U.S. GOVERNMENT PRINTING OFFICE

66–939 CC WASHINGTON : 2001

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

(II)

COMMITTEE ON INTERNATIONAL RELATIONS

BENJAMIN A. GILMAN, New York, Chairman

WILLIAM F. GOODLING, Pennsylvania

JAMES A. LEACH, Iowa

HENRY J. HYDE, Illinois

DOUG BEREUTER, Nebraska

CHRISTOPHER H. SMITH, New Jersey

DAN BURTON, Indiana

ELTON GALLEGLY, California

ILEANA ROS-LEHTINEN, Florida

CASS BALLENGER, North Carolina

DANA ROHRABACHER, California

DONALD A. MANZULLO, Illinois

EDWARD R. ROYCE, California

PETER T. KING, New York

STEVE CHABOT, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

MATT SALMON, Arizona

AMO HOUGHTON, New York

TOM CAMPBELL, California

JOHN M. MCHUGH, New York

KEVIN BRADY, Texas

RICHARD BURR, North Carolina

PAUL E. GILLMOR, Ohio

GEORGE P. RADANOVICH, California

JOHN COOKSEY, Louisiana

THOMAS G. TANCREDO, Colorado

SAM GEJDENSON, Connecticut

TOM LANTOS, California

HOWARD L. BERMAN, California

GARY L. ACKERMAN, New York

ENI F.H. FALEOMAVAEGA, American

Samoa

MATTHEW G. MARTINEZ, California

DONALD M. PAYNE, New Jersey

ROBERT MENENDEZ, New Jersey

SHERROD BROWN, Ohio

CYNTHIA A. MCKINNEY, Georgia

ALCEE L. HASTINGS, Florida

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

ROBERT WEXLER, Florida

STEVEN R. ROTHMAN, New Jersey

JIM DAVIS, Florida

EARL POMEROY, North Dakota

WILLIAM D. DELAHUNT, Massachusetts

GREGORY W. MEEKS, New York

BARBARA LEE, California

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

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

CASS BALLENGER, North Carolina

CHRISTOPHER H. SMITH, New Jersey

ILEANA ROS-LEHTINEN, Florida

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

KEVIN BRADY, Texas

PAUL E. GILLMOR, Ohio

GARY L. ACKERMAN, New York

MATTHEW G. MARTINEZ, California

ROBERT MENENDEZ, New Jersey

ROBERT WEXLER, Florida

STEVEN R. ROTHMAN, New Jersey

JIM DAVIS, Florida

EARL POMEROY, North Dakota

VINCE MORELLI, Subcommittee Staff Director

DAVID ADAMS, Democratic Professional Staff Member

KELLY MCDONALD, Acting Professional Staff Member

JESSICA BAUMGARTEN, Staff Associate

(III)

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

(1)

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.

2

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,

3

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 31⁄2 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

4

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 beVerDate 11-MAY-2000 13:18 Mar 13, 2001 Jkt 066939 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 F:\WORK\66939.TXT HINTREL1 PsN: HINTREL1
5

come 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?

6

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 reelected a little over 1 or 11⁄2 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 $411⁄2 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

7

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

8

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

9

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

10

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.

11

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

12

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

13

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 selfsufficient 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 relaVerDate 11-MAY-2000 13:18 Mar 13, 2001 Jkt 066939 PO 00000 Frm 00017 Fmt 6633 Sfmt 6601 F:\WORK\66939.TXT HINTREL1 PsN: HINTREL1
14

tions, 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,

15

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.

16

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 copresidents 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 BrazilU.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.

17

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 41⁄2 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

18

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 commitVerDate 11-MAY-2000 13:18 Mar 13, 2001 Jkt 066939 PO 00000 Frm 00022 Fmt 6633 Sfmt 6601 F:\WORK\66939.TXT HINTREL1 PsN: HINTREL1
19

ment 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

20

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?

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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.

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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

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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—preVerDate 11-MAY-2000 13:18 Mar 13, 2001 Jkt 066939 PO 00000 Frm 00027 Fmt 6633 Sfmt 6601 F:\WORK\66939.TXT HINTREL1 PsN: HINTREL1
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liminary 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

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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.

26

Mr. BALLENGER. I am just curious because there is such a big todo 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

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ple 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.

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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,

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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

30

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.]

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A P P E N D I X

JULY 26, 2000

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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%,

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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.

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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

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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 antidumping 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

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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 Brasølia, 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 Bras ́ılia 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 cliche ́s 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’’.

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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.

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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.

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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.

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