Brazil: Scenesetter - Economic Partnership Dialogue October

C O N F I D E N T I A L SECTION 01 OF 05 BRASILIA 001418 SIPDIS STATE FOR EEB A/S SULLIVAN AND WHA A/S SHANNON E.O. 12958: N/A TAGS: ECON ETRD EINV EAGR BR SUBJECT: Brazil: Scenesetter - Economic Partnership Dialogue October 30, 2008 REFS: selected recent reftels: A) Brasilia 1122 B) Brasilia 1254 C)Brasilia 1265 D) Brasilia 1267 E) Brasilia 1267 F) Brasilia 1271 G) Brasilia 1299 H) Brasilia 1302 I) Brasilia 1325 J) Brasilia 1335 K) Brasilia 1366 L) Brasilia 1407 M) Sao Paulo 268 N) Sao Paulo 454 O) Sao Paulo 486 P) Sao Paulo 497 Q) Sao Paulo 548 R) Rio 236 ¶1. (SBU) SUMMARY: The third meeting of the Economic Partnership Dialogue (EPD) provides an excellent opportunity to reinforce the importance USG attaches to deepening and expanding the positive economic agenda between the United States and Brazil now, through the transition, and into a new Administration. This Dialogue is an opportunity to lay out our vision for the US-Brazil economic relationship as Brazil continues to develop as a significant regional and global economic player, potentially laying the foundation for expanded positive cooperation in other policy areas over time. The meeting will permit the two sides to cement a broader partnership under the Dialogue, expanding into areas such as development cooperation in Africa and a new sectoral initiative to support aeronautics industry cooperation. Participants will welcome progress on initiatives such as the June civil aviation agreement expanding passenger and cargo services including to the under-developed north/northeast of Brazil, the October CPSC-IMETRO Memorandum of Understanding expanding information sharing and cooperation on consumer product safety issues, and roadshows in the United States showcasing infrastructure trade and investment opportunities in Brazil. We also seek to continue dialogue on issues such as investment/tax agreements and OECD membership. END SUMMARY STRATEGIC OVERVIEW - - - - - - - - - ¶2. (C) Recalling the original EPD theme "Rising to the Challenge of Globalization," this third session, and the first with new MRE Economics U/S Mendonca, provides an important opportunity to lay out our vision for deeper and broader cooperation with Brazil on economic themes and, over time, increasingly in other policy areas. Brazil is undergoing a transition, moving from a sense of itself as the inward-looking, beleaguered and put-upon poor relative to significant and constructive engagement on the world stage in certain areas. Most notable has been Brazil's engagement on multilateral trade and finance issues. Brazil has moved from a debtor to a creditor nation, to a country that gives development assistance rather than only a recipient, from a country relying on an import substitution model to a country that recognizes it is a global player in the agricultural sector while continuing to struggle to manage protectionist interests on the manufactured goods side. Brazil achieved investment grade this year. Two-way FDI has increased considerably with the United States, and Brazil's significant investments abroad have begun to spark some interest in investor protections in riskier markets like Ecuador where Brazilian investors have experienced problems. Brazil's sound fundamentals have allowed GOB to react to the global financial crisis without the sense of meltdown that marked previous crises. ¶3. (C) This transition in self-perception and in defining itself on the global stage is not yet complete. Mission sees this internal struggle play out across Ministries, inside Ministries, and even within specific Ministers. For example, MDIC (Commerce Ministry) supports intellectual property rights protection as a spur to innovation, while the Health Ministry believes the best approach to pharmaceutical cost control is spurning these protections in the short-sighted hope this will foster development of local generics production. MRE includes officials lobbying for global engagement and others with more parochial, "anti-Western" instincts. Even specific key individuals, including at Planalto, struggle with hearts drawn to socialist, anti-Western and anti-private sector models and minds that know engagement and openness to cooperation with the private sector are the path toward Brazil's continued growth. This evolution plays itself out even more publicly in the Congress, where members range from those that object to debt relief for Africa, not seeing the strategic value, to those actively lobbying for increased competitiveness, openness and global engagement. Brazil's non-governmental "elite" is similarly evolving, with some key opinion-makers stuck in the past and others, particularly among the business sector, actively urging a new model for increased global engagement. ¶4. (C) We see Brazil evolving toward a new definition of national interest as opinion-makers' perceptions of Brazil's place in the world, its importance, and its ability to influence evolve. Brazil wants to be the best of the BRICS, they want to be a leader among developing countries, and they want to engage with powers like the United States and the European Union in areas of mutual interest (such as 4+1 trade talks or an EU "FTA") as well as advance their bilateral interests in fora such as the WTO. We should not view this evolving strategy as inherently inconsistent. ¶5. (C) Regional integration and loyalty to regional groupings and BRASILIA 00001418 002 OF 005 mechanisms remain a policy priority, and Brazil's work to build consensus in these fora serve to enhance its status as a regional leader. Brazil is sensitive to its role in the region as a stable democracy with the tenth largest global economy in a neighborhood that includes partners making far less predictable and positive choices. Brazil defines its national interest as requiring constructive dialogue with all governments, including ones that openly criticize the United States. This has also led Brazil to emphasize development assistance and economic cooperation that may make more political than economic sense in the short-term, but that is hoped will deepen longer-term integration based on a more stable model. This economic cooperation ranges from inducing its state-controlled companies to invest in markets that make less sense from a profit perspective, to signing numerous bilateral pledges to increase trade and investment ties that are not necessarily implemented but serve an important political objective. Consistent with the priority it places on maintaining good relations with unstable neighbors and influencing from the inside, Brazil is sensitive to any perceived USG attempts to deliberately exclude these unpalatable partners while including Brazil and other USG-defined "good guys" in Latin American-specific conversations. Interlocutors cite this reasoning in declining, for example, USG invitations to attend "Latin American" side meetings at the IDB and Bank/Fund annual meetings. Brazil's initiative to host a Latin American regional summit is intended to signal the nation's leadership and commitment to the integration of the region. ¶6. (C) Brazil places great importance on its role as a leader of the G20 and on demonstrating its commitment to Mercosul (an economic mechanism developed for political reasons). It played a significant, and constructive, role in attempting to build G20 consensus for WTO liberalization and cajoled Argentina heavily for flexibility while staunching supporting their interests with negotiating partners. At the same time, Brazil is defining its interests in a broader context, particularly in the economic area. At the end of the day, Brazil defined its own national interest by breaking away from the inflexibilities demonstrated by partners such as India and Argentina and built a consensus with other trade partners for increased trade liberalization. This decision to recognize that Brazil stood to gain enormously under a Doha agreement and needed to prioritize concluding an agreement, while simultaneously managing the political fall-out from its G20 and Mercosul partners, was not taken in a policy vacuum and was carefully coordinated internally. It was no accident that, immediately following Brazil's participation in the so-called "G7" consensus, the government arranged an enormous delegation, including 300 private sector participants, to Argentina to demonstrate the political as well as economic importance Brazil continued to place on that relationship. It was not by chance that Amorim responded in a published op-ed, to aspersions cast in a press article, strongly asserting his G20 credentials and support for G20 positions in WTO negotiations. USG engagement with Brazil must continue to recognize the government's need, and ability, to manage these interests as one policy whole as it defines its national interest. ¶7. (C) On global issues, Brazil does not yet consistently see itself as having a constructive role to play, yet Brazil welcomes bilateral dialogue with the United States where it is treated as an equal partner. Brazil retains sensitivities as a developing country that it not automatically fall in line with US positions where it perceives no direct national interest. In fact, Brazil often perceives its own national interest as not sitting in judgment on other nations as it manages its own very real internal sovereignty sensitivities. Brazil has begun limited engagement via its lead of the UN mandate in Haiti, attractive as a UN-blessed mission in a country in the region that welcomed their presence, and its desire to participate in the Annapolis conference. While Brazil is not yet convinced it could or should engage across global political issues, Brazil sees engagement on global economic issues as more tangibly in its national interest. GOB has responded responsibly and capably to the global financial crisis. Recognizing policy choices in other countries can directly affect its own economic growth, Brazil has been eager to engage developed country partners in finding a way forward. As chair of the G20, Brazil has recognized the need to bring that grouping together in addressing the crisis. ¶8. (C) We have similarly found Brazil defining its national interest as intersecting the United States' more consistently on the economic agenda. The biofuels MOU has proven an excellent forum for cooperation which has produced tangible results and an increased sense of the value of working together. This success can potentially be expanded to other areas of the economic relationship, such as broader energy cooperation and possibly a 4+1 trade discussion. The energy agenda holds enormous potential for a new Administration as Brazil becomes a significant player in oil and alternative fuels. Trade discussions could be fruitful to explore. Similarly, as we build successes over time demonstrating bilateral cooperation yields mutual benefit, this economic cooperation may encourage bilateral BRASILIA 00001418 003.2 OF 005 cooperation on broader global issues, including political and security questions. ¶9. (C) Brazil is an emerging nation still feeling its way internally toward a new sense of itself and its place on the global stage. As such, its definition of national interest will not always coincide with our own. Mission suggestion would be to treat Brazil more as a "Japan" or a "France" - a partner that can be frustrating and that we may not always agree with, but one we can work with constructively with a shared assumption that areas of positive engagement and cooperation can be found. Brazil is not yet a Japan or a France, but engaging with Brazil seriously will foster its growth into that role. Brazil's competition group is the BRICS, its neighborhood is Latin America, and it will evolve as a significant global presence eventually. It would be a mistake to treat Brazil as a third-tier country or to assume that the GOB is not focused on its national interest. We should commit deeply to engagement with this large democracy and growing economy, recognizing our common interests and the potential to deepen cooperation in an gradually expanding range of policy topics where our respective national interests coincide. ¶10. (SBU) EPD AGENDA TOPICS - SOCIAL INCLUSION/DEVELOPMENT COOPERATION: Following up USAID Fore's visit in August and earlier EPD discussions on the US MCC and the Brazilian Bolsa Familia, cooperation in third countries provides an excellent opportunity for us to benefit from each other's expertise and experience in complementary assistance projects in countries of common interest. AID and ABC have agreed to further expand existing cooperation and initialized technical level meetings to enhance each others' knowledge of existing and planned USAID and ABC projects in Haiti and Mozambique and to seek further trilateral cooperation initiatives in African countries belonging to the Community of Portuguese-Speaking Countries. USAID agreed that it would pursue Brazil's participation in donor coordination meetings where they provide development assistance, similar to Brazil's current participation in Haiti. These steps represent the first tangible progress on social inclusion in the EPD. - AGRICULTURE: MRE understands that USDA has the lead in USG on CODEX and on the CCA. Regardless, the Brazilians desire and intend to discuss their concerns regarding developing country participation in CODEX for State to hear. MRE understands that FAS will respond on this agenda item. - INFRASTRUCTURE: Infrastructure investment under the PAC remains an enormous political priority for the Lula government, both domestically and in terms of the regional integration agenda. In the context of the global financial crisis, the President and Ministers have repeatedly emphasized that, whatever the government's response, commitment to the PAC will remain staunch. This commitment is both a political priority as the PT maneuvers toward the 2010 elections, and a policy priority based on lessons learned in past economic crises. In the past 20 years, Brazil chose to abandon infrastructure investment as it struggled to impose fiscal discipline, resulting in poorly maintained or in many cases non-existent infrastructure for roads, rail, ports, the electrical grid, and other examples. Recognizing profoundly inadequate infrastructure is constraining Brazil's potential growth prospects, policymakers are determined not to make this mistake in future. This area has been cited as one where Brazil can offer valuable "lessons learned" to other developing countries working with IMF and other institutions. To date, MRE's role has been limited to coordinating the infrastructure "roadshows" to the United States. - CIVIL AVIATION: The EPD will welcome the agreement negotiated with ANAC in June. You may wish to note our hope that expanded flight possibilities into the north/northeast of Brazil will further social inclusion objectives, as potential increased American tourism and other business opportunities could also benefit development objectives in that region. - HOPE II: In addition to underlining Brazilian business interest in taking advantage of HOPE II, MRE will present preliminary ideas for possibly designing a Brazilian equivalent of the HOPE program. This would probably require new legislation in Brazil (rather than regulatory change). MRE also needs to sort out internally whether it can act unilaterally or, more probably, would have to negotiate within Mercosul. At the EPD, MRE will principally be looking for feedback whether US textile producers would have any interest in an eventual potential Brazilian HOPE program for Haiti. - SECTORS: In addition to proposing a sectoral event on aeronautics, MRE has invited MDIC to come to the EPD to present a proposal on cooperation in the software/IT sector. The sectoral discussion presents a good opening to introduce IPR discussion into the conversation and its links to innovation and competitiveness in these BRASILIA 00001418 004 OF 005 specific sectors. - IMPORT SAFETY: The EPD will welcome the October 22 MOU between CPSC and IMETRO. FCS understands there was MDIC sensitivity to MRE's proposal to sign at the EPD - Mission is grateful to avoid getting in the middle of that issue and believes simply welcoming the signed agreement will be acceptable to all parties. If Ministry of Justice's proposal on product recall cooperation is ready, MRE may invite them to present at the EPD. - DISTINCTIVE PRODUCTS: According to MRE, the question of Brazilian treatment of bourbon, bourbon whiskey, and Tennessee whiskey may be nearing a solution. The technical experts at the agriculture ministry (MAPA) have indicated that two of the requests made via demarche are doable: retracting the current bourbon definition and including the products on the distinctive products list. The suggested U.S. definition of bourbon however presents some technical problems that MAPA will discuss in detail at a bilateral meeting with Tobacco, Tax, and Trade Bureau's Bill Foster the day prior to the EPD meeting. - INNOVATION: MRE/Economics has struggled internally to find its value-added in work already underway via MDIC, ABDI, the Science Ministry, and other parts of GOB. MRE rejects IPR as a positive area of engagement on the innovation agenda. MRE will welcome OES' presentation and innovation work under the Joint Commission Meeting on Science and Technology process, which another part of MRE leads in conjunction with the Science Ministry and State/OES leads for the USG. - TELECOMMUNICATIONS/INTERNET: We understand that in addition to resource concerns involved in negotiating a highly technical Mutual Recognition Agreement (MRA),ANATEL and other parts of GOB may be reluctant to negotiate on product categories where domestic production exists. Brazil will ask where USG thinking is on ICANN renewal and continues to believe internet governance should be further internationalized. - OECD: MRE found the technical sessions in Washington and their diplomat's visit to USOECD extremely helpful in understanding how the USG organizes its staff and interagency work. MRE prefers not to be pressed to accept more extensive offers of technical assistance. You may wish to proactively seek Brazil's input and expertise in a specific work area of the OECD, such as biofuels, as a way to further draw Brazil into the OECD's work and as a signal that USG values the contribution and expertise Brazil can offer. While opinions vary within both Ministries, the Finance Ministry at higher levels is generally more enthusiastic about eventual OECD membership as a way Brazil can gain more influence on global economic issues. The upper levels of MRE, however, remain skeptical of the institution as a perceived rich country club imposing its will on developing economies. - INVESTMENT/TAX: GOB remains uninterested in pursuing a BIT-style agreement, signaled again clearly even in MRE edits to the proposed agenda for the October 29 technical session. GOB remains unwilling to consider the investor protections a BIT includes, and is not convinced that resources should be prioritized toward negotiating with the United States in any case given unprecedented levels of two-way FDI. MRE has not been moved by arguments that a BIT would attract deeper small and medium sized investment that form the backbone of a strong two-way investment relationship. With Brazilian business concern focused more on major investment disputes in countries like Argentina and Ecuador and a thwarted experience in the Congress that failed to ratify MRE's 1990s BITs, MRE, Finance and MDIC are reluctant to spend the political capital a BIT would require despite a CEO Forum recommendation to explore an arbitration mechanism. As opinion in the Congress and among the business community continues to evolve, we should continue to press MRE on this issue. US-Brazil tax treaty discussions September 30-October 2 confirmed most issues are resolvable through negotiation. However, GOB indicated it would not be possible to change its legislative system to permit transfer pricing and dispute settlement. USG is seeking business feedback whether a BTT that does not include these elements would be of value. ¶11. (SBU) Congressional Lunch, October 29 This diverse group of Senators and Deputies will give a good flavor of the diversity of opinion on economic issues and the appropriate role of government. Opinions range from PT Deputy Tatto, chair of the House Economics committee, who speaks with admiration and envy of the Chinese government's perceived ability to "control" its economy and who is highly protectionist, to Pedro Eugenio, Chair of House Finance, who is economically liberal and interested in increased ties with the United States. The group will be interested in an exchange of views on the global financial crisis and response, the Doha Round, BRASILIA 00001418 005 OF 005 and potential areas of bilateral cooperation. You may wish to initiate dialogue on other areas of US interest such as investment and tax agreements. This group will have a diversity of views on regulatory reform in Brazil. You should ask for their perspectives on the feasibility of the government getting particular initiatives through Congress by 2010 (from domestic tax reform to bilateral agreements). ¶12. (SBU) MDB/CNI/Central Bank dinner, October 29 This group brings together MDB representatives who help Brazil address its development needs, a business community representative who can speak to Brazil's current environment and the impact of the financial crisis, and Finance Ministry who plays a key role in addressing the crisis. The conversation could range from Brazil's infrastructure needs and US cooperation to address, the global financial crisis' impact, political and economic views on Brazil's evolution, and regional topics of interest. The IDB and CAF representatives are Bolivian, adding additional perspectives to this conversation. SOBEL