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P 171532Z JUL 06
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RUEHQT/AMEMBASSY QUITO 1889
RUEHME/AMEMBASSY MEXICO 2011
RUEHOT/AMEMBASSY OTTAWA 0977
RUCPDO/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 001440 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR - MSULLIVAN 
TREASURY FOR OASIA 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD 
 
 
E.O. 12958: N/A 
TAGS: ECIN ETRD PREL ECON BR
 
SUBJECT: PROSPECTS FOR BRAZIL'S MERCOSUL PRESIDENCY 
 
REF: A. Buenos Aires 1566 
 
 ¶B. Brasilia 918 
      ¶C. Montevideo 567 
 ¶D. Brasilia 786 
 
 
¶1. (SBU) Summary.  Recently, Econoffs met with Julio Laranjeiras, 
Counselor for Mercosul at the Ministry of External Relations to 
discuss Brazil's ambitious and hopeful integration agenda during its 
5-month tenure as Mercosul pro tempore president starting August 1. 
Brazil plans to, among other things, move forward the USD 100M 
Infrastructure Fund and promote Fasttrack-like trade promotion 
authority.  Venezuela's recent entrance into the trade bloc, 
Paraguayan and Uruguayan complaints about lack of influence over 
decision-making, and disputes and GOB fissures over the usefulness 
of Mercosul to Brazil as a whole, will all weigh heavily on Brazil's 
short 5-month tenure.  Despite these and a multitude of other 
issues, the Ministry of External Relations remains upbeat about its 
chances of progressing a truly supranational agenda.  Given the 
myriad challenges confronting Mercosul, post is not so hopeful. End 
Summary. 
 
An Ambitious Agenda 
------------------- 
 
¶2. (U)  On July 11, Econoff and Econ Assistant spoke to Julio 
Laranjeiras, Counselor for Mercosul at the Ministry of External 
Relations (MRE), about what he called a critical moment in 
Mercosul's 15-year history.  On August 1, Brazil will take the reins 
for 5 months as pro tempore president of the trade bloc.  According 
to Laranjeiras, Brazil has an ambitious agenda, but will concentrate 
on two specific issues.  First, a key priority will be the 
institutionalization of the USD 100 million Infrastructure Fund to 
improve roads, bridges, port facilities and standards institutions 
in the most underdeveloped areas of the bloc (i.e., Paraguay and 
Uruguay).  These improvements are intended to facilitate trade by 
reducing the time needed to get products to market and improving the 
end-products made in bloc countries, he said.  Brazil's second 
priority is the development of Fasttrack-like authority in each of 
the participant states to ease incorporation of Mercosul standards 
and regulations. Currently, Mercosul regulations require member 
country Parliamentary approval, which can be a lengthy process. 
 
¶3. (SBU)  While the main priorities are in themselves ambitious, 
Brazil also looks to move forward on broader issues.  Specifically, 
Brazil would also like to make progress in eliminating double 
taxation of goods within the bloc, that is, elimination of taxes 
paid twice on goods imported into one member country and 
subsequently re-exported to another. The bloc has, on a trial basis, 
eliminated double taxation on zero tariff items to accustom 
countries to the idea, he noted.  Another item Brazil would like to 
pursue is the establishment of safeguards against hoof and mouth 
disease, given the importance to member nations of meat exports. 
According to Laranjeiras, all of the measures get to the heart of 
what Mercosul needs--achieving supranationality.  Brazil remains 
hopeful that its presidency can set the tone for a higher level of 
trust among member states and put an end to the beauty contest 
nature of the trade bloc's rotating presidency.  Laranjeiras 
acknowledged that Brazil's presidency faces intra-GOB and 
inter-Mercosul challenges, but declared that Brazil hopes its focus 
items will allow internal and external critics to better understand 
the long run benefits of Mercosul. 
 
 
Internal Strife: Dissent from Other Ministries 
--------------------------------------------- - 
 
¶4.  (SBU)  Laranjeiras admitted that most parts of the GOB, 
 
BRASILIA 00001440  002 OF 003 
 
 
especially in the Lula administration, regard Mercosul as an 
Itamaraty/Presidency project, bringing no immediate benefit to 
Brazil.  Skepticism has increased as Brazil heads into its 
presidential election season.  He specifically named the Ministry 
(and Minister) of Finance as an obstacle, but hinted that Minister 
of Development, Industry and Commerce Furlan has been unhelpful as 
well. The Finance Ministry objects to Brazil providing 70 percent of 
the Mercosul Infrastructure Fund, while other countries in total 
will provide only 30 percent (Note: The USD 70 million has been 
allocated from Brazil's 2007 budget). When pressed, Laranjeiras 
mentioned that other ministries had complained that underdeveloped 
areas in Brazil's northeast will get short shrift compared to needy 
areas in Paraguay and Uruguay.  He also mentioned complaints that 
the money could be better used in addressing the serious income 
disparities within Brazil.  Finally, he has also heard from other 
GOB officials that politically Brazil is focused excessively on 
external affairs and needs to refocus on internal Brazilian 
problems. 
 
External Strife: Paraguay, Uruguay and Argentina and... 
--------------------------------------------- ---------- 
 
¶5. (SBU)  As Laranjeiras noted, Brazil seeks to level the field for 
current members at a time when Paraguay and Uruguay have once again 
asserted that they have seen little to no profit from membership in 
the bloc and that Argentina and Brazil reap all the benefits. 
Paraguay has complained bitterly that non-tariff barriers keep its 
products out of the largest target market - Brazil.  The 
Infrastructure fund, which would target funds for technical 
assistance, is meant to address this complaint.  Since Brazilian 
exports must meet technically higher standards for U.S. and European 
markets, the GOB does not contemplate lowering its own to 
accommodate Paraguay or Uruguay, but instead helping the two 
countries raise their capacity to produce at the requisite level. 
In Laranjeiras' opinion, Uruguay's threat to sign a Free Trade 
Agreement with the U.S. is plain bluster.   He said that his 
contacts in Montevideo informed him that Uruguay is nowhere close to 
completing the requirements for a trade deal, lacking the capacity 
and political will to do so.  Meanwhile, Uruguay remains at odds 
with Argentina regarding the cellulose processing plants along their 
common border, the construction of which the International Court of 
Justice has ruled need not be stopped. 
 
¶6. (U)  For its part, although still with observer status, Chile has 
weighed in on the future of the trade bloc by pointing the finger at 
Argentina as a divisive force. This complaint comes after Buenos 
Aires proposed price increases for foreigners who drive to Argentina 
to buy gasoline and in the wake of speculation that Argentina will 
raise the price of natural gas exports to Chile.  Bolivia, another 
Mercosul observer, has not endeared itself to the bloc due to its 
recent oil and gas nationalization and its threatened expulsion of 
foreigners and seizure of foreign-owned (mostly by Brazilians) 
Bolivian farm land. 
 
External Strife: Venezuela 
-------------------------- 
 
¶7. (SBU)  Amidst all the strife enters Mercosul's newest member 
state, Venezuela. Overall, Laranjeiras regards Venezuela's recent 
ascension to membership as positive for all of South America, 
signaling cooperation and engagement instead of isolation. 
Laranjeiras noted that according to Brazilian trade experts, 
Venezuela's trade structures are better aligned with Brazil and 
Argentina than other current members.  He also expressed surprise at 
how quickly Venezuela moved to accept the terms of accession, saying 
that frankly, everyone expected the process to take much longer.  He 
believed that this indicated seriousness about Venezuela's 
engagement that Brazil had not seen before.  According to 
 
BRASILIA 00001440  003 OF 003 
 
 
Laranjeiras, a big benefit to Mercosul is the obvious bankroll that 
Chavez seems to be willing to share with his neighbors, especially 
at a time when the trade bloc needs an injection of funds.  When 
pressed on whether Chavez would use his petro-dollar-backed might to 
undercut Brazil's and (to some extent) Argentina's influence in the 
bloc, Laranjeiras was silent.  He also had no answer as to whether 
Brazil saw the possibility of Chavez using Mercosul to further his 
PetroCaribe agenda.  Engaging Venezuela was simply meant to bring a 
rogue player into the democratic fold and to broaden the economic 
base to further the Mercosul integration agenda.  Laranjeiras was 
adamant that Mercosul would not allow Chavez to flout democratic 
rules for participation.  Any anti-democratic behavior on 
Venezuela's part would be met with expulsion from the bloc. 
 
Comment 
------- 
 
¶8. (SBU) To put it kindly, Brazil's view of its upcoming tenure is 
sunny at best.  The culmination of disputes between the larger and 
smaller players, the infighting among neighbors, the entrance of 
Venezuela and outright hostilities between observer countries and 
member countries, mean that Brazil will enter a volatile situation 
that will likely worsen.  Still smarting from what was largely read 
as a misstep in its handling of Bolivia's nationalization of oil and 
gas resources, the Ministry of External Relations will need a 
deliverable to deflect the harsh light detractors within the GOB 
will shine on any and all Mercosul activity during the next five 
months.  Taking over after Argentina's rocky pro tempore presidency 
means Brazil is climbing up a very steep hill and will need more 
than hope to emerge from its own upcoming presidency of Mercosul 
unscathed.  End Comment. 
 
 
WILLIAMSON