US embassy cable - 05BRASILIA2804

UNCLAS SECTION 01 OF 03 BRASILIA 002804 
 
SIPDIS 
 
DEPT FOR WHA/BSC AND EB/TPP 
STATE PASS TO USTR FOR MSULLIVAN AND JHENDERSON 
USDOC FOR 4332/OTA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
NSC FOR SCRONIN 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, China 
SUBJECT: BRAZIL PROMULGATES SAFEGUARD PROVISIONS FOR IMPORTS 
FROM CHINA 
 
REF:  A) 04 Brasilia 2885, B) Brasilia 2367 
 
1. Summary.  After a failed attempt to secure voluntary 
export restraints from China, on October 6 the GoB published 
decrees establishing regulations for imposing safeguards on 
imports of Chinese products.  Textile producers were the 
first to file petitions seeking relief; as many as 20 more 
sectors may file safeguard requests.  Foreign Minister 
Amorim has stated an interest in continuing a dialog on 
voluntary export limits with China.  End Summary. 
 
2. On October 6, the GoB published in the Diario Oficial two 
decrees establishing regulations for implementation of 
safeguards on imports of Chinese products -- Decree 5,558 is 
specific to textiles and Decree 5,556 covers temporary 
safeguards for all other products (see details in paras 7 
through 14). 
 
3. Brazilian industries had been clamoring for safeguards as 
imports from China have surged this year.  In 2003 and 2004, 
Brazilian exports to China far outstripped trade in the 
opposite direction.  However, in the first nine months of 
this year, imports from China grew by 47.8 percent compared 
with the same period in 2004, while exports to China 
expanded at a rate of only 8.6 percent, squeezing Brazil's 
trade surplus to below $1 billion. 
 
4. Some 20 sectors have indicated an interest in seeking 
safeguards, including textiles, apparel, machinery and 
equipment, toys, shoes, eye glasses, tires, and transport 
equipment.  Textile manufacturers were the first to file 
safeguard petitions under the new regulations.  So far they 
have requested safeguards for seven products: corduroy, 
textured polyester thread, and five types of silk. 
According to the Brazilian Association for the Textile 
Industry (ABIT), imports of the silk products had increased 
243 percent in volume from January through August 2005 in 
comparison with the same period in 2004.  ABIT expects 
petitions to be submitted for 75 textile and apparel 
products in all, mostly for apparel.  On October 13, eye 
glass producers followed suit with a petition. 
 
5. Although the toy industry already benefits from a general 
safeguard, they argue that an additional safeguard targeting 
imports from China is necessary.  In the first seven months 
of this year, toy imports from China increased by 94 percent 
compared with the same period in 2004.   In 2002, imported 
toys from China accounted for 22 percent of the Brazilian 
market; today that figure is 48 percent.  According to the 
shoe industry, Brazil imported 9.4 million pairs of shoes 
from China between January and August 2005, compared with 
only 4.3 million pairs in the first eight months last year. 
 
6. Although the decrees were drafted in June, the GoB had 
held off implementation in the hopes of negotiating 
voluntary export restraints with China.  When Minister of 
Development, Industry and Trade Furlan's mission to Beijing 
in mid-September failed to secure a Chinese commitment to 
limit its exports in certain sectors, the government moved 
forward with the new regulations.  That being said, Minister 
Amorim has continued to state in public Brazil's openness to 
negotiating solutions for sectors submitting safeguard 
petitions.  The regulations themselves, detailed below, 
provide for consultations as part of the safeguard 
deliberation process. 
 
Safeguard Petition Process 
-------------------------- 
 
7. The decree for textiles (Decree 5,558) provides industry 
with the ability to request safeguard action should an 
increase in Chinese imports of a specific product cause or 
threaten to cause an "imbalance" in the market for that 
product; the decree does not state what form the safeguard 
might take, but stipulates that it may not extend beyond 
December 31, 2008.  The decree for other products (Decree 
5,556) provides for safeguards in the form of additional 
tariffs and/or quotas, should a rapid increase in imports of 
a product from China cause injury or threaten injury to 
domestic producers of that product or a similar product. 
This decree also deals with the specific case in which 
increased imports from China are the result of trade 
diversion caused by measures taken in other WTO member 
countries.  Safeguards for products other than textiles may 
not extend beyond December 11, 2013. 
8. Producers seeking relief must submit their safeguard 
petitions to the Foreign Trade Secretariat (SECEX) in the 
Ministry of Development, Industry and Trade.  Brazil's 
Foreign Trade Chamber (CAMEX) will make the final decision 
on application of safeguards based on an analysis and 
recommendation from SECEX.  SECEX has four months to close 
the investigation in the case of textiles, and eight in the 
case of other products.  Importers, exporters and other 
interested parties may provide written submissions for a 
period of 30 days following initiation of the investigation. 
Upon opening the investigation, a request will be made for 
preliminary consultations with China.  The Chinese 
government will be given 10 days from the initiation of 
investigation to respond to the request; the consultations 
must be held with 30 days. 
 
9. For textiles, the decree stipulates that an "imbalance" 
exists when imports from China are increasing rapidly, 
either in absolute terms or relatively, such that they 
impede the orderly development of trade in the specific 
product.  In making a determination, SECEX will take into 
consideration the impact of the imports on the domestic 
industry, reflected in changes in economic variables such as 
capacity utilization, sales, market share, and prices. 
 
10. Once SECEX completes a preliminary positive 
determination for a textile product, consultations with 
China will again be requested if a pre-condition is met. 
The pre-condition is that China immediately limit exports of 
the product in question so that they do not exceed 7.5 
percent of the quantity imported by Brazil during the first 
12 months of the most recent 14 month period.  The 
consultations must begin within 30 days from receipt of the 
request and can last for 90 days, with a possible extension 
if both parties agree.  Should the consultation precondition 
not be met or the consultations not result in a mutually 
satisfactory result, a safeguard may be applied until 
December 31 of the year in which the first request for 
consultations was made.  If the consultation request was 
made within the last three months of the year, the safeguard 
will be in force for a period of 12 months.  CAMEX retains 
the authority to suspend the safeguard for reasons of public 
interest. 
 
11. In making determinations for injury or market imbalance 
for other products, SECEX will consider the volume and rate 
of growth of imports in absolute and relative terms, the 
market penetration of the imports, and the impact on the 
domestic industries of both the product and of similar 
products as evidenced by changes in economic variables such 
as production, capacity utilization, stocks, sales, market 
share, prices, profits and losses. 
 
12. Should SECEX/CAMEX conclude that a delay in applying a 
safeguard measure for a product (other than textile) would 
cause damage that would be difficult to repair, a 
provisional measure, in the form of an additional ad valorem 
and/or specific tariff, may be applied for up to 200 days. 
Notwithstanding, once SECEX makes a preliminary positive 
determination for a product, the GoB will again request 
consultations with China.  The consultations must take place 
within 30 days and may last for a period of 60 days from the 
date of the request.  Should the consultations not result in 
a mutually satisfactory result, a definitive safeguard, in 
the form of an additional ad valorem and/or specific tariff 
and/or a quantitative restriction will be applied for a 
period necessary to prevent or repair the market imbalance. 
Should the safeguard be applied for more than 2 years when 
the increase in imports was relative, or applied for more 
than 3 years in the case where the increase in imports was 
absolute, CAMEX must consider the possibility that China 
could suspend substantively equivalent concessions or 
obligations. 
 
13. Decree 5,556 also outlines a separate process should the 
increase in imports be due to trade diversion.  The decree 
states that trade diversion exists when a measure applied in 
a third WTO member country to a product imported from China 
in order to prevent or repair a market imbalance in that 
country, causes or threatens to cause an increase in exports 
of that product from China to Brazil.  In making its 
determination on trade diversion, SECEX will take into 
consideration the actual or imminent increase in the share 
of product imports from China in the Brazilian market; the 
nature or extent of action adopted or proposed by China or 
the third WTO member country;  the actual or imminent 
increase in the volume of imports from China owing to the 
measure taken or proposed by China or the third WTO member 
country; the market conditions (supply and demand) within 
the Brazilian market for the product; and the volume of 
Chinese exports destined to WTO members which apply a 
provisional or definitive safeguard measure. 
 
14. The provisions for trade diversion also provide for 
preliminary consultations with China.  After SECEX makes a 
preliminary positive determination on trade diversion, the 
GoB will again request consultations with China and/or the 
third country applying the measure; the consultations would 
take place within 30 days and last up to 60 days.  Should 
the consultations not reach a mutually satisfactory result, 
Brazil could withdraw concessions, or limit in another way, 
imports from China, "in proportion to what is necessary to 
prevent or repair the trade diversion."  Application of a 
safeguard measure to remedy trade diversion would lapse 30 
days after termination of the measure causing the trade 
diversion.  If the measure causing trade diversion is 
modified, SECEX would re-examine the issue to determine if 
the safeguard should be revised, withdrawn, or maintained. 
 
DANILOVICH