CODEL GRASSLEY: FRANK DISCUSSIONS ON TRADE IN SAO PAULO

UNCLAS SECTION 01 OF 06 SAO PAULO 000436

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/BSC, WHA/EPSC, WHA/PDA, EB/MTA
STATE PASS USTR FOR AUSTR EISSENSTAT AND SULLIVAN/LEZNY
H PASS SENATORS GRASSLEY, CRAPO, ALLARD
H ALSO PASS REPS KING, ENGLISH, CARNAHAN, PETERSON, ISSA
NSC FOR CRONIN
TREASURY FOR OASIA, DAS LEE AND FPARODI
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC ALSO FOR 3134/USFCS/OIO/SHUPKA
AID/W FOR LAC/AA
SOUTHCOM FOR POLAD

TAGS: OREP PGOV PREL ETRD EAGR ECON ENRG BR
SUBJECT: CODEL GRASSLEY: FRANK DISCUSSIONS ON TRADE IN SAO PAULO


A) SAO PAULO 360; B) SAO PAULO 352; C) BRASILIA 628


1. (SBU) SUMMARY: During its recent visit to Sao Paulo, CODEL
Grassley engaged in vigorous and sometimes contentious discussions
with representatives of Brazil's private sector over U.S. and
Brazilian trade policies and different approaches to bilateral and
multilateral trade negotiations. Brazil's most powerful industrial
association, which officially supports free trade but has many
protectionist members, urged greater leadership from the United
States in international trade negotiations and a more generous US
offer to reduce agricultural subsidies. The Sao Paulo business
sector in general wants closer ties to the U.S., is frustrated with
the Lula administration's excessive focus on South-South trade at
the expense of expanding trade with the U.S. and other developed
countries, and overwhelmingly supports (in private) opposition
presidential candidate Geraldo Alckmin over the reelection of
President Lula. The visit offered an excellent opportunity for the
CODEL to hear directly from important private sector leaders on a
number of issues, as well as to expose the Brazilians to the
perspective of key members of the U.S. Congress. END SUMMARY.


2. (U) Senator Charles Grassley (IA) - Chairman of the Senate
Finance Committee - and his delegation visited Maringa, Parana state
and Sao Paulo, March 22-23. Other members of the delegation
included Senators Mike Crapo (ID) and Wayne Allard (CO);
Representatives Collin Peterson (MN),Phil English (PA),Steve King
(IA),Darrell Issa (CA),and Russ Carnahan (MO); and, Assistant U.S.
Trade Representative for the Americas Everett Eissenstat. In
Maringa the delegation toured a sugar mill and ethanol plant. In
Sao Paulo, it met with the leadership of the Federation of
Industries of Sao Paulo State (FIESP) and the American Chamber of
Commerce (AMCHAM),and visited a General Motors facility where
members learned about the manufacture and operation of flex-fuel
automobiles. They also received a briefing on Brazilian agriculture
from a representative of the industry-funded think tank Institute
for International Trade Negotiations (ICONE). This cable addresses
the trade aspects of the Codel visit. The ethanol and
FlexFuel-engine automobile aspects, and Rep. Issa's separate meeting
with the Brazilian-Lebanese community, were reported in refs A-B.

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Very Frank Discussion on Trade with FIESP
--------------


3. (SBU) During a discussion that was unusually frank,
representatives of the Federation of Industries of Sao Paulo State
(FIESP) used their time with CODEL Grassley mostly to lecture the
Members of Congress and their staff on the pitfalls of current U.S.
tactics and positions regarding multilateral and bilateral trade
negotiations. Using a very Brazilian modus operandi, FIESP speakers
acknowledged the importance of Brazil's trade relationship with the
United States, while trying hard to appear fiercely independent -
but not belligerent - with respect to USG positions.


4. (SBU) In an encouraging introduction to an open and frank
discussion of business issues between U.S. lawmakers and leaders of
Brazil's industrial sectors, FIESP President Paulo Skaf noted the
historic ties between the United States and Brazil, and his
country's love of such things American as music and technology. He
reviewed highlights of Brazilian trade statistics and the basics of
trade relations between Brazil and the United States, noting that
the United States remains Brazil's number one single-country trading
partner.


5. (SBU) Skaf then turned the microphone over to his chief economic

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and trade advisor, former Ambassador to the United States Rubens
Barbosa, who challenged the U.S. lawmakers regarding U.S. trade
positions on agriculture and implored the United States to take a
leadership role to revive the stalled WTO Doha Round and FTAA
negotiations. He began by suggesting that the FTAA should not be
considered failed. Barbosa said a sound framework for the FTAA is
already in place due to Brazilian and U.S. leadership, and that with
a commitment to the process by our two leader nations, negotiations
need only be restarted in order to move the agreement forward. He
noted that he often needed to remind GOB representatives that 68
percent of imports to the United States face no tariffs, and he
proudly pointed out that Brazilian (applied) tariff have fallen in
recent years from an average of 55 percent to the current 11 percent
average. Barbosa then went on to describe how key Brazilian sectors
were affected by trade restrictions, and both he and several of the
other FIESP panelists said the United States is in the best position
to jump-start the FTAA negotiations by offering concessions,
particularly in the area of agricultural supports. He said
"balanced negotiations" were needed, and FIESP leaders also accused
the United States of abandoning multilateral trade agreements in
favor of bilateral agreements that hold little value in terms of
creating free trade and building regional relations.

Brazil Wants to Be Both Developed and Developing
-------------- ---


6. (SBU) In his response, Sen. Grassley led the Members in
suggesting the Brazilians were disingenuous by touting their
country's strong export figures but insisting that the United States
is in the best position to offer concessions in order to facilitate
multilateral trade pacts. The Members noted that Brazil wants to be
seen as a developed nation when it comes to negotiations regarding
agricultural exports, but simultaneously as a developing nation when
it comes to reducing its own tariffs on goods and services. One
Member said that dozens of small developing countries with nothing
to gain are "lining up" to negotiate free trade agreements with the
United States simply for the prestige of it, and that given Brazil's
desire to be a leading regional and global player, it should be more
willing to make serious concessions if it really wants WTO and FTAA
negotiations to resume in substance.


7. (SBU) Chairman Grassley pointed to continued reductions in
agricultural supports, as evidenced by Congress's recent budget
proposals, as proof that the United States remains committed to Doha
and FTAA. Refuting the charge that the United States has abandoned
the multilateral arena in favor of bilateral trade agreements,
Chairman Grassley said that while the United States also prefers
multilateral agreements, given the logjams in both the Doha Round
and FTAA negotiations, the United States will continue to negotiate
bilaterally wherever it can in order to continue facilitating free
trade in general.

Plea to Eliminate US Tariffs on Ethanol Imports
-------------- --


8. (SBU) Focusing on the popular issue of ethanol production,
Roberto Giannetti da Fonseca, Managing Director of FIESP's
International Affairs and Trade Department, pointed out that Brazil
and the United States are the world's leaders in ethanol production,
and together cannot meet the world's demand. He noted that
Brazilian producers recently met with California Governor Arnold
Schwarzenegger to discuss the use of Brazilian ethanol as an
additive to gasoline. Fonseca suggested Brazil and the United
States could use ethanol as a development tool, exporting technology
and know-how to Africa, for example, so countries there could use

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cassava as a means of producing fuel. Fonseca closed on a familiar
theme, calling on the Members of Congress to eliminate the current
U.S. tariff on ethanol imports as a means of ensuring free trade in
the product. Ref B provides fuller discussions of the CODEL's
discussions on the ethanol issue.

"Brazil Cost" Makes Brazilian Industry Less Competitive
-------------- --------------


9. (SBU) On a less policy-oriented and more practical note, Mario
Marconini, a FIESP industrial sector consultant, offered that most
industrialists in Brazil were adamant free traders, but pointed to
the high cost of doing business in Brazil as a key factor inhibiting
true competitiveness for the country. He lamented that Brazil's
businesses find themselves with an overall tax rate comparable to
that of Western Europe but without the corresponding benefits of
good infrastructure and government services. Thus, he said, even if
a WTO agreement is reached, Brazil will face significant trade
challenges from its competitors.

An Agriculture-Heavy List of Complaints
--------------


10. (SBU) A document distributed during the meeting entitled
"Statement by FIESP Regarding US-Brazil Relations" echoed the themes
raised in discussion, acknowledging the importance of the
relationship, lamenting the lack of an agenda, urging US leadership,
and complaining about FTAs the US is signing in the region. The
document also listed a number of trade concerns about which FIESP
seeks US Congressional support, including:

-- Generalized System of Preferences: 15 percent of Brazilian
exports to the US benefit from GSP and Brazil wants to maintain that
benefit.
-- Intellectual Property: FIESP supports rigorous IPR enforcement
in Brazil.
-- Aircraft Sales: Embraer should be allowed to sell 36 military
aircraft to Venezuela, a sale blocked by the USG.
-- Services: The US has many restrictions at state and federal
levels (such as citizenship and residency requirements) to the
practice of professional services such as law, engineering, and
architecture.
-- Double Taxation Agreement: Needed with increasing number of
Brazilian firms investing in the US, such as Embraer (aircraft),
Gerdau (steel),and Cutrale (orange juice).
-- Ethanol Subsidies: Reduction of US subsidies for ethanol (13
percent corn production subsidy, 13.5 cents credit per liter of
ethanol produced, import tariff of 13.8 cents per liter) will enable
Brazil to become a strategic partner to help the US' energy policy.
-- Soybean Subsidies: Brazil has considered challenging the US in
the WTO over the USD 1.5-3.2 billion in subsidies annually.
-- Anti-Dumping: 15 of the 278 anti-dumping measures in place in
the United States are against Brazil (orange juice, shrimp, and
steel),with the perception they exist for protectionist purposes.
Constraints faced by Brazilian producers (e.g., high taxes and
interest rates) hinder the adoption of sustained artificially low
prices.
-- Market Access: Although the US economy is open, there are key
markets in which Brazil is competitive that are restricted by quotas
(sugar, tobacco, beef),tariff peaks (footwear and textiles and
clothing),and sanitary barriers (chicken and beef).
-- WTO Panel Compliance: The US "has not complied" with the cotton
case deadline, and Brazil is considering requesting another WTO
panel because, while two offending subsidy programs have been
eliminated, certain other programs remain unchanged. The Byrd

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Amendment "should have been ended" in 2005, but will only be ended
in Jan. 2007; Brazil has the right to retaliate but has chosen not
to do so.

Comment: Behind FIESP's Positions
--------------


11. (SBU) FIESP is Brazil's most powerful industrial federation
encompassing 122 industrial sectors and thousands of businesses.
The current leadership under President Paulo Skaf, a textile
manufacturer with political ambitions who campaigned for the job
promising a closer relationship with the Lula administration, is
pro-free trade, despite the protectionist tendencies of many of its
members. Industrial leaders have confided to us that Brazil does
indeed have a handful of competitive industries that could withstand
a reduction of import tariffs that would be negotiated in the Doha
Round. FIESP's seemingly excessive advocacy of agriculture, an area
largely outside its membership, could well be hiding behind the
skirts of knotty agricultural issues to protect its inefficient
sectoral members as long as possible. At the same time, FIESP may
simply be taking an inherently Brazilian stand on trade issues it
believes are in the country's national interest. While FIESP has
tried to come closer to the current GOB, it has been frustrated by a
series of GOB decisions that are diametrically opposed to FIESP's
interests, such as the decision to grant market economy recognition
to China.


12. (SBU) Comment Continued: It is no secret that the overwhelming
majority of business people in Sao Paulo support opposition
presidential candidate Geraldo Alckmin.
Regarding Amb. Barbosa, who heads FIESP's economic council but does
not have a direct leadership position in the federation itself, it
seems Skaf wanted someone of Barbosa's experience and prestige in
international trade matters. However, Barbosa is strong-willed and
retains a certain compulsion to defend MFA policies, as he had to do
as ambassador to the US, even if his organization does not
necessarily agree with everything he says. In fact, a senior FIESP
leader confided to us well after the Codel meeting that Barbosa had
gone too far and did not accurately reflect FIESP's official views.
END COMMENT.

--------------
Breakfast at AMCHAM - Trade Negotiations
--------------


13. (SBU) Senator Grassley led off the cordial but spirited
breakfast meeting at AMCHAM by describing the purpose of the CODEL's
visit. The group wanted to encourage AMCHAM to continue its dialogue
with the GoB; learn more about the similarities between the two
countries in the agricultural sector, particularly in its approaches
to ethanol and addressing energy crises; and seek ways to move
forward with WTO Doha Round negotiations. This last issue was
particularly critical because the President's Trade Promotion
Authority (TPA) is due to expire in July 2007; thus it is incumbent
on Brazil and the United States to move forward quickly on trade
negotiations. Senator Grassley said he supports renewing TPA, but
there is resistance in Congress to liberalizing trade, as
demonstrated by the difficulty in ratifying the Central
American/Dominican Republic Free Trade Agreement (CAFTA/DR).


14. (SBU) AMCHAM Board Member Joseph Tutundjian (Chairman of
International Negotiations Task Force) said AMCHAM sees itself as
"lobbying" on behalf of both USG and U.S. private sector interests,
but is looking for more good-faith measures from U.S. to make its
task easier. At the same time, AMCHAM does not agree with the GoB's

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FTAA negotiating strategy. Members of the delegation noted that the
U.S. cannot make more substantive concessions on agriculture without
a comprehensive agreement. At the same time, the U.S.-Brazil Caucus
in the House is working to create awareness of the issues and
promote mutual interests.


15. (SBU) The AMCHAM leaders noted that in trade negotiations
involving Brazil, private actors and industry representatives do not
have the prominent role their counterparts did in other free trade
agreement (FTA) negotiations such as NAFTA. The Brazilian private
sector has been excluded from the debate on agriculture, which was
not the case in the NAFTA talks. The lack of strong private-sector
input has impeded progress. They also argued that the U.S. pursuit
of bilateral FTAs in Latin America is viewed as a threat and a means
of isolating Brazil. Senator Grassley rejoined that a comprehensive
WTO or FTAA agreement is needed to help establish rule of law and
facilitate private initiatives. It is Brazil that is isolating
itself through the deadlocks in WTO and FTAA negotiations with its
intransigent negotiating position. Despite the debacle at the
September 2003 Cancun WTO Ministerial, some progress was made at
December 2005 Hong Kong WTO Ministerial.


16. (SBU) AMCHAM members acknowledged that both the U.S. and Brazil
recognize that the EU is the greatest impediment to reducing
subsidies and resolving the agricultural disputes that have stymied
WTO negotiations. Both countries share an interest in persuading
the EU to make greater concessions. However, Brazil sees the EU as
less of an obstacle than the U.S., because the EU imports far more
agricultural products than the U.S. does. Senator Grassley and
other members of the delegation noted that agriculture is a
particularly difficult issue because it is a strategic pillar for
all parties. Grassley reiterated that the U.S. cannot make more
substantive concessions on agriculture without a comprehensive
agreement. The 2002 Farm Bill, which contains many agricultural
subsidies, remains in effect and will not be dismantled without such
an agreement. Congress would need grounds to replace it, such as
greater access to the Brazilian market in manufacturing and
services.

--------------
Roundtable on Agriculture
--------------


17. (U) Later in the day, CODEL Grassley attended a 45-minute
presentation and discussion on agricultural trade negotiations.
Scheduled speakers were Marcos Sawaya Jank, President of ICONE, a
think tank that advises Brazilian industry and government on trade
policy matters, and Joao Sampaio, President of the Brazilian Rural
Society (SRB),the Brazilian equivalent of the American Farm Bureau.
In this event, Sampaio deferred to Jank and indicated that Jank was
advocating SRB's position as well.


18. (SBU) Jank gave a presentation outlining Brazilian views on
agriculture in the WTO. He stressed that Brazil and the U.S. have
areas of significant common interest, especially on market access,
export competition, and sanitary/phytosanitary and genetically
modified organism (GMO) issues. Jank pointed out that we have
significant divergence of interests on the issue of agricultural
supports, and began a detailed examination of agricultural supports
for selected U.S. products. Jank's critique of U.S. policy provoked
a spirited exchange with several of the delegation members,
principally with Senator Grassley and Representatives Issa and
Peterson. The CODEL members clearly stated that Brazilian
flexibility on access for goods and services is inadequate, and its
willingness to fight for market access for agriculture was likewise

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inadequate in light of Brazil's fixation on American agricultural
support levels. (Comment: Jank is a longstanding Consulate contact
who is one of Brazil's most knowledgeable and articulate experts on
agricultural trade issues. He has been critical of the current
GOB's trade negotiating strategy and could end up in some
influential GOB position should opposition candidate Geraldo Alckmin
win the October presidential elections. That said, he also reflects
the broadly supported Brazilian position that the U.S. needs to
offer even more substantial cuts in agricultural subsidies if the
Doha Round is to have any chance of success. End Comment).

--------------
Comment
--------------


19. (SBU) This visit provided members of the delegation with
exposure to Brazilian views on trade issues, especially in the area
of agriculture. At the same time, it gave some of our key Brazilian
private-sector interlocutors a chance to hear what the trade
negotiations look like from the perspective of key members of the
U.S. Congress. The fact that real differences of opinion were aired
in several of the meetings, and that the debates were at times
pointed and even heated, is a healthy sign. Overall, the Sao Paulo
business sector wants closer trade relations with the U.S. and is
critical of the Lula administration's foreign policy of focusing on
South-South relations. We will continue to work toward closer
cooperation on trade and other issues with FIESP, AMCHAM and other
business organizations. End Comment.


20. (U) This cable was coordinated/cleared with Embassy Brasilia.

MCMULLEN