BRAZIL - FOLLOW UP ON AMB. SOBEL'S MEETING WITH DEPUTY USTR

UNCLAS BRASILIA 000121

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR FOR AMB. VERONEAU
STATE PASS USTR FOR CRONIN
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA

E.O. 12958: N/A
TAGS: ETRD USTR ECPS EINV PREL BR
SUBJECT: BRAZIL - FOLLOW UP ON AMB. SOBEL'S MEETING WITH DEPUTY USTR
VERONEAU

REF: 06 STATE 193863

This cable is sensitive but unclassified, please protect
accordingly.


1. (SBU) Summary: Post appreciates USTR's thoughtful and considered
outline (reftel) of potential initiatives that the USG might pursue
bilaterally with Brazil to enhance the trade relationship. After
reviewing those ideas put forth, we believe the area of greatest
near term potential is a bilateral steel forum. Although
sensitivities on both sides may initially limit the scope of topics
discussed in such an initiative, mutual confidence built over time
may allow for additional subjects to be broached as well. Post also
supports the idea of asking Brazil to lower tariffs on certain
integrated circuits as well. Unfortunately, Brazil has placed on
hold Congressional ratification of bilateral investment treaties
with many countries due to differences over whether it can
constitutionally submit government agencies to binding foreign
arbitration. End Summary.

Steel Forum
--------------


2. (SBU) Brazil is a major steel producer and exporter, which, like
the steel industry United States, views with some concern China's
emergence as a new steel competitor. Brazil has long-standing and
extensive supply links with U.S. industry, from pig iron that feeds
many U.S. steel mills, to unfinished steels that are further
processed by U.S. mills. Moreover, given acquisitions and mergers,
the Brazilian steel industry has a growing stake directly in the
U.S. steel industry. These commonalities form a promising ground
for a bilateral forum.


3. (SBU) We would expect that at least initially there would be some
subjects that the Brazilians would not want broached, or the raising
of which would make them view USG intentions for the forum with
suspicion. Foremost among these are recent allegations of slave
labor conditions in the Brazilian charcoal industry, which provides
inputs to local pig iron producers and through them ultimately to
U.S. industry. The GoB is cooperating with a DHS/ICE investigation
into labor conditions at these charcoal camps but we expect that it
would want to keep the affair in law enforcement channels.


4. (SBU) National Development Bank (BNDES) support for Brazil's
steel industry likely would be another sensitive point for the
Brazilians. For the GoB, overall BNDES support for industry,
including steel, is not negotiable. The GoB is unlikely to see much
purpose in a bilateral dialogue with the USG on the point (although
they may be willing to clarify specific questions on the mechanics
of BNDES financing). Brazil nevertheless has negotiated constraints
and limits on BNDES financing. For example, Brazil engaged
constructively in the recent successful negotiation, under OECD
auspices, of the aircraft finance understanding. Brazil's goals in
that process were two-fold: a) to limit the costs of export finance
to the national treasury; and, 2) to ensure fairer competition and
clear rules of the game with Canada, Brazil's main rival in that
sector. It is possible that Brazil's concern with China's emergence
as a competitor in steel would create an opportunity for engagement.
Whether that concern would be sufficient to overcome Itamaraty's
south-south cooperation focus on China and join a WTO subsidies case
is an open question.

Integrated Circuits
--------------


5. (SBU) Post also supports the idea of asking Brazil to join the
WTO Information Technology Agreement, or alternatively, the
Government/Authorities Meeting on Semiconductors (GAMS) in reducing
to zero the duties on Multi Chip Packages (MCPS). The GoB desires
to support development of a larger semi-conductor industry in Brazil
to feed its existing electronics industry, but these plans would not
necessarily conflict with the tariff reductions on MCPS.

SOBEL