Brazil-USA: Bumpy Road Ahead

Brazil-USA: Bumpy Road Ahead

I foresee a deterioration of relations between the Bush administration
and Lula’s PT version of
Brazil. The American president will
soon remove career diplomat Donna Hrinak as the US envoy to Brazil.

This is a shame as she understands Brazil well. Her replacement
will probably be a Bush right-wing
political appointee.


Richard Hayes


Not much of significance has taken place in Brazil during the period of more than three weeks that I was out of the
country. The US dollar continues to be traded in the R$ 2.85-R$ 2.95 range, inflation seems under control at well under 1
percent per month, the trade surplus continues to increase and IMF targets are being met. The rosy macro economic picture
continues to make it easy for Brazilian banks and companies to roll their maturing foreign debt and place new issues while
investors gobbled up another US$ 1.5 billion sovereign debt issue.

C-bonds are selling above US$ 0.92 to the dollar and the so-called Brazil risk is at around 650. The SELIC or basic
interest rate was reduced by another point to 19 percent per annum this week. With inflation running at less than 10 percent per
year, real interest rates are still among the world’s highest. Banks have lowered what they charge to borrowers a bit but
personal credit still costs over 8 percent per month.

The structural reforms have made little progress in congress. Lula’s goal of having them approved by year-end may
not be reached. Both the tax reform measures and social security reform are bogged down as legislators spend little time in
Brasília actually working. It is too early to predict how all of this will work out. In the meantime, Brazilians work 133 days out
of the year just to pay taxes, according to one report.

Unemployment remains at record high levels in most sectors. Road building and other infra structure projects are
paralyzed for lack of funds and poor administration at the federal level. Lula’s promise to create 10 million new jobs during
his four-year term looks even more hollow as fewer people are working now than when he took over on January 1 of this
year. His personal popularity continues to erode and less than 50 percent of persons polled recently think that the PT
government is doing a good job.

In an effort to encourage new investment by industry, Finance Minister Antônio Palocci and other key ministers met
with ten top business leaders this week to hear their suggestions and gripes. High interest rates and doubts about future
buying power of the populace have impeded expansion of productive capacity. While utilization in some areas is running as
high as 80 percent, in the capital goods sectors, new orders are scarce with factories showing 35-40 percent of unused
capacity. The fact that this government is talking with the private sector at all is positive. But aside from Palocci, Development
Minister Luis Fernando Furlan and Agriculture Minister Roberto Rodrigues, the ministry seems more occupied with
redistribution of income rather than job creation.

Lula’s social programs have yet to show any signs of realization. The Zero Hunger plan, which gained much
attention for Lula at home and abroad, has now been rolled into a new program labeled "Bolsa Família," a sort of catch-all
hand-out scheme aimed to help poor people. So far this is all talk and most of the funds go to bureaucrats leaving little left over
for those for whom the program is supposed to help. Some administrative changes were made as in the social area that may
be a prelude to a reorganization of Lula’s cabinet that could begin next month.

FTAA Impasse

Talks between the US and Brazil about the Free-Trade Area of the Americas, or FTAA (ALCA in Portuguese) seem
to be leading nowhere. Unfortunately, Itamaraty (the Brazilian Foreign Service) is in charge of the negotiations on the
Brazilian side whereas the US leaves diplomacy to the diplomats and specialists in the matter handle trade issues.

Robert Zoellick, the American Trade Representative with ministerial rank, once kept Lula waiting for a time
deemed excessive when Lula as a presidential candidate was visiting Washington a few years back. This old insulting incident
plus the general third world mentality of those chosen by Itamaraty to lead the talks seem to have overly prejudiced Brazil
against attempting to reach any agreement.

No effort to technically examine the issues to determine if some specific points could be maneuvered to Brazil’s
advantage is evident. Emotion seems to predominate over reason.

Ademar Bahadian of Itamaraty, who is the co-chairman of the talks along with an American representative,
illustrated this xenophobic attitude during a recent appearance at a seminar about the role of legislators regarding ALCA in Brasília.

US intransigence over farm subsidies and anti dumping policies have done little to give strength to rational
Brazilians who may want to find a way to have more free access to the huge American market. Wise cracks by Peter Allgeier, an
American under Secretary of Commerce, have not helped the American cause and created fodder for anti American slanted press reporting.

Zoellick, who blames the recent Cancun fiasco on Brazil’s leading a group of 22 nations opposed to the trade
policies of the US, Europe and Japan, is scheduled to meet with the Brazilians in Miami next month. Celso Amorim, Brazil’s
Foreign Minister, has yet to confirm his presence alleging other pressing matters.

Amorim as the number one man in Itamaraty is responsible for having pushed Lula’s pointless visit to Cuba after a
recent swing through New York and Mexico. Maintaining such a friendly relationship with Fidel, whose treatment of the
political opposition has been condemned by most of the free world, does little to ingratiate Lula and Brazil in world circles and
the Bush anti-Cuban administration.

If Brazil chooses to not join FTAA for one reason or another, it will be difficult to determine which side is to blame.
Two wrongs do not make a right. Perhaps Brazil will allow the voices of the private sector and more reasonable ministers
such as Furlan and Rodrigues to be heard. Even Lula, who once called FTAA an annexation of Brazil by the US, has
suggested that perhaps Brazil should seek means to take advantage of the positive aspects of a free trade agreement. Itamaraty
should take note if Brazil is not to be left sitting on the sidelines.

Eventually such a treaty would have to be ratified by the Brazilian congress, a difficult feat even in normal times.
José Genoíno, president of the PT (Workers’ Party), has suggested that a plebiscite should determine if Brazilians want to be
a part of the hemispheric free market. Given the lack of knowledge of what is involved on the part of voters and strident
opposition from certain politicians, it is doubtful that such an issue would be approved.

The same could be said if such a matter were to be put before the public in the US, which has its own unemployment
problems and feels that free trade agreements cause a dislocation of manufacturing facilities away from the United States.

The meeting in Miami next month will be crucial to keeping the door open for a possible solution that satisfies all
concerned. All the other Latin American and Caribbean countries, with the possible exception of Argentina and Paraguay,
are anxious to gain easier access to the US market. With or without Brazil, some sort of an agreement will probably be
reached by the end of 2004 unless US protectionists are vociferous in an election year.

Regardless of the outcome of these important trade talks, I foresee a deterioration of relations between the Bush
administration and Lula’s PT version of Brazil. For one thing, Bush will soon remove career diplomat Donna Hrinak as the
US envoy to Brazil. This is a shame as she understands Brazil well, knows Lula from her days in the Consulate General in
São Paulo and has probably been able to explain to Washington that Lula’s style and ideology do not necessarily reflect the
stance of all influential Brazilians.

Her replacement will probably be a Bush right wing political appointee, who may not be as tolerant as Ms. Hrinak is
of the socialistic, leftward leaning of Brazil’s current government. By the same token, it is rumored that Rubens Barbosa,
the competent Brazilian ambassador in Washington and a hold-over from Fernando Henrique Cardoso’s government, will
be retired early next year and will likely be replaced by a more "progressive" element from Itamaraty’s bevy of
nationalistic diplomats. Therefore the dialog between the hemisphere’s two most important nations could soon become more complicated.

As the year-end Christmas season approaches, there is a feeling of moderate optimism in the air. This year’s retail
sales could be better than 2002. After GNP growth of less than 1 percent this year, government forecasters are talking about a
3-3.5 percent increase in GNP next year. From where the buying power and investment in industrial capacity and
infrastructure projects to make this happen will materialize has yet to be defined.

São Paulo, 27 October 2003


Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. Since then,
Hayes has worked directly and as an advisor for a number of Brazilian and international banks and companies.
Currently he is a free lance consultant and can be contacted at

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