BRAZIL-US TRADE RELATIONS: A ROCKY ROAD AHEAD

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00990R000100480001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 27, 2016
• Document Release Date: December 13, 2012
• Sequence Number: 1
• Publication Date: March 16, 1988
• Content Type: MISC

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a
Central Intelligence Agency
Washington. D. C20505
DIRECTORATE OF INTELLIGENCE
16 March 1988
Brazil-US Trade Relations: A Rocky Road Ahead
Summary
The recent negotiations over Brazil's policies on
computer technologies underscore the width of the gap
between the US and Brazil over fundamental approaches
to trade. We believe Brazil's willingness to make some
concessions on informatics reflects a studied
determination to make only the minimal accommodation
needed to avoid retaliation, rather than any intention
to compromise on trade issues in general. In our view,
Brazil, guided by an extremely aggressive, highly
self-serving trade philosophy, will prove just as
formidable on other looming issues, such as
pharmaceutical patent protection. Moreover, Brazil's
continuing political disarray has played into the hands
of those in the bureaucracy and on the political left
whose views on trade are the most rigid and
nationalistic.
The Brazilian Approach to Trade
US-Brazilian tensions over trade are, in part, rooted in
Brazil's view that trade is an integral part of its broadly
defined economic development model, and therefore a matter
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Analysis. Comments and queries are welcome and may be directed
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affecting both national security and pride. Brazil has developed
its export strategy--at times coupled with import substitution
policies--to serve its national interests. In the 1960's it
provided increased exports to help avoid depending on coffee
for foreign exchange; then in the 1970's to help ease its heavy
reliance on imported oil and, most recently, to help reduce the
burden of burgeoning foreign interest payments. The success of
this approach has inclined many Brazilians to worry that US
pressure for liberalization of trade is a threat to their export-
driven development model and that it is aimed at preventing the
evolution of competitive domestic industries. Another
lonstanding preoccupation for Brazilians is their belief that
multinational corporations dominate the market in many
industries. As a result, Brazilian politicians often point to US
pressure-for trade liberalization as an attack on Brazilian
sovereignty.
Brazilians take it as an article of faith that their
government should intervene heavily to bring about favorable
trade conditions. Consequently, Brazil's import restrictions and
its aggressive export promotion programs have frustrated many
foreign commercial interests, who feel at an unfair disadvantage
vis-a-vis their Brazilian competitors. Much of Brazil's effort
to restrict imports is based on its perceived need to protect key
infant industries. This protection ranges from requiring tedious
licensing procedures, through the use of layers of entangled
bureaucracy, to the outright closing of markets for industries
such as data processing.
Brazil utilizes practically all the :known trade policy tools
to protect its industries and promote exports. These include
export subsidies and restrictions on imports that compete with
potential Brazilian exports, programs for preferential export
financing to trading companies, and medium term loans for
exporters of Brazilian goods. The government also provides
incentives for importers of capital goods and of inputs used to
manufacture exported products through tax and duty exemptions.
While subsidies have generally declined since 1980--due largely
to the reduction and eventual elimination of two export incentive
programs--they remain significant.
Suspicious of the US
The Brazilians are leery of their commercial dependence on
the US, which is their largest foreign market, and they bridle at
what they regard as efforts by Washington to dictate matters of
trade policy. On the one hand, they fear regulating the conduct
of trade, and they continue to-expect-special-treatment from the
US. On the other hand, they resent what they believe is
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protectionist senti-ment in the US, believing that Washington
seeks to transfer its economic concerns--such as the trade
deficit--onto trading partners, particularly those with large
trade surpluses or with closed markets. Some Brazilians, for
example, have expressed the view that the omnibus trade bill now
in Congress is specifically aimed at Brazil, as are current
restrictions on items such as sugar and alcohol.
Brasilia may launch a campaign to prevent its phase-out from
the general system of preferences program (GSP) if Washington
considers it again this year, possibly claiming that the action
would be discriminatory and damaging to its efforts to gain debt-
servicing revenues through exports. Its GSP exports--a
relatively small fraction of bilateral exports--have decreased
gradually in the past three years. Brazil dropped from the third
largest beneficiary of the program to the eighth by early this
year.
Political Disarray Complicates Policymaking
Brazilian trade policy has been further complicated by the
disarray that has characterized the slow-moving transition to
full civilian government. President Sarney, fighting
congressional efforts to trim his term, has focused on policy
issues largely in terms of whether and how they will affect his
domestic political strength and prospects for his tenure.
Lacking decisive leadership at the top, the making of foreign
trade policy has tended to fall increasingly to segments of the
bureaucracy with relatively narrow interests and clear,
Third-World biases. The result has been to accentuate even
further Brazil's ingrained, parochial, protectionist agendas.
Brazil's commercial policies are directed from the
Third-World oriented Foreign Ministry, which has long dominated
decisionmaking on all significant international economic and
trade issues. Key GATT-related positions in the Ministry are
staffed by diplomats experienced in foreign trade and economic
issues, who form a core of support for protectionist policies.
Ministry personnel in second and third-echelon positions often
make decisions independently of the foreign minister, who is
largely a figurehead, according to US officials. Foreign
Ministry officials generally present a united front, revealing
little about any internal debates on the course of Brazilian
international economic relations. Moreover, instructions from
Brasilia are almost never questioned by representatives in the
field.
In this milieu, bureaucratic groups such as the Special
Secretariat for Informatics (SEI), a particularly nationalistic
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body, have gained prominence. During the informatics
negotiations, SEI; the principal policy body, consistently pushed
a protectionist approach that subjects each new foreign
investment or import proposal to a so-called "national similars"
test without consistent guidelines. This practice, which gives
SEI arbitrary leeway, enables it to prohibit the entry of any
product it deems to have a functional equivalent--currently
produced or on the drawing board--by a Brazilian firm.
The recent, well publicized differences over informatics
also illustrate the relative lack of clout that key interest
groups, including the business sector, have had with government
economic policy. SEI was able to push its restrictive line
despite calls from numerous influential businessmen and leading
journals to open Brazil's closed door policy. Polls earlier this
year showed that many Brazilians believed US sanctions would have
been justified, given the government's stance.
President Sarney finally reined in SEI's authority--with
great reluctance--after the US threatened to retaliate. He
convened the National Council on Informatics--an interagency
policy review groupN 1
In
addition, Brasilia assured Washington that it would consider US
concerns as it writes regulations to govern SEI's decisionmaking.
Recent press reports indicate, however, that SEI has already
proposed new rules which, if adopted, would still allow it
considerable arbitrary decisionmaking authority.
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Trade policy has also been somewhat hostage to the intense
political maneuvering over Brazil's new canstitution. The
current draft version contains controversial protectionist
measures toward foreign investment and trade that could lead to
direct confrontation with the US. For example, it curtails or
prohibits foreign investment in high technology, minerals,
petroleum, and health care--all industries in which there is
major US participation.
These planks reflect the power of Brazil's political left,
which is seeking to increase the government's ability to regulate
economic and social activities. Many of the original draft
provisions were written by congressional committee chairmen
appointed by the center-left leadership of'the majority
Democratic Movement Party who are intent upon charting a
constitutional course fundamentally different from the current
constitution, written by the former military regime.
The protectionist proposals, as well as those granting
liberal labor reforms and extending government economic powers,
have sparked an outcry from Brazilian businessmen, .despite the
fact that many of them have long accepted a heavy state role in
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the economy. As a. result, a moderate-conservative bloc in the
Constituent Assembly has formed to force compromise language on
some draft provisions. Nevertheless, internal disunity and
bickering have hampered its effectiveness and will probably
permit many of the left's provisions to survive. We believe the
most controversial economic and trade-related issues will
probably not be resolved until implementing legislation is
written late this year.
Problems to Come
These factors--Brazil's fundamental protectionist view of
trade, the unsettled policymaking milieu, and the lessons learned
from the_informatics episode--lead us to conclude that Brasilia
will remain at odds with Washington over several outstanding
trade-related issues.
With regard to intellectual property rights protection,
Brazil fundamentally rejects most aspects of the arguments posed
by the industrialized countries, taking the position that the
developing countries' right to technology transfer is really the
issue. Brasilia's goal is to make any and all technology
available to developing Brazilian firms at the lowest possible
cost and with minimum restrictions. It can be expected to argue
that efforts to protect foreign technology are an infringement on
its sovereignty. Another important factor, however, is that
Brazil lacks sufficient protection for patents, trademarks, or
trade secrets and, while Brazilian laws include some copyright
protections, they are poorly enforced. For example, customers
can readily buy copies of pirated softwarb programs or videos for
little more than the price of a blank diskette or tape.
We expect that negotiations on pharmaceutical patent
protection will prove difficult, as Brazil continues to resist US
pressures to provide protection for ethical drug manufacturers.
We expect Brasilia to be at least as insistent on this issue as
on informatics, claiming that cheap healthcare products are vital
to social welfare, and that patent protection would drastically
raise prices. Brasilia, fearing public criticism if it allowed
companies to pass on development costs through patent protection,
argues that multinationals already control most of the market,
making additional protection needless until the domestic industry
develops. Multinational pharmaceutical firms, on the other
hand, argue that the most immediate threat to their operations is
the lack of profitability due to low, government-set prices,
particularly on new medicines where research and development
costs have not yet been recovered.
We also anticipate continuing frictions,-over Brazil's
aggressive export promotion tactics. As Brazil's trade presence
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in the world grows. and its exports further diversify, its export
push will affect US interests more frequently and on more
products. For example, US exporters increasingly claim that
Brasilia subsidizes products in competition with US goods for
third country markets such as poultry and soybeans. The
Brazilians, in turn, are challenging US agricultural subsidies--
such as the export enhancement program--in GATT.
Brazilian-US differences are also spilling into
international arenas. Brasilia is uses forums such as the GATT's
Uruguay Round and UNCTAD to rally support for trade preferences
for developing countries. As a self-proclaimed leader aiming
developing countries and with no initiatives of its own, Brazil
is playing an obstructionist role in the GATT Uruguay Round
actively 'opposing key US objectives on services, investment, and
intellectual property rights. In addition to Brasilia's
inexperience and lack of infrastructure to enforce even existing
intellectual property rights protection, strong domestic
opposition from highly protected industries fuels Brasilia's
desire to avoid the extension of GATT rules to cover trade in
services. As the Round's substantive talks intensify this year,
Brazil is trying to disrupt the negotiations through delay
tactics and procedural wrangling.
Implications
We believe that lingering tensions between the US and Brazil
over a range of issues, exacerbated by Brazilian perceptions that
the US can exert too much economic leverage, may, over time,
prompt Brazil to seek to shift its purchases away from the US.
Were Brasilia to do so, it could eventually have a significant
impact on several US industries --such as coal and aerospace--
despite Brazil's relatively small role as a foreign market.
Brasilia--which has threatened to shift import sources during
previous trade rows--has already demonstrated its ability to seek
out alternate suppliers for major US imports over 'several years.
For example, through increased self-sufficiency and imports from
Argentina, Brazil has gradually lowered its purchases of US
wheat--from 2.5 million MT in 1982 to possibly none this year.
On coal, although industry analysts claim it would be difficult
for Brazil to find substitutes for high-quality, competitively
priced US coal this year, they note that other countries'
marketing efforts could squeeze out US sales over time.
Moreover, Brazil's considerable imports of large commercial
aircraft from the US could eventually be replaced by comparable
West European models.
Finally, there is little prospect that the confused
political situation will be resolved any time soon. In fact,
Brasilia could become increasingly unable to focus effectively on
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trade issues if Sarney's term is shortened and a new presidential
election campaign jets underway in earnest. In any case, even
after political turmoil subsides, we expect Brazil to remain
committed to 'a trade policy rooted in the highly aggressive,
export-oriented philosophy that has prevailed to date.
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Appendix: The Special Secretariat for Informatics
Brazil's restrictions on the importation of computer
technology began under the military government in the late 1970s
as a way to protect its "infant" data processing industry from
foreign competition. Originally envisioned as a way to protect
indigenous micro- and mini-computer production, the informatics
retrictions expanded to include a wide variety of
computer-related products. In April 1979 a special committee--
composed of officials of the National Intelligence Service,
Foreign Ministry, Finance Ministry, and joint chiefs of staff--
was formed to study how to regulate informatics. The Special
Secretariat for Informatics (SEI) was in turn created the
following October. Placed under the control of the National
Securitli'.Council (CSN), SEI was a small regulatory organization
manned principally by military officers and civilian technocrats
who felt that the national interest dictated limiting foreign
influence in the computer industry. In 1984 the Informatics Law,
which imposed broad and severe limits on technology imports and
on foreign investment in high technology industries, codified the
market reserve policy.
The advent of civilian government in 1985 brought attempts
to increase civilian control over SEI but not to re-orient
policy. In September 1985, President Jose Sarney removed SEI
from the purview of the CSN and placed it under the control of
the newly created Ministry of Science and Technology. Sarney
also created the National Council on Computer Policy and
Automation (CONIN), a general advisory board composed of members
of Congress, industry representatives, and ministers to oversee
SEI activities and policies.
The influence of the military and of strongly nationalistic
civilians on informatics policy making remains strong. The
current head of'SEI, for example, is Jose Ezil Veiga da Rocha, a
retired Navy captain and a staunch advocate of the market reserve
policy. A prominent player in informatics policymaking since the
1970s, Ezil was a leading drafter of the Informatics Law
according to the US Embassy. Another key figure is Ministry of
Science and Technology Secretary General Luciano Coutinho, who as
part of his duties, oversees SEI. According to various sources,
he is uncompromising in his nationalism and has close ties to
leftist congressmen, including prominent members of the majority
Brazilian Democratic Movement Party, who support the tough
informatics policy.
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SUBJECT: Brazil-US Trade Relations: A Rocky Road Ahead
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Distribution:
External:
James P. Moore, Deputy Assistant Secretary,
International and Economic Policy, Department
of Commerce
1 - James Buchanan, Chief, South America Division
Office of Analysis for Inter-American Republic
Bureau of Intelligence and Research
1 - Peter Field, Director, Office of South America
Department of Commerce
1 - Stephan P. Farrar, Director for Int'l Economic
Affairs, National Security Council
Original
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1
--Diehard Tropp, Special Assistant to the
Administrator, Department of State
1
- Col. John A. Cash, Defense Intelligence Officer
for Latin America, Defense Intelligence Agency
1
- Robert Gelbard, Deputy Assistant Secretary of
State for South America Affairs, Department of
State
1
- Robert Pastorino, Deputy Assistant Secretary of
Defense for Inter-American Affairs, International
Security Affairs
1
- David Beale, Director, Office of Brazilian Affairs
Internal:
1
- D/DCI-DDCI Executive Staff
1
-DDI ?
1
- 0/DDI
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1
- NIO/LA
1
- NIC/AG
1
- PDB Staff
1
- C/PES
1
- DDI/CPAS/ILS
1
- D/ALA
2
- ALA/PS
1
- ALA Research Director
5
- CPAS/IMC/CB
1
- C/ALA/SAD
1
- DC/ALA/SAD
1
- C/ALA/SAD/BR
2
- ALA/SAD/BR
1
- ALA/SAD
1
- C/OGI/ECD
1
- LDA/AL/SA
DDI/ALA/SAD/BR
(16 Mar 88)
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