BRAZILIAN INFORMATION SECTION 301

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01117R000702280004-8
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 6
• Document Creation Date: December 23, 2016
• Document Release Date: April 4, 2011
• Sequence Number: 4
• Publication Date: September 5, 1986
• Content Type: MEMO

IN& Ag. ? . .
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IULII I I AL
OFFICE OF THE UNITED STATES
TRADE REPRESENTATIVE
EXECUTIVE OFFICE OF THE PRESIDENT
WASHINGTON
20506
September 5, 1986
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
From: Trade Policy Review Group
Subject: Brazilian Informatics Section 301
ISSUE
On May 14, 1986, the EPC informally agreed that the Brazilian
informatics restrictions represent an "unreasonable" trading
practice under section 301 and directed the TPRG to begin pre-
paring a retaliatory package. The EPC further agreed that it
would recommend that the President make a formal finding of
unreasonableness under section 301, unless Brazilians entered into
"serious negotiations" to resolve the informatics dispute.
The EPC must now review the results of the bilateral consultations
with the Brazilians and determine an appropriate USG response in
preparation for USTR's September 15 recommendation to the President
and Brazilian President Sarney's September 10 visit.
BACKGROUND
Section 301 Case
o This informatics case is one of three that were self-initiated
by the Administration last September. USTR must provide a
recommendation to the President on September 15. The
President then has 21 days (until October 6) to review the
recommendation.
Braz,ilian Informatics Policy
o The informatics investigation challenges a Brazilian law and
policies that severely restrict U.S. trade and investment
in the informatics sector and withhold explicit copyright
protection for computer software.
o These policies have resulted in a rapid and unchecked
proliferation of restrictions on U.S. informatics products.
A comparative market analysis prepared by the U.S. Department
of Commerce and approved by an inter-agency working group
estimates that U.S. companies are losing between $337 and
$452 million in sales of hardware and software per year as a
result of the Brazilian restrictions.
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gpc Decision
o In February, the GOB agreed to meet with the USG in Caracas.
The talks were polite, but unproductive.
o On May 14, the EPC informally agreed that the Brazilian
informatics regime is a violation of section 301 and directed
the TPRG to develop a package of retaliatory options. The
EPC further agreed to recommend that the President issue a
formal finding of unreasonableness, unless the Brazilians
entered into "serious negotiations' within a "reasonable
period of time.'
o Informatics is a highly nationalistic issue in Brazil and
the section 301 case is often perceived as an attack on
Brazilian national sovereignty. Reports of the EPC's
decision led to a series of inflammatory newspaper articles
in Brazil and a negative public reaction.
o On May 26, Deputy Secretary of State Whitehead visited
Brasilia. The Whitehead visit succeeded in calming the
Brazilians and produced an agreement to begin bilateral
consultations. (The Brazilians had previously refused to
negotiate.)
o On July 2, USTR Yeutter arid Brazilian Special Ambassador
Paulo Tarso Flecha da Lima held bilateral consultations in
Paris. Although the GOB delegation was cordial, it made no
concessions. However, the Brazilians indicated that the
Sarney Administration has "no present intention" of applying
the market reserve policy to other sectors, such as pharma-
ceuticals, or extending the policy as it relates to trade
after its scheduled expiration date in 1992. Apart from
these clarifications, the Brazilians firmly defended the
informatics law.
o The third round of consultations on August 11 focussed on a
non-paper listing USG objectives in the section 301 case.
The Brazilians were polite but showed very little flexi-
bility. They indicated that the GOB is weighing possible
forms of intellectual property protection for computer
software and offered to communicate the results of their
internal deliberations to the USG. They also offered to
establish ap ad hoc government appeals group to review
problems encountered by U.S. companies on a case-by-case
basis.
o On August 12, Ambassador Yeutter delivered a letter to
Ambassador Paulo Tarso which outlined objectives in the
areas of market reserve, administrative procedures, investment
and intellectual property rights. On September 3, the GOB
submitted its written repsonse, which largely reiterated
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concessions already discussed during the two previous rounds
of consultations. Certain proposals were actually weakened
in the written version. Most of the concessions were
vaguely-worded commitments for future action. As in the
Paris talks, the most prominent omission was in the investment
area.
Although the GOB's response is the first written commitment
the USG has received, we do not know whether it represents
Brazil's 'final offer.' However, Ambassador Paulo Tarso
indicated to Ambassador Schlaudemann that the GOB was
prepared to continue talks after President Sarney's visit.
Progress of Negotiations
Our assessment of Brazil's offer is as follows:
o Market Reserve - The production of informatics products is
limited to Brazilian national companies through a policy
known as "market reserve." The effect of market reserve is
to prohibit foreign trade and investment in certain segments
of the Brazilian market. The USG has asked for a commitment
not to renew market reserve for informatics after 1992, a
phase-out of market reserve for certain informatics products,
and an agreed definition of "informatics" products to limit
the vague and expansive interpretation by SEI.
Status: The Brazilians' letter indicated that the Sarney
Administration has no intention of renewing market
reserve for informatics after it expires in 1992 or of
extending market reserve to new sectors. They have
clarified, however, that Sarney is not in a position to
bind future Brazilian presidents or the Brazilian
Congress. In addition, even without "formal" market
reserve, Brazil uses other trade and investment measures
to restrict its market. The Brazilians have also
indicated that their all-encompassing interpretation of
"informatics" products, e.g. toy animals containing a
computer chip, is deliberate and fully consistent with
the spirit of the law. The GOB's written response
indicates there is a "possibility" of providing the USG
with a list of products excluded from the definition of
"informatics." However, this list would be updated
each year, significantly diminishing the list's useful-
ness in establishing certainty for U.S. industry.
Investment - Brazil restricts new U.S. investment in the in-
formatics sector and limits the expansion, upgrading, and
modernization of existing production facilities. The USG
has asked for national treatment for U.S. firms, a right to
upgrade existing facilities without government interference,
and implementation of provisions of the informatics law
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allowing 30 percent foreign ownership of joint ventures and
100 percent foreign ownership in exceptional circumstances.
The U.S. would also like to see some limits on Brazilian
export performance and local content requirements.
Status: The Brazilians deny that U.S. firms face
investment restrictions and have offered no assurances
that they will permit even the limited joint ventures
provided for in the law. Nor is there a provision for
the termination of market reserve as it relates to
investment. Moreover, it is not clear from the Bra-
zilians' letter whether the new CONIN appeals process
applies to investment, as well as import, decisions;
nor is it apparent how SE/'s modernization will assist
the investment approval process.
Administrative Procedures - U.S. companies have complained
about burdensome and opaque Brazilian administrative pro-
cedures. The USG has asked for time limits, clear criteria
for evaluating applications, and a right of appeal.
Status: The GOB's letter proposes (1) CONIN as an
appeals board for companies contesting SEI decisions;
(2) "modernization" of SE/'s administrative procedures;
(3) establishment of ad us committees within the
U.S.-Brazil Trade Subgroup "to survey special issues of
concern to our bilateral economic relationship;" and
(4) adoption of "indicative" schedules for decisions
related to imports and investments. While some of
these proposals appear to be responsive to Ambassador
Yeutter's requests, the proposals contained in the
letter are not sufficiently detailed to allow an
assessment. The GOB response did not offer to provide
definitive criteria for SEI's approval of import
licenses nor to specify time limits for reviewing
applications.
o Computer Software - The USG is seeking full copyright
protection for computer software, i.e. life of the author
plus 50 years, as well as a commitment by the GOB to refrain
from a proposed decree that would require the registration
of all imported software and restrict the importation of
any software with a Brazilian national "similar."
Status: The GOB informed us that CONIN has recommended
that copyright be adopted for software. We know from
President Sarney' s recent discussion with Ambassador
Schlaudemann that the GOB believes 25 years' protection
would be sufficient, although this detail is omitted
from its letter. We have no assurance that the Congress
will approve the President's legislation once submitted.
Absent from the letter are responses to our request to
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(1) review the draft software intellectual property
rights protection proposal before it is submitted to
the Brazilian legislature; (2) improve enforcement of
intellectual property rights, including trade secret
protection; and (3) not extend market reserve to
software.
U.S. Industry
? The U.S. industry has taken a cautious approach to the case,
since several companies have major investments in Brazil
which could be the targets of counter-retaliation. Conse-
quently, the case has been driven by the USG's concerns
about the implications of Brazilian policies for future
bilateral trade relations and the spread of market reserve
to other sectors in Brazil as well as to other developing
countries.
o Some in the industry have indicated that the USG should
proceed with retaliation if necessary, since abandoning the
case now could encourage further proliferation of restrictions
on U.S. products in Brazil and other developing countries.
Others, however, expressed a strong preference for avoiding
retaliation, since a trade war could jeopardize their
investments.
o When approached on a possible interim deal, the industry was
adamant that computer software receive full (life plus 50
years) copyright protection. Industry representatives
stated that the companies would support an interim package
that included copyright protection, no software registration
requirements, a list of excluded products, and GATT notifica-
tion.
Congressional Views
o In general, Congress has not played an active role in the
development and pursuit of this section 301 case. Because
of the U.S. informatics industry's ambivalence about the
case, there has been no pressure for Members to become
active participants in the issue.
? However, should Brazil refuse to grant further concessions
and should we refrain from retaliating, we should expect
serious opposition from those in Congress who believe that
the Administration lacks resolve in trade policy and section
301 in general. Those who wish to eliminate Presidential
discretion in section 301 and other statutes may use our
unwillingness to take strong action against Brazil as a
argument to press for amendments limiting the President's
discretion. In addition, those who seek retaliation against
Brazil for constituent reasons, e.g. representatives of
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footwear-producing states, will criticize the lack of action.
Brazilian Debt
o Brazil is unlikely to undertake broad, precipitous action
with respect to its debt service (i.e. a moratorium) but its
level of rhetoric is likely to increase, even though this
could hurt Brazil by undermining financial market confidence.
The GOB may also continue to refuse to eliminate $2 billion
in arrears of official credit, including $300 million to
Eximbank.
gATT Implications
? Since the beginning of the section 301 case, there has been
inter-agency agreement that the informatics issue should not
be pursued in GATT. First, several important elements of
the case, such as investment and intellectual property, are
not subject to current GATT disciplines. Second, it is
doubtful that Brazil would cooperate in a GATT dispute
settlement proceeding and even more unlikely that Brazil
would accept an adverse panel ruling.
o Nevertheless, several elements of the informatics policy
raise serious GATT questions, such as the market reserve and
law of similars. These issues were raised briefly in
Brazil's 1985 GATT Balance-of-Payments (BOP) Committee
review. Brazil, however, took an unhelpful approach to the
BOP review. Brazil may receive support for its restrictions
from other developing countries who also use BOP measures to
restrict imports and protect domestic industries.
Recommendations
That the USTR recommend that the President find Brazil's
policy to promote a national informatics industry unreasonable
within the meanina of section 301 of the Trade Act of 1974.
To date. the BraziLian Government has not offered a satisfac-
tory settlement of this case:
2 that the President not make a decision regarding unreasonable-
ness until October 6. Pending the results of the ongoing
bilateral neaotiations:
L. in light of the possibiitv of achievina further gains
through negotiation. that the USTR defer specific recommen-
dations as to appropriate actions in order to pursue such
negotiations. The USTR will advise the President of the
outcome of these neaotiations before October 6 (the statu-
torilv-reauired date for Presidential determination) and
recommend an appropriate course of action at that time.
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