BRAZIL: CHINA AND BRAZIL STRENGTHEN RELATIONS,

C O N F I D E N T I A L SECTION 01 OF 05 BRASILIA 000534

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/14/2028
TAGS: PREL ETRD EINV BR CH XR
SUBJECT: BRAZIL: CHINA AND BRAZIL STRENGTHEN RELATIONS,
SLOWLY

REF: A. 06 BRASILIA 603

B. BRASILIA 9

C. BRASILIA 48

D. 07 SAO PAULO 718

E. SAO PAULO 130

F. 05 BRASILIA 2317

G. BEIJING 1315

Classified By: Deputy Chief of Mission Phillip Chicola, reasons 1.4 b/d


1. (SBU) Summary. Sino-Brazilian relations are officially
excellent, characterized by a booming economic relationship
and a political relationship that has become increasingly
closer, especially since 2004. Both governments are taking a
long-term view and are trying to focus on crafting a
patiently constructed relationship that they hope will
increasingly yield political fruits in south-south affairs,
international organizations, and bilateral cooperation.
However, there is evidence that the Brazilian private sector
may be beginning to take a different view, as a result of the
unbalanced trade relationship. The Brazilian Foreign
Ministry has placed political goals above economic
considerations, causing dire consequences in some Brazilian
manufacturing sectors. The Sino-Brazilian relationship
purports to be cooperative, and they have much to offer each
other. But at this point, there is evidence of both economic
competition and some political frustration with a lack of
Chinese responsiveness. Although the Brazilians are
committed to strengthening this relationship over the
long-term, Brazil is not getting all it wants from the
relationship. It is not clear that the two sides will be
willing to take the necessary steps to maximize its
potential. End summary.

2004 Summit Raises Prospect for a More Dynamic Relationship
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2. (U) China and Brazil established formal diplomatic
relations in 1974, and over the next twenty years signed six
agreements covering trade (1978),maritime transportation
(1979),science and technology (1982),culture and education
(1985),economy and technology (1990),and the peaceful
application of outer space (1995). In the mid-nineties, the
two countries established a Strategic Partnership,


3. (SBU) Characterized by economic "complementarity" and a
general coincidence of political interests, the
Sino-Brazilian relationship advanced toward a high point in
2004, when the heads of state exchanged visits.


4. (U) Professor Lytton Guimaraes, coordinator of the Asian
Studies Nucleus at the University of Brasilia, points to the
significant fact that Lula's visit to China in May 2004 was
also a trade mission, with over 400 businessmen accompanying
the official delegation. President Hu visited Brazil in
November 2004 during a Latin American tour that culminated in
his participation at the APEC meeting in Chile. His trip
generated a lot of hope in official and unofficial circles in
Brazil, mainly for trade and investment opportunities, but
also for political benefits.


5. (SBU) In the intervening years, numerous Brazilian trade
missions have traveled to China seeking business
opportunities. But without a bilateral summit since November
2004, the relationship has been mainly managed at the deputy
minister level and below, except for Brazilian Vice President
Alencar's March 2006 trip to Shanghai for the first meeting
of the for the High Level Committee on Consultation and
Cooperation (COSBAN) (ref A) and the August 2006 visit of top
Chinese legislator Wu Bangguo.

Economic Complementarity Gets Few Compliments in Brazil
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6. (SBU) According to Chinese and Brazilian diplomats, the
Sino-Brazilian economic relationship is based on

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"complementarity," not competition: Brazil exports to China
low value added commodities such as iron ore, soy, and
petroleum, with these three commodities representing about
70% of the export value, while China exports high value added
goods such as electronics. Booming trade seems to bear
witness to this complementarity: China recently passed
Argentina to become Brazil's second largest export market,
after the U.S., while Brazil is China's ninth largest export
market.


7. (SBU) The GOB claims to be comfortable with a situation
that currently favors China as exporter of high value added,
finished manufactured goods. This may be because Brazil is
able to export finished goods such as aircraft, electronics,
shoes, and furniture to other markets. But Brazil and China
compete in third country markets, and Brazilian industries in
sectors such as shoes and toys have suffered greatly from
Chinese competition both at home and abroad. The Brazilian
business community has witnessed loss of domestic and third
country market share without a commensurate increase in the
Chinese market. While bemoaning their loss of market share
to China, industry groups tell us they also worry about
possible loss of jobs in Brazil as companies move to China to
take advantage of cheaper production costs (ref E).


8. (SBU) As a result, there is tension lurking under the
surface of these booming trade figures. A large number of
Brazilian businesses, above all commodity exporters, are
benefiting from the increasing trade. But manufacturers
remain less satisfied (ref E) because finished products are
harder to sell in China than commodities, and many have lost
market share at home and in third countries to Chinese
products. While the trade balance was in Brazil's favor, the
unhappiness among manufacturers seemed to be only
special-interest carping around the margins, but the trade
balance has now shifted in China's favor. Brazilian exports
to China in 2007 were USD 10.7 billion, up 27.93% over 2006,
while Chinese exports to Brazil were USD 12.6 billion, up
57.92% over 2006, resulting in Brazil's first trade deficit
with China. If not checked, a trade balance in China's favor
will almost certainly generate additional bad feelings, which
could become a political problem for both sides. Itamaraty
China desk officer Pablo Pereira told us the Chinese have
already agreed to exercise some voluntary restraint at
Brazil's request in an effort to control the trade imbalance.



9. (U) The Brazil China Business Council reveals in its
first China-Brazil Trade Report (February 2008) that
non-durable consumer goods comprise only 14% of Chinese
exports to Brazil. Likewise, Chinese Ambassador Chen Duqing
pointed out in a 2007 interview in Visao da China, published
by the China Brazil Trade and Industry Council, that the bulk
of the exports are not consumer goods, but industrial goods.
Therefore, he suggested, they contribute to Brazilian
manufacturing capacity and, because they are inexpensive,
help control inflation to the benefit of consumers.



10. (C) By placing Brazil in the role of raw materials
supplier, China has laid the groundwork for resentment in the
Brazilian manufacturing sector, which includes not only toys,
shoes and textiles, but high value added products such as
cell phones and aircraft. In one important exception, China
entered into an agreement with Brazil's Embraer to buy 100
airplanes made in China and Brazil, but fulfillment of the
contract has been slow and did not begin until after China
constructed a plant in Harbin very near the Embraer plant to
do very similar work, possibly violating Brazilian
intellectual property rights, according to Professor
Guimaraes. As business sector dissatisfaction in Brazil
grows (refs D and E),China may face an increasing challenge
of managing Brazilian expectations to avoid souring the
broader relationship.

...And Insufficient Chinese Investment in Brazil

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11. (SBU) Some Brazilians also resent the unfulfilled
promise of massive Chinese investment in Brazil, first
aroused by President Hu's 2004 prediction of billions of
dollars in Chinese investment in Latin America. (Chinese
investments in the region are only about USD 2.4 billion,
according to Rodrigo Maciel, Executive Secretary of the
Brazil-China Business Council, and according to Shixue Jiang,
Deputy Director of the Institute of Latin American Studies of
the Chinese Academy of Social Sciences, citing Chinese
Commerce Ministry statistics, total investment in Latin
America stood at USD 11.5 billion in 2005, but was
overwhelmingly (USD 10.92 billion) in the Cayman Islands and
British Virgin Islands. Both citations are from "Enter the
Dragon: China's Presence in Latin America," SAIS, 2007). For
their part, Chinese investors often complain of the same
types of barriers and disincentives to investment as American
investors do, including corruption and excessive bureaucracy
(Ref E).


12. (C) Federal Deputy William Boss Woo (PSDB, Brazilian
Social Democracy Party, opposition; from Sao Paulo),the only
Chinese-Brazilian federal legislator (his father is of
mainland origin via Taiwan, and his mother is Japanese-born),
who came to politics from a career in community police work
and seems attuned to the views of ordinary Brazilians,
complained to Poloff that China has repeatedly missed
opportunities to take positive steps and to improve its
image, suggesting for example that China could have used the
recent, temporary EU ban on certain Brazilian meat products
to approve the same products for China's market. He said
China has missed opportunities to provide foreign aid, and
Japan is in the Brazilian market bidding on large public
works projects, while China is not. Deputy Woo said China
fails to create brand consciousness for its products because
they are manufactured for re-branding and retail sale by
third parties. As a result, Brazilian consumers do not
recognize any brands as Chinese. Professor Guimaraes said
some Brazilians expected a significant increase in Chinese
investment in Brazil as relations improved, but it has not
come, and frustration has set in.


Political Harmony Without a Clear Melody
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13. (SBU) In 2006, China and Brazil formally initiated the
COSBAN (Sino-Brazilian High Level Committee on Consultation
and Cooperation, or Comissao Sino-brasileira de Alto Nivel de
Concertacao e Cooperacao) in Shanghai with the participation
of Brazilian Vice President Jose Alencar and Chinese Deputy
Prime Minister Wu Yi. (ref A). The next COSBAN meeting
should take place later this year in Brazil. In the first
COSBAN meeting, China and Brazil agreed to support each other
in international organizations, work toward a successful
conclusion of the Doha Round, and cooperate in many political
areas to strengthen south-south relations and the voice of
the developing world globally. Brazil's and China's only
high profile joint undertaking is a satellite program that
predates the COSBAN. The several COSBAN subcommittees are to
report on their work at the COSBAN meeting in 2008. The two
countries recently upgraded their relationship to a Strategic
Dialogue, intending to signal a closer political
relationship, but again, concrete results have been difficult
to discern.


14. (C) Brazil has made consistent overtures to the Chinese,
offering China market economy status in November 2004 and
organizing meetings of the BRICs (Brazil-Russia-India-China)
(ref G). China has not reciprocated in meaningful ways so
far. According to Professor Guimaraes, China's behavior with
regard to Brazil has been ambiguous. China does not support
Brazil's top foreign policy goal, a seat on the UN Security
Council, as that would entail also supporting Japan, which
China will not do, he added. (In fact, the subject was

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something of a sore point at the recent BRIC meeting in Rio
de Janeiro, per ref G). The BRICs will hold a first
ministerial meeting in Yekaterinburg in May, but it is on the
margins of a Russia-India-China meeting that Brazil appears
to have greater weight for the other three. Guimaraes also
believes China's positions in the WTO have not gone as far as
Brazil would have liked. Deputy Woo takes a similar view,
saying that "China does not try hard enough" in Brazil and
supports Africa more.


15. (C) The two governments maintain, however, that all is
well. China desk officer Pablo Pereira would not admit to
any troubles in the relationship, and pointed to China's
voluntary trade restraints and the mutual support in
international bodies such as the WTO. Chinese Embassy
Political Counselor Song Yang also said the political
relationship is healthy and mutually beneficial, with its
emphasis on friendship, south-south cooperation, and
bilateral cooperation.

Comment: In It For The Long Haul
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16. (C) The Sino-Brazilian relationship is both competitive
and cooperative, and they have much to offer each other.
Nonetheless, it is not clear whether over time the two sides
will be able to manage the relationship to maximize its
potential. Clearly China is a higher priority for Brazil
than vice versa, but even without a convergence of political
interests, the volume of trade alone between the two would
keep Brazil on China's radar, even as it pursues resources in
Africa, where, as Professor Guimaraes pointed out, it is less
criticized for its political imperfections. Still, in its
single-minded pursuit of commodities and export markets,
China has not taken accompanying steps to heighten its
cultural profile or increase its "soft power" in Brazil. For
the moment, each side remains poorly understood by the other
(ref C).


17. (C) The full potential of the relationship is hard to
gauge, particularly since a leadership change in 2010 in
Brazil could bring an end to Lula's south-south focus.
Nonetheless, the relationship will remain important to Brazil
and is increasingly institutionalized, so may well survive
any future refocusing of Brazil's foreign policy priorities.
At present the relationship seems to be delivering more for
China than Brazil, which could cause problems if uncorrected.
Itamaraty has given precedence to the relationship's
political goals, which drive Brazil's China policy, while
economic consequences, both positive and negative, seem to be
collateral results and not on a par with the GOB's
south-south objectives. President Lula will probably go to
China for the opening of the Olympic Games in August 2008,
although that alone is unlikely to accelerate a relationship
in which both sides seem comfortable with the tortoise's
pace, not the hare's. End comment.


18. (U) Statistics on Brazil-China Trade
Brazilian exports to China (in billions of USD)
2002: 2.521 32.54% increase over previous year
2003: 4.533 79.83% "
2004: 5.441 20.03% "
2005: 6.835 25.61% "
2006: 8.402 22.93% "
2007: 10.749 27.93% "

Chinese exports to Brazil (in billions of USD)
2002: 1.554 16.98% increase over previous year
2003: 2.148 38.21% "
2004: 3.710 72.76% "
2005: 5.355 44.31% "
2006: 7.990 49.23% "
2007: 12.619 57.92% "

(Source: Brazilian Ministry of Development, Industry, and
Trade)

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