C O N F I D E N T I A L SANTIAGO 000938

SIPDIS

STATE PLEASE PASS TO USTR KDUCKWORTH
STATE FOR WHA/BSC, EEB/TPP/BTA/EWH, EAP/EP, AND WHA/EPSC
TREASURY FOR SSENICH
COMMERCE FOR KMANN

E.O. 12958: DECL: 10/20/2018
TAGS: ECON ENRG ETRD OVIP UNGA EFTA CI

SUBJECT: A/S SULLIVAN AND PDAS KELLY LUNCH WITH CHILEAN BUSINESS LEADERS ON NEW TRADE INITIATIVE (PATHWAYS)

Classified By: Ambassador Paul E. Simons. Reason 1.4 (b) and (d).


1. (C) Summary. A/S Sullivan and PDAS Kelly met with Chilean business leaders August 22 to brief them on U.S. economic engagement in the Western Hemisphere and preview USG plans for a new initiative to broaden access to the network of Free Trade Agreements in the region (now named Pathways to Prosperity in the Americas). They answered questions on: the P-4, Brazil, the Colombia and Panama FTA,s, global energy developments and Chile,s own energy problems, biofuels and food prices, U.S.-Chile economic engagement, and China,s role in the global economy. End Summary.

U.S. Focused on Economic Engagement and a New Initiative
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2. (U) Ambassador Simons hosted a lunch in honor of EEB A/S Sullivan and WHA PDAS Kelly with business leaders in Chile on August 22. Other U.S. participants in the meeting were: Mrs. Simons, WHA/EPSC Director Rooney, TPP Senior Policy Advisor Lurie, E/POL Counselor Alsace, and Econoff. Chilean business leaders attending the lunch were: Executive Secretary of ECLAC Alicia Barcena, President of AMCHAM Mateo Budinich, President of EmbotelladoraAndina Juan Claro, President of Fundacion Chile Oscar Guillermo Garreton, President of Expansiva Jorge Marshall, Chairman of the Center for Public Studies Eliodoro Matte, Executive Boardmember of the Corporation for Latin American Economic Research (CIEPLAN) Patricio Meller, President of SOFOFA Business Association Bruno Philippi, ECLCAC Director of the International Trade and Integration Division Osvaldo Rosales, President of the Association of Banks and Financial Institutions Hernan Somerville, and President of CIEPLAN Eugenio Tironi.


3. (C) A/S Sullivan opened the lunch by citing the recent period of achievement in promoting and negotiating Free Trade Agreements (FTA,s) in the Western Hemisphere. The U.S. had signed 12 FTA,s in the region. He noted the USG was developing an initiative (now known as Pathways to Prosperity in the Americas) to deepen economic engagement in the hemisphere and enable citizens in countries with FTA,s with the U.S. to take advantage of this network of arrangements and institutions. PDAS Kelly underlined that he and A/S Sullivan had devoted a lot of time to the initiative, which was a sign of U.S. commitment to improving the lives of real people in the Americas. This was a theme President Bush often emphasized during his visits to the region, stressing issues of social justice and inclusion.

4. (C) Alicia Barcena, Executive Secretary ECLAC, asked how the USG planned to highlight the importance of trade as a tool for development without making it a divisive issue. A/S Sullivan noted the new initiative would first focus on the U.S., free trade partners in the hemisphere working to address their concerns. The USG wanted to continue to press forward in a positive direction on trade, starting with FTA partners, but without excluding others who could be included in the future.

P-4: U.S. Exploring Investment and Service Chapters
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5. (SBU) A/S Sullivan opened the lunch to further questions. Hernan Somerville, President of the Association of Banks and Financial Institutions, asked about the U.S. intentions toward the P-4 in APEC. A/S Sullivan explained the U.S. was looking at participation in the P-4 in investment and services chapters. The initiative was not a U.S. undertaking, but we were examining the idea of expanding to other chapters in the future, and enlarging geographic membership. There were many trade initiatives in play, including the Arc of the Pacific. The U.S. was not asking to be a part of the Arc, but in general wanted to play a role in broad economic initiatives in the hemisphere.

U.S. - Brazil: Economic Engagement But No Free Trade
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6. (SBU) Osvaldo Rosales, ECLCAC Director of the International Trade and Integration Division, inquired about the prospect of free trade with Brazil in the future. A/S Sullivan noted the Bush Administration,s success in building constructive relationships with big developing partners, such as Brazil, India, and China. He cited positive engagement between Presidents Bush and Lula, agreement between the U.S. and Brazil in the Doha Round negotiations, and the Economic Partnership Forum suggested by Secretary Rice and FM Amorim. These were all examples of increasing economic integration in the hemisphere and with Brazil. Although Brazil was not yet ready for free trade with the U.S., there was continuing progress on economic engagement.

Update on Colombia and Panama FTA,s
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7. (SBU) Eliodoro Matte, Chairman of the Center for Public Studies, asked for an update on the Colombia and Panama FTA,s pending before the U.S. Congress. A/S Sullivan emphasized that everyone in the Administration from President Bush on down was focused on pushing Congress to approve the Colombia FTA. PDAS Kelly explained that the Congress, main objection to the Panama FTA had been the implication of the Speaker of Panama,s Parliament in a criminal affair. The Speaker was due to leave in the near future (Note: That change has now occurred.) and that would likely remove any further obstacles to Congressional approval of the Panama FTA.

Venezuela: Self-Selecting Out of Economic Engagement
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8. (SBU) Hernan Somerville asked about the economic importance of Venezuela in the hemisphere. A/S Sullivan emphasized that despite provocations from Chavez, the U.S. did not want to rise to the bait of everyday verbal sparring. While Brazil was looming large in the region, Venezuela was becoming almost an afterthought, not only for the U.S., but also its economic partners in the hemisphere. A/S Sullivan underlined that none of his regional interlocutors had expressed anxiety about the U.S. offending Chavez. The GOV,s policies were effectively self-selecting Venezuela out of any serious discussions or efforts to deepen economic integration in the region. The U.S. was taking pains in the energy sphere to be as constructive as possible with Venezuela, considering 60% of its oil exports went to the U.S.

Energy: Global Picture and Chile,s Problems
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9. (SBU) Bruno Philippi, President of SOFOFA, asked for an update on the impact of soaring energy costs around the world. A/S Sullivan believed this was a challenge with which every country was dealing. The U.S. strategy was one of energy diversification. One positive story that was emerging was a new focus in the U.S. private sector on developing alternative energy. The USG was investing a considerable amount of money in research, for example in the G-8 (about $4 billion a year) and the Department of Energy, which was offering $43 billion in loan guarantees on clean energy technology (open to all companies investing in the U.S., including Chilean companies).


10. (SBU) Philippi opined that he did not see any real results coming from U.S. efforts. A/S Sullivan respectfully disagreed, noting there was a lag-time. For example, President Bush in his last two State of the Union addresses had talked about second generation fuels and it was now a critical issue in the U.S. presidential campaign. Ambassador Simons noted that there were many state initiatives in the U.S. that were beginning to bear fruit. The prices for alternative energy were coming down rapidly, such that some hoped solar power might become cost competitive with coal in the near future. A/S Sullivan suspected OPEC countries had over-played their hand, because the decision to maximize oil profits was spurring efforts to develop alternative energy. If there were to be a major discovery, it might spell the end of dependency on petroleum.


11. (SBU) Eliodoro Matte noted Chile was in a bind over whether to choose coal or hydro-power as the best way to diversify. He asked what the U.S. position was on a carbon tax. A/S Sullivan explained that 51% of U.S. energy comes from coal, 20% from nuclear, and 8-10% hydro-power. He noted the U.S. faced a similar quandary as Chile. This had produced a lot of renewed interest in nuclear energy, because it was clean and a technology the U.S. already possessed. He said that the question of a carbon tax would ultimately be up to the next U.S. president. The Bush Administration insisted that China and India be part of any agreement to reduce greenhouse gas emissions. Despite being close to such an agreement at the last G-8 summit, China and India had ultimately proved averse to lowering their emissions. This would make it very hard to reach an agreement in the future, no matter who was the next U.S. president. PDAS Kelly asked about the nuclear energy debate in Chile. Bruno Philippi said that in terms of cost, it was not a competitive option when compared to coal.

Biofuels Forcing Up Food Prices?
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12. (SBU) Osvaldo Rosales asked for U.S. thinking on biofuels, effect on food prices in the global economy. A/S Sullivan replied that the data he had seen indicated biofuels production was only responsible for, at maximum, a 10-12% increase in food prices. He explained that some factors increasing oil prices were forcing up food prices. There was a large imbalance in global supply and demand, due to a variety of circumstances, such as the recent severe drought in Australia. He preferred to look at the rising prices as part of more positive phenomenon. The global economy had grown so quickly and strongly, that a temporary period of imbalance was only natural.


13. (SBU) Alicia Barcena noted Brazil was calling for an international summit on biofuels in November. She thought it was a great opportunity to examine the issue seriously and ECLAC was developing a paper on the topic. A/S Sullivan said the U.S. and Brazil had agreed to a strong joint initiative on biofuels and were also cooperating on research and development. The U.S. was also working with Brazil and the EU on biofuel standards.

U.S.-Chile Economic Engagement: A Positive Example
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14. (SBU) MatteoBudinich, President of AMCHAM, noted the U.S. and Chile had a strong economic partnership thanks to their FTA, but wondered what sectors could benefit from increased economic engagement. A/S Sullivan noted he had been to the fifth anniversary of the signing of the U.S.-Chile FTA. The numbers from the agreement were staggering. During the first four years, U.S. exports to Chile had increased 200% and Chilean exports to the U.S. had increased 170%. This was a textbook example of the benefits of free trade. However, he deferred to Matteo and those around the table as the real experts on what sectors should receive increased focus. Ambassador Simons said there were a lot more value-added products moving from Chile to the U.S., which was hopefully a sector that would continue to prosper and benefit from increased engagement, such as the Chile-California initiative.

China,s Role in the Global Economy
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15. (SBU) E/Pol Counselor noted China,s economy was growing at between 8-9% per year and asked A/S Sullivan for his view of China,s role in the global economy, given its growing presence in Chile and Latin America. A/S Sullivan explained that the U.S. saw Chinese investment in other economies as a positive development as long as it produced local employment. Hernan Somerville was pleased by the U.S. position. He noted Chinese companies were buying up the former interests of U.S. companies leaving countries like Ecuador and Venezuela. He recommended Chile be the springboard for Chinese investment in the hemisphere.


16. (C) A/S Sullivan inquired about the Chilean experience with Chinese companies. He noted U.S. companies brought good corporate practices when they invested in other countries, but this was not always the case with Chinese companies. For example, China was not a signatory to the OECD Anti-Bribery Convention, although the U.S. was hoping to encourage China to sign. Somerville replied that Chile,s rules on transparency and rule of law were the same as in the U.S. He explained that Chile wanted Chinese investment but not at any cost. China had to play by the rules, which would only redound to its benefit. However, Chile could do more to attract Chinese investment. Bruno Philippi said Chinese companies were often incredulous that local labor could not work 12 hours a day 7 days a week.


17. (SBU) A/S Sullivan said that he traveled to China frequently and encouraged Chinese investment abroad. Somerville noted that with new Sovereign Wealth Funds (SWF), transparency rules would be critical to ensuring Chinese investment respected international norms. Wall Street was going to need Asian money. A/S Sullivan explained that the U.S. was well-disposed to SWF,s that were motivated by financial gain and normal investment criteria. However, SWF,s used as an instrument of national foreign policy were extremely problematic. PDAS Kelly added President Bush had said at APEC that any development increasing China,s engagement in the international financial system was a positive step.


18. (U) This cable has been cleared by A/S Sullivan and PDAS Kelly.

SIMONS