WHAT’S BEHIND BRAZIL’S FTAA POLICY

Código Fecha Clasificación Origen
03BRASILIA2233 18 July 2003 Confidencial Embassy Brasilia

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This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 06 BRASILIA 002233

SIPDIS

USTR FOR SCRONIN, KLEZNY
DEPT FOR E:ALARSON; WHA:CSTRUBLE, SPINKHAM; EB:BMANOGUE
NSC FOR JOANNA WALLACE
USDA FOR JBPENN

E.O. 12958: DECL: 07/16/2013
TAGS: ETRD, BR, Fee Trade Agreement of America (FTAA)
SUBJECT: WHAT’S BEHIND BRAZIL’S FTAA POLICY

Classified By: Janice Fair, Economic Officer for Reason Section 1.5 (b)
and (d)

1. (U) The description that follows of the political and
economic factors helping to shape Brazil’s trade policy, and
specifically its approach to the FTAA negotiations, is
offered to assist U.S. policymakers in determining whether
and how enough common ground can be found to conclude the
FTAA process successfully.

2. (C) Summary and introduction. A number of concurrent
forces are moving Brazil along its present FTAA trajectory.
These forces, or considerations for formulating policy, are
sometimes contradictory and may have led to some GOB
miscalculation on how best to achieve Brazil’s interests
within the FTAA as well as the degree of hemispheric support
it would receive for its ideas to restructure the
negotiations. Brazil’s political goals, which include a
leadership role in South America along with a strong focus on
development and the social agenda, sometimes clash in its
pursuit of certain national economic interests. However, the
GOB’s vision of a reformulated FTAA is solidly rooted in its
perception of national interest and of the outcome required
for Brazil to benefit from the FTAA. The newly-elaborated
three-track approach is not simply a negotiating ploy.
Brazil’s FTAA calculation has always differed from that of
other countries in the hemisphere. For Brazil, the bottom
line is improved access to the U.S. market for its
agricultural and industrial goods, not regional rules for
attracting foreign direct investment.

3. (C) Despite Brazil’s strong desire to secure improved
access to the U.S. market, the rigid perspective of Itamaraty
officials in charge of FTAA policy inclines us to take at
face value the GOB claim that it will not continue with the
across the board FTAA negotiations as originally envisioned
and currently structured. We also suspect that the GOB is
currently in a vulnerable stage in its FTAA policy, given the
substantial general rebuff of the Mercosul three-track
proposal that occurred during the Trade Negotiating Committee
(TNC) meeting in San Salvador July 8-11.

4. (C) Regis Arslanian, unofficially Itamaraty’s new policy
director for the FTAA and Mercosul-EU negotiations, has
suggested privately that a compromise would be possible
between Mercosul’s three-track proposal and a baseline
agreement that he understood the USG to have contemplated
(septel). According to Arslanian, a bilateral structure for
all market access negotiations is the key element for Brazil.
End Summary.

5. (C) As the GOB evaluates potential benefits of an FTAA,
assesses the current status of negotiations, and develops
proposals to move the negotiations more in line with its
perceived interests, we believe the following chief factors
impact its deliberations:

* Brazil’s desire to be a regional political leader and, in
particular, to be the driving force behind Mercosul’s
reinvigoration.

* The belief that some Brazilian producers are not
sufficiently competitive to benefit from and in fact could
lose through a free trade agreement at this time.

* The recognition that Brazil needs substantial expansion of
exports to attain the economic growth necessary to address
its social agenda.

*The belief that exports to the United States will continue
to grow anyway.

* The concern that rules within comprehensive trade
agreements may constrain the GOB’s ability to design its own
preferred economic development policies.

* The difficulty in convincing the public and Congress that
an FTAA agreement would be a net positive for Brazil.

* The existence of divisions and opposition within society
and government alike on the direction of Brazil’s FTAA policy.

LEADER OF SOUTH AMERICAN INTEGRATION

6. (C) The dominant theme in President Lula’s foreign policy
has been Brazil’s role as the natural leader of South
American integration, with Mercosul as the cornerstone. Lula
has met almost every South American counterpart at least once
in the six months since taking office. Press reports that
follow such meetings are replete with declarations of
solidarity, including references to the need to forge common
positions within the FTAA and WTO against developed country
protectionism. Brazil has used the granting of BNDES credit
lines to Argentina, Venezuela, Bolivia, Colombia and Peru to
reinforce these regional ties and fidelity to Brazil.
However, the GOB may have taken the rhetoric too seriously,
confusing no-cost statements of support in public
declarations with substantive positions within negotiations.
Despite Brazil’s efforts to forge closer alliances with
countries in the region, it appears that Mercosul’s
(Brazil’s) proposal to reformulate the FTAA was roundly
rebuffed in the San Salvador TNC meeting.

7. (C) President Kirchner’s election in Argentina has
apparently provided Brazil with a like-minded partner to make
Mercosul a priority. However, Mercosul remains more
important as a political project than an economic one, and at
times Brazil’s political interests regarding Mercosul appear
to blind it to its own economic interests. Virtually all
Brazilians now recognize that the Mercosul market is
insufficient to provide the export growth Brazil needs.

BRAZIL COST - LACK OF COMPETITIVENESS

8. (C) Rather than drawing attention to the new opportunities
that a hemisphere-wide trade agreement could present, the
FTAA generates fear in Brazil: the widespread perception that
many Brazilian industries cannot compete effectively, at
least not yet. Although developed country protectionism is
always cited as a major problem undermining Brazil’s
competitiveness, so are internal problems sometimes called
the "Brazil cost," i.e., high costs associated with Brazil’s
tax structure, outdated social security system, labor code,
poor education, and, in general, bureaucratic obstacles to
commerce. While the GOB is committed to social security and
tax reform, it seems to lack faith it can lower the "Brazil
cost" sufficiently in the near term to guarantee Brazilian
competitiveness in the free trade environment an FTAA
agreement would create.

EXPORTS ARE ESSENTIAL

9. (C) The GOB sees export growth as essential for economic
growth and job creation. The GOB is still following tight
fiscal and monetary policies designed to control the
inflation that started to accelerate following last year’s 30
percent devaluation of the Real. Foreign direct investment
has fallen off and capital in-flows have not recouped
following last year’s financial uncertainties. Exports grew
at a record pace at the beginning of this year, but are
expected to taper off somewhat with a strengthened currency.
Although the FTAA is a trade negotiation among 34 countries,
the GOB has stated clearly that its primary interest is
access to the U.S. market for goods. Thus there is a strong
incentive for Brazil-led Mercosul to stick with the FTAA if
it is clear that achieving a trade agreement with the United
States outside the FTAA is highly unlikely.

EXPORTS HAVE BEEN GROWING

10. (C) Although seeking improved access to the U.S. market
is a high GOB priority, some Brazilians note that exports to
the United States continue to grow anyway, even without a
trade agreement. The United States is Brazil’s largest
export market, and officials cite growth in exports to the
United States in each of the last seven years as evidence of
a trend. Although the GOB wants to negotiate increased
access to the U.S. market through the FTAA, it is unlikely
that Brazil would choose to do so at any cost.

FREEDOM TO PURSUE DEVELOPMENT POLICIES

11. (C) While aggressively seeking increased access to
foreign markets to allow for economic development through
export growth, the GOB is hesitant to enter into
comprehensive trade negotiations — for example, those that
include rules on services, investment and government
procurement — due to fear that these might constrain its
ability to develop new economic development policies. Such
thinking was reflected in the GOB proposals in late 2002 to
changes the WTO TRIMS agreement to, among others, allow
performance requirements for investors, and again in
Brazil/Mercosul’s FTAA goods market access offer that
included provisions to protect infant industries. Although
not wishing to go all the way back to the inward-looking
policies of the sixties, the GOB does appear more concerned
about maintaining its freedom of action than about
establishing better hemispheric-wide rules for economic
activity.

FTAA A HARD SELL

12. (C) Hand-wringing about the FTAA is a daily staple in the
Brazilian press, creating a constant sense of pressure and
urgency. There isn’t a single day when articles speculating
about FTAA policy do not appear in the major Brazilian
dailies, and reporting in smaller newspapers and magazines on
the subject is also prolific. Past rhetoric by Lula and his
PT party helped create this hostile climate, and the GOB has
increased public doubt and confusion through its own
often-conflicting statements. The result has limited the
GOB’s maneuverability and intensified the leadership
challenge it faces in winning domestic approval for any
agreement.

13. (C) Opposition to the FTAA is not new in Brazil.
Although industries worry about the "Brazil cost" and their
own specific competitive aspects, and labor organizations are
fearful about employment repercussions and loss of union
leadership, the arguments of the most vocal opponents are
usually ideological. The emphasis that Lula and Itamaraty
have given under the Lula administration to communication
with civil society, both domestically and through FTAA
hemisphere-wide fora, underscores the GOB’s real concern
about garnering public support for the FTAA.

14. (C) We believe that concern about deep-seated domestic
opposition to an FTAA deal is behind Mercosul’s recent
proposal to allow participation of private sector and
legislative representatives in its official FTAA delegations.
In contrast to other countries’ concerns about
confidentiality and the inflexibility that an expanded

SIPDIS
delegation composition might introduce into the negotiations,
Brazil apparently sees direct participation by these groups
as a means of gaining their approval for any eventual
agreement. The GOB may also be pushing for a bilateral
structure for market access because it would be simpler to
explain the trade-offs that were made to reach agreement.
Similarly, for Itamaraty a "positive list" approach for
services and investment market access makes it easier to
convey details on concessions to labor leaders and other
social and political leaders.

NOT EVERYONE AGREES WITH ITAMARATY POLICY

15. (C) There has been a recent consolidation of power within
Itamaraty, first with the replacement of Ambassador Hugueney
and now with the replacement of Ambassador Simas, of a group
that has viewed the FTAA skeptically for years. By all
accounts, the driving force behind current Itamaraty policy
is the Secretary-General, Pinheiro Guimaraes. He has been
among the Brazilian observers who have for years portrayed an
FTAA deal as at worst as a project of the United States to
take over the Brazilian economy and at best as a necessary
evil.

16. (C) However, not everyone within the diplomatic corps
nor within the government agrees with Itamaraty’s current
FTAA policy. Within other ministries, including the
ministries of Agriculture, Development and Finance, there is
concern that Itamaraty’s minimalist approach does not take
proper account of the potential economic benefits to be
gained through the FTAA. Nonetheless, Itamaraty has been put
in charge of coordinating FTAA policymaking, and we do not
believe efforts to exploit differences among ministers would
be successful. Attempts to stir the pot in this way would
likely only stiffen hardliners and undermine like-minded
ministers.

COMMENT

17. (C) As the GOB reflects on its next step(s) given the
lack of support for Mercosul’s three-track proposal, we
believe it will see its scope for movement as very limited.
After so publicly arguing for this approach, the GOB will
have a hard time abandoning it. Some in the GOB may harbor a
sense of being misled, since they took Ambassador Zoellick’s
presentations in Brasilia in May as an invitation to engage
in a dialog about reformulation of the FTAA. Arslanian, for
example, said the Brazilian delegation in El Salvador was
disappointed that the U.S. side made no mention there of a
"baseline" approach.

18. (C) There are intense political and social pressures for
Brazil to step back from the broad-based FTAA negotiations as
currently configured. Should the GOB fail to obtain
structural changes in the negotiations, Brazil is likely to
simply go through the motions with the FTAA, refraining from
constructive participation. Eventually it might even feel
compelled to suspend participation in the negotiations,
reluctant as it might be as a regional leader to be seen as
the villain who killed the golden egg.

19. (C) The present moment could be an opportune time should
the USG decide to explore potential modifications to the FTAA
negotiations that would give Brazil some of the political
backing it is seeking. As noted above, Regis Arslanian
seemed to suggest to econoff that Mercosul could be flexible
on a number of areas important to the United States —
services and investment rules, IPR and government procurement
within the FTAA — as long as market access could be
negotiated bilaterally. In future discussions the USG may
have with the GOB on this issue, we would of course be
leaving Brazil in no doubt that it, not the USG, is the
demandeur for change in FTAA scope. End Comment.
HRINAK