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### Viewing cable 05BRASILIA1142, SLOW GROWTH IN US EXPORTS TO BRAZIL

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05BRASILIA1142 | 2005-04-28 19:02 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    UNCLAS SECTION 01 OF 04 BRASILIA 001142

    SIPDIS

    SENSITIVE

    STATE PLEASE PASS TO USTR FOR SCRONIN
    DEPT OF TREASURY FOR FPARODI
    USDOC FOR 3134/USFCS/OIO/WH/EOLSON
    USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD
    USDA FOR FAS/ITP AND FAS/FAA/WH
    STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE
    STATE PASS EXIM FOR NATALIE WEISS, COCONNER
    STATE PASS USTDA FOR AMCKINNEY

    E.O. 12958: N/A
    TAGS: BEXP ECON ETRD EAGR BR
    SUBJECT: SLOW GROWTH IN US EXPORTS TO BRAZIL

    REF:  BRASILIA 682

    ¶1. (U) THIS IS A JOINT STATE/FCS MESSAGE; IT INCLUDES INPUT
    FROM AMCONSULATES SAO PAULO AND RIO DE JANEIRO.  UNLESS
    OTHERWISE SPECIFIED, DISCUSSION OF U.S. EXPORT TOTALS IS
    BASED UPON USDOC, NOT GOB, DATA.

    ¶2. (SBU) SUMMARY AND INTRODUCTION.  OVER THE PAST DECADE
    GROWTH IN U.S. EXPORTS TO BRAZIL HAS STAGNATED, WITH THE
    TOTAL OSCILLATING AROUND THE USD 11 TO 13 BILLION LEVEL.
    THE GOOD NEWS, HOWEVER, IS THAT, AT LEAST FROM 1992-2001,
    EXPORTS TO BRAZIL FROM U.S. SMALL AND MEDIUM-SIZED
    ENTERPRISES HAVE INCREASED IN VALUE SUBSTANTIALLY (242
    PERCENT).  BASED UPON OUR CONTACTS WITH POTENTIAL EXPORTERS
    AND A REVIEW OF THE DATA, POST BELIEVES THAT THE SPOTTY
    PERFORMANCE OF U.S. EXPORTS OVERALL REFLECTS:  A) THE
    INABILITY OF THE BRAZILIAN ECONOMY TO EXPAND IN A
    SUSTAINABLE FASHION, B) THE TEN-YEAR DECLINE IN THE VALUE
    OF THE BRAZILIAN REAL VERSUS THE USD, AND C) THE
    DIFFICULTIES U.S. EXPORTERS FACE (I.E., LACK OF KNOWLEDGE,
    ARCANE IMPORT REGULATORY REGIME, AND INADEQUATE PORT
    INFRASTRUCTURE) IN ENTERING THE BRAZILIAN MARKET.  MORE
    WORRISOME, WHILE IN 2004 U.S. EXPORTS TO BRAZIL INCREASED
    23.6 PERCENT, THE U.S. MARKET SHARE OF BRAZILIAN IMPORTS
    DECLINED TO 18 PERCENT, INDICATING THAT THE U.S. IS LOSING
    GROUND COMPARED TO OTHER COUNTRIES.

    ¶3. (U) ALL THIS IS AGAINST THE BACKGROUND OF DECLINING GOB
    NORMAL-TRADE-RELATIONS (NTR) TARIFFS OVER THE PAST TEN
    YEARS.  RECENT STATEMENTS BY PRESIDENT LULA THAT HE IS
    CONSIDERING PROMOTING GREATER IMPORTS TO BRAZIL PROBABLY
    ARE INTENDED MORE TO PRESSURE DOMESTIC INDUSTRY TO KEEP
    PRICES IN CHECK RATHER THAN TO SIGNAL ANY UPCOMING IMPORT-
    FRIENDLY POLICY.  INDEED, ONE OF THE DRIVING FORCES BEHIND
    BRAZIL'S RECENT RESURGENCE IN INTERNATIONAL FINANCIAL
    MARKETS HAS BEEN ITS ABILITY TO POST STRONG TRADE AND
    CURRENT ACCOUNT SURPLUSES.  END SUMMARY AND INTRODUCTION.

    ¶4. (U) WITH A GROSS DOMESTIC PRODUCT OF NEARLY US$600
    BILLION, BRAZIL REPRESENTS ABOUT HALF OF SOUTH AMERICA'S
    POPULATION, TERRITORY, AND ECONOMY.  IN 2004, BRAZIL
    IMPORTED US$62.8 BILLION IN PRODUCTS, THE VAST MAJORITY OF
    WHICH WERE INDUSTRIAL AND MANUFACTURED GOODS.  (BRAZIL IS A
    HIGHLY COMPETITIVE PRODUCER OF AGRICULTURAL COMMODITIES AND
    A MAJOR FORCE IN THE AG EXPORT MARKET.)  LAST YEAR,
    ESTIMATED U.S. EXPORTS TO BRAZIL WERE US$13.86 BILLION AND
    BRAZILIAN EXPORTS TO THE UNITED STATES REACHED US$20
    BILLION.  THIS US$13.86 BILLION FIGURE REPRESENTS A 23.6
    PERCENT INCREASE OVER THE U.S. EXPORT TOTAL FOR 2003 - US$
    11.218 BILLION - BUT IS SUBSTANTIALLY LOWER THAN THE PEAK
    LEVEL OF US$15.928 BILLION IN 2001 AMD MORE OR LESS
    EQUIVALENT TO THE EXPORT TOTAL FOR 1999, US$13.249 BILLION.
    SEE TABLE 1 BELOW.

                   TABLE 1

    US EXPORTS TO BRASIL, 1994 TO 2004
             (IN BILLIONS OF US$)
    ----------------------------------------
    1994     1995    1996     1997    1998
    8.118   11.443  12.699   15.912  15.157

     1999    2000    2001     2002    2003     2004
    13.249  15.359  15.928   12.408  11.218   13.863

    ALTHOUGH DISCERNING A CLEAR TREND FROM THE ABOVE FIGURES IS
    DIFFICULT, IT WOULD APPEAR THAT BOTH STRONG GDP GROWTH AND
    A STABLE EXCHANGE RATE -- AS WAS THE CASE IN 1995, 1997,
    2000 AND 2004 -- ARE ESSENTIAL TO U.S. EXPORT GROWTH.
    (TABLE 2 BELOW SETS FORTH EXCHANGE RATE AND GDP GROWTH DATA
    OVER THE SAME PERIOD.)

                              TABLE 2

    BRAZIL GDP AND AVERAGE ANNUAL EXCHANGE RATES, 1994 TO 2004
    --------------------------------------------- --------------
                        1994     1995     1996     1997    1998
    GDP GROWTH          5.9%     4.2%     2.7%     3.3%    0.1%
    E/R VERSUS USD      .85      .97      1.04     1.12    1.21
    1999      2000      2001     2002     2003     2004
    0.8%      4.4%      1.3%     1.9%     0.5%     5.2%
    1.79      1.96      2.32     3.53     2.89     2.93

    ¶5. (U) THIS UP-AND-DOWN PERFORMANCE ON EXPORTS COMES
    AGAINST A BACKGROUND OF STEADILY DECLINING IMPORT TARIFFS.
    BETWEEN 1994 AND 2003, AVERAGE BRAZILIAN N-T-R TARIFFS
    DECLINED FROM 14.38 PERCENT (MEDIAN 20 PERCENT) TO 10.83
    PERCENT (MEDIAN 13 PERCENT).  MEANWHILE, PER TABLES 3 AND 4
    BELOW, IN 2004 THE U.S. MARKET SHARE OF BRAZILIAN IMPORTS
    HAS DECLINED TO 18 PERCENT (GOB MINISTRY OF DEVELOPMENT
    INDUSTRY AND COMMERCE FIGURES), INDICATING THAT THE OVERALL
    LEVEL OF U.S. EXPORTS IS NOT ONLY LEVELING OFF BUT THAT THE
    U.S. IS LOSING GROUND COMPARED TO FOREIGN COMPETITORS,
    PRINCIPALLY, ASIA.

                                TABLE 3

            PERCENTAGE MARKET SHARE OF U.S. IMPORTS (FOB)
    --------------------------------------------- --------
    1994      1995      1996      1997      1998
     20%       21%       22%       23%       23%

    1999      2000      2001      2002      2003      2004
     24%       23%       23%       22%       20%       18%

                               TABLE 4

      INROADS INTO IMPORT MARKET BY FOREIGN COMPETITORS* (FOB)
    --------------------------------------------- -------------
                 1998   1999   2000   2001   2002   2003   2004
    ASIA          13%    13%    15%    16%    17%    18%    20%
    AFRICA         3%     5%     5%     6%     6%     7%     9%

    *PERCENTAGE MARKET SHARE

    ¶6. (U) A REVIEW OF THE MINISTRY'S IMPORT STATISTICS FOR
    2004 PROVIDES A FEW SNAPSHOTS OF THE DEGREE TO WHICH
    FOREIGN COUNTRIES ARE GAINING GROUND IN THE BRAZILIAN
    MARKET.  FOR EXAMPLE, IN 2004 THE U.S. WAS THE FOURTH
    LEADING SUPPLIER OF AUTO PARTS, TRAILING GERMANY,
    ARGENTINA, AND JAPAN.  HOWEVER, WHILE U.S. EXPORTS FOR 2004
    INCREASED A HEALTHY 32 PERCENT, THOSE OF ARGENTINA (65.56%)
    AND JAPAN (42.8%) INCREASED EVEN MORE.  THE SAME PHENOMENON
    OCCURRED WITH INTEGRATED CIRCUITS, WHERE THE UNITED STATES
    IS THE SECOND LEADING SUPPLIER, BEHIND SOUTH KOREA BUT
    AHEAD OF TAIWAN.  YET, SOUTH KOREAN EXPORTS ROSE 64.72%,
    TAIWANESE EXPORTS 96.94 PERCENT, AND U.S. EXPORTS ONLY
    18.22%.  PHARMACEUTICALS TELL A SIMILAR STORY.  THE U.S.
    LEADS SWITZERLAND IN THIS CATEGORY, THOUGH U.S. EXPORTS
    ROSE 12.46% WHILE SWISS EXPORTS ROSE 16.16%.  THE GOOD
    NEWS, HOWEVER, IS THAT IN THOSE CATEGORIES IN WHICH THE
    U.S. HELD A COMMANDING MARKET SHARE, INTER ALIA, AVIATION
    MOTORS AND AVIATION PARTS, U.S. EXPORTERS WERE ABLE TO
    OUTDO THEIR FOREIGN RIVALS IN TERMS OF INCREASING SALES.

    ¶7. (U) IN REVIEWING THE DATA, IT IS IMPORTANT TO BE AWARE
    THAT THE OCCURRENCE (OR NON-OCCURRENCE) OF SEVERAL HIGH-
    VALUE ADDED SALES IN A SPECIFIC YEAR COULD DISTORT THE
    EXPORT TOTALS FOR THAT YEAR.  FOR INSTANCE, TURNING BACK TO
    USDOC FIGURES, ONE HTS CATEGORY WHERE THIS MIGHT TAKE
    PLACE, MIGHT BE "AIRCRAFT, SPACECRAFT AND PARTS THEREOF."
    HOWEVER, LOOKING AT THE FIVE BEST YEARS FOR U.S. EXPORTS
    UNDER THIS LINE ITEM (2001 - $1.569 BILLION, 2002 - $1.236
    BILLION, 2004 - $1.274 BILLION, 1999 - $.954821 BILLION,
    AND 1998 - $.910094 BILLION), IN THREE OF THOSE YEARS TOTAL
    U.S. EXPORTS DECLINED AS COMPARED TO THE YEAR BEFORE.

    ¶8. (SBU) THE DIFFICULTY OF DOING BUSINESS IN BRAZIL MAY BE
    ONE REASON BEHIND THE SPOTTY PERFORMANCE OF U.S. EXPORTS.
    FOR INSTANCE, A RECENT STUDY PREPARED BY THE MINISTRY OF
    DEVELOPMENT, INDUSTRY, AND COMMERCE CONCLUDES THAT BRAZIL'S
    PORTS ARE OPERATING AT VERY NEAR THE SATURATION POINT.
    EVEN AT BRAZIL'S MOST EFFICIENT PORTS, THE COSTS OF MOVING
    CARGO ARE SIGNIFICANTLY HIGHER THAN THOSE IN MANY
    INDUSTRIAL COUNTRIES.  MEANWHILE, A DIZZYING ARRAY OF
    TAXES, FEES, AND OTHER SURCHARGES (A NUMBER OF THEM
    CASCADING, I.E., INCLUDING OTHER TAXES IN THE CALCULATION
    BASE) CAN MAKE FINAL PORT COSTS UP TO 70 PERCENT HIGHER
    THAN FREE ON BOARD PRICES.  SOMETIMES IT TAKES LOCAL LEGAL
    REPRESENTATION TO MANEUVER THROUGH THE INTRICATE MAZE OF
    REGULATIONS, WHICH, OF COURSE, ONLY DRIVES UP IMPORT COSTS
    EVEN MORE.  NOTWITHSTANDING THE DIFFICULTIES INHERENT IN
    EXPORTING TO BRAZIL, THIS CANNOT FULLY EXPLAIN THE LAGGING
    U.S. EXPORTS - AFTER ALL, ASIAN AND AFRICAN EXPORTERS FACE
    THESE SAME PROBLEMS AND THEIR SALES TO THE BRAZILIAN MARKET
    ARE INCREASING.

    ¶9. (U) THE SILVER LINING TO THIS CLOUD IS THE PERFORMANCE
    OF U.S. EXPORTS FROM SMALL AND MEDIUM-SIZED ENTERPRISES
    (SME), WHICH OVER A TEN-YEAR TIME PERIOD HAVE REGISTERED
    SOLID GROWTH.  SPECIFICALLY:

    --  U.S SME EXPORTS TO BRAZIL INCREASED IN VALUE BY 242
    PERCENT FROM 1992 TO 2001.  IN US DOLLAR TERMS, THE
    INCREASE VALUE WAS NEARLY US$2.65 BILLION.

    --  OVER THIS SAME TIME-PERIOD, THIS 242 PERCENT GROWTH
    MADE BRAZIL THE FASTEST GROWING MARKET FOR U.S. SME EXPORTS
    IN THE WORLD.  MEASURED BY THE US DOLLAR GAIN (US$2.65
    BILLION), BRAZIL RANKED SEVENTH IN THE WORLD.

    --  MEANWHILE, IN 2001, 26 PERCENT OF U.S. EXPORTS TO
    BRAZIL CAME FROM SMES.

    THE EFFORTS EXERTED BY THE U.S. COMMERCIAL SERVICE OF THE
    DEPARTMENT OF COMMERCE ON BEHALF OF U.S. SMES ARE ONE OF
    THE CHIEF REASONS BEHIND THIS INCREASE IN SME EXPORTS TO
    BRAZIL.  IT IS ESTIMATED THAT THE U.S. COMMERCIAL SERVICE
    HAS ASSISTED OVER 200 COMPANIES PER YEAR FOR THE LAST TEN
    YEARS IN ENTERING THE BRAZILIAN MARKET (INCLUDING 281 IN
    2003 AND 171 IN 2004.)  THIS IS IN ADDITION TO HELPING
    COMPANIES ALREADY EXPORTING TO BRAZIL TO INCREASE THEIR
    SALES (I.E., 272 IN 2003 AND 371 IN 2004.)  OTHER U.S. SMES
    COME TO MARKET THEIR WARES AT THE DOZENS OF REPUTABLE
    INTERNATIONAL SHOWS IN SAO PAULO AND OTHER BRAZILIAN
    BUSINESS CENTERS.

    ¶10. (SBU) RECENTLY PRESIDENT LULA HAS THREATENED TO
    ENCOURAGE GREATER IMPORTS IF LOCAL BUSINESS DOES NOT HOLD
    THE LINE ON PRICE INCREASES.  WHILE, IN OUR VIEW, THE GOB
    IS PRINCIPALLY USING THE PRESIDENT'S STATEMENTS AS A DEVICE
    TO JAWBONE THE BUSINESS COMMUNITY INTO HELPING HOLD THE
    LINE ON INFLATION, IT WOULD BE A MISTAKE TO ASSUME THAT HE
    WILL NOT ACT IF HE HAS TO.  INDEED, ON MARCH 4, AT FINANCE
    MINISTER PALOCCI'S REQUEST, LULA ZEROED OUT TARIFFS ON
    IMPORTS OF 15 TYPES OF STEEL PRODUCTS, GIVEN THE RECENT
    SERIES OF PRICE INCREASES SPARKED BY SURGING WELL DEMAND.
    (REFTEL A).

    ¶11. (SBU) HAVING MADE CLEAR THAT, IN SPECIFIC CASES WHERE
    NECESSARY, HE WILL MAKE GOOD ON HIS THREAT, LULA IS NOW
    FREE TO RELENT ON THE IDEA OF SLASHING TARIFFS ACROSS-THE-
    BOARD -- ESPECIALLY SINCE DOING SO MIGHT ERODE THE BALANCE
    OF TRADE AND CURRENT ACCOUNTS SURPLUSES THAT THE GOB HAS
    WORKED SO HARD TO ACHIEVE.  THE 2004 CURRENT ACCOUNT (US$11
    BILLION) AND TRADE (US$33.6 BILLION) SURPLUSES HAVE HELPED
    IMPROVE BRAZIL'S REPUTATION WITH BOTH INTERNATIONAL MARKETS
    AND THE CREDIT RATING AGENCIES, AND HAVE PROVED A READY
    SOURCE FOR FINANCING DOLLAR-BASED LOANS.  IT IS UNLIKELY
    THAT THE GOB WILL END UP BITING THE HAND THAT FEEDS IT.

    DANILOVICH

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