US embassy cable - 04BRASILIA1832

UNCLAS SECTION 01 OF 02 BRASILIA 001832 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/IFD/OMA/O'REILLY, AND WHA/EPSC 
NSC FOR DEMPSEY 
USTR FOR KLEZNY,SCRONIN 
TREASURY FOR OASIA - SEGAL 
USDA FOR FAS/FAA/TERPSTRA 
USDOC FOR 4332/ITA/WH/OLAC 
USDOC FOR 3134/USFCS/OIO/WH 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EFIN, EINV, SOCI, PGOV, PREL, BR, Trade 
SUBJECT: MERCOSUL/EU TALKS BREAK-OFF: NOT JUST A BRAZILIAN 
"TACTIC" 
 
 
This Cable is Sensitive but Unclassified. Please Protect 
Accordingly. 
 
1. (U) Top GoB negotiators on Wednesday July 21 abruptly 
broke off EU/Mercosul trade talks in Brussels and returned 
to Brazil leaving only lower-level staff to continue 
eventual exchanges on technical parameters or detail.  The 
GoB move was a reaction to the EU's latest agricultural 
market access offer, presented on Monday, which the 
disappointed Brazilians at once denounced as a retreat from 
the previous EU offer.  Inter alia, the Europeans reportedly 
conditioned the ultimate definition of their agricultural 
tariff/quota offers upon WTO Doha Round developments, and 
made explicit that previously proposed agricultural-import 
quotas would be phased-in, backloaded, over ten years. 
 
2. (SBU) By all local accounts and appearances, the walk-out 
came precipitously and shocked the Europeans -- as well as 
Brazilian media and observers who have been fed a steady 
recent diet of glowing GoB affirmations about achieving a 
Mercosul-EU trade agreement before Lamy leaves his post in 
October.  It probably also caught much of the GoB's own 
fifty-plus negotiating team on the hop.  CAMEX (Foreign 
Trade Chamber) executive secretary Mario Mugnaini, en route 
to Brussels with the latest input from Brazil's private 
sector after a Lula meeting with businessmen, landed to find 
his trip OBE'd. 
 
3. (U) As of Friday July 23, the declared GoB view is that 
the walk-out was a necessary tough tactic to force the EU to 
talk turkey about farm trade.  "The agricultural offer is 
the one that justifies this negotiation. Parceling out the 
quotas makes the agricultural offer inexistent...The time 
has come, once and for all, for the Europeans to understand 
that they need to improve their agricultural offer," in the 
words of the GoB delegation's new chief, Regis Arslanian. 
Local reports cite the Europeans in turn as claiming that 
the ten-year phase-in intention was previously notified and 
blaming Mercosul's "inflexibility" for the suspension of 
negotiations.  Arslanian's EU counterpart Karl Falkenberg 
noted that "Parceling is normal and it is, for example, in 
our agreements with Chile and Mexico."  No doubt the EU also 
has cause for its own complaint that Mercosul's offers (or 
lack thereof) on industrial trade, services and investment 
fall comparably short of what European interests require. 
 
4. (U) Both sides have underscored that negotiations have 
not been called off.  However, at least in Brazil it now 
seems broadly expected that the main hope for their 
resumption hinges on next week's events vis-a-vis Doha Round 
negotiations.  The always-optimistic Mugnaini has been 
quoted as suggesting that a ten-year phase-in period for the 
quotas might actually be acceptable, as long as the quotas 
themselves were steeply raised, but Itamaraty has since 
issued an apparent disavowal. 
 
5. (SBU) In a development whose possible correlation with 
the negotiations' progress has been lost on no-one here, 
Arslanian last week unexpectedly displaced veteran GoB trade 
negotiator and Ambassador to Brussels Graca Lima as head of 
the Mercosul team.  Itamaraty spokesmen up to and including 
Foreign Minister Amorim assert there was no policy import to 
this personnel shift.  Nobody seems to accept this, and a 
July 22 `Estado de Sao Paulo' editorial (Septel) reflected a 
common view in calling Graca Lima's sidelining just the 
latest in a series of ideologically-motivated underminings 
of Brazil's best trade diplomats since Lula's 
administration, and the new top Itamaraty leadership, took 
over. 
 
6. (U) Media have highlighted that Agriculture Minister 
Rodrigues and Industry Minister Furlan both made calls of 
solidarity to Graca Lima.  (NOTE:  U/S Larson heard of the 
Brussels breakdown in his July 21 meeting with Rodrigues, 
who expressed surprise at the development, but did not offer 
a view as to how far-reaching its effect would be.  END 
NOTE.)  Otherwise, general reaction in Brazil seems to have 
been to feel vaguely let-down, but irresolute.  The National 
Agricultural Confederation (CNA) was forthright in 
protesting the Mercosul walk-out, but the National 
Confederation of Industries (CNI) considered it "sensible." 
 
COMMENT 
------- 
7.  (SBU) Itamaraty made this disruption happen, but should 
be feeling very uneasy.  It has invested enormously in 
promoting the line that Brazil can gain improved trade 
conditions vis-a-vis developed countries with or without 
FTAA.  So far, its institutional returns for doing so under 
Lula have been rich.  Now, though, Amorim and Guimaraes face 
the prospect of the ballyhooed EU/Mercosul pact proving a 
chimera, disappointing the expectations that they themselves 
fueled.  Their best hope at this point may be the chance of 
last-minute WTO success in overcoming the Doha Round 
impasse.  Absent that, Amorim may have to choose between 
outright failure to get any Mercosul/EU agreement at all by 
October, or signing an "agreement" that is transparently 
pallid. 
 
DUDDY