This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 04 BRASILIA 001974
SIPDIS
SENSITIVE
TREASURY FOR SECRETARY SNOW
STATE PLEASE PASS TO USTR
E.O. 12958: N/A
TAGS: EFIN OVIP ETRD
SUBJECT: SCENESETTER CABLE FOR VISIT OF SECRETARY SNOW
1. (U) The United States Mission in Brazil warmly welcomes your visit to Brasilia, Rio de Janeiro, and Vitoria (Espirito
Santo) July 31-August 3. We are currently working with your staff on the logistical arrangements for your travel. In
Brasilia, we have confirmed meetings for you with President Lula, Finance Minister Palocci, and Central Bank President
Meirelles. In addition, the Charge d'Affaires plans to host several representational events for you with key Brazilian
contacts. In Rio de Janeiro, planning is proceeding for both your public outreach and your bilateral contacts, in
conjunction with the August 2 Group for Group Activities. Finally, your stop in Vitoria offers the chance to view
first-hand the steps that Brazil is taking to improve its outdated public infrastructure and cement its status as a
world export power.
2. (SBU) From our perspective, we see your visit here as an opportunity to send an overarching signal about U.S-Brazil
bilateral relations above and beyond the financial/economic realm. While your message on financial issues should be that
Brazil should stay the course with its orthodox economic program, on foreign policy Brazil and the U.S often butt heads.
Because the GOB looks at the world through an outdated third world "North-South" lens, our bilateral relationship -
across a range of issues - is often difficult. We have our hands full here in trying to keep the dialogue with Brazil
multi-dimensional and solid, capable of weathering the frequent - and sometimes pronounced -- differences of opinion.
3. (SBU) Below is some background information on the economic and political situation in Brazil today. We look forward
to exploring these themes during the course of your visit.
FOREIGN POLICY --------------
4. (SBU) President Lula has run an activist foreign policy with a focus on South America, forging alliances with other
mid-sized powers (South Africa, India) as well as other third world countries. He has moved to revitalize Mercosul as a
trading bloc and has sought a regional approach to the FTAA talks. Indeed, given its size and natural resources, Brazil
has long seen itself as the natural leader of the region (even if that perception is not shared by many of its
neighbors). In February 2005, Lula signed a "strategic alliance" with Venezuela's Hugo Chavez to promote joint energy
and infrastructure projects, as well as possible purchases by Venezuela of Brazilian defense articles.
5. (SBU) Emblematic of Brazil's rising self-confidence on the world stage is its tenacious pursuit of a permanent UN
Security council (UNSC) seat. Brazil and other G4 states (India, Germany, Japan) are pressing now for votes on a
resolution on UNSC reform. This stance is at odds with the USG position, which wishes to defer UNSC reform until after
other changes in the UN systems, and which currently endorses Japan's UNSC bid. Brazil leads the UN peacekeeping force
in Haiti with 1,200 troops on the ground there, and is also spearheading a "G-20" group of developing nations. Brazil
has a long tradition of commitment to the UN and other multilateral institutions. Many Brazilians are therefore deeply
concerned by the war in Iraq, viewing it as a sign of U.S. unilateralism. President Lula voiced public opposition to the
war, although this opposition never jeopardized bilateral relations and both sides continue to work on the broader
bilateral agenda. Finally, Brazil is a player in high-profile global issues such as health (AIDS, pharmaceuticals) and
the environment. However, its stances on these issues (such as the possible compulsory licensing of anti-AIDS drugs) has
at times not been welcome to USG policymakers.
6. (SBU) Brazil's self-confidence has changed the tone of its relationship with the U.S., sometimes in ways to our
liking, sometimes not. It helped keep issues like our requirements that Brazilian airlines furnish passenger data or our
insistence on stronger IPR enforcement from blowing up into political food fights. The GOB worked quietly with us on the
timing and details of its shoot-down program to accommodate our statutory requirements. Nevertheless, hyper- sensitivity
on issues viewed as infringing on Brazil's sovereignty can get out of hand and may be seen as signs of political
immaturity. Many Brazilians believe the U.S. has designs on the Amazon. Our fingerprinting of visitors to the U.S. drew
reciprocal treatment for Americans here; visa and immigration issues remain sensitive points.
PRESIDENT LULA --------------
7. (U) President Luiz Inacio Lula da Silva was inaugurated in January 2003 after a career as a Sao Paulo metalworker and
labor leader. He founded the left-of-center Workers' Party (PT) in 1980 and lost three presidential campaigns before
winning in the October 2002 elections. Lula can run again in October 2006, and recent polls give him a sizeable lead
over potential challengers. He has traveled extensively in pursuit of a higher international profile for Brazil. He has
met President Bush several times and the two have a good rapport. Despite the common perception that Lula's social
agenda, including his trademark "Zero Hunger" program, has not delivered much, Lula's popularity remains high and
remarkably detached from that of his government. He is seen as honest, optimistic and inclusive, particularly towards
the lower classes and marginalized sectors. Lula often seeks a range of opinions on policy, making a point of consulting
labor, civil society, business leaders, and state governors. Since the mid-1990s, the PT party has steadily moderated
its leftist positions and moved towards the center, forming alliances with parties from the left to the right. This has
caused some grumbling from the PT's left wing but made the party far more electable.
8. (SBU) During recent months the Lula Administration has been beset by a political crisis as interlocking influencing
peddling/vote-buying scandals continue to unfold. The President's Chief of Staff has resigned his post, Lula has
embarked upon a series of cabinet shuffles, and a number of high-level officials in Lula's party and his party's
coalition have departed. Central Bank President Meirelles may depart the government soon (due to unrelated allegations
against him) though Finance Minister Palocci appears well- entrenched. Still, a July 2005 poll shows that Lula's
approval rating stands at 60%, and, so far, the scandals have not punished Brazil in the international markets. Lula's
popularity reached a nadir of 54% in June 2004, when the public seemed to lose confidence in his fiscal austerity
program and in the face of weak 2003 GDP growth and stubbornly high unemployment. Overall, confidence in the
administration has rebounded as the economy improved, although the recent corruption scandals still may take a toll. The
public's top concern -- crime and public security -- has not notably improved under this administration. The opposition
will use these shortcomings and scandals to try to deny Lula any legislative victories in hopes of eroding Lula's
popularity prior to the October 2006 elections. ECONOMIC DEVELOPMENTS ---------------------
9. (U) Brazil's economy, aided by a benign international environment, should have another solid year in 2005. GDP growth
of 5% in 2004 has coupled with booming exports, healthy external accounts, inflation under control, decreasing
unemployment and reductions in the debt-to-GDP ratio. President Lula and his economic team have implemented prudent
fiscal and monetary policies and pursued necessary microeconomic reforms. In March 2005, the Brazilian government
declined to renew its Stand-by Agreement with the IMF and in mid-July it announced that it would pay early US$5.12
billion in Standard Reserve Facility payments due by March 2006.
10. (U) Brazil has made progress but significant vulnerabilities remain. Despite registering its first year- on-year
decline in 2004, Brazil's (largely domestic) government debt remains high, at 52% of GDP. Total foreign debt, while
falling, is still large in relation to Brazil's modest export base. Over time this concern will be reduced by healthy
export growth, which has anchored the positive trade and current accounts. Personal incomes improved in 2004 after a
significant decline over the previous decade. Income and land distribution remains skewed.
11. (U) Sustaining high growth rates in the longer term depends on the impact of President Lula's structural reform
program and efforts to build a more welcoming climate for investment, both domestic and foreign. In its first year, the
Lula administration passed key tax and pension reforms to improve the government fiscal accounts. Judicial reform and an
overhaul of the bankruptcy law, which should improve the functioning of credit markets, were passed in late 2004, along
with tax measures to create incentives for long-term savings and investments.
12. (U) Public-Private-Partnerships, a key effort to attract private investment to infrastructure, also passed in 2004.
Labor reform and autonomy for the Central Bank are on the agenda for 2005. Despite this well-considered reform agenda,
much remains to be done to improve the regulatory climate for investments, particularly in the energy sector; to
simplify tortuous tax systems at the state and federal levels; and to further reform the pension system. Prospects for
much of this reform agenda are dim for the remainder of Lula's term.
TRADE POLICY ------------
13. (U) President Lula has made economic growth and poverty alleviation top priorities. Export growth figures
prominently in plans to generate growth and reduce what is seen as a vulnerability to international financial market
gyrations. To increase exports, the government is seeking access to foreign markets through trade negotiations and
increased export promotion as well as government financing for exports.
14. (U) To increase its international profile (both economically and politically), the Lula administration is seeking
expanded trade ties with developing countries, as well as a strengthening the Mercosul customs union with Uruguay,
Paraguay and Argentina. In 2004, Mercosul concluded free trade agreements with Colombia, Ecuador, Venezuela and Peru,
adding to its existing agreements with Chile and Bolivia to establish a commercial base for the newly-launched South
American Community of Nations. This year Mercosul is pursuing free trade negotiations with Mexico and Canada and hopes
to be able to resume trade negotiations with the EU. The trade bloc also plans to launch trilateral free trade
negotiations with India and South Africa, building on partial trade liberalization agreements concluded with these
countries in 2004. China has increased its importance as an export market for Brazilian soy, iron ore and steel,
becoming Brazil's fourth largest trading partner and a potential source of investment.
DOHA AGENDA - WTO -----------------
15. (SBU) Brazil leads the G-20 group of developing countries that is pressing for agricultural trade reform in the WTO
Doha Development Agenda negotiations. Brazil's assertive leadership of the G-20 was blamed in some quarters for causing
the failure of the WTO Cancun Ministerial in September 2003. Since then, Brazil has been more constructively engaged in
the Doha Round as a member of the "Five Interested Parties" informal group, although many of its positions are still at
odds with U.S. interests. In May 2005, Brazil's current representative to the WTO, Ambassador Luiz Seixas Correa, was
defeated by former EU Trade Commissioner Pascal Lamy for the position of WTO Director General; Seixas Correa will be
replaced by Ambassador Clodoaldo Hugueney in September. Brazil is expected to maintain its assertive stance in the Doha
Round on agricultural trade reform while taking more defensive postures in the discussions covering industrial products
and services.
FREE TRADE OF THE AMERICAS - FTAA ---------------------------------
16. (SBU) The U.S. and Brazil have been co-chairs of the FTAA ("ALCA" in Portuguese) talks since 2002. It has been a
difficult period, rife with uncertainty over Brazil's commitment to the talks. While the Lula administration shed the
extreme anti-FTAA rhetoric of the 2002 presidential campaign, it has not embraced the FTAA as a priority. Strong
Brazilian commercial interests have yet to overcome these ideological hurdles to what is viewed as a "U.S.-led
initiative."
17. (U) During the FTAA Ministerial in Miami in November 2003, the U.S. and others agreed to a new framework for
negotiations to accommodate the sensitivities of Mercosul countries, principally Brazil. The compromise allowed
countries to assume different levels of commitments, but guaranteed that there would be a common set of rights and
obligations covering all the original areas of negotiation. Following the Miami Ministerial, negotiations to define the
"common set" have not been successful. U.S. and Brazilian negotiators met in January and in February 2005 to explore
prospects for resuming negotiations, but the process has not moved forward, in part due to Mercosul's continued interest
in pressing for U.S.-Mercosul negotiations. Brazil is slated to host the next FTAA ministerial meeting, but no date has
yet been set.
REFORM AGENDA -------------
18. (U) In 2003, Congress passed Lula's key reforms to the public sector pension system and the tax code. The 2004
legislative season was not very productive, in part because of a political scandal early in the year followed by
campaigning for the October municipal elections. In December 2004, several key bills passed into law, including a reform
of the judicial system, a modern bankruptcy law, and Public Private Partnerships to fund infrastructure projects. In
March 2005, a law to legalize biotechnology crops and stem cell research passed. The Lula administration has been less
successful in combating crime, poverty, and decaying infrastructure. The flagship "Zero Hunger" program has reached only
a fraction of the estimated 50 million Brazilians living in poverty. The administration was also slow to make progress
on agrarian reform. Other bills awaiting attention this session include: further judicial reforms, Central Bank
autonomy, and a reform of political parties and campaign funding.
AGRICULTURE -----------
19. (U) Agriculture is a major sector of the Brazilian economy, and is key for economic growth and foreign exchange.
Agriculture accounts for 13% of GDP (and 30% when including agribusiness) and 40% of Brazilian exports. Brazil enjoyed a
positive agricultural trade balance of US$34 billion in 2004. Brazil is the world's largest producer of sugar cane,
coffee, tropical fruits, frozen concentrated orange juice (FCOJ), and has the world's largest commercial cattle herd
(50% larger than the U.S.) at 170 million head. Brazil is also an important producer of soybeans (second to the United
States), corn, cotton, cocoa, tobacco, and forest products. The remainder of agricultural output is in the livestock
sector, mainly the production of beef and poultry (second to the United States), pork, milk, and seafood.
MANGANIELLO