BRAZIL: NEXT STEPS ON FREE TRADE AGREEMENTS

UNCLAS SECTION 01 OF 02 BRASILIA 000958 SIPDIS SENSITIVE SIPDIS DEPT PLEASE PASS TO USTR SCRONIN/KLEZNY USDOC FOR 3134/USFCS/OIO/WH USDOC FOR 4332/ITA/MAC/WH/OLAC/MCAMPOS AID/W FOR LAC/AA TREASURY FOR OASIA USTDA FOR AMCKINNEY GENEVA FOR USTR E.O. 12958: N/A TAGS: ETRD ECON BR SUBJECT: BRAZIL: NEXT STEPS ON FREE TRADE AGREEMENTS ¶1. (SBU) Summary. On May 24, in a joint "NAFTA" approach to the Ministry of External Relations, the Econ Counselors from the U.S. and Canadian Embassies, along with the Commercial Counselor from the Mexican Embassy, met with Evandro Didonet, the Ministry's recently-appointed Chief of its International Trade Negotiations Division. Didonet, who is responsible for the negotiations of FTAs - but not for the WTO Doha Round talks - said that the most serious FTA discussions currently on Mercosul's plate were with Israel and the Gulf Council countries (GCC). As for the ongoing EU-Mercosul FTA talks, he noted that while the EU saw these negotiations as a fall-back plan in case the Doha Round failed, Mercosul hoped for an agreement regardless of the outcome of Doha. He did not see much significance to the EU's planned designation of Brazil as a "strategic partner" at the upcoming July 4 EU-Brazil summit in Brussels, calling it more show than substance. End Summary. ¶2. (SBU) Didonet, formerly the Deputy Chief of Mission at the Brazilian Embassy in Washington, took charge of the International Trade Negotiations Division in February. While under his predecessor - Ambassador Regis Arslanian -- the unit reported to the MRE U/S for South American Affairs, an internal reorganization now has the division reporting to the U/S for Economic Affairs. Thus, responsibility for the Doha Round, FTAA, EU-Mercosul, and other trade talks now lies with the Secretariat for Economic Affairs. SIPDIS ¶3. (SBU) With respect to the substantive negotiations Brazil (and Mercosul) were currently engaged in, Didonet made the following comments: -- On agriculture, the principal roadblock to conclusion of the decade-long EU-Mercosul FTA negotiations, the EU has offered much more on market access in the context of the Doha Round that it has in the Mercosul talks. The EU would only get serious, he felt, if the Doha Round were to stall - then it would aggressively seek to conclude FTAs with Mercosul and other partners. For Brazil, he said, the difficulty was not dealing with the EU, but coming to a common position with its Mercosul allies -- Argentina, Uruguay, and Paraguay. (As Venezuela had not implemented the Mercosul Common External tariff, it is only an observer, and not a participant, in the EU talks.) -- Brazil is committed to the success of the Doha Round. There is no "Plan B." Indeed, Didonet admitted, should the Doha Round fail, the GOB would be left without a forum for pursuing the agricultural subsidy cuts it wants so desperately from the USG. -- China, not the U.S. or the EU, is Brazil's number one worry on trade. The flood of low-cost Chinese imports into the country, principally in the footwear, textile, and toy sectors, combined with the rising exchange rate, meant that Brazil was not only in danger of losing competitiveness overseas but vulnerable to "attack" in its home market. Within a few years, it was possible that Chinese auto imports could displace domestic Brazilian vehicle production. For these reasons, he opined, Brazil was reluctant to agree to steep cuts in non-agriculture tariffs in the Doha Round. Indeed, due to the rising exchange rate, imports had already risen 20 percent this year even in the absence of any tariff cuts. -- Mercosul was closest to inking FTAs with Israel and the GCC countries. The Israel pact was likely to be signed this year, while the GCC agreement was "a little more difficult" because of the issue of how to deal with the petrochemical sector, the source of much of the GCC's exports to the bloc. For Brazil, he added, the most important GCC countries were Saudi Arabia and the UAE, with Qatar, Bahrain, Kuwait, and Oman being of much less significance. -- While negotiations were ongoing with India and the Southern African countries, these talks were more discussions of tariff BRASILIA 00000958 002 OF 002 preferences as opposed to full-fledged FTAs. Chicola