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UNCLAS SECTION 01 OF 02 BRASILIA 000362 
 
SIPDIS 
 
DEPT PLEASE PASS TO USTR - MSULLIVAN 
USDOC FOR 3134/USFCS/OIO/WH/EOLSON 
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD 
NSC FOR SCRONIN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD EIND BR
SUBJECT: BRAZIL AND ARGENTINA AGREE ON A TRADE SAFEGUARDS MECHANISM; 
ACCORD ON AUTOS STILL PENDING 
 
 
¶1. (SBU) Summary. Tensions between Brazil and Argentina over access 
to each other's markets continue.  In early February, Brazil and 
Argentina finalized their long-running negotiations on a bilateral 
trade safeguards mechanism should excessive exports from one country 
endanger an industry in the other.  While Brazilian industry (and 
some within the government) saw the accord as acquiescing to 
Argentina's one-sided demands, Foreign Minister Amorim - anxious to 
maintain good relations with the country's neighbors to the south -- 
defended the agreement as fair and balanced.  Meanwhile, contentious 
talks are still ongoing regarding renewal of the current automotive 
export agreement between the two countries.  The rancorous 
atmosphere surrounding these two sets of negotiations underscores 
the difficult nature of the Brazil-Argentina relationship.  Many 
here are beginning to wonder whether Brazil's traditional policy of 
using Mercosul as a device to manage relations with the Argentines 
is really worth the trouble.  End Summary. 
 
White Smoke on Safeguards 
------------------------- 
 
¶2. (SBU) After months of acrimonious talks, Brazil and Argentina 
finally agreed to a bilateral "competitive adaptation mechanism" 
(MAC), i.e., a framework for imposing import safeguards.  The 
provisions of this mechanism would be invoked whenever businesses 
representing 35% of a specific industry filed a request with their 
government.  Thereupon would follow a series of informal 
industry-to-industry meetings and separate government investigations 
(possibly lasting up to 340 days), culminating in a potential panel 
decision should the two sides prove unable to agree.  The three 
panel experts -- one Argentine, one Brazilian, and the third from a 
non-Mercosul country - would then render judgment, with the 
complainant country, should it prevail, receiving authorization to 
impose quotas lasting for 3 years (with a possible 1 year 
extension).  Any exports from the respondent country above the quota 
would be subject to the Mercosul Common External Tariff for that 
product, minus ten percent. 
 
¶3. (U) According to the press, the Brazilian export sectors most 
likely to be negatively affected by the MAC include footwear, 
textiles, appliances, steel, poultry and pork.  Certain Brazilian 
agricultural producers (wheat, rice, milk, garlic, onions, fruits, 
and wine) are considering using the MAC offensively against 
Argentina. 
 
But Still Waiting on An Automotive Industry Accord 
------------------------------------------- 
 
¶4. (SBU) The agreement on the MAC leaves renewal of the automotive 
industry accord as the principal item remaining on the bilateral 
trade agenda.  Under the "flex" system contained in that document, 
for every US$2.60 exported by one country (Brazil), the other 
(Argentina) must export at least US$1.00.  Brazil wants to leave the 
formula as it currently stands while Argentina seeks to reduce the 
flex ratio to 2.20.  In addition, Buenos Aires would like the 
agreement to be of indefinite duration and the flex ratio to be 
applied individually to every company - instead of the current 
practice of applying it to the industry as a whole.  Both 
governments had hoped to have the agreement done by the end of 
November in time for the commemoration of Brazil-Argentina 
Friendship Day.  However, with Brazilian and Argentine automakers 
each pressuring their government's negotiators, achieving consensus 
in time, in an atmosphere marked by rancor on both sides, proved 
impossible.  Therefore, the agreement was extended until March, by 
which time negotiators hope to have an interim agreement in place. 
A final agreement is not expected until after June. 
 
Brazilian Industry Livid 
------------------------ 
¶5. (SBU) Brazilian business reps, including spokesmen from the 
powerful FIESP (Sao Paulo State Industrial Federation) have been 
vocal in their criticism of the deal the GOB negotiated on the MAC. 
They question why the GOB agreed to such a lengthy safeguard period 
(possibly up to 4 years) and point out that under the MAC any space 
ceded by Brazilian manufacturers in the Argentina market could well 
be filled by third country producers.  Specifically, we have been 
told that there are studies showing that voluntary limits on 
 
BRASILIA 00000362  002 OF 002 
 
 
Brazilian "white goods" exports to Argentina last year resulted in 
increased imports from third countries, while not a single 
additional unit was produced in Argentina.  In industry's view, 
government policymakers who already have proven themselves tone-deaf 
to input on issues such as the FTAA and the proposed EU-Mercosul 
FTA, once again ignored domestic business interests.  Meanwhile, 
officials at two Sao Paulo-based auto manufacturers have told us 
that they fear that the GOB will do so again in the ongoing 
automotive accord talks. 
 
Divergent Thinking within the GOB 
--------------------------------- 
¶6. (SBU) In early February, Emboffs spoke with a well-placed MFA 
diplomat who described the situation within the GOB on this issue. 
One camp, we were told, recognized that Brazilian business interests 
were not being served but felt that given Argentina's worries about 
regaining ground for its industry in the wake of its recent economic 
meltdown, the importance of maintaining good relations with Buenos 
Aires trumped all else.  The most prominent spokesman for this point 
of view was Foreign Minister Celso Amorim, who, when the terms of 
the MAC were announced, publicly characterized it as fair and 
balanced.  The accord on MAC, under this line of thinking, was the 
price for keeping Mercosul intact.  And while one-sided concessions 
may not make much economic sense, politically they do serve to keep 
Argentina and Brazil from butting heads and help advance Brazil's 
aspirations for a U.N. Security Council seat. 
 
¶7. (SBU) A second camp, led by Minister of Development, Industry, 
and Commerce Luiz Fernando Furlan, saw the MAC as preemptive 
capitulation.  Our MFA interlocutor noted that buried within the 
text of the agreement was a clause which allowed a party to impose 
"provisional" safeguards unilaterally should the situation so 
warrant.  Incredible as it sounds, our contact said, the Argentines 
think the safeguards mechanism will induce foreign investors to 
invest in Argentina rather than Brazil.  Because of his pro-Brazil 
stance, we were told, Furlan was a hated man in Argentina - so much 
so that he had not traveled there once during his three years as 
Minister. 
 
Comment 
------- 
 
¶8. (SBU) While Amorim prevailed with respect to the MAC and could 
well impose his imprint on any automotive sector accord, he might 
not be able to continue his string of wins indefinitely.  We heard 
that had not Brazilian exporters been constrained by Mercosul in 
negotiating agreements to expand existing (and open new) markets, 
instead of exporting US$117 billion in 2005 (a record), they could 
have done much, much more.  Argentina was cited as the culprit in 
preventing Brazil from concluding an FTA with key trade partners 
like the U.S. and the EU.  Clearly, these statements reflect the 
dissatisfaction with Mercosul felt by a number of key Brazilian 
government and industry actors.  The entry of Venezuela into the 
bloc and the growing restiveness of the smaller members - Uruguay 
and Paraguay, both of which questioned why they were excluded from 
the MAC talks - will only feed further rethinking regarding the 
economic benefits of Mercosul. 
 
¶9. (SBU) Recently Amorim told a visiting U.S. delegation that 
Venezuela's entry into Mercosul was more "an expression of political 
hope than an economic reality."  Given the Amorim-led effort to 
pacify Argentina, it is becoming increasingly the case that for 
Brazil Mercosul is a "political hope, not an economic reality." 
 
LINEHAN