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DE RUEHMN #0567/01 1722052
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R 212052Z JUN 06
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 5931
INFO RUCNMER/MERCOSUR COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 0421
RUEHLP/AMEMBASSY LA PAZ JUN SANTIAGO 2869
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L MONTEVIDEO 000567 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/BSC AND EB/TPP 
DEPT PASS USTR 
NSC FOR CRONIN 
TREASURY FOR OASIA FOR DOUGLASS 
USDOC FOR ITA/MAC/WBASTIAN 
SOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 06/21/2016 
TAGS: ETRD ECON PREL PINR AORC UY
SUBJECT: MERCOSUR: THE ARGENTINE PRO TEMP PRESIDENCY AND 
THE UPCOMING BRAZILIAN PRESIDENCY - THE VIEW FROM URUGUAY 
 
REF: A. MONTEVIDEO 465 
 
     ¶B. MONTEVIDEO 448 
     ¶C. MONTEVIDEO 254 
 
Classified By: James D. Nealon, Charge d'Affaires a.i., 
for reasons 1.4 (b) and (d). 
 
 ¶1. (C) Summary:  Argentina's pro temp presidency of 
Mercosur is seen in Uruguay as a resounding failure 
that weakened the trading bloc's institutions.  The 
conflict over the paper pulp mills overshadowed the 
entire presidency, as the dispute spun out of control 
and Argentina blocked the GOU's attempts to resort to 
Mercosur for a resolution.  There was little if no 
progress on perfecting the customs union.  Uruguay and 
to a lesser extent Paraguay became increasingly vocal 
in their criticism of the bilateral axis of Argentina 
and Brazil.  They also publicly questioned Mercosur's 
overall usefulness for its smaller members.  The only 
movement under Mercosur's Argentine presidency was a 
definite acceleration of the process to integrate 
Venezuela. 
 
¶2. (C) The change of presidency will be celebrated at 
the next Mercosur Summit in Cordoba on July 20-21, when 
Brazil takes over.  This Summit is likely to be 
dominated by Venezuela's formal induction.  As for 
Brazil's pro temp presidency, expectations are that it 
may be distracted by general elections.  Chavez may be 
tempted to take center stage within Mercosur, and this 
may accentuate the shift of Mercosur from a trade- 
oriented bloc to a more political entity.  GOU 
officials generally expect Brazil to produce another 
lackluster presidency of Mercosur.  End Summary. 
 
The conflict over the pulp mills spun out of control 
--------------------------------------------- ------- 
¶3. (SBU) The conflict over the pulp mills spun out of 
control during the Argentine presidency.  No one could 
have expected such a harsh conflict, not only because 
of the traditionally good neighborly relations between 
the two countries, but also given the initially 
perceived ideological affinity between Vazquez and 
Kirchner.  President Vazquez was reportedly deeply 
offended that Argentine President Kirchner did not even 
answer his personal letter requesting a special meeting 
of Mercosur to deal with the pulp mill issue. 
 
¶4. (U) The GOU eventually sued the GOA before the 
Mercosur Court of Arbitration for not complying with 
the requirement to grant "free transit of goods" within 
the bloc (under the first article of the Treaty of 
Asuncion).  The Tribunal has not been able to meet, 
however, as Argentina has contested the designated 
President of the Court, Spanish jurist Luis Marti.  At 
the meeting of Mercosur foreign ministers in Buenos 
Aires on June 16, the GOU finally presented its case on 
the bridges blockade but failed to align Brazil and 
Paraguay to its side, as both countries' foreign 
ministers refused to get involved and called for a 
bilateral negotiated solution to the conflict. 
 
Little progress on perfecting the customs union 
--------------------------------------------- -- 
¶5. (U) There was little progress in harmonizing the 
Common External Tariff (CET), integrating the four 
customs and agreeing on ways to distribute customs 
revenues.  While it was agreed that some goods would be 
traded duty free, these are the goods that currently 
pay zero CET.  The CET is still replete with exceptions 
too numerous to list (100 for Argentina and Brazil, 225 
for Uruguay and 650 for Paraguay, plus the exceptions 
made by special import systems such as the giant Manaus 
Free Trade Zone (FTZ), the Tierra del Fuego FTZ, and 
all of the other FTZs).  About half of Mercosur's 
imports are not covered by the CET.  If Mercosur does 
not perfect its CET, it is unlikely that any progress 
will be made in negotiations with the EU. 
 
 
Uruguay increasingly disappointed and critical 
--------------------------------------------- - 
¶6. (C) The GOU is extremely disappointed with 
Mercosur.  President Vazquez and EconMin Astori have 
repeatedly sent strong signals of discontent with the 
direction in which Mercosur is heading.  Vazquez was 
clearly disappointed at the way Kirchner used his pro 
temp presidency to prevent any attempts by the GOU to 
resort to Mercosur mediation in the paper mills 
dispute.  The increased bilateral handling of trade 
issues between Argentina and Brazil (ref C) has been 
perceived here as a clear snub to Mercosur's smaller 
members.  Tri-lateral meetings with Venezuela, again 
excluding Uruguay and Paraguay, have tended to 
exacerbate this perception.  As a result, Uruguay, 
Paraguay and Bolivia held their own summit in Asuncion 
a couple of months ago to discuss a gas pipeline whose 
layout would purposely skirt Argentina. 
 
¶7. (U) This disappointment with Mercosur has not been 
limited to the GOU but has extended to the private 
sector as well.  In an unusual move, the five largest 
business chambers in Uruguay recently issued a joint 
 
open letter extremely critical of Mercosur, in which 
they urged the GOU to embark on free trade agreements 
with the U.S. and other markets.  Meanwhile, Uruguay 
continues to diversify exports away from Mercosur, as 
exports to the trade bloc grew by 6.5 percent on a 
year-to-year basis, well below the 18 percent growth to 
non-Mercosur markets.  Still, no one, whether within 
the GOU, the opposition or the private sector, calls 
for a withdrawal from the trade bloc.  The stated goal 
for all is "more and better Mercosur" (Ref B). 
 
Progress on Venezuela's integration into Mercosur 
--------------------------------------------- ---- 
¶8. (U) The most important and most trumpeted 
achievement of Argentina's pro temp presidency has been 
Venezuela's accelerated incorporation into Mercosur. 
On June 16, Mercosur's foreign ministers met in Buenos 
Aires to pin down the conditions for entry which had 
been arranged at the May 23 technical meeting, also in 
Buenos Aires (ref A).  These conditions are that 
Venezuela will: 1) have 4 years to adopt the CET; 2) 
have 4 years to pass and implement Mercosur's 
legislation; 3) have 6 years to grant full duty-free 
treatment on sensitive goods from Mercosur countries 
(under a non-linear schedule); 4) have a still 
indeterminate transition period to implement the 
customs union (i.e. trading the rest of the goods duty 
free).  In addition, Venezuela will be able to 
participate in Mercosur's foreign negotiations upon 
signing the accession protocol in Cordoba.  This 
protocol will then have to be ratified by the five 
legislatures.  Venezuela will become a full member 30 
days after ratification of the protocol. 
 
¶9. (C) We had been told by Uruguayan negotiators at 
the May 23 technical meeting that there had been 
considerable pressure from Brazil and Argentina to 
reach an agreement on Venezuela's accession.  In return 
for Uruguay and Paraguay's acceptance, Venezuela 
pledged to grant immediate preferential access on a 
list of products. 
 
¶10. (C) From what our contacts tell us, Venezuela's 
accession is bound to give the bloc a more political 
flavor than its original trade-oriented intent.  Chavez 
will undoubtedly use his newly-found bully pulpit to 
rail against the U.S. and promote his "Bolivarian 
Alternative", unfortunately with the seal of Mercosur. 
Venezuela's integration may also make it much more 
difficult for Uruguay to obtain a waiver to negotiate a 
Free Trade Agreement (FTA) outside of Mercosur, whether 
with the U.S. or with other partners.   As far as we 
know, the GOU has not officially submitted the request 
for the waiver, but contacts have been made and MFA 
 
officials told us the GOU will raise the issue with 
Brazilian ForMin Celso Amorim during his visit to 
Montevideo on June 23. 
 
What will happen at the Mercosur Summit in Cordoba? 
--------------------------------------------- ------ 
¶11. (C) The centerpiece of the Cordoba Summit will 
most likely be the signing by Venezuela of its protocol 
of accession to Mercosur.  There have been rumors that 
Cuban leader Fidel Castro will also be present, the 
first time he would ever attend a Mercosur Summit. 
Given the lack of progress on the trade front, this 
will be the opportunity to showcase the new political 
dimension of Mercosur.  Chavez may also want to show 
his accession to Mercosur as one more step down the 
road to Latin American integration, towards his 
"Bolivarian Alternative for the Americas" (ALBA).  As 
the Summit will mark the beginning of Brazil's pro temp 
presidency, it will provide an interesting insight as 
to the new power dynamics within the bloc.  Will Brazil 
maintain its traditional lead, will Chavez emerge as 
the new power to be contended with, or will there be a 
kind of "triumvirat" linking Kirchner, Lula and Chavez? 
 
¶12. (C) As indicated by our GOU contacts (ref A), the 
idea of integrating Venezuela into Mercosur was 
Brazil's grand scheme to control Chavez.  Our contacts 
implied that some in Itamaraty were starting to have 
second thoughts as to the wisdom of this plan, in 
particular after Chavez's heavy hand in the Bolivian 
nationalization of gas production.  Our contacts told 
us, however, that the GOB is still supporting 
Venezuela's induction.  Chavez has invited the 
presidents of the four Mercosur countries to Caracas 
for a July 4 celebration of Venezuela's accession.  The 
date picked for the celebration is undoubtedly no 
accident. 
 
¶13. (U) The Cordoba Summit could also see some 
announcement of a new customs code to take effect in 
¶2008.  This would certainly be a move in the right 
direction, by facilitating trade and eliminating the 
double imposition of the CET.  However, the press has 
referred to it as a "framework agreement", which does 
not seem too impressive.  Both its scope and schedule 
of entry into effect are still undefined. 
 
Low expectations for the Brazilian Pro Temp Presidency 
--------------------------------------------- --------- 
¶14. (C) With the Brazilian presidential elections in 
October 2006, our GOU contacts do not expect that the 
GOB will concentrate much effort on Mercosur.  Still, 
there have been statements by both Brazilian ForMin 
Celso Amorim and Presidential Foreign Policy Advisor 
Marco Aurelio Garcia published in the Uruguayan press, 
in which they declare that Brazil intends to focus its 
presidency on the "plight" of smaller members.  Garcia 
is quoted as saying that he would be upset by the way 
Mercosur has failed if he were Uruguayan.  Reports of 
planned major investment initiatives by Brazil's public 
banking entity BANDES have been taken with a grain of 
salt here, as people recall the many unfulfilled promises 
of investment flows of the past. 
 
Comment: A failed presidency leads to a distracted one 
--------------------------------------------- --------- 
¶15. (C) The perceived failure of Argentina's pro temp 
presidency has definitely had a negative effect on 
Uruguay's perception of Mercosur by weakening the 
bloc's institutional strength and exposing abuses by 
the larger members.  Brazil's pro temp presidency may 
well be a distracted one, as the GOB concentrates on 
internal politics, elections and its problems with 
Bolivia.  Chavez may take advantage of a perceived 
power vacuum to attempt to shape Mercosur, but the 
trading bloc's inherent sluggishness may prevent 
radical moves.  While we may hear more bombastic 
statements coming out of an increasingly political 
 
Mercosur, major policy shifts are unlikely.  Uruguay 
will probably continue to loudly criticize Mercosur's 
failures but attempt to influence internal reform from 
within.  End Comment. 
Nealon