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FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 5021
INFO RUEHAC/AMEMBASSY ASUNCION 5346
RUEHBU/AMEMBASSY BUENOS AIRES 3927
RUEHCV/AMEMBASSY CARACAS 3189
RUEHLP/AMEMBASSY LA PAZ 4486
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RUEHMN/AMEMBASSY MONTEVIDEO 6173
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RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 000661 
 
SIPDIS 
 
SIPDIS 
STATE PASS TO USTR FOR MSULLIVAN/KLEZNY 
NSC FOR SUE CRONIN 
TREASURY FOR FPARODI 
AID/W FOR AA/LA 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/USFCS/OIO/SHUPKA 
 
E.O. 12958: DECL: 04/04/2016 
TAGS: ETRD ECIN PGOV PREL BR
SUBJECT: MERCOSUR TURNS 15 - A SOMBER QUINCEANERA 
 
REF: A. BRASILIA 362 
     ¶B. MONTEVIDEO 254 
     ¶C. 3/22 2006 CRS REPORT "MERCOSUR AND U.S. TRADE 
        POLICY" 
     ¶D. 2/3/2006 CRS REPORT "BRAZILIAN TRADE POLICY AND 
        THE UNITED STATES" 
     ¶E. BRASILIA 653 
     ¶F. MONTEVIDEO 305 
     ¶G. BRASILIA 117 
 
Classified By: Charge d'Affaires Phillip Chicola, based upon Reasons 1. 
5(B) and (D) 
 
¶1. (SBU) Summary.  The fifteenth anniversary of the Treaty of 
Asuncion, which created Mercosul, took place on March 26, but 
was barely noticed in Brazil.  Instead of an elaborate 
birthday celebration, the only events marking the date here 
were scattered ) and poorly publicized ) retrospective 
seminars.  The reason, of course, is that the alliance is in 
the midst of a troubled adolescence, with intra-bloc trade 
lagging and junior members of the partnership rebelling 
against their larger neighbors.  Meanwhile, economic 
asymmetries and political tensions make dialogue among member 
countries difficult.  Within GOB circles, there is a vigorous 
debate ongoing regarding the economic usefulness of Mercosul 
) though the pro-Mercosul forces continue to have the upper 
hand.  It is too early to tell how all this will work out, 
but the consensus in Brazil is that intra-Mercosul relations, 
especially given the recent entry of Venezuela into the bloc, 
will get worse and may never get much better.  End Summary. 
 
Debate Within Brazil on Mercosul 
-------------------------------- 
¶2. (SBU) Mercosul is not universally loved in Brazil.  As 
post has previously reported (ref A), industry groups and 
certain government policymakers are openly questioning 
whether Mercosul benefits Brazil economically at all.  This 
line of thinking posits that Brazil could export much more if 
it were free of the constraints imposed upon it by the 
Mercosul customs union; specifically, without such baggage as 
the Mercosul common external tariff (or its Mercosul partners 
in general) Brazil would have greater success negotiating 
trade agreements with its main partners, such as the U.S. and 
the EU.  The numerous exceptions of free trade within the 
bloc, such as the Automotive Accord, restraints on sugar, and 
the bilateral Brazil-Argentina safeguards mechanism (MAC), 
are seen by this faction as further irritants. 
 
¶3. (SBU) However, within the GOB the dominant camp, lead by 
the Foreign Ministry, continues to embrace the alliance, 
noting that any economic negatives are more than outweighed 
by the political elements ) i.e., the existence of a forum 
for settling regional quarrels (especially between Brazil and 
Argentina), which gives Brazil a nearly undisputed leadership 
role.  In addition, pro-Mercosul partisans argue that with 
Argentina, Paraguay, and Uruguay along for the ride, Brazil 
gains a force multiplier in its efforts to cement its role 
not only as the dominant player in South America but as the 
natural leader of the developing country G-20 bloc in the WTO 
Doha Round negotiations.  Concentrating first on South-South 
integration, this reasoning continues, will provide Brazil 
greater leverage when confronting the developed world at the 
negotiating table. 
 
Lagging Intra-Mercosul Trade 
---------------------------- 
¶4. (U) Theory, unfortunately, has not coincided with reality. 
 The level of intra-Mercosul trade has ebbed and flowed over 
the years in a sine-curve like fashion.  In 1998, Mercosul 
absorbed about 17 percent of Brazilian exports.  In 2005, 
this figure was a mere 9.9 percent.  Meanwhile, as a whole, 
Mercosul only absorbs about 20 percent of the exports of its 
member countries.  In comparison, the corresponding figure 
for intra-bloc exports within the EU is 65 percent, and for 
NAFTA, 70 percent. 
 
BRASILIA 00000661  002 OF 003 
 
 
 
Economic Asymmetries and Political Tensions 
------------------------------------------- 
¶5. (U) There is no shortage of work analyzing the mediocre 
performance of the Mercosul bloc to date. Ref C looks at the 
issue in terms of asymmetries.  "From the outset, Mercosu(l) 
struggled to reconcile a basic inconsistency of partial 
economic union:  how to achieve trade integration, while also 
ensuring that the benefits would be balanced among members, 
and that each country would retain some control over its 
trade, production, and consumption structure.  At the heart 
of the problem are the 'natural asymmetries' that exist among 
four economies with inherently large discrepancies in size, 
structure, resources endowment, and level of development . . 
. . These differences can be compounded by 'policy 
asymmetries' that arise from incongruities in fiscal, 
monetary, industrial, exchange rate, and other policies. 
Either type of asymmetry can distort trade flows, causing 
large imbalances that threaten the stability of the 
agreement." 
 
¶6. (SBU) Political and cultural tensions complicate 
intra-bloc relations as well.  The Brazil-Argentina rivalry 
casts its shadow over much of Mercosul decision-making. 
However, there are other fault lines as well.  There is no 
love lost between Brazil and Paraguay, as evidenced by the 
continuing friction over cross-border contraband and the 
general Brazilian disdain for things Paraguayan. (When foot 
and mouth disease resurfaced in Brazil in 2005, one of the 
first, and still most popular, explanations was contamination 
from unvaccinated Paraguayan cattle.)  And while Uruguay and 
Paraguay both have issues with each other ) as do Brazil and 
Argentina ) the two smaller countries complain about the 
larger countries and vice versa.  The current flap between 
Argentina and Uruguay (ref F) regarding the latter's 
construction of paper mills on a common border river is just 
the latest example of this.  From the Brazilian point of 
view, Paraguay and Uruguay should just be glad that they are 
part of the show.  As one prominent Sao Paulo business leader 
commented to us, "Why should we pay attention to the 
Uruguayans when their GDP is less than that of Santo Amaro (a 
suburb of Sao Paulo and home to a number of multinational 
companies)?" 
 
Enter Chavez 
------------ 
¶7. (SBU) Now into this turbulent state of affairs steps 
Venezuela.  As ref B notes, Caracas' entry will only increase 
the lack of coherence within Mercosul.  From an economic 
point of view, Venezuela does not fit in as its 
petroleum-dominated economy provides yet another layer of 
asymmetry as does its Andean Community tariff structure. 
Trying to reconcile Venezuela's Andean Community Common 
External Tariffs with those of Mercosul could take years. 
Moreover, Brazilian industry leaders point out that removing 
GOV tariff barriers will not have any great differential 
impact as local businesses already are selling as much as 
they could ever expect to Venezuela.  On the import side, few 
fear competition from what are seen as inefficient Venezuelan 
manufacturers. 
 
¶8. (C) The calculation of President Lula and Foreign Minister 
Amorim appears to have been that Venezuelan accession would 
promote regional stability by subsuming Chavez within the 
multilateral Mercosul framework.  In fact, FM Amorim recently 
told a visiting US delegation that Venezuela,s entry into 
Mercosul was "more of a political hope than an economic 
reality." Ref G.  Yet, politically, such a move threatens to 
increase tensions as by siding with either Brasilia or Buenos 
Aires the vocal Chavez could destabilize the Brazil-Argentina 
relationship - in a way that neither tiny Uruguay or Paraguay 
ever could.  Moreover, a fundamental tenet of Brazilian 
foreign policy is that Brazil should serve as the leader of 
South America.  If Chavez covets that role, however, then 
Brazil-Venezuela conflict within Mercosul is inevitable.  In 
 
BRASILIA 00000661  003 OF 003 
 
 
view of the above, dissension within Mercosul is likely to 
get worse before it gets better. 
 
What Does the Future Hold? 
-------------------------- 
¶9. (C) What might complicate the situation even further would 
be any USG move, in response to Montevideo's continuing 
veiled hints, to seek to initiate FTA talks with Uruguay. 
Such a step would enrage Brazil government officials, who 
would certainly see it as an effort to diminish GOB influence 
by splitting Mercosul.  Without a doubt, both Brazilian 
officials and the local media would be very vocal on this 
point.  That said, whether Brazil would take any significant 
actions in reply is another question.  With the FTAA already 
at an impasse (ref E), the GOB's ability to respond on that 
front is limited.  And given that Brazil has clearly made the 
success of the Doha Round its highest trade priority, it 
would seem counter-productive as well to retaliate in that 
forum.  The GOB could conceivably try to compensate for the 
"defection" of Uruguay by speeding efforts to upgrade Bolivia 
to full membership.  Adding Bolivia ) with all its 
uncertainties - to the club, however, would certainly lead to 
even less cohesion, especially while Brazil and the Morales 
government continue to spar over issues such as energy sector 
investment and access to natural gas. 
 
¶10. (U) Post welcomes the opportunity to hear views from 
other concerned Mercosul posts and looks forward to 
contributing to any ongoing discussion. 
 
Chicola