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.

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Industry and Official Concern
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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).

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Media Emphasis
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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

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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