The October 17 Meeting of the U.S.-Brazil Bilateral

UNCLAS SECTION 01 OF 06 BRASILIA 002314

SIPDIS

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STATE PASS EXIM FOR NATALIE WEISS, COCONNER
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SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD KIPR EINV ENRG WTRO BEXP BR
SUBJECT: The October 17 Meeting of the U.S.-Brazil Bilateral
Commercial Mechanism



1. (SBU) Summary and Introduction. On October 17, a USG
delegation met with the Brazilian interagency economic players in a
session of the two countries' Bilateral Consultative Mechanism (BCM)
meeting. The wide-ranging agenda covered a variety of issues,
including WTO matters (the Doha Round, current and potential future
disputes, anti-dumping methodology, etc.),agriculture (subsidies,
the Farm Bill),prospects for renewal of the USG's GSP program,
possible cooperation on biofuels, current U.S. and GOB international
trade negotiations, and intellectual property rights. The USG
delegation, chaired by A/USTR Everett Eissenstat emphasized that
many of the items on the agenda were long-standing controversies and
could not be resolved in a single meeting. For its part, the GOB
side, chaired by Acting Ministry of External Relations (MRE) U/S for
Economic Affairs Roberto Azevedo, made the point that it was
worthwhile taking stock where we were bilaterally.


2. (SBU) A/USTR Meredith Broadbent, USTR Southern Cone Director
Sue Cronin, WHA/EPSC Economist Joseph Salazar, and Embassy/Sao Paulo
Consulate officers rounded out the USG delegation. Over 40
officials attended for the GOB, including representatives from the
MRE; the Ministry of Development, Industry, and Commerce; the
Ministry of Agriculture; the Ministry of Finance; the Ministry of
Health; the Ministry of Justice; the Ministry of Culture; ANVISA
(Brazil's FDA-equivalent); INPI (Brazil's Patent/Trademark agency),
the Federal Police; and the Federal Highway Police. End Summary and
Introduction.

Multilateral Trade Talks
--------------

3. (SBU) In addition to the October 17 Bilateral Consultative
Mechanism discussions with Azevedo et. al., Eissenstat, Broadbent,
and Cronin met the previous day with the MRE's Chief of
International Trade Negotiations, Amb. Regis Arslanian. In the
meeting Arslanian painted a positive picture of the Mercosul's
ongoing trade talks. Arslanian said that the Mercosul/Israel and
Mercosul/South Africa Customs Union (SACU) negotiations were well
advanced and that the final goods-only agreement would cover 100% of
products traded. (Note: it is unclear whether Arslanian was
including agriculture in his calculation of product coverage or
not.) With respect to talks with Mexico, he stated that discussions
on a Mercosul-Mexico FTA were in the very preliminary stages and
that, despite press reports to the contrary, Brazil had absolutely
no intention of seeking a bilateral agreement with Mexico -- as
opposed to the pact contemplated under the aegis of Mercosul.


4. (SBU) Arslanian was similarly hopeful regarding the Mercosul/EU
FTA talks, stating that what was currently on the table reached 88%
of goods traded. (Excluded were machines, chemicals, electronics,
and certain auto parts; agriculture was included in the 88% although
the EU contemplated that sensitive products would be subject to
quotas.) Besides the phase-in period, where the EU sought 10 years
and Brazil 18 years, the principal areas in contention, he said,
were services (where Brazil was on the defensive) and agriculture
(where the EU was on the defensive). Brazil had offered 100%
national treatment to the EU and, on investment, was willing to open
almost all areas to the EU, including manufacturing and agriculture.
Arslanian argued that the GOB was similarly forthcoming on
services, although, in general, it much preferred mode 1 over mode

3. If the EU could be more flexible on agriculture, Arslanian
declared, the upcoming November 6-7 talks in Rio could bring an
agreement within reach. He cited the EU's offer on beef as an

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example of its intransigence. Currently, under an onerous 175%
tariff Brazil exports 222,000 tons of beef per year to the EU.
However, the EU's present offer would establish a quota system under
which Brazil would only be able to export 116,000 tons per year.
Indeed, Arslanian said, the EU would have to improve its offer on
12-13 agricultural items, including sugar, poultry, wheat, ethanol
and dairy.


5. (SBU) Finally, Arslanian expounded on Brazil's current
situation regarding Bilateral Investment Treaties (BITs). While
the GOB has signed 14 such agreements with countries such as
Germany, Spain, Belgium, Italy, Chile, and Korea, the Brazilian
Congress has either rejected them or put them on hold - principally
because of provisions subjecting parastatals to binding
international arbitration. To get the investment agenda moving
again, Arslanian reported that the GOB was now consulting with the
legislature on a new model BIT (which excluded controversial items
such as transfer of royalties, expropriation, and, of course,
binding international arbitration for state-owned enterprises).
A/USTR noted that in any BIT protection for investors in disputes
with state parties would be of critical importance to the USG.


6. (SBU) The next day U.S. del explored Brazil's international
trade scenario with Azevedo as well. With respect to the
EU-Mercosul talks, Azevedo echoed many of Arslanian's statements,
noting that the two sides were testing to see if progress could be
made on agriculture, services, and flexibilities. Notwithstanding
the expectations of some, he said, non agricultural market access
(NAMA) had not proven to be a great stumbling block nor had the
imminent accession of Venezuela to Mercosul. What had proven to be
a problem, he continued, was the EU's insistence on the concept of
Doha Round "downpayments" in the context of the agriculture
discussions. Under this concept, if whatever the EU offered under
an eventual Doha Round agreement was greater than what Brazil
received under the Mercosul-EU FTA, then Brazil would have to make
further concessions to pay for the difference. Azevedo
characterized this as negotiating twice for the same benefit, adding
that this was unfair. Azevedo also noted that Mercosul was
discussing a trilateral agreement with India and the SACU (a
long-term goal),looking at broadening its bilateral goods-only pact
with India to include greater product coverage, and moving forward
on bilaterals with Pakistan and India.


7. (SBU) Finally, both Arslanian and Azevedo (the latter in
informal remarks on the margins) stated that in Brazil's
multilateral and Mercosul trade negotiations the country was doing
all that it could to be forward-leaning. Doing more on services,
Arslanian noted, would require the GOB to amend up to 33 statutory
and constitutional provisions. For his part, Azevedo opined that
opening up Brazil's manufacturing sector to greater competition
could end up knocking the country's macro-economic adjustment
off-track. Brazil would do what it could, he continued, but would
be careful not to sign up to commitments that politically it could
not deliver.

WTO Issues
--------------

8. (SBU) AUSTR Eissenstat's emphasized the rationale for the
creation of the Bilateral Consultative Mechanism, that is to work
towards solution of problems. The agenda proposed by Brazil did not
provide many opportunities to find solutions, as most issues raised

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were being dealt with in the WTO or were beyond the scope of USTR to
resolve.


9. (SBU) Leading off the discussion on WTO, Azevedo raised issues
which the GOB has broached with the USG a number of different times
during the past year. He stated that the GOB was concerned about
the need to make progress on the Doha Round, and saw several
critical events upcoming: i.e., both the U.S. and Brazilian
elections, expiration of TPA in mid-2007, and U.S. congressional
consideration of the Farm Bill. He declared that for Brazil, it was
essential that the USG improve its offer on agricultural subsidies
and ensure that our Doha commitments included compliance with the
WTO cotton panel ruling. A/USTR Broadbent noted that to date, the
USG felt that it had been unable to get substantive commitments from
Brazil on NAMA and services and that in the end a balanced package
would be necessary. Azevedo said that a successful Doha Round would
allow the U.S. and EU to lock in lower Brazilian tariffs and that we
should not underestimate the value of binding Brazilian tariffs at a
particular level. While during the recent 20 years Brazil tariffs
had fallen, he observed, it could well be that in the wake of a
failed Doha Round protectionist elements within the country managed
to reverse this trend. A/USTR Eissenstat replied that the USG has
consistently embraced the concept of an ambitious Doha Round and
that we would need something beyond binding lower tariffs to be
successful. He noted the frustrations in Congress regarding
movement on tariffs, in particular bills that would raise tariffs.
AUSTR Broadbent noted that U.S. industry does not view percent cuts
in bound tariff rates that do not penetrate applied tariffs as a
significant tariff concession in the NAMA negotiations. To earn the
support of U.S. manufacturers for the Doha Round, Brazil will need
to offer cuts in real tariffs paid at the border, cuts that are
large enough to increase trade flows. Cuts in bound tariffs are not
enough.


10. (SBU) Turning to the issue of trade remedies, Azevedo stated
that the GOB had concerns about the methodology the ITC used in
anti-dumping cases. In one recent case, he said, in calculating
anti-dumping margins the ITC had not acknowledged the possibility of
the exporter recouping the value added (ICMS) tax paid. While he
did not definitively state that the GOB would challenge this in the
WTO, he characterized this agenda item as "early warning" for the
USG. Azevedo went on to complain about the continued used by the
USG of "zeroing" methodology after it had been outlawed by the WTO.
Eissentat noted that WTO rulings on zeroing were complex and that
under certain circumstances zeroing was permissible. On the issue
of USG pre-privatization subsidies, Azevedo stated that as time
passed this was becoming much less of a problem in countervailing
duty cases. On ORANGE juice, Azevedo observed that next year the
GOB might seek to argue that Hurricane Katrina had changed
circumstances with respect to past USG anti-dumping determinations.
On shrimp, he said that the GOB had a number of complaints about the
USG methodology in its anti-dumping determinations (zeroing,
definition of injury, definition of domestic industry, etc.) and
would participate in the India/Thailand/Ecuador WTO case as a third
party. And on cotton, Azevedo opined that the USG had not complied
with the previous WTO panel decision and if the Doha Round remains
stalled, the GOB "could not sweep this under the rug." Finally,
Azevedo declared the rules negotiations in the Doha Round were "not
a minor issue" for the GOB. Part and parcel of its desire for gains
on market access, he said, was the need to protect these gains
through a good package on rules.

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11. (SBU) Responding to the concerns on GOB's trade remedies,
Eissenstat noted that all these matters had been in dispute for some
time and it was clear that the USG viewed the rights and obligations
on rules differently from the GOB. Specifically, that the United
States would reserve that right to use its trade remedy law to
ensure fair trade practices. On the rules negotiations he made the
point that this was an important area for the USG as well. He also
noted that the U.S. and Brazil have found areas where their
interests converge in the rules negotiations and that we shared
Brazil's desire for a balanced package. On cotton, Eissenstat noted
that the United States had taken significant steps to comply with
the WTO ruling. Eissentat went on to observe that the USG was
concerned that recently someone had leaked to the press the story
that the U.S. had objected to one of the proposed judges on the WTO
cotton compliance panel. Such a leak was counter to long-standing
WTO norms. After consulting with his colleagues, Azevedo replied
that the GOB also was concerned that such a leak had occurred but
assured the U.S. side that no one in Brasilia was responsible for
it.

Agriculture/GSP
--------------

12. (SBU) Leading on agenda item of agriculture, Eissenstat stated
that while some had focused on the impending expiration of TPA, both
the GSP and the Farm Bill would soon expire as well. The USG has
recognized that given the upcoming review of the Farm Bill, some
reform of U.S. programs was in order. In response to Azevedo's
query as to how Doha Round talks could proceed without TPA in place
-- i.e., foreign negotiating partners could not be sure that the
U.S. Congress wouldn't change any deal agreed to --, both Eissenstat
and Broadbent reiterated that for Doha to succeed, all parties must
move together. Eissenstat emphasized that it would not make sense
to put something on the table in the negotiation if the other side
could simply pocket it and move on. Broadbent added that we were
looking for reciprocal progress, that U.S. industry does not feel
that it has much to gain at this juncture. Azevedo replied that
based upon his reading of the consensus of analysts, it did not
appear that the U.S. was ready to move on agriculture.


13. (SBU) With respect to GSP renewal, Broadbent explained that
the U.S. was conducting the first review of this program in 20
years. In 2005 the USG had completed its first stage review, she
said, and the second stage review (focusing on 13 large GSP
beneficiary countries, including Brazil) was now ongoing and looking
at, inter alia, the 83 current competitive need limit waivers
(CNLs). During this process over 800 parties had submitted public
comments, including nearly 200 from, or associated with, Brazil.
Broadbent noted that the results of USTR's review would soon go to
Congress and that we hoped to persuade the legislature to extend the
program. Azevedo stated the Brazilian Ambassador Abdenur was
following the GSP debate closely. The GOB would take it very badly,
he declared, if it appeared that the country had lost GSP
eligibility because of: 1) a misperception in Congress that it had
not been helpful on WTO, 2) discrimination on the part of the USG,
or 3) some sort of WTO-inconsistent act. A/USTR Broadbent assured
the Brazilians that the USG decision on GSP would be
non-discriminatory and consistent with WTO rules.


14. (SBU) Closing out the discussion of GSP, Azevedo stated that
the GOB had an ongoing issue with the USG's import classification of

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Brazilian cachaca - which was being treated the same as rum even
though its taste was "distinctively different." USTR Southern Cone
Director Cronin replied that the United States was aware of Brazil's
interest in getting cachaca designated as a beverage typical of
Brazil (i.e., a designation similar to that done for Irish whiskey)
but that under the CFR this required a 60-day public comment
period. She noted that domestic spirits manufacturers would
certainly submit comments, and that it was not clear that they would
support such a designation.

Ethanol
--------------

15. (SBU) Azevedo turned to Claudia Vieira Santos, Deputy Chief of
the MRE's Energy Department, to brief on the GOB's efforts on
ethanol. Santos stated that Brazil saw ethanol as a strategic issue
on which it could cooperate with both the developing and the
developed countries. Joint initiatives on ethanol could have a
positive effect on bilateral relations in general, she continued,
with increased trade represent just one possible impact. (Santos
promised to provide the U.S. del - through the Brazilian Embassy in
Washington - a list of areas on which the Brazilian government was
moving forward on bilateral international cooperation.) Santos
pointed to President Bush's early October speech to the Renewable
Energy Conference in St. Louis as evidence that other countries
shared this vision. Azevedo seconded this assessment, noting that
biofuels cooperation could possibly be a major element in Brazil's
agenda with the U.S. Still, he characterized the USG's imposition
of a 54 cent per gallon tariff on imported ethanol as an area of
concern for Brazil. In addition, he made clear that Brazil would
oppose any efforts by the USG to exclude this levy from any general
tariff reduction formulas agreed to in the Doha Round. Such a move
would set a dangerous precedent, he said, which Brazil would
"forcefully seek to correct."


16. (SBU) A/USTR Eissenstat made it clear that the USG viewed the
54 cent per gallon tariff as a national security measure and had no
intention of making this issue part of any tariff-cutting
discussions in the Doha Round or that it was subject to discussion
in the biofuels initiative.

The Commercial Dialogue
--------------

17. (SBU) Embassy Commercial Attache Dinah McDougall briefed the
group on the progress made to date in the bilateral Commercial
Dialogue initiated in June 2006 by Secretary Gutierrez and Minister
of Development, Industry, and Commerce Luiz Fernando Furlan.
McDougall noted that the Dialogue and its four Working Groups
(Business Facilitation, Investment Promotion, IPR, and Standards)
did not overlap with the BCM process as the Dialogue focused on
doing business issues not trade negotiations. She stated that the
two ministers - Gutierrez and Furlan - were set to meet in early
November in Washington; thereafter, a Brazilian delegation planned
to travel to the United States pursuant to a U.S. Customs-related
program on "Moving Goods Efficiently." MDIC staffer Mauricio do Val
echoed McDougall's remarks, declaring that the GOB was happy with
how the Dialogue was evolving.

Intellectual Property Rights
--------------

18. (SBU) On IPR, the Brazilian side had its MRE IPR Office
Director brief on the status of the GOB's efforts. In addition,

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officials from the public-private Anti-piracy Council, the Federal
Police, and the Federal Highway Police spoke on their individual
agency's workplans. Eissenstat stated that the USG applauded the
progress that Brazil had made over the past year on copyright
piracy. He asked whether the Brazilian government would be willing
to receive a USTR delegation later this year to look at IPR issues
in greater depth. Azevedo responded that the GOB felt that the U.S.
was unwilling to recognize what Brazil had done on IPR. It was
extremely frustrating, he said, for Brazil to constantly be subject
to scrutiny from the USG but not receive any credit for its
achievements. Typical of this, he stated, was the USG's
unwillingness to downgrade Brazil's Special 301 status from Priority
Watch List to Watch List in the wake of the January 2005 dismissal
of industry's copyright piracy petition. Eissenstat noted that
copyright piracy was an important issue for the USG and that
notwithstanding the GOB's efforts the size of the problem remained
immense. In the end, Azevedo appear to acquiesce to the travel of
the proposed USTR IPR delegation.

USTR Comment
--------------

19. (SBU) Brazil asked for this meeting of the BCM. Given the
offensive nature of its proposed agenda, it is not clear what Brazil
hoped to achieve, other than to rehash issues that trouble the
bilateral and multilateral trade relationship. At the lunch that
followed the meeting, Azevedo made it clear that he did not expect
to chair subsequent meetings of the BCM, so it does not seem the
meeting was called in order to establish Azevedo as AUSTR
Eissenstat's new counterpart. In terms of Brazil's trade policy,
the meeting with Arslanian, the BCM, and the lunch all pointed to a
continuation of a trade policy that does not lend itself to finding
solutions to bilateral problems or additional, significant common
ground in the multilateral negotiations. USTR will, of course,
continue to engage - but is not overly optimistic. End USTR Comment


20. (U) This cable was cleared by USTR prior to transmission.

SOBEL