[WPRT 106-3]
[From the U.S. Government Publishing Office]
106th Congress WMCP:
1st Session COMMITTEE PRINT 106-3
_______________________________________________________________________
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
__________
REPORT
ON
TRADE AND ECONOMIC GROWTH MISSION TO VENEZUELA, CHILE AND BRAZIL
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
MARCH 31, 1999
Prepared for the use of Members of the Committee on Ways and Means by
members of its staff. This document has not been officially approved by
the Committee and may not reflect the views of its Members
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
LETTER OF TRANSMITTAL
----------
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Trade
Washington, DC, March 31, 1999.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Chairman Archer: I am pleased to transmit to you the
enclosed delegation report on the recent Subcommittee on Trade
mission to Venezuela, Chile, and Brazil. The report contains an
overview of the mission, summaries of meetings with top trade
officials and American embassy officials, and copies of several
documents pertinent to our mission. The primary purposes of the
trip were to meet with government and business officials in
each of the three countries to explore multilateral, regional,
and bilateral trade opportunities.
The report describes the issues surrounding the World Trade
Organization (WTO) negotiations set to begin in 1999,
particularly agriculture, services, dispute settlement, and
intellectual property in an effort to find areas of common
ground as well as to share views on how those issues should be
handled. The delegation also discussed issues in the ongoing
negotiation of the Free Trade Area of the Americas (FTAA) and
other regional arrangements, including Mercosur (the Southern
Common Market).
I hope that this information will be useful to you.
Sincerely,
Angela Ellard,
Staff Director, Subcommittee on Trade.
Enclosure.
MEMBERS OF THE DELEGATION
Members of the House of Representatives
HON. BILL ARCHER, Chairman HON. WILLIAM JEFFERSON
HON. E. CLAY SHAW HON. KAREN THURMAN
HON. LARRY COMBEST
HON. JAY DICKEY
HON. WES WATKINS
HON. PHIL ENGLISH
Staff
ANGELA ELLARD TIM REIF
DON CARLSON
TOM SELL
KAREN HUMBEL
C O N T E N T S
__________
Page
Letter of Transmittal............................................ iii
Members of the Delegation........................................ v
Overview of the Mission.......................................... 1
Venezuela.................................................... 5
Chile........................................................ 17
Brazil....................................................... 41
Attachments...................................................... 64
OVERVIEW OF THE MISSION
From January 7 through 16, 1999, a bipartisan delegation of
the Committee on Ways and Means led by Chairman Bill Archer
visited Venezuela, Chile, and Brazil to conduct a factfinding
mission on trade and economic issues. The primary purposes of
the trip were to meet with government and business officials in
each of the three countries to explore multilateral, regional,
and bilateral trade opportunities.
Specifically, the delegation discussed issues surrounding
the World Trade Organization (WTO) negotiations set to begin in
1999, particularly agriculture, services, dispute settlement,
and intellectual property, in an effort to find areas of common
ground as well as to share views on how those issues should be
handled. The delegation also discussed issues in the ongoing
negotiation of the Free Trade Area of the Americas (FTAA) and
other regional arrangements, including Mercosur (the Southern
Common Market). The delegation exchanged views concerning
bilateral trade disputes between the United States and each of
the three countries, particularly in the areas of agriculture
and intellectual property. The impact of the financial crisis
on trade liberalization was also a primary focus of the
mission, particularly in Brazil. In addition, the delegation
discussed the likely trade and economic policies of the new
Venezuelan Government. The delegation also discussed the
prospects for the U.S. administration to obtain trade
negotiating authority and whether trade negotiations could
proceed without having such authority in place. In Chile, the
delegation discussed a possible free trade agreement between
the United States and Chile. Finally, the delegation explored
the manner in which the three countries have dealt with social
security and pension reform. Attachment A contains a press
release announcing the delegation's visit.
Caracas, Venezuela
On January 8, the delegation received a briefing from U.S.
Ambassador John Maisto and his staff, focusing on political,
economic, and trade issues, particularly in light of the new
Chavez government set to take office on February 2. The
delegation next met with the Venezuelan American Chamber of
Commerce to discuss the perceptions of the U.S. business
community toward doing business in Venezuela. The group
stressed the need to conclude a tax treaty and a bilateral
investment treaty with Venezuela. In addition, the group asked
the delegation to expedite a visit between President Clinton
and President-elect Chavez.
The delegation next had a very cordial meeting with
President-elect Chavez. The President-elect emphasized that he
is a believer in democracy, and he promised to look into
concluding the bilateral investment treaty and the tax treaty
currently under negotiation with the United States. Chairman
Archer and Congressman Jefferson promised to do everything
possible to encourage President Clinton to invite Chavez to
Washington. After the meeting, each of the members of the
delegation signed a letter to President Clinton asking that he
receive Chavez. President Clinton then agreed, and Chavez
traveled to Washington later in January. (See attachment B.)
In a meeting with the Jose Ignacio Moreno Leon, one of the
economic advisors to President-elect Chavez, the delegation
discussed improving government efficiency. Moreno Leon noted
that the tax treaty was currently under review and that there
were no substantive problems remaining. Since that meeting,
U.S. Ambassador Maisto informed the delegation that the treaty
was signed by both parties. (See attachment C.)
The delegation met with the Vice Minister for Agriculture
and Livestock, Arnaldo Badillo, and discussed cooperation
between the United States and Venezuela in the agriculture area
and Venezuelan restrictions on U.S. poultry. With respect to
the ban on U.S. citrus, the Vice Minister said that the ban was
quite old and was being reviewed.
The delegation then attended a luncheon hosted by the
Council of Venezuelan-U.S. Businessmen (CEVEU) and discussed
U.S.-Venezuelan issues and the Venezuelan economic and
political situation.
After lunch, the delegation met with the Minister of
Industry and Commerce, Francisco Astudillo. The discussion
touched on the bilateral investment treaty, U.S. preference
systems, U.S. trade negotiating authority (fast track), and the
Free Trade Area of the Americas (FTAA) negotiations. Chairman
Archer also raised the issue of the trademark of Sysco, a
Houston company whose trademark had been stolen in Venezuela.
The Minister promised to resolve the issue quickly and appeared
optimistic of a good result for the company.
President Caldera then met with the delegation and
discussed the key accomplishments of his administration and his
optimism for Venezuela under the leadership of President-elect
Chavez.
In the last event of the day, the delegation was hosted for
dinner by the Minister of Energy and Mines and Petroleos de
Venezuela S.A. (PDVSA), the state oil company. The group
discussed depressed world energy prices, the need for new
technologies to enhance production, increased opportunities for
U.S. companies to participate, Venezuela's dependence on oil
revenues, and the impact of the new Chavez administration.
Santiago, Chile
The Codel then traveled to Santiago. On January 11, the
delegation received a briefing from U.S. Ambassador O'Leary and
his staff on the political and economic situation in Chile,
trade issues between the United States and Chile, recent
developments in the Pinochet case, Embassy security, and trade
development issues.
The delegation then met with the Chilean Minister of
Agriculture, Carlos Mladic, discussing prospects for fast track
and further trade liberalization through the FTAA process and
the WTO. The Chilean Minister of Finance, Eduardo Aninat, met
with the delegation next, again discussing fast track and
related trade issues. The Minister noted that negotiating a
free trade agreement without fast track would be difficult. He
further stated that Chilean standards on labor and the
environment are world class and that Chile would support a
trade agreement in which Chile was held to its existing
standards. Chile would oppose, he emphasized, being forced to
put in place even higher standards through trade negotiations.
On Monday, January 11, Congresswoman Thurman addressed in
the Conference on Women's Political Participation at the End of
the Century, at Valparaiso, Chile. The text of her speech is
included as attachment D.
On Tuesday, January 12, the delegation met with the
American Chamber of Commerce in Chile, discussing fast track
and trade negotiating opportunities. The Amcham participants
emphasized that the United States was losing out on
opportunities in Chile to its competitors because of the lack
of a trade agreement. The Amcham presented the delegation with
a report providing some examples of lost opportunities. (See
attachment E.)
The delegation met with Dr. Jose Pinera, the designer of
the Chilean pension system. He provided an interesting
background on how Chile reformed its pension system as well as
advice for U.S. legislators. Chairman Archer invited Dr. Pinera
to testify before the Committee on Ways and Means.
The delegation then met with the Foreign Relations
Minister, Jose Miguel Insulza. Issues such as fast track
authority, trade with Mercosur (the Southern Common Market),
existing strong Chilean protections on labor and the
environment, and the FTAA negotiations were discussed. The
Minister later hosted a luncheon for the delegation.
President Frei then received the delegation. He described
Chile's recent unilateral tariff reduction, social security
reform, Chile's labor and environmental protections, and
privatization. Next, in a meeting with German Molina, the
Chilean Labor Minister, the Members discussed Chile's approach
to fixing the pension system. In addition, Minister Molina
described Chile's child labor and minimum wage laws. Finally,
the delegation met with Juan Gabriel Valdes, Chile's Director
General of International Economic Relations, to discuss the
FTAA, fast track, and other trade issues. In response to a
question from Chairman Archer, Ambassador Valdes agreed to help
the United States in seeking EU implementation of the banana
and beef hormone decisions. With respect to labor and the
environment, Ambassador Valdes reiterated the point made by
other Chilean officials that Chile would not want to make
changes to its standards in order to qualify for a trade
agreement. This view, he noted, is shared by other Latin
American countries. The Ambassador and Chairman Archer
discussed the possibility of negotiating an agreement between
the United States and Chile without having fast track in place,
agreeing that such a strategy would pose risks.
Brasilia, Brazil
In Brasilia, the delegation met on January 13 with the U.S.
Embassy staff for a country team briefing. The Members
discussed with the staff that day's policy change by the
Brazilian Government to allow the Brazilian currency to float
in a wider band. In addition, they addressed the prospects for
Brazil to carry out the reforms required by the IMF.
The delegation then met with Brazilian President Henrique
Cardoso. The delegation strongly encouraged the President to
continue the reforms to which Brazil had committed. The
President reassured the delegation that the reforms were on
track, any setbacks were temporary, and that reform was
complicated by the fact that Brazil is a democracy and not an
autocracy. After the meeting, Chairman Archer issued a press
release expressing his confidence in Brazil. (See attachment
F.)
On January 14, the delegation continued its meetings, first
with Ambassador Jose Botafogo, the Executive Secretary of the
Brazilian Foreign Trade Board. In this meeting, the
participants engaged in an extended dialog about trade issues
between the United States and Brazil, including protection of
intellectual property rights, antidumping and subsidy
allegations concerning steel, and trade in orange juice and
other agricultural products.
In a meeting with Foreign Minister Luiz Lampreia, the
delegation again encouraged Brazil to continue its reforms. The
discussion turned to the issue of trade negotiating authority.
The Minister emphasized the danger of mixing trade and labor
issues, arguing that it could lead to a resurgence in
protectionism. The Minister also discussed the FTAA
negotiations, noting that it is difficult for Brazil to make
further concessions in the current financial environment.
The delegation also met with leaders from the legislative
branch of government. First, the delegation had a meeting with
Senate President Antonio Carlos Magalhaes, in which the
President guaranteed that the Congress will approve the tax
increases to which it has committed. In a meeting with leaders
from the Chamber of Deputies, the Members discussed a host of
trade issues, including steel, orange juice, and sugar. The
delegation was hosted for lunch by a group of Members of the
Senate and the Chamber of Deputies.
After lunch, the delegation met with Finance Minister Pedro
Malan, who emphasized the progress toward reform that the
Cardoso government has made. He explained that recent setbacks,
such as the failure to pass a government proposal on social
security reform, would be overcome. In addition, he noted that
the declaration by one governor that his state would not
service its debt to the federal government may have been
politically motivated. With respect to the decision of the day
before to devalue the currency, the Minister reassured the
Members that the move was sound and that world financial
leaders had been made generally aware of the issue in the past
weeks, although not right before the decision because of
confidentiality concerns.
In its last meeting in Brasilia, the delegation spoke to
Ambassador Celso Lafer, the Minister of Development, Industry
and Commerce, about the WTO negotiations, Brazilian protection
of intellectual property rights, and agriculture.
The delegation then traveled to Sao Paulo, Brazil.
Sao Paolo, Brazil
On Friday, January 15, the delegation was briefed by the
U.S. Consulate General about a variety of trade, economic,
political, and security issues. The delegation then met with a
panel of bankers to discuss the Brazilian financial situation.
The delegation then was hosted for lunch by the American
Chamber of Commerce in Sao Paulo to discuss trade and
investment issues. Finally, the delegation met with the
Industrial Association of the State of Sao Paulo (FIESP), an
organization of Brazilian businessmen about the economic and
investment climate in Brazil.
VENEZUELA
Country Team Briefing by Ambassador John Maisto and U.S. Embassy Staff
Caracas, Venezuela; Thursday, January 7, 1999
Ambassador John Maisto began by introducing his country
team. On the bus ride to Caracas from the airport, he had
described the current political situation in Venezuela, noting
that President-elect Chavez had been elected in December by a
57-percent vote and a 67-percent voter turnout in the presence
of U.S. observers. A former military official, Chavez led the
coup against the government in 1992. After he was jailed, he
entered politics and ran for President. It is unclear, however,
what policies he will espouse as President.
In the briefing, Ambassador Maisto concentrated on specific
issues relevant to U.S.-Venezuela bilateral relations. He spoke
of drug trafficking and transshipment, bilateral investments,
and intellectual property rights as issues that the Codel
should address. From a broader perspective on trade, he
mentioned that President-elect Chavez sees himself as a
successor to Bolivar, which could mean that his administration
will be even more regionally biased than the Caldera
administration. Regardless of all these problems and the
overarching uncertainties surrounding the new administration,
Ambassador Maisto believed there is a positive story to tell in
Venezuela. As he stated it, ``money can be made'' in Venezuela,
and the country team is eager to help American businesses and
entrepreneurs to tap into the possibilities.
Economic Counselor Perry Ball gave a brief presentation on
the relatively weak state of Venezuela's economy. He blamed the
current problem on the low price of oil, and the fact that the
Venezuelan economy is almost totally dependent on this one
natural resource. He also mentioned a systemic problem,
referred to as ``Dutch Disease,'' which caused an extreme
overvaluation of the Venezuelan currency, in turn creating
unrealistic exchange rates and making things difficult for
businesses trading internationally. He explained that this
situation will inevitably force the government to devalue its
currency, which he claimed needed to be done now. However, he
said that President-elect Chavez would most likely not devalue
the currency because it would most hurt those who support him,
and he could not afford to lose any political support when he
is pushing for constitutional reform.
Commercial Counselor Eric Sletten gave an overview of U.S.-
Venezuelan trade. He started out by giving some fact and
figures: The United States is the largest importer of
Venezuelan products and the largest exporter to Venezuela;
Venezuela is the twenty-third largest export market for the
United States; 49 percent of its imports come from the United
States and 30 percent of those come from the port of Houston;
it imports approximately 2 billion dollars' worth of goods per
year from Texas and is the second largest export market for
agricultural products from Texas; 62 percent of U.S. exports to
Venezuela are manufactured goods, the largest class of exports
being oil industry related (28 percent), the second largest
being telecommunications equipment. He mentioned that the
overvalued currency actually helps U.S. exports, and once the
currency is devalued one could expect to see a drop in exports
back to 1996 levels. Last, he mentioned three items that would
help U.S. exports: (1) signing a bilateral investment treaty,
(2) signing a tax treaty, and (3) increasing the number of
flights by U.S. airlines between Caracas and points in the
United States.
With respect to the bilateral investment treaty, the
Ambassador pointed to a number of outstanding problems. The
first problem is the insistence by Venezuela on a preference
for the Andean community. The second problem is the Venezuelan
technology transfer requirements.
Breakfast meeting with the Venezuelan American Chamber of Commerce
(VENAMCHAM)
Caracas, Venezuela; Friday, January 8, 1999
VENAMCHAM President Jorge Redmond welcomed members of the
Archer Codel to Venezuela and quickly touched on the many
questions confronting the Venezuelan business community today.
Referring to the recent Presidential election and transition to
the new administration of Hugo Chavez, Mr. Redmond spoke of a
``new era in Venezuelan Government.'' Mr. Redmond stressed that
the U.S. Government's actions toward this new government were
of great importance in terms of the tone that is set. In this
light, Mr. Redmond stated that the United States could send two
very positive signals by (1) expediting an official visit by
President-elect Chavez to the United States, and (2) sending a
high-level government official to President-elect Chavez's
February 2 inauguration. Mr. Redmond also stressed his hope
that the United States would maintain pressure on the
Venezuelan Government to expedite both a tax treaty and an
investment treaty between the two countries.
Chairman Archer responded by first offering a ``prospero
ano nuevo'' and introducing the other members of the Codel. He
expressed that the United States has often taken for granted
its good relations with Venezuela in the past--and that now we
must all work to foster those good relations in the future.
Chairman Archer mentioned that the Codel would be meeting with
the President-elect later in the day. He also stated his view
that the new that the President of the United States should
meet with President-elect Chavez as soon as possible and
promised to convey that message to the Clinton administration.
Meeting with President-elect Chavez
Participants: President-elect Chavez, Minister of Interior-designate
Luis Miquilena, Foreign Minister-designate Jose Vicente Rangel,
and recently appointed Deputy Foreign Minister Jorge Valero
Briceno
Caracas, Venezuela; Friday, January 8, 1999
The delegation met for 90 minutes with President-elect
Chavez. Chairman Archer began the meeting by congratulating the
President-elect on his election and saying that he is looking
forward to continuing a strong relationship with Venezuela. The
President-elect welcomed the delegation and the opportunity
that it presented to deepen the bond between the United States
and Venezuela. Chavez noted that he is a ``Jeffersonian
democrat,'' who deeply believes in democracy. The Venezuelan
people, he stated, have clearly and overwhelmingly proven their
strong will for democracy, not only in the electoral process
but with respect to ethical, moral, and social issues. He
promised to respect human rights, freedom of speech, and the
rights of minorities. He remarked that there has been much
reported in the press that he would set up a dictatorship or
violate human rights. However, he is not a dictator, he said,
and he does not intend to revoke democracy, as observers will
soon see for themselves. He pointed to his two cabinet
ministers-designate as an example of his openness, saying that
they are neither ``yes-men'' nor ``subordinates.''
The President-elect then began to discuss some of the
difficulties that Venezuela faces. The fair and equitable
dispensation of justice is one of the most critical elements of
a democracy, but the current system is nonfunctional. There are
many in jail, especially the poor, who have been denied due
process, he said, and even burned alive without anyone being
held responsible. He also pointed to the banking crisis, noting
that he is left with a $7 billion loss, representing 9 percent
of GDP, for which no one is responsible. The government, he
concluded, has been corrupt. He continued that the judiciary is
infiltrated by drug traffickers, who rule with tremendous
immunity. One of his priorities is to transform the judiciary
``deep down'' to recover the legitimacy of the system. Even the
executive branch is unaccountable and governorships corrupt, he
said, and many elected leaders are legal, but not legitimate.
``We must make our mandates legal,'' he said, so that we ``give
the people the democratic power to recall their mandate.'' The
legislative branch, he added, must be legitimized so that the
people have true representatives. He pointed to the election
for the Latin American parliament, noting that the slate system
meant that the people did not know for whom they were voting.
Democracy, he said, has been ``asphyxiated'' here, creating a
dangerous social pressure in a country with an 80-percent
poverty rate and millions unemployed. There has been a
``peaceful and democratic revolution here,'' he concluded, and
he asked for U.S. help.
Chairman Archer said that he, too, hoped to see a
strengthening of the bonds between the United States and
Venezuela. He remarked that he was pleased with the President-
elect's comments, noting that he was not surprised to hear that
Chavez was such a strong believer in democracy because he is
the ``product of one of the most open elections Venezuela has
ever had.'' He pointed to the 57-percent margin of victory as
being a strong endorsement of the President-elect and of
democracy. ``You'll carry the torch well,'' he said
confidently. The beauty of democracy, he added, is the prospect
for peaceful revolution, which means that no country can remain
isolated. He emphasized that it is important to keep the
channels of communication open.
Chairman Archer then turned to the pending bilateral
investment treaty and the tax treaty, asking the President-
elect to consider them carefully and quickly, if the current
government does not act first. The Chairman noted that Chavez
has said that he welcomes investment, and these treaties would
``give a high degree of comfort'' to investors to come in and
build, creating jobs and a higher standard of living. He added
that it is the shared view of the delegation that Chavez should
come to Washington after the inauguration, and he promised to
encourage President Clinton to invite Chavez.
Congressman Jefferson noted that he and Chavez have two
things in common: they are both Jeffersonian democrats as well
as lovers of baseball. He then echoed the Chairman's comments,
saying that he is encouraged by the President-elect's remarks.
Louisiana, he said, has a strong agriculture base and a natural
interest in trade. It is important to both Louisiana and
Venezuela to see the price of oil increase. He added that he
agreed that President Clinton should meet with Chavez, pledging
to request such a meeting--as long as Chavez promised to pitch
for the Democrats during the yearly Capitol Hill baseball game.
President-elect Chavez responded that he is ready to go to
Washington and recognizes the need to go, pointing to requests
from a number of industry sectors. He has talked to a number of
investors, he said, and has an ``ambitious program'' for
economic development that he wants to air. Venezuela is in a
difficult economic situation, he emphasized, with a deficit
representing 10 percent of GDP and a high foreign debt
representing 40 percent of the budget. The price of oil, he
added, is threatening to go below $7, but the budget was based
on a $12 price, meaning that the deficit may worsen. For the
first quarter of 1999, he needs $1 billion just to make the
payroll. Furthermore, a strike by oil workers could paralyze
that industry.
Chavez said that he has received invitations from the heads
of state of Spain, France, Germany, Italy, and Canada. It would
have been good to visit Washington, he said, but ``we will have
to wait.'' In his meetings, he intends to focus on both
political issues, especially his commitment to democracy, and
economic issues. He said that he will pledge to pay the
Venezuelan debt, but because the ``present profile is too
burdensome,'' he hopes to reschedule and seek a different
formula.
As to the pending bilateral investment treaty and tax
treaty, Chavez said that he has already begun to study the
agreements. He promised to ``energize'' the process, to
identify the delicate points and reactivate the negotiations.
He said that he will look to resolving problems and signing the
agreements. He also said that he has a bill almost ready on
foreign investment to be submitted to Congress in order to
``give safety'' to investors. He also expressed enthusiasm
about U.S.-Venezuelan cooperation in the areas of anti-
corruption, counternarcotics, and extradition.
After the meeting, Chairman Archer held a brief press
conference. When asked whether the issue of the constituent
assembly was addressed during the meeting, Chairman Archer
replied that it was not and that the issue is strictly an
internal one for Venezuela that he does not seek to influence.
He also said that the delegation would recommend to President
Clinton that he receive President-elect Chavez as soon as
possible after Chavez' inauguration on February 2.
Meeting with Jose Ignacio Moreno Leon, Economic Advisor to President-
Elect Chavez and Rector of the Metropolitan University
Participants: Jose Ignacio Moreno Leon and Carlos Tinoco (businessman)
Caracas, Venezuela; Monday, January 8, 1999
Mr. Moreno Leon, the founder and former superintendent of
SENIAT, the Venezuelan Tax Authority, commented that the focus
of the Chavez government will be to reduce government
expenditures. He indicated that the Chavez government is
planning to take several steps to achieve this objective,
including by improving government efficiency and reducing the
number of ministers in the President's Cabinet. For example, he
stated that the Interior Minister would likely also serve as
the Minister of Justice.
Chairman Archer urged quick approval of the bilateral tax
treaty as soon as the new government takes office and asked
what problems remained to acceptance and ratification by
Venezuela. Mr. Moreno Leon responded that it was his
understanding that the final text was being reviewed by the
Foreign Ministry and that there were no outstanding substantive
problems remaining. He indicated that one reason for the delay
in approval might be Venezuela's lack of familiarity with tax
treaties, which has caused the ministries involved to undertake
a more lengthy review process than might otherwise be the case.
Mr. Moreno Leon also indicated that the foreign ministry had
already approached key Members of the Senate, which will be
charged with preparing implementing legislation for the treaty,
to explain its provisions and sound out any questions or
concerns. He indicated that there was no reason at this time to
expect difficulty in Senate ratification and asked whether any
problems were expected in the U.S. Senate with respect to
ratification. Chairman Archer indicated that he was not aware
of any.
Chairman Archer then turned to the subject of the bilateral
investment treaty (BIT) and urged quick approval of that
agreement. Mr. Moreno Leon explained that Venezuela has raised
new concerns as a result of questions posed by Venezuela's
Ambassador to the World Trade Organization (WTO). In
particular, Mr. Moreno Leon noted the two points about
preserving a preference for Andean Pact country investors and
being able to require technology transfer as a condition for
making an investment. With respect to the regional preference,
Chairman Combest stated that the United States regarded all of
South America as important trading partners and was concerned
with subregional arrangements that granted exclusive
preferences to members. Mr. Moreno Leon took note of the points
raised by Chairmen Archer and Combest.
Mr. Moreno Leon mentioned that one potential element of the
incoming government's plan for fiscal reform was the
institution of a value-added tax. Mr. Moreno Leon explained
that the incoming government was considering replacing the
existing wholesale/luxury tax of 16.5 percent with a value-
added tax that did not include as many exemptions and applied
to retailers as well as wholesalers and manufacturers. Mr.
Moreno Leon indicated that, given the broader base of the tax,
it might be possible to set a lower rate, for example 12
percent. Congressman Shaw questioned whether it wouldn't be
simpler to institute a reformed sales tax. Mr. Moreno Leon
indicated that one of the objectives of the revised approach
was to increase tax revenues to the federal government, which
has been downsizing over the last several years even as state
governments have been increasing in size. A sales tax might
just feed the growth in state governments, he concluded.
Meeting with Vice Minister for Agriculture and Livestock, Arnoldo
Badillo
Participants: Vice Minister Badillo; SASA head Dr. Rudolfo Marcano
Caracas, Venezuela; Friday, January 8, 1999
Vice Minister Badillo began the meeting by wishing all
attendees a happy new year, and then introduced various
representatives of the Ministry of Agriculture attending the
meeting including the General Director for Livestock, the
Director of Farm Planning, the Director of Farm Extension, the
Director of Research, Director of Farm Statistics, and the
Director of Marketing.
Chairman Archer thanked the Vice Minister, introduced
members of the Codel, and yielded to Chairman Combest.
The Vice Minister spoke of the importance of the Binational
Commission for Agriculture made up of representatives of the
U.S. Department of Agriculture and the Venezuelan Ministry of
Agriculture (MAC) which had originally been established in
1983, and was recently renewed in January of 1998. He noted
several agreements that had been produced in the most recent
meeting of the Binational Commission in May 1998. In the area
of farming statistics, USDA's National Agricultural Statistics
Service (NASS) is facilitating the development of a permanent
counting system and is funding a scholarship which brings young
statisticians to Venezuela to provide hands-on guidance. Also,
USDA's Economic Research Service (ERS) has set up a computer
model to measure the economic and social impacts of
agriculture. Regarding issues of sanitation and control, USDA's
Animal Plant Health Inspection Service (APHIS) is providing
needed technical expertise. Mr. Badillo mentioned this
cooperative effort had proved crucial to the eradication of
foot and mouth disease in cattle in some states, as well as in
the eradication of a certain fruit fly from the Paraguana
Peninsula, enabling the export of melons grown on this
peninsula to the United States. He also mentioned cooperative
efforts in agricultural extension and marketing programs. Mr.
Badillo concluded by saying that the Binational Commission also
acts as a productive informal channel for working out disputes
and concerns more efficiently, suggesting that it should be
even more active in the future.
Chairman Combest stated the Codel's interests--to further
cooperation and good relations between the two countries. He
then raised some problems between the United States and
Venezuela. Chairman Combest focused on the fact that health and
food safety concerns are often raised as trade barriers in
disguise. He pointed out as an example Venezuela's questionable
import restrictions on U.S. poultry and stated it is for
problems such as this that cooperation and communication
between USDA and the MAC is so important. (According to the
USDA, the United States meets conditions set by Venezuela and
other Andean Pact countries for poultry because the United
States is free of highly pathogenic Avian Influenza and Exotic
Newcastle Disease.) He noted how such cooperation had benefited
Venezuela in the fruit fly-free designation on the Paraguana
Peninsula. Chairman Combest said he understands the political
need to protect one's own producers, but that this goal should
not compete with the goal of free and fair trade, which can be
mutually beneficial for producers and consumers. Chairman
Combest concluded in saying that he would like to return to
Venezuela with a group from the House Agriculture Committee so
as to focus on these issues more and to offer help in
facilitating better cooperative work in the future.
Mr. Badillo responded by saying that Venezuela is one of
the most open markets in South America and that it had
generally been liberalizing its trade laws since 1989. He also
pointed out that this is a difficult and sensitive reality from
the farmers' perspective, to which Chairman Combest noted
``farmers are the same everywhere.'' He said that while he and
other government officials believed it in the farmers' best
interests to advance multinational trade agreements, the
farmers were very contrary and had actually staged several
protests in recent years. However, he mentioned the last year
had been almost conflict free, and the Chavez administration
would be inheriting a relatively peaceful farming sector.
At this point, Vice Minister Badillo called upon his
colleague, Rudolfo Marcano, head of Venezuela's equivalent to
APHIS, to address health-related trade problems. Mr. Marcano
stated that pest and health issues are of great importance for
international trade. Although there are some very difficult
challenges which sometimes are no more than simple questions of
interpretation, Venezuela is working very hard to promote
reasonable actions and response to these difficulties. He noted
a great success in Venezuela's continuing to import U.S. wheat
throughout the karnal bunt scare after the completion of a
quick risk analysis. Regarding U.S. poultry, he noted that the
nonpathogenic strain of Avian Influenza that U.S. flocks carry
could become pathogenic and so it was still considered an
unacceptable risk. He explained, ``We know of the U.S. interest
(in exporting poultry to Venezuela), but we have to protect our
own people.'' He also noted that Venezuela is working closely
with APHIS on this matter. Regarding Florida citrus, he noted
that it is a very old and outdated law that prohibits Florida
oranges from import. He mentioned that Venezuela is currently
working to update the law and that he hoped this matter could
come to a mutually beneficial end in the near future.
Luncheon Hosted by the Council of Venezuelan-U.S. Businessmen (CEVEU)
Participants: Gustavo Marturet, President, Banco Mercantil; Alejandro
Reyes Sabal, Vice President, Venepal; Gustavo Vollmer Acedo,
President, Corpalmar; Pedro Carmona, President, Quimica Venoco;
Octavio Azpurua, Director, Corpbanca; Imelda Cisneros, Partner,
Arthur D. Little; Hernando De Castro, Partner, De Castro,
Degwitz, Lasry; Oscar Augusto Machado, Director, Sivensa; Luis
Hinestrosa, President, Rualca; Rafael Strauss, President,
Pequiven; Carlos H. Blohm, President, H. Blohm S.A.; Jose
Rafael Bermudez, Partner, D'Empaire, Reyna; Ana Teresa Wallis,
Executive Director, CEVEU
Caracas, Venezuela; Friday, January 8, 1999
The luncheon began at 12:30 p.m. at the Caracas Country
Club. It was hosted by Gustavo Marturet, Executive Director of
CEVEU, which is a 10-year-old nonprofit organization whose
purpose is to strengthen relations between Venezuela and the
United States. The group was divided among four tables, each of
which was hosted by a member of the Board of CEVEU.
Mr. Marturet delivered a welcome to the Delegation and
addressed both U.S.-Venezuelan relations and domestic
Venezuelan economic and political issues. He strongly
emphasized his belief and that of CEVEU that the relationship
between the United States and Venezuela is taken for granted by
both countries. However, his main point was that the private
sector in Venezuela (as represented by CEVEU) is important to
the economy but small in comparison to the public sector and
the many public sector industries. The private sector, though
small, reflects needed diversification in the economy away from
its petroleum base and enhances an open and democratic society.
CEVEU is committed to Venezuela being a part of the
international community. As such, Mr. Maturet listed the main
goals of their organization: (1) promotion of trade in general
and particularly a preferential relationship with the United
States; (2) completion and implementation of both the pending
U.S.-Venezuelan bilateral investment treaty (BIT) and the
pending U.S.-Venezuelan Tax Treaty; and (3) enhancing the role
of the private sector in Venezuelan society.
U.S. Ambassador John Maisto reiterated the U.S. position in
support for both treaties as well as the hope that they might
be concluded and signed at an early date. In response to a
comment by one of the CEVEU members that President-elect Chavez
has promoted a law that guarantees the sanctity of foreign
investments in Venezuela, the Ambassador pointed out that such
a law did not take the place of the BIT.
A discussion followed, led primarily by Pedro Carmona, with
regard to the domestic political environment in Venezuela, Mr.
Carmona was a candidate for one of the state assemblies in
voting that occurred in late 1998. He lost his election by 600
votes out of 26,000 cast. The President-elect has promoted the
idea of a new constituent assembly to replace the current
Congress. The CEVEU favors reform of the current Congress
rather than the replacement favored by the President-elect. If
the Congress is a vehicle for enacting changes in the
Venezuelan Government, each of the 26 states must ratify those
changes. President-elect Chavez says that ratification will not
happen if the states must ratify all changes. The current
constitution was written in 1961 by the two major political
parties in closed door sessions. Venezuela has had 23
constitutions in its history, including 4 this century. Until 2
years ago, when changes were enacted, the President appointed
every governmental official, including mayors and governors.
The Congress did, however, appoint the Supreme Court.
In commenting on the initial appointment of the Chavez
government, Mr. Carmona made the observation that most of the
new Chavez team is only now discovering the world that exists
beyond Venezuela, highlighting their almost exclusively
domestic political focus. He said that the new President's
Chief of Staff, in particular, was a surprise. President Chavez
appointed a prominent newspaperman to this job, which is
ministerial level. The new Chief of Staff was described as a
cross between Larry King and John McLaughlin and someone who
had not always agreed with Chavez in the past and certainly not
during the campaign. Mr. Carmona said that the new President is
tentatively reaching out to the business community but that
community remains wary given the President-elect's ties to Cuba
and the fact that he went to Cuba after his release from jail
for leading an abortive coup against the government.
A discussion ensued with regard to business conditions in
Venezuela. Oscar Machado, another CEVEU board member, commented
that bank loans now carried a 49-percent interest rate. In
addition, under Venezuelan law, 70 percent of bank deposits
must stay in the Venezuelan Central Bank and that fact severely
limits funds available for loans. In particular, he noted that
there is no market for small business loans, which hampers
promotion and expansion of the private sector. Again, with
regard to the private sector, he strongly stressed the
importance of continued preferences for Venezuela under the
Generalized System of Preferences.
Meeting with Gerencial Maldonado, Minister of Industry and Commerce
Participants: Minister Maldonado and Dr. Astudillo, Director,
Venezuelan Trademark Agency (SAPI)
Caracas, Venezuela; Friday, January 8, 1999
The delegation met with Industry and Commerce Minister
Maldonado and Dr. Astudillo, the head of the Venezuelan
Trademark Agency. The Minister began the meeting by noting that
Venezuela is in a time of transition but the change would be
peaceful. Although the incoming government has new plans, he
expects continuity. The Minister then raised the bilateral
investment treaty being negotiated between the United States
and Venezuela. He said that the ``fundamentals'' are done, but
there have been difficulties in concluding the agreement. He
hopes that concluding the negotiation will be a point of
continuity with the new government. The particular difficulties
that he pointed to include Venezuelan requirements for
technology transfer as a condition for foreign investment. In
addition, Venezuela seeks certain exceptions that the United
States disagrees with, including an exception for certain
``economic integration schemes'' to which Venezuela belongs
(such as Andean Community members). The Minister also pointed
to the issue of compensation for foreign firms in the event
that their assets are destroyed by the Venezuelan armed forces
during civil unrest, noting that this issue is less difficult
to solve. It is in the national interest to conclude an
agreement, and all parties must search for flexibility, he
said. The ``perfect should not be the enemy of the good,'' he
concluded.
The Minister then turned to the issue of U.S. preference
systems, such as the Generalized System of Preferences (GSP)
and the Andean Trade Preferences Act (ATPA). The Minister noted
that half of Venezuela's trade with the United States is
through the GSP program. This is an important program, the
Minister said, because it allows the development of
nontraditional exports. GSP renewal should be ``more stable,''
he said, because the current system creates uncertainty for
exporters. As to the ATPA, Venezuela is the only country of the
five Andean countries that does not receive preferences under
this program. The other Andean countries, he said, support
Venezuela's inclusion in the program. The program would be
helpful, he said, because Venezuela, a transit country for
drugs, must spend resources combating drugs. In addition, not
receiving the preference creates disparities in the region as
companies relocate in order to take advantage of the benefits.
The discussion next moved to the issue of fast track and
the Free Trade Area of the Americas Agreement (FTAA).
Congressman Shaw expressed the hope that fast track is
concluded quickly, but he noted that it is controversial.
Chairman Archer explained the constitutional reasons for the
fast track process and noted that there is support in the Ways
and Means Committee and in the full House under the right
circumstances, but the President ``put out no effort'' last
year and the bill failed. The ``overwhelming majority'' of
Republicans favor free trade, he said, and he promised to ``do
everything possible'' to get fast track passed, hopefully by
March. In the meantime, he hopes to enter into bilateral
agreements.
Chairman Archer then addressed the unresolved BIT
negotiations. With respect to the carve-out for the Andean
Community, the Chairman noted that Venezuela would probably
object if the United States sought to carve out its own
preferential relationships, thus illustrating that
``preferences are not acceptable.'' Nevertheless, he said, he
hopes to resolve the negotiations soon. With respect to the GSP
program, he said there is strong support in the United States
and that he wished the program could be made permanent. U.S.
budget rules, however, ``score'' the bill as spending money. As
a result, GSP extension competes with other groups seeking a
tax reduction, and an extension only for a limited period of
time is all that is possible. As to the ATPA, the Chairman said
that he could not fully address the issue at the meeting. He
noted, however, that the United States does not ``get credit''
for all that it does unilaterally in extending benefits without
asking for anything in return. He promised further discussion
on the issue.
The meeting turned to the issue of the trademark of Sysco,
a Houston company that had its trademark stolen by a former
Venezuelan distributor, Erasmo Morales de Paz. Sysco's attempts
to recuperate its trademark have resulted in a long-running
legal case. The Chairman thanked the Minister for his efforts
concerning Sysco, noting that although it is only one case, it
stands out to the United States and the world as an example of
whether Venezuela protects intellectual property rights. Dr.
Astudillo reviewed the current status of the case, explaining
that SAPI had nullified the Venezuelan pirate's trademark in
November, but Morales de Paz appealed the decision. As a
result, SAPI cannot issue Sysco the exclusive use of the
trademark. SAPI must now respond to the appeal, and he
anticipates that SAPI will stand by its initial decision.
However, that decision can then be appealed to the Ministry. If
that appeal is rejected, then Morales de Paz can appeal
directly to the Venezuelan Supreme Court, which could take 6 to
9 months. Dr. Astudillo noted that SAPI cannot grant Sysco
exclusive use of its trademark until the entire appeals process
is completed. He also noted that Sysco did not challenge the
use of the trademark in the time required by law. The United
States, however, has claimed that the patent was ``well
known.''
Chairman Archer asked how quickly a decision could be
rendered. Dr. Astudillo said that he hoped for a decision
during February. Chairman Archer expressed concern that the
current leadership in the Ministry could not commit the new
government and asked for a decision before the new government
took office. Dr. Astudillo responded that the current
leadership can make clear that the Sysco trademark was well
known, but a decision was not possible until the next Gazette
is published in mid-February. The Ambassador expressed
frustration with the appeals procedures, observing that the
lengthy process gives the pirate more rights than the aggrieved
party. The Minister and Dr. Astudillo replied that Supreme
Court action would probably be rapid and that the court
historically has respected Andean Decision 344, the statute
that governs this case. They were optimistic that the case
would be resolved quickly in a manner favorable to Sysco.
Meeting with President Caldera
Caracas, Venezuela; Friday, January 8, 1999
U.S. Ambassador Maisto opened the meeting by thanking
President Caldera for taking the time to meet with the Codel.
Chairman Archer then introduced each member of the Codel and
explained that the purpose of the trip was to reaffirm the
strong bonds of friendship between the United States and
Venezuela. Chairman Archer also explained that the Ways and
Means Committee was the oldest committee in the U.S. House of
Representatives and that it was responsible for all tax, trade,
social security, medicare, welfare, and customs legislation.
President Caldera welcomed the delegation and stated that
he considered himself to be a longstanding friend and admirer
of the United States. He expressed appreciation for the work of
the Codel and the U.S. Congress in strengthening the bonds of
friendship between Venezuela and the United States. He said
that he understood the congressional perspective since he had
been a member of the lower chamber in Venezuela and then a
senator, in addition to serving twice as President.
President Caldera stated that as President, he has had his
own difficulties persuading his powerful Finance Committee,
whose jurisdiction was comparable to that of Ways and Means, to
support government proposals. More generally, he stated that he
was pleased to say that his government has been able to govern
effectively over the last 5 years while holding only 20 percent
of the parliament. Governing was not always easy, he said.
However, President Caldera stated that the government, by
engaging in a dialog has been able to make progress in key
areas such as keeping peace with labor unions and advancing
more productive labor-management relations, even modifying the
social security law through a Tripartite Commission of labor,
business, and government interests. One of his key
accomplishments was to bring the banking system back to
stability, where 5 years before more than 50 percent of the
banks were insolvent.
Turning to the just-concluded presidential and
congressional elections, President Caldera stated that his role
was to ensure freedom and democracy, not to take a role or
endorse a particular candidate. He stated that conversations to
date between President-elect Chavez and the United States have
been very positive and that U.S. Ambassador Maisto was playing
an important and constructive role. He stated that he was
optimistic for the future of his country and for continued
strong Venezuelan-U.S. relations. In this context, he said that
completion of the Free Trade Area of the Americas by 2005, as
currently planned, would be an important step.
Dinner Hosted by Minister of Energy and Mines Erwin Arrieta
Participants: Minister Arrieta, PDVSA President Luis Giusti, Ambassador
and Mrs. Maisto, American Embassy Officials, and more than 20
top officials of Petroleos de Venezuela S.A. (PDVSA)
Caracas, Venezuela; Friday, January 8, 1999
The dinner began at 7:30 p.m. at Hacienda La Estancia in
Caracas. The Hacienda is a colonial era home in central Caracas
owned by PDVSA. The Hacienda and its grounds are located
adjacent to the former headquarters of the foreign oil
companies which developed Venezuela's oil industry, prior to
its nationalization. In addition to the Delegation, the guests
included Ambassador and Mrs. Maisto, American Embassy
officials, and more than 20 top officials of PDVSA. The dinner
was hosted by Energy and Mines Minister Erwin Arrieta. The
dinner was held outside on the Hacienda's patio. In addition to
a large head table, the Delegation was divided among six
additional tables, each hosted by a senior PDVSA executive.
Following the dinner, a tour of the Hacienda was conducted by
the Hacienda's staff.
The discussions at dinner were numerous and varied,
although primarily concentrated on several points: (1)
depressed world energy prices and its impact on Venezuela; (2)
the continued need for new technologies (primarily U.S.) to
enhance production; (3) increased opportunities for U.S.
companies to participate in the Venezuelan oil industry in
production, refining and chemicals; (4) the dependence of
Venezuela on oil revenues; and (5) the impact of the new Chavez
administration on oil policy and relations with the United
States and U.S. energy companies.
President Giusti's time as the head of PDVSA has been
highlighted by the opening of the Venezuelan oil industry to
foreign investment, which has allowed many U.S. companies to
bid on and receive interests in the development/redevelopment
of many oil fields. The Venezuelan Government has allowed
foreign investments in a number of older fields that need
extensive new production technology to retain and expand
production as well as several new exploratory areas.
President Giusti was at one time rumored to be considering
entering the now completed Presidential race. It was widely
assumed that President-elect Chavez would seek his replacement
as PDVSA's President. However, before Chavez took any action,
President Giusti announced that he would not remain as
President of PDVSA. It was the feeling of most PDVSA officials
at the dinner that, while Mr. Giusti is extremely well-
regarded, overall policies at PDVSA will not change as the
result of the executive turnover. In fact, most expect that his
successor would be appointed from the top executive ranks at
PDVSA.
Brief welcoming remarks were delivered by Minister Arrieta
following dinner, and Chairman Archer responded on behalf of
the Delegation. In addition to thanking PDVSA for hosting the
dinner, Chairman Archer commented not only on the historic
relationship between Venezuela and the United States in the
energy field but also on the specific long-term relationship
between his home city of Houston, Texas and Venezuela. Most of
Venezuela's oil exports enter the United States through the
Port of Houston, and, since Venezuela is one of the top
suppliers of U.S. imported oil, he expressed the strong need
for a vibrant and expanding U.S.-Venezuelan economic
partnership.
CHILE
Country Team Briefing by Ambassador John O'Leary and U.S. Embassy Staff
Santiago, Chile; Monday, January 11, 1999
The meeting was opened at 9 a.m. at the U.S. Embassy by
Ambassador John O'Leary. The Ambassador assumed his post in
Chile in the summer of 1998.
Ambassador O'Leary's opening remarks for the briefing
concentrated on three points: (1) the United States-Chile
bilateral relationship; (2) the Pinochet case; and (3) the
Crowe Committee Report on Embassy Security.
The Ambassador expressed that at no time have ties between
the United States and Chile been stronger. It is a superb
bilateral relationship that was solidified by President Frei's
visit to the United States in 1997 and President Clinton's
visit to Chile in 1998. He outlined the highlights of that
relationship occurring since he assumed his current post: (1)
accompanying the Defense Minister to Washington, DC in
September 1997; (2) the formation of a new Joint Consultative
Commission on Defense issues; (3) formation of the second Joint
Commission on Trade and Investment, which has the goal of
defining where further progress on trade issues can be made;
(4) the Consultative Commission on Agriculture, which has its
second Ministerial meeting in Washington DC in September; (5)
the signing of the bilateral agreement on labor issues; (6) the
beginning of formal talks in Baltimore on January 25 on a
Social Security agreement; (7) the inclusion of Santiago in the
Department of Energy's Clean Cities program (In winter,
Santiago is one of the most polluted cities in the world); and
(8) cooperation with the Interior Department's public lands
management team (30 percent of Chile is public lands).
With regard to the Pinochet case, the Ambassador believes
that Chile appreciates the U.S. position. The United States,
while taking no position on the case itself, has stated that it
is a matter of extradition between the United Kingdom and
Chile. The Ambassador commented that every democracy must
reconcile demands for justice with the need for reconciliation
and the United States is reviewing its documents with specific
references to human rights abuses in Chile under Pinochet and
will declassify where appropriate, although most records from
1963 to 1973 are already publicly available. The Ambassador
reported that he has unfettered access to Chileans from across
the political spectrum, and he believes that, even among the
many individuals in the government now who were strongly
opposed to the Pinochet government, most Chileans still oppose
the proceedings against Pinochet in the United Kingdom by the
Spanish Court.
With regard to Embassy security, the Ambassador reflected
that the Embassy attacks in Africa were during his first week
in Santiago. While 88 percent of State Department overseas
facilities do not meet the minimum setback requirements set in
1985, the new Embassy facility in Chile does.
Congressman Jefferson raised the issue of the Chilean
reaction to the failure to pass fast track legislation in the
United States. The Ambassador stated that the United States has
paid an economic price in missed opportunities since the Summit
of the Americas in 1995 and that most Latin American nations
will not negotiate seriously with the United States without
fast track. The Chileans were disappointed by the House vote
last fall but still want progress on trade liberalization. They
are over their initial disappointment and are ready to move
ahead. They have decided that the future of Chile lies in a
larger world and would herald the passage of fast track.
Chairman Archer raised the issue of Mercosur and Chile's
role. The Ambassador stated the Chile and Bolivia are associate
members of Mercosur. Chile continues to talk with Mercosur
about expanding its involvement and will explore options as
they develop, but Chile is clearly more interested in the long-
term with a more global trade opening.
Congressman Watkins raised the issue of current trade/WTO
issues with Chile. The Ambassador responded that two issues
were currently pending: (1) distilled spirits related to
preferential treatment in Chile for the domestic pisco liquor
versus U.S. imports; and (2) salmon, where there is talk that
Chile may seek WTO dispute resolution over antidumping
penalties levied by the United States since there is a feeling
among Chileans that the U.S. antidumping regime is
protectionist.
Chairman Archer raised the question as to whether Chileans
feel that they are being singled out by the United States in
trade disputes. The Ambassador replied that, in the popular
press, that attitude is prevalent but not among educated
Chileans. He cited examples and facts related to several trade
cases: (1) the mushroom case is actually against a 100-percent
U.S.-owned subsidiary in Chile; (2) in the tempered wood
products case, Chile is only one of many countries involved;
and (3) Chile is defending the U.S. position on environmental
impact statements. The Ambassador added that two issues of
current bilateral interest to the United States in Chile were
intellectual property rights on pharmaceuticals and the need
for lower tariffs on U.S. luxury automobiles.
Congressman Shaw spoke with regard to the dangerous
precedents that could grow out of the Pinochet case, and the
Ambassador agreed that the unprecedented case could present
risk to the United States in the future.
The briefing was then turned over to the Acting Chief of
Mission (ACM), who briefed the Delegation on the political
situation. The current Government of Chile is a center left
coalition, and elections are scheduled for December 1999. The
leader of the Socialists (Lagos) was considered the frontrunner
until the Pinochet case but the situation has now changed. He
believes that there is a lack of other dynamic candidates
within the government coalition. Among the opposition, the two
leading candidates were not ``clicking'' with the electorate,
and one dropped out on Friday.
In response to a question from Chairman Archer about what
issues divide the major opposing political coalitions, the ACM
pointed to three primary issues: (1) the size and role of
government; (2) appropriate the tax base; and (3) the role of
the private sector versus maintaining the social safety net. He
added that there were three areas of broad agreement
politically: (1) public safety; (2) public education; and (3)
infrastructure. He also added that drug policy was not a
divisive issue. In response to Congressman Shaw's question
about controlling the export of precursor chemicals for drug
production, the ACM replied that, while the Chileans were aware
of it, there had not been a lot of progress in that area.
Chairman Combest asked if the Chileans follow up on
intelligence information that is shared with them by the United
States with regard to precursor chemicals. The ACM said that
there was not much intelligence information to follow up on.
Some precursors originate in the United States, and Brazil is a
primary source for Bolivian drug production while Chile is a
secondary source.
Congressman Dickey asked the foreign service careerists on
the Embassy staff to describe their goals. The ACM replied that
his goal was to see Washington decisionmaking become more based
on the facts they gather and trying to improve receptivity
overseas to U.S. ideas and products. Congressman Watkins
commented on the positive work that the Embassy was playing in
improving U.S. exports to Chile.
The Economic Counselor then made a slide presentation on
Chile, noting Chile had 8-percent annualized growth in this
decade and that while growth was down, it would continue. He
cited the primary reason for Chile's growth as the focus on
exports, which now constitute 20 percent of GDP, including
services. In addition, 50 percent of Chile's economy is somehow
connected to exports. Chile sees North America and the Europe
as providing the greatest opportunities for growth, and
currently the United States has a $2 billion trade surplus with
Chile. Chile has free trade agreements (FTAs) with every
country in the hemisphere, except Central America and the
United States. While the growth rate in U.S. exports to Chile
has been declining since 1995, Canada's exports are up 50
percent in the first full year (1997) of its FTA with Chile.
According to the Economic Counselor, U.S. competitors are
growing faster than U.S. companies in Chile, and he cited the
recent telephone contract awarded to a Canadian company over a
U.S. company as a big part of the growth in Canada's exports to
Chile.
Don Carlson asked about specific cases of lost U.S. sales
in Chile. The Economic Counselor said such information was
difficult to quantify and cited cases in which McDonald's is
now sourcing french fry machines from Mexico and another
company is sourcing Caterpillar equipment from Caterpillar's
Brazilian subsidiary.
The Commercial Attache explained the role which he and his
staff play in assisting U.S. business in Chile. He cited: (1)
the opening in Chile of Home Depot's first international
location, where company officials saw more traffic in the first
2 weeks that any other store opening; (2) the $350,000 sale of
trout eggs from Washington State; (3) Motorola's success in
winning a police communications contract over a French bid; (4)
1,596 counseling sessions last year for American businesses;
(5) helping U.S. businesses collect bills owed by Chileans; and
(6) a commitment to concentrate on helping small U.S.
businesses which have a greater need for Embassy services. He
described several characteristics of the Chilean market that
impact on U.S. sales: (1) young but aging population; (2)
generally well-educated consumers; (3) poverty levels that have
decreased from 45 percent in 1987 to 23 percent in 1996; and
(4) a concentration 40 percent of the population in Santiago.
He also cited the fact that there are more ADRs (stocks) from
Chile traded on the New York Stock Exchange (26 issues) than
there are Mexican ADRs.
The Agriculture Attache cited the United States as a
growing market for Chilean products, noting that 1999 will see
some substantial growth in U.S. agricultural exports,
particularly feed given the drought in Chile. Areas of big
growth for Chile in the United States include seafood, seeds,
wine, and forest products. He also cited case studies that
point out particular problems for the United States in the
Chilean market: (1) U.S. potato exports, which are down 27
percent despite 7-percent market growth; (2) pet food, where
the United States is up only 20 percent versus 469 percent for
Argentina and 338 percent for Canada and where Ralston Purina
is now producing its products in Argentina for Chile; and (3)
beer, where the United States is down 30 percent versus 16-
percent market growth and where Budweiser is now produced in
Argentina for the Chilean market. He further cited the impact
of duties and Mercosur in these and other similar cases.
The Defense Attache cited recent developments in military
sales to Chile. The Chilean Air Force is now considering the
replacement of 30-year-old A-37 fighters with the choice of:
(1) the F16 or F18A from the United States; (2) the Mirage from
France; or (3) the Grippen from Sweden. The initial sale will
be in the range of $600 million for 20 planes, with a potential
total of 60 planes.
Congressman English raised the issues of the labor and
environmental regimes as they exist today in Chile. The Embassy
staff replied that the recent Chile-Canada FTA contained a side
letter to the agreement to maintain the maximum parallel to
similar side provisions in NAFTA. The level of environmental
protection in Chile was cited as similar to that of the United
States. It was described as ``not bad'' overall but not at
current U.S. levels. With regard to labor, no industrywide
unions/negotiations are allowed under Chilean law. The labor
regime was described as fundamentally satisfactory with labor
unions not being a significant force.
Meeting with Chile Minister of Agriculture Carlos Mladnic
Santiago, Chile; Monday, January 11, 1999
Chairman Archer expressed thanks for arranging the meeting
and yielded to Chairman Combest for his comments.
Chairman Combest also expressed his gratitude, commented
that he sees Chile as very similar to the United States in
terms of its advanced agricultural industry and focus on free
trade, and stated that the United States regards Chile as a
leader among South American countries. He congratulated the
Minister for his agency's good and progressive bilateral work
with the USDA on agricultural issues and offered the services
of the House Agriculture Committee to foster these cooperative
relationships in the future. Last, he mentioned that some of
the difficult issues involved in the international trade of
agricultural goods should be addressed in such a cooperative
way. Specifically, food safety and phytosanitary problems
should be addressed for the common benefit, with the common
goals of ensuring a safe food supply and a viable domestic
agricultural industry.
Minister Mladnic began his remarks by giving a brief
summary of Chilean trade policy. He explained that agriculture
is generally treated the same as other industries, with the
exceptions of special price bands for sugar and wheat, which
are in place to protect the domestic industry from an erratic
and ``improperly influenced'' world market. He was proud of the
fact that Chile has negotiated many regional trade agreements
and was considering more, and that it has achieved an overall
average tariff of 7 percent. He explained that Chile had begun
its work to reduce tariffs in the 1970s, when its own tariffs
were as much as 100 percent. ``Now,'' he said, ``everyone in
the South American region seems to be oriented toward reducing
tariffs.'' Chile was hurt last year by the change in export
markets (30 percent of Chile's exports go to Asia), but
remained true to its free trade beliefs, which he characterized
as seeing, ``tariffs as a tax on exporters rather than
importers.'' He described Mercosur as a natural and important
political and economic relationship. For several years in the
early 1990s, he explained, Chile put off other nations while
holding out for a free trade agreement with the United States.
However, after 1994, after seeing no promising signs from the
United States about working toward an agreement, Chile ``quit
holding out.'' ``For the last 5 years,'' Minister Mladnic
explained, ``the world has seen the United States only talking
about free trade.'' As a contrast, during this time, the Latin
American region has been progressing. He stated the signs from
the United States are confusing and asked the delegates to
describe the U.S. position on fast track and the FTAA.
Chairman Combest responded that ``it is confusing for us as
well'' and explained the difficult politics behind the fast
track issue particularly. He stated that the delegation will be
working to convince a majority of their colleagues in the U.S.
Congress of the necessity of fast track and that he trusted a
vote would be taken on the issue within the first 4 months of
the 106th Congress. Chairman Combest also expressed hope that
discussions on striking a free trade agreement with Chile could
take place even in the absence of fast track.
Minister Mladnic said that he understood the political
difficulties of a free trade philosophy, but he explained that
in South American countries, even the farmers see free trade as
an opportunity rather than a liability. He went on to say that
there are those in Chile who would leave the United Sates
behind and concentrate on Mercosur instead. He said he
personally believed that the FTAA represented the best
interests of Chile for the future, but he was frustrated by the
lack of leadership by the United States.
Congressman Watkins asked the Minister if he knew of any
particular losses caused by the lack of an agreement; Minister
Mladnic responded that Chile loses U.S. markets to Canada and
Mexico, while the United States loses Chilean markets to others
with whom Chile has agreements. The people in both countries
lose, he said, because they are not getting the best possible
product at the lowest possible price. The Minister's aide made
a particular point about the irony that while the United States
has talked of ``extending NAFTA to Chile,'' Chile has struck
trade agreements with Mexico and Canada, thus accomplishing its
own NAFTA without the United States.
The conversation then shifted to environmental and labor
policies as they relate to trade. Minister Mladnic pointed to
Chile's relatively high standards. Even so, he said, these
politics should not burden trade agreements. Chile might be
willing to address the issues in side agreements, as they did
with Canada, but the WTO is the more appropriate place to
discuss these issues, he concluded.
Congressman Shaw generally agreed with this assessment and
explained that the fast track legislation which had been agreed
upon by the Clinton administration and considered in the last
Congress did not contain such labor and environmental
standards.
Chairman Archer affirmed that he would try to pass fast
track early this year. He explained the reasons for its failure
last year, attributing the loss to the powerful lobbying of
organized labor and President Clinton's lack of leadership on
the issue. With that, he called upon Congressman Jefferson to
give some further insight from the Democratic perspective.
Congressman Jefferson stated the last vote was ``tainted by
the election,'' and now that a new Congress has begun, the
United States can pass fast track. He said the President,
regardless of his ongoing personal problems, will continue to
go about his business and will provide necessary leadership on
this issue. Regarding labor and environmental issues, he
requested that the Chileans ``be willing to be flexible'' and
allow these issues to be addressed in the body of a free trade
agreement. He said such willingness would help many Democrats
in Congress as fast track is debated in the future.
As time was running short, Chairman Archer again thanked
the Minister, who ended the meeting by again making a plea for
the United States to clarify its trade policy and stating his
hope that an agreement could be struck in the near future.
Meeting with Minister of Finance, Eduardo Aninat, Santiago, Chile
Santiago, Chile; Monday, January 11, 1999
The delegation met with Chile's Minister of Finance,
Eduardo Aninat. Minister Aninat began the meeting by
congratulating the United States on the surprise turnaround of
the fiscal deficit. He noted that Chile has had 12 years of
continuous surplus.
The discussion then turned to trade issues. Chairman Archer
asked about Chile's plans with respect to Mercosur, the
Southern Common Market. Brazil, Argentina, Paraguay and Uruguay
are members, and Chile and Bolivia are associate members. The
Minister replied that Chile follows the core principles of free
trade and openness but without being tied in to any one bloc
because all blocs should eventually converge. Accordingly,
Chile is an active participant in Mercosur, the Asia-Pacific
Economic Cooperation Forum (APEC), 26 bilateral agreements, and
a host of bilateral investment treaties (BITs). In addition,
Chile has unilaterally reduced its tariff by 1 percentage point
per year, beginning in 1999, to reach 6 percent in 2005. The
United States, he noted, is the only major country in the
western hemisphere that does not have a trade agreement with
Chile.
Chairman Archer stated that he intends to move fast track
as a priority item but the votes in the House are uncertain. He
noted his intent to bring the bill to the House floor in March
or April, and he said that he hopes for the help of the
administration to get it passed. Once the administration is
committed to ``go all out,'' he added, the bill could go
through the Committee quickly. There is only a narrow window of
opportunity, he said, because the fall, the eve of the
election, would be a more difficult time. If the bill passes
the House, it would then be much easier to achieve passage in
the Senate. Chairman Combest described the background of the
consideration of the fast track bill, mentioning that the bill
was ready in November 1997 but that fast track supporters were
short by a ``handful'' of votes. The business and agriculture
communities, he said, are strongly supportive. Characterizing
his outlook as ``optimistic,'' he expressed his hope that
coordination with the administration will be better this year.
Congressman Shaw added that the ``unqualified support'' of the
President is necessary to the success of fast track.
Congressman Jefferson also noted that he ``fully supports''
fast track.
Congressman Jefferson then asked the Minister whether he
views having fast track as a requirement for concluding a free
trade agreement between the United States and Chile. The
Minister replied that the issue is a political one. Having fast
track is one ``key input,'' he said. Chile ``won't not
consider'' negotiations without fast track, he added, but
negotiating without fast track could produce ``lots of side
noise'' in the Chile-United States relationship. There would be
considerable lobbying on a variety of issues which, at the end,
could ``menace the incentive to produce'' an agreement. The
worst scenario, he said, would be a ``stalemate,'' so
proceeding without fast track would be only the third or fourth
best approach. The agenda for the negotiation is
``straightforward'' and not complex, and Chile has signed side
agreements on labor and environment with Canada which are
similar to the NAFTA side agreements.
Congressman English then followed up on the issue of the
side agreements, saying that he had heard that Chile opposes
putting labor and environmental issues in the agreement itself
and prefers side agreements instead. Minister Aninat said that
Chile is more prepared with its own standards than Mexico was,
that Chile has a higher percentage of collective bargaining
agreements than the United States, and that Chile has a strong
environmental law. Chile does not have ``complexes'' on these
issues, and it does not matter whether labor and environmental
issues are included in the text of the agreement or in the side
agreements as long as Chile is held only to its existing
standards, he said. Chile, the Minister added, would ``oppose
having higher standards placed on us, a small developing
country.'' Chile is not in a position to push up wages while
opening trade at the same time. The Canadian Parliament, he
noted, did not object to an agreement in which Chile does no
more than maintain its existing standards. Enforcement, he
stated, is very important, and Chile is among the few countries
that enforces its standards. The United States ``cannot be
threatened by Chile's size,'' he said, because Chile has high
standards and represents an ``easy case.''
Chairman Archer stated his agreement with the Minister. It
is not appropriate, he said, to authorize negotiating authority
to ``beat up'' on small developing countries by forcing them to
establish standards beyond their reach. Rather, higher
standards come with the development that is created by trade.
Chile is a ``magnificent example'' that every country which
opens its borders increases its standard of living. Yet,
protectionism keeps its allure, he noted. Protectionism, he
concluded, ``never dies but only slumbers.'' Minister Aninat
noted his concern that there may be a temptation in Asia to
enact protectionist measures as a response to the financial
crisis. Such actions, he said, would be ``horrible.'' Because
of the danger of returning to protectionism, U.S. leadership is
critical and urgently needed. He pointed to APEC as such an
example, and there may be fallback in other areas as well.
Chairman Archer then told the Minister that concluding a
tax treaty between the United States and Chile would be a
positive development. The Minister replied that there have been
preliminary discussions on this issue. In 1998, Chile passed a
framework allowing for the negotiation of tax treaties similar
to the model of the Organization for Economic Cooperation and
Development (OECD). Negotiations have been completed with
Canada and Mexico, but the agreements have not been passed yet
by the Chilean Congress. Chile has a tax treaty with Argentina,
but it is not very thorough. Minister Aninat pointed to the
1999 Chilean elections, stating that there is only a small
window to negotiate such a treaty with the United States.
Furthermore, Chile has been balancing negotiations between
developed and developing partners. Chile will negotiate two or
three tax treaties this year, and the agenda is too full to add
another negotiation, such as one with the United States. There
are not many Chilean multinational corporations in the United
States, while there are many in Latin America, he noted.
Negotiating resources, in addition, are limited. He concluded
that a tax treaty negotiation with the United States would be
appropriate in the longer term, but not this year.
Congressman English then inquired about the Chilean import
ban on used autos. He asked whether Chile would be amenable to
modifying the ban because used autos are such a natural export
from the United States. Minister Aninat promised to study the
issue. He noted that Chile has consistently lowered tariffs on
autos, and Chile imports many U.S. cars and car parts. Hardly
any cars are produced Chile, he noted. Chile, however, has a
``terrible congestion problem,'' and Chileans perceive that the
number of cars per capita is already high. As a result,
removing the ban is probably not a high priority.
Chairman Archer then asked the Minister whether he would
have the responsibility for negotiating an agreement with the
United States should there be an opportunity. The Minister
replied that before 1995, he would have been the negotiator.
However, because ``nothing happened,'' he lost credibility.
Therefore, Aninat said, Minister Insulza (the Foreign Minister)
would ``set up'' the negotiations in the future, but the
Finance Ministry would engage in the practical negotiations. He
concluded by saying that if the United States has fast track,
then the negations could begin in late May and be concluded in
approximately 4 months.
Conference on Women's Political Participation at the End of the Century
Panel Participants: Senator Cristina Munoz of Paraguay, Representative
Rosario Machese of Canada, Deputy Ligia Castro of Costa Rica,
Ms. Maria Jose Lubertino of Argentina, and Ms. Helena
Reutersward of the Swedish Embassy in Santiago
Valparaiso, Chile; Monday, January 11, 1999
On January 11, Congresswoman Thurman addressed the
Conference on Women's Political Participation at the End of the
Century in Valparaiso, Chile. The conference was organized by
the Congressional Family Commission and the National Women's
Service. The purpose of the conference was to commemorate 50
years since Chilean women won the right to vote and to be
elected as citizen's representatives in Chile's Congress as
well as to explore the experience of women in Chilean politics
and compare it to the experience of women in the political
systems of other countries in the Western Hemisphere and
elsewhere.
Congresswoman Thurman participated in a panel of women
legislators and political commentators from different
countries, primarily in the Western Hemisphere. The other
speakers were: Senator Cristina Munoz of Paraguay,
Representative Rosario Machese of Canada, Deputy Ligia Castro
of Costa Rica, Ms. Maria Jose Lubertino of Argentina, and Ms.
Helena Reutersward of the Swedish Embassy in Santiago.
Maria Jose Lubertino of Argentina opened the panel by
recalling that 1987 marked the 50th anniversary of women
obtaining the vote in Argentina. She noted that the decision to
grant women the right to vote in 1937 was supported by a
majority of all the major parties in Argentina at the time.
Ms. Lubertino stated that she would focus her remarks on
the period 1985 to 1999, following the restoration of democracy
to Argentina. She stated that during this time, supporters of
women's rights were able to develop strategies that crossed
party lines and got more women involved both inside the
Parliament and outside it. As a result of this mobilization,
they were able to achieve passage of an important women's
rights law in 1988, although it took 5 years to develop
enforcement.
In 1994, Ms. Lubertino continued, 30 percent of Argentina's
Constituent Assembly were women. Elections in 2001 are likely
to provide additional opportunities for women candidates.
Issues that many women have supported have included cleaning up
government and providing greater transparency in government. In
addition, women bring a different approach to issues of
governance than men. Without the full participation of women in
the voting and governing process, democracies lose 50 percent
of their potential.
Senator Cristina Munoz of Paraguay followed next,
explaining that the key challenge for the first election where
women could run for office in Paraguay was to have women run
for local offices. In this regard, Senator Munoz remarked that
decentralization of power assisted in promoting changes in the
power structure.
In the early 1990s, Paraguay established a Commission for
women and passed a landmark law that ensured equal rights,
prohibited discrimination against women, guaranteed that
protective measures for women would not be considered
inconsistent with the Constitution and established a 20-percent
quota for women to hold elected office. Senator Munoz commented
that she believed that these quotas were necessary to ensure
that women could get sufficient financing for political
campaigns. In addition, in the 1998 Presidential election in
Paraguay, four women's groups organized and sponsored debates
among the candidates.
Finally, Senator Munoz observed that studies demonstrate a
clear correlation between alleviating discrimination against
women and promoting economic development of societies. She
noted, for example, a correlation between domestic violence
against women and lower productivity rates in the workplace.
The third speaker was Deputy Ligia Castro of Costa Rica.
Deputy Castro noted that 11 out of 57 Parliamentarians in Costa
Rica are women, that the Vice President of Costa Rica is also a
woman, and that approximately 40 percent of the elected office
holders of her political party, the Christian Democrats, are
women. She noted further that women are required by law to be
represented in local assemblies, but that more women in Costa
Rica than Argentina or Paraguay have been. At the same time,
Costa Rica has not yet passed laws that protected women against
discrimination and domestic violence.
Representative Rosario Machese of Canada spoke next,
commenting that Canada has removed a number of the barriers
that had kept women from participating fully in the political
system, but that there are still some areas for progress. He
noted that women obtained the right to vote in Canada in the
1920s, and that the first woman in Canada's Parliament was
elected in 1929. Representative Machese expressed the view that
international treaties and conferences have helped to advance
the cause of women's rights in various countries, noting the
importance of all forms of public education in advancing
women's rights.
Helena Reutersward of the Swedish Embassy in Santiago was
the fifth speaker, noting that women were accorded the right to
vote in Sweden in 1921. She further remarked that the first
five women Parliamentarians were elected the following year,
and that in 1983, women won the right to serve in Sweden's
armed forces.
In 1992 and 1994, Ms. Reutersward noted, Sweden passed
equal rights laws. These laws promoted women's rights by
advancing the principle of equal rights and responsibilities
for women and men, including opportunities in the workplace,
shared responsibilities in the home, and freedom from domestic
violence. She commented that even these important legal
advances have not equalized the distribution in power in
government or families. Nonetheless, legal targets requiring
the equal participation of women in all councils of government
by 1998 have been met. However, women occupied only 43 percent
of the senior positions of authority in government, and only 20
percent of senior positions in the business sector.
Congresswoman Thurman opened by stating that the victory
being acknowledged at the conference, women's suffrage in Chile
50 years ago, has had implications for every aspect of life: in
the home, on the job, in communities, and in government. She
added that the women who achieved the right to vote in Chile
irrevocably transformed the country of Chile and the world
because the effect of women's increased presence in the
political process can be seen on all levels--economic,
political, social, and legal.
Congresswoman Thurman commented that Chile could be proud
of the legacy of the women's rights movement, a legacy that
includes a record number of women in the Chilean Parliament.
That is true in the 106th Congress of the United States as
well, where a record 58 women are serving in the U.S. House of
Representatives and there are 9 women senators. Apart from
numbers, Chile and the United States share many other
similarities in the fight of women to win suffrage and other
political gains. Women's movements, both in Chile and in the
United States, emerged at a time when women were fighting for
equality in education, employment, government, and basic human
rights.
Congresswoman Thurman commented that these gains are
reflected in the campaigns of Chilean women today for peace,
defense of the family, and human rights. For example, creation
of the National Women's Service has struck a blow for reducing
poverty, particularly for women, eliminating all forms of
violence against women, and reducing the pay gap between men
and women.
On these points and others, Congresswoman Thurman stated
that she honored Chilean women not as members of a women's
movement, but as ``women in movement.'' She noted that
recently, the United States celebrated the 75th anniversary of
women's suffrage, but that event took place 150 years after the
signing of the U.S. Declaration of Independence. It took years
of organized struggle on the part of many courageous women and
men, and there was much work left to be done.
In that regard, Congresswoman Thurman stated that she has
learned from the American suffrage movement and her service in
the U.S. House of Representatives that the best way to get
things done politically on issues of importance to women is by
coming together, regardless of party identity. An example of
such an effort is the Congressional Caucus for Women's Issues,
which recently celebrated its 20th anniversary. In the Caucus,
which is comprised of women Members of the House of
Representatives, legislators put their partisan differences
aside to advance issues of particular importance to American
women and families, such as education, health care, teen
pregnancy, domestic violence, retirement security, and economic
equity.
Further, as the number of Congresswomen has grown, so too
has their influence, as they move up the ranks of leadership in
both the Democratic and Republican parties. For example, in
1990, when the Caucus launched an investigation into the
exclusion of women from clinical trials by the National
Institutes of Health, there were no women Members on the
Appropriations Subcommittee that oversees NIH's funding. In the
past Congress, there were four women on that subcommittee.
Similarly, there are now three women on the influential Ways
and Means Committee, which is responsible for nearly two-thirds
of the federal budget. In fact, women serve on every committee
in the House, and they are making a difference, she said.
In addition to championing specific legislative goals, the
Caucus has also served as an inspiration and a model for women
parliamentarians the world over. In fact, what many governments
are learning is that if women are full and equal partners in
society, their countries will flourish.
In closing, Congresswoman Thurman borrowed a comment from
U.S. Supreme Court Justice Ruth Bader Ginsburg, who is only the
second female to be appointed to the Supreme Court and known by
many as ``the legal architect of the modern women's movement.''
Upon learning the history of women's rights movements, Justice
Ginsburg stated, ``I think about how much we owe to the women
who went before us--legions of women, some known but many
unknown. I applaud the bravery and resilience of those who
helped all of us--you and me--to be here today.''
Following Congresswoman Thurman's remarks, the panel
session was closed by two Chilean legislators, who offered
their observations on the panel's comments. The first,
Antonella Sciaraffia, a Member of Chile's House of Deputies,
stated that equality of participation was important because it
would ensure that women's perspective on issues would be
reflected in legislative proposals and debate. In addition, the
qualities that women bring to decision-making would be fully
reflected. She stated that, while she understood the desire of
some speakers to use quotas to advance the participation of
women in the political process, she believed participation by
women should continue to grow based on merit.
The second commentator, Adriana Munoz, observed that there
were only 19 women in Chile's Parliament and that if the growth
of women's presence in the Parliament grew apace, it would take
500 years to reach equality with men. Due to cultural
resistance in Chile to fuller participation by women in the
electoral process, quotas are necessary as a tool.
Participation by women would tend to humanize the political
agenda, bringing a human element to issues like the budget, she
concluded.
Breakfast Meeting with AMCHAM Representatives
Participants: AMCHAM President Alex Fernandez and approximately 25
business executives
Santiago, Chile; Tuesday, January 12, 1999
The group of approximately 25 business executives was led
by current AMCHAM President Alex Fernandez. He began the
breakfast by introducing all present AMCHAM members and staff.
AMCHAM represents 525 companies doing business in Chile, which
collectively account for approximately 18 percent of the
Chilean GNP. Of the companies represented, 25 percent are U.S.
companies, 25 percent are Chilean, and 50 percent are joint
ventures between United States and Chilean businesses.
AMCHAM's chief mission is to foster trade between the
United States and Chile. Second, it seeks to foster U.S.
investment in Chile (the United States is the top foreign
investor in Chile). Third, it provides consultative help to its
members on complicated international business matters and
matters of global political interest such as labor and the
environment. AMCHAM also publishes a monthly business journal,
which is the only Chilean publication in English.
Mr. Fernandez made the statement that it was 7 years since
then-President George Bush gave Chile what it considered to be
a strong signal that it would be the fourth partner of NAFTA.
Now, U.S. companies are losing business in Chile because the
United States has not followed through. He cited the fact that
U.S. companies such as Burger King no longer buy U.S.-grown and
processed french-fried potatoes, which are assessed Chile's
standard 10 perent duty, but rather purchase Canadian potatoes
which have tariff-free access. He also noted that the United
States is not only losing out on product exports, but service
exports as well, citing a Canadian engineering firm that
recently won a large project bid in Chile. Mr. Fernandez summed
up by saying that ``for U.S. business' sake, the United States
needs fast track and the United States and Chile need a
bilateral trade treaty.'' One AMCHAM participant reiterated
this point, saying the current duty on U.S. goods simply
``makes them uncompetitive.''
Chairman Archer responded by explaining the political
outlook for fast track, promising to do everything possible to
pass fast track early on in the 106th Congress. Chairman
Combest added that the business community must help in the
effort to pass fast track by energizing the grass roots,
particularly its own employees, who directly benefit from free
trade. Mr. Fernandez agreed that the business community can and
should do a better job. As another example of how the current
situation was hurting U.S. workers, he cited Caterpillar, a
U.S. company based in Peoria, Illinois, which now has a plant
in Brazil. He stated that Chileans would have a natural
preference for Caterpillar's U.S.-made tractors, but the 10-
percent price advantage on the Brazil-made tractor will win out
every time. Congressman Shaw reiterated the point that, because
of the political dynamics of the fast track issue, Members of
Congress must hear from their constituents rather than just the
business executives, and noted that Chairman Archer's
commitment to work toward passage of fast track in the early
part of 1999 should energize the business community to energize
its grass roots network now.
Congressman Dickey asked why Chile would be so concerned
about striking a bilateral free trade agreement with the United
States when it already has access to the U.S. market. In
response, Mr. Fernandez explained that Chile believes in free
trade as a worthy global idea. From a domestic view, he noted
that competitive imports make Chilean businesses more
competitive and ultimately benefit the consumer.
A General Electric executive in the group rose to note that
GE depends upon exporting its products from the United States;
in 1997, the company exported approximately 11 billion dollars'
worth of products. Due to the fact that export markets are
growing more than twice as fast as the U.S. market, the
importance of free trade agreements for the United States will
only increase. He also noted that GE had lost about 1 billion
dollars' worth of business in Chile to Siemens due to the 10-
percent tariff advantage. In response, Congressman Watkins
again noted that the United States has ``some serious educating
to do'' on the importance of free trade to everyday Oklahomans
and the like. He noted that ``96 percent of the world's markets
live outside the United States; do we want to be a part of the
global market or forfeit it?''
Congresswoman Thurman gave the Democratic perspective on
the fast track and free trade issues, noting that organized
labor is not the only opposition and that environmental issues
are very important as well. She also noted, from a Florida
perspective, that there are significant agricultural interests
that must be addressed. She insisted that labor and
environmental issues could not be separated from trade and that
other problems such as nontariff trade barriers and the lack of
enforcement of trade agreements present difficult political
realities that must be handled.
At this point, one participant asked about the prospect of
passing a special targeted fast track for Chile. Chairman
Archer responded that he would not want to set such a precedent
by which a separate fast track would have to be passed for
every agreement. He noted that the United States has a great
product to sell in free trade because it historically benefits
all while protectionism ``cannibalizes.'' Free traders must
sell this concept by becoming energized, by being honest in
recognizing that with free trade there will be job
displacements and change, and by being prepared to cite
examples and explain specifics. With that, he thanked members
of AMCHAM on behalf of the Codel, and the meeting was
concluded.
Attachment E contains ``Missing Business Opportunities,'' a
report prepared by AMCHAM Chile which notes U.S. losses
attributable to the lack of bilateral trade agreement.
Meeting with Dr. Jose Pinera, Designer of the Chilean Pension System
Santiago, Chile; Tuesday, January 12, 1999
The delegation met with Dr. Pinera, who is President of the
International Center for Pension Reform and Cochairman of the
CATO Institute's Project on Social Security Privatization. In
addition, Dr. Pinera served as Minister of Labor and Social
Security in Chile from 1978 to 1980. At the suggestion of
Chairman Archer, Dr. Pinera spoke in detail about the creation
of Chile's private social security system, of which he was the
primary architect during his tenure as Labor/Social Security
Minister. A summary of his remarks is as follows:
Chile adopted a Social Security system, similar to
that of the United States, in 1925. It was a pay-as-
you-go system (PAY-GO), the idea for which had started
much earlier in Prussia under Otto van Bismark. It
provided for an age 65 retirement, while live
expectancy was only 48. It is a prime example of the
law of unintended consequences and was imitated all
over the statist nations of Europe.
According to Dr. Pinera, a pay-as-you-go system is
basically flawed. In the United States, there were 40
workers for every single retiree at the beginning, and
the system was in demographic balance. Two factors,
however, changed its future: (1) decline in fertility
rates; and (2) extension of life. A PAY-GO system is
structurally flawed and doomed. You can prolong the
agony of the current system by raising taxes (which is
unfair) or cutting benefits (because Bismark was wrong)
or increasing national debt.
Dr. Pinera became Minister of Labor and Social
Security at age 30, motivated by a concern about the
poor and particularly the poverty of the elderly. He
concluded that the system was wrong and came to the
simple idea (but a powerful one) that all workers
should invest in an individual retirement arrangement
(IRA) during their working lives. The key element of an
IRA is compounding where the growth is exponential, not
linear. In the United States, 60 percent of the
population does not have the access or the money to
save. In Chile, the revolution in retirement planning
allows people to divert social security payments from
the government to a system of private accounts in a
conservative and diversified portfolio of bonds and
stocks (with property rights guaranteed by the Chilean
Constitution). Dr. Pinera believes in the market but I
am not naive. I firmly believe that prudent rules are
needed.
Giving people the power and control is at the center
of this new system in Chile. Every worker in Chile owns
wealth and is a capitalist. The Communists claim that
``Pinera has destroyed the revolutionary fervor of the
workers.'' The hidden secret of PAY-GO is that it
discriminates against the poor (that is, lower income
workers) and minorities, who start work earlier and who
die earlier.
The United States should start with at least 5 or 6
percent of FICA taxes diverted to private accounts in
conservative portfolios. The current year is the best
test of the system in Chile. Pension funds are down 1
percent during the worst year since the system was
created due to the Asian crisis. This, however,
compares to a 25-percent decline in the Chilean stock
market and proves the point that diversification is the
key. In Chile, the Congress has determined that no more
than 20 to 40 percent of any account may be in stocks.
The Central Bank sets the exact percentages within
these boundaries. The system is managed by the private
sector through a board, the Superintendents of Pension
Funds. The rationale for the new system, 19 years ago,
was based on a 4 percent return. The real rate of
return for 17 years has been 11 percent per year above
inflation, even with the 1 percent decline in 1998.
Transition is a major issue to be dealt with in the
implementation of any new retirement system. Pinera
proposed are three basic rules:
(1) ``Do not steal your grandmother's check.'' You
must guarantee benefits to the elderly and make it
clear (with no ambiguity) that the elderly will not be
harmed. In reality, there is no guarantee in the United
States today. The Supreme Court's decision in 1960 in
the case of Fleming v. Nestor held that there are no
property rights to Social Security benefits. It further
held that Social Security is not an insurance system
and taxes are not premiums and the government needs to
be able to adjust to changing conditions.
(2) Every worker must have the option to stay in the
current government system or to opt out. In Chile,
there was no age limit on opting out, and 93 percent of
Chileans opted out.
(3) New entrants into the labor system must go into
the new system. This is essential to closing the door
to unlimited unfunded liabilities in the future. In
Chile, in 10 or 15 years, the last person to opt out of
the new system will reach retirement and, with everyone
else under PAY-GO, then government will see a decline
in expenditures.
In closing, Dr. Pinera proposed eliminating income
taxes in Chile and using a VAT, once the decline in the
old retirement system's expenditures begins. Doing so
will increase and create wealth and will restore
privacy, the emerging threat of the 21st century. He
believed that in the United States, new budget
surpluses should not be used to prolong the agony of
the current system but to begin the movement to a new
system of private individual accounts.
Meeting with Jose Miguel Insulza, Foreign Relations Minister
Santiago, Chile; Tuesday, January 12, 1999
The delegation next met with Foreign Minister Insulza.
Chairman Archer began the meeting by stating that fast track is
a top priority and that he intends to begin work immediately so
that it can be passed by April at the latest. Minister Insulza
mentioned that he is negotiating a trade pact with Bolivia. In
addition, Chile is working on a trade agreement with Europe,
although it was ``not easy.'' Chile is also active in APEC and
Mercosur, as well as with the Andean countries. With respect to
Mercosur, the Minister said that Chile is interested in further
negotiations with Mercosur for strategic reasons, and
negotiations have sped up after the failure of fast track. U.S.
leadership, he noted, is important, and only the United States
can keep trade negotiations worldwide moving forward. Chile is
in an awkward position, he added, because the United States is
its largest trading partner, but Chile has an agreement with
every major economy in the Western Hemisphere except for the
United States. Latin America is a growing market for the United
States. It is becoming as big a market for goods as Europe, and
it is already larger than China and Japan. In fact, he said,
Brazil buys more U.S. products than China.
Chile is ``very flexible,'' he said, about the form of an
agreement with the United States. There have been discussions
in Chile concerning whether an agreement would involve joining
NAFTA or negotiating a bilateral agreement. The agreements that
Chile has with Canada and Mexico are similar to the NAFTA, so
the form of an agreement with the United States is not as
important as before. He would prefer NAFTA accession to a
bilateral agreement, but Chile would not reject a bilateral
agreement, he promised. He added that Chile is also open to
hemispheric trade through the FTAA, but he expressed concern
that countries may ``opt out'' of such a pact, particularly
smaller economies, making such an agreement difficult to
accomplish. With respect to labor and environment issues, he
mentioned that Chile has a good environmental agreement with
Canada. He again expressed his eagerness to negotiate with the
United States, noting that discussions about an agreement began
with President Bush.
Chairman Archer responded by agreeing with the Minister's
support for a trade agreement between the United States and
Chile. He said that delegation's visit to is a recognition that
South America is a natural market for the United States. He
expressed no preference for a NAFTA accession or a separate
bilateral agreement, saying that what is important is to ``keep
the ball moving.'' He noted that U.S. Ambassador Derham is
willing to work with the White House to get it done.
Congresswoman Thurman noted that there is considerable
bipartisan support for trade in the United States. She also
discussed briefly the international conference on women's
issues that she had attended the day before in Valparaiso.
Minister Insulza noted that Chile is in transition. More
developed than many developing countries, it was invaded by
Asian exports but still lowered its tariffs unilaterally. Its
views on labor issues are moderate, and while Chile has been
reluctant to include certain issues, such as labor, in trade
negotiations, Chile did not rush to support India and Brazil
when they opposed raising labor issues. Chile, in short,
believes that there should be some regulation on labor issues
at some point.
Congressman Shaw told Minister Insulza that he is gratified
by the Chilean support that he has seen and expressed his
support for fast track. He is happy to see the decrease in
skepticism and the increase in attention in the Chilean press
concerning fast track.
Minister Insulza described that 1994 and 1995 were years of
high expectations within Chile for an agreement with the United
States. Chile is still eager, he added, but there will not be
much discussion in Chile until fast track authority is granted
to the President. Chileans are cautious, he noted. However, it
is necessary to move quickly because Chile wants to negotiate
with the United States before increasing its role within
Mercosur. The Minister said that Chile is not in a position to
join the Mercosur common market, and Mercosur, not an
integrated process or union, does not cover issues such as
services and investment. Chile is not interested, he said, in
joining a common market for goods only. However, although
Mercosur is far from forming a union now, it may be in the
future, and Chile would rather conclude an agreement with the
United States first.
Meeting with President Eduardo Frei
Santiago, Chile; Tuesday, January 12, 1999
Chairman Archer began the meeting with President Frei by
commending Chile as a marvelous example to the world in having
unilaterally decreased its tariffs. ``We are in 100-percent
agreement'' on trade issues, he said.
President Frei responded by saying that despite the Asian
crisis, Chile sought an opportunity to liberalize trade.
Congress passed legislation allowing a 5 point total reduction
in tariffs, from 11 percent to 6 percent, he explained. The
average tariff rate paid is approximately 8 percent, and that
average will drop to 4 percent by the end of the tariff
reduction period. Free trade within Chile, he said, has been
very positive and has had a good impact on the economy,
particularly in creating more jobs. Although Chile is a small
country, 50 percent of the GDP is related to trade, he noted.
Accordingly, trade is an important pillar of the Chilean
economy, and Chile aggressively is seeking new trade
agreements. For the first time, he noted, Chilean firms are
becoming internationalized and going abroad to invest, having
invested $14 billion, although mostly in Latin America. Chile
has invested $7 billion in Argentina alone. There is extensive
U.S. investment in Chilean services. The U.S.-Chilean
relationship, he stated, is important for the medium to long
term. Accordingly, Chile is very interested in agreements
beyond Mercosur and seeks an agreement with the United States.
Congresswoman Thurman thanked the President for his
hospitality and spoke briefly about the international
conference on women's issues that she had attended the day
before.
Chairman Combest then told President Frei that he knows
that the United States has been sending mixed and confusing
signals concerning trade. This message is primarily political,
he emphasized, and is not an indicator of the true U.S. trade
policy. The agriculture community is very supportive of moving
forward on trade agreements with Chile and other Latin American
countries. President Frei responded by pointing to U.S.-Chilean
working committees, especially in the area of agriculture, as a
positive development, creating a close relationship. Chairman
Combest agreed and urged the continuation of these committees.
Congressman Shaw noted to the President that Chile has
fixed social security before the United States, and he is in
Chile to learn from the Chilean example. Such reform, he noted,
has contributed to social growth and the development of a world
class capitalist economy. He asked the President whether the
success of trade has been a political benefit and how trade
factors into the 1999 elections. President Frei responded that
Chile made a choice of openness, and, at this point, it is
difficult to go back because Chile is so dependent on trade.
Candidates for political office have, in general, expressed the
desire to expand trade and seek further agreements because they
view trade as a pillar leading to economic progress. Trade,
like the privatization of the pension system, has influenced
Chilean development. Before the pension reform, the investment
rate was 14 to 18 percent of GDP, while last year the rate
climbed to 30 percent. Congress is now debating a second
pension fund, he explained. With $3 billion in pension funds,
more funds must be invested abroad--only 5 percent is invested
abroad today. By 2005, the President noted, the pension fund
will match the size of the economy. The pension system changed
overnight 17 years ago, and many people could not join the new
system if they had been working too long. The cost to finance
the transition amounted to 14 percent of the Chilean budget,
which meant more taxes, but a positive outcome overall,
President Frei stated.
The President then brought up the subject of labor and
environmental protection. He had just signed a law making Chile
the first Latin American country to ratify seven agreements of
the International Labor Organization. Chile, he said, maintains
an international standard. In addition, a number of bills are
pending in Congress to improve labor laws, and he recently sent
a bill to Congress concerning unemployment assistance. In
addition, the President said that he has signed legislation to
create a basic environmental law. That law, he stated, is in
full operation and requires every project to provide an
environmental impact assessment. Canada reviewed Chile's
environmental standard, President Frei said, and agreed that
Chile has world class regulations. Small developing countries
must first solve the problem of poverty, he said, but Chile has
made progress in the labor and environmental areas.
Accordingly, Chile is ready to sign additional agreements as it
did with Canada and Mexico.
Congressman English expressed the strong sense that the
United States and Chile must strengthen their trade
relationship and create more opportunities. Congressman Watkins
stated that he has a strong, positive impression of President
Frei's leadership. Congressman Dickey cited Chile's commitment
to capitalism and asked President Frei to be patient with the
United States. President Frei responded by noting that the
Chilean economy has been hit by the Asian financial crisis,
reducing income to the state by $2 billion, or 8 to 9 percent
of the treasury. Chile, however, has been able to adjust, and
President Frei noted that there has been no deficit while he
has been President. He pointed to Chile's lowest level of
inflation ever and a high savings rate. Chilean reserves exceed
1 full year of imports, and practically all foreign debt has
been paid, leaving only $4 billion. Chile, he said, has been
able to weather the Asia storm. In fact, the economy grew 4
percent last year. He also pointed to the decline in the
Chilean poverty rate, from 45 percent to 20 percent in a
decade. President Frei stated that he hopes to end poverty in
the beginning of the next century. Chile has only 15 million
people, he said, but has expended tremendous efforts to reach
development. Education, stated the President, is the top
priority and is a pillar for development. His government has
made profound reforms in education, doubling investment. He
pointed to the fact that 70 percent of schools will have
extensive telecommunications capability.
He then spoke about the extensive privatization in Chile,
noting that deep-rooted change has occurred in infrastructure
and transportation. New social programs in housing, which
include the private sector, have been implemented. A full 72
percent of the budget is dedicated to social programs, he said.
The President also pointed to judicial reform, noting that
Chile is changing to oral public trials in criminal cases.
``Internally,'' he said, ``we are progressing and
surmounting.''
President Frei concluded by saying that it is important to
have a good relationship with the United States, its neighbor.
A trade agreement between the United States and Chile would be
a ``powerful signal'' to Latin America. Chairman Archer
responded enthusiastically, committing his efforts to pass fast
track so that the United States and Chile will have an
agreement in place before President Frei leaves office.
Luncheon Meeting with Foreign Minister Insulza
Santiago, Chile; Tuesday, January 12, 1999
Foreign Minister Insulza hosted Chairman Archer and the
other members of the delegation at a lunch at the Foreign
Ministry. Foreign Minister Insulza again welcomed the Archer
delegation and indicated the importance of the delegation's
visit from the point of view of reinforcing strong and positive
ties between the United States and Chile. Chairman Archer
indicated that the meetings that the delegation's meetings in
Santiago, including the session with President Frei, had been
very positive and that there were many areas of common interest
and agreement--in fact, far more areas of agreement, especially
with respect to trade, than points of disagreement.
Chairman Archer asked Minister Insulza what he considered
to be the major problems before Chile at the current time.
Foreign Minister Insulza mentioned that the question of how the
matter of General Pinochet should be handled was the most
prominent issue in Chile currently. He said that more than 70
percent of the Chilean people wanted the matter resolved
through a trial, but that the overwhelming percentage of those
wanted that trial to occur within Chile. There was broad
agreement that Chile should handle this matter itself. Minister
Insulza indicated gratitude for the support that the United
States had provided to date in seeking to bring the matter to a
successful and early resolution. He indicated that the key
point for Chile was preserving the sanctity of its sovereignty.
He also stated that the episode had strained relations with
Spain, more so than with the United Kingdom.
Foreign Minister Insulza continued that there were a number
of border matters that Chile was attempting to resolve with its
neighbors. These included matters with regard to Argentina,
Bolivia, Peru, and Venezuela. However, for the most part,
Minister Insulza said, President Frei had completed the foreign
policy agenda he had set for himself upon being elected, with
only one major exception--completion of a free trade agreement
with the United States. Chairman Archer responded that he hoped
to be able to work in the United States to promote that
objective, which he indicated he and many others share.
Meeting with German Molina, Labor Minister
Participants: German Molina, Chile Minister of Labor; Vice Minister
Patricio Tombolini
Santiago, Chile; Tuesday, January 12, 1999
Minister Molina commented at the outset that Chile had been
waiting a long time for the U.S. Congress to renew so-called
``fast track'' trade negotiating authority so that Chile could
negotiate accession to NAFTA. He welcomed the Codel's visit as
a sign of the commitment of its members to work on the passage
of this important legislation, even though he understood that
they could not guarantee swift passage. He commented that in
his view, Chile's labor standards are already adequate to
withstand U.S. scrutiny in the context of a NAFTA agreement and
that the bilateral agreement with Canada, modeled on NAFTA, is
working well. On a separate subject, Minister Molina commented
that the Vice Minister would be visiting the United States in
the coming months in order to explore concluding a bilateral
Social Security Treaty. Chairman Archer expressed support for
concluding such an agreement.
Congressman Shaw expressed interest in a dialog over
Chile's approach to fixing its social security system in light
of the steps the United States will have to take in the coming
years to shore up the U.S. system. Minister Molina indicated
that the Vice Minister could help the Codel understand the
strengths of Chile's system as well as ways that the government
was addressing its weaknesses.
Vice Minister Tombolini stated that the key transitional
issue was finding an acceptable mechanism during the process of
replacing the pay-as-you-go system with the individual
capitalization system. In Chile, he explained, the government
required tight controls over the investment of funds provided
by individual workers. Minister Molina added that currently,
the system contains $31 billion, approximately one-quarter of
Chile's GNP. These dollars are working for the country and
luring additional foreign investment. The two key problems the
system has faced have been: (1) absence of universal coverage,
because some workers are not included in the system; and (2)
situations in which workers' salaries are too low and their
retirement savings require supplementation by the government.
On the whole, however, the system is working well.
Chairman Archer asked what other problems the system has
encountered--for example, the cost of transition.
Minister Molina replied that the cost of administering the
system is somewhat higher than it should be, namely that the
average administrative expenses are higher than comparable
private funds. He noted that eight firms compete for the right
to manage the funds of each employee: that is, each employee
can choose from eight different plans. Congressman Shaw asked
whether the higher administrative costs are because the
individual accounts, some of them very small, perhaps only
$5,000 or so, are too small to manage economically. Minister
Molina noted that this is not a particular problem because the
funds are pooled, albeit accounted for individually.
Vice Minister Tombolini explained that at retirement, an
employee has three options for how the proceeds of his or her
retirement fund would be paid: (1) annuity; (2) ``planned
withdrawal''; or (3) planned withdrawal with an annuity. He
stated that the system has solved the problem of declining
birth rates with rising life expectancy rates. However, he
added that the system lacks adequate transparency.
Chairman Combest asked whether the employer contributes to
the individual retirement accounts. Vice Minister Tombolini
stated that under the old system, the employer, employee and
the government each contributed to the system. However, he
added, under the current system, only the employee contributes,
with two exceptions: (1) where an employee's contributions fall
below a certain level, the government makes a contribution; and
(2) in certain ``very heavy jobs'' or in the case of jobs with
occupational accidents, employers pay a premium as well to
cover accidents and earlier retirement. In this case, the
contribution level of the employer depends on the risk of
injury of the activity in which the employee is engaged.
Mr. English inquired whether Chile has a child labor law.
Minister Molina responded that Chile does and that it was the
first country in South America to have signed all of the basic
seven ILO covenants. Chile's child labor provisions provide
that: (1) in general, children under the age of 18 cannot work;
(2) children between the ages of 15 and 18 may work with the
written permission of their parents; and (3) children between
the ages of 14 and 15 may work only in some special activities
related to the work of the family, such as on a family farm.
Mr. English also inquired whether Chile has a minimum wage
law. Minister Molina responded that it does of approximately
87,000 pesos (approximately $210) per month, with a 48 hour
work week.
Meeting with Juan Gabriel Valdes, Director General of International
Economic Relations
Santiago, Chile; Tuesday, January 12, 1999
Ambassador Valdes began by thanking members of the Archer
Codel. He noted that he had just come from Valparaiso, where he
had been working on a trade pact with Bolivia. His division,
which was organized just a few years ago, is in charge of
negotiating, administering and enforcing all trade agreements.
In addition to continuing work toward a Free Trade Area of the
Americas (FTAA), he mentioned they are currently working on a
bilateral agreement with the EU, that they would be traveling
to South Korea in March to discuss a potential free trade
arrangement, and that they would be closely following the
coming WTO round negotiations on agriculture.
Regarding United States and Chilean interests, Ambassador
Valdez noted three points of work that had been established by
the Joint Commission on Trade when it last met in October of
1998. They are: (1) to work on business facilitation measures;
(2) to strike a mutual recognition agreement on standards and
technical norms; and (3) to exercise transparency on issues
related to labor and the environment, which he termed ``the two
most controversial issues in the Western Hemisphere.'' With
respect to labor and environmental standards, he plainly stated
Chile does not support the use of trade sanctions to enforce
international standards but will respect its own laws. He went
on to explain that it was in its own interest to have
relatively high standards.
Ambassador Valdes concluded his statement by saying that
the FTAA was not progressing as Chile had wished. He noted his
concern over the failure by the United States to pass fast
track trade negotiating authority and stated that Chile, with
clear signals from the United States, was ready to provide
needed leadership among the South American nations.
Chairman Archer thanked Ambassador Valdes for his thoughts
and for agreeing to meet. He expressed understanding of Chilean
frustrations, explained the importance of fast track authority
in the U.S. Government, and expressed his hope that fast track
would be passed and that the United States would have a free
trade agreement with Chile by the end of the current
administration.
Regarding the WTO, he cited the EU banana and beef hormone
cases and stated that we must ``give it teeth.'' He explained
that if problems such as the EU's failure to implement were
simply allowed to persist, then support for the WTO in the U.S.
Congress would likely wane. Ambassador Valdes contended that
the WTO is a sound international body and is especially
important for smaller countries like Chile, but agreed that it
needed to be strong. He told Chairman Archer that he can depend
on his help.
Ambassador Valdes then sought to clarify his point (3) from
above. The free trade agreement with Canada, he said, makes no
reference to or establishes any preconditions for so-called
international environmental and labor standards. Chile did not,
and in no case would it want to make legislative changes to its
existing laws and standards in order to ``qualify'' for a trade
agreement. He noted that they are important issues, but they
should not burden trade negotiations. Also, he mentioned that
he does not favor arbitrary trade sanctions based on compliance
with environmental or labor standards established in an
agreement. He added that the Latin American countries are
fearful and mistrustful of U.S. ``objectives'' for increasing
these standards.
Mr. Shaw asked the Ambassador how long it would take,
beginning today, to negotiate a free trade agreement between
the United States and Chile, and if negotiations could begin
working to get some issues out of the way. He also asked if
Chile would be willing to begin negotiating if President
Clinton showed a serious interest.
Ambassador Valdes responded saying there are some very
difficult issues that will need to be worked out particularly
in the areas of agriculture, financial services and
antidumping. With respect to anti dumping issues, he mentioned
the Chilean agreement with Canada allows no antidumping suits
once tariffs go to zero, a position Chile would presumably seek
in any negotiations with the United States. He mentioned that
Chile took 9 months to negotiate with Canada and stated his
opinion that 6 months would be sufficient with the United
States. Regarding the possibility of beginning negotiations, he
said, ``Chile has been very straightforward about its desire to
craft a free trade agreement and has actually committed many
resources to begin thinking about a proper negotiations
framework.'' He mentioned that Chile has even looked at the
possibility of negotiating with the United States in the
absence of fast track. He asked if and how it would be possible
for the United States to negotiate without fast track. Chairman
Archer responded ``anything is possible,'' and asked if Chile
would truly be willing. Ambassador Valdes said ``officially
no,'' but if it was a possibility, Chile might be ``open to the
idea.''
Chairman Archer explained that this scenario would pose
many risks. While he, as Chairman of the House Ways and Means
Committee, which has jurisdiction over such matters, could
probably shepherd a clean agreement through the House, the
Senate has different rules, which would allow any of the 100
Senators to seek to amend the agreement. He mentioned that
lobbyists from every different interest group would each have
something special needed in the agreement so that
implementation would not be impossible, but extremely risky.
Regarding fast track, Chairman Archer discussed the
political difficulty of passing the authorizing legislation
through Congress. He explained that the major difficulty
centered around the labor and environmental issues. He then
affirmed that he would not preside over a bill which makes
labor and environmental standards a part of the agreement and
therefore subject to sanctions. Ambassador Valdes responded,
adding that ``Chile would not negotiate such an agreement.''
Congresswoman Thurman next brought up the issue of sanitary
and phytosanitary standards, saying that any agreement would
need clear and enforceable standards. Ambassador Valdes agreed
and mentioned that Chile is working with USTR and USDA/APHIS on
these issues. He also mentioned the work being done by USDA and
the Chilean Ministry of Agriculture through the Consultative
Committee on Agriculture. Congresswoman Thurman then stated
that these agreements need to be established early, to which
Ambassador Valdes quipped, ``we wouldn't want to solve all the
problems too early--we would forfeit our ability to bargain.''
The meeting then came to a close.
BRAZIL
Country Team Briefing James M. Derham, Charge d'Affairs, and U.S.
Embassy Staff
Brasilia, Brazil; Wednesday, January 13, 1999
The meeting was opened at 4:15 p.m. at the Kubitscheck
Plaza Hotel by James M. Derham, Charge d'Affaires at the U.S.
Embassy in Brasilia. The Charge's opening remarks reflected on
the fact that this would normally be a very quiet time in
Brasilia. Following a Presidential election like the one that
just occurred with the re-election of President Cardoso to a
second term, personnel changes would be minimal and new
legislation would normally await the installation of both the
returning President and a new Congress. However, the financial
crisis with today's decline in the value of the Brazilian real,
the fact that Brazil is losing its foreign exchange reserves,
and the sharp decline in the stock market bring an aura of
crisis. The big questions, according to the Charge, are what
will be the new economic plan and what will be the central
government's role and responsibility. Since the United States
took the lead in putting together the IMF response to earlier
economic problems in Brazil, this new crisis requires the
attention of the U.S. Government. The importance and potential
of Brazil are key factors for the United States to consider as
it formulates its response.
The Economic Counselor then took over the briefing. In his
opinion, Brazil is still recovering from 25 years of
protectionism characterized by heavy reliance on state
enterprises and state control of the economy. There was 1,500-
percent inflation per year for the 5 years leading up to 1994,
when then-Finance Minister and now President, Enrique Cardoso,
implemented the Real plan. Since then, tariffs are down from 34
percent to 14 percent and there have been $81 billion in
privatizations with $25 to $35 billion in further
privatizations to go. The current economic problems began in
late 1997 with the Asian meltdown and the September 1998
Russian default. Interest rates have doubled to a 42-percent
overnight rate, with the resulting huge increase in the funds
needed for debt service.
President Cardoso's Economic Stabilization Plan, under IMF
auspices, includes several key features: (1) $9 billion
reduction in central government spending; (2) increasing taxes
by $15 billion; and (3) the establishment by the IMF of a $41
billion line of credit for Brazil. To accomplish the domestic
Brazilian component of this plan requires significant action by
the lame duck Congress, which has been called back into session
in Brasilia.
The Economic Counselor reported that Brazil made a
significant change in monetary policy the night before. The new
policy provided for a 9-percent devaluation of the real with up
to 12\1/2\ percent over the coming year. The actual market
experience during the day amounted to an 8.7 percent 1 day
devaluation. The current crisis was, in part, precipitated by
the declaration by the Governor of Minas Gerais State of a
moratorium on the repayment of debts owed by his State. In
order to address the problem of state debts, the central
government has renegotiated the debt of 24 of the 27 Brazilian
states.
The Embassy staff then provided a short description of the
current political situation. As a result of the recent
election, the government coalition will have 378 out of 513
seats in the new Chamber of Deputies and 60 out of 81 seats in
the new Senate. Similar numbers exist in the lame duck
Congress, which is currently sitting. In addition, 20 out of 27
state governors are at least nominally associated with the
government coalition. The staff characterized the political
landscape in Brazil as unpredictable.
The meeting was then adjourned in order for the Delegation
to go to the Presidential offices to meet with President
Cardoso.
Meeting with President Henrique Cardoso
Brasilia, Brazil; Wednesday, January 13, 1999
The delegation met with Brazil's President Cardoso. Earlier
in the day, Brazil made the surprise announcement that it would
permit the Brazilian currency, the real, to float in a wider
band than had been previously permitted.
Chairman Archer began the meeting by congratulating
President Cardoso on beginning to implement the reforms Brazil
had pledged in its agreement with the International Monetary
Fund. ``The world is watching,'' Chairman Archer said, because
what Brazil does during this crisis will have a ``ripple effect
all the way to the United States.'' He strongly encouraged
President Cardoso to continue implementing the reforms.
President Cardoso responded by saying that he intends to
continue with the basic reforms in an effort to reduce
monopolies, increase competition, reorganize the government,
and open the economy. He pointed to the $25 billion in foreign
capital in Brazil as a sign of confidence. The next reforms to
be implemented, he noted, are more difficult, and many require
amendments to the constitution. There have only been 14
amendments to the constitution in the last 4 years, and they
are difficult to do, he noted, requiring a three-fifths
majority in each House. However, initial reforms have been
approved, he said, and several important bills will be
considered shortly. Congress has already approved basic social
security reform, giving the executive more freedom to make
complementary changes. With respect to fiscal adjustment, the
President said that 70 percent of what was required has already
been done.
What is missing, he said, is only one tax (on check
transactions), which is very difficult to do. The Senate has
approved this tax by a 61-12 vote, but the Senate must vote
again on this proposal on January 16, and then the House must
act. The President noted that he sent additional executive
orders to Congress at the end of December, and he expects that
the last ones will be approved by Congress the day of the
delegation meeting, to raise $4 billion, which makes up for the
delay in the implementation of the check tax. Brazil is making
progress, he said, and all that still needs to be done besides
the check tax is legislation Congress will take up in February
concerning taxes on retirees.
The President said that he spoke to the head of the IMF,
who said that Brazil ``must be tougher.'' This is so difficult,
the President said, because Brazil is a democracy and Congress
``likes to be independent.'' He has the cooperation of the
Congress, the President added, but change takes time. In
September, the government made a decision to achieve a $5
billion surplus, and Brazil has been able to achieve this goal.
Now, the President said, he must convince the market ``to be
informed about social and political realities.''
With regard to the change in the band for currency
fluctuation, the President said that the change was
``reasonable'' and not a surprise, and Brazil has ample foreign
reserves. He said that he is optimistic because Brazil has the
instruments and the determination to succeed. He added that the
United States has been very helpful throughout the crisis, even
when the change in the currency band was announced.
The discussion then turned to other matters. Congressman
Shaw noted that social security is in a global crisis. The U.S.
system is ``solid'' until 2013, he said, so the United States
is in a better position than the rest of the world. President
Cardoso noted that it is always difficult to cut privileges.
Congresswoman Thurman then asked how the United States can
be of assistance. The President responded that it is important
to explain that Brazil is acting in good faith. Congressman
Watkins added that he appreciated the President's positive
attitude, but he also noted that Brazil is key to preventing
Latin America from becoming another Asia. He said that he hoped
that Brazil can successfully implement the IMF reforms because
it is unclear whether the world economy can stand another Asia.
President Cardoso noted in response that the reforms are
Brazilian, not IMF reforms, and Brazil itself made the
determination to make the necessary changes.
Congressman Dickey then asked how Brazil has been able to
cut expenses. The President replied that Brazil has expanded
its tax collection from $120 billion to $200 billion, creating
a surplus of $5 billion last year. However, he pointed to
social security and debt interest as being very real problems.
Debt interest alone, he said, amounts to 7 percent of GNP (with
6 points being interest and only 1 point capital). He said that
Brazil pays retirees $20 billion, while it only collects $2
billion. The bill that he sent to Congress would make
additional cuts of $8.7 billion, and it is impossible, he
stated, to cut any more. He pointed to the flowers in the
office, noting that he pays for them personally. Education,
health, roads are all impossible to cut. The World Bank, he
said, has told him that social programs must be cut, but he
does not know how such cuts can be achieved.
Congressman English noted his strong sense that the United
States has a great stake in Brazil's success. He expressed his
hope that the United States and Brazil can partner together,
and he wished the President luck. The President responded that
relations with the United States have never been better, and he
wishes to continue such an strong and important relationship.
Breakfast Meeting with Ambassador Jose Botafogo Goncalves, Executive
Secretary of the Brazilian Foreign Trade Board
Participants: Ambassador Botafogo and five members of his staff
Brasilia, Brazil; Thursday, January 14, 1999
The breakfast meeting with Ambassador Botafogo and five
members of his staff began at 8:30 a.m. at the Kubitscheck
Plaza Hotel in Brasilia. The Ambassador is a career diplomat
and is the trade advisor to President Cardoso. The Ambassador
began the meeting by commenting on the fact that the Codel had
visited with President-elect Chavez in Caracas and asking for
the Members' impressions. Chairman Combest responded with a
detailed account of that meeting with particular emphasis on
how personable the new President was and how open-minded he
appeared on many of the issues that he must confront in
Venezuela, as compared to how he has been quoted and described
in the U.S. press. Congressman English commented that many of
the problems that President-elect Chavez faced were structural
in nature and would require substantial governmental changes to
effect. He speculated that how he deals with the oil industry
and, particularly, how he deals with succession at PDVSA should
indicate how pragmatic he will be. The Ambassador responded
that it is common in Latin America for the new ``caudillo'' or
leader to have his rhetoric and actions tempered by the
business community.
Shifting back to Brazil, the Ambassador commented on the
continued stability of the Constitutional processes. The 1988
Constitution allowed for 5-year revisions but there have been
no major revisions since it was implemented. He commented that
time is needed to consolidate real change.
Chairman Archer extended the thanks of the delegation for
the Ambassador's willingness to meet and entered into an
extended dialog with the Ambassador about specific trade
concerns between the United States and Brazil. He first
commented, however, that he was glad to come to a country where
the United States had so few major trade complaints. He noted
that enforcement of intellectual property rights (IPR) was a
continuing major concern. While the law is Brazil is good, its
enforcement is the issue. The Ambassador replied that it is
primarily an issue for Brazilian enforcement authorities and
that failure to enforce IPR also hurts Brazilian companies. The
Chairman stated that it is the U.S. position that it loses $125
million per year in Brazil due to IPR violations. Both the
Chairman and the Ambassador agreed that it is a serious problem
and also results in a significant loss of tax revenues to
Brazil. The Brazilian IRS has had several operations on the
border with Paraguay to attack counterfeit goods entering from
that country, and Brazil believes that piracy is taking place
both within and outside Brazil. The Ambassador cited Asia as
the main external source of pirated goods in Brazil but also
noted the need to renegotiate the pact with Paraguay which
gives them inspection-free access of a Brazilian port (Managua)
since Paraguay is a landlocked country. He agrees that
improvements in IPR protection/enforcement are needed. The
Chairman asked if there has been any prosecution of violators,
and the Ambassador responded that there probably have been but
that he was not positive. He did note that seizures at the
borders were on the increase.
Ambassador Botafogo then moved the discussion to other
trade issues, such as steel antidumping. It was his contention
that the way the United States calculates antidumping margins
is wrong. In the case of Brazil, where the government has
privatized the steel industry over the last 10 years, the
antidumping regime looks back farther to calculate margins.
Since 1990, he said Brazil has unilaterally dropped its tariffs
and other import controls. He cited the Brazilian belief that
talks with the USTR have been disappointing and that the lack
of fast track negotiating authority for the Clinton
administration is hindering Brazil's interest in negotiating
the FTAA with the United States. Furthermore, Brazil still
faces high tariffs on key potential exports to the United
States, such as textiles, orange juice, and sugar.
Congressman English responded with regard to steel, citing
that Brazilian exports of steel to the United States increased
50 percent in 1 year while Japan's export increased 100 percent
in that same year. He said he believed that Brazil is less of a
focus of U.S. concern than Japan, Russia, and Korea. The U.S.
steel industry needs time to adjust to new world market
realities in steel, citing the potential risk of the loss of
100,000 of the 160,000 U.S. steel jobs. The Ambassador
responded that Brazil has only 2 percent of the U.S. steel
market and that industries in both countries should meet to
resolve their mutual problems.
Returning to antidumping issues, Chairman Archer said that
the U.S. Congress sets the standard with respect to
antidumping, permitting suits to address whether any product
has been sold at a price less than that in its domestic market.
He said it would be difficult as a practical matter to believe
that the United States will ever rid itself of antidumping
laws. The Chairman said that he will the moratorium on imports
sought by U.S. steel producers. He also stated that he
``hates'' quotas (for example, sugar or textiles) but the
reality is that WTO rules permit it. Continuing on with regard
to fast track, Chairman Archer said that he would make a very
strong push to secure it. The Ways and Means Committee has
negotiated language with the administration and he pointed out
that Ways and Means Trade Counsel, Angela Ellard, who
accompanied the delegation, was the Committee negotiator with
the administration. An FTA, unfortunately, only remains talk
without fast track negotiating authority, in the Chairman's
opinion.
Ambassador Botafogo declared that there is a strong level
of common interest between the United States and Brazil, and
that the two nations should talk more. He is of the opinion
that there is not enough knowledge in the United States about
the progress that is being made in Brazil on both its economy
and trade. He then indicated that Brazil has problems with the
language already negotiated on fast track and would like to see
changes before it is enacted. At the Chairman's request, he
promised to communicate those concerns in writing.
Congressman Shaw responded to earlier comments with regard
to orange juice. He said that weather and supply issues are
powerful political realities, and he acknowledged that flexible
tariffs are indeed protectionism. He indicated his agreement
with the Ambassador's statements on sugar quotas.
In closing, the Ambassador spoke briefly about the lost
opportunity for Brazilian alcohol fuels in Florida and
expressed his belief that there is a possible market for such
products in California as that state seeks to meet its new air
pollution rules.
Meeting with Foreign Minister Luiz Felipe Palmeira Lampreia
Brasilia, Brazil; Thursday, January 14, 1999
The delegation next met with Foreign Minister Lampreia.
Chairman Archer began the meeting by noting that the relations
between the United States and Brazil are ``incredible'' and
that any frictions are inevitable. He encouraged the Minister
to continue Brazil's reforms, stating that what Brazil does has
an impact on the world. Minister Lampreia responded by pointing
to the level of mutual respect and understanding between the
United States and Brazil. The relationship, he added, is full
and balanced. During the financial crisis, he said, Brazil has
seen the capacity of the United States to lead. The ``bitter
medicine'' of the fiscal package has created some resistance;
it is difficult to make cuts because the needs are so pressing.
Brazil had been postponing fiscal adjustment for some time, but
now the ``hour of truth has arrived.'' The President, he said,
has been able to pass 14 constitutional measures and other
measures to open the economy, but these reforms take time
because the President has to put together a Congressional
majority for each vote. But there is a sense of urgency now, he
said. Congress approved two measures the day before and will
approve the tax increase promised.
Congressman English said that many in Pennsylvania are
interested in the Brazilian market. Steel, he said ``may divide
us for a time,'' but the United States has a stake in Brazil's
success. Trade, he added, improves the relationship. In
response, the Minister pointed to the $100 billion in foreign
investment in Brazil, with half of that coming in the last 6
years. Mercosur, he said, has become an important center for
trade--for example, FIAT now produces more cars in Brazil than
in Italy. He also noted that he understands how sensitive the
steel issue is in Washington. However, Brazil believes that it
is being ``targeted without justification'' because it is ``not
in the same league as Russia and Japan,'' whose imports have
surged while Brazil's have remained small. The International
Trade Commission, he added, has found ``no injury.'' (It is
possible that the Minister meant that the Commerce Department
has not made a ``critical circumstances'' finding with respect
to Brazil, because the ITC has indeed preliminarily found
injury or threat of injury by Brazilian imports.) Brazil fears,
he said, an increase in protectionist policies in the United
States.
Congressman Watkins added that he knows Brazil must make
difficult decisions now, but he said that the United States
``is counting on you'' because ``we cannot afford another
Asia.'' The United States has had to make difficult decisions
in the past, he noted, and he hopes that Brazil can also make
the difficult decisions to ``shore up'' the reforms. The
Minister responded that some states feel that the ``medicine is
too bitter'' and try to challenge the federal government.
However, Brazil does not have much choice, and the government
will impose strict discipline. When one state did not
cooperate, the federal government responded by threatening to
withhold tax benefits to that state.
Congressman Dickey noted that his Appropriations
subcommittee had to make painful cuts in social security
programs, but Congress was somehow able to make the point to
Americans that such cuts were the best for the United States.
He hopes that Brazil can bring the necessary discipline to
bear. The Minister agreed. He noted that inflation has masked
Brazil's debt in the past, but the social cost of inflation is
``terrible.''
Chairman Combest then asked the Minister his impression of
Venezuela's President-elect Chavez. He responded that he is
``well-meaning'' and has a ``strong sense of duty.'' His ideas
have been general, and it is unclear how policy will be
affected, the Minister said. His personal view is that Chavez
could easily become either a very important leader (like
Argentine President Menhem) or entirely the opposite.
Venezuela, he noted, is plagued by low oil prices, a weak
political system, and economic troubles.
Congresswoman Thurman mentioned that she was encouraged by
the delegation's meeting with President Cardoso, noting that he
had told the Brazilian people of the reforms he intended to
implement before the election so that it would not come as a
surprise. The Minister agreed, stating that he is among the
first politicians to announce in advance of the election that
he intends to increase taxes but to win nevertheless.
Congresswoman Thurman continued that the United States has
increased taxes on the elderly and has made other difficult
reforms, and as a result the United States now has a surplus.
``Pain,'' she said, ``gives us gain.'' She pledged to continue
giving Brazil support.
Congressman Dickey asked whether Brazil would devalue again
if ``the world lets you do this (devaluation) smoothly.'' The
Minister responded that there is ``no reason'' to devalue
again. The currency, he said, has been overvalued but should
now be adequate.
The delegation and the Minister then began to discuss trade
issues because the Minister has responsibility for running
trade negotiations. Chairman Archer asked the Minister his view
on the relationship between labor and environment issues and
fast track, particularly the use of trade sanctions in this
context. With respect to labor issues, the Minister responded
that ``we all favor core standards.'' However, Brazil ``has
problems'' with the use of trade sanctions to enforce these
standards. It is ``difficult and dangerous,'' he said, ``to mix
trade and these concepts.'' An ``intrusive policy,'' he noted
``runs the risk of a resurgence of protectionism in the guise
of protecting such standards.'' He raised the issue of
differences in wages across countries, asking rhetorically
whether a country should be penalized for having lower wages.
Linking trade and labor issues ``introduces confusion'' and
could lead to ``misuse and distortion.'' With respect to the
environment, the Minister said that it is ``hard to see'' how
Brazil and other countries can have the same environmental
standards as the United States. Brazil has environmental
concerns, he added, and there are areas in which countries can
make progress on a multilateral basis. Environmental issues,
therefore, are different from labor issues, which can create
``distortions.''
Chairman Archer noted that he is committed to bringing fast
track out of the Ways and Means Committee as soon as possible,
but there are not now sufficient votes in the full House. He
pledged to work with the administration to pass fast track
early this year, noting that he hopes to have the bill on the
floor no later than April. The Minister mentioned that he is
concerned about the FTAA process. It is ``hard to see how we
can liberalize further in the midst of this storm,'' he said,
but the United States should have the ability to lead the trade
debate, particularly in agriculture. Brazil and the United
States, he concluded have much in common with respect to
agriculture and must work together in the face of Europe.
Meeting with the President of the Senate, Senator Antonio Carlos
Magalhaes
Brasilia, Brazil; Thursday, January 14, 1999
The delegation next met with the President of the Senate.
Chairman Archer began the meeting by saying that the delegation
came to Brazil because of Brazil's importance to the world. He
complimented the Senator on what Brazil has done with respect
to structural reform and fiscal adjustments. He encouraged the
Senator to keep to the package Brazil agreed to with the IMF
because the ``world is watching.'' The Senator responded that
he was grateful for the interest of the delegation, noting that
the United States and Brazil share an interest in ending the
crisis. He pointed to the deep economic and cultural ties
between the two countries. He recognized the support that the
United States has given, stating that he knows that the United
States ``sometimes looks with doubt'' on Presidential and
legislative actions, but there has been an ``unmistakable
demonstration of Brazil's commitment to all that it has
promised.'' Brazil, he said, is on the ``right path.'' He
pointed to the fact that the day before, two-thirds of the
Senate passed an essential measure and promised to be finished
with legislative action on all reforms by March. No one, he
said, likes to help those that do not do their part, but ``we
will do our part.'' He also mentioned that the United States
and Brazil should increase cooperation between its Congresses.
Congresswoman Thurman stated that she was very encouraged
by the action that the Brazilian Congress has taken. She noted
that the United States has taken difficult measures to make the
economy sound and to end the deficit. The Senator pledged to
continue his efforts to reach a fiscal balance with social
justice.
Chairman Combest noted that U.S. support for the IMF is
easier when it is obvious that governments are serious in
making sure that promised reforms are imposed. He commended the
Senator for the actions already taken and encouraged
expeditious consideration of actions that are left to be
undertaken. The Senator responded by thanking the delegation
for U.S. support, which has been important to Brazil.
Congressman Shaw mentioned that he was impressed that the
President said that he was going to increase taxes. He asked
the Senator whether the President had the necessary votes in
Congress. The Senator responded by ``guarantee(ing) that the
Congress will approve'' these tax increases. The only defeat,
he noted, has been regarding one social security measure, but
this measure will pass during January or February because the
current social security system is not acceptable. He stated
strongly that ``I guarantee that it will pass.'' Brazil, he
said, is on its way to collapse otherwise, and ``we can't let
this happen.'' Congressman Shaw said that the United States is
reforming as well, although it is not in a crisis yet. The
Senator said that Brazil has ``eliminated the excesses of the
retirement system for Congressmen,'' so Congress has led by
example. He concluded by saying that he hopes in April to say
that Brazil has fulfilled its commitments.
Meeting with President of the Chamber of Deputies, Deputy Michel Turner
Brasilia, Brazil; Thursday, January 14, 1999
Approximately 20 members of the Chamber of Deputies were in
attendance, including the Chairmen of the Foreign Relations,
Economic, and Agriculture Committees.
Deputy Turner gave a warm welcome to members of the Codel,
stressing the good relations that the two countries have. He
boasted that the legislative body of Brazil was modeled, both
structurally and idealistically, after the legislative branch
of the U.S. republic. He said the greatest battles of the
Brazilian Republic occurred in the efforts to reproduce the
federative system of the United States. He said the writings of
Madison had been very influential, ``like the Bible,'' and
again expressed his great satisfaction in hosting the
delegation.
Chairman Archer responded that the United States is still
but a young democratic experiment, and made the additional key
point that ``the House of Representatives is by far the most
important body in this experiment,'' to which there was
unanimous agreement in the room. Chairman Archer proceeded to
introduce the members of his delegation, and then began to
address the economic situation in Brazil. He congratulated the
group on the courage they had shown in making some strong
reforms and encouraged them to work to complete the reforms
called for under the IMF package. He expressed hope that they
would resist any pressures to slide back to ``economic
protectionism'' during these times of difficulty and pledged to
continue his fight to reduce barriers to trade from his
position in Washington.
To respond, Mr. Turner yielded to the Chairman of the
Foreign Relations Committee, who noted that there are a number
of ``sensitive'' subjects that needed to be addressed. He
explained that he had received complaints from many sectors of
Brazilian industry about protectionist measures espoused by the
U.S. Government. He complained that these send a very confusing
message. Specifically, he mentioned that only 48 hours before,
President Clinton had expressed what they considered to be
protectionist ideas regarding steel imports. He compared this
to the barriers that are prevalent in agricultural trade.
Chairman Archer responded that we may never be rid of all
the protectionist measures, but that the United States is the
most free market in the world today. He touched on the
political difficulties of the steel issue and yielded to
Congressman English, who represents an area of heavy steel
production.
Congressman English stressed the difficult nature of this
issue, saying the United States stands to lose over 100,000
jobs in its basic steel industry. He mentioned that the U.S.
industry had filed an antidumping petition, and that while
President Clinton has resisted becoming very involved, he had
addressed some of the most pressing issues particularly with
respect to Japan. With Brazilian imports having increased by 50
percent, Brazil should also be aware of these political
sensitivities and respect the U.S. industry, he said. ``We
should all be playing on a level, subsidy-free, playingfield,''
he concluded. The Foreign Relations Committee Chairman
responded he does not have an interest in dumping but does have
an interest in establishing new and fair markets.
Congressman Shaw interjected his view that while there are
industries worth protecting (such as steel from a national
security interest), others, like sugar, are less defendable.
However, he contended, the U.S. tariffs are generally low,
about 2.5 percent across the board, whereas Brazil's are high,
approximately 17 percent. We must work together to lower these
tariffs, he said, but we must also respect each other's
interests.
Chairman Archer stated that the United States, as the
world's leading economy, must set an example for other
countries. He then contended that the United States is doing so
by adhering to the rules of the WTO. In sugar, steel, or any
other commodity where one might argue that the United States is
being protectionist, the United States is at least being
consistent and abiding by the agreements which have been made.
Chairman Archer said he too does not like quotas or other
protectionist measures and he hoped that one day the world
would be rid of them. Until then, he said, the United States
will continue to lead by honoring the agreements it makes and
understanding and respecting the interests of others. He
mentioned that there will be significant political pressures in
the United States to close U.S. borders to steel imports, but
he pledged to fight these pressures.
Congresswoman Thurman specifically addressed agriculture,
saying that United States and Brazilian farmers could both
agree to work to expand into areas that neither country
currently has access to. She mentioned that if farmers from
both countries see and experience progress in this regard, then
the whole concept of free trade is easier to sell. A Member of
the Chamber's Committee on Agriculture took the opportunity to
speak and sharply criticized the U.S. tariff rate on frozen
concentrated orange juice, which he considered to be far too
high.
Lunch with Members of Senate and Chamber of Deputies
Participants: Deps. Werner Wanderer, Roberto Balestra, Abelardo Lupiao,
Rubens Medina, Lael Varela, and Paulo Delgado
Brasilia, Brazil; Thursday, January 14, 1999
Deputado Werner Wanderer, who hosted the luncheon,
commented that the eyes of the world are on Brazil to see
whether Congress will do its job to address the key problems
Brazil faces. He stated that he was confident that Congress--
the Senate and Chamber of Deputies--would do its job. He stated
that Brazil asked the United States for help in putting
together an aid package because the United States is Brazil's
largest partner. Representatives from the Congress were
scheduled to travel to the United States shortly and they want
to be able to say that they have taken the necessary steps.
Brazil understands the seriousness of the commitments it has
made and will do its part. In addition, Brazil is anxious to
work out the few areas of trade friction with the United
States.
Chairman Archer responded that the bonds between Brazil and
the United States have never been stronger, but that they could
be made stronger still. He indicated that he believed that the
problems can be solved by people of good faith with an honest
dialog. Chairman Archer complimented Deputado Wanderer on the
progress to date in addressing the important problems. Chairman
Archer quoted Congresswoman Thurman as saying that the Members
of the U.S. Congress understand the problems that Brazil's
Congress faces in addressing problems with government spending.
It is not easy to make the tough decisions, he said. However,
Chairman Archer concluded, it is true that the eyes of the
world are on Brazil, and, he is confident that Brazil would
respond appropriately.
Meeting with Finance Minister Pedro Malan
Brasilia, Brazil; Thursday, January 14, 1999
Chairman Archer opened the meeting by saying that a key
purpose of the Codel's visit was to emphasize the importance of
U.S. relations with the countries of South America. Chairman
Archer added that he wanted to compliment the tough measures
that Brazil had already taken and those for which it was in the
process of seeking approval from the Congress. He stated that
he was encouraged to hear that the expanded currency band for
the real, which had resulted in a devaluation of approximately
9 percent over the previous day and a half, had focused
attention on pressing problems in Brazil and mobilized
governors to urge legislators to support the government's
package of reform measures. He asked Minister Malan to address
the particular concern expressed by some senior U.S. Government
officials that Brazil had taken the step suddenly and without
prior consultation.
Minister Malan opened by stating that this was the sixth
year that some in President Cardoso's Cabinet had been working
with him. When Malan joined Cardoso in 1993, when Cardoso was
Finance Minister, inflation was running at 30 percent per
month. Already at that time, they were aware that keeping a lid
on inflation on a sustained basis would require an ongoing
program of reforms. In a democratic society, that means having
to work with Congress to get those reforms enacted into law.
Minister Malan stated that the reform program has made
substantial progress. In 1997, inflation was 2 percent, and the
economy was 25 percent larger than it had been in 1993--the
fifth largest economy in the world. Brazil is attracting
substantial amounts of foreign private investment, in part due
to Mercosur (the customs union comprising Argentina, Brazil,
Uruguay and Paraguay), which constitutes a market for goods and
services of approximately $1.3 trillion.
Minister Malan stated that Russia's crisis in the summer of
1997 has catalyzed the Cardoso government's reform program. In
the 1998 election, Cardoso's platform included unpopular
provisions such as raising domestic interest rates and
announcing 3 more years of fiscal austerity reforms. Malan
stated that the data will show that the government met its
fiscal targets for December 31, 1998, and will do so in 1999 as
well. Just today in the Congress, he stated, agreement had been
reached on increasing the contributions of retired and active
government employees to social security and pension programs,
and he promised that the agreement will be voted on early next
week.
In addition, Malan added, there were several reasons why
the press had a more negative perception of the government's
reform program. For one thing, the press has tended to focus on
a vote in the Chamber of Deputies in December 1998 defeating a
government proposal on social security. However, this vote was
not put into context of other measures that were passed and the
possibility, now seemingly a likelihood, that this element of
the program would be passed this month, he said.
In addition, the declaration by the Governor of Minas
Gerais that the state would not continue to service its debt to
the central government was given greater credibility abroad
than in Brazil. In Brazil, Malan explained, the move was seen
as largely political in nature by a former president who may
well be a candidate again in 2002. By contrast, Malan pointed
out, the press has not reported that the federal government has
negotiated binding contracts with 24 of the 27 states in Brazil
concerning debt repayment to the central government, or that 18
of the 26 states have expressed strong support for the Cardoso
government's reform program and that the remaining 6 are not
sharply divided on the question.
Turning to the international dimension of Brazil's approach
to the current crisis, Minister Malan stated that in the fall,
he had met in Washington with the nine largest Central and
South American countries together with World Bank,
International Monetary Fund and U.S. Treasury leadership to
discuss the response of Brazil and South America to the Russian
crisis and the best approaches to it. He had suggested that the
U.S. Federal Reserve Bank should lower interest rates and the
IMF should develop preventive measures. For Brazil, the IMF
package of preventive measures amounted to $41 billion from
various sources, including key IMF members such as the United
States, the World Bank, and the Interamerican Development Bank.
Brazil has received $9 billion to date of that amount, and
Malan stated that it was his intention and hope that Brazil
would not actually have to use the capital. At the same time,
Malan stated, new foreign direct investment in Brazil in 1998
totaled $25 billion--and this is not volatile foreign capital.
Finally, Minister Malan directly addressed the Cardoso
government's decision the previous day to allow the currency to
devalue by 9 percent. Malan stated that the move was prompted
by the view within the government that the real was overvalued
and in need of correction. He rejected some public estimates
that the currency was overvalued by 20 to 25 percent and saw
the overvaluation being in the single digits. For example, in
1998, the real devalued 8 percent against all other currencies;
similarly in the period 1997 to 1998, the currency devalued
approximately 12 percent against the U.S. dollar.
Responding to Chairman Archer's expressed concern that the
Cardoso government's action was not predictable, Malan asserted
that the shift of the band from a ratio of 1.12 : 1.21 real/
dollar to a ratio of 1.20 : 1.32 real/dollar, was foreseeable.
On the question of specific prior consultation and notice to
the U.S. Government, Malan stated that he had discussed the
move conceptually with various officials, including U.S.
Treasury Secretary Rubin, Deputy Secretary Summers, and Stanley
Fisher (Deputy Director of the IMF) over the previous months.
However, more specific consultation would have been difficult
and not necessarily advisable. He explained that in the day or
so prior to the devaluation, rumors began circulating about the
possible move, in turn roiling currency markets. So, more
specific consultations were not possible in the days leading up
to the decision, and delay might have made the situation worse.
However, Malan assured the Codel that there was no intentional
surprise in the move and, in fact, President Cardoso had spoken
the day before with Secretary Rubin and that day with Deputy
Director of the IMF Fisher.
Finance Minister Malan closed with a related point, on
which he asked the Codel for their assistance. The point
related to Brazil's transparency on the amount of the public
debt in the country. Unlike many other countries, Malan
explained, the figure for Brazil's public debt includes not
just central government debt, but also the debt of the 27
states and 550,000 local governments. Malan expressed his view
that Brazil is often penalized in comparisons of the size of
public debt in different countries because its debt figure
includes many more items than other countries and, therefore,
is not a fair basis for comparison.
Congressman English asked Malan whether, in view of the
financial crisis that had affected so many countries in Asia,
Russia and other countries, the international financial system
needed to restore a restructured Bretton Woods system. Malan
replied that he agreed that more structure was needed in light
of the Asian and Russian examples. He noted that a process was
underway in the Bank for International Settlements (BIS) to
address problems such as regulation of leveraged funds. In
addition, a proposal for a lender of last resort should also be
considered. Such a lender could be the IMF or BIS or another
entity. With respect to exchange rates, Malan foresaw the
development in the longer term of three essential currency
blocs, one each built around the yen, dollar, and euro.
Congresswoman Thurman asked Malan about the composition of
the new Congress that would be seated in February 1999--whether
it would make the government's job harder in getting its reform
plan enacted into law. Malan responded that approximately 200
of the 513 legislators in the new Congress would be new, but
that this would not present ``a major discontinuity.''
Moreover, the Cardoso government was seeking institution of a
procedure that would speed up voting in the Chamber of
Deputies, thereby facilitating passage of the program.
Meeting with Minister of Development, Industry and Commerce, Ambassador
Celso Lafer
Brasilia, Brazil; Thursday, January 14, 1999
Ambassador Lafer welcomed the delegation and thanked them
for positive statements made to the press with regard to
Brazil's recent currency devaluation. He expressed the
Ministry's interest in issues of international trade and
mentioned his personal involvement in recent WTO meetings in
Geneva. He stated that while an interagency council of the
Brazilian Government will ultimately make the decisions in
future WTO rounds, his ministry will be heavily involved in the
negotiations.
Chairman Archer returned the thanks, and stated that while
the United States supports the WTO, there are certain aspects
that must be improved. He added that the current framework
needs more teeth and that it currently allows countries to
delay compliance with their agreements by questionable means.
As an example, he cited the European Union's actions with
respect to imports of beef and bananas. He stated that the U.S.
Congress will have to reaffirm the WTO in Congress next year
and that he fears support is eroding. Last, Chairman Archer
mentioned that any help Brazil could provide to persuade the
WTO to take strong stands on such compliance cases would be
good for everyone's sake.
Ambassador Lafer responded that he had served on a WTO
dispute resolution panel in the past. He described these
particular cases as ``sensitive'' but stated that he too
believed it important to resolve such issues for the
credibility of the organization. In essence, he agreed that the
WTO needs more teeth but defended the process and structure,
stating ``we are better served with it than without it.''
Shifting issues, Chairman Archer congratulated Ambassador
Lafer on Brazil's passing a stronger intellectual property
rights (IPR) law but stated it needs greater enforcement. He
cited an estimated $125 million in U.S. products being pirated
each year. To this, Ambassador Lafer responded that the
Brazilian patent office is within his ministry and that he
would investigate the issue of implementation.
Ambassador Lafer then asked the group what the outlook of
the United States would be for the WTO negotiations on
agriculture. Chairman Combest expressed the priority of trade
issues to the agricultural industry in the United States adding
that strengthening dispute settlement and enforcement
authorities would be high on the list of topics for
negotiating. Congresswoman Thurman asked Ambassador Lafer what
potential problems he saw in the agricultural negotiations. He
responded ``many,'' citing problems with the EU because it
cannot maintain its Common Agricultural Policy (CAP) at its
current rate of subsidization; Japan and Korea have a similar
problem in their rice and sugar programs; India has its food
security issue; and Egypt will hold fast to its export
promotion programs. The Ambassador concluded, however, that
``with cooperation, there is room for much progress.''
Congresswoman Thurman pressed him on phytosanitary issues, to
which he answered the science is complicated, but often the
complaints are nothing more than trade issues. He went on to
say that the Cairns Group (of which Brazil is a member) of
developed and underdeveloped nations will push for and give
much legitimacy to trade liberalization.
Chairman Archer asked Ambassador Lafer if the development
of Mercosur helped or hindered an FTAA. The Minister answered
that ``it helps,'' explaining they are complementary efforts of
a different nature.
Congressman Shaw brought up the issues of drug trafficking
and trade in precursor chemicals. He noted that Brazil has a
close proximity to some heavy drug producing regions and asked
if there was anything the U.S. Congress could do to help Brazil
in its efforts to stem these problems. There was too little
time left to get into a complete discussion of these problems,
and so Ambassador Lafer simply noted that it is a difficult and
complex problem for Brazil, that compounded by the length of
the inland border. Chairman Archer commented that ``one area
where the United States does not support free trade is in
drugs,'' and the meeting came to a close.
The delegation then traveled to Sao Paulo, Brazil.
Consular Briefing by the U.S. Consul General Gwen Clare and Staff
Sao Paulo, Brazil; Friday, January 15, 1999
The meeting was opened at 9:30 a.m. at the U.S. Consulate
in Sao Paulo, Brazil by Consul General Gwen Clare. In her
opening remarks, she stated that it was difficult not to be
impressed by the commitment and talent represented by the
Brazilian Government team in addressing Brazil's economic
problems and the current crisis sparked by the devaluation of
the real. In her opinion, the real question is how the private
sector reacts. She further commented that there was ongoing
international criticism of the lack of international
consultation leading up to the most recent devaluation and that
the government's credibility as well as international
confidence were critical (along with the reaction of American
bankers) to a solution. She also noted that the Consulate's
commercial office is the third largest in the world.
The Security Officer for the Consulate provided a
confidential briefing on terrorism and terrorist threats in the
region.
Congressman Watkins stressed his belief that the United
States needs to encourage investment in Brazil, and the Consul
General responded that Brazil was a huge market but not a cheap
one in which to operate. Furthermore, she cited the
government's continuing focus on public works projects.
The Labor Officer at the Consulate briefly commented on the
unemployment rate, which he believes is understated. The lowest
rate cited by government statistics is 8 percent, and that
figure applies only to urban areas. Labor costs are 100 percent
of wages compared to 40 percent in the United States.
Congressman English expressed his concern about the
assistance that is available to small and medium size U.S
businesses that are seeking to break into the Brazilian market.
The Commercial Officer of the Consulate said that the level of
services was good and said that 7,000 U.S. firms do business in
Brazil. He has further been emphasizing distribution of
information on the Y2K problem and has implemented a computer
system to track all commercial cases or inquiries that the
Consulate is handling.
The Agricultural Officer cited Brazil as both a supplier
and competitor to U.S. companies and as a huge market for U.S.
products. He said that Brazil supplies the United States with
large quantities of coffee, citrus, and oilseeds. As an export
market, Brazil is the top U.S. market for soybeans (raw). Many
U.S. companies are now producing in Brazil versus 1990, and
those companies, as well as the Consulate staff, are
continually looking at new products and niche markets that can
be opened to U.S. companies.
The U.S. Information Agency officer commented further on
the Y2K issue. He made the observation that business in Brazil
is far more concerned with addressing potential Y2K problems
than is the Brazilian Government.
Congressman Shaw observed that, since arriving in Brazil,
the delegation has heard that everything is being done right
but it is clear that the economic problems and economic
hysteria is shaking current confidence. It was the opinion of
the Consular staff that Brazil is at a crossroads. It is
spending too much and the federal deficit is growing. Thus far,
it has been unsuccessful in its efforts to cut spending. It is
concentrating on raising taxes which, in turn, is anathema to
business. The consensus furthermore was that the next week in
the Congress was critical. While the Congress has suspended a
60-percent increase in their own pay, the staff was skeptical
of success in the effort to pass government pension reform.
Meeting with Panel of Bankers
Participants: P.J. Garrido, Senior Vice President, Bank America of
Brazil; Geraldo Jose Carbone, President for Brazil and Northern
Latin America of Bank Boston; Gustavo Marin, Global Corporate
Bank Business Manager for Brazil of Banco Citibank; Alfredo
Gutierrez, Managing Director for Brazil and Mercosur of J.P.
Morgan; and Bernardo Parnes, Managing Director and President,
Brazil of Banco Merrill Lynch.
Sao Paulo, Brazil; Friday, January 15, 1999
The Codel's questions and ensuing discussion focused on:
(1) the impact of the Cardoso government's decision 2 days
earlier (Wednesday, January 13) to replace the existing
exchange rate band for Brazil's currency (the real) with a
broader band that effectively allowed the real to devalue by
approximately 9 percent in 1 day; (2) prospects for addressing
the consequences of the devaluation, including a 23-percent
decline in the stock market on Thursday, January 14; (3)
possible next steps by the government and private sector in
reaction to the unfolding situation; and (4) overall views by
the banks represented of Brazil's economy and the likely
effectiveness of the Cardoso government's efforts to reform and
curtail government's involvement in the economy. Shortly after
the meeting adjourned, the bankers and Codel learned of the
Cardoso government's decision announced just that morning that
the Central Bank would not intervene to purchase reais at the
1.32 real/dollar rate, thereby effectively allowing the real to
float freely against other currencies, including the dollar.
Following that decision, the stock market increased more than
30 percent that day. In the days and weeks that have followed,
Brazil's stock market, exchange rate markets and other aspects
of its economy have continued to experience sharp fluctuations
in reaction to the developing economic situation and political
efforts by the Cardoso government and the Congress to address
Brazil's problems.
Chairman Archer opened the meeting by asking the panel what
it anticipated for Brazil's stock market that day and beyond.
Garrido responded that the market had fallen to an index level
of 4600 earlier in the year in reaction to the Russian crisis
and reached 5000 the day before (January 14), so it remained
above its low for the year. Parnes said that he thought it
could go as low as 3600.
Chairman Archer explained that the Codel had strongly
emphasized in meetings with Brazilian Government officials the
previous day the urgent need to continue implementing the
Cardoso government's Real Plan. Now, it seems that more is
needed. Gutierrez responded that the issue now is how quickly
measures can be taken in a credible way to convince the markets
that the government measures will be effective. Basically, he
continued, the government has run out of time. The government's
efforts over the last several months have disappointed the
market, and the Cardoso government's decision this week to
allow the currency to devalue has only played into the market's
reaction. Garrido added that even if the Congress passes
additional Real Plan measures this month, the new laws will
have to be approved by the new Congress, which would mean
waiting until June or July. Congressman Shaw interjected that
the President of the Senate had told the Codel that all the
measures would be in place by April. Garrido conceded that
could happen. But, Marin commented that April could be too
late. There was a $1.8 billion capital outflow yesterday, and a
further outflow of $2.0 to $2.2 billion is expected today. That
is not sustainable.
Chairman Archer asked the panel's view of the degree to
which the real is overvalued. Parnes responded that valuation
is not the key. The key is Brazil's ability to be front line to
prevent spread of Asian financial/economic crisis. Carbone
commented that one of two things will have to happen: controls
imposed by the government on outflow of capital or a free float
of the currency. Marin agreed that those were the only
alternatives and added that the degree of devaluation is
irrelevant. Gutierrez warned that neither step would be a
panacea and each would bring its own set of problems. Carbone
said that rumors were circulating that morning that the
government was not intervening to sustain the new currency
band, suggesting that it might allow a broader band or a float.
The estimated value of the currency as of that morning was
approximately 1.45 real/dollar (exceeding the 1.32 real/dollar
upper limit of the band established 2 days earlier).
Chairman Archer commented that the political reality is
that Brazil is a democracy not a dictatorship and that all the
changes were not going to happen in the next 10 to 60 days. He
asked, given that reality, how the private sector sees the
situation unfolding and options for the government to manage
the economic situation effectively. Marin said that the
government had to take some steps immediately to begin to
restore confidence.
Chairman Archer followed up to ask what would happen to
interest rates if the currency were allowed to float freely.
Gutierrez responded that interest rates would rise sharply,
serving both as a tourniquet on the outflow of capital and a
tourniquet on the lifeblood of the economy. Gutierrez added
that, in his estimation, the government had committed a major,
major mistake with its January 13 devaluation. Parnes responded
that in Mexico's case, capital flowed back within 9 to 18
months. Chairman Archer commented that Mexico had NAFTA,
whereas Brazil does not. Carbone interjected that Brazil, like
Mexico, has a solid and major industrial base. The two
challenges for Brazil will be to avoid returning to the indexed
inflation of the early 1990s, which led to soaring rates of
inflation, and to continue reforms. He said there was a very
high probability in his view that the government would allow
the real to float freely.
Garrido said that her principal concern was indexation.
Under that system, everything in the economy--prices, salaries,
interest rates--all were indexed to inflation. This system hurt
Brazil's poor the most, since others could put their money in
bank accounts, which would earn interest also indexed to the
rate of inflation. This system created a vicious inflationary
cycle. But, while the country suffered as a whole and the poor
in particular, rich and middle-income individuals were
effectively protected, so there was little pressure to reform.
Gutierrez agreed and added that the government now has to do
more than it announced in November in order to restore
confidence because expectations have grown.
Chairman Archer said that some U.S. policymakers have
raised the possibility that if the devaluation had been
greater, then interest rates could have actually gone lower. He
asked for the panel's reactions. Gutierrez agreed. The broader
currency band is the worst of both worlds since it creates
uncertainty over the ultimate value of the currency. Once the
real finds a new level in the market, then interest rates can
begin to adjust and fall. Until then, rates will need to remain
high in order to continue to attract capital. Marin added that,
with respect to inflation, there are two ways the situation
could evolve: (1) indexation; or (2) the Argentine model--
essentially, allowing a recession to occur.
Congressman English asked whether the new President of the
Central Bank was a good appointment--whether he enjoyed the
respect of the business community and others. Gutierrez
responded that he was a solid man but added that in the current
crisis, that would not be a major factor in helping to calm and
resolve the situation.
Congressman Shaw asked the participants what they thought
the impact of the Brazil situation would be on the rest of
South America. Garrido said that the key players are Argentina,
which holds a presidential election in 2000, and Mexico. Marin
commented that Argentina is doing well--with good liquidity,
little movement in the Argentine peso against the U.S. dollar,
and stable interest rates. He said that overall Argentina is in
good shape to weather the current situation, much better shape
certainly than in 1995, because it had sustained a recession
and economic transformation. He expected a market contraction
over the next year of approximately 1 to 2 percent, but that
the government's mind set is to retrench and defend the
currency, not inflate the economy.
Carbone interjected that some assume the devaluation of the
real would be the end of the world, but he disagreed. He sees
Brazil as undergoing a 10-year process of transforming its
economy. If the current situation is handled well (that is, not
return to the inflationary indexation system), Brazil will be
in much better shape a year from now. The problem, he said, is
that the week's devaluation occurred in the middle of a
difficult situation--the government's ongoing attempt to make
painful adjustment. Gutierrez commented that the problem in his
view is that the government put the cart before the horse. The
government helped to create a panic because it attempted to
lower interest rates at a time when rates should remain high,
since the government has not taken the steps necessary to put
its fiscal house in order.
Chairman Archer asked if there is anything he, the Codel,
or the U.S. Congress back home could do to help bring the
current situation to a sound and positive conclusion. Marin
stated that the situation has to be resolved by Brazil. Garrido
said that the world, including Brazil, believes that the only
country that can really affect change is the United States and
that the U.S. Congress and President are distracted with the
impeachment debate. Chairman Archer commented that on the trip
the only issues that the Codel discussed were issues of trade
and economic relations and that the Ways and Means Committee
will continue to focus on those issues and other issues within
its jurisdiction.
Congresswoman Thurman asked whether there are particular
messages the members of the Codel and Members of Congress
should send to businesses and foreign government officials in
meetings in the United States and elsewhere, in addition to the
points the Codel has already been raising. Gutierrez commented
that he and his clients are focused on Brazil's strong
potential over 10 years, not focused as much on the current
situation. Garrido commented that, although she often sounds a
cautious note, she would point out that she came to Brazil as a
skeptic but believes that Brazil has privatized to the extent
no other country has done so.
Chairman Archer asked what, if anything, is different in
Brazil's market fundamentals today as compared with a year ago
that would precipitate the current economic problems. Garrido
responded that there is nothing in Brazil's fundamentals;
rather, it was the international situation that had changed and
helped to precipitate the current situation. Carbone added that
Brazil is exposed to the global financial/economic problems
because it is a net borrower. Marin added that international
investors' appetite for risk has changed dramatically because
of the Asian crisis.
Luncheon Hosted by the American Chamber of Commerce
Sao Paulo, Brazil; Friday, January 15, 1999
The luncheon began at 12:30 p.m. at the new headquarters
building of the Sao Paolo-American Chamber of Commerce. The
Amcham have recently relocated to its own building in which it
offers space for American businesses to operate, in addition to
Chamber activities.
Chairman Archer was introduced by the President of the
Amcham. In his remarks, the Chairman stressed that impeachment
is not going to dominate the agenda of the new Congress. He
stressed his belief that the Amcham and its member companies
should always remember that their success in operating overseas
was America's success. Export jobs in the United States are far
better jobs and pay more than jobs for the U.S. domestic
market. Unfortunately, in his opinion, there is a disconnect
between Americans and international business. He stressed his
commitment to replacing the U.S. income tax system with a
consumption tax in order to give America a fair advantage in
international markets, rather than the disadvantage U.S. tax
laws currently place on all American business activity
overseas. He detailed the interrelationship between tax policy
and success in international business.
Congressman Dickey raised the issue as to whether Brazil
will face up to the need to cut its spending. The Amcham
President responded that, for the first time, the government is
debating new issues of critical economic importance. It is a
democracy, but a young democracy. There is no voting by
individual voting districts but rather through slates of
candidates by city or state. He explained that the country is
being run by professors who are not responsive to the Congress
but that the Congress is learning and Brazil is more democratic
than the world gives it credit for being. At this time, the
populace is more concerned about fiscal stability, which is
what it voted for in the recent election. Tax revenues are now
going to support a bloated bureaucracy. Further, there is no
institutionalized system for business to influence government
or seek redress of its grievances. The Brazilian business
community is very concerned as to what will be the reaction of
the United States to the latest devaluation of the real.
Chairman Archer relayed that the U.S. State Department was
shocked at not receiving advance notice of the devaluation
given the IMF package. Congressman Watkins added in response to
earlier comments that companies need to get involved at the
grassroots to have an impact on Brazilian Government policies.
Roger Blacker, an economist, commented that Brazil did not
know that it was going to have to devalue and the situation had
gotten out of hand. A protest by Ford Motor workers and the
Minas Gerais debt suspension added to the uncertainty, along
with a substantial capital outflow. The real fear, he believes,
is hyperinflation if the new exchange rate fails. He noted that
Brazil is the only nation that declares all debt (federal,
state, and municipal) as part of the national debt.
Mr. Marcello commented that the profitability of U.S.
companies in Brazil has been outstanding. At this moment,
Brazil's national position is vulnerable and it needs U.S.
support politically. In addition, Brazil's private sector needs
U.S. support.
P.J. Garrido, Managing Director and Country Manager for
Bank of America, commented that the IMF is crucial because
there is no substitute for its role. She declared that the
United States must stand by democracies and that Brazil's
democracy works best when it is under pressure. She believed
that Brazil will pass the necessary reforms and that pain is
being felt here. Observers should look for layoffs in state
jobs and whether the Congress makes the government workers pay
into the social security system as indicators of the commitment
to reform.
John McCarter of GE Latin America insisted that, in his
opinion, Brazil is indeed making the changes it needs but the
Constitutional process is difficult. He made the point that the
Congress is feeling the pressure to act for the first time in a
long time. He reflected that the government that privatized has
been re-elected, is an important sign of change. In addition,
he pointed out that a large part of the public debt is
attributable to the former public sector that has now been
privatized.
Congresswoman Thurman added that Americans are supportive
and that the delegation's meetings in Brasilia and Sao Paolo
have been positive. Furthermore, she cited Chairman Archer's
press release on the delegation's positive impressions.
Chris Lund, an American who has been in Brazil since 1962,
related his own history and how he had seriously considered
giving up his U.S. citizenship over tax issues but decided, in
the end, that no price could be placed on American citizenship.
He felt that in looking at Brazil, the delegation's personal
observations will be critical. The dimensions and problems of
Brazil's democracy are tremendous but he will always be biased
for democracy and for Brazil. He believes that there is a
danger in grouping Brazil with every other country. He declared
that Brazil is not Russia or Indonesia; No longer do private
interests control Brasilia. There has been a profound cultural
change in Brazil. Ten years ago, the reaction would have been
``IMF go home.'' Now the reaction is ``IMF Welcome.''
Furthermore, Brazil's banking system is not like Thailand and
is now sound without a property or asset bubble.
Congressman English asked if the IMF prescriptions or
solutions are right for Brazil. A clear majority of the Amcham
members present said yes, noting that the reality is that
Brazil wrote its own plan after learning the lessons of earlier
IMF bailouts.
Meeting with the Industrial Association of the State of Sao Paulo
(FIESP)
Participants: Carlos Roberto Libone, First Vice President; Roberto
Faldini; Luiz Fernando Furlan, Second Vice President and
Director of International Relations
Sao Paulo, Brazil; Friday, January 15, 1999
The delegation then met with FIESP, an organization of
Brazilian businessmen. Mr. Liboni began the meeting by pointing
to the ``wrong actions'' that the Brazilian Government has
taken in the past, recognizing that the Brazilian currency has
been overvalued. The recent exchange rate devaluation, he said,
allows the market to determine the true value of the currency.
Brazil, having devalued, is now in a better position. He stated
that he looks to the future with optimism. Mr. Furlan pointed
to some common misconceptions about the Brazilian economy. The
first is that something must be wrong because prices are so
high. Mr. Furlan stated that the problem has been the
overvalued currency, which caused Brazil to lose market share.
He said that the Brazilian stock market has responded favorably
to the devaluation and that exporting companies will benefit
from the change. Industries that depend on credit have suffered
because of high interest rates, amounting to 9 percent per
month. He pointed to a segmentation phenomenon within Brazil in
which several industries are doing well despite the crisis but
on average Brazil is not growing. However, he concluded that
Brazil will be able to implement its fiscal adjustment.
Mr. Faldini stated that he believes the press coverage of
the crisis has been unbalanced. Brazil has actually opened its
economy considerably to world markets and has abolished
uncompetitive policies. Tariffs have been reduced from 32
percent to 17 percent, and industrial production has grown 7.5
percent per year for the last 8 years. Privatization has raised
$16 billion and has been successful in the areas of steel,
petrochemicals, telecommunications, rail, and electricity.
Subsidies are disappearing. The banking system has been
``cleaned up'' so that weaker banks have been bought and state
banks are no longer used for ``pet projects.'' Inflation has
decreased from 50 percent per month in mid-1994 to below 2
percent in 1998. Brazil, he said, is in a period of stability.
President Cardoso will be in office for 8 years, and his
economic team has an international reputation of competence,
quality, integrity, and experience. There are still problems,
he said, but the trend is upward. Brazil has been in transition
to democracy, and democracy ``makes it harder to get things
done.'' It is important to have U.S. support, he concluded.
Chairman Archer responded that the delegation came to South
America because of its importance and not because of the
crisis. Too long, he said, the United States has been
complacent about South America. He promised to report back that
he is confident that Brazil will keep its commitment to the IMF
package and that all structural reforms will be put in place as
rapidly as possible given that Brazil is a democracy. He stated
that he realizes the process will be slow. He also said that
often change is not made until real pressure is brought to
bear. Perhaps the recent devaluation, he stated, might help to
spur Congressional action. He asked the participants whether
they believed that the IMF reforms would be enough, saying that
they may need to be increased, but he felt confident that
Brazil would do its part. He also emphasized that Brazil must
resist the temptation to slide into protectionism. He then
spoke about fast track, promising to put fast track before the
U.S. Congress shortly. He noted that he could not guarantee the
outcome of the House consideration, but he noted that fast
track is important to U.S. negotiators in eliminating foreign
barriers, particularly in agriculture. The United States, he
said, is afraid to ``unilaterally disarm'' in the area of
agriculture and needs trade negotiations to bring about such
reform. He concluded by pointing to the opportunity that trade
negotiations present, adding that when one ``starts with South
America,'' one must ``start with Brazil.'' Chairman Archer
noted that agriculture is always the most sensitive issue. The
key to reducing barriers, he said, is Europe. If the United
States obtains fast track and begins negotiations to reduce
agriculture barriers, particularly with Europe, then the United
States will systematically reduce its barriers, benefiting
Brazil.
Congresswoman Thurman agreed, noting that Europe is not the
only country with barriers. She pointed to the need to remove
nontariff barriers to trade all over the world, particularly in
the area of sanitary and phytosanitary barriers. She pointed to
citrus trade as an example where the United States thought that
it could open markets in Mexico but has sold no oranges and
where Japan refuses U.S. grapefruit. The United States, she
added, opened its market to foreign tomatoes and lost $850
million.
Chairman Archer noted that he does not like quotas, but the
United States does resort to them, such as in sugar and
textiles. As a result, U.S. consumers suffer. Although such
quotas are WTO-legal, the United States must lead in changing
the rules of the WTO and implementing the new rules, leading to
a much more open market.
A FIESP member asked whether fast track would be broad or
limited to specific negotiations. Chairman Archer responded
that fast track could take any form. He then explained the
constitutional reasons for fast track, noting that the
President cannot negotiate trade agreements without authority
from Congress. As a result, he said, only trade issues should
circumvent the normal legislative process, and in his fast
track bill he has limited fast track to those issues directly
related to trade. He expressed his fear that the administration
will disregard to economic costs of linking nontrade issues to
trade agreements. The Democrats, he said, are insisting on
broadening fast track to include such issues, but to do so
would lose Republican votes. Congressman Dickey added that
Congress is not giving up its legislative responsibility
because it must still vote on the agreement after it is
negotiated. Organized labor, he added, does not support fast
track because it does not want to open the U.S. market. More
support from business, he said, is necessary for fast track to
be successful. When asked about timing on fast track, Chairman
Archer said that he hoped to report fast track out of the Ways
and Means Committee within 2 to 3 weeks, but that full House
consideration was less certain.
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