SCENESETTER FOR THE VISIT OF CODEL SPECTER

UNCLAS SECTION 01 OF 05 BRASILIA 000678

SIPDIS

STATE FOR H AND RM/F/DFS/FO/AA/CAA
STATE FOR WHA/BSC

SENSITIVE
SIPDIS

FROM CHARGE CHICOLA FOR CODEL SPECTER

E.O. 12958: N/A
TAGS: OREP AFIN AMGT ASEC PGOV ECON KSCA SENV OTRA DR CO
PE, BR
SUBJECT: SCENESETTER FOR THE VISIT OF CODEL SPECTER

REFS: (A) STATE 52607, (B) STATE 52608, (C) BRASILIA 674


1. (SBU) The United States Mission in Brazil warmly welcomes your
April 12-15, 2006 visit to Brasilia (DF) and Manaus (AM),Brazil.
We look forward to your trip and are arranging meetings and events
for you in Brasilia and Manaus. As the Charge d'Affaires, I will
meet your party upon arrival and accompany you to your meetings in
Brasilia. Science Counselor Patricia Norman will meet you in
Manaus, and accompany you throughout your stay in Manaus.


2. (SBU) Your trip comes at a transition point on the political
scene. During the second semester of 2005, congressional deputies
from Lula's governing coalition were accused of accepting bribes,
while officials from the President's party (the PT) were alleged to
have engaged in influence peddling and illegal campaign
fund-raising. These revelations forced the resignation of several
members of Lula's inner circle, including his Chief of Staff (who
was also expelled from Congress) and more recently his Finance
Minister (who is facing a criminal investigation).


3. (SBU) However, "scandal fatigue" has set in, and President Lula
has successfully used the slack time over the Brazilian holidays to
recover lost political ground. Recent polls show Lula regaining the
lead in the presidential race, and defeating the recently chosen
PSDB party candidate, Geraldo Alckmin, were elections held now. As
we get closer to the October presidential elections, Lula will
likely expand anti-poverty programs and increase pork-barrel
spending, to cement his standing among working class voters.
Despite Lula's recent recovery in polls, the potential for
additional scandal revelations and the probability of a well-run
national campaign by Alckmin that raises his profile with voters
make sound predictions impossible at this point.

THE BILATERAL RELATIONSHIP
--------------


4. (SBU) While relations between the U.S. and Brazil are friendly,
often the USG encounters major difficulties in gaining the
cooperation of senior policymakers on issues of significant interest
to the United States. Eager to assert its own influence, the
Brazilian government shies away from cooperation with the USG -
unless it can clearly be characterized as a reciprocal exchange
among equals. Indeed, hyper-sensitivity on issues viewed as
infringing on Brazil's sovereignty can get out of hand and may be
seen as signs of political immaturity. Many Brazilians believe the
U.S. has designs on the Amazon. Our fingerprinting of visitors to
the U.S. drew reciprocal treatment for Americans here; visa and
immigration issues remain sensitive points.


5. (SBU) During recent months, our ongoing dialogue with the
Brazilians has focused on a variety of potentially useful projects
for both sides. We sought to interest the GOB in a Defense
Cooperation Accord, but the Foreign Ministry rejected the proposal
even though the Defense Ministry was supportive. Gaining agreement
on privileges and immunities to be granted U.S. servicemen engaging
in military exercises has been just as tough sledding, as the
Foreign Ministry saw it as "a foot in the door" and linked it with
Brazil's strong opposition to Article 98 agreements. We are
receptive to renegotiation of a stalled bilateral agreement
governing space launches at the country's equatorial base at
Alcantara, but the GOB has moved glacially to re-engage, even though
the agreement clearly serves Brazilian interests. On trade issues,
when unscripted, President Lula has characterized the FTAA as "off
his agenda." In addition, in the wake of its WTO victory against
the USG on cotton subsidies, Brazil has been vocal in seeking to get
the USG to enact remedies immediately, notwithstanding the fact that
our Congress is still working on the Farm Bill. IPR is another sore
point, as it has become clear that the USG and the Brazilian
government have different views on the degree of protection to be
afforded to intellectual property. Only after much lobbying have we
gotten the GOB to: a) turn the corner on copyright piracy, and b)
persuaded policymakers to seek negotiated solutions rather than
compulsory licensing of AIDS anti-retrovirals. Some U.S. funding in
support of the development of Brazil's HIV/AIDS programs have run
into a snag. Nearly $5 million in support may be lost if issues
involving grants to local NGO's are not resolved.


6. (SBU) However, not all our conversations are difficult. At the
personal level, Lula has met President Bush several times and the

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two have a good rapport. On issues involving matters perceived as
technical in nature - i.e., law enforcement and science (but not
counter-terrorism) - the GOB is eager to engage. For example, they
are active in the planning of a bilateral science and technology
commission meeting planned for June, a positive outcome of the POTUS
visit to Brazil last November. The Brazilians are also interested
in working with U.S. forest agencies in exchanging expertise on
forest management. The CDC has had excellent success in working
with the Ministry of Health in technological transfer in health.
NIH medical research partnerships have increased. In another area
from 2003 to 2004, the GOB worked quietly with us on the timing and
details of its shoot-down program to accommodate our statutory
requirements (although now a new crop of GOB bureaucrats appears to
be unaware of the government's past promises).


7. (SBU) On development assistance issues, our dialogue is positive
- but constrained. Notwithstanding lackluster results to date, the
Brazilian government's multi-billion dollar poverty alleviation
program -Zero Hunger - receives substantial funding from the World
Bank and IDB. Given USG budget constraints and the fact that Zero
Hunger is, in essence, a cash transfer program (albeit with
conditions),USAID support has been limited. Instead of focusing on
cash transfers to the poor, USAID has sought to target its efforts
towards promoting sustainable livelihoods - inter alia, through
working with small and medium-sized enterprises. The Embassy's
Public Affairs programs aimed at promoting young leaders takes a
similar targeted approach. This difference in focus, broad cash
transfers versus targeted assistance, ends up putting the USG at the
margins of Brazil's overall anti-poverty efforts.

AGRICULTURE
--------------


8. (U) Agriculture is a major sector of the Brazilian economy, and
is key for economic growth and foreign exchange. Agriculture
accounts for 13% of GDP (and 30% when including agribusiness) and
36% of Brazilian exports. Brazil is the world's largest producer of
sugar cane, coffee, tropical fruits, frozen concentrated orange
juice (FCOJ),and has the world's largest commercial cattle herd
(50% larger than the U.S.) at 170 million head. Brazil is also an
important producer of soybeans (second to the United States),corn,
cotton, cocoa, tobacco, and forest products. The remainder of
agricultural output is in the livestock sector, mainly the
production of beef and poultry (second to the United States),pork,
milk, and seafood.

ENVIRONMENT
--------------


9. (U) As one of the world's "megadiverse" countries, environmental
issues loom large in Brazil. Of the world's known plant species,
22% exist in Brazil, and the figures for birds (17%),mammals (11%),
and fish (11%) are also significant. The Amazon basin holds 20% of
the world's fresh water. Presently, approximately 22% of the
Brazilian Amazon is set aside as official indigenous reserves and an
additional 12% of the Amazon should be protected in parks over the
next ten years. Amazon deforestation rates, however, have been very
high the last few years, driven by strong expansion in Brazilian
agriculture, particularly the drive for land by the cattle and soy
industries. Yet, a significant fall in the rate of deforestation
from 2005 to 2006 marks what many hope is the turning point for the
Amazon and Brazil's efforts to combat deforestation.


10. (U) Internationally, Brazil is an energetic advocate on
environmental issues and treaties including the Kyoto Protocol.
Yet, for many, the Brazilian government has not met the high and
largely exaggerated expectations of many environmentalists during
the first years of the Lula Administration. The early 2005 passage
of a Biosafety law, representing an opportunity to legalize GMO
crops, drew especially strong criticism from environmentalists. The
agricultural industry's lobbying for expansion of the transportation
network in the Amazon has raised additional concern. Meanwhile, the
Ministry of Environment and others in the government have launched
several policy initiatives focused on sustainable development and
conservation in the Amazon and Atlantic Forests, hoping to broaden
the policymaking base for environmental protection. These efforts
were recently strengthened by the passage of a forest concessions
law. As in other policy areas, the Lula Administration is more
centrist on environmental issues than much of its devoted, leftist

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political base expected.

ETHANOL
--------------


11. (U) The success of Brazil's ethanol program has made it a model
for the world in terms of alternative energy. Brazil's comparative
advantage is its ability to inexpensively produce ethanol from
sugarcane, which has the highest starch content of any plant stock.
In addition to obtaining five harvests from one planting, cane hulls
(bagasse) are used to produce the thermal energy necessary to power
the conversion process. Cane also requires less processing than
ethanol produced from corn -- which is the method used in the U.S.
to manufacture ethanol. According to the World Bank, at current
prices, Brazil can make ethanol for about US$1 a gallon, compared
with the international price of about US$1.50 a gallon for gasoline.
At the pump ethanol receives favorable tax treatment from the
Brazilian government. It is exempted from the largest federal tax
on gasoline (CIDE) and is subject to lower rates on two other
federal levies (PIS and COFINS). Nevertheless, ethanol prices can
vary substantially from state to state and can be volatile during
the interharvest season when supply is not guaranteed. In contrast,
gasoline prices tend to vary less and are controlled by the
government.


12. (U) Since the 1980s, Brazil has attempted, without great
success, to promote ethanol fuel exports to the United States. U.S.
tariffs and charges make Brazilian imports uncompetitive. In
addition to import tariffs of 1.9 to 2.5 percent, the U.S. imposes a
54 cents/gallon charge on ethanol imported for use as fuel. This
charge must be paid by countries not covered by FTAs or other trade
preference arrangements. Given the requirements of its fast-growing
domestic market, whether Brazil will indeed be able to produce
enough ethanol to supply international markets is an open question.
Some estimate that over the next one to two years, the maximum
percentage of Brazil's cane crop which can be devoted to ethanol
production is 54%. If so, this would mean that Brazilian ethanol
production is already running at 95 percent of capacity; and the
country's ability to expand its sugarcane acreage is limited to
perhaps 20 percent over the next 3-4 years.


13. (U) Brazil's Ministry of Science and Technology has indicated
its desire to work with the United States on technical cooperation
programs relating to ethanol.

FOREIGN POLICY
--------------


14. (SBU) Reflecting Brazil's ambivalence towards the United States,
President Lula has run an activist foreign policy with a focus on
South America and the Third World, seeking to forge alliances with
other mid-sized powers (South Africa, India, etc.). He has traveled
extensively in pursuit of a higher international profile for Brazil.
Despite prodding from the USG and others, Lula has refused to
condemn Cuba for human rights violations and, in fact, at one point
pushed for Cuban membership in the Rio Group. Brazil has also
advocated a Cuba-Mercosul trade pact, and has now agreed to upgrade
Venezuela from associate membership to full membership status in
Mercosul. The GOB has worked to increase both its economic and
political ties with Venezuela. Enhanced integration of the two
countries' energy sectors is high on its agenda. Lula has been
especially solicitous of Chavez. During the September 29-30, 2005
South American Community of Nations Summit in Brasilia, Lula praised
the Venezuelan President's democratic credentials ("if anything,
Venezuela has an excess of democracy") and declared that the Chavez
government had been demonized by its foes. Lula reiterated these
themes during an early December visit by Chavez to the Northeastern
state of Pernambuco.


15. (SBU) Given its size and natural resources, Brazil has long seen
itself as the natural leader of the region (even though that
perception is not shared by its neighbors).
Emblematic of Brazil's efforts to gain greater standing on the world
stage is its tenacious pursuit of a permanent UN Security Council
(UNSC) seat. In fact, many observers point out that Brazil has
"subordinated" other economic and political interests with such
countries as China and Russia in exchange for support (which has not
been forthcoming) for its UNSC aspirations. Brazil and other G4
states (India, Germany, Japan) are, despite recent setbacks,

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continuing to press their campaign for a vote on a resolution on
UNSC reform. This stance is at odds with the position of many Latin
American countries, including those which Brazil believes should
follow its "natural leadership."


16. (SBU) Brazil has long seen international fora as a way to
enhance its international stature. Reflecting this, in 2005 it
launched failed national candidates for the top jobs at both the WTO
and the IDB. The failure of both, together with the unlikely
prospects for a permanent seat in the UNSC, has widely been seen in
Brazil as a "political disaster.

PRESIDENT LULA
--------------


17. (SBU) President Luiz Inacio Lula da Silva was inaugurated in
January 2003 after a career as a Sao Paulo metalworker and labor
leader. He founded the left-of-center Workers' Party (PT) in 1980
and lost three presidential campaigns before winning in the October
2002 elections. Lula is eligible to run for reelection in October

2006. Elected in large part on promises of promoting an ambitious
social agenda, including a "Zero Hunger" program, Lula's government
has failed to deliver much in this area, as managerial shortcomings
and the public's top concern - crime and public security - have not
improved under this administration.


18. (SBU) As noted above, in recent months the Lula Administration
has been beset by a grave political crisis as interlocking influence
peddling/vote-buying scandals have plagued elements of Lula's PT
party. During the second half of 2005, the crisis placed Lula on
the defensive and politics were dominated by investigations,
accusations and revelations. The President's Chief of Staff
resigned his post and was later expelled from Congress. Meanwhile,
several other congressmen are the subjects of investigations and
expulsion proceedings owing to bribery allegations. Most recently,
Lula's influential Finance Minister Palocci has stepped down amidst
renewed charges of corruption. Thus far, Brazilian society -
including the opposition - seems disinclined to hold Lula personally
responsible for the scandals, and he has recovered some lost ground
in public opinion.

MACRO-ECONOMIC DEVELOPMENTS
--------------


19. (SBU) President Lula and his economic team have implemented
prudent fiscal and monetary policies and pursued necessary
microeconomic reforms. As a result, Brazil's economy, aided by a
benign international environment, has flourished. GDP growth of
4.9% in 2004 has coupled with booming exports, healthy external
accounts, tame inflation, decreasing unemployment and reductions in
the debt-to-GDP ratio. While GDP growth in 2005 registered 2.3% --
with third quarter growth coming in at negative .08% -- economic
activity should pick up in early 2006. In recent months the real
has risen sharply against the dollar while the Sao Paulo Stock
Exchange (BOVESPA) has hit record levels. In March 2005, the
Brazilian government declined to renew its Stand-By Agreement with
the IMF and in mid-December 2005 it announced it would prepay both
its remaining IMF and Paris Club obligations.


20. (SBU) Overall, while Brazil has made considerable progress,
problems remain. Despite registering its first year-on-year decline
in 2004, Brazil's (largely domestic) government debt remains high,
at 51% of GDP. Real interest rates (at nearly 12 percent) are among
the highest in the world. Income and land distribution remain
skewed. Investment (including FDI) is low. The country's sovereign
risk ratings are two to three levels below investment grade. And
the informal sector constitutes between 35 to 40 percent of the
economy, in part because the tax burden (nearly 38 percent of GDP)
is so high. The good news is that the uncertainty surrounding the
political scandal has not frightened away foreign investors.


21. (SBU) Sustaining high growth rates in the longer term depends on
the impact of President Lula's structural reform program and efforts
to build a more welcoming climate for investment, both domestic and
foreign. In its first year, the Lula administration passed key tax
and pension reforms to improve the government fiscal accounts.
Judicial reform and an overhaul of the bankruptcy law, which should
improve the functioning of credit markets, were passed in late 2004,
along with tax measures to create incentives for long-term savings

BRASILIA 00000678 005 OF 005


and investments.


22. (SBU) Public-Private Partnerships, a key effort to attract
private investment to infrastructure, also passed in 2004, although
implementation of this initiative still awaits promulgation of the
necessary regulations. Labor reform and autonomy for the Central
Bank were on the agenda for 2005, but now look unlikely to be
addressed until after the October 2006 elections. Despite this
well-considered reform agenda, much remains to be done. The
government needs to improve the regulatory climate for investment,
particularly in the energy sector; to simplify torturous tax systems
at the state and federal levels; and to further reform the pension
system. Given the proximity of the October elections, prospects for
much of this reform agenda are dim for the remainder of Lula's
term.

TRADE POLICY
--------------


23. (SBU) To increase its international profile(both economically
and politically),the Foreign Ministry (Itamaraty) is seeking
expanded trade ties with developing countries, as well as
strengthening the Mercosul customs union with Uruguay, Paraguay and
Argentina. Arguably the GoB has fallen short on this latter
objective. The Brazil-Argentine relationship is rife with trade
disputes, recently leading to adoption of a safeguard mechanism for
bilateral trade. Meanwhile, Uruguay and Paraguay regularly complain
that Brazil and Argentina reap a disproportionate share of benefits
from the bloc, and threaten the group's solidarity in various ways
-- for instance, Uruguay's recent open discussion of a possible FTA
with the United States, which would contravene Mercosul rules.


24. (SBU) Nonetheless, the bloc remains engaged in certain external
trade negotiations. In 2004, Mercosul concluded free trade
agreements with Colombia, Ecuador, Venezuela and Peru, adding to its
existing agreements with Chile and Bolivia to establish a commercial
base for the newly-launched South American Community of Nations. As
noted earlier, Mercosul is upgrading Venezuela's status from
associate to full membership. In addition to Cuba, the bloc is
currently exploring free trade talks with Israel, the Dominican
Republic, Panama and states of the Gulf Cooperation Council, as well
as trying to build on partial trade liberalization agreements
concluded with India and South Africa in 2004.


25. (SBU) China, which was offered market economy status by Brazil
as a part of Lula's effort to secure PRC support for Brazil's bid
for a USNC seat, has increased its importance as an export market
for Brazilian soy, iron ore and steel, becoming Brazil's fourth
largest trading partner and a potential source of investment.
However, low-priced Chinese imports, particularly in the textile,
footwear, and toy sectors, are now threatening to displace domestic
Brazilian production. As many Brazilian observers have indicated,
all this effort is aimed at countries which together represent less
than a third of Brazil's foreign trade. Free trade negotiations with
the EU continue to languish.

CHICOLA