US embassy cable - 04BRASILIA1307

UNCLAS SECTION 01 OF 04 BRASILIA 001307 
 
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USDA FOR FAS/FAA/ITP, U/S PENN AND FAS ADMINISTRATOR TERPSTRA 
USDOC FOR 4322/ITA/MAC/WH/OLAC/WBASTIAN/JANDERSON/DMCDO UGALL/ 
ADRISCOLL 
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PLS PASS TO EXIM FOR A FOLEY 
PLS PASS TO USTR FOR SCRONIN, LYANG, BPECK 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EIND, ECON, EINV, ETRD, KIPR, PGOV, BR, Economic Policy & General Analysis 
SUBJECT: GRAB BAG OF GOB INDUSTRIAL POLICY MEASURES 
 
Refs: A) Brasilia 1098  B) Brasilia 661 
 
SENSITIVE BUT UNCLASSIFIED; PLEASE PROTECT ACCORDINGLY. 
 
1. (U)  Summary:  As promised, Minister of Development, 
Industry and Trade (MDIC) Luis Furlan unveiled a huge composite 
of measures under the umbrella of Industrial, Technology and 
Foreign Trade Policy (PITCE in the Portuguese acronym) on March 
31.  A grab bag of recycled programs, financing and tax 
incentives as well as new councils and government agencies, the 
PITCE comes with promises to modernize, restructure, and 
streamline the broken pieces of government that hamper 
industrial growth.  Attractively wrapped in technological 
innovation, the PITCE offers something for everyone (plus a 
little extra for the four strategic sectors of semiconductors, 
software, pharmaceuticals and capital goods) while attempting 
to appear sufficiently different from the discredited 
industrial policies of Brazil's past.  Fiscal constraints 
necessarily limit the viability of the various options, but the 
GoB has already budgeted R$ 550 million (US$ 183.3 million) for 
2004.  Furlan and his deputies insist that PITCE is not static 
and will be altered when necessary to fit the country's 
development needs.  Their assertion parallels Itamaraty's often- 
voiced reluctance to commit to any multilateral trade 
obligations that would limit GoB flexibility in this sphere. 
End Summary. 
 
Everything But The Kitchen Sink 
------------------------------- 
 
2. (U)  On its web site, MDIC defines over 50 industrial policy 
measures under the headings of a) industrial modernization, b) 
foreign markets & competitiveness, c) product, process, and 
management innovation, d) strategic options for semiconductors, 
e) software, f) capital goods and g) pharmaceuticals, h) 
harbingers of the future, i.e. biotech and nanotech i) 
strengthening small and medium enterprises, j) strengthening 
the national system of innovation, and k) creating a favorable 
environment for industrial development.  Each listing includes 
a definition of the measure, a goal and a responsible 
government entity to lead the effort.  With such broad 
parameters, existing programs are easily folded, or slightly 
modified to fit, into the PICTE. 
 
3. (U)  Under foreign markets and competition, export-promotion 
publicity campaigns executed by the Ministries of Tourism, 
Culture and Foreign Relations constitute a specific measure. 
The program "Brazil Exporter," launched in November 2003 by 
MDIC and also a PICTE measure, is itself a collection of 
assistance efforts aimed at getting small businesses to export 
via training, improvements in product design, and greater 
access to credit.  The PICTE broadens the Brazil Exporter 
program to include specific measures for Brazilian states 
underrepresented in the export market as well as a new drawback 
system that would partially reimburse import duties on goods re- 
exported or used in manufacture of exported goods.  Expanding 
the application of special computerized customs procedures to 
include semiconductors, and efforts to reinvigorate the 
metrology network and certification programs under the 
supervision on INMETRO (The National Institute of Metrology, 
Standards and Industrial Quality) for paper, cellulose and 
furniture industries, exemplify the relatively low-cost PICTE 
goal of redirecting the efforts of bureaucratic structures to 
accommodate sectors the GoB believes have greater export 
potential. 
 
4. (U)  Modernizing customs policies and procedures, 
facilitating the opening and closing of businesses, creating 
MDIC-led competitiveness forums for biotechnology and 
franchising, as well as development of a broad extension 
service designed to assist smaller businesses to export their 
products, typify the horizontal measures that account for much 
of the PICTE's efficiency and transparency goals.  The plan 
also calls for installation of foreign trade and investment 
attraction kiosks within the international branches of the Bank 
of Brazil, as well as the creation of five distribution and 
logistics centers overseas to support the efforts of small and 
medium-sized export businesses. 
 
5. (U)  The PICTE spawns more policymaking, calling for the 
development of specific industrial-policy programs for 
nanotechnology and biomass.  The PICTE prioritizes the passage 
of several bills including innovation legislation, which would 
create a legal framework for privately conducted research to be 
funded through government resources and, in some cases, using 
government labs.  Passage of a bill (1787/96) protecting the 
intellectual property of lay-out designs of integrated 
circuits, a TRIPS requirement that has lain dormant in the 
Brazilian Congress for several years, is now an objective of 
the Lula administration.  Digital inclusion and the free 
software movement also figure in the policy.  Incentives will 
be designed for the development of software solutions using 
open code, and the GoB plans to add 30,000 to the network of 
computer-using small businesses by 2007. 
 
Potentially Affecting the Bottom Line 
------------------------------------- 
 
6. (U)  At least eight of the PITCE measures are concrete tax 
or concessional financing incentives, the most broad being the 
"Modermaq" program which offers fixed-rate 5-year financing for 
up to 90 percent of the sale price of industrial-equipment 
purchases.  In addition to Modermaq, the PICTE includes a 
reduction of the import tax on some capital goods without 
locally or Mercosul-produced equivalents.  (Note:  Brazil 
grants case-by-case reduced tariff rates on specialized capital 
goods not produced locally.) This reduction of the exceptional 
tariff rates from 4 to 2 percent for goods produced within 
Mercosul and to zero for goods not produced within Mercosul 
began with the implementation of a resolution in February 2004. 
The GoB characterizes the equalization of the COFINS (social 
security system contribution) tax on imports and exports 
(reftel A) and the gradual elimination (starting with a 30 
percent rate reduction in 2004) of the industrial production 
tax (IPI) on equipment destined for productive activity as 
PICTE measures as well.  A Presidential decree (no. 4,928/03) 
of December 2003 permits reductions in the calculation of the 
net profit taxes (CSLL) for businesses that invest in 
technological research and product development. 
 
7. (U)  The meat of the benefits for the four strategic sectors 
are Brazilian Development Bank (BNDES) lines of credit for 
software marketing and export; pharmaceutical production, 
research activities, business incorporation, acquisition and 
fusion; and the purchase or production of made-to-order capital 
goods.  The line of credit for semiconductor production will 
come from the Ministry of Science and Technology's (MCT) FINEP, 
the Ministry's financing arm for studies and projects linked to 
sector specific funds.  2004 financing under these credit 
schemes ranges from R$ 10 million for chips to R$500 million 
for pharmaceuticals and capital goods. 
 
More or Less Bureaucracy? 
------------------------- 
 
8. (U)  The PICTE calls for the creation of a National Council 
of Industrial Development as well as a Brazilian Agency for 
Industrial Development. While both are to be organized by MCT 
and MDIC, the Council would bring together government, business 
and labor to help define policy directives, and the Agency 
would concentrate the execution of policy objectives in one 
government organ.  In addition, the PICTE envisions a one-stop- 
shop for potential investors that would also develop the agenda 
for sector-specific investments.  Called the "Special Room for 
Attracting Investment," this permanent group directly linked to 
the Presidency would bring together representatives of the 
Ministries of Development, Foreign Relations, Finance, 
Planning, Mines and Energy, Agriculture, Science and 
Technology, Tourism, and the Civil Household. 
 
Government-run Labs 
------------------- 
 
9. (U)  Several PICTE objectives aim to create new public 
laboratories, and to modernize existing ones.  While several 
are specific to the pharmaceutical sector, including a new 
national factory for the production of blood tests and vaccines 
and a laboratory for nuclear medicine research and production, 
others would focus on metrology and biotechnology.  A planned 
national public laboratory for chemical metrology would 
establish a certification framework to judge the purity of 
chemical products, and a national laboratory for material 
metrology would set national standards for building materials 
such as ceramics and carbon fiber products.  The National 
Laboratory of Industrial Technology will develop projects and 
promote research in applied micro and nantechnology in 
partnership with businesses and the function of the 
Biotechnology Center of the Amazon, inaugurated in 2002, will 
be strengthened to better assist businesses with sustainable 
harvesting of biotech production for commercial purposes.  The 
policy recognizes that bringing successful innovations to 
market will require strong intellectual property protection, 
especially in the target areas of pharmaceuticals, software, 
nanotech, and biotech.  Therefore, the restructuring of the 
Brazilian Patent Institute (INPI) and improving the regulation 
of ANVISA, the Brazilian Sanitary Surveillance Agency, are key 
PICTE measures that require further elaboration (septel). 
 
Comment 
------- 
 
10. (SBU) The PICTE is nothing if not ambitious in scope, and 
it endeavors to encompass parts of the GoB's total development 
agenda, even social priorities in health and education through 
digital inclusion and expanding production at public labs. 
Inclusive, modern, nationalist, populist, this policy offers 
something to every constituent.  By promoting industrial growth 
and efficiency via incentives to invest in new technology and 
export, particularly high-value added goods and services, the 
real prize the Lula administration seeks is job growth. 
Fostering cutting-edge technological development in the 
innovative sectors of the future and correcting bureaucratic 
bottlenecks is the icing on the cake that appeals more to the 
business than labor crowd. 
 
11. (SBU)  Above all, the set of measures which Lula's GoB is 
cumulatively presenting as its industrial policy is manifestly 
crafted to avoid significant new budget outlays or adverse 
policy impact.  The designers of the PICTE creatively aim to 
accomplish its specific goals with minimal fiscal distress, 
chiefly by re-modeling existing structures and supplementing 
the energy of the private sector.  While there are some clear 
import-substitution goals, especially in pharmaceuticals, 
petroleum and gas production, the plan introduces no overtly 
protectionist quotas or tariff hikes.  Those measures that 
require substantial public investment like the creation of new 
public laboratories may necessarily be longer-term goals, 
despite Brazil's world-class research capabilities, due to the 
tight fiscal environment.  MDIC's Secretary for Production, 
Carlos Gastaldoni has frankly characterized the PICTE to us as 
part standard operating procedure and part wish list.  He 
considered the Modermaq program as the most significant in 
short-term impact, characterizing the access to capital at a 
fixed rate as one of the biggest hurdles small Brazilian 
businesses face.  He noted that the strong emphasis on 
technological innovation should help guarantee a dynamic policy 
that can respond to industry's evolving needs. 
 
12.  (SBU)  The GoB's industrial-policy ideology has a trade- 
policy dimension.  Lula's administration considers its freedom 
to intervene with government supports as potentially essential 
for Brazil's industrial progress.  Any proposal -  presented in 
the context of free trade or not -- that might hem in this 
ability is rebuffed as an effort to deny an indispensable 
right, a right that, GoB interlocutors often remind us, more 
developed economies have freely exercised in the past. 
Brazilian recognition that the positives and negatives of 
globalization have significantly altered governments' toolkit 
of viable options plainly influenced this leftist GoB's 
supposedly improved version of national `industrial policy.' 
The result aims to be a hybrid applicable to Brazil's local 
realities, but also compatible with existing trade commitments. 
In practice, its impact in the internal sphere is likely to 
remain muted.  There is far too little in GoB coffers to 
significantly subsidize chosen industries and too much reliance 
on trade earnings for this GoB to repeat wholesale the statist 
policy errors of the nation's 1950s'-1970s' past.  For current 
and future trade negotiations, however, industrial policy goals 
will continue to limit what the GoB views as in its interest 
for further liberalization in sectors such as services, 
government procurement, investment and IPR. 
 
HRINAK