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UNCLAS SECTION 01 OF 05 BRASILIA 000786 
 
SIPDIS 
 
DEPT FOR WHA/BSC, EB/TPP 
DEPT PLEASE PASS TO USTR FOR MSULLIVAN, KLEZNY 
DEPT PLEASE PASS TO USAID FOR LAC/AA 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USFCS/OIO/WH/RD/DANDERSON/SHUPKA 
USDA FOR JBPENN, FFAS 
NSC FOR SCRONIN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD KIPR ECON BR
SUBJECT:  BRAZIL/MERCOSUL BILATERAL TRADE NEGOTIATING PRIORITIES 
 
REFS:  (A) 05 Brasilia 3052, B) Pretoria 1331 
 
BRASILIA 00000786  001.2 OF 005 
 
 
¶1. SENSITIVE BUT UNCLASSIFIED 
 
¶2. (U) Introduction and Summary.  This cable is intended to provide 
a brief overview of Mercosul's bilateral trade negotiations.  The 
following information is based primarily on Econoff's conversations 
with Orlando Leite Ribeiro of the Foreign Ministry's Regional 
Integration Division (who covers negotiations with countries within 
Latin America), and Ernesto Henrique Araujo, head of the Division of 
European Union and Extra-Regional Trade Negotiations (who covers all 
other bilateral and inter-regional negotiations). 
 
¶3. (U) In line with its foreign policy tilt toward developing 
countries and desire to reduce reliance on major trading partners, 
Brazil's, and by extension Mercosul's, trade negotiating priorities 
for 2006 continue to reflect an interest in nurturing 
non-traditional export markets of geopolitical value.  Within the 
western hemisphere, Mercosul plans to concentrate its efforts on 
completing an FTA with Cuba, while FTAs with Israel and countries of 
the Gulf Cooperation Council are also on tap for this year, 
according to Brazilian officials.  The GoB continues to express 
optimism that Mercosul-EU trade talks can be wrapped up before 
conclusion of the WTO Doha Development Agenda (DDA) negotiations, 
despite EU rhetoric and action that suggests otherwise.  Unless 
noted, the Mercosul trade negotiations discussed below cover only 
trade in goods.  End Introduction and Summary. 
 
CLOSE TO HOME - Trade Integration Stalls in Western Hemisphere 
 
¶4. (SBU) After Mercosul's push in 2004 to complete FTAs with 
countries of the Andean Community, further regional trade 
integration has slowed.  Mercosul's FTAs with Colombia, Ecuador, and 
Venezuela came into force in February 2005 and with Peru in December 
2005, adding to existing agreements with Bolivia and Chile, but no 
new trade agreements have since been concluded with regional trade 
partners. 
 
¶5. (SBU) Cuba:  Started in 2005, Ribeiro identified the conclusion 
of FTA talks with Cuba as a Mercosul and Brazilian priority for 
¶2006.  Work to consolidate existing trade agreements between Cuba 
and the individual Mercosul members is already complete, paving the 
way for discussions on how to expand them into a full-fledged, 
goods-only, free-trade agreement with the bloc.  Although an FTA is 
a prerequisite for associate membership in Mercosul, Ribeiro voiced 
doubts that negotiations would lead to this for Cuba, suggesting 
that associate membership only makes sense for countries in close 
geographic proximity since associate member discussions focus on 
border and physical integration issues. 
 
¶6. (U) Chile:  Mercosul launched discussions with Chile in 2005 
intended to expand the 97 percent product coverage of their existing 
goods-only FTA (Complementary Economic Agreement [ACE] 35) and to 
add services.  Mercosul hopes to have a draft services agreement by 
June and to conclude talks by year-end.  [Note. Brazil's interest in 
expanding Mercosul's existing ACE with associate member Chile is in 
part driven by criticism from Brazil's private sector, led by former 
Ambassador to the U.S. Rubens Barbosa, over erosion of Brazil's 
trade preferences resulting from U.S. FTAs with Chile and other 
Latin American partners.] 
 
¶7. (U) Bolivia: Mercosul is looking to expand the product coverage 
of its FTA with Bolivia (ACE 36) up from the current 90 percent. 
Although President Lula has publicly made overtures to Bolivia to 
 
BRASILIA 00000786  002.2 OF 005 
 
 
upgrade from associate to full membership with the bloc, no formal 
invitation had been extended to Bolivia as of mid-April as Mercosul 
continued to deliberate on the issue. 
 
¶8. (SBU) Venezuela:  During the Mercosul Summit in December 2005, 
Ministers set a one year deadline for negotiating a program of 
accession to full membership status for Venezuela (ref A). 
According to Ribeiro, negotiations with Venezuela on establishing a 
program for accelerated tariff reductions are tough and slow-going. 
Ribeiro described Venezuelan trade officials as "not very happy," 
given that the number of Venezuelan tariff lines already consistent 
with Mercosul's Common External Tariff number only in the single 
digits.  Ribeiro noted that the accession program would include a 
timeline for Venezuela's compliance, which could extend to many 
years. 
 
¶9. (U) Peru, Colombia, Ecuador: Prompted by concern over dislocation 
of Brazilian suppliers in the Andean market, according to press 
reports, Foreign Minister Amorim has already informally alerted 
these countries that Mercosul intends to invoke a provision of the 
bloc's Economic Complementary Agreements (ACE 58 and 59) negotiated 
under ALADI rules, which would obligate these countries to extend to 
Mercosul the same concessions provided to the United States through 
bilateral FTAs.  After eliminating import tariffs for US products, 
the FTA partner would reportedly have 90 days in which to negotiate 
the elimination of barriers to Mercosul products.  Reports suggest 
that the economic impact of such a move could be significant given 
the asymmetric nature of the ACEs, which currently provide for a 
very gradual reduction in Andean tariffs for Mercosul products. 
 
¶10. (SBU) Mexico: Despite plans at the beginning of 2005 to 
negotiate a comprehensive FTA (goods only) between the bloc and 
Mexico, Ribeiro said Mexico chose not to move forward.  Instead, 
Mexico has repeatedly pressed Mercosul to grant it associate 
membership without first having the necessary FTA in place.  The GoM 
argued that its auto agreement with the bloc, its FTA with Uruguay 
and its partial trade agreements with the other three Mercosul 
partners should be sufficient.  According to Ribeiro, Mexico again 
during the December 2005 Mercosul Summit made the pitch for granting 
it associate membership without a comprehensive FTA, but was 
rebuffed once more.  Speculating that Mexico might have concluded 
that an FTA would worsen its trade deficit with the bloc, Rebeiro 
stated that the GoB is unwilling to make an exception for Mexico 
that would set a bad precedent for future negotiations. 
 
¶11. (SBU) CARICOM:  Free-trade negotiations continue with countries 
of CARICOM, but without urgency.  Although Ribeiro characterized the 
negotiations as "not complicated" and predicted a substantially 
asymmetric agreement in CARICOM's favor, there is no deadline for 
talks and CARICOM is setting the pace. 
 
¶12. (SBU) SICA:  Negotiations with the System for Central American 
Integration (SICA) countries are on-hold.  Ribeiro claimed that 
despite having signed a work program for negotiations with SICA 
foreign ministers in late 2004, SICA trade ministers had different 
priorities, such as implementing the CAFTA-DR agreement with the US 
and more recently preparing to launch free-trade talks with the EU. 
 
¶13. (SBU) Dominican Republic and Panama:  There are separate work 
programs for FTA talks with the Dominican Republic and Panama, which 
are proceeding at a measured pace, with usually two meetings 
scheduled per year. 
 
LOOKING ELSEWHERE FOR THE POLITICAL/TRADE DEAL 
 
BRASILIA 00000786  003.2 OF 005 
 
 
 
¶14. (U) Outside the region, Mercosul is attempting to keep the 
Mercosul-EU negotiations alive, deepen its strategic trade 
relationship with India and the Southern African Customs Union 
(SACU), and make new trade inroads in the Middle East through 
negotiations with Israel and countries of the Gulf Cooperation 
Council. 
 
¶15. (SBU) European Union:  Like one of Brazil's popular telenovelas, 
the saga of Mercosul-EU FTA negotiations goes on.  The GoB once 
again set itself up for a fall when on the eve of talks in Brussels 
in early March, it announced with much fanfare that the negotiations 
had "restarted," with both sides expected to bring fresh proposals 
to the table.  Less than a week later, press accounts talked of the 
door being slammed (again) in Mercosul's face.  The negative 
assessment of progress made during the Brussels meeting was 
reinforced by the Foreign Ministry's IPR Chief, who admitted to 
Econoff that the EU had brought IPR negotiations back to square one 
by reneging on its offer to relent on its Geographical Indications 
demands and negotiate something along the line of the US-EU Wine 
Agreement. 
 
¶16. (SBU) Extra-Regional Negotiations Chief Ernesto Araujo gave a 
more positive spin to the meeting.  He downplayed the notion that 
the meeting was convened to "restart" the negotiations, pointing out 
thatMinisters had agreed to the meeting, and its new format, late 
last year.  By "new format," Araujo was referring to the decision to 
focus discussion on three major negotiation components -- services, 
agriculture, and flexibilities (asymmetric treatment for Mercosul). 
The idea, according to Araujo, was to address these most difficult 
issues by crafting a proposal in the form of a comprehensive package 
of trade-offs, rather than as a one-sided offer of concessions, 
which has been the traditional approach. 
 
¶17. (SBU) While the EU did not offer any new proposals, Araujo was 
upbeat about the prospect that Mercosul's own "packaged" offer, 
which identifies the concessions it seeks in agriculture for the 
concessions it is willing to make in services, might move the 
negotiations forward.  Furthermore, Araujo claimed that as a result 
of bilateral meetings in late March, Foreign Minister Amorim was 
able to move EU Trade Commissioner Mandelson off his well-publicized 
position that the Mercosul-EU negotiations could not conclude until 
after the WTO Doha negotiations.  [Note. This is in contrast to 
comments made to Econoff in early April by EU Trade Officer-Brasilia 
that the bilateral negotiations with Mercosul are not an EU priority 
and will not be completed ahead of Doha.] 
 
¶18. (SBU) India and SACU:  As noted in previous reporting (ref B), 
neither the Mercosul-SACU nor Mercosul-India partial, trade 
preference agreements signed in December 2004 and March 2005, 
respectively, have entered into force.  However, that has not held 
back Mercosul in seeking to upgrade or deepen the agreements, 
according to Araujo.  Laying out the bigger picture, Araujo 
explained that Mercosul will work this year with SACU (principally 
South Africa) and India to expand their initial, partial agreements, 
while a separate working group will explore possible negotiation of 
a trilateral free-trade agreement.  While there is a lot of 
enthusiasm for the idea of a trilateral FTA, Araujo cautioned that a 
final decision will depend on what the working group produces by the 
end of the year.  Araujo denied press reports that the potential 
trilateral agreement would include IPR provisions, stating that the 
GoB is not interested in negotiating TRIPS plus provisions with 
anyone.  Likewise, on services and investment, he said talks in 
these areas might focus more on facilitation than on new market 
 
BRASILIA 00000786  004.2 OF 005 
 
 
access commitments; he gave examples of allowing code-sharing as a 
way of affecting air services without a GATS type negotiation. 
 
¶19. (SBU) On the bilateral side, talks are underway with SACU to add 
a couple thousand, more commercially relevant products to the 
partial agreement by mid-year.  Mercosul also hopes to conclude a 
separate agreement on the automotive sector in the same timeframe. 
Araujo said talks with India are proving more difficult due to 
India's sensitivity in the agricultural sector, but work is 
continuing to expand the initial agreement.  In all these 
discussions, Araujo declined to provide product specific details. 
 
¶20. (SBU) Israel:  Araujo said Mercosul negotiations on a goods-only 
FTA with Israel should wrap up by June.  Israel was not interested 
in including services or investment components in the agreement, 
according to Araujo. 
 
¶21. (SBU) Gulf Cooperation Council (CCG):  Building on momentum 
created during the South American-Arab Summit in Brasilia in March 
2005, Mercosul launched FTA negotiations covering goods, services 
and investment with countries of the Gulf Cooperation Council (Saudi 
Arabia, Bahrain, Kuwait, Oman, Qatar, and United Arab Emirates) last 
November.  Araujo predicted a relatively straightforward negotiation 
given the complementary nature of the Mercosul and GCC economies 
and, in particular, the lack of agricultural sensitivities in the 
GCC countries.  Negotiations are expected to conclude by year-end. 
 
¶22. (SBU) Egypt and Morocco:  Araujo described the separate partial, 
trade preference talks with these two countries as going slowly, 
with neither side pressing to move quickly. 
 
¶23. (U) South Korea: A feasibility study on potential free-trade 
negotiations is due to be completed by year-end. 
 
COMMENT 
 
¶24. (SBU) GoB officials point to increased trade diversification in 
2005 as vindication of the GoB's policy of prioritizing trade within 
the region and with strategic, non-traditional trade partners.  In 
2005, Brazilian exports to ALADI (Latin American Integration 
Association) members, including its Mercosul partners, grew by 29.1% 
to reach $25.4 billion, or 21.5% of Brazil's total exports, and 
exceeding exports to the United States ($22.5 billion).  Export 
growth to Brazil's strategic non-traditional markets, such as South 
Africa (32.2%), India (74.5%), and the countries of the Gulf 
Cooperation Council (31.6%) also easily outstripped the overall 
export growth rate of 22.6%, even without new trade agreements yet 
being in-force.  When pressed, however, trade officials concede that 
these impressive growth rates are calculated off extremely low 
starting points. 
 
¶25. (SBU) For instance, in 2005, even with substantial growth, only 
1.2% of Brazil's exports were destined for South Africa; 1.0% for 
India and 2.1% for the Gulf Cooperation Council countries.  Exports 
to Israel and Cuba each received only about 0.2% of Brazil's exports 
last year.  While exports to Brazil's main traditional markets of 
the EU and United States showed less robust growth of 9.7% and 12.1% 
respectively in 2005, they still absorbed 22.4% and 19.2% of 
Brazil's exports. 
 
¶26. (SBU) While no one is arguing that increasing exports to 
non-traditional markets is a negative development, current trade 
figures will not be sufficient to quell private sector criticism 
that large potential gains with Brazil's more economically 
 
BRASILIA 00000786  005.2 OF 005 
 
 
significant trading partners are being sacrificed as a result of 
current GoB priorities.  Nonetheless, given the entrenched 
perspective on this issue within President Lula's administration, we 
only foresee a change in GoB trade priorities and policy should 
presidential elections in October result in a change of government. 
 
MINIMIZE CONSIDERED. 
 
LINEHAN