SCENESETTER FOR THE ECONOMIC DIALOGUE VISIT OF WHA A/S

UNCLAS SECTION 01 OF 04 BRASILIA 002242 SIPDIS C O R R E C T E D COPY - PARAGRAPH NUMBERING CORRECTED SENSITIVE SIPDIS E.0. 12958: N/A TAGS: ECON ETRD EINV EFIN PREL SENV BR SUBJECT: SCENESETTER FOR THE ECONOMIC DIALOGUE VISIT OF WHA A/S SHANNON AND EB A/S SULLIVAN BRASILIA 00002242 001.2 OF 004 REFTEL: A) BRASILIA 1819; B) BRASILIA 1813; C) BRASILIA 1826 D) BRASILIA 2064 E) BRASILIA 2066 F) BRASILIA 2067 G) BRASILIA 2087 H) BRASILIA 2174 I) BRASILIA 2206 J) BRASILIA 2234 K) BRASILIA 2082 L) BRASILIA 2124 ¶1. (SBU) Summary: Your visit for the economic dialogue will expand and develop economic cooperation themes discussed during the Under Secretary for Economic, Energy and Agricultural Affairs Reuben SIPDIS Jeffery's August visit (REFTELS A, B, C). We hope to use the dialogue to focus on areas where we can deepen our partnership. We hope the upcoming interaction will communicate clearly that we intend to work with Brazil based on mutual respect and in recognition that Brazil is now a global player on economic issues and that with this engagement comes responsibility that Brazil needs to assume. While relations between the U.S. and Brazil are friendly, the USG often encounters significant difficulties in gaining buy-in from senior policymakers on issues of global and bilateral interest to the United States. Eager to assert its own influence, the Brazilian government resists cooperation with the USG unless it can clearly be characterized as a partnership among equals. ¶2. (SBU) From the nascent regional infrastructure initiative USG is developing with the Planning Ministry, to excellent cooperation under the March 2007 US/Brazil biofuels MOU, Brazil is eager to work with us in areas perceived as in its own self-interest. In areas such as proposals to negotiate a Bilateral Tax Treaty or a Bilateral Investment Treaty, while these accords would be in the long-term growth interests of Brazil, short-term domestic tax loss revenue fears and constitutional issues impede progress. In aviation, recent leadership shake-ups have delayed Brazil's short-term ability to engage sufficiently productively in negotiations. In other areas, inter-Ministerial differences in views can result in opaque interactions. For example, on IPR issues, the Justice and Trade Ministries tend to be more receptive to enhancing enforcement and to streamlining regulatory approval processes, while the Health Ministry and the FDA-equivalent ANVISA have advocated publicly (for example at WHO and WIPO) that IPR is in direct contradiction to the global public good. Agricultural biotechnology is another challenge, given that the Agricultural Ministry supports the technology while the Environment Minister is passionately against. Finding areas of mutually beneficial cooperation and identifying where Brazilian self-interest lies will be key to the success of our economic policy partnership. END SUMMARY ECONOMIC BACKGROUND INFORMATION (see also reftels): -------------- MACRO-ECONOMIC DEVELOPMENTS -------------- ¶3. (U) President Lula and his economic team have implemented prudent fiscal and monetary policies and pursued reform. Brazil's external accounts have improved substantially over the last three years. For 2007, Brazil's Central Bank is forecasting 4.7 percent growth and the IMF predicts 4.4 percent. The Central Bank predicts 2007 inflation will be 3.96 percent. The IMF predicts 3.6 percent inflation for 2007. ¶4. (SBU) Buoyed by exports and investment inflows, the real has remained strong for most of the year, allowing the government and businesses to pay down external debt and invest in capital equipment. Last year, the government eliminated the last of its restructured debt from Brazil's late-1980's default. Based upon the improving external debt dynamics, Fitch IBCA upgraded its credit rating on Brazil's long-term debt in May 2007, to BB+. ¶5. (SBU) Key challenges remain. The net public sector debt-to-GDP ratio is on a downward trend but remains high, at about 44%. Real interest rates are among the highest in the world; reducing them will require both reductions in the government's borrowing requirement and reform of the financial sector. Income and land distribution remain skewed. Investment and domestic savings are low, but growing. The informal sector constitutes over 40 percent of the economy, in part due to the tax burden (nearly 38 percent of GDP),one of the highest among large developing economies. ¶6. (SBU) Sustaining and expanding growth rates in the longer term depends on further structural reform efforts and concrete steps to create a more welcoming climate for investment, both domestic and foreign. A bill allowing Public-Private Partnerships, a key effort to attract private investment to infrastructure, passed in 2004, although implementation of this initiative still awaits promulgation of the necessary regulations. Labor reform, additional tax reform and autonomy for the Central Bank were on the agenda for 2005 to 2006, but appear unlikely to be addressed at in the near term. The government still needs to improve the regulatory climate for investment; to simplify torturous tax systems at the state and federal levels; and to further reform the pension system. BRASILIA 00002242 002 OF 004 -------------- Infrastructure -------------- 8.(SBU) Poor infrastructure issues have long been cited as part of the "Custo Brasil" or "Brazil Cost," a term used to refer to the systemic problems (that also include a cumbersome regulatory system) that hinder Brazil's competitiveness. For example, the interior of the country depends on a series of ill-maintained roads for transportation of goods to its aging ports. Brazilian officials have signaled that the GOB is interested in working with the USG to explore ways to maximize funds, technology and managerial skills in infrastructure projects around the country, or possibly for the two countries' entities to invest in third countries. GoB officials have proposed that both governments work together on implementation as well as financing using a possible "tripod format" (a partnership between the GoB, a Brazilian company, and a US company) for infrastructure projects. -------------- CIVIL AVIATION -------------- ¶9. (SBU) Brazil is facing deficiencies in infrastructure, the collapse of flagship national carrier Varig in 2006, and two major airline crashes resulting in the loss of hundreds of lives in less than one year. A complete overhaul of civil aviation authority ANAC's leadership is in progress, with three of five new directors confirmed in the last weeks now officially in place and two more nominees scheduled for confirmation hearings in the coming weeks. Bilateral aviation talks planned for Dec. 5-7 were cut short by a day when it became clear that key U.S. outcomes could not be achieved, and what few concessions that were being offered by the GOB would only be desirable if tied to other US objectives which the Brazilian team was not able to fulfill. Specifically, the opportunity for new third-country code-sharing for airlines to test the markets in the north/northeast region was denied, and all markets below Brasilia (including Sao Paulo, Rio, Belo Horizonte, Porto Alegre, etc.) were all deemed off the table for new frequencies. Brazil's head of delegation admitted that ANAC was not ready to fully engage on these issues. That said, this meeting was the first bilateral consultation in 10 years and as such, was an important first step for future negotiations. A Memorandum of Consultations was signed on December 6 recapping the discussion and indicating the two countries' intent to meet again before the end of ¶2008. -------------- DOHA AGENDA - WTO -------------- ¶10. (SBU) Brazil has used the Doha Development Agenda (DDA) negotiations as the main forum for engaging with developed country partners. Brazil leads the G-20 group of developing countries in pressing for agricultural trade desires in the DDA. Brazilian industry leaders and GoB officials have underlined that concern over the impact of Chinese imports on domestic manufacturers is one root cause behind their unwillingness to agree to the non-agricultural tariff cuts proposed by both the USG and the EU during the Doha Round. To date, Brazilian proposals do not provide real market access. China has increased in importance as an export market for Brazilian soy, iron ore, and steel, becoming Brazil's fourth largest trading partner. Impelled by a stronger real, this year China is set to become the second largest exporter to Brazil, passing Argentina and second only to the U.S. Low-priced Chinese imports, particularly in the textile, footwear, and toy sectors, are now threatening to displace domestic Brazilian production. ¶11. (SBU) Brazil's objections to US agricultural programs have sparked initiation of a WTO case. In the cotton dispute, some in the Brazilian congress have introduced an IPR "cross-retaliation" bill - a proposal that has some executive branch support and is winding its way through the Brazilian congress. -------------- BIOFUELS -------------- ¶12. (U) Brazil's ethanol program is a model for alternative energy, based on inexpensive production from sugarcane. Ethanol 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. In contrast, gasoline prices vary less and are controlled by the government. U.S. tariffs and charges make Brazilian imports less competitive. In addition to import tariffs of 1.9 to 2.5 percent, the U.S. imposes a 54 cents/gallon surcharge on ethanol imported for use as fuel, which has led to a strong Brazilian push to lower or BRASILIA 00002242 003 OF 004 eliminate it. (Comment: Brazil is able to sidestep in part the surcharge by exporting a large volume of ethanol to Caribbean countries, which then do some processing and ship the finished product to the United States under favorable treatment established by the Caribbean Basin Initiative. End Comment.) Under the March 7 DOS/MRE MOU, joint participation in third party biofuels initiatives in St. Kitts, El Salvador and in the Dominican Republic has begun, NIST-led standards work is on-going, and DOE/USDA hosted a delegation of Brazilian scientists. -------------- AGRICULTURE -------------- ¶13. (U) Agriculture is a major sector of the Brazilian economy, and accounts for 13% of GDP (and 30% when including agribusiness) and 33% 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 180 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 U.S.),pork, milk, and seafood. -------------- Intellectual Property Rights (IPR) -------------- ¶14. (U) On April 30, 2007, the Office of the U.S. Trade Representative (USTR) moved Brazil to "Watch List" status in its Special 301 Annual Report as a result of the country's progress, particularly in copyright protection and IPR enforcement. Included in the USTR announcement was notice that Brazil will be subject to an Out-of-Cycle Review to monitor its progress on outstanding IPR concerns and to evaluate the sustainability of recent enforcement progress. On May 4, 2007, the GoB announced the issuance of a compulsory license for Merck Pharmaceutical's HIV/AIDS medicine Stocrin. GoB officials cited cost reduction for their free HIV/AIDS public health program as the motivation for this action. In contrast, some pharmaceutical industry representatives feel new Minister of Health Jose Gomes Temporao was driven more by ideology than by concern about future damage to Brazil's investment climate as a result of this action. -------------- FOREIGN POLICY -------------- ¶15. (SBU) Brazil has long seen itself as the natural leader of the region and covets a permanent UN Security Council (UNSC) seat. 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.)- the 'South-South Policy.' Lula has refused to condemn Cuba for human rights violations and, in fact, has pushed for Cuban membership in the Rio Group and a Cuba-Mercosul trade pact. 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. Lula has consistently praised the Venezuelan President's democratic credentials and continues strongly to support Venezuelan membership in Mercosul, despite opposition in Brazil's congress. Lula has gone to great lengths to mend rifts that appeared recently over Venezuela's apparent involvement in Bolivia's decision to nationalize its oil and gas industry and over Chavez's biting remarks to Brazilian Congress members who condemned the GoV's decision to close an independent television station. President Lula and President Bush have spoken favorably of trilateral assistance, though so far this has only resulted in a joint health mission to Sao Tome and Principe. Further activities may take place in other Portuguese-speaking countries (Mozambique and Angola). At UNGA this year, President Lula spoke of Iran's right to enrich uranium and its peaceful nuclear program, which undercut efforts to keep the pressure on Iran to suspend enrichment. -------------- ENVIRONMENT AND CLIMATE CHANGE -------------- ¶16. (SBU) Brazil is a major player on international environmental issues and strongly supports the Kyoto Protocol with its "common, but differentiated responsibilities" principle. The GoB is actively engaged in international climate negotiations under the United Nations Framework on Climate Change (UNFCCC). Brazil is a leading emitter of greenhouse gases due to the substantial amount of deforestation in the Amazon region. In recent years, the rate of deforestation has dropped by over 50 percent, though it remains BRASILIA 00002242 004 OF 004 significant and there are signs that the rate may go up in 2008. At the UNFCCC, Brazil in late 2006 proposed creating financial incentives for avoiding deforestation, but which would be outside the carbon credit system and would not include any obligations on Brazil to protect the forest. The proposal has interesting points to it, however, it is not consistent with USG policy on climate change. ¶17. (SBU) Thus far, Brazilian reaction to President Bush's Global Climate Change (GCC) initiative has been lukewarm - they fear it will undermine the work of the UNFCCC. GoB officials have said previously that the U.S., as a non-signatory to the Kyoto Protocol, places more emphasis on energy efficiency and expense than the environment (REFTEL B). After the September 27 - 28 Major Economies Meeting (MEM) on climate change, the head of the Brazilian delegation to the MEM, Ministry of Exterior Relations Under Secretary Everton Vargas told the press, "We see only a reiteration SIPDIS of what he [Bush] has said in the past. We don't want this focus on voluntary controls." . . . Bush tried to convince the participants that now he is taking seriously the problem of global warming. But in practice, he only defended his obstinate position." ¶18. (SBU) Brazil's Foreign Minister Celso Amorim in Bali criticized the U.S. and EU proposal on lowering tariffs on environmental goods because it did not include reducing or eliminating tariffs on ethanol (which both the United States and the EU have) and addressing agricultural subsidies. He accused the developed countries of being "two-faced" by cloaking efforts to promote their commercial exports under the "green" label while maintaining protectionists barriers on products from other countries, particularly ethanol. He told reporters that "Bali is a point of departure between the developed and developing countries], not one of arrival." ¶19. (SBU) Brazil has been a leader on access and benefit-sharing of genetic resources. This includes the issue of the overlap of the Convention on Biological Diversity (CBD) and other international environmental agreements and the WTO. Brazil supports efforts at WIPO and the WTO to revise patent regimes in order to include mandatory requirements on disclosure of the origin of genetic resources used and any use of traditional knowledge. CHICOLA