts expressed concern over the high
prevailing level of interest rates and the continuing strength of
the Real. Echoing past statements he has made to the press, FIESP
President Paulo Skaf took to task the Lula government for the high
SELIC baseline interest rate (currently 17.25 percent) and called
for changes in the GOB's economic team. Finance Minister Palocci,
he said, had fallen under the spell of interest rate hawks at the
Central Bank and, given his lack of formal economic training, had
proven unable to resist. Former Sao Paulo state Secretary for
Science and Technology Emerson Kapaz, however, noted that in view of
the confidence the market placed in Palocci, he did not expect the
Finance Minister to depart the government prior to the October 2006
election. Separately, Charles Wortman, President of J.P. Morgan

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Brasil forecast that the SELIC would drop to approximately 15
percent by the fourth quarter, a prediction roughly in line with the
market consensus.


7. (SBU) The strength of the Brazilian Real versus the U.S. dollar
provoked even greater concern. Ford's Barry Engel said that the
strong Real complicated his company's exports, which in 2005
represented 42 percent of total production. While the company would
do what it could to maintain its hard-won overseas markets, it much
preferred the Real to trade at the 2.5 to 2.6 range - as opposed to
its current 2.2 to 2.3 level. Suzano Paper executive Boris Tabacof
stated that his company, along with a number of other firms as well,
was suffering, as 2.8 was the equilibrium point.


8. (SBU) CIESP President Claudio Vaz worried that the strong real
could make the country's US$44 billion trade surplus disappear as
quickly as it appeared. While the products Brazil sold abroad were
varied, its export base was narrow: 40 companies were responsible
for 45% of exports while 60 companies accounted for 65% of exports.
Big business dominated the export sector, he noted, with the
country's many small and medium-sized enterprises focusing on the
domestic market. Caterpillar's exports, for instance, had risen
from US$150 million several years ago to US$1 billion today. Both
Vaz and Tabacof called for the Central Bank to intervene in the
foreign exchange market to establish some type of floor for the
value of the real.

FTAA and WTO
--------------


9. (SBU) The industry leaders we spoke to were of two minds on the
trade agenda. While they felt that the Lula government's policy of
seeking to expand South-South trade had resulted in the neglect of
the bilateral trade relationship with the U.S., they blamed the
USG's "failure to move on agriculture" for the impasse. Ford
Mercosul President Antonio Maciel declared that given that
three-fifths of those in the Brazilian congress had links to the
farm industry, if the U.S. were to make concessions on agriculture
the FTAA would be a done deal. In a separate conversation, FIESP
International Affairs Director Roberto Gianetti da Fonseca opined
that an agreement on agriculture in the Doha Round could pave the
way for resumption of FTAA talks, but argued that within the WTO the
USG still needed to do more on domestic subsidies. Former Amb. to
the U.S. Rubens Barbosa agreed that the USG was recalcitrant on the
subsidies issue, and added that the close U.S. Senate vote on CAFTA
ratification demonstrated that the United States did not have the
requisite political will to make the concessions necessary to make
an FTAA possible. Both Barbosa and Emerson Kapaz worried that any
FTAA agreed to would be unbalanced in the USG's favor.


10. (SBU) In response, the Charge recounted the President's offer
to do away with U.S. agriculture subsidies, provided that our WTO
trading partners made concessions of similar magnitude. In
addition, Charge noted Chile's experiences in the wake of the
conclusion of the U.S.-Chilean FTA: both exports and GDP
skyrocketed, while poverty rates declined. Trade liberalization, he
declared, was the key to robust economic growth. Charge further
observed that while within the FTAA context Brazil wanted greater
access to the U.S. agricultural market and the U.S. wanted rigorous
commitments in sectors such as services and IPR, it was up to each
side's negotiators to hammer out a mutually-beneficial accord.
Brazil's Foreign Ministry (Itamaraty) would have to advocate the
GOB's interests while USTR would advance those of the USG.


11. (SBU) Gianetti, Barbosa, and former GOB Ambassador to France
Sergio Amaral replied that under the current government Itamarty was
too apt to subordinate the business community's interests to the
GOB's political agenda. The Charge agreed, observing that perhaps
Brazil might consider breaking the Foreign Ministry's monopoly on
trade negotiations and establishing an interagency unit, analogous
to USTR. In a separate conversation, CIESP's Claudio Vaz endorsed
the idea of a Brazilian USTR, calling for greater heat and less
light in GOB trade policy. However, he cautioned that the USTR

BRASILIA 00000206 003 OF 005


concept likely would only come to fruition under a government led by
the more business-friendly PSDB party. AmCham Advocacy Committee
Director Geraldo Barbosa told us (privately) that in view of the
limited results of the Doha Round Hong Kong meeting, Finance
Minister Palocci was seeking to find a way to promote a "U.S.-Brazil
FTA." Barbosa will meet with Palocci in May to follow up.


12. (SBU) Comment. In December 2005, AmCham had recounted to us
similar statements by Palocci. Its unclear to us how serious the
Minister is about his offer, although we will continue to track
this. The good news from the Charge's overall discussions on trade
liberalization is, however, that none of our interlocutors saw the
idea of a Mercosul-U.S. 4+1 agreement as a panacea. Each recognized
that the same issues (IPR, agriculture, services, etc.) which impede
progress on the FTAA, would also make the negotiation of a
comprehensive 4+1 accord difficult. End comment.

Bolivia, Venezuela, and Peru
--------------


13. (SBU) Views with respect to how best to promote regional
stability were varied. Ford's Antonio Maciel opined that the entry
of Venezuela into Mercosul would in the end have only political, as
opposed to economic, significance. For Venezuela to become
economically integrated into Mercosul, he said, it would have to
depart the Andean Pact - a step it could not take given that the
Andean Pact was its "natural cultural bloc." In a separate
conversation, Roberto Teixeira da Costa, a prominent Sao Paulo-based
businessman, fretted that the USG pays too little attention to Latin
America, adding that if Lula were to be reelected, Chavez would
likely try to exert greater leverage over Brazil through "checkbook
diplomacy." Emerson Kapaz reiterated this point, noting that PDVSA
is two and a half times the size of Brazil's Petrobras and was
certainly capable of using its petrodollars to influence domestic
policies.


14. (SBU) Charge stated the USG's disputes with Chavez principally
stemmed from the fact that he meddled in the affairs of his
neighbors through support for "anti-systemic" political groups.
Such actions undermined democratic institutions both in Venezuela
and the region. In addition, Charge noted, Chavez was a notoriously
weak administrator. The country's oil wealth was not filtering down
to the masses, which were only growing poorer. Chavez put greater
priority on assisting Cuba and buying Argentine bonds, than he did
on the welfare of the Venezuelan people or the maintenance of the
country's infrastructure (inter alia, the failing highway bridge
between Caracas and the coast).


15. (SBU) Both Roberto Teixeira da Costa and Sergio Amaral averred
that the U.S. and Brazil needed to cooperate more on regional
stability issues. Bolivia President-elect Evo Morales was
"unsophisticated," Amaral said, and Peruvian presidential candidate
Ollanta Humala could be a danger as well. As for Chavez, Amaral
continued, he was the greatest threat as he not only took the
populist line in his public statements but in his actions as well.
Separately, Claudio Vaz opined that now that Argentina President
Kirchner's party had made legislative gains, Kirchner would be less
confrontational vis-`-vis both the United States and Brazil. Now
that Kirchner had strengthened his hand internally, Vaz thought, he
would not need to continue to blame the country's problems on
foreigners.

Serra, Alckmin, and Lula
--------------


16. (SBU) In the upcoming presidential race, our private sector
interlocutors preferred Sao Paulo Governor Geraldo Alckmin over his
fellow Tucano Jose Serra (currently Mayor of Sao Paulo city).
(Note: PSDB party members are nicknamed Tucanos). AmCham officials
recounted that they had surveyed businessmen at various recent
Chamber meetings throughout the country. Although, admittedly,
their poll was not necessarily representative, they stated that 97
percent of the respondents saw Alckmin as the best candidate.

BRASILIA 00000206 004 OF 005


AmCham Executive Director Artur Vasconcellos said that the private
sector was impressed with the way Alckmin had promoted growth and
economic development in the state. Alckmin was viewed as a talented
manager, willing to sit down with all concerned to seek the best
solution.


17. (SBU) In contrast, Gianetti described Serra as "voluntarioso"
(rough translation: my way or the highway),i.e., he does not like
to listen to contrary opinions. FIESP and CIESP officials exhibited
a similar lean towards Alckmin, with Claudio Vaz echoing AmCham's
praise of Alckmin's management skills and describing Serra as
someone who believes that positive results flow from his policies
rather than negotiated solutions. Kapaz and Amaral were more
guarded in their assessments of the two, noting that both would make
excellent candidates and the challenge for the PSDB would be to find
a way to choose the nominee without splitting the party.


18. (SBU) The prospect of a Lula second term excited no one.
Teixeira da Costa observed that given the ongoing political
scandals, if reelected Lula would enter office with no honeymoon.
This meant that it would be difficult for him to move forward on the
wide range of difficult initiatives that both PT and opposition
leaders recognized would have to be broached -- fiscal reform,
social security reform, political party reform, tax reform, etc. --
during the next president's first 100 days in office. (In a
separate conversation, Ford President Maciel opined that the next
government also would need to quickly engage in additional trade
opening, with increased imports helping to check inflation and
further integrating Brazil into the world economy.) Both AmCham and
FIESP officials noted that they were already raising these issues
with political leaders so that once in office any new government
could hit the ground running.


19. (SBU) Vaz was even more pessimistic about the prospect of Lula
being reelected, stating that a Lula second term would be an
"economic disaster." In the wake of the scandal, the PT bancada
would likely fall from 90 to 50 or so, he said, thus forcing Lula to
rely upon Chavez-style populism to garner support for his policies.
Brazil's institutions would survive the cold bath, he concluded, but
the country would be worse for the wear.

Way Forward for 2006
--------------


20. (SBU) The consensus among our contacts was that with the
election set for October 2006, this would be a lost year in terms of
the government's micro-reform agenda and the FTAA. Accordingly,
FIESP and AmCham officials agreed that business to business dialogue
would be the best way to make use of the time remaining before the
election. Both FIESP and AmCham commented that the mutual goodwill
created by the USG's decision to terminate the copyright piracy GSP
review and the GOB's decision to refrain from compulsory licensing
of anti-AIDs retrovirals created the climate for successful talks.
The two organizations mapped out an array of upcoming events that
they might (separately) pursue, including inter alia:

-- intensified FIESP dialogue with the National Association of
Manufacturers,
-- organizing lobbying trips to Washington,
-- scheduling an AmCham-U.S. Embassy Coordination Summit to discuss
advocacy issues,
-- continuing the industry sectoral discussions that AUSTR
Broadbent initiated in December 2004, possibly in connection with
any future visit to Sao Paulo by DUSTR Schwab,
-- combined AmCham/CIESP matchmaking U.S. and Brazilian
medium-sized firms, and
-- discussion at the June 9-13 AACCLA Mid-year meeting in Rio de
Janeiro.


21. (SBU) Finally, FCS Chief noted that the
government-to-government Informal Commercial Exchange (ICE) talks
contemplated for June 2006, possibly in connection with a visit by
Commerce Secretary Gutierrez, also would be a step forward.

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