```

[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

U.S. RELATIONS WITH BRAZIL: STRATEGIC PARTNERS OR REGIONAL COMPETITORS?

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         THE WESTERN HEMISPHERE

                                 OF THE

                              COMMITTEE ON
                        INTERNATIONAL RELATIONS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                        WEDNESDAY, JULY 26, 2000

                               __________

                           Serial No. 106-144

                               __________

    Printed for the use of the Committee on International Relations

 Available via the World Wide Web: http://www.house.gov/international 
                               relations

                                 ______

                   U.S. GOVERNMENT PRINTING OFFICE
66-939                     WASHINGTON : 2001

                  COMMITTEE ON INTERNATIONAL RELATIONS

                 BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania    SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa                 TOM LANTOS, California
HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska              GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey     ENI F.H. FALEOMAVAEGA, American 
DAN BURTON, Indiana                      Samoa
ELTON GALLEGLY, California           MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida         DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina       ROBERT MENENDEZ, New Jersey
DANA ROHRABACHER, California         SHERROD BROWN, Ohio
DONALD A. MANZULLO, Illinois         CYNTHIA A. McKINNEY, Georgia
EDWARD R. ROYCE, California          ALCEE L. HASTINGS, Florida
PETER T. KING, New York              PAT DANNER, Missouri
STEVE CHABOT, Ohio                   EARL F. HILLIARD, Alabama
MARSHALL ``MARK'' SANFORD, South     BRAD SHERMAN, California
    Carolina                         ROBERT WEXLER, Florida
MATT SALMON, Arizona                 STEVEN R. ROTHMAN, New Jersey
AMO HOUGHTON, New York               JIM DAVIS, Florida
TOM CAMPBELL, California             EARL POMEROY, North Dakota
JOHN M. McHUGH, New York             WILLIAM D. DELAHUNT, Massachusetts
KEVIN BRADY, Texas                   GREGORY W. MEEKS, New York
RICHARD BURR, North Carolina         BARBARA LEE, California
PAUL E. GILLMOR, Ohio                JOSEPH CROWLEY, New York
GEORGE P. RADANOVICH, California     JOSEPH M. HOEFFEL, Pennsylvania
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
                    Richard J. Garon, Chief of Staff
          Kathleen Bertelsen Moazed, Democratic Chief of Staff
                                 ------                                

                 Subcommittee on The Western Hemisphere

                  ELTON GALLEGLY, California, Chairman
DAN BURTON, Indiana                  GARY L. ACKERMAN, New York
CASS BALLENGER, North Carolina       MATTHEW G. MARTINEZ, California
CHRISTOPHER H. SMITH, New Jersey     ROBERT MENENDEZ, New Jersey
ILEANA ROS-LEHTINEN, Florida         ROBERT WEXLER, Florida
MARSHALL ``MARK'' SANFORD, South     STEVEN R. ROTHMAN, New Jersey
    Carolina                         JIM DAVIS, Florida
KEVIN BRADY, Texas                   EARL POMEROY, North Dakota
PAUL E. GILLMOR, Ohio
               Vince Morelli, Subcommittee Staff Director
           David Adams, Democratic Professional Staff Member
            Kelly McDonald, Acting Professional Staff Member
                  Jessica Baumgarten, Staff Associate

                            C O N T E N T S

                              ----------                              
                                                                   Page

                               WITNESSES

Linda Eddleman, Deputy Assistant Secretary, Bureau of Western 
  Hemisphere Affairs, U.S. Department of State...................     2
H. E. Rubens Barbosa, Ambassador, Embassy of Brazil..............    10
Michael A. May, Director, MERCOSUL--South America Project, Center 
  for Strategic and International Studies........................    13
Mark Smith, Executive Director, U.S.-Brazil Business Council.....    16

                                APPENDIX

Prepared statements:

The Honorable Elton Gallegly, a Representative in Congress from 
  the State of California, and Chairman, Subcommittee on the 
  Western Hemisphere.............................................    32
The Honorable Gary L. Ackerman, a Representative in Congress from 
  the State of New York, and Ranking Democrat, Subcommittee on 
  the Western Hemisphere.........................................    33
The Honorable Robert Menendez, a Representative in Congress from 
  New Jersey.....................................................    35
Linda Eddleman...................................................    37
H. E. Rubens Barbosa.............................................    51
Michael A. May...................................................    52
Mark Smith.......................................................    72
Question submitted for the record, Answered by Deputy Assistant 
  Secretary Eddleman.............................................    85

 
U.S. RELATIONS WITH BRAZIL: STRATEGIC PARTNERS OR REGIONAL COMPETITORS?

                              ----------                              

                        Wednesday, July 26, 2000

                   House of Representatives
             Subcommittee on the Western Hemisphere
                       Committee on International Relations
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:30 p.m., in 
room 2200, Rayburn House Office Building, Hon. Elton Gallegly 
(Chairman of the Subcommittee) presiding.
    Present: Representative Gallegly.
    Mr. Ballenger. [presiding] Ms. Secretary, I would just like 
to welcome you here.
    For those of us, and presuming--some of you may not know 
this, but I had a Brazilian son for about 8 months one year 
that lived with us, went to college, and then we visited his 
family many times in Sao Paulo, and I would say that, for those 
of us in this country who look into the future of the Western 
Hemisphere in general, not recognizing the size, the economy, 
the population of Brazil is sheer ignorance on our part.
    So this is the beginning of an effort on our part to get a 
little better connection. I know the Ambassador asked me if I 
would help put together an interchange between the Brazilian 
legislative body and ours, and I hope to do that after the 
election. But first of all, we have all got to get elected for 
this thing to happen. But it is a pleasure to have you here, 
and any knowledge you can partake to us we would greatly 
appreciate.
    Anybody wish to make an opening statement?
    Mr. Ackerman. Thank you very much. Appreciate your saying 
that we all have to get reelected. I take that as an 
endorsement of my campaign.
    Mr. Ballenger. My voice in New York is completely worth----
    Mr. Ackerman. I doubt that.
    I want to thank you and thank the Chairman for calling this 
hearing. I think it is very important. I have a prepared 
statement that, in the interest of saving time and hearing from 
the Secretary, I ask unanimous consent to be able to put in the 
record.
    Mr. Ballenger. Without objection.[The statement of Mr. 
Ackerman appears in the appendix.]
    Mr. Ballenger. It is all yours, Ms. Secretary.

STATEMENT OF LINDA EDDLEMAN, DEPUTY ASSISTANT SECRETARY, BUREAU 
    OF WESTERN HEMISPHERE AFFAIRS, U.S. DEPARTMENT OF STATE

    Ms. Eddleman. Thank you very much, sir, and thank you for 
that warm welcome. Mr. Chairman, Members of the Subcommittee, 
it is a pleasure to be here with you today to discuss the state 
of U.S.-Brazilian bilateral relations. With the Chairman's 
permission, I would like to submit a copy of my written 
statement for the record.
    Mr. Ballenger. Without objection.
    Ms. Eddleman. I will now use my oral remarks to highlight 
some key elements of our bilateral relationship.
    Brazil's growing international stature and its dominant 
position in Latin America make it a key player on many issues 
affecting U.S. interests. It is the world's fourth largest 
democracy and ninth biggest economy. Brazil accounts for 50 
percent of South America's population and 45 percent of GDP.
    It shares a common border with all but two of South 
America's nations, and its Portuguese-speaking heritage links 
it to countries on three other continents. As evidenced during 
the world financial crisis in 1998 and 1999, Brazil's economic 
health is key to hemispheric prosperity, and also impacts on 
U.S. and global financial markets.
    Brazil is influential at the U.N. and other multilateral 
fora, and is active on international security and peace keeping 
issues. Within the Hemisphere, Brazil is a critical player in 
efforts to deepen democracy and promote regional stability. 
There is almost no global or hemispheric issue today that can 
be addressed without Brazil's participation.
    U.S. policy recognizes Brazil's increasing hemispheric and 
global significance, and U.S.-Brazilian bilateral relations are 
currently better than at any time since Brazil sent 25,000 men 
to fight with the Allies in Europe during World War II. On 
foreign policy issues, President Cardoso's modernizing, 
internationalist vision has combined with our active engagement 
with Latin America to broaden and deepen bilateral cooperation 
in a wide range of sectors.
    The level of exchange between our governments has never 
been higher. Similarly, President Cardoso's efforts to 
modernize Brazil's economy--based on macroeconomic 
stabilization, privatization, deregulation, and trade 
liberalization--have greatly enhanced bilateral trade and 
investment ties.
    Since the end of military rule, Brazil has held four 
Presidential elections and successfully weathered the 
impeachment and resignation of its first directly elected 
president. The Brazilian military no longer plays a significant 
role in domestic politics, and Brazil appointed its first 
defense minister--a civilian--last year.
    Brazil's Federalist system provides multiple opportunities 
for local involvement in politics, and numerous political 
parties and nongovernmental organizations create an active 
civil society. An aggressive, independent press also enriches 
political and cultural life, and helps hold politicians 
accountable to the public.
    Recent opinion polls show a high level of public 
dissatisfaction with the Brazilian political system's seeming 
inability to solve the country's daunting social problems, 
including income inequality, high crime, unemployment, and the 
poor quality of public services, but no major political actor 
in Brazil advocates a break with democratic governance.
    Brazil's economic crisis in late 1998, which was triggered 
by the Russian default in August 1998 and culminated in the 
real devaluation in January 1999, underscored the importance of 
a sound Brazilian economy to global and hemispheric prosperity. 
During the fall of 1998, senior IMF and Administration 
officials warned that the collapse of the Brazilian economy 
could trigger an economic melt down in Latin America and deepen 
the turmoil in international capital markets.
    The impact on Argentina, which sends over 30 percent of its 
total exports to Brazil, would have been especially grave. 
These considerations led the IMF, in close consultation with 
the United States, to assemble a $41.5 billion financial 
package to help Brazil overcome the crisis. The U.S. 
contributed $5 billion from its economic stabilization fund.
    The international financial package, coupled with the 
fiscal discipline maintained by President Cardoso's economic 
team, and structural reforms approved by the Brazilian 
Congress, enabled Brazil to overcome the real crisis and to 
embark on a path of renewed growth. This year, the economy is 
projected to register GDP growth of 3\1/2\ to 4 percent, with 
inflation falling to 6 percent. Brazil has regained access to 
international capital markets and repaid the loans disbursed by 
the U.S. and other bilateral lenders ahead of schedule.
    Still, Brazil needs to pursue additional structural 
reforms, including social security and tax reform, to 
consolidate its fiscal position and lay the foundation for 
future sustained high growth. The Cardoso administration 
recognizes the need for additional measures, and is working to 
build congressional and public support for these politically 
difficult actions.
    President Cardoso's economic modernization program has 
created numerous trade and investment opportunities for U.S. 
firms. U.S. exports to Brazil rose 64 percent during this 
period, and Brazil was the 13th largest export market for U.S. 
goods in 1999. Moreover, U.S. direct investment in Brazil 
almost doubled between 1994 through 1999, rising to over $35 
billion. Brazil is the 8th largest recipient of U.S. direct 
investment in the world, and more than 400 of the Fortune 500 
companies have operations in the country.
    Manufacturing accounts for almost 60 percent of U.S. 
investment, but the fastest-growing sectors are telecom and 
energy.
    Excuse me, Mr. Chairman. I notice you just walked into the 
room. Would you like me to break, or should I finish making the 
statement?
    Mr. Gallegly. [presiding] No, go right ahead.
    Ms. Eddleman. In the hemisphere, Brazil and the U.S. share 
a common interest in promoting stability and democracy. In the 
past, citing principles of national sovereignty, Brazil was, in 
our view, overly reluctant to speak out forcefully when 
hemispheric countries violated their citizens' basic human or 
political rights.
    We have welcomed greater Brazilian activism under the 
Cardoso administration in promoting internationally the tenants 
of democracy. For example, Brazil advocated the inclusion of a 
democracy clause in Mercosur. The first ever summit of South 
American presence will take place in Brazil later this month, 
and will focus on democracy as well as on the threat posed by 
narcotics trafficking and other transnational criminal 
activities.
    These welcome initiatives, aimed at creating mechanisms for 
mutual support among democracies must, in our view, be 
complemented by meaningful measures when countries retreat from 
democratic norms. There are sometimes important differences 
between the United States and Brazil over the appropriate 
tactics for responding to threats to democracy.
    In Colombia, Brazil strongly backs President Pastrana's 
peace initiative, and Brazilian officials regularly review 
developments in the country with their U.S. counterparts. 
Brazil attended the July 7th Madrid meeting on Colombia, and it 
has informed the Pastrana government that Brazil adheres to the 
Madrid Declaration and is in favor of Plan Colombia.
    President Cardoso has met with Pastrana several times and 
has encouraged him to continue with these peace efforts. At the 
same time, senior Brazilian military officials have voiced 
concern about possible spill over from the Colombian conflict 
into western Brazil, and have taken steps to increase Brazil's 
military presence in the border area.
    Among these is Raytheon's SIVAM Amazon Monitoring System 
Project, which will help Brazil improve its control over its 
territory, including air space, to better combat narcotraffic 
in the Amazon region.
    In the sphere of military cooperation, Brazil's improved 
diplomatic and economic relations with its neighbors and its 
shift toward a more outward-looking foreign policy have led to 
enhanced bilateral military ties. The U.S. relationship with 
the Brazilian military, which had been very close after World 
War II, deteriorated during Brazil's military government from 
1964 to 1985. With the return of civilian rule, increasing 
contacts between the Brazilian and U.S. militaries produced a 
steady improvement in relations.
    The first visit to Washington by a Brazilian Defense 
Minister, a post created only a year ago, in late June provided 
an opportunity to deepen the level of military-to-military 
cooperation. Similarly, the conclusion of a Section 505 
assurances agreement on June 2nd is a concrete example of 
increased mutual trust and will result in closer ties once it 
is ratified by the Brazilian Congress.
    Brazil's increasing economic and political integration into 
global and hemispheric affairs has created common U.S. and 
Brazilian interests on a range of regional and multilateral 
issues and led to a new era of bilateral cooperation. On 
economic issues, President Cardoso's market-based modernization 
program has generated an explosive surge in U.S. trade and 
investment and has generated pressure from both the Brazilian 
and U.S. private sectors for bilateral commercial agreements 
that reflect the new economic reality.
    On foreign policy issues, President Cardoso's 
internationalist approach has produced new opportunities for 
the U.S. and Brazil to work together constructively on global 
and regional issues, and has resulted in growing policy 
coordination. This cooperation will become even more important 
in the future as the extent of Brazil's involvement in the 
hemisphere and the world continues to grow.
    Thank you.
    [The prepared statement of Ms. Eddleman appears in the 
appendix.]
    Mr. Gallegly. Thank you very much, Madam Secretary. I 
apologize for coming in a few minutes late, but between the 
vote and everything else, our schedule is a little bit topsy-
turvy today.
    I do have a couple questions for the Secretary. But before 
we do that, without objection, I would like to have my opening 
statement made a part of the record rather than reading it into 
the record, to save time, I'll just submit it because we are 
going to have some more votes.
    [The prepared statement of Mr. Gallegly appears in the 
appendix.]
    Mr. Gallegly. Mr. Sanford, did you have a statement you 
would like----
    Mr. Sanford. I do not.
    Mr. Gallegly. Fine.
    So without objection, my statement will be made a part of 
the record.
    Madam Secretary, you state that the U.S. welcomes greater 
Brazilian activism in the promotion of democracy in the 
hemisphere. I would like to know, in your opinion, did Brazil's 
position at the OAS with respect to the recent flawed elections 
in Peru pose any problems for the U.S.?
    Ms. Eddleman. Mr. Chairman, I would like to give you first 
a general reaction to your question, and then a more specific 
response with respect to Peru. My general reaction is that, 
based on our interactions with our Brazilian counterparts, and 
based on the actions they have taken in the hemisphere, 
particularly with respect to Ecuador and Paraguay where, of 
late, those governments were threatened by potential military 
coups, it is clear that the Cardoso administration and the 
Brazilian government generally are committed to the principle 
of promoting democracy throughout the region.
    That being said, I think it must be acknowledged that the 
United States and Brazil have traditionally taken a different 
tactical approach to questions involving threats to democracy. 
The United States approach has traditionally been a bit more 
proactive, and the Brazilians tend to take a more low profile/
less proactive view.
    We feel that their policy has been evolving, and they have 
been willing to become a little bit more proactive. But our 
approach on Peru was somewhat different.
    The point with Peru that I would like to stress, however, 
is that in the end the Brazilian government, along with the 
U.S. Government, supported the consensus to send a mission down 
to Peru to work on democratic reforms. Secretary Gaviria and 
Foreign Minister Axeworthy are in the process of carrying out 
that mission.
    Mr. Gallegly. You spoke of Brazil's effort with respect to 
Colombia in your statement. But others have hoped that Brazil 
would take an even more active role in the conflict. Are you 
satisfied that Brazil is doing all it could with respect to 
Colombia?
    Ms. Eddleman. The situation in Colombia is, as you know, 
sir, a very intractable problem. It is not my area directly, 
but I am aware of some of the steps that the Brazilian 
government has taken, both publicly and indirectly. As 
mentioned in my statement, the president of Brazil has met a 
number of times with President Pastrana, has supported the 
Madrid Declaration, and has made clear the concern the 
Brazilian government has for the situation in Colombia.
    Mr. Gallegly. Thank you, Madam Secretary.
    Mr. Ackerman?
    Mr. Ackerman. Thank you very much.
    Madam Secretary, your statement talks about the 
macroeconomic reforms undergone in Brazil under the President 
during his current term in office. Inasmuch as his approval 
rating is hovering somewhere around the 20 percent mark, and 
considering there seems to be an emerging scandal concerning 
his former chief of staff, how do you assess the momentum to 
complete the economic reforms that have been embarked upon?
    Ms. Eddleman. You are correct, sir, in pointing out that 
the president's popularity ratings certainly have decreased. He 
was re-elected a little over 1 or 1\1/2\ years ago, with 50-
some percent of the vote, and his poll ratings hover between--
actually, as low as 13 percent in some polls, and in the 20's. 
He has been very successful in promoting macroeconomic reform 
and in securing passage of the legislation.
    But the low poll numbers could make it more difficult for 
him to achieve passage of certain key pieces of legislation, 
which do need to be passed in order for Brazil to continue its 
structural adjustment. There is outstanding tax reform 
legislation and social security reform legislation that needs 
to be passed.
    That being said, we can only look to the history, and the 
president has been very successful in securing passage of 
legislation when it is critical. So we are hopeful that he will 
be successful over time.
    Mr. Ackerman. How do you assess the possibility that has 
been speculated upon from time to time that he might be forced 
to resign?
    Ms. Eddleman. Certainly the poll numbers must be of concern 
to his advisors and to the president himself. On the other 
hand, it has not come to the attention of anyone, certainly in 
Washington, and we have checked with our Embassy down in 
Brasilia. There have been no calls for resignation or calls 
for, perhaps removal from office. So we do not expect that to 
be the case, and believe that he will fulfill his term.
    Mr. Ackerman. One further question, if I may, Mr. Chairman.
    Of the $41\1/2\ billion assembled by the international 
community for aid to Brazil during its economic crisis, all of 
which--that was borrowed has been paid back on time or early--
how much of that money was actually borrowed, indeed, and how 
much of the $5 billion made available from the U.S. was 
borrowed?
    Ms. Eddleman. I don't know if I can give you an accurate 
breakdown. As you say, the $41.5 billion was--a component of it 
was bilateral assistance; $5 billion of it was U.S. loans. 
Those amounts were paid back in full as of April. I don't know 
how much of it was drawn down. I can get you that information 
in writing----
    Mr. Ackerman. Appreciate it.
    Ms. Eddleman [continuing]. If you would like. The other 
bilateral assistance has also been paid back, and they are 
hitting all of their IMF targets on time.
    [The information referred to follows:]
       Ms. Eddleman's Written Response to Mr. Ackerman's Question
    You are correct that all of the funds made available to Brazil have 
been repaid as of April of this year. Over the course of the crisis, 
Brazil borrowed about $23 billion, $9.46 billion of which was from 
bilateral sources, including $3.25 billion from the United States. 
Brazil repaid early and with interest.

    Mr. Ackerman. I thank you, Madam Secretary.
    Thank you, Mr. Chairman.
    Mr. Gallegly. Mr. Ballenger?
    Mr. Ballenger. Thank you, Mr. Chairman.
    Because of our friend from New York's past history, Mr. 
Ackerman, I was in the southern part of Brazil at one time. I 
noticed that just lately there was a large I guess amount of 
damage done to the environment in Iguacu. It turns out--the 
newspaper said it didn't have any great effect on it. I was 
just curious as to how that could happen.
    Ms. Eddleman. Sir, I think you might be referring to an oil 
spill that recently took place on the Iguacu River. I think it 
was a tanker that was owned or operated by Petrobras. I don't 
think that the spill affected the falls per se, but it was an 
environmental problem. There actually was a spill--I think that 
occurred either today or yesterday--so this is certainly an 
area of concern.
    The Brazilian government has fined Petrobras in the past, 
and Petrobras has made public commitments to do a better job in 
this area.
    Mr. Ballenger. I was just curious on the energy 
conservation, and so forth.
    There was a large tree-planting area, and I think the 
gentleman that set it up, an American liquidated it. Does that 
still exist, do you know?
    Ms. Eddleman. I am not aware of that particular project. I 
do know that a good deal of the money that AID provides to 
Brazil goes to sustainable development, and AID tries to target 
that money to local projects, because some of the problems in 
terms of enforcement are environmental laws in the Amazon. But 
I could look into the question on that particular project, if 
you would like.
    [The information referred to follows:]
      Ms. Eddleman's Written Response to Mr. Ballenger's Question
    If we are thinking about the same project, your recollection is 
correct. An American did once own a paper-pulp project in the Amazon 
region. I understand he liquidated his holdings some 20 years ago.

    Mr. Ballenger. I know in flying over that area at night--
have they cut down on the fire? I mean, the burning of the 
trees, and so forth, the jungle?
    Ms. Eddleman. My understanding is that the rate of 
deforestation is fairly constant, so it is not a terrible story 
to tell in that the situation isn't worse, but it isn't a great 
story because the situation hasn't improved all that 
dramatically. Fires did take place in the region, I think it 
was last year, and this forced the Brazilian government to come 
together with a plan to deal with fires in the future, and the 
U.S. Government made a contribution to that effort, to the 
fighting of the forest fires.
    Mr. Ballenger. I notice President Cardoso has--you 
mentioned working on social security reform. Is there an effort 
generally--I mean, do people--because of the success in Chile, 
is that a reason that there is success in that effort, or that 
effort in general in South America?
    Ms. Eddleman. In Chile, the Chilean social security system 
is known partly because of its privatized aspect. The effort of 
social security reform in Brazil has focused on attempts to 
reduce the amount of the budget that needs to go to social 
security payments, to pensioners. The number is quite 
extraordinary. I don't have the statistic off the top of my 
head, but it really boggles the mind.
    The president was successful, in fact, in passing social 
security reform, a first cut at it, a few--I think maybe 6 to 8 
months back. The courts then overturned portions of it, so they 
need to go back to the legislature now and try to deal with the 
problem a second time around.
    Mr. Ballenger. Thank you.
    Mr. Gallegly. Mr. Davis?
    Mr. Davis. It is my understanding that in the Seattle Round 
of the WTO, the position that the Brazilian government took 
with respect to the United States was to register some level of 
opposition to our anti-dumping laws, and also to express 
concern about discussion of labor and environmental protections 
in connection with trade agreements. Could you elaborate a 
little bit on that position, as you understand it?
    Ms. Eddleman. The Brazilian government is very active in 
multilateral and regional trade agreements, both the WTO and 
the FTAA. In Seattle, the government of Brazil took some 
positions that were very supportive of our positions.
    They are very supportive, for example, of the dispute 
resolution process in the WTO and are very supportive of our 
position generally on agriculture; for example, attacking the 
EU position on export subsidies. There was actually a fairly 
coordinated Latin American approach to the question about 
agriculture.
    However, sir, you are correct that on the anti-dumping 
question the Brazilian government has been fairly critical of 
our anti-dumping laws and wanted to address this issue through 
the WTO process--a position that we oppose.
    Also, on the question of labor and the environment, the 
position of the Brazilian government at this point is not to 
include trade--excuse me--not to include labor and 
environmental issues in trade negotiations. They are afraid 
that it could be used for protectionist purposes.
    Mr. Davis. Let me followup on what was being asked by Mr. 
Ballenger. What types of tax reform are we hoping the Brazilian 
Congress will approve?
    Ms. Eddleman. I understand that the Brazilian tax system 
is--part of the problem is that it is very, very complex. There 
are many layers of Federal, state, and local taxes, and the 
administrative burden on companies--that alone is very 
difficult for companies to deal with and to comply with. In 
addition, some of the aspects of the tax system are regressive 
and were put into effect as an immediate response to the 
financial crisis.
    For example, there is a financial transaction tax, which is 
considered to be fairly regressive. The Brazilians would like 
to see this tax done away with and perhaps replace it with 
other types of tax measures.
    Mr. Davis. The opposition to those changes is coming?
    Ms. Eddleman. I think tax reform is generally a difficult 
topic, particularly before municipal elections, which are going 
to be taking place in October.
    Mr. Davis. I have no more questions. Thank you, Mr. 
Chairman.
    Mr. Gallegly. Thank you, Mr. Davis.
    Mr. Sanford?
    Mr. Sanford. Yes, sir. A couple of quick questions.
    First, as I understand it, the U.S. has basically expressed 
support of the upcoming meeting of South American presidents in 
Brazil. But some people have registered the concern that, well, 
no, this is another attempt at Brazil basically trying to press 
for a quicker integration of, basically, South American 
countries in advance of the FTAA negotiations.
    Do you agree with the concern, or, no, it is an unwarranted 
concern?
    Ms. Eddleman. As a general matter, we think the idea of a 
South American summit is a very good idea. It is an 
opportunity--it is the first time the South American presidents 
will be getting together in one place, I think ever, and it is 
going to address, in our understanding, a range of issues, 
including trade but also democracy, infrastructure, counter 
narcotics questions, and other transnational issues.
    We think that efforts for the regional leaders, and 
particularly important players like Brazil, to address these 
kind of questions, that these are laudable efforts.
    The point you make with respect to trade, however, is well 
taken. We feel that regional trade agreements, if that is the 
purpose of--one of the purposes of this meeting, is that that's 
an acceptable objective as long as these regional agreements 
are not trade-diverting and are consistent with the WTO.
    Mr. Sanford. With respect to social security reform, do you 
like what has happened with the idea of these private or 
personal accounts? Or do you dislike what has happened?
    Ms. Eddleman. In terms of privatized social security 
accounts? I have to say, sir, I don't know enough about it to 
give you a good answer. But I could try to get back to you with 
a Departmental view, if you like. I think the Treasury 
Department probably takes the lead on these kind of things, 
though.
    [The information referred to follows:]
       Ms. Eddleman's Written Response to Mr. Sanford's Question
    A number of Latin American countries, beginning with Chile in 1981 
and including Peru, Colombia, Argentina, Uruguay, Bolivia, Mexico, and 
El Salvador, have reformed their social security systems either to 
replace or supplement public pensions with individual investment/
savings accounts. In many cases these whole or partial privatizations 
of social security have increased the resources available to individual 
retirees and have expanded the size of capital markets in these 
countries. The success of the programs has varied from country to 
country.

    Mr. Sanford. You handle economic issues, though, right?
    Ms. Eddleman. I do handle economic issues. The social 
security reform effort in the pension system in Chile has been 
very effective.
    Mr. Sanford. Right.
    Ms. Eddleman. But it is unclear whether it has been 
effective because of the particulars of the Chilean economy, 
which differs somewhat from the situation of Brazil, which is a 
much more heterogeneous country in which you have wide 
variations in income. Whether a system like that would work in 
Brazil isn't clear. It has been very successful in Chile.
    Some, in fact, in the United States have looked to the 
Chilean model and have advocated adoption of aspects here in 
the U.S.
    Mr. Sanford. Yes. Although I would take exception there, 
and certainly you could see a wide range of different income 
levels when you go to the Andes in Chile or either the Andes on 
the Argentinean side.
    The mission after the fact--I was really concerned about 
what happened in Peru. The mission after the fact, does that 
embolden people or encourage them to say, yes, you go ahead, 
you grab all the marbles, and he who holds the gold makes the 
rules, and they are going to send a mission after the fact to 
help us to look at the better work in terms of democratization? 
Do you agree with that or disagree?
    Ms. Eddleman. We certainly have concerns about the 
situation in Peru, and your points are well taken. In terms of 
giving you a Departmental position, I would be out of my depth 
in doing that. I don't handle Peru, sir.
    [The information referred to follows:]
       Ms. Eddleman's Written Response to Mr. Sanford's Question
    We certainly have concerns about the situation in Peru, and your 
points are well taken. We support the conclusion of OAS election 
observers that Peru's national electoral process which returned 
President Fujimori to office was not free and fair and failed to meet 
internationally recognized standards. We welcome the OAS General 
Assembly resolution tasking a special mission to Peru to develop 
proposals for democratic reform and we fully support the OAS' work. We 
are urging all parties to the political process to work with the OAS to 
develop and implement reforms to the judicial and electoral systems, 
measures to enhance protection of human rights and freedom of 
expression, and steps to ensure civilian control of the intelligence 
services and armed forces. We will work with the Fujimori government as 
long as it meets its commitments to the OAS and to strengthen 
democracy. However, we are reviewing all aspects of our relations with 
Peru with a view to responding appropriately if these commitments are 
not met.

    Mr. Sanford. Thank you.
    Ms. Eddleman. But I will take it back.
    Mr. Gallegly. Thank you very much, Madam Secretary, for 
being here this afternoon. Again, I apologize for coming in 
late, and I am sure we will be seeing a lot more of each other 
in the future. We appreciate your testimony today.
    If the next panel would come forward.
    I really apologize for coming in here late.
    Ms. Eddleman. Thank you very much for having me.
    Mr. Gallegly. Thanks for working with our folks.
    I want to welcome our second panel today, and it is an 
honor for us to have the Ambassador with us, and I thank you 
for making the trek up here to come and testify before our 
Committee today.
    Mr. Ambassador, we will start with you, and you are welcome 
to start your statement.

  STATEMENTS OF H. E. RUBENS BARBOSA, AMBASSADOR, EMBASSY OF 
                             BRAZIL

    Ambassador Barbosa. Thank you very much, Representative 
Gallegly, for inviting me to be present here in the Committee. 
It is an honor for me to examine the situation in Brazil and 
the relationship with the U.S.
    I will be summarizing my prepared statement, which I have 
already submitted to you, Mr. Chairman, for the record.
    Mr. Gallegly. Without objection, that will be made a part 
of the record in its entirety.
    Ambassador Barbosa. Thank you.
    I have prepared some comments here on the Brazilian--
domestic situation, but I think that the Assistant Secretary 
covered that to a large extent. I just will stress that if we 
could summarize some of what happened in Brazil in the last 10 
years, I would say two words--modernization and democracy. 
Economic modernization has transformed the country, as well as 
the strengthening of democracy after a period of authoritarian 
government. This is the fourth government after the civilian 
rule was back in Brazil.
    In terms of the economy, we are in the middle of a very 
strong program of economic stabilization. We managed to curb 
inflation to restore growth and restore confidence abroad. 
Brazil, due to this situation, today is the third largest 
recipient of foreign direct investment with over $31 billion 
last year. This year we think that the number will be similar.
    In terms of priorities in the economic area, the 
stabilization program and the fight against inflation and 
reduction of the fiscal deficit remain priorities of the 
government. The social reforms and the strengthening of the 
allocations for these social areas--education, health, social 
security--are also top in our priority. The improvement, the 
consolidation of democracy, is also our main priority.
    In terms of foreign policy, I think that I should mention 
that is a top priority for us--the consolidation of the 
regional trading bloc. Mercosur, integrated by Argentina, 
Brazil, Uruguay, and Paraguay, and also the efforts to 
consolidate South America as a unit. The reference was made 
here about the summit, and perhaps I could discuss further 
that.
    Also, we are committed to discussing at this stage the 
FTAA, the Free Trade Area of the Americas. But it is important 
when one considers the Brazilian position in relation to 
regional integration, both in South America and the hemisphere, 
to understand that as far as Brazil is concerned the major 
trading partner for us is not the United States; it is Europe, 
considered as a bloc.
    Twenty-eight percent of our trade is with Europe. The 
United States comes normally third after South America. Last 
year, due to the recession and other reasons, the United States 
became the second largest trading partner. Individually, of 
course, the United States is the biggest trading partner we 
have. But as a group, South America comes second, and the 
United States comes third. So this has to be seen in 
perspective when one tries to understand our position in 
relation to the trade negotiation.
    As far as U.S.-Brazil bilateral relations, we never had 
such a good stage. It is an excellent level. We have developed 
in the last years a convergence of values, of frank, 
transparent dialogue. For many years, I can't remember a better 
period in our relations.
    Brazil is important to the U.S., as the U.S. is important 
to Brazil. As I said, individually, the U.S. is the major 
trading partner, the largest investor, we have good cooperation 
in all areas. And Brazil, for the United States is also, as we 
see it, important. We are the 11th trading partner to the U.S. 
The U.S. stakes in Brazil are enormous, perhaps not always 
appreciated here, understood here.
    You have U.S. interests U.S. companies have the largest 
investment--foreign direct investment in Brazil than in any 
other emerging market countries, including Russia, China, 
India, and even Mexico, to my surprise. U.S. investment in 
Brazil is 50 percent higher than in Mexico.
    If you take the 500 top U.S. companies, the Fortune list, 
over 420 are based in Brazil. So, in trade, as I said, we are 
the 11th trading partner with you, with $13 billion exports to 
Brazil. In the last 5 years, the U.S. has developed a trade 
surplus with us. Coming down, it is true. Last year we had 
nearly $2 billion or $1.9 billion deficit.
    Brazil is one of the few countries with which you have a 
surplus, and this has not prevented Brazil from being perhaps 
severely affected by restrictions in our exports to the United 
States. It happens, and I am not questioning that the United 
States, is the most open, the most liberal country in the 
world, is an importer of last resort with $200 or $300 billion 
deficit. But it happens that--in the case of Brazil, most of 
our main products are affected by restrictions. If you are 
interested, we can come back to this point.
    In terms of the hemisphere, I think that the Brazilian view 
is that after NAFTA the economic geography of the hemisphere 
changed. We clearly have three different areas. You have North 
America, with Canada, Mexico, and the United States; you have 
Central America and the Caribbean; and you have South America.
    This is a reality, and we think that the time is right for 
a new approach, a fresh approach toward the hemisphere in which 
U.S. economic and foreign policy would take into consideration 
the differentiations that exist in the Hemisphere, not only in 
terms of the individual characteristics of the countries, but 
also about the different characteristics of the regions that 
exist in this area.
    South America is the case in point. Even though we hear 
much about Latin America here and about Latin countries, after 
a year here in the United States as Ambassador, I can say that, 
as I see it, when you speak about Latin America, you are 
speaking actually about Mexico and about Central America, not 
about South America. This is a question--an important question 
to be discussed.
    We are giving importance to South America, as it was 
mentioned here, because we think that South America has a 
common history, common values, and we are, for the first time 
ever holding this meeting which will take place on the 31st of 
August. It will be the first ever summit among heads of states 
of the region. We have a defined agenda. We will be discussing 
a strengthening of democracy. We will be discussing drug 
problems. Most important, we will be discussing regional 
integration, physical integration, in terms of energy, 
communications, and telecommunications.
    This is good, I think, for everybody. It was mentioned that 
the U.S. Government has supported this initiative, which will 
open new opportunities of doing business and trade between the 
north, the United States, NAFTA, and us.
    For you to have an important view of the meaning of this 
meeting, you know that in energy, for instance, South America 
is self-sufficient in oil, natural gas, coal, and water, which 
is a precious commodity. This will be discussed for the first 
time in the future.
    The main priorities, as Brazil sees it, in the region are 
the strengthening of democracy, fighting drug, and trade and 
investment. We are committed in the negotiations in Mercosur as 
our top priority. The expansion of Mercosur to South America, 
including other countries, the Andean countries as associate 
members, and the discussion about the FTAA. Of course, we will 
be discussing the FTAA, the Free Trade Area, according to our 
national interest, as you will be discussing according to your 
national interests.
    There are principles that the presidents of the region, the 
hemisphere, have approved. They will be following these 
principles--the market access, reciprocity. We think that by 
2005 we have a reasonable chance to have something in place.
    So I think that the relationship between Brazil and the 
United States is excellent, and our views on the hemisphere are 
shared. The increased consultations between our two countries 
in this frank and transparent way, covering all of these areas, 
are good and are positive, fruitful to our two countries.
    I think that the title of this hearing, the strategy of 
Brazil-U.S. as strategic partners or regional competitors--as 
we see it, we see the United States as a strategic partner. We 
would like to have the same view from the United States, 
because the stakes between Brazil and United States are of a 
sort that there is no alternative to this strategic 
partnership.
    Thank you very much.
    [The prepared statement of Ambassador Barbosa appears in 
the appendix.]
    Mr. Gallegly. Thank you very much, Mr. Ambassador.
    Mr. May, Director of MERCOSUL, would you please present 
your statement?

STATEMENT OF MICHAEL A. MAY, DIRECTOR, MERCOSUL--SOUTH AMERICA 
    PROJECT, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

    Mr. May. Thank you, Mr. Chairman.
    My name is Michael May. I direct the Brazil MERCOSUL 
project at the Center for Strategic and International Studies, 
and I would like to make some brief points and request that my 
testimony be placed in the record.
    Before beginning, I would like to recognize Brazilian 
Ambassador Barbosa, who has worked tirelessly to improve U.S.-
Brazil relations, and he has pursued his mission energetically 
and is very active in developing meaningful links between 
Brazil and the Members of the Congress.
    Mr. Gallegly. Without objection, Mr. May, your testimony 
will be put in the record in its complete form.
    Mr. May. Thank you.
    I congratulate you and the Subcommittee for holding this 
timely hearing and encourage you and others to make additional 
fora available dedicated to Brazil, Argentina, and the 
democratic and stable countries of the Southern Cone.
    I have been dealing with Brazil professionally for 20 years 
and still find that U.S. relations with Brazil are somewhat of 
an enigma. Few other countries with the strategic size and 
economic and commercial potential are as ignored by U.S. policy 
makers and the Congress as Brazil. The U.S.-Brazil relationship 
should not suffer from benign neglect. We should give 
sufficient attention to it.
    CSIS has congressional outreach, and with the support of 
some of your colleagues such as Mr. Davis we have developed the 
Brazil MERCOSUL congressional study group. The 19-member 
congressional study group is to be used as a resource for the 
Congress in helping to expand its knowledge and focus on this 
increasingly important region of the United States.
    The CGS has counterpart groups in the Brazilian and 
Argentine Congress. One of the members--a Brazilian Congressman 
is sitting here today, Deputy Roches.
    It is interesting. CSIS has sponsored four fact-finding 
visits of 28 key congressional staff to Brazil in MERCOSUL. For 
most of the staff, it was their first visit to anywhere in 
Latin America. The majority of the group had been to Taiwan and 
other countries in Asia, but it was their first trip into the 
region. This is an example of the need that we need to do to 
get more of an interchange and raise the level of 
understanding.
    I think, unfortunately, far too often the institutional 
memory of the U.S.-Brazil relations among most of our policy 
makers is short, and maybe it goes back to the election of 
Cardoso, the real plan. I believe that it contributes to 
perhaps somewhat of an inconsistent relationship.
    U.S. policy makers paint Latin America with a very wide 
brush, and very often consider South America to be an extension 
of Mexico. Brazil is of continental size. It has a land area of 
3.3 million square miles. It has a huge manufacturing 
potential, $900 billion GDP, and a population of about 170 
million Portuguese-speaking people.
    Brazil's economy is larger than that of Russia's, and it 
attracts about five times more American investment than China. 
Today, the Brazil-U.S. relationship is more mature and dynamic, 
and both sides are attempting to increase levels of respected 
communication. Through trials and error, we have established an 
effective working relationship as both countries concentrate 
more on expanded trade and commerce.
    I believe that it is very important for the United States 
to recognize that Brazil, not unlike Canada or closest allies 
in Western Europe, will pursue an independent foreign policy. 
This is natural, and it is indicative of a mature relationship 
built on mutual respect.
    Brazil's involvement in MERCOSUL is very important. As 
mentioned, MERCOSUL consists of Argentina, Brazil, Paraguay, 
and Uruguay. It was formed in 1991, and Chile and Bolivia are 
associate members. It is the third largest trading block in the 
world, has a GDP of about $1.3 trillion, a population of over 
200 million people, and it accounts for over 50 percent of the 
industrial output of Latin America.
    Brazil is by far the largest member country of MERCOSUL, 
accounting for more than two-thirds of the block's GDP. 
Argentina's percentage is about 25 percent.
    Although there has been some tension between Brazil and 
Argentina, both countries are working hard to resolve trade 
problems, and MERCOSUL is a fact of life. The currency issue is 
problematic. Brazil's real floats while the Argentine peso is 
pegged one on one with the dollar by a currency board. This 
issue will probably continue to cause some amount of tension.
    But despite the continuing problems that face MERCOSUL 
countries, such as the same problems that would face the U.S. 
and Canada, and the U.S. and Mexico, Chile--the group is very 
cohesive. Chile plans to become a full member of MERCOSUL. It 
is clearly in the best interest of the United States to engage 
Brazil, to engage MERCOSUL. We should not be afraid, nor be 
ignorant of this group. We should understand how it functions, 
and we should try to engage it as much as possible.
    The European Union's predatory and aggressive agricultural 
policy has been a major hindrance to EU-MERCOSUL integration. 
Nevertheless, the European Union continues to aggressively 
pursue a free trade agreement with MERCOSUL, while the United 
States remains, unfortunately, on the sidelines.
    MERCOSUL's democracy clause has been instrumental in 
maintaining democracy in Paraguay. Brazil played a very, very 
key role in this. I think that democracy is in Paraguay in 
large part due to Brazilian involvement. The MERCOSUL countries 
have dramatically reduced tensions by reducing their militaries 
and eliminating missile and nuclear programs.
    Brazil has also cooperated with the United States in 
mediating the Peru-Ecuador border conflict, and it will be 
interesting to see how close the two countries will be as far 
as cooperating on Colombia.
    The Ambassador mentioned about the summit that is coming 
up. I think this is a very natural meeting. It is one that the 
U.S. should support, and it is one that the U.S. should 
continue to be involved with as much as possible.
    The Free Trade of the Americas, the FTAA, is projected to 
conclude in the year 2005. Despite public statements by the 
Administration, and some in Congress, without fast track 
negotiating authority, the U.S. is perceived in the region as 
aloof and unconcerned. Despite the fact that U.S. negotiators 
have been diligently taking part in the FTAA working groups, 
the perception remains that the FTAA, and especially the 
southern part of South America, are not priorities for the 
United States.
    The next administration and Congress should cooperate to 
enact fast track and take other strong concrete actions to show 
Brazil and the MERCOSUL democracies, and the hemisphere as a 
whole, that we are indeed serious in developing strong ties 
with this increasingly important region.
    Brazil and the United States will be the final set of FTAA 
co-presidents in the period immediately prior to the conclusion 
of the negotiations of FTAA in 2005. I think it is very clear 
that there will be no FTAA unless the United States and Brazil 
are fully engaged in this process.
    I will leave the trade and investment issues--they have 
been covered--for my colleague from the Chamber. But I would 
like to make one small point on that, that about 2 months ago 
the U.S. and Brazil signed an agreement whereby American 
companies can launch satellites from Brazil's Alacontra Space 
Center. This is yet another example of the importance of the 
strong and maturing relationship that the two countries have 
been able to develop.
    Finally, regarding the future, one of the most interesting 
problems affecting the two countries is a surprising lack of 
knowledge about each other that perhaps may exist amongst the 
average person. I encourage Congress to take a proactive role 
in visiting Brazil, and especially meeting your Brazilian 
congressional colleagues. CSIS's congressional study group 
would be pleased to help in this effort.
    I would suggest that both countries investigate ways to 
streamline the tourist visa processes, to encourage more 
interaction of our people. It is interesting that there are 
more American tourists that visit some small Caribbean 
countries than visit Brazil. Brazil is just a beautiful country 
and very inviting.
    The future will bring its share of disagreements, but they 
will be differences among friends. The U.S. and Brazil are 
distinct countries with specific vital interests. Although 
there is agreement on most issues, and I repeat most issues, we 
will not agree with Brazil on everything. The important point 
for both countries is that, even in disagreement, they continue 
to strive for better understanding and to never lose sight of 
the strong bond and friendship that exists between the two 
countries and their peoples.
    Thank you.
    [The prepared statement of Mr. May appears in the 
appendix.]
    Mr. Gallegly. Thank you very much, Mr. May.
    Our next witness is Mr. Mark Smith, Executive Director, 
U.S.-Brazil Business Council.
    Mr. Smith?

   STATEMENT OF MARK SMITH, EXECUTIVE DIRECTOR, U.S.-BRAZIL 
                        BUSINESS COUNCIL

    Mr. Smith. Thank you very much.
    Good afternoon, Mr. Chairman and Members of the Western 
Hemisphere Subcommittee.
    I am Mark Smith, and I am the Executive Director of the 
Brazil-U.S. Business Council, and Director of Latin American 
Affairs for the U.S. Chamber of Commerce. I appreciate the 
opportunity to testify today regarding the prospects for the 
Brazil-U.S. relationship.
    The Brazil-U.S. Business Council is an organization focused 
on promoting a strategic partnership between Brazil and the 
United States, to increase the flow of trade and investment 
between our two countries. The Council has two country 
sections--one in the United States based in Washington, which 
represents 65 of the largest direct U.S. investors in Brazil, 
and one in Brazil, based in Rio de Janeiro, which represents 
major Brazilian corporations with interest in the United 
States, as well as Brazil State Federation of Industry and key 
trade associations.
    Brazil is the top priority market for any U.S. company with 
a global perspective. In 1999, according to the U.S. Department 
of Commerce, the total stock of U.S. foreign direct investment 
in Brazil reached over $35 billion, surpassing Mexico, which is 
$34 billion, and reaching 4\1/2\ times the level of U.S. direct 
investment in China.
    From the trade perspective, Brazil is the U.S.'s 11th 
largest export market in the world and still growing. Many are 
surprised to hear that the U.S. exported more to Brazil last 
year than to China, but this is only part of the picture. While 
the U.S. had a $68 billion trade deficit with China last year, 
it enjoyed a $1.9 billion surplus with Brazil.
    Since President Collor began opening the Brazilian economy 
in 1991, U.S. exports to Brazil have more than doubled, 
reaching over $13 billion in 1999. This opening has created 
significant opportunities for businesses all over the United 
States, particularly in Florida, California, Texas, New York, 
and Illinois, which are the top five states in terms of total 
exports to Brazil.
    The numbers tell a compelling story. Today, Brazil is 
Florida's No. 1 export destination. From 1993, Florida exports 
to Brazil increased 312 percent. During the same period, 
California exports increased 215 percent, Texas 290 percent, 
New York 207 percent, and Illinois 375 percent. Other states 
have also benefited. Georgia exports over this period to Brazil 
increased 768 percent, while Ohio exports increased over 420 
percent.
    The opening of the Brazilian economy has also changed the 
nature of Brazil-U.S. trade flows. Whereas, prior to opening 
its economy, Brazil enjoyed large surpluses with the United 
States, Brazil saw those surpluses dry up and become 
increasingly sizable deficits, reaching as high as $6.28 
billion in 1997. From 1991 to 1999, U.S. exports to Brazil 
increased 114 percent, while Brazil exports to the United 
States increased only 68 percent.
    This trade imbalance has defined Brazil's trade agenda with 
the U.S. ever since. Many in the Brazilian government and media 
contend that the deficit is largely a result of U.S. 
protectionism in many of its key export areas, particularly 
steel, orange juice, and footwear. However, this scenario is a 
bit more complex.
    While the U.S. does employ tariff quotas and other measures 
to protect its businesses in many of these areas, it remains 
the most open market in the world. No one disputes that 
Brazil's exports are negatively impacted by these protections. 
However, they are not the most significant reasons for Brazil's 
trade deficit to the United States.
    The disconnect between Brazil's export portfolio in the 
areas of strongest growth in U.S. demand, competitive 
challenges from other nations, and the failure of Brazil to 
create a recognized national brand in the United States, are 
the principal factors behind Brazil's export performance.
    As many of you know, early last year, Brazil underwent a 
maxi devaluation of its currency with the real losing close to 
40 percent of its value vis-a-vis the U.S. dollar. The 
devaluation had a significant impact on both the Brazilian 
economy and Brazil-U.S. trade flows.
    Due to the decrease in Brazilian purchasing power, U.S. 
exports to Brazil fell 13 percent last year, while a cheaper 
real helped Brazil increase its exports to the U.S. by 12 
percent, bringing the trade deficit down to $1.8 billion, from 
$5.04 billion in 1998.
    Although Brazil's devaluation should help decrease Brazil's 
trade deficit with the United States, it clearly will not be 
enough. In order for Brazil to even the trade gap in the long 
term, it is going to have to take a hard look at its export 
strategy and take decisive measures to address the challenges 
that I have outlined.
    Despite causing considerable pain for Brazilian consumers 
and heartburn for U.S. investors, the devaluation allowed the 
Cardoso administration to introduce an inflation targeting 
regime that will lay a firm foundation for sustainable growth 
well into the future. The short-term results of the regime are 
impressive.
    Brazil expects to meet the primary surplus numbers agreed 
to with the IMF, as a part of its financial assistance package. 
Real interest rates are at their lowest level since the launch 
of the real plan in 1994. Inflation is expected to end this 
year below 6 percent. Brazil is expected to grow at least 4 
percent this year.
    Although we believe that Brazil has truly set the stage for 
a new burst of growth and prosperity, there are some dark 
clouds on the horizon. Investors are increasingly concerned 
about the rising popularity of leftist policies and an 
increased degree of nationalism among key segments of the 
Brazilian population and government.
    Over the last year and a half, there have been several 
events that have highlighted this issue. The annulment of tax 
incentives connected to Ford's investments in the state of Mato 
Grosso, and the efforts of the state of Minas Gerais to limit 
the shareholder's rights of Southern Company, the state's 
electrical utility, are notable examples.
    Currently, the Brazilian government is trying to pressure 
the pharmaceutical industry into voluntarily freezing prices 
until the end of the year. We remain confident that the Cardoso 
administration will continue to move forward with its 
impressive efforts to open the Brazilian economy, but are 
closely monitoring this disturbing trend.
    Now that I have shared the Council's analysis of the 
commercial relationship, I would like to highlight two of the 
most important bilateral and regional issues that our member 
companies are looking at. Our members feel very strongly that 
the negotiation of the Free Trade Area of the Americas should 
be given top priority by both governments and congresses.
    The United States should move quickly to cement the terms 
of our commercial relationship with Brazil and the region 
through an accelerated negotiation of this important trade 
agreement. Fast track has become the measure of U.S. leadership 
in, and commitment to, the region. Congress' ability to pass 
fast track legislation limited to trade issues would allow the 
U.S. to take the initiative and move the negotiations forward 
at a quicker pace.
    The longer the U.S. remains without fast track, the more 
countries will decide to hedge their bets by pursuing other 
trade integration options with their partners in the 
hemisphere.
    Why is the FTAA important? The U.S. doesn't have a trade 
agreement that ensures preferential access for U.S. exports in 
good times and bad with Brazil as we do with Mexico in the 
NAFTA. This lack of certainty increases the risk of doing 
business in Brazil for all companies, most significantly for 
smaller companies who don't have the resources to absorb this 
level of risk.
    When Mexico went through a devaluation in 1995, our trading 
preferences were protected by NAFTA. As Mexico's GDP plunged 8 
percent, the U.S. actually gained market share vis-a-vis our 
European and Asian competitors.
    Advancing the negotiation of the FTAA is also critical 
because Mercosur is aggressively moving to advance negotiations 
with our competitors in the region and in Europe. These 
agreements would give our competitors preferential access to 
the Brazilian market, and could facilitate the erosion of U.S. 
market share in Brazil.
    The fact that Spain surpassed the United States as the No. 
1 foreign direct investor in Brazil last year illustrates that 
this competitive threat is very real. President Cardoso and 
President Frei's announcement in June that Chile will be 
joining the block as a full member should also serve as a 
wakeup call for the United States.
    The U.S. cannot afford to sit on the sidelines as our 
competitors gain preferential access to the Brazilian market. 
We have got to make the FTAA negotiation a top economic 
priority and regain our leadership in the hemispheric 
integration process.
    Working with Brazil to promote legal and regulatory 
framework that promotes electronic commerce is also a top 
priority of the business community. This is an area where we 
believe the Members of the U.S. Congress can be particularly 
helpful by sharing their experiences and lessons learned with 
their Brazilian counterparts.
    Specifically, the Council is working to support electronic 
signatures legislation in Brazil that is technology neutral and 
broad enough in scope that it will promote the spread of e-
commerce. The business community is also focused on postal 
legislation in Brazil that could subject the express shipments 
industry to regulation by its competitor, the Brazilian Postal 
Service.
    The title of today's hearing poses the question: Are Brazil 
and the United States strategic partners or regional 
competitors? I would submit that our countries are both, but 
add that our competition and partnership extends beyond the 
Western Hemisphere and emphasize that the partnership and 
competition are not mutually exclusive.
    While our countries are working together in the areas as 
diverse as the elimination of agricultural export subsidies in 
the WTO, and the construction of an international space 
station, we are also vigorous competitors. From a business 
perspective, the issue is not whether we will compete, but, 
rather, how we will compete.
    The Council believes that the businesses and consumers of 
both countries will ultimately benefit from open and fair 
competition on a bilateral, regional, and global level. The 
challenge for our public and private sector is to build a 
framework for this competition based on shared goals and 
principles.
    As those of you in Congress well know, building consensus 
requires a strong desire and a lot of effort. Given that Brazil 
is our second-fastest growing export market in the world after 
Mexico, we believe that the benefits of this partnership far 
outweigh the investment required.
    I would just like to close with a thought about the future 
of our economic and political relationship with Brazil. 
Recently, President Clinton traveled to Japan for the meeting 
of the G-7, where he discussed the global challenges presented 
by the 21st century. As we look to the future, we have to ask 
ourselves, is he talking to the right people?
    Currently, the G-7 has no representatives from the 
developing world, even though Brazil's economy is the eighth 
largest in the world. If we are going to overcome the 
challenges of this new century, we are going to need 
institutions that more accurately reflect the political and 
economic realities of the world in which we live. This means 
providing a seat at the table for leaders of the developing 
world, like Brazil.
    I would like to encourage you to take a closer look at the 
impact of Brazil-U.S. trade and investment on your district and 
our country, and thank you very much for the opportunity to 
testify.
    [The prepared statement of Mr. Smith appears in the 
appendix.]
    Mr. Gallegly. Thank you very much, Mr. Smith.
    Mr. Ambassador, some of the folks in Brazil--and I think 
including the press--raised the concern that the U.S. is trying 
to undermine Brazil's growing international role and to 
undermine the country's aspirations for political and economic 
autonomy. How do you respond to that and assess that, at least 
as it relates to what appears to be suspicions?
    Ambassador Barbosa. After a year here in Washington, I can 
say that I haven't seen, on a concrete basis, any action that 
would go in that direction. I see, on the contrary, a growing 
recognition of Brazil as a partner, and as a country in the 
hemisphere that shares the values, the principles, and could 
forge an important strategic partnership to the matters in the 
hemisphere.
    We are not concerned about that. We read much things in the 
press. But I don't think--and I couldn't see by myself here in 
any way this--an action in that sense. Of course, as it was 
said here, being strategic partners doesn't mean that we agree 
on everything. We have our own positions. You have your own 
positions, and we respect that.
    There is a growing respect between the two countries, and 
this is a good sign.
    Mr. Gallegly. I think that is encouraging. But the fact 
remains there are some, and it is my understanding, it happens 
rather frequently in the press, that there is this underlying 
concern for the U.S., or at least suspicion that the U.S. is 
making an effort to undermine the country's political and 
economic aspirations.
    But you say that that is really not the belief of your 
office, or the people that you represent in the government?
    Ambassador Barbosa. Brazil is a developing country. Our 
action is focused on the region, and we don't see any action 
from the U.S. to the contrary. Now, we just saw how the 
administration is supporting the Brazilian initiative in South 
America.
    The only point in which we have some strong disagreement is 
in the trade area. We disagree in some areas in Geneva, in the 
WTO, and we disagree on anti-dumping, on subsidies, on specific 
issues. But, in general, in the bilateral relations, I don't 
see any major problem.
    Mr. Gallegly. Just disagreeing doesn't mean that there is 
an attempt to undermine. I really wanted to get your assessment 
if those suspicions were prevalent, or whether they were just 
sporadic, and I think you have answered the question.
    Obviously, there are going to be differences as we go 
along. That is healthy. Differences, I think, are healthy, 
depending on how broad the differences are. But the fact 
remains is that suspicions of undermining is a lot more serious 
than--or at least the perception of undermining is a lot more 
serious than having some reasonable differences on respective 
trade policies.
    Ambassador Barbosa. From our point of view, from the 
Brazilian point of view, we don't see any--we don't hear any--
in any way, this threat of undermining us in the world forum.
    Mr. Gallegly. I am pleased to hear that, and it appears 
that you have very definite feelings about that. I appreciate 
that, Mr. Ambassador.
    Mr. Ackerman?
    Mr. Ackerman. Thank you very much.
    Mr. Ambassador, in your statement, you enumerate a number 
of things that you believe restrict products from Brazil to the 
U.S. market. We would argue, I think, that some of these items 
are legitimate forms of--come under the rubric of concern that 
U.S. consumers have for safety for the products that we buy and 
the standards that we have.
    How can we reconcile your concern for access to the markets 
with our consumers' concern with safety?
    Ambassador Barbosa. The main items that are restricted 
actually meet the standards here. It is a question of 
protection for areas here, industries that sometimes feel it 
difficult to compete. In the case of steel, the most pressing 
point for us, it is clear, we met all of the standards here.
    We compete with other countries. There is not the question 
of standards of this product and the quality of the product. It 
is really a question of restrictive measures to, in some cases, 
protect some industries here.
    Mr. Ackerman. In the areas of labor and environmental 
standards, how do you respond to the position of most of our 
citizens that they are entitled to protect the environment?
    Ambassador Barbosa. In the case of labor standards and the 
environment, Brazil is comfortable to say that we abide by most 
of the conventions of the ILO, and we changed completely the 
approach toward the environment. Today, in Brazil, there is a 
growing concern by the population about the preservation of 
nature, the rain forest, and preservation of all standards. 
This is one thing.
    Another thing is the question of inclusion in the WTO, or 
in the FTAA for that matter, of a reference to labor standards 
and environmental criteria, because one thing is to discuss 
labor standards and environmental in their appropriate fora, in 
the ILO.
    Another thing is to draft a clause in a trade agreement, 
taking into consideration labor standards for export, for the 
transactions. So we think that labor standards and 
environmental issues could be easily taken by countries to 
protect their economies.
    In the case of Brazil, speaking for Brazil, we have still 
some social problems. But they are not linked to trade. It is 
probably not revealing any secret, we have as the government 
has acknowledged, a problem of child labor in some areas, but 
not related to export. This could be seen by importing 
countries as an area that could be invoked to restrict products 
in the future.
    So Brazil has a very strong view against inclusion of labor 
standards and environmental issues in trade agreements. This is 
a very strong position that we take, we took in Seattle, and we 
will be discussing this in international fora.
    Mr. Ackerman. Let me try this with Mr. May, if I might. How 
would you explain the Brazilian government's differing 
reactions to the political crisis in Paraguay with the clearly, 
in our view, flawed electoral process in Peru?
    Mr. May. I think in the case of Paraguay, first of all, 
there was a consensus that the country was literally on the 
verge of a violent perhaps civil war. The Brazilians took a 
very proactive position, with the support of Argentina, the 
U.S., and some others.
    In the case of Peru, Brazil's policy is to support 
democracy. But I think its traditional approach, if you look in 
terms of the way Brazilian foreign policy has functioned, 
literally since--I would say the last 20 to 50 years--they tend 
to go about working behind the scenes and taking a rather low-
key or less high-profile approach.
    I think that it is safe to say that the Brazilian Foreign 
Ministry is closely involved in monitoring what is happening in 
Peru. I think it is more or less a difference of approach. The 
U.S. has taken a position that what has happened there is not 
propitious for the development of democracy, and many feel that 
Fujimori has not done the right thing.
    I can't speak for the Brazilian Foreign Ministry, but I 
would think that their view is that they would also like to see 
a return to a fully democratic Peru. In their view, this is the 
best way of bringing it about.
    Mr. Ackerman. Did you want to comment on that, Mr. 
Ambassador?
    Ambassador Barbosa. I agree. In relation to Paraguay, in 
Mercosur, we included what we call the ``democratic clause''. 
We borrow that from the European Union. So there is a mechanism 
in Mercosur that gives the right for the members to, if it is 
the case, if the constitutional law is not complied with by a 
specific country, to suspend that country.
    Mr. Ackerman. Are you talking about the 1080 process?
    Ambassador Barbosa. What?
    Mr. Ackerman. For Mercosur, OK.
    Ambassador Barbosa. Mercosur. We have that, the democratic 
clause. This is important. That is why Brazil, Argentina, the 
way we helped to find a political solution in Paraguay. This 
was a more proactive role.
    In the case of Peru, I think that what May said is true. We 
tend to take a more--a less conspicuous, a less high-profile 
position. Our style is different. We don't go to the press. We 
don't go--we don't put pressure in public.
    But we are not unaware of the situation, and we are 
concerned because you may appreciate that Brazil has borders 
with all but two countries in the region. We have 10 
neighboring countries, and we follow very closely all of the 
situations, political situations, in countries, neighboring 
countries to us.
    Mr. Ackerman. I appreciate that.
    I only have one more question, if we have the time, for Mr. 
Smith, if I could. Your statement commends President Cardoso 
for his economic team, for getting what you say is the economy 
back on track. With that in mind, how much of Brazil's 
structural reforms depend upon the president himself? Or, to 
phrase it a different way, if the president--and when the 
president leaves office, will Brazil continue down that same 
macroeconomic reform path?
    Mr. Smith. I would have to say that I don't think that 
Brazil's path toward reform is completely vested in the person 
of President Cardoso. The fact is that the overall Brazilian 
society has supported his efforts. In fact, the Congress, which 
I hope that you feel as I do that represents Brazilian society 
quite effectively, has also been very supportive in all of his 
efforts and been very involved.
    In fact, if you take a look at what has taken place in the 
tax reform discussion, which we view as probably one of the 
most important structural reforms that still needs to take 
place in Brazil, President Cardoso has lost a lot of the 
momentum in the process. Brazilian government has really been--
the Brazilian Congress has been driving the issue.
    So I think that is an indicator that these reforms are 
universally--I wouldn't say universally--are widely held to be 
good and necessary, and I believe that the Brazilian population 
realizes that without making these reforms the Brazilian 
economy is not going to be the global competitor that they want 
it to be.
    Mr. Ackerman. Thank you.
    Mr. Ballenger. [presiding] Let me ask a question I guess of 
anybody that wants to answer. But I think we are probably 
speaking of a quotation from you, Ambassador. You have been 
quoted recently as saying Brazil was not terribly anxious to 
negotiate a Free Trade of Americas Agreement, that the priority 
was to revitalize and possibly expand Mercosur. Would you react 
to that?
    Ambassador Barbosa. This has to be seen in the context I 
gave to you. we have our top priority, the consolidation and 
deepening of Mercosur, and negotiation with the other South 
American countries to become associate members of Mercosur. 
This is our top priority.
    In relation to the FTAA, Brazil is committed at this stage 
to negotiate in all working groups, the nine working groups 
that exist. We prepared a paper. We are discussing in earnest, 
in a transparent way, and we think that by April 2001, which is 
the limit for the drafting of this trade agreement, we will 
have a draft--preliminary draft of the agreement, with brackets 
in many parts, but we will have one.
    Brazil is cooperating with that. This is one thing. Another 
thing is the trade negotiation, the preferences that will take 
place after that, by 2002 or 2003. We will have to enter into 
meaningful trade negotiations. At that stage, we think that 
fast track is important.
    If there is no fast track, it will be difficult, not only 
to Brazil but to all other--32 countries in the hemisphere, to 
enter into negotiations, because the major partner--the United 
States--will not have a clear negotiating position. The 
statement has to be seen in this context.
    Mr. Ballenger. Mr. May?
    Mr. May. Yes. Three quick points. I think, first of all, 
Mercosur continues to be consolidated. If there is a down side 
about Mercosur, that it still needs institutions and 
infrastructure. I think the four countries in Mercosur, 
including the two observing countries, are in the process of 
putting more flesh on the bones. That is a process that is 
ongoing.
    The second thing is, is that there is a certain concern 
inside Brazilian industry, among certain sectors, about opening 
up a bit too quickly and perhaps being inundated by other 
goods. They need time to make themselves a bit more 
competitive. I think that there is a final view that goes 
beyond Brazil that covers most of our trading partners in South 
America, and that is a view that no one really wants to go too 
far, give away too much, until they really know what the 
posture of the United States is going to be.
    At this point, even though our professional negotiators are 
working very hard, along with the other professional 
negotiators on the FTAA, there is no official political 
commitment, i.e. the fast track process, and that is viewed 
very, very strongly, is a very strong signal in the region that 
the U.S. is, indeed, competitive. Without that, it is like, you 
can still walk away, you can still not really get involved. I 
think that it all--those three points reflect Brazil's 
position.
    Mr. Ballenger. I would like to throw in something that will 
fit with what I think you are going to say to me. As a Member 
who supported NAFTA, spoke strongly for NAFTA, I would say that 
NAFTA would have one heck of a time getting through this body 
again right now.
    I think in speaking with the Chamber, when you want to talk 
fast track, somewhere along the line I think if we can ever get 
either of our Presidential candidates to--you will notice that 
neither one of them are saying anything about NAFTA. Nobody 
said anything about fast track, nobody said anything about 
world trade, because it doesn't win anybody any brownie points 
as far as the election is concerned.
    It is an issue that I think somewhere along the line the 
money of the Chamber and its membership could be well spent in 
being the positive advertiser of what it has accomplished. The 
fact that most people don't know what fast track is back home, 
somebody needs to tell them. You all have money; go ahead.
    Mr. Smith. Thank you very much for spending our money in 
advance. I would just like to add one quick point about the 
Mercosur consolidation. Recently, as I mentioned in my remarks, 
President Lagos and President Cardoso have announced that Chile 
will be entering as a full member of Mercosur.
    This raises some very interesting questions because Chile's 
average tariffs are quite a bit lower than the average tariffs 
of the common external tariff in Mercosur. So, actually, if 
Chile was to enter--Cardoso also recently mentioned that he 
wouldn't expect that Chile would be raising--Chile to raise 
their tariff duties.
    So, in fact, the consolidation of the Mercosur process 
could perhaps be a very good step toward the eventual FTAA 
negotiation and be a middle ground whereby Brazilian industry 
could get--have more time and get used to competing with lower 
tariffs.
    In terms of the trade education process, the Chamber has 
identified that as the No. 1 issue for us, in terms of the 
international area. We have been working very heavily, 
particularly on the China PNTR, to make the case for trade. I 
think the fact is that we were very happy to hear that 
Candidate Bush mentioned the FTAA during his remarks on the 
border with Mexico. That is the first time any major candidate 
has mentioned it as a part of this process.
    So there is a whole lot of work to be done. The Chamber has 
raised a whole lot of money and is putting together a program 
called trade routes that went to all of the districts where we 
thought we could have the most impact. I believe it is 65 U.S. 
Congressional districts.
    Also, there is efforts by the business round table to do a 
similar thing. So we are trying to put our money where our 
mouth is, but it is a huge undertaking and it is not going to 
be a process that we are going to change people's sentiments 
overnight.
    Mr. Ballenger. Yes. But you don't have to run for 
reelection, so you can go ahead and do it.
    Mr. Smith. There we go.
    Mr. Ballenger. I have one thing more. I would like to say, 
having been to Brazil several times, you all at one time when I 
was there were converting your automobiles to pretty much a 
blend of alcohol and--I guess gasoline and alcohol was the 
blend. But you were going a substantially larger percentage of 
alcohol than we had tried in this country.
    Did that turn out to be a way of cleaning up the 
atmosphere? I had heard that maybe it polluted in a different 
manner or something. I mean, I am really speaking to all of 
the----
    Ambassador Barbosa. We have a mix--22 to 23 percent of the 
fuel in any car is alcohol, is a blend they make. But the 
number of cars in Brazil increased so much in big cities, so we 
have this pollution problem. In Sao Paulo, we have a rotation 
by the registration number, so the problem remains there. But 
we are going ahead with this program of alcohol as fuel.
    Mr. Ballenger. But was that not basically because of the 
availability through the sugar--the amount of sugar that you 
had that it went to alcohol, not for pollution, not----
    Ambassador Barbosa. It is a bit of everything. First, when 
we started this program, the oil price was very high, as high 
as it is today. Second, the problem of the environment. Third, 
Brazil is the largest world sugar producer, so we have an 
excess stock of sugar cane. So there is a combination of the 
three elements.
    Mr. Ballenger. I am just curious because there is such a 
big to-do in this country today about the pollution caused by 
automobiles.
    Ambassador Barbosa. You were discussing here the subject. 
It is in the Congress, a piece of legislation about the 
replacement of MTBE for ethanol, and we are following that. It 
is important.
    Mr. Ballenger. But if pollution in Brazil was compounded, 
or was not any better because of the using of ethanol, alcohol, 
or MTBE----
    Ambassador Barbosa. But the fleet of our cars in Brazil 
increased tremendously. Today, we produce nearly two million 
cars by a year, per year. So it is a huge increasing number. 
That is why.
    Mr. Ballenger. I would like to say to any Members that want 
to go, when the times comes if you can, if you want to see a 
big city, it makes New York looks like a puddle jump that Sao 
Paulo. You get on one of their skyscrapers, and there are just 
miles of skyscrapers everywhere.
    Mr. Davis?
    Mr. Davis. I would like to ask each of you, taking into 
account all of the factors that have been discussed today, when 
are you recommending that Congress take up and debate renewal 
of fast track authority with the president with respect to the 
FTAA?
    Mr. May. When?
    Mr. Davis. When?
    Mr. May. If you could do it in the next 5 minutes, it would 
be good since that can't----
    Mr. Davis. No. That is why this is--it is a difficult 
point, and I expect, something relatively sophisticated from 
you all. I don't think the stage is set to debate this in 
January.
    My second question, let me just go ahead and ask this. One 
of the reasons why the permanent NTR for China succeeded in the 
House, in my judgment, was that there was a defined agreement 
established. It was painfully clear who the winners and losers 
were going to be.
    I think that made the debate more constructive because, Mr. 
Ambassador, in our country, as you know, the notion of free 
trade generates a tremendous amount of anxiety. I am sure it 
does in your country as well. When you can put things in a 
little clearer form, it makes it more manageable.
    I don't assume that whatever form a multilateral agreement 
takes with South America is ready to be defined in those terms 
any time soon. It may be critical to do so in order to have a 
constructed debate here in Congress.
    Mr. May, I think if it were to come up in 5 minutes or in 5 
days or 5 weeks, I think we would have the same unfortunate 
result we had a year and a half ago.
    Mr. May. But I think, Congressman, that in the next 
administration, regardless who wins, in the next Congress this 
will be an issue that will have to be addressed. Now, again, 
Congress may not pass it, but it will be forced to address it.
    The interesting point, I think, is that the European Union 
is not waiting. The European Union is taking a very, very 
aggressive position. I think there are some subtle developments 
that occur on this. Is there just the perception that there is 
movement between MERCOSUL and the European Union? In the minds 
of many people who may control some of the bureaucratic 
elements within Argentina or Uruguay or Brazil, or whatever, I 
would think that the tendency would be to be a little more 
favorable to the Europeans because they feel that there is 
this--the countries are gravitating together more.
    On the contrary, the prevailing view in the region is that 
the U.S., because of the lack of fast track is unable or 
unwilling to actually begin the process from--advance the 
process.
    Now, again, at the end of the day, one may not get an FTAA. 
One may get 50 percent of the FTAA, or whatever. But unless we 
have the vehicle by which we can begin this process, then 
everybody is basically going to be standing around and looking 
at each other and saying, ``Well, what do we do now?'' The 
Europeans aren't.
    They are going to be going in, like they have been. I am 
afraid that it is going to cost the U.S. not only jobs and 
exports, but I think it is going to affect the U.S. in being 
able to be taken seriously as an ally and to be able to work 
with the countries of the region on noncommercial issues, 
whether we are talking about the promotion of democracy, 
whether it be in Peru or Colombia or East Timor.
    I think that the U.S. has to be projected as somebody who 
is willing to invest effort and time and energy in this. The 
Congress can play a very large role in that regard.
    Ambassador Barbosa. You have two questions here. Not only 
FTAA, the Congress will have to address also the question of 
the multilateral negotiations that I don't think will have the 
opportunity to be launched this year. But from next year on, 
there is this problem.
    As far as the FTAA is concerned, as I said, in the case of 
Brazil we don't think fast track is necessary now. But it will 
be necessary when we discuss trade preferences, and then it is 
inevitable. This is not only our position. This is the general 
position of all countries in the area.
    We can only negotiate if we know exactly what will be the 
limits of the U.S. negotiators. So we don't expect a serious 
discussion this year, but in the next administration, at some 
point, this will have to be addressed.
    Mr. Smith. I think I would probably agree with you that if 
we threw the fast track bill out there right now, it would--
yes, it wouldn't have such a great future.
    But I think there needs to be a convergence of--or an 
aligning of certain stars for these things to happen, both in 
terms of a president that has a strong commitment to getting a 
clean fast track bill--you have to have an objective that 
people can buy into. I would hazard to say that Brazil is an 
objective worth buying into, and the FTAA is an objective worth 
buying into.
    Then, you have to have, from the grass-roots level, a 
perception that these things are something that would be good. 
That may be something that--I think those first two factors may 
be easier to exist within the next--perhaps the early part of 
next year. Who knows? But there is also a whole lot of 
education in terms of the benefits of trade that needs to be 
done.
    Certainly, the benefits of NAFTA are, we think, quite 
clear. But in the U.S. public perception, they have been quite 
muddied. So that is a debate that really needs to be clarified, 
I think, before there is clear consensus that these things are 
a good idea.
    Mr. Davis. One last question. Mr. Ambassador, I understood 
the concern you expressed earlier about--in response to 
Representative Ackerman's question about the fact that you have 
issues involving labor and the environment that are far broader 
than trade. Having said that, what would be your position about 
a fast track legislation that provided for enforcement in the 
core agreement of labor and environmental issues that were 
trade-related?
    Ambassador Barbosa. I think it would be negative. I think 
that these would make negotiation of multilateral agreements, a 
new round in Geneva very complicated, and the negotiations in 
the FTAA also.
    Mr. Davis. Can you elaborate a little bit on why?
    Ambassador Barbosa. I was in Seattle in December last, and 
I followed all of the areas, all of the debates in the working 
group there. It is not the Brazilian concern. As I said, we 
have a much better situation in terms of social situation, in 
terms of labor than many other countries. This is not a 
domestic problem.
    We had a difficulty in principle. We think, as I said, that 
it would be easy for the developed countries to use labor 
standards as a protectionist measure. For instance, a concrete 
example--we have a minimum wage in Brazil, less than $100. This 
could be taken by a developed country which could say, look, we 
cannot accept Brazilian products because you are dumping us. 
Our minimum wage is $600, and they are paying $100. So it would 
be considered a dumping mechanism.
    So it is very complicated to include these subjects. We 
accept that rules should be defined in the ILO; we accept that. 
We are complying. We accepted and signed most of the 
resolutions there, and we are trying to improve the social 
conditions in Brazil. But to link this with trade, as far as 
Brazil is concerned, the present administration is concerned in 
Brazil, we will resist to that.
    Mr. Davis. Thank you.
    Mr. Ballenger. I think if you would check with the 
Mexicans, you did sign the paper but you don't have to do 
anything about it. They have----
    I would like to just ask you one thing. I have got a 
quotation here that you said. ``We need a fresh Washington 
perspective on South America, a new way of thinking about 
Brazil.'' What is necessary to persuade you that such changes 
are underway, and what do you think Brazil is looking for?
    Ambassador Barbosa. I don't know. This is an internal 
matter, and the foreign Ambassador to speak about domestic----
    Mr. Ballenger. You are safe with----
    Ambassador Barbosa. But since you invited me, I think that 
the problem that South America faces, and Brazil faces in 
particular, is a natural consequence of the approach that is 
prevailing in the U.S. foreign policy and economic foreign 
policy.
    Today, 10 years after the Cold War, we are still concerned 
about national security issues. There is a debate in this 
country, if you read the ``Foreign Affairs'' articles by 
Democrats, by Republicans, by scholars here in this country 
debating this problem--and if you think in terms of national 
interest, not in terms of national security interest, the 
approach would be different.
    A country like Brazil, that doesn't pose any threat to you. 
South America is not a threat in any way to the United States. 
As one of your colleagues said, Brazil is not in your RADAR's 
here, is not in the RADAR, because we are not a threat to you. 
As I tried to point out in my paper, there is a number of 
examples.
    The stakes that exist to the United States and Brazil are 
bigger, are much important to you here, to your companies here, 
than in other big countries, in Russia, China, and India, much 
higher. But the focus is not on South America, not on Brazil. 
It is on countries that are perceived by you here as a threat, 
in any way, political, economic, military, or whatever.
    So this is a point, and a fresh approach that I have been 
discussing here, speaking when I am invited, is that in the 
future, in the coming years, a differentiation should be made 
by the decision makers here. I mean, you have already a policy 
toward North America. You have NAFTA to the Central and 
Caribbean--Central America and Caribbean, you have CBI. You 
approved here recently a new form of CBI.
    But in terms of South America, there is no policy because 
we are not in the RADAR's here. This is the idea.
    If I may just to complement--some of you asked about the 
loan to Brazil--the $41 billion loan that we borrowed in 1998. 
Just for your information, we draw only around $20 billion out 
of this $41 billion. We repaid our $20 billion, $10 billion 
from the IMF and $10 billion from the G-7 countries, and we 
paid everything back with the exception of $1.8 billion to the 
IMF. So everything that we draw we paid back already.
    Mr. Ballenger. Mr. Smith, you had your hand up.
    Mr. Smith. I think that, as you may know, the Brazil-U.S. 
Business Council has been in the process of supporting a Brazil 
caucus chaired by Representative Colby. As a part of our 
recruitment process, we have been going around to offices 
throughout both--on both sides of the aisle. What we have found 
is that people are very happy to meet with us, very excited to 
talk about Brazil. But there is a feeling that Brazil hasn't 
done the kind of marketing effort that a Chile or a Mexico has 
done here in the United States.
    I think it is quite notable that, we have been talking 
about Chile. Certainly, it is a success story in terms of 
opening its market. But in terms of overall size of U.S. 
business with Chile compared to overall size of our business 
with Brazil, it is, not even the size of the state of Sao 
Paolo.
    I think there is two sides of this whole picture. First, 
the Brazilian government, and certainly Ambassador Barbosa, has 
been extremely active in that, and we think this is a great, 
great trend. But there has been, over the past several years, 
not as much of an effort as some of the other more effective 
countries, in terms of increasing their profile in Washington, 
have done.
    Also, I think it is the business--and that is myself--and 
the people that we represent, we are really beginning to 
mobilize ourselves, and I think that we have identified that as 
a real strategic challenge for ourselves as well and look 
forward to working with the Members of this Subcommittee and 
others to make that more of a reality. But we have our work cut 
out for us, and it really requires a partnership on the sides 
of both key elements here in the U.S. that care about Brazil 
and the Brazilian government.
    Mr. Ballenger. Let me just apologize to Ambassador Barbosa, 
because I met with Jim Colby and the Ambassador. Jim said, 
``Cass, how about you getting involved with Brazil?'' But I 
would hope you recognize there is an election going on, and 
Brazil right now is not quite as important as North Carolina.
    Anyhow, I would like to thank you gentlemen for attending. 
I think it has been a very constructive meeting.
    Without objection, I would like to submit, for the record, 
a statement from Congressman Menendez, if that is satisfactory 
with you all.
    The Committee is adjourned.[The statement of Mr. Menendez 
appears in the appendix.]
    [Whereupon, at 3:29 p.m., the Subcommittee was adjourned.]
      
=======================================================================

                            A P P E N D I X

                             July 26, 2000

=======================================================================

      
    [GRAPHIC] [TIFF OMITTED] T6939.001
    
    [GRAPHIC] [TIFF OMITTED] T6939.002
    
    [GRAPHIC] [TIFF OMITTED] T6939.003
    
    [GRAPHIC] [TIFF OMITTED] T6939.004
    
    [GRAPHIC] [TIFF OMITTED] T6939.005
    
    [GRAPHIC] [TIFF OMITTED] T6939.006
    
    [GRAPHIC] [TIFF OMITTED] T6939.007
    
    [GRAPHIC] [TIFF OMITTED] T6939.008
    
    [GRAPHIC] [TIFF OMITTED] T6939.009
    
    [GRAPHIC] [TIFF OMITTED] T6939.010
    
    [GRAPHIC] [TIFF OMITTED] T6939.011
    
    [GRAPHIC] [TIFF OMITTED] T6939.012
    
    [GRAPHIC] [TIFF OMITTED] T6939.013
    
    [GRAPHIC] [TIFF OMITTED] T6939.014
    
    [GRAPHIC] [TIFF OMITTED] T6939.015
    
    [GRAPHIC] [TIFF OMITTED] T6939.016
    
    [GRAPHIC] [TIFF OMITTED] T6939.017
    
    [GRAPHIC] [TIFF OMITTED] T6939.018
    
    [GRAPHIC] [TIFF OMITTED] T6939.019
    
         Prepared Statement of Ambassador H. E. Rubens Barbosa
    I would like to thank Representative Elton Gallegly, Chairman of 
the Western Hemisphere Subcommittee, for this invitation to exchange 
views on recent developments and future trends in the relationship 
between Brazil and the United States. It is a honor for me, both 
personally and as the Brazilian Ambassador to the United States, to 
address the distinguished members of the House Committee on 
International Relations to examine the long history of shared values 
and close cooperation between our countries and to assess the 
opportunities and challenges which lie ahead.
    Since the birth of our two nations, Brazil and the United States 
have shared a common history of peaceful relations, political and 
ideological affinity, and productive trade and financial interactions. 
For almost two centuries, our countries have been writing a success 
story of ever-growing diplomatic ties, underscored by an unprecedented 
degree of cooperation over the last decade, during which several old 
differences were resolved and new common initiatives, such as the FTAA, 
were launched. In order to build our future bilateral relationship on 
the past and present successes, we need to look ahead, analyzing the 
nature of the new challenges and priorities facing our countries.
    As Representative Gallegly requested, I will divide my presentation 
into five parts: 1) current economic and political conditions in 
Brazil; 2) Brazil's priorities and challenges ahead; 3) the role the 
United States could or should play in helping Brazil address its 
priorities and challenges; 4) Brazil's view of the Hemisphere; 5) how 
Brazil and the United States can work together in addressing the 
challenges of the Hemisphere. I will conclude these remarks by 
answering the question proposed in the title of this hearing; whether 
Brazil and the U.S. are strategic partners or regional competitors.

          CURRENT ECONOMIC AND POLITICAL CONDITIONS IN BRAZIL

    If someone were to summarize what has happened in Brazil over the 
last ten years, two significant trends would stand out: economic 
modernization and the strengthening of democracy. A strong commitment 
to macroenomic stabilization and reform of our economy, along with 
growing participation by civil society and consolidation of our 
democratic institutions, with regular and free elections, have 
characterized our recent history.
    Both the Brazilian government and society have worked very hard to 
achieve these positive results. We have pressed and continue to press 
for domestic structural reforms in order to consolidate the ``Real 
Plan'', the stabilization program, and to create conditions for further 
improvements in our social indicators. We have already liberalized 
trade rules and have been successfully carrying out one of the largest 
privatization programs ever undertaken, probably the largest in the 
entire history of capitalism. We are pursuing new reforms in several 
areas, such as social security, the tax system, the laws governing 
fiscal accountability. Brazil's most important domestic goal is to 
maintain economic stability in order to promote a more balanced, just, 
equitable and democratic society.
    Over the last three years we have faced serious challenges as a 
result of the international turbulence that arose out of the Asian and 
the Russian crises. As a major emerging economy, Brazil was not immune 
to the worldwide economic effects of the Asian financial turmoil in 
1997 and the Russian insolvency in 1998. The Brazilian government 
reacted energetically, adopting restrictive policies aimed at achieving 
fiscal austerity and macroeconomic stability. To preserve the conquests 
derived from the stabilization program, the Government was able to rely 
on firm support from Congress, of a vigilant and active press and the 
approval of the Brazilian population as a whole. The way Brazil has 
overcome recent economic crisis shows how active our civil society has 
been and how mature our democracy has become.
    The doomsday scenario that was predicted by some never 
materialized. The government adopted a two-part strategy comprised of: 
(a) a severe tightening on the fiscal front and the adoption of a 
multi-year fiscal adjustment program and (b) the negotiation of an 
international agreement involving multilateral financial organizations 
and most of the developed countries.
    In January of 1999, the Brazilian Government was forced to devalue 
the Real and adopt a floating exchange rate currency regime. At the 
time, it was widely thought that the impact of such a devaluation would 
unleash inflation rates, leading to the return of the so-called 
``hyperinflation'' and to a deep recession in 1999.
    What actually happened over the course of 1999 was completely 
different, due mainly to the sound fundamentals of the Brazilian 
economy. Brazil not only avoided a GDP contraction but is now clearly 
on the road to a strong economic recovery. Instead of recession, final 
figures for 1999 indicated a positive growth rate of 0.82%, fueled by 
the impressive recovery in the last quarter at a rate of 3.1%. Contrary 
to pessimistic prophecies, inflation remained well within the 
government's 6-10% forecast, at around 8%. The Government has also been 
able to meet, and even to exceed, the public sector primary surplus 
target agreed to with the IMF. Moreover, the new exchange rate regime 
has opened new opportunities for the export sector, by helping 
Brazilian products to compete in both domestic and international 
markets.
    The overall economic outlook for Brazil in 2000 and the years ahead 
is very positive. GDP growth this year is expected to reach between 3% 
and 4%, as a result of declining interest rates, among other factors. 
Inflation forecast is around 6%. The main sign of the confidence in the 
Brazilian economy has been the continued high level of foreign direct 
investment flowing into the country. In 1999, FDI inflows reached a 
record US$31 billion, ranking Brazil as the fourth highest investment 
destination in the world, after the U.S., the U.K. and China. This 
positive trend is expected to continue this year, boosted by economic 
recovery and renewed privatization.

                BRAZIL'S PRIORITIES AND CHALLENGES AHEAD

    From the perspective of the Brazilian Government, there is no 
contradiction between austere macroeconomic policies, social progress 
and democratic consolidation. Stabilization creates conditions for 
improving standards of living and strengthening democracy. We pursue 
economic success in the name of social justice and increasing political 
participation.
    One cannot deny that the difficulties experienced over the last 
three years due to the international financial turbulence have made 
social progress more difficult. The prevailing trend, however, is 
unquestionable: the Brazilian people are benefiting greatly from 
economic stability and will benefit even more substantially in the 
future.
    Statistics show that social progress in Brazil has been 
considerable in recent years. The most important achievements have been 
in housing, access to services, infant mortality rates and particularly 
in education. Education is one of our main challenges and first 
priorities. The Brazilian Government's emphasis on education, 
especially for elementary education, in a focused nationwide effort to 
bring every child into a school, has resulted in remarkable progress. 
From 1993 to 1999, the number of children aged from 7 to 14 in school 
increased from 88.5% to 94.7%, and will continue to grow. As for other 
social achievements, the infant mortality rate during the nineties 
continued its 30 year downward trend in Brazil, decreasing from 48 
deaths per thousand in 1990 to an estimated 35 deaths in 2000. Brazil 
spends 21% of its GDP on programs and activities related to the 
improvement of social conditions.
    Also impressive has been the growing consumption of other goods and 
services, such as television sets, radios and telephones, by vast 
sectors of the Brazilian population, especially poor Brazilians. This 
has been one of the most important results of the ``Real Plan'', which, 
according to statistics published last week, has contributed to a more 
balanced income distribution in Brazil. That is why macroeconomic 
stability, control of inflation and sustained growth continue to be our 
main challenges and priorities.
    As for the priorities and challenges for Brazil's foreign policy, 
the Government of President Fernando Henrique Cardoso has reinforced 
the long-standing principles and goals of our diplomacy, which has 
always been an unwavering dedication to fostering development and 
promoting peace and international cooperation.
    Consistent with more than a century of peaceful and cooperative 
relations with its neighbors, and inspired by shared values and common 
purposes, Brazil's most important diplomatic priority is to strengthen 
our cooperation with South American countries in order to increase 
economic integration and to preserve political stability in the region. 
Toward this end, the strengthening of Mercosul and the consolidation of 
the dialogue with all other South American countries are paramount in 
Brazil's foreign affairs agenda.
    Mercosul, which includes Brazil, Argentina, Paraguay and Uruguay, 
is the third largest trading pact in the world, and the most 
significant trade group in Latin America, noteworthy both for its 
institutional framework and its rapid and continuous growth. Trade 
between Brazil, Argentina, Paraguay and Uruguay increased more than 
400% from 1990 and 1998, when it reached a total of more than US$ 20 
billion. In 1999, there was a decline in trade between the four 
countries, due to economic difficulties faced by all. In 2000, however, 
Mercosul has resumed its historical pattern of increasing flows of 
trade and investments and growing interdependence.
    Integration between the four countries is not a goal in itself. 
Brazil and its partners do not intend to prevent foreign competition. 
To the contrary, Mercosul is a mechanism for promoting better 
integration into the international economy. The twin objectives of 
domestic strengthening and outward integration are complementary. The 
more the four Mercosul countries deepen their economic, political, 
social and cultural integration, the more they will be able to proceed 
towards an increased and sustained exposure to foreign competition. 
Integration is an instrument for more far-reaching goals: it not only 
creates favorable conditions for economic development and political 
stability in our countries, but also enables them to seize the 
opportunities, and to avoid the risks, of an increasingly open and 
unstable international economy.
    This is why the international agenda of Mercosul is so multifaceted 
and comprehensive. First, in 1996, it established free trade area 
agreements with the two ``associated'' countries, Chile and Bolivia. 
Chile has just requested full accession to Mercosul. The bloc is also 
currently negotiating with the other Andean countries the establishment 
of a free trade area. Taking into account the economic and political 
importance of the countries of Mercosul and the Andean Pact, the 
signature of a free trade agreement would represent a landmark on the 
path towards an increasingly integrated South America. Mercosul also 
negotiates free trade agreements within the Western Hemisphere (the 
Free Trade Area of the Americas), the European Union and South Africa.
    This outward-looking approach and wide array of international 
negotiations indicate that Mercosul is an example of ``open 
regionalism''. From the Brazilian perspective, open regionalism, 
combined with other cardinal principles of our economic diplomacy, such 
as the strengthening of the multilateral trading system, converges on 
Brazil's fundamental interest in preserving the balanced and evenly 
distributed trade and financial ties that we have with the various 
regions and countries of the world. Brazil's main trading partners in 
1999 were the European Union (28%), the United States (22%) and South 
America (20%), reflecting a more balanced distribution of trade than is 
true of most countries.
    In brief, the Brazilian foreign policy has been based on a two-
pronged strategy. On the one hand, Brazil's permanent commitment to 
peaceful coexistence and the negotiated settlement of disputes has 
provided the framework for a diplomacy dedicated to international 
disarmament, non-proliferation and the defense of shared values, such 
as respect for human rights and promotion of sustainable development. 
On the other hand, and consistent with these foreign policy principles, 
Brazil's quest for economic and social development has guided our 
approach aimed at promoting an increasignly integrated neighborhood of 
countries, along with a growing exposure to the global economy.

THE ROLE THE U.S. COULD OR SHOULD PLAY IN HELPING BRAZIL TO ADDRESS ITS 
                       PRIORITIES AND CHALLENGES

    Few other moments in the history of Brazil-US relations have 
witnessed the degree of cooperation and convergence of values and 
interests that our countries share today. A mature dialogue and mutual 
trust currently characterize our bilateral relationship, which has 
greatly benefited from convergent positions on a wide variety of 
subjects, including the promotion of interamerican cooperation, respect 
for human rights, protection of the environment, support for democracy, 
consolidation of the multilateral trading system and defense of non-
proliferation, to mention just a few. Together with a growing U.S. 
awareness of the importance of the Brazilian economy and society, this 
common perspective has enabled our governments to develop a very 
special relationship, confirmed by the fact that Brazil is listed among 
the 10 U.S. strategic partners.
    Brazil is currently the 11th market for U.S. products. The United 
States is the main individual trading partner and foreign investor in 
Brazil. The stock of U.S. investments in the Brazilian economy amounts 
to US $ 40 billion, greater than American investments in any other 
emerging market, including China, Russia, India or even Mexico. Brazil 
is currently one of the few countries with which the United States has 
a trade surplus, reflecting Brazil's wholehearted dedication to trade 
openness and liberalization. The U.S. trade surplus with Brazil reached 
US$ 5 billion in 1998, the fourth largest in the world, and was nearly 
US$ 1.5 billion in 1999.
    Despite the importance of these economic ties, Brazil is underrated 
in the United States. I am confident that the more Brazil is studied 
here and the more the U.S. Congress is informed about U.S. stakes in 
Brazil, the more decision-makers will learn to differentiate a country 
which, while facing serious challenges, is making steady progress on 
the road towards economic and social development, entering the new 
century as an important player in the Hemisphere and on the world 
stage. The history of our country has been marked not only by peaceful 
relations with our neighbors, but also by our tradition of cultural 
diversity and tolerance, as well as an impressive penchant for economic 
growth.
    Recent developments have demonstrated the great potential for 
improved cooperation between Brazil and the United States. Over the 
last three months, two important decisions have been made by our 
governments. First, we have agreed to institutionalize our relationship 
by establishing a framework for regular meetings of senior foreign 
officials. This will tend to free our bilateral relationship from the 
personal inclinations of the senior officials in office, making 
governmental contacts more predictable and regular. Second, Brazil and 
the U. S. have reached a historic and much-sought agreement allowing 
for the participation of American companies in the space launch 
activities at the Alc-ntara launch site. This constitutes a 
breakthrough on the Brazilian path towards both technological progress 
and commercial competitiveness in several highly sophisticated 
technological sectors. It also underscores the growing mutual trust 
between our countries in the areas of sensitive and advanced 
technologies.
    The United States has also been very supportive of Brazil in our 
efforts to safeguard and consolidate our program of macroeconomic 
stabilization. Washington took the lead among the industrialized 
countries in supporting the agreement signed by Brazil and the IMF. 
This was a very important step in consolidating economic stability in 
Brazil, although we are still concerned with the current ``volatility'' 
of the international financial markets. The Brazilian government 
continues to support a more continuous and close monitoring and 
assessment of the nature and mobility of short-term capital, as well as 
multilateral efforts aimed at improving the capacity of national 
governments and multilateral institutions to foresee and prevent 
financial crises. We need a more stable, transparent and predictable 
international financial structure, as the Brazilian President Fernando 
Henrique Cardoso remarked in a meeting in Florence last November with 
Presidents Clinton and D'Alema, and Prime Ministers Blair, Jospin and 
Schr der.
    Notwithstanding the excellent relations between Brazil and the 
U.S., some important challenges lie ahead. They arise not from 
incompatible worldviews, values or principles, but from concrete and 
naturally divergent interests. The most evident example is how to 
foster bilateral trade, currently well below the potential of the two 
largest economies of the Americas. Several of the most competitive 
Brazilian products, such as steel, ethanol, sugar, shoes, textiles, 
orange juice, tobacco, and meat, face considerable trade barriers in 
the U.S. market, including tariff peaks, retaliatory threats, 
antidumping and countervailing measures, quotas, safeguards, voluntary 
restriction agreements, restrictive technical norms, sanitary and 
phytosanitary measures and increasing domestic subsidies. Moreover, 
labor standards and environmental considerations may be used to 
legitimize disguised protectionist measures against exports from 
developing countries.
    Studies currently being carried out both in Brazil and by the 
Brazilian Embassy in Washington indicate that U.S. trade barriers 
significantly affect as many as 80 major Brazilian export products. 
These barriers go a long way towards explaining the unbalanced 
bilateral trade flows over the past decade. Despite the fact that the 
U.S. economy is open to most imports, having the largest trade deficit 
in the world, many of Brazil's most important export products face 
insurmountable trade barriers that severely limit, or even prevent, 
their entry into the American market.
    Brazil has reiterated its concerns about protectionist pressures in 
the United States and, specifically, about measures against Brazilian 
exports. Recent anti-dumping and anti-subsidies measures have been 
arbitrarily applied against Brazilian steel products, without any 
genuine evidence of improper practices.The continued existence of such 
non-tariff import barriers is not consistent with the importance that 
the American Government claims to give to its relationship with Brazil, 
nor with the stated goal of both countries to increase bilateral trade 
exchanges.

                    BRAZIL'S VIEWS OF THE HEMISPHERE

    The Western Hemisphere enters the 21st century with a new economic 
geography. For all practical purposes, in economic and financial terms, 
it is already perceived by the business community as being composed of 
three different groups of countries: North America, Central America and 
the Caribbean, and South America. I will concentrate most of my remarks 
on that last of those three areas, which is the least known in the 
United States.
    Today the countries of South America are engaged in an 
extraordinary move towards integration. This move is reshaping the 
economies of the region in very visible and powerful ways, even though 
its various manifestations may occasionally appear to be spontaneous 
and uncoordinated. Roughly 340 million people live in South America, 
generating a GDP of about US$ 1.5 trillion, making the region a fast-
growing destination for international trade and investment.
    Throughout most of South America, regional integration has acquired 
great impetus since the early 1990s, due in large part to the 
consolidation of democratic institutions and the adoption of converging 
policies in the areas of economic discipline and trade liberalization. 
Different sub-regional mechanisms--especially Mercosul--play a key role 
in providing a framework for advancing integration, but the process may 
also benefit from a series of apparently unrelated bilateral 
initiatives. In fact, one of the most significant aspects of the 
current trend in South America has been the strengthening of actual 
physical infrastructure links, especially in energy, transportation and 
telecommunications. Conversely, the region is self-sufficient in energy 
and its abundant oil, gas, coal and water resources have all become 
precious commodities that are bound to expand trade further within and 
beyond South America. With improved infrastructure facilitating 
increased trade flows, the nations of South America are becoming 
increasingly interconnected. As never before, national borders bring 
neighbors together instead of separating them.
    In such auspicious circumstances, and in the spirit of friendship 
among neighbors, Brazilian President Fernando Henrique Cardoso has 
decided to bring together the Heads of State of the twelve South 
American countries for a discussion on common endeavors and matters of 
mutual interest. This South American Summit, a historical first, will 
take place in Bras[lia, on August 31st and September 1st, 2000. The 
agenda will include only a few essential items, so that the meeting can 
be as focused and action-oriented as possible: (a) the strengthening of 
democracy, (b) the expansion of trade, (c) improving infrastructure 
integration, (d) drug trafficking and related crimes, and (e) science 
and technology.
    The countries of South America share more than geography and 
history. They share common values and a commitment to build a better 
future for our citizens, through the consolidation of democratic 
institutions, sustained economic growth and the struggle to overcome 
social injustice. They know that by working together they can enhance 
their individual and collective abilities to attain those goals. They 
know that together they stand a better chance of achieving a successful 
integration into the globalized economy.
    The Brasilia summit will provide the perfect opportunity for an in-
depth discussion on the future of South America. The region, as a 
whole, should benefit. This is particularly true because the presidents 
will look into special measures, with the backing of multilateral 
financial institutions. Hopefully this meeting will also provide a 
clear road map for the future of regional integration.
    Brazil appreciates the fact that the U.S. government has taken a 
very constructive view on this summit meeting, and has made public its 
support for the Brazilian initiative.
    This is an especially promising moment, rich in opportunities for 
foreign investors. In order for American entrepreneurs to make the most 
out of it, however, a very important question must be addressed: the 
urgent need for policymakers in this country to tear down the veil of 
worn-out cliches about the region. It is high time for decision-makers 
beyond those who focus on ``Hispanic'' constituencies, and for analysts 
beyond those who specialize in the region, to realize that, yes indeed, 
there are major differences between individual countries south of the 
Rio Grande.
    When it comes to Latin America, it is not unusual for those of us 
who work in the region to be confronted in the United States by a 
tendency to accept and spread simplistic generalizations, as if they 
were simply common wisdom. All too often, problems that affect any one 
country (or a given group of countries) are perceived as ``regional'' 
and extrapolated accordingly.
    Just to mention a few examples: if the armed forces do not behave 
as they should in a particular country, suddenly the ghost of military 
regimes is viewed as haunting the region again; if major political 
changes sweep another country, suddenly the dangers of populism 
threaten to overtake the whole region; if drugs are a matter of life 
and death in some countries, the same is somehow deemed true for all 
the others countries in the region; if the economic outlook appears 
less than promising in one country, the achievements of the last decade 
are at imminent risk everywhere else; if people are somewhat 
disappointed with the performance of democratically-elected 
governments, suddenly there is talk of a widespread ``democracy-
fatigue'', and so on, seemingly without end.
    It is high time for a fresh approach, one that fully takes into 
account the various sub-regions and the individual characteristics of 
countries within them. Unfortunately, South America, as an American 
congressman eloquently put it some months ago in a congressional 
hearing on U.S. foreign policy: ``is simply not on Washington's radar 
screen''.
    Too bad for the region, some may argue. But this also constitutes a 
missed opportunity for the United States, since economic prosperity, 
sustained growth and political stability in the whole Hemisphere 
coincide with America's national interest. A fresh Washington 
perspective on South America is long overdue, and its natural corollary 
ought to be a new and comprehensive way of thinking about Brazil. Given 
its continental dimensions and the strength of its economy, Brazil 
should be seen as both the engine for growth and a magnet for foreign 
investment in South America.
    Among the countries of the world, Brazil ranks fifth in population 
and size. Few Americans realize that it is larger than the continental 
United States. It also has one of the ten largest economies of the 
world--ranking in eighth, ninth or tenth place, depending on the source 
and criteria used. Moreover, Brazil is the most industrialized and 
economically diversified country in the Southern Hemisphere.
    Brazil has enjoyed peace with its neighbors for over 130 years, and 
shares with the United States the western values that are at the very 
core of both nations: freedom, justice, democracy, tolerance and the 
rule of law. Brazil is a racially and ethnically diverse and integrated 
country, enriched by the contributions of people from every corner of 
the world. We are keenly aware that this is the central feature of our 
nationhood, the major source of our strength. Brazil has a sense of 
national purpose and a vision of a better future, which we are striving 
to reach sooner rather than later.
    It is crucial that the United States deal with Brazil on its own 
merits within the region, in a differentiated way. Our bilateral 
relations must reflect the relative weight of our two countries.
    Brazil is ready to take on the responsibilities that arise from its 
importance in the region.

HOW BRAZIL AND THE US CAN WORK TOGETHER IN ADDRESSING THE CHALLENGES OF 
                             THE HEMISPHERE

    During the last decade or so, the Hemisphere has witnessed 
unprecedented changes, mostly for the better. This is true in the 
North, where the outstanding economic performance of the United States 
has put to rest any possible doubts about American preeminence on the 
world stage. It is also true in the South, where democracy is now 
virtually universal and economic disarray and inflation have given way 
to stability and a strong drive towards integration.
    Yet many serious problems remain to be solved in the Hemisphere: 
economic, political and especially social problems. But our region is 
on the move, in the right direction, and will certainly emerge stronger 
after overcoming our current challenges. As sustained economic growth 
picks up and countries in the region continue to tackle their 
respective problems with greater confidence and a renewed sense of 
regional solidarity, the conditions are now in place for an era of 
achievement and prosperity, during which social justice can at long 
last be attained.
    Brazil and the United States share the fundamental values that must 
be at the very core of any meaningful integration process in the 
Hemisphere: democracy, promotion of human rights, protection of the 
environment and fighting against poverty, discrimination and organized 
crime in their many forms. Brazil and the United States are vital 
players as the Hemisphere continues to move forward in the integration 
process that will hopefully provide the basis for a future of progress 
and sustained growth for all countries in the region.
    Two of the basic tenets of such an endeavor are the consolidation 
of democratic institutions throughout the region and the fight against 
organized crime.
    Democracy is the very cornerstone of the positive changes we have 
seen in the Hemisphere in recent years and its consolidation must be at 
the top of the regional agenda. Sometimes this may prove challenging, 
but we must all see to it that firm political support from our 
countries is readily available whenever there is a real threat to the 
democratic order in the region. In view of some recent events, Brazil 
and the United States have often consulted each other on this issue and 
the results have been very positive. Such consultations are beneficial 
to the strengthening of democracy throughout the region and should 
continue.
    Organized crime, especially drug trafficking and related crimes, 
has become a transnational phenomenon that does not respect political 
or moral boundaries. To increase our likelihood of success in the fight 
against it, we must all strive to increase regional cooperation and 
coordination, including information sharing. This is yet another area 
in which Brazil and the United States have much to gain from 
maintaining open the channels of communication and carrying out a 
continuous and frank dialogue.
    Again, there may be times when our views do not necessarily 
coincide, but this should be seen as an extra incentive for our two 
countries to consult closely and seek a better understanding of our 
respective positions.
    Brazil has always had an unwavering commitment to regional 
integration and has been an active player in the ongoing negotiations 
aimed at the establishment of a Free Trade Area of the Americas (FTAA). 
The Brazilian Government has engaged in these negotiations in earnest 
since the very inception of the initiative and we share the will to 
have them successfully concluded in 2005.
    In the nine negotiating groups that have been established for the 
FTAA process, we have worked hard to meet the challenges and achieve 
the goal of having a preliminary draft agreement ready for the 
ministerial meeting scheduled for April 2001, in Buenos Aires, as 
decided by the 34 countries of the hemisphere in Toronto, in November 
1999.
    Not surprisingly, Brazil's positions in these negotiations are 
dictated by the need to safeguard its national interests. They are also 
based on a few fundamental principles, which include reciprocity, 
decision-making by consensus, a single undertaking (i.e. nothing is 
agreed until everything is agreed) and market access for all sectors. 
Those are the principles approved by the Heads of State of the 
Americas.
    Brazil believes that if the FTAA is to become a reality, it is 
imperative that it be perceived as a two-way street by all the 
countries of the hemisphere, large and small, developed and developing 
(i.e. give some, take some, so that all emerge better off at the end of 
the day). This must be a win-win negotiation. A win-lose approach would 
mean the kiss of death for the dream of a free trade area ranging 
``from Alaska to Tierra del Fuego''.
    The FTAA and Mercosul should maintain distinct, mutually supportive 
dynamics, as has been the case so far. On the one hand, Mercosul has 
been strengthened by its participation, as a unit, in the discussions 
on the FTAA. On the other hand, progress towards the FTAA has been 
aided by Mercosul's contributions and proposals.
    Hemispheric integration must not become a destabilizing factor for 
national economies, due to excessive and sudden exposure to new and 
increased levels of foreign competition. Gradualism and respect for 
distinctive national conditions are two fundamental principles that 
must guide negotiations. The future of the FTAA depends on its capacity 
to offer balanced results, with equal benefits for all. Reciprocity is 
the name of the game. That is why we hope to see concrete and 
substantial advances concerning our demands for improved access to 
highly protected sectors of the U.S. economy. Progress must be achieved 
not only by reducing tariffs, but also by tackling the urgent and 
fundamental question of non-tariff barriers, such as anti-dumping 
duties, subsidies and quotas.
    The road leading to the creation of the FTAA is not yet free from 
obstacles, despite the overall genuine level of commitment in the 
region to make it smooth and successful. By 2003, Brazil and the United 
States will co-chair the Trade Negotiating Committee of the FTAA. The 
two countries will play a decisive role in coordinating the negotiation 
process as they jointly take over the steering wheel during what will 
hopefully be the final leg of this journey.

              CONCLUSION: STRATEGIC PARTNERS IN THE REGION

    In this yet-to-be-properly-named ``post cold war era,'' we are 
witnessing a great deal of debate in the Unites States on the 
definition of ``national interest.'' Discussions are being held within, 
among and outside governments, major publications have opened their 
pages to foster this debate and the issue has also become an important 
topic in the current presidential campaign.
    Opinions may vary, but everyone seems to agree that the moment is 
ripe for a fresh assessment of what should be considered the ``national 
interest''. Underlying this proposition is a widespread recognition 
that the previous definition is no longer suitable.
    Why is that so?
    I would venture to say that it is because the current definition is 
based too heavily on ``national security'' considerations, which means 
that U.S. priorities are determined primarily by risks and threats, 
rather than by opportunities. In other words, some countries are placed 
at the top of the U.S. foreign affairs agenda because they are 
perceived to pose a direct threat to U.S. national security interests.
    For the only superpower in the global arena, it is natural that 
such national security issues remain very high on the agenda, but there 
should also be room at the top for other kinds of considerations. One 
way of achieving this would be by broadening the concept of 
``security'' to encompass not only defense matters but also everything 
from the economy to the environment, from trade to immigration.
    Another way, however, would be to place a higher priority on non-
security national interests, more in line with the changes brought 
about by globalization and the information revolution.
    The advantage of basing policies on a broader conception of the 
national interest, as opposed to the somewhat more negative concept of 
national security interest, is especially evident in terms of U.S.-
South America relations.
    There are no imminent military threats originating in South 
America. There are, however, vital American interests at stake--
especially in terms of investments, trade and finance--and the goal of 
strengthening relations with the countries of the region deserves all 
the attention it can get.
    Why Brazil? How does Brazil fit in this picture? Some basic facts 
and figures can be helpful in answering these questions.
    In terms of GDP, Brazil is larger than Russia and India combined. 
Using the purchasing power parity concept, Brazil's GDP in 1999 was 
about US$ 1.4 trillion, which represents a per capita income of US$ 
6,350.
    American companies, quick to realize where the most promising 
opportunities are, invest far more in Brazil than in China, Russia, 
India or even Mexico. Of the 500 largest U.S. companies listed in 
Fortune magazine, about 420 currently operate in Brazil.
    As for trade, the United States exports more to Brazil than to 
China, Russia or India and Brazil has been identified by the U.S. 
Commerce Department as one of the ten ``strategic partners'' of the 
United States in this new century.
    Brazil is also ready for the ``new economy.'' About 7 million 
people in Brazil have access to the Internet, which places us in 7th 
place worldwide (after the U.S., Japan, the United Kingdom, Canada, 
Germany and Australia). Brazil is already the third largest purchasing 
market for Amazon.com. Today, about 80% of the e-commerce in Latin 
America is concentrated in Brazil. The number of new Brazilian 
subscribers to ISPs is growing exponentially, at one of the highest 
rates in the world.
    For all those reasons, Brazil--as a strategic partner--is a natural 
choice for inclusion in the short list of U.S. foreign policy 
priorities.
    The traditional U.S. foreign policy thinking in terms of the ``Big 
Ones'', which has previously been based primarily on national security 
considerations, should now be broadened to include Brazil for reasons 
that are based on opportunities, rather than threats, on U.S. national 
interests, rather than on international security concerns.
    Brazil and the United States are the two major countries of this 
Hemisphere. They share the desire, and the commitment, to see this 
entire region prosper and consolidate its democratic institutions. They 
share a vision of a common future with fewer inequities and more social 
justice for all the peoples of the Americas, North and South. They 
share a determination to see this Hemisphere free from drug trafficking 
and other forms of organized transnational crime. They can and must 
work together in order to advance our shared goals.
    The respective national interests of Brazil and the U.S. may not 
always coincide--even though more often than not they do--and it is 
only natural that as their bilateral relationship becomes more 
comprehensive and more complex new problems and occasional differences 
of opinion may arise.
    Partners do not necessarily agree on everything. The important 
thing is to intensify their bilateral dialogue, keeping it open and 
straightforward, while dealing with occasional differences of opinion 
in a constructive, honest and transparent fashion, so as to avoid the 
pitfalls of a past that has often been, in the words of Congressman 
David Bonior, ``more patronizing than respectful.''
    The Brazil-U.S. relationship is so broad, close and ripe with 
potential for additional growth that it is only natural that it should 
acquire an importance that goes beyond what is merely regional.
    If one considers ``regional competition'' in the narrow sense of 
the term, as in a ``zero-sum game,'' I would not hesitate to say that 
this is not an appropriate way to describe the relations between our 
two countries.
    Partnership should really be the key word here.
    A real and effective partnership between Brazil and the United 
States would both serve the national interests of the two countries and 
provide concrete benefits to all the countries of the Americas.
    This partnership is already in the making.

    [GRAPHIC] [TIFF OMITTED] T6939.041
    
    [GRAPHIC] [TIFF OMITTED] T6939.042
    
    [GRAPHIC] [TIFF OMITTED] T6939.043
    
    [GRAPHIC] [TIFF OMITTED] T6939.044
    
    [GRAPHIC] [TIFF OMITTED] T6939.045
    
    [GRAPHIC] [TIFF OMITTED] T6939.047
    
    [GRAPHIC] [TIFF OMITTED] T6939.048
    
    [GRAPHIC] [TIFF OMITTED] T6939.049
    
    [GRAPHIC] [TIFF OMITTED] T6939.050
    
    [GRAPHIC] [TIFF OMITTED] T6939.051
    
    [GRAPHIC] [TIFF OMITTED] T6939.052
    
    [GRAPHIC] [TIFF OMITTED] T6939.054
    
    [GRAPHIC] [TIFF OMITTED] T6939.055
    

```