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National Press Club Morning Newsmaker Press Conference with Members of a Council on Foreign Relations Task Force on Brazil

Speakers: Arturo C. Porzecanski, managing director and head of emerging markets, ABN AMRO Inc., Riordan Roett, director, the Western Hemisphere Program of the Nitze School of Advanced International Studies at Johns Hopkins University, and Kenneth R. Maxwell, Nelson and David Rockefeller Senior Fellow, Council on Foreign Relations
Chair: Stephen Robert, chancellor, Brown University; chairman of Robert Capital Management; former chairman and CEO of Oppenheimer Group
Speaker: Peter Hickman
February 20, 2001
Council on Foreign Relations

MR. HICKMAN: —But at any rate, our speakers, as you know, are members of a Council on Foreign Relations task force on Brazil who are going to discuss the report the task force did, plus an open letter to President Bush on U.S.-Brazil issues.

Those speakers are, on my immediate right, Dr. Stephen Robert, the task force chair, who’s also chancellor of Brown University, chairman of Robert Capital Management, and former chairman and CEO of Oppenheimer Group; and Mr. Arturo Porzecanski, on my far right, managing director and head of emerging markets of ABN AMRO Inc.; and on my left, Mr. Riordan Roett, a task force member, who’s the director of the Western Hemisphere Program of the Nitze School of Advanced International Studies at Johns Hopkins University.

And I also want to welcome the minister-counselor of the Brazilian embassy, Mr. Paulo Roberto de Almeida. Bienviendo. And I want to thank, again, the communications director for the Council on Foreign Relations to New York, April Palmerlee, who suggested and helped arrange this morning’s meeting.

Very, very briefly, to summarize the summary, which you may already have, the letter to President Bush, open letter, simply says that Brazil is an essential partner in U.S.-Latin American relations, and it urges certain courses of action, and it outlines some obstacles to these actions.

So our speakers will discuss that, and after they speak, they will take your questions. And please give them your name and affiliation when you ask them. And when you do have a question, if you’ll give me a signal at any time during the news conference, I’ll call on you in turn and as many of you as time permits.

And finally, if you haven’t already done so, as you leave, please add your name to the sign-in sheet outside. Thank you very much.

Dr. Robert?

MR. ROBERT: Thank you, Peter, and thank you all for coming. I’m told that at the end of this conference, anyone that wants to can march over to the Canadian embassy and picket.

Well, this report, which you’ve all read, so I’m not going to spend a lot of time on it, because you’ve read it, and I’m sure you want to hear my colleagues and you want to ask a lot of questions. If I had to summarize the report in a few words, it would just be, let’s, the United States, treat Brazil as important or as an important a partner as it really is and not just have a policy that focuses on Brazil either in a way that’s one-sided toward United States interests or only in times of serious crisis, like 1998.

The fact is that while I think the United States has been guilty of some of those practices in the past, it’s not a realistic or an intelligent policy for the United States going forward, as it has not been a good policy in the past.

Brazil is the third-largest democracy in the world, by far the largest country in South America. It borders on nine of the 11 other countries in South America. Its economy is twice as big as India’s and Russia’s, and almost as big as China’s. Private investment in Brazil from the United States is fives times annually what it is in China.

So this is a country of major importance, major importance in terms of having democracy in the Southern Hemisphere. Brazil is a very well-working democracy. We said in our report that they, in a series of local elections, counted 110 million votes last year, flawlessly and electronically. If that was a dig at any other country, it wasn’t intended.

But the countries around it are not doing well, in many cases, in terms of democratic, honest, transparent governments. We have only to look at Venezuela and Colombia and Peru and Ecuador and Paraguay, to name a few, where serious problems exist. And if we are going to promote stable democracies, stable free-market systems, non-statist systems in South America, if Brazil were to slide away from democracy and away from free markets, it would be an almost irreversible setback to any hope for democratic and free-market governments in that very, very important area of the world. So in terms of promoting democracy and free markets in South America, it is critical. It is the linchpin. It’s hard to conceive of a healthy South America without a healthy Brazil.

In terms of drugs, a major issue for the United States, as it’s a major issue for Brazil. Clearly, the drug problems in Colombia and other bordering countries permeate the very porous Brazilian border. We have a common interest in Brazil in fighting drugs; we, because we don’t want those drugs exported to the United States. Brazil not only doesn’t want the drugs exported, it doesn’t want their governments corrupted by the huge influence of narco money that exists in bordering regions. So in terms of our drug policy, we should have a very strong interest in cooperation with Brazil, as they should with us.

And lastly, trade. We are experiencing in the United States some of the massive benefits of globalization of free trade. NAFTA has been a strong success, despite the worries of some severe critics back in the early and mid-’90s. The “huge sucking sound” of jobs has really been the huge sucking sound of trade going back and forth, and really it’s, I think, documentable that NAFTA has been a great help to all three economies, and certainly the United States and the Mexican economy.

It’s not clear how trade will develop between Brazil, Mercosur, the rest of South America and North America. That’s going to be contentious. It’s going to—I think the current timetable is to seriously start those discussions in 2002 and complete them by 2005. There’ll be all kinds of issues on all sides of this debate. But it’s very important that we try to look beyond parochial disputes and parochial industries, whether in Brazil or here, that have their own self-interest at heart and take a broader picture as we did with NAFTA, and so that Brazil, South America and North America can get the benefits of globalization and free trade between those two very, very important areas.

We are not the only ones that will be negotiating with Brazil and other South American countries. Clearly, Europe already is and will continue to be a major competitor of ours. And to the extent that we fail, that we’re guided not by a broad, long-term view, but by parochial self-interests or certain industry groups, certain strong industry lobbies, we could lose out to Europe in terms of the great benefits of having a very open, competitive trade agreement with Brazil and the rest of South America.

So for all those reasons and others, we came to the belief that the United States has to have a direct, forceful, clear, focused policy toward Brazil. It can’t be treated as something you only worry about in times of crisis. It maybe isn’t as important as Mexico, because Mexico is right on our border, but it certainly would be a very, very close second in the Americas in terms of the U.S. national interest.

So, we think that we ought to be able to see the strategic importance of a country like Brazil to the United States, even in the absence of developing their own nuclear capability. There is some thought that we tend to, perhaps, focus on a Pakistan or a North Korea, or India, or whoever it may be, because they either have or have threatened to have a nuclear capability, and we should be able to see these other very, very important reasons for a clear policy and a strong policy other than just kind of nuclear blackmail.

So with that introduction, I’d like to turn this over to my colleague on the task force, Arturo Porzecanski, who is just back from Brazil and presumably will give us very hot news.

MR. PORZECANSKI: Thank you, Stephen. Good afternoon. Thank you for being here. Indeed, in Brazil, trade issues these days are every hot, and I certainly hope that the Bush administration will, by looking at what is going on in the relationship between Canada and Brazil, know what not to do.

I very much second the report on which we’ve been working during recent times. I think we have, as a country, an excellent window of opportunity in the next few months. It’s, I think, only a question of a few months, because the U.S. agenda will tend to get crowded with items, and also the Brazilian agenda. They have a presidential election coming up in a year and a half, October next year, and therefore there is only so much that they outgoing administration of Fernando Henrique Cardoso can hope to accomplish in this time. So I really think that it’s a window of opportunity here to establish a new strategic relationship between the United States and Brazil.

It behooves us in many ways, as I say. In terms of timing, it’s an excellent timing. We don’t have any major financial crises to attend to. Mexico is doing very well. The free trade initiative, as was pointed out, is working and there is good dialogue on a bilateral and multilateral basis with Mexico. We don’t have civil wars in Central America to capture the headlines, so from the United States’ point of view, it’s a great opportunity to pick our priorities rather than let events drive us where they will.

And I think that Brazil, as was mentioned, is the key to whatever problems remain in the region. Colombia is viewed by Brazil and the other South American countries as very much a regional issue. Experience has shown that when there is a drug problem as widespread as that one, there are a lot of spillover effects. So that we need Brazil to deal with the Colombian issue, and we also need Brazil to shore up, as has been mentioned, some of the other democracies that are very fragile, are looking very fragile, in the Andean region, in particular, and closer to Brazil on the southern belly in Paraguay, as well.

I think that the Brazilian government would very much welcome being recognized as a potentially strategic partner with the United States. And as mentioned, we have a time period, defined in months, I would say, from now to year end, to get things done on a bilateral agenda. Trade is very much on the front burner. As you know, there is a timetable. We cannot make progress on the Free Trade for the Americas without making progress vis-a-vis Brazil. If we can have a rapprochement with Brazil on the issues, the rest will, I think, pretty much take care of itself because Brazil exports agricultural commodities, it exports manufactured goods, it exports services. So by dealing with Brazil, you’re basically dealing with all the issues out there. I think for me personally—the task force doesn’t say this, but I think that the pursuit of a free trade agreement with a small country would be a Pyrrhic victory. Really it’s with Brazil and the region that we need to have a free trade deal.

The country is capturing a lot of foreign investment, as you probably know, $30 billion last year, $30 billion the previous year, and it’s been over $20 billion for now a half-dozen years. A lot of that investment is American. So I think that we need to get along with Brazil well also to foster not just trade, but the investment climate that has flourished in recent times.

So I’ll leave it there and wait for your questions later on, and I’ll pass it, if it’s all right, to our colleague, Professor Riordan Roett.

MR. ROETT: Good afternoon. Let me take a slightly different tack from Steve and Arturo, all of whom made very important comments, and to basically focus my brief remarks on the geopolitical and the foreign policy implications of our relationship with Brazil.

There’s no question that our relationship with Mexico is very important. There’s also no question that the United States will remain the major actor in North America. There is, therefore, no question either that Brazil will be the major actor in South America. And we have to understand that increasingly there is a North America and a South America. They’re not incompatible, they’re not in conflict, but they are two very different realities, and I think it’s very important to recognize that first.

Second, the question of leadership. Brazil is the regional leader, and Brazil will remain the regional leader in South America. It has proven so in its very helpful participation in resolving the Peru-Ecuadorean border conflict, in preventing coups d’etat in Paraguay, in a very thoughtful approach of dealing with Venezuela, and some would contrast that with the United States approach to dealing with Venezuela, and, therefore, very helpful in identifying potential conflict spots in the region.

Mercosur. Mercosur is and will continue to be an important economic, as well as political and foreign policy association in South America. Many of the comments by some United States officials over the years about Mercosur have not been taken particularly well in Brazil or, in fact, in Mercosur itself. And it’s now time, I think, to step up and recognize that Mercosur is more than just a trade, free market in the making, but it also a very important stabilizing, political stabilizing factor in South America, and plays a very important role and will continue to do so.

Brazil in Mercosur is the major interlocutor with the European Union. Brazil called the first summit of the heads of state and chiefs of government of Latin America, or of South America last August. Brazil was critical in organizing, previously, the European Union’s summit with the heads of state of Latin America. Brazil will take an important lead role in the politics of deciding trade strategy in Quebec City. And President Cardoso will be here in April to talk with President—what’s his name?—Bush about the strategy for trade in Quebec.

[Laughter.]

Therefore, it seems to me that in looking at our overall foreign policy interests in the 21st century—and we have very strong ones, as my colleague has pointed out, in terms of trade, investment and dealing with multilateral problems like drugs and terrorism—we need to move from the negative to the positive and understand that a very strong, strategic partnership with Brazil will yield great benefits in dealing with the very complex, very complex geopolitical foreign policy and strategic issues that I think have emerged and will continue to emerge in the region.

Finally, the Amazon. The Amazon is a controversial issue. It’s a very important issue. The Brazilian government, rightfully so, is increasingly concerned about the militarization or potential militarization because of spillovers from Colombia. Therefore, I think it behooves the United States to be well aware of Brazilian thinking with regard to the Amazon, with regard to those issues, and not leave this to merely reporting or happenstance discussions with regard to the developments in the Amazon region.

Brazil, therefore, for all these reasons, because of its size, its potential, its growth, because of its regional leadership, because of the very important bridge with the European Union, and because of Mercosur, a dynamic and very important political as well as economic entity, means the United States and the new administration should very carefully reassess our relationship with South America. That means reassessing our relationship with Brazil. And we must be very careful not to allow a very important and, I think, very thoughtful relationship with Mexico to in any way overpower the realities of our dealing with Brazil in a very clear and very equal manner on a set of very complex issues that I think will only become more complex as time passes.

Thank you.

MR. HICKMAN: Thank you very much, gentleman. And before we go to questions, I wanted to point out that we have another member of the task force here, Mr. Kenneth Maxwell in the back, who is the project director. And I’m sure that you can fire some questions at him too, possibly. And I also want to recognize Ambassador Harriet Babbitt, former ambassador to the Organization of American States, and Undersecretary John Holum, who’s made it big in the private sector, I just found out. Welcome to all of you.

We are now open for questions, and please let them know who your question is for.

Ambassador Babbitt.

Q: I have a comment and then a question. And I’m not sure whether I’ve broken protocol by sitting at the table; it’s really a press table, but—

MR. HICKMAN: You’re a freelancer.

Q: You’re welcome. I was, as you pointed out, the U.S. ambassador to the OAS. I’m now at the International Center for Scholars.

My comment is this, that the report mostly treats Brazil as an extraordinarily important regional leader. My impression is that many Brazilians see Brazil as a very important global leader, and that perhaps some of the tension in the approach which is taken by many in the United States towards Brazil as merely a regional leader, which adds to perhaps something of an obstacle section of your report.

I have a narrower question, and that is that in the section dealing with trade, the report very clearly points out the disappointment in the United States with the Brazilian regulatory agencies’ selection of the European standards for cellular telecommunications requirements, which obviously prejudices the United States with respect to hardware sales, software sales, certain content. The report says this need not have occurred. And I wonder if you all would expand on that process and how you see it in the context of this report?

MR. ROBERT: If I could just take the role of finding the best person to answer these questions. I think particularly on Brazil’s role as a world leader, Riordan is the best one to talk about that. And on the specific telecommunications issue, I think maybe Arturo is. So why don’t we start with Riordan.

MR. ROETT: I think there’s no doubt that President Cardoso and Foreign Minister Lafer and others have, I think, made it very clear that Brazil is not engaged in overreach and that it recognizes its very important regional role, and selectively in global issues; trade, for example, the World Trade Organization. When Ambassador Lafer was in Geneva, he played an extraordinarily important role in worldwide trade negotiations. So therefore, on selective issues, there’s no question Brazil will become an important international player, but in terms of consolidating its position in South America, increasingly I think the countries of South America look to Brazil to set the tone for their external relationships. And Brazil always provides the leadership in both trade, as well as environmental and other security areas, I think, for South America increasingly.

Over the course of this century, I don’t think there’s any doubt, if the current economic development process continues in Brazil, that there Brazil will more and more play a broader international role in a number of fora.

MR. ROBERT: Arturo, do you want to take the telecommunications issue?

MR. PORZECANSKI: I’m not particularly acquainted with the facts surrounding that Brazilian decision to choose a particular standard that wasn’t the U.S. standard, but, in general, I think that the idea behind the report is, if we don’t have a constructive agenda, then we’re going to have an agenda by default, and it could very well be destructive, because then it’s steel and orange juice and mad cow and, you know, things like that. And meantime, time goes by, the private sector wants to get things done, and decisions will be taken which may not be the most rational and certainly not the most beneficial to the United States.

So it’s time to stop and think about it and come up with a positive agenda. And there’s so much that can be accomplished by working together and by recognizing Brazil, first and foremost, as a regional leader, but, of course, we all know that they have greater ambitions than that.

MR. HICKMAN: Jesus, and then Jose.

Q: On the situation in Colombia and relating to Brazil, you mentioned that Brazil needs to be more involved in solving the problems of Colombia, of the region of Colombia. How can Brazil play that role when most of the countries in South America see the Colombia issue, especially the drug trafficking, as a problem of the United States, and they don’t want to be involved, especially when money from the United States is given to that country in terms of arms and special training for the Colombian forces? How can Cordoso and Bush deal with that problem? How they can reconcile their difference in that point?

MR. ROETT: I think it’s an important point. Clearly, there is not much of a role for anybody except the United States and Colombia the way Plan Colombia is currently defined. Therefore, the terms of the discussion would need to change to, again, understand that Colombia is as much a regional as it is a bilateral issue. That was not the case with the Clinton administration. We don’t know what the Bush administration’s position will be. My understanding is that the secretary of State may well visit Colombia for an on-the-ground review of Plan Colombia.

The fact that President Bush publicly stated that we, the United States, have some responsibility for the drug trade, I believe the first president to say that, is a very important step in the right direction. If we were indeed to begin to look at this as a multilateral and regional problem and not just a bilateral problem between the U.S. and Colombia, which is not, given the very serious possibilities of paramilitaries, drug lords, guerrillas moving across borders, which they indeed are doing at the present time, then there would be an appropriate role for other countries in the region, of which Brazil obviously would be a logical candidate.

MR. PORZECANSKI: If I could just add one thing. I really don’t think that viewed from the Brazilian perspective, they don’t care about what’s going on in Colombia or how the U.S. is handling it and so on. I think they care very deeply, because they know that, as I mentioned, it very quickly becomes a regional issue there. People spill over the borders, money-laundering spills over the borders, gun-running spills over the borders. So I think that Brazil would very much like to discuss that issue with the United States. I think that they have some suggestions on how to go about it, and I think that the problem is sufficiently complex that we should hear all the good ideas that there are out there.

MR. ROBERT: I would just add one or two things to, I think, the comments, which I agree with, of my colleagues. The report talks about the U.S. and Brazil cooperation on the Colombian issue mainly in the context of “if Plan Colombia fails.” I suppose there probably could have been a big debate on whether we should have said “if” it fails or “when” it fails, but it talks about that in the context of if it fails.

The second thing I would say is I think Colombia is a whole separate discussion, because to me, probably outside of Africa, it would be hard to find a country that’s in as much disarray, where there’s as much lack of any sign of a civil society, where government is as ineffective in protecting its people as what we have today in Colombia. So I think obviously the drugs are a huge part of the problem in Colombia, but the problem is far more complex than that, and to figure out what the right policy is in Colombia would be a task force report in itself, which there may have been. Ken, was there a task force report on Colombia?

There is a task force report on Colombia of the Council on Foreign Relations, actually. Thank you.

MR. HICKMAN: Before we go to the next question, you mentioned Plan Colombia. As you may know, on March the second, I believe it is, the foreign minister of Ecuador, Heinz Moeller, will be here, and he is going to talk about Plan Colombia, among other things.

Jose?

Q:—I’d like you to discuss the possibilities for survival of the Mercosur. There’s a lot of talk about Argentina maybe dropping out because they are more interested in becoming a member of NAFTA or whatever, and they’re not doing very well. But what do you think about that? And what would happen in that case?

MR. ROBERT: Would you repeat the question, also?

MR. PORZECANSKI: Yes. It’s a question about the health of Mercosur and—yeah, that’s essentially it—and Argentina. And I think Mercosur is ailing, and the fact that the Chileans are, as you know, interested in doing a deal with the United States, even as they try to become a member of Mercosur, and the fact that, according to all press reports, Argentina, Uruguay and Paraguay are very much pressing Brazil to get on with this new administration in terms of trade, because Mercosur, for them, is not the endgame; it’s just a bridge to the region-wide free trade agreement. I think it’s very much recognized in Brazil, and that’s why I think the time is right, because we have a new administration here; we have a definitely pro-free regional trade attitude, even within the Mercosur membership; we have a new foreign minister in Brazil; and we have, as I mentioned, the clock ticking down to the next administration in Brazil.

So I think that considering not just the original timetable of FTAA, which mandates that progress be made, this is certainly a great opportunity to face some of the issues head-on and make something happen.

MR. ROBERT: Thank you. I would just add to that, and I’ll attribute these comments to myself, not to the task force. But one of the problems in Argentina is what I view as an overvalued currency. And I really think the problem of Argentina is not going to be solved until that problem is dealt with, in the same way that I don’t think the problems of Brazil could have been solved after 1998 to the extent they are if the currency hadn’t been devalued.

I was very heartened to see a speech by Secretary O’Neill last week in which he was asked if the United States was going to have a strong dollar policy. And he said, “Look, there is no such thing as a strong currency policy.” You have a strong economy, and if you have a strong economy, the residual of that will be the strength or the lack of strength of your currency. And I think the more—in my view, that was a breath of fresh air after all the good money chasing bad money that we spent trying to help countries all over the world prop up currencies that were overvalued and which had no hope in the long term of being sustainable.

So while I respect Argentina for their currency board and for their attempt to deal with inflation and for their discipline, the fact of the matter is, an overvalued currency is still just that, and I think that’s going to be integral to them solving their problem. I think getting out of Mercosur or getting into NAFTA, and so forth, is not going to be the answer to their problem.

MR. HICKMAN: Savio (ph)?

Q:—Tiempo del Mundo. You mentioned the statement by Mr. O’Neill, but actually he has to correct that because of the reaction of the financial and the currency markets.

But going back to the general, there is this mention of financial and all along the political importance of Latin America, and even there is mention of the dollarization process as a de facto process in Latin America as the way perhaps to stabilize the economies.

My question is, how—I mean, which is the role of U.S. policy, the U.S. government and its policy, in trying to help Latin America to become a more stable and less volatile economy, if there is any role?

MR. ROBERT: Well, I’ll just start, and then I’m sure some of my colleagues might want to chime in on that.

First of all, you’re right that there was—the Treasury had to issue some clarification to Secretary O’Neill’s speech, because the dollar immediately started to weaken after he said that, which, you know, in my view is kind of silly. And I suppose it’s the problem, when you’re in as high a position as Secretary O’Neill, anything you say can and will affect markets. I guess I think Treasury wimped out a little. I think they should have just—the markets would have snapped back anyway; they didn’t need to say that. But I think that’s an old pattern of behavior that they need to shake and haven’t been able to do so yet.

You know, I think economic reform is fragile. It’s fragile in all emerging countries. And it’s even fragile—a capitalist economic system is even fragile in developed countries, as we’ve seen. So Japan, for instance, would be an example of a developed country with a, quote-unquote, “free-market system” that’s had 10 years of problems that they still are not able to get out of completely.

So, why are they fragile? Well, because they’re not as deeply ingrained. And it goes everywhere from the educational systems to capital flows being so much more important. I was interested in a statistic I saw the other day that capital flows are now 13 times greater than trade flows. So that really, that confidence of the world, which is volatile, to invest particularly in emerging countries is so important to their development. And yet, as we all know, currency flows can be turned on and off far faster than other types of flows. So that that kind of confidence becomes very important.

I think the rule of law and the judicial system is critical. And I don’t mean only having a commercial code, because there are a number of countries with actually very, very modern, sophisticated commercial codes but there’s no way to enforce them; they don’t have the transparency, the kind of judicial system. I’m not even sure if Brazil has kind of the concept of precedent yet, do they? I’m not positive of that. But I think every case is kind of decided on its own, I think, rather than having the use of precedent. But don’t hold me to that.

So all kinds of transparency, bribery, et cetera, the kind of governability of countries, the fractionalized nature of the party system in many of the governments, the banking system in some countries is, you know, not as solid as you’d like to see it, et cetera. So what we are doing—now, the U.S. government, I think, in many ways can only be encouraging. Yes, it can give technical assistance, it can give advice, but in many ways on these issues it can only be encouraging. These are sovereign countries who certainly have control over their own economic system. We should give whatever advice is asked for and that we’re capable of giving. NGOs should also be involved, as we mentioned in the report. But our capacity is somewhat limited. Mostly these countries have to do it for themselves.

One of the things the Council is doing, which I don’t think is mentioned in the report, but I’ll mention it now. It’s a good lead-in. Because economic reform in most emerging countries has been kind of an on-again, off-again process and there tends to be, unfortunately, sometimes a lack of sustainability, and sometimes when economic reform is slipping and diminishing it’s not noticed, generally speaking, until there’s a crisis, such as ’94-’95 in Mexico, or ’98 in so many of the other countries. So on our website, we are going to have a Brazil report which will update—it will provide kind of a continuous update on how reform in Brazil is going and whether it seems to be making progress or whether it seems to be stalled, whether it seems to be slipping backward. So that we will have kind of a—going forward, a continuing monitor of how things are going, and so that we don’t, hopefully, get caught quite as much by surprise as we did in some of the global economic crises of the past. And for anyone that wants to look at it, the website is: www.cfr.org. And that will be one of the continuing roles of this task force is that site. After the publication of this report, the task force went into kind of hibernation, and it can be called out, well, for specific reasons, but most of its ongoing, continuing work will have to do with that website.

Anyone else want to comment on that question?

MR. ROETT: A quick comment on emerging markets. You know, if we were meeting here four or five years ago before the crisis in July of 1997 in Thailand, we’d be talking about the Asian miracle and the Asian model. Well, we now know there’s no Asian miracle and there wasn’t much of a model.

If you look at the management of the so-called “tigers” in Asia right now—at the Wahid government in Indonesia, Mahathir in Malaysia, the new prime minister of Thailand, Mr. Thaksin—compared to the leadership in Brazil with Arminio Fraga, Pedro Malan, President Cordoso, we’re talking light-years of difference in terms of leadership, in terms of understanding of the international financial markets. And, of course, Brazil and Mexico are being rewarded this year, and last year, with extraordinarily large capital flows, which are not going to Asia because the markets understand there’s leadership and understanding about the appropriate policies in a country like Brazil. Can it change? Of course it can change; the markets change all the time.

But why this is an important window of opportunity, it seems to me, is that post evaluation and the superb handling of that post-evaluation policy process by the economic authorities in Brazil means that this year, next year, certainly, are good years for Brazil. The reforms are in place; there are more reforms to take place, but there always are, as there are in this country. And therefore, there is a window of opportunity both in terms of trade, capital flows, financing, for the U.S. and Brazil to talk about some very important issues.

MR. HICKMAN: Anybody else? Arturo?

MR. PORZECANSKI: No.

MR. HICKMAN: Okay.

Ana?

Q: I have two questions.

MR. HICKMAN: Could you give your name and affiliation, please?

Q: Ana Baron from Clarin, Argentina. First on Argentina and on the currency board, if that is the problem of Argentina, how do you see the solution? Is it more towards dollarization or more towards going to floating exchange rates? For you and Arturo.

And the second is on Brazil’s leadership. It seems that Mexico is evidently changing, and very swiftly, from the role they see for themselves in the hemisphere. They’re talking much more about democracy, and probably they’re going to change their vote in the Commission of Human Rights, you know, on Cuba. I don’t see in Brazil the same attitude, and I see Mexico going south, or trying to coordinate with Mexico. So I wanted to ask you, when you say that Brazil should engage more, how do you see it not only in Colombia, but generally, generally speaking, its relationship with Mexico? It seems that they really want to have a role in that.

[Discussion among briefers.]

MR. PORZECANSKI: I’m not going to pass judgment on the Argentine currency regime. [Laughter.] But all I’m going to say is that what’s interesting is that the European economic area seems to be working, and it seems to be working with an exchange regime of fixed exchange rates all tied to this new currency called the euro. And the other thriving free-trade area is, of course, North America, with floating, freely floating exchange rate regimes. So although I never come to a conclusion on the basis of one or even two observations, it’s suggestive that to have a thriving free-trade area, you don’t have to have fixed rates, you don’t have to have floating rates. You have to have one or the other.

MR. ROBERT: No, I would just—you know, I would just have a slight difference with my friend, Arturo, here, on whether Europe has fixed exchange rates. I mean somehow the euro went from $1.15 to 80 cents, back to 93 cents. Doesn’t seem that fixed, to me. Maybe it’s fixed within itself, which is a little bit different. So there is certainly some shade of difference there.

I’ll turn it over to Riordan on the Mexican—

MR. ROETT: I’m not necessarily of the mind that foreign policy follows trade and investment. But clearly, if you look at Mexico’s interests in terms of trade and investment, they’re north, not south, first.

Second, I think that two most important heads of state meetings in the last couple of years were both held in Brazil. Now, it may well be that Brazil has more hotel rooms than Paraguay, but the fact is the heads of state of South America met in Brasilia, at the president’s invitation, and the European Union met in Rio de Janeiro with the heads of state of Latin America the year before.

So clearly, Brasilia is now recognized, and Brazil, as an important interlocutor in terms of the South American interface with the European Union, as well as with the other countries in South America, and clearly will play a very important role in Quebec City in determining the outcome of the agenda for trade as we move forward. Whether we move the date back to 2003, 2004, Brazil will have to be included.

The U.S. and Brazil are the final co-chairs of the FTAA round. Therefore, the United States will need to sit down with Brazil if they’re going to co-chair equally and to come up with an agenda for the final round. So while Mexico certainly has, I think, a new interest, given its democratic government, in expanding ties with South America—I think that’s very legitimate and very welcome—but I think in terms of the realities of where we are in the 21st century, Brazil will still play the principal role; not the exclusive, but the principal role.

MR. HICKMAN: A question in the back?

Q: Tom Canahuate from Defense News.

The report recommends reviving the U.S.-Brazilian military-to-military cooperation. Can you provide some detail as to what are those possible areas of cooperation between the two militaries, and perhaps address the impact that might have on Brazil’s plans to modernize its air force? I believe they’re spending in excess of $2 billion, want to spend in excess of $2 billion to modernize their air force, a number of different aircraft types. Can you comment on the impact on that program as well?

MR. ROBERT: Does anyone want to take that? But even Ken, if you want to—anyone that feels particularly qualified to answer that question?

I’m not getting—

MR. ROETT: Yeah, I think I have a very general comment. There’s no question that there is a concern, I think, in Brazil for the modernization of equipment, new technologies. And if you look at the figures, Brazil has spent very little on military spending on a per capita basis historically, compared to many of its neighbors, certainly in the ’70s and ’80s.

So I think that given the very fact that there is now new concerns about the Amazon, there’s new concerns about borders, et cetera, the modernization of the air force is a logical step and a preemptive step for the Cardoso government to take.

I think it’s important to point out as well, of course, that Brazil now has a civilian defense minister, and that therefore military spending and military priorities are very much part of the civilian government’s decision-making process, not driven by military thinking—certainly in consultation, as it happens in this country. But quite clearly, President Cardoso has gone a long way towards reducing the overall policy influence of the armed forces.

On the specifics of the air force, I think that’s logical, given what’s happening in the center of the continent.

MR. HICKMAN: Jim?

Q: Jim Landers of the Dallas Morning News. When you talk about a developing a partnership, I wonder how interested Brazil is in pursuing that partnership, particularly with trade, where they seem to be content to hold the United States at arm’s length while they consolidate Mercosur into sort of a formidable negotiating partner of the United States, rather than take us one-on-one.

MR. ROBERT: I think it’s a good question. The question has to do with—in terms of a trade partnership, does Brazil see it in their own interest, or would they rather strengthen Mercosur and create a stronger bargaining entity?

Clearly—and I think the report states this—Brazil wants to strengthen its own Mercosur trading bloc, it wants to strengthen its own position, and clearly it’s going to negotiate with more trading partners than just the United States, even at the same time.

That’s not necessarily bad for us. Mexico has its own trade agreement—our NAFTA partner has its own trade agreement with the EU. Chile is negotiating agreements with us and the EU at the same time. So I think it’s perfectly logical and even desirable that countries or trading blocs have more than one trade agreement or free trade agreement, and they can coexist, as in the case of Mexico.

So Brazil thinks it’s in its interests—by the way it’s acting, appears to think it’s in its interests to strengthen its own trade bloc and also to negotiate with both United States and Europe at the same time, and undoubtedly feels it has more leverage that way. To me, that’s a perfectly reasonable policy, and one that shouldn’t threaten the United States; it should just get the United States on the balls of its toes to make sure that it doesn’t get left behind in these negotiations.

The one good thing about it—and maybe this is a sign that Brazil’s policy is fairly wise—is that if you talk to many American officials about trade with Brazil, you can see them stifling a yawn. But if you talk to them about us losing a trade war with the European Union—(chuckling)—they wake up again and their interest perks up. So I think there is probably a lot of justification to Brazil’s policy.

Anyone else want to talk about that?

MR. ROETT: Yeah. To comment, I think the task force was particularly preoccupied with the fact that the Brazil-U.S. relationship unfortunately has boiled down to trade disputes. And the Brazilian ambassador in Washington and other members of the Brazilian government have pointed out time and again, I think reflecting what we wrote in our task force report, in the absence of a clear medium-term agenda, the U.S.-Brazil relationship has been shaped by interest group concerns in the United States—orange juice, steel, et cetera—which poisons the larger relationship. And what we would like to do on the task force side is to move away from the poisonous part of the relationship, because there is so much more that needs to be dealt with, and that may then actually have a positive impact on the very complicated but very rich trade relationship between the two countries.

But if we go along the same path for the next 10 years, where we’ve been in the past 10 years, we’re not going anywhere, because all we’re going to do is fight over trade, orange juice, and over steel and many other issues. And all of the non-tariff barriers to Brazilian goods coming to this country will grow higher and higher as special interest groups are able to pick away at U.S. policy.

Broaden it out, put trade in an appropriate context, deal with broader political and geopolitical and foreign policy questions, don’t ignore trade, but be very realistic that the Brazilian position is not unrealistic, and obviously our position is not totally unrealistic, and there’s room to give on both sides. But if we don’t talk in a broader context, we’re going to go on with this no-win situation, which really has evolved over the last decade and is very, very frankly negative in terms of the overall relationship between Washington and Brasilia.

MR. HICKMAN: Any other questions? Yes, ma’am?

Q: My name is Maria—

[TAPE CHANGE.]

Q:—sector, really go over the United States’ terms. And why is it that the United States’ terms are not sufficiently, if not aggressive, but proactive? We see, for instance, England is still talking about divesting some of its assets in Brazil, as well as [inaudible], which is the French company, is proactive in negotiating larger shares, as well as British Gas is really competing out some of U.S. companies.

And the other question that I have is, how do you see—we’re about a year and a half from the election process. How do you see the ability of President Cardoso to consolidate, follow up and the ability to actually implement the reforms that are needed to be done before the next election? Actually, that then ties with the fact that a lot of—

MR. PORZECANSKI: On the first question, I really think that because the investment climate in this country has been so good, whereas it has not been as good in Europe, it’s only understandable a lot of the European companies have tried to diversify away from their backyard and go to a place like Brazil, whereas a lot of U.S. companies have had some very exciting things happening right here. So I don’t think that U.S. companies are less aggressive or, you know, somehow are missing an opportunity and so on.

And with regard to the second question, I think that uncertainty about the whole political transition process is likely to be an issue a year from now, and that’s why in a sense it would be great to have a working agenda between the United States and Brazil that in a way will tie the successor to Cardoso as well. And that’s why I think that we should use the coming months to get closer to Brazil, because in so doing we’ll also be getting closer to Cardoso’s successor, whoever that may be.

MR. ROETT: A quick comment. I have read the task force report, so I know where things are in it, and that we say on page 5, “In fact, European investment in Brazil, especially in telecommunications, financial services, and utilities, has increased massively in the last few years, and EU-Mercosur total trade has increased by over 120 percent since 1990. In 2000, Spain surpassed the U.S. as Brazil’s top foreign investor. In terms of exports, the Europeans clearly outstrip U.S. exports, both in numbers and growth.”

This is a new reality, and this reality is not going to change unless we do become more competitive in the region. And it might well be as Arturo says, that he’s correct, that there are other opportunities. But clearly the Europeans have found a new niche. In a sense, Europe has returned. And as we know, Europe was where the action was after World War I and even in the inter-war period. We took over in 1945. There is now a revision, and the Europeans are extremely competitive.

There are a number of cultural, historical, and other reasons why the Europeans are doing so well. There’s also high motivation, given the cultural, linguistic, and other ties, historical ties. And I think the United States is not being pushed out of South America, but we are finding ourselves in competition with the European Union the way we never expected to do so 10 years ago.

That at some point in the future could become an issue, another reason why it’s important, I think, for us to engage, both public sector as well as private sector, more aggressively as to preclude that happening.

Q: But my question was really how would a policy actually help engage the private sector, since they can act independently. And the Europeans, very often the private sector is tied to the public sector—

MR. ROETT: Well, the critical issue, I think, is the economic health of the countries in South America. Business follows good opportunities. And given the stability in Brazil—and hopefully, that will have an impact on Mercosur—in the medium to long term, that hopefully will attract direct foreign investment from the United States into the Southern Cone.

But given the aggressiveness of the Europeans, I think that we’re fighting at the present time an uphill battle.

MR. HICKMAN: Any more questions or comments? If not, two quick announcements:

One, Tomaso has asked me to remind you that in addition to the sound file, that Federal News Service is covering this, recording it, and they will sell you a transcript, if you want, of the conference.

And the other is that for those who came in late, if you haven’t signed in, please add your name to the sign-in sheet outside.

Gentlemen, thank you very much.

[END OF EVENT.]

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