Title: U.S.-Brazil: A New Era of Bilateral Cooperation
BRAZIL: A NEW ERA OF BILATERAL COOPERATION
Linda H. Eddleman
Deputy Assistant Secretary
Bureau of Western Hemisphere Affairs
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. In recent years, Brazil's economic modernization program and more forward-leaning approach to international issues have led to much greater interaction between our two societies. U.S.-Brazilian commercial activity has surged, the number of citizens traveling between our two countries has climbed, and Brazilian participation in hemispheric and international events has risen. In my testimony today, I will review the current state of U.S.-Brazilian bilateral ties, with a focus on political, economic, and security issues.
Brazil: A Growing International Actor
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% of South America's population and over 45% of GDP. It shares a common border with all but two of South America's nations, and its Lusophone 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 pivotal to hemispheric prosperity, and also impacts on U.S. and global financial markets. Brazil is influential at the UN and other multilateral fora, and is active on international security and peacekeeping issues. Within the hemisphere, Brazil is critical to efforts to deepen democracy and to promote regional stability. Brazil's rich biodiversity, including the extensive resources of the Amazon, makes it a vital participant in efforts to protect our global environment. In fact, 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. In fact, 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. U.S. exports to Brazil were $13.2 billion in 1999, with the stock of U.S. direct investment exceeding $35 billion.
The vigorous political activity now underway in Brazil in anticipation of nationwide municipal elections in October is testimony to the country's vibrant democracy. Since the end of military rule in 1985, 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 established a civilian Defense Ministry last year. Brazil's federalist system provides multiple opportunities for local involvement in politics, and numerous political parties and non-governmental organizations create an active civil society. An aggressive, independent press also enriches political and cultural life, and helps hold politicians accountable to the public. Recent opinion polls show a high level of public dissatisfaction with the Brazilian political system's seeming inability to solve the country's daunting social problems -- including income inequality, high crime, unemployment, and the poor quality of public services -- but no significant political actor in Brazil advocates a break with democratic governance.
The Real Devaluation and Economic Recovery
Brazil's economic crisis in late 1998, which was triggered by the Russian default and Brazil's failure to curb its large fiscal deficits, 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 meltdown in Latin America and deepen the turmoil in international capital markets. The impact on Argentina, which sends over 30% of its total exports to Brazil, would have been especially grave. These considerations led the IMF, World Bank, and IDB -- in close consultation with the U.S. -- to assemble a $41.5 billion financial package to help Brazil overcome the crisis. The U.S. contributed $5 billion from the 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 devaluation and to embark on a path of renewed growth. Brazil's economy grew by almost 1% of GDP in 1999, with consumer inflation under 9%. This year, the economy is projected to register GDP growth of 3.5-4%, with inflation falling to 6%. Brazil has regained access to international capital markets and repaid the loans disbursed by the U.S. and other bilateral lenders ahead of schedule. It has maintained sound fiscal and monetary policies, and its public sector fiscal deficit will fall from over 10% of GDP in 1999 to 4.5% this year. Still, while the economy appears to be recovering from the detrimental effects of its financial crisis in early 1999, substantial hurdles remain. 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.
Despite Brazil's better than expected economic performance in 1999, the real devaluation put substantial pressure on other economies in the region. Argentina's economy fell by 3% of GDP, and Uruguay and Paraguay experienced negative growth. Trade within MERCOSUR (Southern Cone Common Market) -- the imperfect customs union consisting of Brazil, Argentina, Paraguay, and Uruguay -- dropped by 25%, and MERCOSUR members erected an array of tariff and non-tariff barriers to intra-regional trade. Still, Brazil's strong recovery this year has boosted growth in the region, and alleviated trade tensions within the group. Moreover, Brazil and Argentina have worked to improve macroeconomic coordination within MERCOSUR, and to resolve specific sectoral disputes over autos, textiles, sugar, and footwear. However, the consolidation of macroeconomic stability in Brazil remains key to the Southern Cone's economic prospects.
Brazil-U.S. Economic Ties
President Cardoso's economic modernization program has created numerous trade and investment opportunities for U.S. firms. Total bilateral trade reached $24.5 billion in 1999 -- up from $16.8 billion in 1994 -- and U.S. exports rose 64% during this period. Brazil was the 13th-largest export market for U.S. goods in 1999, and the U.S. ran a bilateral surplus of $1.9 billion. Capital goods and other high-value added products account for about 50% of our exports. Moreover, U.S. direct investment in Brazil almost doubled between 1994-99, rising from $19 billion to over $35 billion. Brazil is the eighth-largest recipient of U.S. direct investment in the world, and accounts for almost 50% of U.S. investment in South America. Over 400 of the Fortune 500 companies, including Colgate, Citibank, Compac, Bell South, and Ford, have operations in the country. Manufacturing accounts for almost 60% of U.S. investment, but the fastest-growing sectors are telecommunications and energy. The U.S. share of total foreign direct investment in Brazil is about 28%, and U.S. firms have been the leading participants in Brazil's privatization program.
The size of Brazil's economy and its growing trade and investment links with the U.S. and other countries in the hemisphere make it an essential player in the Free Trade Area of the Americas (FTAA) negotiations. Brazil accepts the Miami Summit commitment to reach an agreement by 2005, and will co-chair the talks with the U.S. during the final phase of negotiations starting in November 2002. Still, it generally favors a slower pace in the talks than that advocated by the U.S. The government voices concern that the absence of U.S. "fast track" negotiating authority and the impact of U.S. trade barriers on some of Brazil's largest exports. Brazil continues to spearhead efforts to revitalize MERCOSUR and also hopes to use a Summit of South American leaders convened by President Cardoso for late August to revive trade talks between MERCOSUR and the Andean Community. The U.S. supports these efforts at subregional trade liberalization as long as they are WTO-consistent, support further market-opening in the hemisphere, and are trade creating rather than trade diverting. Brazil and its fellow MERCOSUR members are also engaged in trade negotiations with the European Union, but Europe's reluctance to trim its agricultural subsidies makes progress unlikely in the near term.
The rapid expansion of U.S. investment in Brazil has inevitably led to a growing number of trade and investment disputes. The USTR is currently engaged in WTO consultations on issues involving intellectual property rights and custom valuation. On investment, one problem is the conflict between U.S. investors and state authorities over control of an electric utility company in the state of Minas Gerais. A second case involves a dispute between a U.S. telecommunications firm and Brazilian federal tax authorities over unpaid tax bills stemming from the Telebras privatization. Similarly, heavy U.S. investment in Brazil's services sector -- and the resulting introduction of new technologies and business practices -- has increased the need for greater certainty and coordination on tax issues. Our ability to help U.S. firms deal with these issues has been hampered, however, by the lack of basic bilateral commercial agreements that we have with many other countries. In this vein, we are encouraged by the Treasury Department's goal of expanding the United States' network of bilateral income tax treaties in Latin America, and support efforts to conclude a tax treaty that would provide benefits to U.S. and Brazilian taxpayers.
Enhanced Bilateral Institutional Links
Our enhanced economic relationship mirrors our increasingly close cooperation on a wide range of foreign policy, security, environmental, educational, and other multilateral issues. Presidents Cardoso and Clinton have met on several occasions over the last 5 years, and we have developed a variety of formal and semi-formal structures to help manage issues of mutual concern -- including an annual Common Agenda for the Environment meeting, annual meetings of the U.S.-Brazil Education Partnership, annual Bilateral Law Enforcement talks, annual Bilateral Working Group for Defense meeting, and biannual foreign policy consultations at the Under Secretary level. We are also exploring the possibility of setting up a bilateral Consultative Committee on Agriculture. These mechanisms have greatly facilitated bilateral policy coordination and have helped institutionalize our cooperative relationship.
Cooperation on Regional Issues
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 and non-interference, the internal affairs of nations, Brazil was in our view overly reluctant to speak out forcefully when hemispheric countries violated their citizen's basic human or political rights. We have welcomed greater Brazilian activism under the Cardoso administration in promoting the tenets of democracy internationally. For example, Brazil advocated the inclusion of a "democracy clause" in MERCOSUR. Under this provision, any MERCOSUR member that abandons democratic rule will lose its trade privileges in the group. The first-ever summit of South American presidents, which Brazil has called for in late August, 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 notable 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 7 Madrid meeting on Colombia, and it has informed the Pastrana government that Brazil adheres to the Madrid Declaration in favor of Plan Colombia. President Cardoso has met with Pastrana several times and has encouraged him to continue with his peace efforts. At the same time, senior Brazilian military officials have voiced concern about possible spillover from the Colombian conflict into Western Brazil, and have taken steps to increase Brazil's military presence in the border area. In addition, Raytheon's SIVAM (Integrated Amazon Monitoring System) project, which is scheduled to come on line in 2002, will help Brazil improve its control over its territory, including air space, to better combat narcotrafficking in the Amazon region.
Similarly, Brazil has worked with the U.S. and other regional actors to support democracy in other countries experiencing political turmoil. During the attempted military coup in Ecuador in early January, Brazil issued a strong statement stressing that Ecuador should resolve its problems with strict observance of democracy and constitutional order. It was instrumental in drafting a MERCOSUR communique on the situation, and helped craft an OAS declaration supporting constitutional rule. In Venezuela, Brazil has encouraged Venezuelans to deal with difficult economic and political issues within a democratic framework. President Cardoso has met with President Chavez on several occasions to reiterate this message. In Paraguay, Brazil has used its substantial economic and political leverage, including Paraguay's membership in MERCOSUR, to promote democracy and constitutional rule. Brazil granted asylum to former Paraguayan President Cubas during the 1999 political crisis, and recently detained former Army Commander and convicted coup plotter Lino Oviedo in Foz do Iguacu. Brazil has said it will carefully consider extradition requests for Oviedo presented by the Paraguayan Government.
On regional stability, Brazil's willingness to assume the lead role in the Peru-Ecuador border dispute, both diplomatically and on the ground in running the peacekeeping operation, was vital to the successful resolution of the conflict. Brazil also participates in the Defense Ministerial of the Americas process, and will host the fourth DMA in Manaus in October. The ministerial will focus on hemispheric security, mutual confidence building measures, and the link between defense and development.
Beyond the hemisphere, Brazil has worked successfully with the United States on a range of multilateral matters including international peacekeeping operations and non-proliferation. That said, there is an element of ambiguity in Brazil's cooperation with us. On the one hand, we are working together on a broader variety of issues than ever before. On the other hand, Brazil has a strong commitment to maintaining its traditional leadership role in developing country groups such as the Rio Group and the Group of 77. There are some within Brazil who fear that close cooperation with the U.S. will bring a loss of policy independence.
Brazil made a valuable contribution to international peacekeeping in the Ecuador-Peru border dispute, and has also participated in peacekeeping operations in Angola, East Timor, and Mozambique. Brazil's Lusophone connection has been particularly useful in Angola and East Timor, where it has consulted with the U.S. on the reconstruction efforts underway in both countries. Brazil strongly backs UN sanctions efforts against UNITA and has financed training programs to help demobilized Angolan soldiers return to civilian life.
Brazil has made outstanding progress on non-proliferation. Steps that show Brazil's commitment in this area include joining the Missile Technology Control Regime (MTCR) and the Nuclear Suppliers Group; forgoing MTCR-class offensive military missiles; implementing MTCR export controls; abandoning its nuclear weapons aspirations by joining the Tlateloco treaty; acceding to the Nuclear Non-proliferation Treaty (NPT) and the Chemical Weapons Convention; signing the Comprehensive Test Bank Treaty and joining the Biological Weapons Convention; and signing the Comprehensive Test Ban Treaty. In October 1998, our bilateral agreement concerning peaceful uses of nuclear energy went into effect. A tangible benefit of our cooperation on non-proliferation is the Technical Safeguards Agreement, which will permit U.S. satellites to be launched from the Alcantara space port once it is ratified by the Brazilian Congress.
Brazil has also been very supportive of U.S. non-proliferation efforts in South Asia, both as a member of the South Asia Task Force, and by serving as an important role model by virtue of its status as a state which chose to forgo nuclear weapons rather than engage in a costly nuclear arms race with a neighbor. Through its participation in the New Agenda Coalition, it also recently made an important contribution to moving the Nonproliferation Treaty Review Conference toward a compromise on nuclear disarmament issues.
Bilateral Military Relations
In the sphere of military relations, 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 immediately before and after World War II, deteriorated during Brazil's military government from 1964-85. 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 2 is a concrete example of increased mutual trust and will result in closer ties once it is ratified by the Brazilian Congress. Still, despite these positive steps, some elements within the Brazilian military remain wary of our intentions. For example, some members of the armed forces continue to assert that the U.S. has designs on the Amazon; an allegation that I am certain takes the Committee as much by surprise as it did the Department of State.
Space is another area in which U.S-Brazilian cooperation has flourished in recent years. In 1995, Brazil joined the Missile Technology Control Regime (MTCR), overhauled its military-controlled space program, and enacted a law governing sensitive technology exports. These changes enabled the U.S. and other countries with space programs to enhance cooperation on space issues including data sharing and experimental coordination. In 1996, the United States and Brazil signed a framework agreement for space cooperation, allowing for a wide range of activities. NASA and Brazil's new civilian space agency now work closely on a variety of programs directed toward the peaceful uses of outer space. U.S cooperation does not extend, however, to space launch vehicles. Brazil is the only developing country participant in the International Space Station (ISS), and is contributing hardware that is vital for the effective use of the station. President Cardoso recently reaffirmed his administration's commitment to the ISS by instructing the executive branch to ensure that funds are available to meet Brazil's ISS obligations even in a time of fiscal austerity.
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 greatly expanded Brazil's links with Latin America and the rest of the world. Brazil's importance to hemispheric prosperity prompted the U.S. to take the lead in assembling a financial package to assist Brazil during the real crisis, and has made it a key player in the negotiation of the Free Trade Area of the Americas. Increased bilateral economic activity has also generated pressure from both the Brazilian and U.S. private sectors for bilateral commercial agreements that reflect the new economic reality.
Similarly, President Cardoso's internationalist foreign policy approach has produced many opportunities for the U.S and Brazil to work together constructively on global and regional issues, and has resulted in the creation of a number of formal and semi-formal structures to facilitate policy coordination. These structures deal with issues ranging from security to the environment to regional stability and have been key in deepening the level of cooperation between our governments. The further development of such institutional ties will become even more important in managing bilateral relations as the extent of Brazil's involvement in the hemisphere and the world continues to grow.
House Committee on International Relations
U.S. Department of State