US embassy cable - 03BRASILIA3814

UNCLAS SECTION 01 OF 04 BRASILIA 003814 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/BSC 
USDA FOR U/S JB PENN AND FAS ADMINISTRATOR TERPSTRA 
COMMERCE FOR 4332/ITA/MAC/WH/OLAC/TSHEILDS 
SEOUL FOR AGCOUNS GRANT PETTRIE 
 
E.O. 12958: N/A 
TAGS: ETRD, PGOV, PREL, KIPR, BR, CH 
SUBJECT: BRAZIL'S EXPANDING TRADE WITH CHINA 
 
REF: BRASILIA 3461 
 
1.  (U)  Summary.  The Lula administration has embarked on a 
determined policy of export expansion in China, seeking to 
build on the boom in this bilateral trade relationship that 
began in 2000.  The Chinese appear to welcome the approach, 
sending at least five trade delegations to Brazil this year 
and demonstrating their confidence with increased investment. 
 Brazil's surplus with China has led the latter to seek 
relatively minor reciprocal market opening.  Brazilian 
diplomats and trade officials forecast continued growth in 
trade with China over the long term, rejecting speculation 
that the current boom will be short-lived as Chinese 
production capacity catches up with demand for several key 
products like steel. The Brazilian desire to strengthen ties 
with China in the wake of the WTO Ministerial in Cancun and 
the formation of the G-20( /-) developing country alliance 
contributed to the increase in official visits, and may lead 
to a Lula visit to China next year. There has been 
speculation that China will officially join India, Brazil and 
South Africa to form an expanded G-3.  While strong 
partnerships exist in several areas, trade is the leading 
current attraction in the Sino-Brazilian relationship.  End 
Summary. 
 
The Statistics 
-------------- 
 
2.  (U)  Brazilian press and the Ministry of Development, 
Industry and Foreign Trade have touted the fact that, 
excluding the European Union (Brazilian trade stats list 
European countries individually), China ranks this year as 
Brazil's second largest export market, after the U.S.  China 
has advanced from Brazil's 12th largest export market to its 
second largest since 2000, and now takes in 6.5 percent of 
Brazil's exports. Over the last year, Brazilian exports to 
China more than doubled while imports grew by 7.5 percent. 
Brazil has exported more than $3.9 billion in goods to China 
so far this year compared to $2.1 billion during the same 
period last year.  In comparison, Argentina and Holland 
(third and fourth in export markets) each purchased 
approximately $3.6 billion in Brazilian goods so far in 2003. 
Soy and iron ore account for approximately seventy-five 
percent of exports to China, with soy exports almost doubling 
within the last year.  The top ten list includes laminated or 
semi-manufactured iron and steel, wood products, auto parts 
and motors, soy oil, and animal furs and skins. Statistics 
provided by the Chinese Embassy indicate that Brazil is 
China's tenth largest trading partner, accounting for 1.5 
percent of Chinese trade.  While far behind the value of the 
U.S. market to Brazilian exports ($13.9 billion so far this 
year), not to mention the EU ($15 billion so far this year), 
the Chinese market now merits, and is receiving, increased 
attention from the Lula administration. 
 
The Visits 
---------- 
 
3.  (U)  The recent flurry of official visits and 
deliverables with trade objectives underscore the importance 
with which the GoB views this relationship.   Minister of 
Development Industry and Foreign Trade Luis Furlan visited 
Macao in October to take part in the first Forum for Economic 
and Trade Cooperation between China and Lusophone countries. 
Minister of Agriculture Rodrigues followed suit in November 
accompanied by a delegation of Brazilian business leaders. 
Minister of Defense Viegas also made an official visit to 
China in November.  The number of Chinese delegations 
visiting Brazil, especially study missions, has overwhelmed 
the small Foreign Ministry staff dedicated to Asia and 
Oceania, according to one diplomat.  Recent high-level 
Chinese visitors that have made stops in Brazil as part of 
regional visits include Chinese Vice-Minister of Agriculture, 
Fan Xiaojian, who held talks in Brazil in late November, and 
senior Chinese Communist Party official, Zhang Dejiang, along 
with a trade delegation from Guangdong province.  Lower level 
trade and investment missions have participated in trade 
fairs and investigated individual sectors.  The Chinese 
government has also sent a study mission to research Brazil's 
social security system.  The strengthening of ties between 
the two countries is also evident in an expanding partnership 
in technology development (see reftel) and space activities. 
 
4.  (U)  Press reports of the trips rarely fail to mention 
the signing of cooperative agreements and the closing of 
trade deals, the significance of which is often difficult to 
determine.  During Rodrigues' visit in early November the two 
countries signed a phyto-sanitary protocol and agreed to 
reciprocal technical exchanges to iron out difficulties in 
certifying sanitary suitability of a range of agricultural 
products including citrus, chicken, pork, and beef.  Fan 
Xiaojian's visit produced an accord establishing rules for 
agricultural marketing and technology transfer, as well as an 
MOU on cooperation in areas ranging from agricultural 
biotechnology to food processing and environmental 
protection.  The trade delegation from Guangdong province 
reportedly closed trade deals in Brazil worth $150 million. 
 
5.  (SBU)  At the Forum for Economic and Trade Cooperation in 
Macao, China and eight Portuguese speaking countries signed 
on to an action plan covering joint efforts at trade 
promotion and eliminating trade barriers, exchange of trade 
and investment information, and cooperation in farming and 
fisheries.  Oswaldo Biato, head of the Ministry of Foreign 
Relation's office that covers China told Econoff that he 
believes the motivation behind this forum was not closer 
trade ties, but Chinese central government support for Macao, 
which would be the headquarters for the organization which 
may eventually be founded.  Macao's economy, he said, is 
dependent on tourism and casinos and needed a special niche 
that was not subject to such variability. 
 
The Potential 
------------- 
 
6.  (SBU)  Despite the dubious trade significance of some of 
the recent accords signed between China and Brazil, there is 
little doubt that the GoB sees enormous potential beyond the 
short term.  Biato expects trade to reach $10 billion by 
2006.  China, the world's leader in attracting foreign direct 
investment ($50 billion in 2003), one of the fastest-growing 
economies in the world (7% in 2003), and in the second year 
of its 5-year transition toward full WTO compliance, is 
looking for strategic, long-term partners, according to 
Biato.  He maintains that even as China's production capacity 
expands for some key imports like soy and steel, the trade 
relationship will continue to be robust, especially to meet 
the needs of a growing middle class.  The pairing is natural, 
as both are developing economic powerhouses in their regions, 
China has excess capital to invest, and Brazil is 
cash-starved.  The Chinese already have small investments in 
the Manaus free-trade zone, including a furniture factory and 
a factory that manufactures televisions.  The Chinese are now 
starting to invest in Brazilian transport projects, including 
port and railway upgrades, investments that are driven by 
existing trade in primary products like soy and iron ore. 
The recent Chinese investment missions focused on 
electronics, pharmaceuticals, steel production facilities, 
thermal electric plants, even fire cracker factories. 
 
7.  (U)  The Chinese market is only just beginning to be 
exploited by the Brazilian private sector, according to 
Brazilian officials.  Trade with China is concentrated among 
40-50 Brazilian firms, many of them multi-nationals. 
Embraer's joint venture with Harbin Aircraft Industry Group 
and Hafei Aviation, and Vale do Rio Doce's joint venture 
exploration company formed with China's Baogang are but two 
of the better known examples of successful bilateral projects 
based on the private sector's positive growth calculation of 
bilateral trade.  Export promotion officials have 
criss-crossed the country encouraging small and medium sized 
firms to follow the lead of their larger brethren. The GoB, 
looking to expand exports of manufactured goods to China, has 
contracted a Chinese consulting firm to research the 15 
sectors where Brazil has the best prospects for growth in 
exports to Asia.  Minister Furlan's trade mission included 
business representatives from sectors with increasing exports 
to China, including the suppliers of medical equipment, 
aluminum, shoes, meats, and home appliances. 
 
Ag Trade 
-------- 
 
8.  (SBU)  As China's population continues to grow wealthier, 
Brazilians see potential for increasing the quantity and 
variety of agricultural exports, including soy, meat, 
chicken, pork, fruit, fruit juice, and coffee.  Brazil's 
Commodities and Futures Market exchange soon plans to open an 
office in Shanghai.  Press reports following Agriculture 
Minister Rodrigues' visit announced that China had certified 
Brazilian beef for import, predicting certification for 
poultry exports soon.  (Note:  Hong Kong is the third largest 
market for Brazilian pork and second largest for chicken 
parts.)   Officials on both sides have overcome earlier 
difficulties with soy shipments regarding identification of 
genetically modified product and the existence of a weed that 
Chinese officials believed to be harmful.  Biato told econoff 
that the Chinese phyto-sanitary problems with Brazilian soy 
mask other concerns regarding food security and 
over-dependence on food imports.  The Chinese government is 
trying to encourage its farmers to grow soy, but is meeting 
resistance, he said. 
 
9.  (SBU)  Biato acknowledged that there was some truth to 
press accounts of Chinese officials demanding reciprocity to 
address China's unfavorable trade balance with Brazil.  These 
reports appeared in Brazilian media during Rodrigues' visit, 
at about the same time as articles claiming that the U.S. was 
pressuring China and Russia to buy more chicken and soy in an 
attempt to reduce Brazilian sales.  Biato said that Chinese 
officials did press for market opening for garlic, corn, 
tripe, apples, lychee and longan fruit.  More significantly, 
he noted, China has requested that Brazil apply market 
economy status to China, thereby limiting the potential for 
dumping cases.  (Note:  Brazil currently has a safeguard in 
effect to protect its toy industry from the onslaught of 
mostly Chinese produced competitors.)  Brazil is considering 
this, as well as a quota for Chinese garlic.  Biato 
underscored the mainly symbolic nature of this reciprocity, 
saying a $2 billion trade deficit with Brazil is 
insignificant for the Chinese. 
 
Political bonds 
--------------- 
 
10.  (SBU)  Despite rumblings that China would soon join the 
India-Brazil-South Africa Dialogue Forum (IBSA), sometimes 
called the G-3, Biato denied this, saying that IBSA was still 
in its infancy and needed to focus on concrete bi- and 
tri-lateral projects making use of the geographical realities 
that join the three before branching out.  Biato did not 
speculate about potential difficulties with India should its 
regional rival express a desire to join IBSA.  However, 
Brazil strongly encourages China's support for a development 
agenda in other multilateral fora, like the WTO.  According 
to press reports, China supports Brazil's bid for a permanent 
seat on the UN Security Council.  Chinese participation in 
the upcoming G-20 meeting in Brazil is expected, and Biato 
confirmed the realistic possibility of a Lula trip to China 
sometime next year. The relationship encompasses many areas 
of cooperation, he said, but trade will be a growing area of 
interest for Brazil. 
 
11.  (SBU)  Comment:  The GoB reserves a special place for 
China in its export promotion efforts, and likewise counts 
China as a partner in advancing its global trade agenda. 
While the money to be made in strong trade links to China is 
not lost on the Brazilians, they also are aware of potential 
pitfalls in opening their own market to the export machine 
that is China, as the toy safeguard demonstrates.  Likewise, 
Brazilian companies know that doing business with and in a 
not-quite-yet market economy has its downside.  Lax 
intellectual property rights protection in China is one 
example of a negative factor for Brazil.  Contraband in 
pirated goods, much of it originating from China, helps to 
fuel organized crime in Brazil and frustrates the efforts of 
the GoB to improve its IPR enforcement.  A September "Estado 
de Sao Paulo" article noted the case of Embraco, a Brazilian 
company making compressors that launched a joint venture in 
China to produce for the local market in 1995.  The company's 
operations director cited lack of patent protection for the 
company's switch from local to foreign suppliers, as their 
competitors could easily buy copies of their designs from the 
local suppliers.  In the quest for export markets and 
building stronger south-south linkages, Brazil appears 
willing to give its developing partners a break on points of 
trade liberalization that do not seriously jeopardize the 
relationship.  While the trade stats continue to point to an 
enriching relationship for Brazil, any bilateral irritants 
are likely to be downplayed. 
 
HRINAK