2013 Annual Advocacy Mission 1

BRAZIL-U.S. “HOT” ISSUES

The Brazil-U.S. economic and commercial relationship has reached historic heights andcontinues to grow. As a consequence, there are an increasing number of “trade irritants” andtrade disputes between the two countries. In addition, political and macroeconomicdevelopments in either country have caused friction in the bilateral trade. Please see the Brazil-U.S. Political Relations document on this tab for further information.

The Brazil-U.S. Business Council (BUSBC) actively works to prevent these matters fromdisrupting the bilateral relationship. Below are the most important current irritants — or “hot”issues—in the bilateral commercial and economic agenda.

1) World Trade Organization (WTO) Cotton Dispute

In September 2002, Brazil successfully challenged a number of U.S. Government cottonprograms in the World Trade Organization (WTO). After seven years of litigation and sidenegotiations in Geneva, the WTO Dispute Settlement Body concluded that the United Stateshad not sufficiently changed its programs to comply with WTO rules. As a consequence, itauthorized Brazil to impose trade retaliation against U.S. goods and “cross-retaliation” againstU.S. intellectual property rights.

In 2010, both countries reached a temporary agreement to avoid retaliation and work toward adefinitive solution in the context of the 2012 Farm Bill. In 2011, Congress attempted, four times,to dismantle the temporary agreement as it includes a monetary compensation clause thatrequires the U.S. to transfer $147.3 million annually to the Brazilian Cotton Institute (IBA). Forthe past three years, the Brazil-U.S. Business Council has lead a coalition of companies –called BRAZTAC – in an effort to lobby for a definitive solution to the case. The BRAZTACposition is that without a definitive solution, the U.S. government should maintain the paymentsin compliance with the temporary agreement.

The U.S. government did not pass a Farm Bill in 2012. The story is repeating itself in 2013 witha more damaging twist. Both the House and the Senate passed their versions of the Farm Bill,but it is unclear if they will go to conference any time soon. However, the United Statestransferred less than the agreed amount to IBA in September in violation of the temporaryagreement. The U.S. Department of Agriculture has stated repeatedly that there is noauthorized money in the budget to make additional transferences to IBA this year. In responseto the U.S. breach of the temporary agreement, the CAMEX (Brazilian Foreign Trade Board)established an inter-governmental task force to report on possible measures of trade retaliationby November 30.

2) Data Center Localization Requirement on the Internet Framework Bill

The Internet Framework Bill (P.L. 2126/2010) was developed as part of a collaborative processbetween the public sector, private sector, and civil society to codify the rights and duties ofinternet users, servers and public authorities. The project received over 800 comments and wasintroduced in the House in August 2010. The three pillars which the bill is based on are: networkneutrality; data privacy; and freedom of expression.

The recent allegations of U.S. spying activities triggered a national discussion in Brazil on theneed to speed up the voting process of the Internet Legal Framework by Congress. The bill

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now is under a “Constitutional urgency” process – a special fast track procedure. It should bevoted on in 45 days if there are no other bills under the same process ahead of it. The latestreport is that the bill will be voted on October 30.

In addition, the Executive branch is now pressuring the bill’s rapporteur, Allessandro Molon(PT), to add a provision to the bill that would require data centers to be established in Brazil.This is now a national security issue for Brazil. Internet companies have been actively trying todissuade the government from adding such a requirement to the text of the bill.

Last month the BUSBC, the U.S. Chamber of Commerce, and several foreign associationssubmitted a letter to the National Congress urging its members to consider the broad negativeeffects within the Brazilian economy of any proposal that would include in-country data storagerequirements.

3) U.S. Export Controls and the Sales of Military Aircraft

For many years, BUSBC member Boeing has been a contender in a bidding process led by theBrazilian Air Force (FAB) to buy modern jet fighters. The U.S. competitors are the French andthe Swedish. In 2010, then Brazilian President Luiz Inácio Lula da Silva made public statementsin favor of the French proposal, but no formal decision was issued. Brazilian President DilmaRousseff already demonstrated interest in revisiting the three proposals, increasing U.S.chances.

On a positive note, earlier this year the United States Air Force (USAF) awarded Brazil’sEmbraer a bid for light support aircraft—the Super Tucanos – after a contentious biddingprocess. It is worth noting that the deals are of different magnitudes: the sale of Embraer’sSuper Tucanos amounts to a few hundred million dollars, while the sale of the U.S. jet fightersamounts to a couple billion dollars.

There is a perception in Brazil that U.S. export controls and the role played by Congress insales of military aircraft are major political risks for Brazil. In 2005, for instance, the U.S. blockeda Brazilian sale of Super Tucanos to Venezuela because the light aircrafts use Americantechnology. A more recently example is the sale of several Blackhawk helicopters purchasedby the Brazilian Air Force from Sikorsky Aircraft. The helicopters software has a technicalproblem whose fix apparently needs a U.S. export license which has not been forthcoming.

When Brazilian President Rousseff visited Washington, D.C. on April 9, 2012, she andPresident Barack Obama agreed to create a presidential-level U.S.-Brazil Defense CooperationDialogue (DCD). The creation of the DCD and the Embraer bidding win reversed some of theprevious estrangement between the two countries. Nonetheless, the recent allegations of U.S.spying have created political friction between Brazil and the United States over the defensesector. FAB’s bidding process decision was postponed to 2014 due to budgetary constraints,while USAF is expected to issue a decision on its new bidding in January 2013.

This past summer, the two countries informally agreed to create a working group to share bestpractices and to resolve questions regarding the application of export control laws - the Brazil-U.S. Strategic Trade Working Group (“STWG”). As of now, the United States is waiting for aconfirmation from Brazil on the establishment of the STWG.