VZCZCXYZ0015
PP RUEHWEB

DE RUEHMN #0616/01 1861803
ZNY CCCCC ZZH
P 051803Z JUL 06
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC PRIORITY 5989
INFO RUCNMER/MERCOSUR COLLECTIVE
RUEHBO/AMEMBASSY BOGOTA 2522
RUEHCV/AMEMBASSY CARACAS 0427
RUEHLP/AMEMBASSY LA PAZ JUL SANTIAGO 2876
RUMIAAA/CDR USSOUTHCOM MIAMI FL//J-5//
RUEHC/DEPT OF AGRICULTURE WASHDC
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 000616 
 
SIPDIS 
 
SIPDIS 
 
DEPT ALSO FOR A/S TSHANNON, WHA/BSC AND EB 
DEPT PASS USTR FOR EEISSENSTAT AND MSULLIVAN 
TREASURY FOR OASIA FOR DDOUGLAS 
COMMERCE FOR ITAITA/MAC/WBASTIAN 
NSC FOR DFISK AND DTOMLINSON 
SOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 07/05/2016 
TAGS: PREL ETRD ECON PGOV AORC UY
SUBJECT: URUGUAY'S FTA AT CROSSROADS WHILE VENEZUELA JOINS 
MERCOSUR 
 
REF: A. MONTEVIDEO 0567 
 
     ¶B. MONTEVIDEO 0555 AND PREVIOUS 
 
Classified By: Charge D'Affaires Linda T. Gonzalez 
for reasons 1.4 (B) and (D) 
 
¶1. (C) Summary: President Vazquez is caught between wanting a 
Free Trade Agreement (FTA) with us and Brazil's open 
opposition to it.  On June 23, Brazil's visiting Foreign 
Minister explicitly warned the Uruguayans that an FTA with us 
would be damaging to Mercosur and Uruguay.  On June 26, GOU 
and USTR officials met in Washington to give the GOU's trade 
officials a clear understanding of the established 
requirements included in a "gold standard" FTA with the U.S. 
On July 4, Chavez hosted a big bash in Caracas to celebrate 
Venezuela's full entry into Mercosur. Seven Mercosur and 
Mercosur-associate Presidents attended.  On July 20-21, 
Mercosur will host a major summit in Cordoba, Argentina to 
cement this process and to welcome Brazil's pro-tempore 
presidency. It is rumored that Fidel Castro may attend. It is 
likely that the issue of an FTA will surface at the Cordoba 
Summit. At any rate, Vazquez will soon have to decide whether 
to formally request an FTA with us because time is running 
out.  If he petitions Mercosur, he may resort to a legal 
argument. The bloc's restrictions on individual member 
states' negotiating trade preferences could violate Uruguay's 
constitution.  Vazquez is also bound to assert (ref A) that 
Mercosur has not been working well for the small countries in 
Mercosur. Most observers doubt that Uruguay would ever pull 
out from the trading bloc because the political costs are too 
high. Such a move would also be awkward for Mercosur, 
especially since Venezuela has just joined. Below are some 
recent developments regarding the state of play. End Summary. 
 
Brazilian Formin Objects to FTA 
------------------------------- 
¶2. (SBU) On June 23-24, Brazil's Foreign Minister Celso 
Amorim visited Uruguay. Beginning with his press conference 
upon arrival and at practically every turn thereafter, he 
warned his hosts that an FTA with the U.S. would be damaging 
to Mercosur and Uruguay. Recognizing the "great unrest among 
the small countries" including, "asymmetries", intra-bloc 
trade problems and the serious pulp mill dispute between 
Uruguay and Argentina, he promised a "New Deal" rectify them 
-- once Brazil assumes Mercosur's pro-tempore presidency. 
"This is not a regular visit," Amorim declared during a press 
conference.  He said that, "Brazil believes that we win with 
an architecture of preserving and strengthening South 
American integration in a very tough, savage world of 
economic blocs. It is obvious that sometimes we may obtain 
advantages if we negotiate separately, but over the long term 
we will all lose." 
 
Negative Reactions 
------------------ 
¶3. (C) Amorim may have overplayed his hand here, since 
there's been considerable backlash to his statements by 
opposition and business leaders in Uruguay.  Blanco Senator 
(and former Foreign Minister) Sergio Abreu bristled at 
Amorim's remarks and characterized his "New Deal" offer as a 
mere "espejito" (a little mirror) since no concrete offers 
were produced.  Among a litany of complaints, Abreu cited 
Brazil's FTZ in Manaus, which exports more than fifty times 
as much (US $20 billion) as does Uruguay.  He also questioned 
why Amorim "should ask us to comply with one percent of 
Mercosur's requirements when 99 percent of them don't work. 
Technically, Mercosur's decision 32/00 doesn't only apply to 
negotiations for trade preferences outside the bloc. Other 
Mercosur obligations are in the text that have not been 
fulfilled."  Several business leaders labeled Amorim's 
statements "paternalistic and devoid of content". and 
underscored the failings of the Common External Tariff (CET). 
(Note: Of the USD 75-85 billion in imports, only USD 15 
billion pay the relevant tariffs. End Note.)  Among others. 
Senator Carlos Baraibar called Amorim's statements an 
 
"interference in Uruguay's domestic affairs."  Mining 
Director Luis Ferrari told A/DCM that "insult to injury was 
added" when Amorim's economic team refused to  discuss the 
specifics of the proposed "New Deal" and talked about 
football instead. Only Formin Gargano seemed pleased by 
Amorim's remarks, while President Vazquez thus far has been 
conspicuously silent. 
 
Insiders say "Steady as She Goes" 
--------------------------------- 
¶4. (C) Charge also spoke to Industry Minister Jorge Lepra and 
Econ Minister Danilo Astori regarding Amorim's remarks. 
(Note: Astori -- the GOU's most visible proponent for an FTA 
-- has lately been having a rough time dealing with domestic 
opposition to his economic and fiscal policies  -- 
particularly from the Communist-dominated labor unions. End 
Note.)  Both ministers indicated the President's continued 
commitment to signing an FTA. Although they did not appear 
privy to how Vazquez was actually going to achieve it, they 
were confident in the President's and his capable Chief of 
Staff Gonzalo Fernandez's abilities to manage the 
international and domestic political challenges to an FTA. 
Other GOU trade officials we spoke with also expressed 
optimism on an FTA and opined that Venezuela's adhesion to 
Mercosur was still fraught with legal questions and 
considerable resentment. 
 
Venezuela and Uruguay/Paraguay 
------------------------------ 
¶5. (C) The signing of the protocol of adhesion for Venezuela 
was supposed to have taken place during the July 20-21 
Cordoba Summit, but was inexplicably moved up to July 4 in 
Caracas.  Embassy learned that in order to convince Uruguay 
and Paraguay to accept Venezuela's entry into Mercosur, 
Venezuela had promised both countries immediate duty-free 
access on a long list of products.  On June 30, Isabel 
Masoller (protect) one of the vice-directors of the Trade 
Advisory Directorate at the Ministry of Economy said she was 
"furious" when she saw the final pared-down list, where key 
products (including meat and dairy) had been removed. 
Masoller described the negotiations as "indigno" (wretched) 
and recommended that the GOU not sign the list. In another 
area, we also learned from Uruguay's Ambassador to Venezuela 
that Vazquez and Chavez discussed Venezuela's Conviasa 
airline's buy-in of Uruguay's embattled Pluna airline. Since 
Brazil's Varig (a major stake holder in Pluna) has been in 
bankruptcy, the Pluna issue is of immediate, pressing concern 
to the GOU. Pluna needs an estimated USD 20 million to stay 
afloat. On the cocktail circuit a number of contacts stated 
that Paraguay is making noises about Mercosur. However, some 
newspapers here characterized Venezuela's entry into Mercosur 
as a good thing based on open market access to more than 
three-quarters of South America's GDP. 
 
Meeting with Brazilian Ambassador 
--------------------------------- 
¶6. (C) On June 26, the Charge met with Brazil's Ambassador 
Eduardo Dos Santos at his request. Dos Santos was obviously 
very curious about what was going on between GOU and USTR 
officials in Washington on that day. The Charge offered him 
something like the anodyne, "Today we met under the mandate 
of Presidents Bush and Vazquez to continue to explore ways to 
deepen our trading relationship under the auspices of the 
U.S.-Uruguay Joint Commission on Trade and Investment (JCTI). 
The meetings were productive and informative. We look forward 
to additional discussions in the future."  But Dos Santos 
came on strong, and said, "Celso Amorim wanted to be very 
clear. An FTA with the U.S. is incompatible with Mercosur, 
for structural and architectural reasons. We'll support 
Uruguay in whatever it decides, but we wanted to be very 
clear."  Charge asked the Ambassador about other of Amorim's 
comments, including that an FTA with the U.S. would "injure" 
Uruguay, but he said "no" and that a lot of things had been 
reported out of context. 
 
 
¶7. (C) Ambassador Dos Santos continued that Celso Amorim had 
met with Vazquez and most of his cabinet and he claimed that 
there was "unanimity and that nobody was in favor of an FTA." 
He said that Vazquez said that President Bush offered him 
one, but that he replied "no", that Uruguay just wanted to 
deepen trade. The Ambassador persisted about what was going 
on in Washington, to which the Charge replied, that no one in 
Washington has any intention of breaking up Mercosur, and 
that the U.S.-Brazil relationship is very important. Dos 
Santos said the proper channel to discuss an FTA was the 4 1 
mechanism, to which the charge responded, "You mean the 5 1 
mechanism." Dos Santos admitted that this would soon be the 
case. 
 
Comment: 
-------- 
¶8. (C) Over time, Venezuela's membership in Mercosur is 
likely to change the nature of this customs union into 
something much more political.  We understand that Venezuela 
now has the power to veto an FTA.  While Uruguay urgently 
needs an FTA with us, we doubt it would ever leave Mercosur 
in order to achieve this objective.  Vazquez is not as 
combative as Evo Morales in standing up to Brazil and 
Argentina.  It would also be technically difficult for 
Uruguay to downgrade its Mercosur membership to associate 
status.  However, Uruguay may choose to highlight Brazil's 
2002 trade deal with Mexico, which was negotiated outside the 
Mercosur bloc and resulted in lower tariffs on some goods. 
It could also argue that Mercosur rules restricting "foreign 
negotiations" is illegal under Uruguay's (and Brazil's) 
constitution.  Most likely, Vazquez will justly complain that 
Mercosur has been a raw deal for Uruguay and has not been 
acting as a real customs union; therefore it needs an FTA to 
compensate for its losses.  How Brazil, Venezuela and 
Argentina will react to Uruguay's arguments is another 
matter. Nevertheless, Vazquez insiders continue to assure us 
that he has already thought all of this out. End Comment. 
Gonzalez