Cablegate: Brazil: Scene Setter, Ustr Ambassador Ron Kirk Visit to Sao

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SENSITIVE
SIPDIS

STATE PASS USTR FOR USTR KIRK, EVERETT EISSENSTAT, KATE
KALUTKIEWICZ
STATE FOR WHA AND EEB

E.O. 12958: N/A
TAGS: ETRD KIRP ECON EFIN EINV EAGR BR
SUBJECT: BRAZIL: SCENE SETTER, USTR AMBASSADOR RON KIRK VISIT TO SAO
PAULO AND BRASILIA, SEPTEMBER 16 AND 17

1. (SBU) SUMMARY: The relationship between the United States and
Brazil is productive and broad-based, with growing economic and
trade ties. Excellent opportunities for increased bilateral trade
cooperation exist, including issues raised in the recent CEO Forum.
Brazil has also prioritized concluding the Doha round of World Trade
Organization (WTO) negotiations. The Government of Brazil (GOB) has
played a constructive role in the G20. Fora including the Economic
Partnership Dialogue between State and the Ministry of External
Affairs (MRE) and the Commercial Dialogue between Commerce and the
Ministry of Industry and Trade (MDIC) have provided opportunities
for increased positive bilateral economic and commercial
cooperation. Recent events including the WTO cotton decision and
orange juice case, issues surrounding the on-going FX-2 aircraft bid
process, and Brazil's suspicion over U.S. access to military bases
in Colombia, may color the atmospherics of your trip, particularly
your interaction with the press. Private sector interlocutors may
raise the recently announced GOB-proposed legislation that would
provide a significant government role in development of potentially
vast new off-shore oil resources. The visit provides an important
opportunity to highlight the potential for increased bilateral
cooperation, emphasizing that specific trade disputes need not
define our overall positive relationship. As Brazil's ambition and
ability to engage on issues of global importance increases, the
value of engaging Brazil and finding areas of mutual interest for
cooperation increases. END SUMMARY

POLITICAL OVERVIEW

2. (SBU) With democracy re-established in 1988 after decades of
military dictatorship, Brazil's democratic institutions are
generally strong and stable. President Luiz Inacio "Lula" da Silva
remains a popular president -- one of the most popular in Brazil's
history and indeed in the world today, with recent approval ratings
still as high as 68 percent nearly seven years into his presidency.
This sustained popularity is based on a combination of his personal
connection with the country's lower classes, orthodox economic
policies, and expanded social programs. Ongoing public scandals
involving the leadership of the Senate and various members of
congress have further eroded the legislature's power vis-a-vis the
executive and its ratings among the Brazilian public. The court
system remains cumbersome and unreliable, but has recently taken
limited steps to curb impunity among public officials, which have
been well received by a public accustomed to abuses by authorities.
The Brazilian political elite and media are already focused on the
October 2010 national elections for president, all 26 state
governors, two-thirds of the senate, and all federal deputies. Lula
is constitutionally barred from seeking a third term and has
designated Civil Household (Prime) Minister Dilma Rousseff as his
party's candidate to succeed him. At this point, Rousseff is a
distant second in the polls to likely opposition candidate Sao Paulo
Governor Jose Serra, but with a year to go, the race remains
unpredictable.

3. (SBU) The United States and Brazil share the basic goals of
fostering hemispheric stability and integration, promoting democracy
and human rights, and preventing transnational illicit activity.
The attainment of a permanent seat on the UN Security Council has
been a central goal of Brazil's foreign policy under President
Lula's government. Regionally, Lula has maintained Brazil's
historic focus on stability, seeing good relations with all parties
as the best way to achieve this goal. As a result, Brazil maintains
an active dialogue with Venezuela and Cuba, has worked to foster
good relations with Bolivia and Ecuador, and has stood firmly on the
principle of respect for sovereignty in the region.

ECONOMIC OVERVIEW

4. (SBU) Brazil is the tenth largest economy in the world and
received investment grade status from Standard and Poor's and Fitch
in 2008. Annual Gross Domestic Product (GDP) grew 5.1 percent in
2008, and inflation was 5.8 percent. The global economic crisis
eroded previous predictions for annual GDP growth for 2009 from four
per cent to essentially flat or slightly negative. Despite this
decline in immediate prospects, Brazil has thus far weathered the
crisis better than most major economies and has recently shown signs
of a recovery, led by strong domestic demand. Conservative
macroeconomic policies in the years prior to the crisis, and
targeted responses during the crisis -- including credit injections
in the financial system and tax cuts on automobiles and consumer
durables -- played a role in lessening the impact of the global
crisis on Brazil.

5. (SBU) Brazil's relatively successful management of the crisis
has encouraged GOB to engage proactively and constructively in the
debate over how to handle the economic crisis including through the

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G20 process. Brazil has called for increased regulation of the
global financial system, increased global access to trade finance,
and an expanded voice and vote for large emerging countries like
Brazil in the International Financial Institutions.

6. (SBU) Brazil is a major producer and exporter. Agriculture
makes up 36 percent of exports, and the agribusiness sector accounts
for 25 percent of Brazil's GDP. Brazil is a leading exporter of
soybeans, beef, sugar, coffee, and orange juice. Brazil also
distinguishes itself as a major exporter of civilian aircraft,
steel, and petrochemicals. The United States is Brazil's top
trading partner overall, and China as of March of this year moved
into first position as Brazil's primary export destination. Prior
to the current financial crisis, U.S.-Brazil trade experienced
significant annual growth surpassing USD 50 billion in 2008 --
Brazil typically experiences a slight positive balance in the trade
relationship.

7. (SBU) Foreign direct investment (FDI) in Brazil is increasing,
with inflows of USD 44 billion in 2008; USD 6.9 billion came from
the United States. Brazilian investment in the United States almost
tripled between 2001 (USD 1.4 billion) and 2006 (USD 3.9 billion).
President Lula has been actively selling Brazil as a solid
investment destination during the financial crisis due to its sound
macroeconomic policies and relatively strong economy. Brazil is
Latin America's biggest recipient of FDI, and in 2008 received
roughly twice the volume of inflow than Mexico received.

8. (SBU) Despite progress in recent years, income distribution in
Brazil remains grossly unequal, with 10 percent of the population
holding over 50 percent of the nation's wealth. With a total
population near 200 million, Brazil is also home to 50 percent of
the people who live in extreme poverty in Latin America. President
Lula's social programs, combined with formal sector job growth and
real increases in the minimum wage, have reduced income inequalities
each year since 2004.

OVERVIEW ON BRAZILIAN MEDIA AND PUBLIC ATTITUDES TOWARDS THE USA

9. (SBU) In terms of general public opinion, the election of Barack
Obama as president seems to have influenced views of the United
States in a positive way. An Office of Research Opinion Analysis
released in March 2009 found that seven-in-10 Brazilians believe the
Obama presidency will be positive for Brazil and the world.
Economically, Brazilians say their future lies with the United
States and China. Majorities held a favorable view of the United
States (57 percent) and saw bilateral relations as being good (65
percent). However, Brazilians have often seen the United States as
an impediment to Brazil's aspirations for regional leadership.
Pluralities said last year that politically and economically, the
United States was as much a competitor as it was an ally and
partner. As of January, half lack confidence in the United States'
ability to deal responsibly with world problems.

10. (SBU) Brazilian journalists, generally speaking, are
professional, balanced, and strive for objectivity. Many are
evenhanded in their treatment of the United States, even if they do
not personally agree with U.S. policies. Some mainstream Brazilian
opinion writers demonstrate biases against U.S. policies, though the
trend has started to change with the election of President Obama. A
small segment of the Brazilian public accepts the notion that the
United States has a campaign to subjugate Brazil economically,
undermine it culturally, and occupy with troops at least part of its
territory. Such attitudes and beliefs have influenced Brazilian
reporting and commentary on issues such as the reestablishment of
the U.S. Navy's Fourth Fleet (which has been characterized as a
threat to Brazil), supposed U.S. nefarious intentions toward the
Amazon and the "Blue Amazon" (seas where new oil discoveries were
found) and most recently, the announcement on U.S. access to
Colombian military bases. That said, the Brazilian media have
reported favorably on U.S. efforts at the recent meeting of the
General Assembly of the Organization of American States and the
Summit of the Americas, and the Obama Administration overall,
portending a change in perspective with regards to U.S. intentions
in Brazil and the region at large.

11. (SBU) Specifically on trade, the mainstream press has been
critical of the United States, asserting USG does not have a trade
policy and that the United States is not committed to advancing the
Doha Round. On the WTO cotton decision, Estado de Sao Paulo in
separate articles characterized the USTR trip as focused on
negotiating retaliation, and asserted cross-retaliation on IPR would
be preferable to goods because withdrawing IP protection "would not
hurt the Brazilian consumer" while goods retaliation potentially
could. While Brazil is not a member of the WTO Government

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Procurement Agreement and maintains its own domestic preference
program, in the past the press was critical of Buy America
provisions in U.S. measures to address the global economic crisis as
protectionist.

SPECIFIC ISSUES: BILATERAL TRADE COOPERATION

12. (SBU) The GOB, including the Ministry of External Relations
(MRE), the Ministry of Development, Industry and Trade (MDIC), and
the External Trade Chamber (CAMEX) Secretariat, has indicated
interest in exploring ways to deepen bilateral trade cooperation
with the United States. While tariff negotiations could only occur
in 4+1 format with Brazil's Mercosul partners, Embassy interlocutors
agree there is scope for bilateral cooperation, with the potential
to expand eventually to 4+1 cooperation if there is mutual interest.
In areas of joint interest, Brazil and the United States could
potentially make common cause in approaches to third countries.
Some in the Brazilian trade associations (Sao Paulo-based FIESP and
its umbrella association CNI) have indicated interest in more
strategic bilateral engagement. Possible areas to explore include
or that may be raised in your Sao Paulo private sector discussions:

Trade and Investment Framework Agreement (TIFA): There is a great
deal of GOB interest, particularly in MDIC, in implementing the CEO
Forum recommendation to pursue a TIFA with the United States. CAMEX
is reviewing existing USG TIFAs, with a view to identifying
preferred elements (NOTE: Mission has received feedback that the
Uruguay TIFA, with its trade facilitation annex, is of particular
interest). While GOB continues to resist Bilateral Investment
Treaty negotiations, increasing Brazilian investment overseas is
fueling interest in engaging in some way more concretely on
investment issues.

Joint Technical Barriers to Trade (TBT) and/or Sanitary and
Phyto-Sanitary (SPS) cooperation: Opportunities exist for
cooperation both on bilateral standards issues, and probably more
attractively, in terms of getting positive movement, in jointly
developing approaches to third countries such as China.
Additionally, there is potentially scope for joint cooperation in
less-developed countries, such as in Africa, in capacity-building to
develop appropriate TBT/SPS rules and procedures.

Joint Agricultural Cooperation: Both Brazil and the United States
are significant agricultural exporters. Opportunities exist to
explore how the United States and Brazil can work together, to
mutual benefit, to open third country markets. Brazil has
sensitivities regarding U.S. agricultural subsidies; however, there
could be common cause regarding barriers in China and the EU for our
exports, including soy and beef. The United States can also
consider re-approaching Brazil on its position on agricultural
biotechnology, which is used domestically, but GOB does not actively
engage internationally to support agricultural biotechnology in
Africa and elsewhere.

Services: While the services sector represents a potential growth
area in Brazil, there is still an undeveloped lobbying effort within
Brazil. The sector has been relatively non-vocal in pressing for
GOB multilateral liberalization engagement. The USG could encourage
further bilateral engagement to reinforce mutual interests beyond
manufacturing and agriculture.

Trade Facilitation: GOB and Brazilian industry have provided
significant feedback that intensified cooperation on trade
facilitation would be welcome. USDOC and CAMEX have sponsored two
week-long trips this year for GOB agencies to learn how customs
clearance and inter-agency coordination works in the United States,
and another is scheduled for November. Other activities include
seminars held by CBP in Brazil for Brazilian Customs and the Federal
Police, and an upcoming Commercial Dialogue Trade Facilitation
meeting to be held in Manaus, Brazil in November. The CEO Forum has
also prioritized trade facilitation.

Anti-Dumping/Trade Enforcement: While GOB disagrees with U.S.
anti-dumping methodology and recently initiated a first request on
orange juice at the DSB, Brazil itself is now using the anti-dumping
tool more intensively and is particularly concerned about Chinese
practices. Opportunities may exist for United States-Brazil
bilateral dialogue and cooperation on the subject.

Innovation: Brazilian government officials continue to state that
innovation is one of their highest priorities and have indicated
interest in cooperation on specific initiatives. Continuing our
bilateral discussions on innovation also provides the USG with an
excellent opportunity to highlight the importance of intellectual

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property rights (IPR) as a pillar of innovation. While some
Ministries' officials acknowledge the importance of IPR to
innovation, GOB writ large does not consistently draw a link between
IPR and the development and commercialization of new technology and
invention. MRE consideration of cross-retaliation on IPR (in the
WTO cotton dispute) could be perceived as a lack of commitment to
the long-term value of IPR to attracting and promoting innovation as
a key element of economic growth. MRE and Casa Civil interlocutors
will not eagerly seize on the theme of innovation's ties to IPR
protection. However, MDIC and CAMEX are well aware of IPR's
importance to economic development and growth, and FIESP has
indicated concerns regarding proposals to cross-retaliate on IPR in
the cotton case.

SPECIFIC ISSUES: WTO COTTON DECISION

13. (SBU) Since the August 31 WTO cotton ruling, there has been a
range of opinions across the public and private sectors regarding
what form the Brazilian retaliation could take. The Sao Paulo
business federation, FIESP, will likely have a muted message, not
wanting the issue to become a barrier to a good trade relationship
with the United States. However, others in the business community,
including the author of the case who is now the President of the
Brazilian Pork Exporters Association, have publicly indicated that
Brazil has not taken advantage of the ruling and should make a
stronger statement on how it plans to retaliate against the United
States. The retaliation strategy is under active discussion in the
CAMEX interagency process, with widely divergent views on whether
threatening to or actually moving to cross-retaliate on services or
IPR is in the best interests of Brazil. (NOTE: CAMEX (the External
Trade Chamber) membership includes MDIC (chair), Casa Civil, MRE,
Finance, Agriculture, Planning, and Agricultural Development
Ministers. CAMEX's mandate includes decisions on trade defense
measures; trade facilitation; common external tariff changes
decisions; export guarantees; international negotiations; and trade
security. END NOTE) We understand MDIC is against IPR
cross-retaliation, while Ministries such as Agriculture are
supportive. While the Ministry of Health is not a CAMEX member
itself, its views on opportunities to increase access to generic
pharmaceutical production are known. The next CAMEX meeting to
discuss is scheduled for September 22.

SPECIFIC ISSUES: DOHA ROUND

14. (SBU) Brazil has been a significant voice in the WTO's Doha
Round negotiations and concluding Doha remains a high priority for
Brazil. Brazil's willingness to break ranks with its Mercosul
partner Argentina and agree to the December 2008 modalities texts
was seen as a major step forward in Brazil's willingness to engage
more concretely on the multilateral stage in support of its own
economic national interest despite competing pressures from Mercosul
and G77 relationships. However, Brazil has been clear that while it
is interested to hear what specific access USG seeks, it is
reluctant to engage in bilateral negotiations on scheduling. Amorim
has been vocal in the press alleging that the USG considers progress
to date to represent a "floor" on market access and a "ceiling" on
subsidies. GOB, reflecting FIESP/CNI industry positions, has been
resistant to WTO sectorals, including electronics or chemicals.
Amorim's public rhetoric is increasingly putting responsibility for
progress on the Doha Round on the USG's shoulders.

SPECIFIC ISSUES: GSP

15. Private sector representatives at your Sao Paulo AmCham event or
business roundtable may raise this issue. Industry keeps a close
eye on developments in the US Congress on GSP renewal, and strongly
advocates remaining in the GSP program.

SPECIFIC ISSUES: LABOR SKEPTICISM ON TRADE

16. (SBU) Brazil has a strong organized labor movement with close
connections to the state and particularly to President Lula's
Worker's Party (PT) government. The major unions support the GOB,
which continues to seek to protect Brazil's labor markets. The
Unified Workers Central (CUT) and the Union Force (Forca Sindical or
FS) both represent many metal workers, who serve the highly
protected automobile industry. The General Union of Workers (UGT)
was originally founded as an offshoot of FS and represents many
service workers and those in the energy sector. Consequently, labor
representatives are generally free trade skeptics and critics. The
CUT is a strongly leftist, ideological organization, many of whose
members still see the United State as an "imperialistic" power bent
on economic domination of other regions, while FS is more moderate.
Nonetheless, a recent July conference organized by FS featured a
number of speakers who portrayed the United States and its free

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trade policies as the origin point for the ongoing global financial
crisis.

SPECIFIC ISSUES: DEPARTMENT OF LABOR LISTS ON GOODS PRODUCED BY
FORCED LABOR AND/OR CHILD LABOR

17. (U) On September 10, 2009, the Department of Labor released:
(1) a list of goods produced by forced labor or child labor in
various countries, as mandated by the Trafficking Victims Protection
Reauthorization Act (TVPRA) of 2005; (2) a list of goods produced by
forced or indentured child labor, as mandated by E.O. 13126 of 1999;
and (3) DOL's 2008 Findings on the Worst Forms of Child Labor. The
first list for Brazil contains the following goods: bricks, cattle,
ceramics, charcoal, cotton, footwear, manioc/cassava, pineapples,
rice sisal, sugarcane, timber, and tobacco. The second list
contains one product for Brazil: charcoal. The GOB will not respond
officially to any reporting by third countries on "alleged human
rights violations in Brazil;" it comments only on reports produced
by multilateral organizations to which Brazil belongs, such as the
UN or OAS. In our demarche to the GOB we made the following points:
the TVPRA List is to promote efforts to eliminate forced and child
labor, not to serve as a legal basis for an import ban; and the E.O.
List is an "initial determination," not a final list, and
governments (and others) have 90 days to submit comments, if they
wish.

SPECIFIC ISSUES: THE CEO FORUM

18. (SBU) In addition to TIFA, trade facilitation, GSP, and Doha
priorities identified above, the July meeting of the CEO Forum
identified priority recommendations on the Information Technology
Agreement, standards to harmonize biofuels, and Haiti and Africa
development cooperation. Framing these priorities in terms of CEO
Forum support will be key in focusing Rousseff's interest. In
addition to the suggestions above for possible TBT/SPS cooperation
in Africa, MRE may raise Haiti textiles and access to U.S. Hope II,
an issue of keen interest to some FIESP members. USTR may wish to
inquire where MRE's draft legislation on establishing a similar
program in Brazil stands (all indications to date are that no draft
yet exists). CNI/FIESP support CEO Forum recommendations for a
bilateral tax treaty (BTT). BTT negotiations are stalled and are
unlikely to make progress in the current election cycle climate.
Brazilian industry has commissioned a study evaluating the positive
economic impact of a BTT with the United States, due in the near
term. With respect to investment, the USG and the Brazilian
government have had productive consultations on Bilateral Investment
Treaty (BIT) elements, although Brazil is still cautious about
negotiating BITs given historical congressional opposition. CNI
remains cautious about the value of BITs, seeing them as a
constraint on industrial policy, but acknowledges the question needs
further consideration as Brazil's overseas FDI increases.

SPECIFIC ISSUES: CLIMATE CHANGE

19. (SBU) After intensive lobbying from senior USG officials and
pressure from other countries and domestic constituencies, President
Lula announced a major shift in Brazil's position in the
international climate change negotiations. In early September he
said that Brazil will agree to an emissions reductions number and
Minister of External Relations Amorim has said the same. This
represents a significant advance over Brazil's previous position
that only the developed countries should have emissions reductions
targets and the developing ones needed to preserve room for growth.
Brazil, however, insists that developed countries provide
substantial technology transfer and financial assistance to
developing countries so that they can take mitigation and adaptation
measures.

20. (SBU) Brazil has opposed efforts to reduce or eliminate tariffs
on "green" goods because the list of products in last year's
initiative did not include biofuels.

SPECIFIC ISSUES: G7/8, G20, AND BRICS

21. (SBU) President Lula has said publicly that "the G7 alone is no
longer in a position to make decisions that require truly globally
coordinated responses" and noting that richer countries must
recognize the growing clout of the BRICs. In Paris just before
June's BRIC Summit in Yekaterinburg, FM Amorim said that the G-8
group is no longer representative of global political and economic
forces. "The G-8 is dead, I have no doubt. I don't know how the
burial will be. Sometimes that happens slowly." GOB remains
sensitive that the G8 plus G5 format not be simply "inviting them in
for coffee" to discuss decisions made by the G8. GOB prioritizes
the G20 mechanism, while conceding consensus-building can be

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cumbersome in this format. As a top-10 GDP country, contacts across
GOB believe Brazil should be at the table in economic
decision-making and has a valuable contribution to make. While the
MRE coordinates G20 participation through its Economic Under
Secretary, Sherpa Pedro Mendonca (who will attend the Amorim
meeting), the G8/G5 process is tracked by its Political Under
Secretary who covers North America/Europe, international
organizations and environment, Vera Machado.

SPECIFIC ISSUES: PATENT PROTECTION -- PHARMACEUTICALS

22. (SBU) In July, the Brazilian National Institute of Industrial
Property (INPI) rejected a patent application by California-based
Gilead Sciences for its HIV drug Viread (scientific name:
tenofovir). The patent rejection (which INPI told Gilead was
"purely technical" but accompanied by "lots of pressure" from the
Ministry of Health) could be the final step in allowing generic
production of tenofovir, since the Ministry of Health (MOH) has
already declared tenofovir to be a drug of public interest (April
2008) and established an inter-ministerial group to oversee the
development of domestic production capacity (May 2009).

23. (SBU) Compulsory licensing has been a topic of much discussion
since Brazil's 2007 decision to issue a compulsory license for
Merck's HIV drug Stocrin (scientific name: efavirenz) and will
continue to be so. However, Brazil's current stance against patents
for incremental innovation in pharmaceuticals could have equally
damaging results. Political pressure to reject patent applications
for legitimately innovative drugs could be a new front in Brazil's
push to cut health costs and bolster its generic drug industry, but
will ultimately damage innovation and competitiveness. The USG has
opportunities to engage on these issues with MRE (through the
Economic Partnership Dialogue, the Bilateral Consultative Mechanism,
and the Joint Consultative Mechanism[JCM]), MDIC (through the
Commercial Dialogue), the Ministry of Science and Technology (which
will lead the delegation to the next JCM), and through direct
dialogue with the Brazilian Congress. Continuing to press
innovation / competitiveness themes and raise their profile within
the spectrum of stake-holder agencies will remain an important part
of the strategy to affect progress on intellectual property
protection in Brazil.

SPECIFIC ISSUES: ENERGY

24. (SBU) For Brazil, turning ethanol into a world commodity is a
key aspect of increasing energy security. Though Brazilian ethanol
is produced from sugar cane, Brazil sees expansion of the global
ethanol market, regardless of feed stock, as a key interest. In
March 2007, the United States and Brazil signed a Memorandum of
Understanding (MOU) on biofuels cooperation. As a result,
scientists and laboratories from the two countries are
collaboratively researching next generation biofuels technologies.
The United States and Brazil are also working together in various
multilateral fora and the bilateral Commercial Dialogue to develop
international biofuels standards and sustainability criteria. By
making it easier to treat biofuels as a tradable commodity, these
standards should foster the emergence of a vibrant global biofuels
market. One irritant in the biofuels relationship is the 54 cents
per gallon surcharge/tariff charged to imported biofuels. The
Brazilians view the tariff as a measure which supports the corn
ethanol industry to the detriment of more efficient sugar ethanol
and regularly question why there should be a trade barrier to a
clean fuel when there is no such barrier for petroleum. Another
issue of concern is the proposed EPA rule making for a renewable
fuel standard, which the Brazilians view as a non-tariff trade
barrier. The Brazilians contest the modeling that was done to
assess the greenhouse gas effects of fuel lifecycles and fear that
such assessments could be used to unfairly impede exports of
sugar-cane based biofuels from Brazil and the third countries where
we are working together to establish domestic ethanol capabilities.
In a welcome and well-received outreach effort, the EPA sent a team
to Brazil in August to share their modeling methodology and hear the
suggestions and concerns of the Brazilians.

25. (SBU) The discovery in 2007 of potentially massive offshore
("pre-salt") reserves of oil and gas estimated to contain between
30-80 billion barrels of oil equivalent could put Brazil within the
top ten oil countries in terms of reserves. Though the discoveries
have generated a great deal of excitement, industry observers
caution that development will probably be slow in coming due to the
expensive technological challenges involved with ultra-deepwater
drilling, including a worldwide shortage of equipment such as
drilling rigs.

26. (SBU) On August 31, the GOB unveiled its long-awaited proposal

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for a new oil regime to administer its ultra deepwater pre-salt
reserves. The proposal, which has been submitted to Congress for
consideration, is destined to be highly politicized in this
pre-election year and will likely undergo significant changes. The
proposed legislation would replace the old concessions model and
make state-owned Petrobras, with a required minimum of 30 percent
participation, the operator on each block, responsible for choosing
the contractors, technology, and personnel. It also creates a new
government entity known as Petrosal to represent the government to
manage the service contracts, and establishes a Social Fund to
direct anticipated new oil state revenues against poverty
alleviation, education, and scientific and technological innovation.
Finally, the legislation provides for up to USD 50 billion to
increase Petrobras' capacity to serve its designated role in the
pre-salt exploration. U.S. oil companies operating in Brazil are
concerned about the new nationalistic model and warn that it could
make their future operations in Brazil commercially non-viable.
They are particularly concerned about the potential for Petrobras'
designation as sole operator to relegate them to essentially a
financing role, and they cite a high degree of uncertainty regarding
the model's potential impact on their investments in Brazil.
ExImBank has extended a USD 2 billion line of credit to support US
equipment and services in development of these reserves.

27. (U) FIESP is engaged in energy policy issues. FIESP will hold
a conference in Sao Paulo October 5-6, their 10th annual
International Energy Meeting, and on September 9 invited Secretary
of State Clinton to be the keynote speaker. The focus of the
conference this year will be on the links between Energy and Climate
Change.

SPECIFIC ISSUES: FIGHTER AIRCRAFT PURCHASE

28. (SBU) An important watershed in achieving a more robust defense
relationship with Brazil will be the decision on a next generation
fighter aircraft. This is a $4 billion sale that would create an
estimated 30,000 jobs in the United States and 5,000 in Brazil.
Boeing's F-18 Super Hornet is a finalist along with the French
Rafale and Swedish Gripen. After hosting French President Sarkozy
in Brasilia for Brazilian Independence Day celebrations, President
Lula announced on September 7 that Brazil is entering advanced
negotiations to purchase 36 French-made Rafale fighters. The
following day Brazil's Defense Ministry confirmed that the selection
process was not closed and the U.S. contender is still under
consideration. With a lower cost and stronger offset program,
Boeing is well-positioned to win on the merits of its bid, but faces
a presumption in the Brazilian political community that doing
business with the United States is negative for Brazil. Boeing
executives are working with FIESP to hold a Supplier's Conference
September 15 and 16 to discuss industrial cooperation and seek
Brazilian partner companies. While Brazilian businesses would
prefer to build a relationship with Boeing, they have not yet made
this view known to the political leadership. Despite significant
USG efforts over the past two months to allay Brazilian concerns
regarding technology transfer and USG trustworthiness as a partner,
significant doubts remain, and further high-level USG support is
needed to level the playing field.

SPECIFIC ISSUES: U.S. ACCESS TO MILITARY BASES IN COLOMBIA

29. (SBU) The announcement in August of a Defense Cooperation
Agreement that sets conditions for continued U.S. military access to
Colombian bases provoked a negative reaction from Venezuela that was
picked up by the Brazilian press and government. Mischaracterized
as the establishment of new U.S. bases, the agreement led many
Brazilian elites to worry that U.S. forces in Colombia might be used
to launch operations in other countries or present a challenge to
Brazilian interests. While we and the Colombians have taken pains
to apprise the GOB of the facts, and the GOB has toned down its
public rhetoric following a summit of South American presidents on
August 28, the GOB still believes that the presence of U.S.
personnel, even with full Colombian assent, is a destabilizing
factor in the region.

COMMENT

30. (SBU) With growing economic clout and increasing interest in
engaging in global economic issues, Brazil has seen its importance
in the region and on the world stage expand significantly. Brazil's
successful management of the global financial crisis has fueled
additional self-confidence, prompting Brazil to speak with more
authority in international fora such as the G-20. While the
government is largely friendly and open to the United States, it
does not and will not always see eye to eye with us. The
sensitivities inherent to the relationship are especially evident

BRASILIA 00001129 008 OF 008

today within the context of the recent series of highly visible
events played out in the press, including concerns over U.S.
military intentions in the region (centering on suspicions that the
United States harbors interests in Brazil's pre-salt oil reserves
and Amazon resources), the WTO cotton decision, and the defense
aircraft acquisition bid. Your visit provides a concrete
opportunity for the United States to once again highlight the many
positive economic and trade ties that unite the United States and
Brazil, and re-direct the focus of our relationship toward expanding
our strong bilateral cooperation.

KUBISKE

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