FIESP Responds to Threat to Brazil's GSP Benefits

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E.O. 12958: N/A
TAGS: ETRD ECON KIPR EINV BR
SUBJECT: FIESP Responds to Threat to Brazil's GSP Benefits



1. (SBU) Summary. The Federation of Industries of the State of Sao
Paulo (FIESP),which represents approximately 34% of Brazil's
industrial units and 39% of its manufacturing jobs, has concluded in
a soon to be released study that if Brazil were to lose its
eligibility for GSP benefits, the country would lose more than
20,000 jobs and at least USD 386 million in exports. The most
effected sectors would be the lumber and automotive (automobiles and
auto parts) industries, with a combined loss of approximately 8,000
jobs. According to FIESP, the graduation of Brazil from GSP would
negatively affect both Brazilian companies and many US companies
that have subsidiaries and manufacturing branches located here. End
Summary.


2. (U) In an as yet-to-be published study, FIESP estimates that
approximately 650,000 jobs are related to the production of goods
that fall under the GSP program, and if these benefits are not
renewed, more than 20,000 of these jobs would be lost. FIESP
President Paulo Skaf, in a faxed letter to the Ambassador dated
August 16, outlined the impending job losses and other potential
negative consequences resulting from GSP exclusion.
According to the FIESP study, the two major industries that would be
most affected if the GSP benefits were withdrawn would be the lumber
and automotive industries, with losses of 4,959 and 2,461 jobs,
respectively. The principal products exported by these industries
under GSP in 2005 include: (1) automobile parts, USD 223.7 million,
(2) lumber, USD 140.0 million, (3) machinery parts, USD 131.2
million, (4) refined copper sheets, USD 107.8 million, (5) refined
copper wire, USD 106.7 million, and (6) carpentry and cabinetry
items, USD 93.6 million. Other products such as wooden doors and
frames, automobile gear boxes, and leather, account for
approximately USD 71-79 million each.


3. (U) FIESP argues that both Brazilian and U.S. companies will be
negatively affected if GSP benefits are not renewed. Only 9% of
Brazilian exports under GSP constitute finished goods for the
consumer, while 75% are raw materials or intermediary products.
FIESP states that many of these materials are destined for
subsidiaries of U.S. owned companies, which if forced to pay higher
prices for the raw materials would then be forced to pass the
increased cost to the final product. In a recent press interview,
Wilson Rocha, Director of Sales and Engineering at TRW, stated that
"the exclusion of Brazil would be a hard blow, in a period when the
company is already struggling to stay competitive with its products,
because of the strong real versus the dollar." Since TRW has
contracts of 5 to 7 years, Rocha concluded that the cost increase
could not be passed onto the price of the product and the "most
difficult thing would be to obtain new contracts."


4. (U) Meanwhile, the press quotes Humberto Barbatto, president of
Santa Terezinha Ceramics, a manufacturer of electrical insulators,
bemoaning the prospect of increased U.S. tariffs for his products:
"We will have serious problems if our products face increased
tariffs in the US. Our clients are already tired of hearing us talk
about a rise in prices."


5. (U) In a tactical move, last month FIESP opened an office in
Washington, DC, which is tasked with lobbying for the renewal of GSP
benefits for Brazil. Besides contacting government officials
influential in the renewal process, FIESP has aligned itself with
two pro-GSP organizations, the Coalition for GSP, and the Brazil GSP
Coalition. The Acting Director of the International Relations
Department for FIESP, Carlos Cavalcanti, has suggested that the
repercussions of GSP benefits not being renewed would be greater in
the political arena than in the economic sphere, and that the USG
tends to politicize such discussions instead of relying on technical

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considerations. According to Cavalcanti, if GSP is not renewed, the
results could be a new era of confrontation and distancing between
the US and Brazil.


6. (SBU) Comment: FIESP and other business associations will likely
offer many examples of Brazilian businesses being injured should the
country be graduated from GSP, and are asserting that many U.S.
businesses will likewise be hurt. We expect they will come up with
more specific examples of such U.S. businesses as they continue
their campaign to prevent the loss of Brazil's GSP benefits. End
Comment.

McMullen