U.S. COMPANIES PRESS TRADE MINISTER ON COMPULSORY

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TAGS: ETRD KIPR EIND BR
SUBJECT: U.S. COMPANIES PRESS TRADE MINISTER ON COMPULSORY
LICENSING, TAXES, AND INFRASTRUCTURE


1. (SBU) Summary. In a May 9 meeting with newly-appointed
Minister of Trade Miguel Jorge, representatives from the Brazil-U.S.
Business Council outlined their thoughts regarding the direction of
bilateral trade trends. Chief on their mind was the damage to
Brazil's investment climate done by the GOB's May 4 decision to
issue a compulsory license for Merck's anti-AIDS retroviral Stocrin
(Efavirenz). Council officials also lobbied for changes in Brazil's
byzantine tax regime (including signature of a bilateral tax treaty)
as well as improvements in port and customs infrastructure. The
Minister and his team stated that intransigence on the part of Merck
had given the GOB no other option than to issue the compulsory
license. They added that the GOB efforts to upgrade the tax system
and import/export infrastructure were already in-train. End
Summary.


2. (SBU) On May 8-9, a delegation from the Brazil-U.S. Business
Council made the rounds in Brasilia, calling upon inter alia,
Vice-President Alencar, the Ministry of External Relations
(Itamaraty),congressional deputies, and the Ministry of
Development, Industry and Commerce (MDIC). An industry association
composed of 75 U.S. and Brazilian firms which do business locally,
Council companies generate over 220,000 jobs in Brazil. Mission
participants represented such diverse firms as Whirlpool, General
Motors, Caterpillar, Guardian Industries, Embraer, Cummins, and
Abbott Laboratories.

Compulsory Licensing
--------------

3. (SBU) The Chairman of the Council, Tom Catania (representing
Whirlpool) and Mark Smith (the Council's Director) led off the May 9
meeting with Minister Jorge and his team by noting their concerns
about the GOB's recent decision to issue a compulsory license for
Stocrin (efavirenz),an AIDs anti-retroviral drug produced by the
U.S. pharmaceutical maker Merck. (Merck had planned to send a
representative on the trip but cancelled in the wake of the GOB's
May 4 license announcement). Catania and Smith stated that while
they recognized Brazil's right to proceed down that path, they
thought that a negotiated settlement would have been the best
solution, particularly in terms of preserving Brazil's reputation as
a country with a positive investment climate.


4. (SBU) Minister Jorge replied that he had personally
participated in the latter part of the negotiations with Merck and
could attest that the atmosphere of trust between both parties had
broken down between both parties. The talks began badly, developed
badly, and ended badly, he said. While neither side showed any real
flexibility, he observed, the climate worsened after Merck's former
Brazil chief departed and his replacement arrived three months ago.
Given Merck's stance, he said, the GOB felt that it had no choice
but to issue the license. Jorge opined that as a former industry
labor negotiator - during his tenure at Volkswagen, he conducted
contract talks with Lula (at that time a union leader) - it is
always a shame when two parties cannot come to terms. This case was
especially tragic because the amount the GOB was saving was only
US$30 million, a pittance given the potential ramifications for
future foreign investment. However, he concluded, Merck
"precipitated this situation" and while the GOB was always willing
to reopen discussions "the ball was in Merck's court." For his
part, Embraer's Henrique Rzezinski (the Chair of the Brazilian
counterpart to the Council) stated that his side of the Council
stood ready to help facilitate further talks. In closing, Jorge
praised the conducted of Abbott Laboratories, which, he said, in the
2005 round of talks with the GOB on retroviral pricing had been much
more accommodating.


5. (SBU) Comment. It appears that both Abbott and Glaxo are both
close to finalizing deals with the Brazilians on their respective
anti-retrovirals, contracts which would afford the GOB substantial
price reductions. Meanwhile, Merck is mulling whether to test the
waters with Presidential Chief of Staff Dilma Rousseff, arguing
that, properly analyzed, its previous offer would be just as
cost-effective for the GOB as the compulsory licensing route. End
Comment.

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Customs and Taxes
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6. (SBU) Catania and Smith also urged the GOB to simplify its
complicated tax system and streamline its clogged import-export
system to stimulate greater trade and economic growth. In response,
Mario Mugnaini, head of Brazil's Foreign Trade arm, noted that a lot
of work had already been done on this score. Imports into Brazil
had increased from US$50 billion several years ago to US$100 billion
today, something which could not have been achieved had not
improvements been made to the country's ports. Mugnaini stated
that Brazil was working on its just-in-time "green zones," and that
the time goods spent in these areas had declined from an average of
24 hours to 12 hours - and had dropped to 4 hours at the Campinas
airport in Sao Paulo. GOB officials were now seeking to expand the
"green zone" model in the country's smaller ports. Advances had
been made in port security as well, he noted, as it was projected
that 98 percent of Brazilian ports would be in compliance with ISPS
standards by the end of the year. US Customs and officials at the
Port of Santos were collaborating on the Container Security
Initiative, he added, with U.S.-bound containers being scanned and
pre-cleared prior to departing Brazil. Still, both Mugnaini and
Jorge admitted that more work needed to be done to improve port
infrastructure, with the latter wryly noting that European and
Japanese companies often came in with the same complaints.


7. (SBU) On taxes, Catania lamented the fact that Brazil's
Byzantine rules and regulations imposed excessive administrative
costs on businesses, both foreign and domestic. Many of the
companies within the Council would like to use Brazil as a base to
manufacture exports destined to other countries, he said, but
Brazil's high cost structure sometimes made that goal problematic.
Mugnaini and Jorge stated that the Lula administration was working
on a tax reform package, but that this legislation would deal mainly
with the allocation of VAT tax revenues/responsibilities between the
federal and state governments.


8. (SBU) Smith made a pitch for increased emphasis on conclusion of
a bilateral tax treaty, noting that the signature of a Tax
Information and Exchange Agreement during the March 8-9 POTUS visit
to Sao Paulo was a good first step. Jorge replied that if it were
up to him, he would sign a bilateral tax treaty "in a minute."
However, the person with in the GOB who had the lead on this issue
was the Secretary of the Treasury within the Ministry of Finance, he
said, and that official was reluctant to agree to any measure which
might diminish tax revenues, no matter how small the reduction.
Jorge committed to speaking to the Secretary of the Treasury to see
whether he could be persuaded to prioritize conclusion of a
bilateral tax treaty with the USG.

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

9. (SBU) On the issues of compulsory licensing, taxes, and
infrastructure/customs, the concerns of Council representatives are
congruent with those of the USG. As such, it is extremely useful to
have private sector voices echoing the points made by both the
Ambassador and various high-level USG visitors. Embassy shall
continue to coordinate with the Council and other U.S. business
advocacy organizations as we seek to expand our trade and investment
relations with Brazil.

Sobel