US embassy cable - 05BRASILIA94

UNCLAS SECTION 01 OF 04 BRASILIA 000094 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR 
NSC FOR MIKE DEMPSEY 
DEPT OF TREASURY FOR FPARODI 
USDOC FOR 3134/USFCS/OIO/WH/EOLSON 
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD 
 
E.O. 12958: N/A 
TAGS: ECIN, ETRD, PREL, ECON, BR, Trade 
SUBJECT: MERCOSUL: CRITICISM GROWS BUT GOB POLICY SHIFT 
UNLIKELY 
 
REF: A) 04 BRASILIA 2885, B) 04 SAO PAULO 1659, C) BRASILIA 
91, D) 04 NEW DELHI 6407 
 
1. (U) This cable reflects input from Consulates General 
Rio de Janeiro and Sao Paulo.  Mission invites comment from 
other posts in the region regarding issues raised herein. 
 
2. (SBU) Summary and Introduction. The Brazilian private 
sector has recently stepped up criticism of GoB trade 
policy, in particular the government's emphasis on 
expanding relations with developing (as opposed to 
developed) countries.  Failure of the December 17 Mercosul 
summit to significantly advance the bloc's program toward 
achieving a customs union, the relative insignificance of 
Mercosul trade for Brazil, and frustration over Argentine 
restrictions on Brazilian exports have caused some in the 
private sector to propose that the bloc devolve into a free 
trade area, liberating its members to pursue independent 
foreign trade policies.  Despite this increasing 
assertiveness by the private sector on trade matters, and 
in particular on Mercosul, unless President Lula personally 
changes course it is highly unlikely that the GOB will 
abandon or dramatically curtail Mercosul integration 
because of industry concerns.  Despite its apparent lack of 
substance, support for regional integration runs deep 
within the President's PT party and the Foreign Ministry. 
Foreign Minister Amorim played a prominent role in 
Mercosul's formation while serving in the same position 
during Itamar Franco's presidency and sees it as a key 
building block for the larger ideal of a united South 
America (led, presumably, by Brazil).  And while President 
Lula is certainly aware of the industry's complaints, so 
far he has consistently supported Amorim's vision.  End 
Summary and Introduction. 
 
Plethora of Private Sector Complaints 
------------------------------------- 
 
3. (SBU) Mid-way through the Lula administration, the 
Brazilian private sector has stepped up its criticism of 
GoB trade policy.  The more strident complaints have been 
touched off by a series of government actions and 
"failures" that reflect a widening breach between private 
sector and government interests.  The list of GoB 
misconduct includes: the suspension in FTAA negotiations; 
the failure to conclude free trade negotiations with the EU 
in October; the granting of "market economy status" to 
China in November (ref a and b), and the GoB's conciliatory 
stance toward Argentina as it imposes restrictions on a 
host of Brazilian exports. In reacting to these events, the 
business community, as well as a number of respected 
analysts, has accused the GoB of subordinating tangible 
commercial interests to outdated ideological biases based 
on North-South conflict and to unrelated geopolitical 
objectives. 
 
4. (SBU) Basically, the GoB is under attack for its 
emphasis on relations with other developing countries and 
the perception that these ties are being pursued at the 
expense of relations with Brazil's major markets, i.e., the 
United States and the EU, which together receive nearly 50 
percent of Brazil's exports.  Given the lackluster results 
of the recent Mercosul Summit (ref c), criticism more 
recently has centered on what is perceived as the GoB's 
desire to preserve Mercosul at seemingly whatever cost. 
 
Excessive Focus on Mercosul? 
---------------------------- 
5. (U) Mercosul detractors point to the bloc's decreased 
importance to Brazil as a trading partner and the minimal 
economic pay-off likely to result from Mercosul's 
"successful" trade initiatives to date.  Following the 1994 
Protocol of Ouro Preto, Brazil's trade with its Mercosul 
partners grew rapidly, from $10.5 billion in 1994 to $18.5 
billion in 1997, with exports and imports in relative 
balance.  But after leveling off in 1998, Brazil's trade 
with Mercosul members declined following Brazil's currency 
devaluation in 1999 and Argentina's subsequent financial 
crisis, reaching a low of $8.9 billion in 2002.  In 2003, 
Brazilian exports to the bloc started to rebound, growing 
95 percent from the low 2002 level.  Although a further 59 
percent growth in exports and 12 percent growth in imports 
from January through November 2004 have lifted two-way 
trade to around $15 billion, it still remains well below 
the peak trade level recorded in 1997.  Furthermore, 
despite recent growth in Brazil-Mercosul trade, the bloc's 
relative importance as a trading partner has declined. 
Trade with Mercosul members accounted for 13.7 percent of 
Brazil's trade in 1994, dropping to 9.6 percent a decade 
later. 
 
6. (U) Nor are the bloc's newly inked trade deals with 
India, the Southern Africa Customs Union, and with the 
Andean countries expected to produce substantial trade 
gains for Brazil.  Brazil's trade with India currently 
stands at a mere $1.2 billion, and the Mercosul-India 
agreement covers only 902 products, about 450 for each 
side.  With respect to the SACU (principally South Africa), 
total trade is about $1 billion, in comparison with 
Brazil's expected $160 billion in overall two-way trade for 
2004.  The partial, tariff preference agreements with these 
countries are only expected to marginally expand access for 
Brazilian products (refs c and d). [Note. In a December 28 
editorial, former Brazilian Ambassador to the U.S., Rubens 
Barbosa, claimed the private sector had not been consulted 
and was unaware of which products were covered by these 
agreements.  During December 13-14 meetings with AUSTR 
Broadbent, an array of Brazilian business people leveled 
similar complaints about inadequate consultations by the 
GoB on international trade negotiations in general.] 
 
7. (U) Likewise, recent trade agreements with Peru, 
Ecuador, Colombia and Venezuela have generated little 
enthusiasm among the private sector as industry has 
complained about the complex set of rules of origin, the 
large number of exceptions, and the longer tariff phase-out 
accorded to the Andean countries.  The GoB points to growth 
of around 50 percent in trade between Brazil and the Andean 
Community in 2004 as indicative of the importance of the 
trade relationship, but this is from a base of only $3.7 
billion in 2003.  Brazil-Andean Community two-way trade 
totaled a mere $4.5 billion through October 2004. 
 
Negotiating by Committee 
------------------------ 
 
8. (SBU) Critics also disagree with claims by the GoB that 
Brazil's leverage vis-a-vis major trading partners is 
enhanced by negotiating as a member of Mercosul, contending 
that conflicting national interests within the bloc impede 
its ability to conclude negotiations with the United States 
and the EU.  The Brazilian private sector insists it was 
Argentine protectionism that forced Mercosul negotiators to 
reduce the level of ambition in the last offer presented to 
the EU, in part causing those negotiations to stall before 
an October 31, 2004 deadline.  Although the business 
community acknowledges that in the FTAA negotiations 
additional factors are at play, such as Brazil's reluctance 
to discuss IPR or new investment rules, many here believe 
that unburdened by its less competitive neighbors, Brazil 
could more easily find the basis for a mutually 
advantageous trade agreement with the United States. 
 
Argentina-Brazil "Refrigerator War" 
----------------------------------- 
 
9. (SBU) Argentina's persistent efforts to restrict 
Brazil's exports in the so-called "refrigerator wars," and 
a perceived complacency on the part of the GoB, have also 
highlighted the costs of Mercosul integration for the 
Brazilian business community.  Over the last decade, 
Argentina has typically enjoyed a small, but positive trade 
surplus with Brazil.  Nonetheless, rebounding Brazilian 
exports in 2003 prompted Argentine complaints about import 
surges in various electrodomestic products.  Argentina's 
emerging trade deficit with Brazil in 2004 provided 
additional fuel for that country's demands that 
restrictions be applied to Brazilian exports of 
refrigerators, washing machines, ovens, televisions, shoes, 
and certain textiles.  From January through November 2004, 
Brazilian exports to Argentina expanded another 64 percent 
reaching $6.7 billion, compared with only 19 percent growth 
($5.1 billion total) in trade in the opposite direction. 
 
10. (U) The conciliatory posture the GoB has adopted, 
encouraging Brazilian producers to negotiate various 
"voluntary" export restrictions, has provoke outrage by the 
Brazilian private sector, and at times by Minister of 
Development and Trade Furlan.  Brazilian refrigerator 
producers accepted a monthly quota of 18,160 units, down 
from the 26,354 being sold, limiting their market share to 
50 percent.  Since July, Argentina has assessed a 21.5 
percent additional tariff on televisions manufactured in 
Brazil's Manaus Free Trade Zone and has been pressing for 
voluntary limits to reduce yearly imports from 160,000 to 
17,500.  The Argentines are also seeking a reduction in 
market share for Brazilian washing machines from 49 percent 
to 35 percent and subjecting imports to a non-automatic 
licensing regime. 
 
11. (SBU) The final straw for some came in the run-up to 
the December 17 Ouro Preto Summit, when Argentine 
negotiators pressed Brazil to accept adoption of a 
safeguard mechanism within Mercosul that would 
automatically impose quotas should neighboring countries' 
currency values and rates of economic growth vary 
substantially.  After convening key advisors, on December 8 
President Lula flatly rejected the proposal, raising 
concern that the trade spat could ruin the upcoming summit. 
Although the safeguard proposal was not on the summit 
agenda, the presidents of Uruguay and Paraguay publicly 
supported Brazil's position.  However, the war is far from 
over.  Brazilian and Argentine negotiators agreed to set 
aside the negotiations on export restrictions and on a 
potential safeguard for the sake of the summit, but 
discussions will resume in January. 
 
For Brazil, Which Road Forward? 
------------------------------- 
12. (SBU) Given the political importance of Mercosul, few 
in Brazil would advocate a complete abandonment of the 
bloc.  However, two schools of thought are emerging on how 
best to cure Mercosul's ills.  One group believes that a 
looser association that allows for greater flexibility in 
accommodating varying national economic interests is the 
way to go.  This group has proposed that Mercosul devolve 
into a free trade area, allowing the free flow of goods 
between members, while enabling them to orient their trade 
with other partners according to national priorities. 
Roberto Gianetti da Fonseca, former Executive Director of 
the GoB's trade chamber (CAMEX) during the Cardoso 
administration, and currently head of International 
Relations at the powerful Sao Paulo FIESP industrial 
federation, has been publicly championing this cause.  His 
proposal has rankled Itamaraty (i.e., Brazil's Foreign 
Ministry), but resonates among many business leaders. 
 
13. (SBU) The other group, led by President Lula and 
Foreign Minister Amorim, argues that it is more, not less, 
integration that is needed and see current Mercosul 
problems as mere growing pains.  Minister Amorim has 
exhorted the business community to keep the bigger picture 
in mind -- the long-term goal of transforming Mercosul, and 
eventually the South American Community of Nations, into an 
EU-type arrangement.  Brazilian officials point out that 
the EU's own formation has been a lengthy and at times 
contentious process.  While acknowledging the trade 
difficulties and attempting to work through them, the GoB's 
answer is also to press ahead with political integration as 
quickly as possible to lock-in the integration process. 
Recent steps to strengthen Mercosul institutions in 
Montevideo, and to install a Mercosul parliament in 2006 
are regarded as key steps in that process. 
 
14. (SBU) With Lula lining up with ForMin Amorim, its 
pretty clear which road forward the GOB will take.  Despite 
the increasing assertiveness by the private sector on trade 
matters, and in particular on Mercosul, unless Lula 
personally changes course it is highly unlikely that the 
GOB will abandon or dramatically curtail Mercosul 
integration because of industry concerns. 
 
CHICOLA