FEAR OF CHINA CONSTRAINS BRAZIL'S STANCE ON THE DOHA

UNCLAS SECTION 01 OF 02 BRASILIA 000990 SIPDIS SENSITIVE SIPDIS DEPT FOR EEB/TPP/MTA/MST FOR AARON SCHEIBE DEPT PASS USTR FOR SUE CRONIN GENEVA FOR USTR USDOC FOR 4332/ITA/MAC/WH/OLAC/ ADRISCOLL/MCAMPOS USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DRAMBO USDA FOR FAS E.O. 12958: N/A TAGS: ECON ETRD WTO BR SUBJECT: FEAR OF CHINA CONSTRAINS BRAZIL'S STANCE ON THE DOHA ROUND REF: A) Brasilia 958; B) Brasilia 755; C) Brasilia 918; D) Sao Paulo 290 ¶1. (SBU) Summary: Brazilian industry leaders and GOB officials have repeatedly underlined that concern about the impact of Chinese imports on domestic manufacturers is a root cause behind their unwillingness to agree to the non-agricultural tariff cuts proposed by both the USG and the EU. Brazilian mining representatives have told us that they worry about China's desire to control South American mineral and other natural resources. Meanwhile, the Brazilian media has prominently featured the threat posed by Chinese imports to domestic producers, including a projected record USD 100 billion in imports from China this year - impelled by a stronger real - along with promises by the GOB to help ameliorate any financial harm caused by this competition. End Summary. -------------- Industry and Official Concern -------------- ¶2. (SBU) A trade specialist at the National Confederation of Industries (CNI) told EmbOff in a May 7 meeting that Brazilian resistance to lowering the Swiss coefficient during the Doha round Non-Agricultural Market Access (NAMA) discussions is largely related to Brazilian industry's fear of being overwhelmed by low-cost Chinese imports. The CNI representative felt that while there is room for negotiation on the coefficient, GOB negotiators will try to keep the coefficient as high as possible for this reason. According to the trade specialist, the GOB believes that higher tariffs are a short term solution that will give Brazilian industries "breathing room" while the GOB addresses known competitive disadvantages such as a burdensome tax structure and infrastructure deficiencies. ¶3. (SBU) This echoes the concerns about the effect of Chinese imports on local industries openly expressed by GOB officials at a May 24 meeting with EconCouns (ref A) and during April 11-13 meetings in Brazil with leaders of the National Association of Manufacturers (ref B). One high-ranking GOB official went further in a closed meeting by expressing reservations about the wisdom of Brazil focusing on China as a trading partner as he believes that country does not have a true market economy. In another recent meeting, Brazilian mining industry representatives voiced concern about Chinese desires to fuel their county's continued economic expansion by gaining preferential access to South American mineral and natural resources, a move seen as posing a direct threat to U.S. industry (ref C). -------------- Media Emphasis -------------- ¶4. (SBU) The Brazilian media, for its part, has focused on the emerging Chinese trade threat. One recent front page newspaper story noted that Brazilian imports are on track this year to surpass USD 100 billion for the first time in history and imports from China are growing explosively - up 46 percent in the first four months of 2007 versus the same period in 2006. This article pointed out that, due to the strengthening real, it is now less expensive for domestic sellers to import cheap Chinese goods and re-label them than produce them in Brazil - a trend the report said was especially pronounced in the appliance, apparel, and footwear markets. Other media articles have keyed on Chinese competitive advantages in labor costs and currency exchange rates (reftel D) as well as promises by President Lula of GOB assistance to companies hurt by Chinese competition and by the appreciation of the real. ¶5. (U) The concerns we have heard are echoed in official trade statistics. According to the Ministry of Development, Industry and Trade, Brazil has gone from a 2003 trade surplus with China of USD 2.4 billion to a deficit in the first four months of 2007 of over USD 363 million. Brazilian exports to China have grown at a healthy BRASILIA 00000990 002 OF 002 clip of 20 - 25 percent annually over that period, but imports from China have grown much faster at 73 percent in 2004, 44 percent in 2005 and 49 percent in 2006. That said, Brazil is still expected to run an overall global trade surplus of over USD 38 billion in 2007, despite the China results. ¶6. (SBU) Comment: Both the GOB and Brazilian industry already view competition from China as a serious threat to the domestic economy and fear any agreement to lower tariff rates will exacerbate this problem. This may limit GOB willingness to agree to a Swiss coefficient figure at the level advocated by the USG and the EU. The GOB appears aware of its infrastructure and bureaucratic inefficiencies and apparently regards maintaining a higher tariff ceiling as a short-term solution that will allow the country time to address these problems before facing intensive price competition from abroad. End Comment. Sobel