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UNCLAS CARACAS 002736 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR DTOMLINSON/SCRONIN 
USTR FOR BHARMON 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EPET BEXP VE
SUBJECT: IMPLICATIONS OF VENEZUELA'S LEAVING THE CAN AND 
JOINING MERCOSUR: THE ROAD AHEAD 
 
 
This message is sensitive but unclassified.  Please treat 
accordingly. 
 
¶1. (U) SUMMARY: Venezuela's April withdrawal from the Andean 
Community (CAN)and subsequent July Mercosur accession has 
cast much of Venezuela's trade law into limbo, while its 
agreement to open the country's doors to Brazilian and 
Argentine imports by 2012 raised alarms among local 
manufacturers and agricultural producers.  However, in purely 
commercial terms, at least for now, little has changed. 
Venezuela still has four years to adopt MERCOSUR's common 
external tariff (CET)(if it ever does) and appears committed, 
per Article 135 of the Cartagena Accord, to uphold its market 
access rights and obligations with CAN countries for the next 
five years, or until replacement agreements are negotiated. 
CAN and Venezuelan negotiators agreed in August to conclude 
negotiations no latter than October 30 on an agreement 
establishing temporary norms applicable for trade in goods, 
rules of origin, safeguards, dispute settlement, sanitary and 
phytosanitary measures, and technical barriers to trade.  At 
the strategic level, most analysts agree that lying behind 
this economically disadvantageous move were Chavez's 
political desires: (1) to punish CAN members Colombia and 
Peru, for signing free-trade agreements with the United 
States, and to influence their recent presidential elections; 
(2) to seek freer hand in deepening the state's role in the 
Venezuelan economy; and (3) to shape the future direction of 
MERCOSUR.  END SUMMARY. 
 
--------------------------------------------- ----------- 
LEAVING THE CAN CREATES LEGAL LIMBO FOR VENEZUELAN TRADE 
--------------------------------------------- ----------- 
 
¶2. (U) On April 22, 2006, the BRV formally advised the Andean 
Community Secretariat 
that it terminated the Cartagena Agreement, the CAN's 
founding document.  Originally conceived in 1969 as a 
regional integration project among current member countries 
and Chile (Venezuela joined the group in 1973; Chile left it 
in 1976), the CAN is more than just a trade bloc.  It seeks a 
level of integration much deeper than MERCOSUR.  The pact 
boasts various EU-style legislative, executive, and judicial 
institutions, as well as a developed body of 
agreement-implementing decisions and resolutions covering not 
only tariffs, but also: non-tariff trade barriers; dispute 
settlement; sanitary and phytosanitary permits; product 
standards, testing, labeling, and certification; rules of 
origin; government procurement; and intellectual property 
rights.  In addition, under the Andean Community's umbrella, 
Colombia, Ecuador and Venezuela signed a cooperation 
agreement to deepen ties among their respective automotive 
sectors.  These CAN-implementing decisions and resolutions 
had a supranational nature and become an integral part of 
Venezuela's trade law and regulatory framework. 
 
¶3. (U) Under Article 135 of the Cartagena Agreement, 
tariff-related decisions and resolutions in the event of a 
member's withdrawal from the pact remain in force between the 
CAN and the departing member-state for five years from the 
date of its formal withdrawal, unless otherwise agreed. 
However, the treaty does not state what has or will become of 
the non-tariff-related regulations.  On August 10, 2006, the 
BRV signed a memorandum of understanding with its former CAN 
partners addressing some of this uncertainty.  The MOU 
confirms that the tariff regime will remain in place between 
the BRV and the CAN for five years from the date of 
Venezuela's denunciation and that the automotive agreement 
will persist pursuant to its own provisions, i.e., for 
 
ten-year renewable terms from September 16, 1999.  The MOU 
also states that the CAN and Venezuela will establish a 
working group to create transitional rules regarding tariffs, 
safeguards, dispute settlement, sanitary and phytosanitary 
measures, and technical barriers to trade.  This work is 
reportedly to be completed by October 30.  The MOU does not 
address, however, what will become of CAN decisions and 
resolutions regarding the remaining array of issues -- 
notably IPR and product standards, testing, labeling and 
certification -- which these implementing documents have 
covered over the years.  And more importantly for firms doing 
business in or with Venezuela, the BRV has made no effort to 
clarify such issues. 
 
¶4. (U) It is no surprise, therefore, given the BRV's 
prevarication, that no single opinion on the matter prevails 
in the Venezuelan legal community.  One view holds that all 
CAN decisions and resolutions remain part of Venezuela's 
domestic law unless or until the National Assembly passes 
legislation expressly repealing them.  The BRV's termination 
of the Cartagena Agreement was not sufficient to make them 
void.  Certain articles of the BRV's constitution, understood 
in light of recent judgments by Venezuela's Constitutional 
Court regarding treaty law, imply that CAN decisions and 
resolutions were automatically incorporated into the 
country's domestic law upon their promulgation by the 
relevant CAN institutions.  For some, then, unless the 
legislature repeals these regulations they will continue to 
benefit and/or burden foreign companies doing business in 
Venezuela.  At the same time, however, because Venezuelan 
companies now hail from a non-member state, they will not be 
benefited or burdened by these same regulations when doing 
business in CAN countries. 
 
¶5. (U) An opposing view holds that only those CAN decisions 
and resolutions expressly ratified by the National Assembly 
continue to be part of Venezuela's domestic law after the 
BRV's termination.  According to this view, the BRV's 
withdrawal from the Cartagena Agreement rendered void all 
CAN-promulgated regulations not so ratified by the Venezuelan 
legislature, and restored to life those conflicting domestic 
laws that had been in force prior to, and superseded by, the 
regulations' promulgation.  In the absence of clarification 
from the BRV, the National Assembly, or the Constitutional 
Court, foreign and domestic firms doing business in Venezuela 
will not know which of these views, if either, is correct. 
(COMMENT: This legal murkiness is precisely the sort of 
business-environment uncertainty in which the BRV seems to 
revel and private firms trying to make investment decisions 
in Venezuela seem to flail.  END COMMENT.) 
 
¶6. (U) The same principles animating the conflict of opinion 
regarding CAN regulations will apply to MERCOSUR's less 
extensive treaty-implementing decisions, resolutions, and 
directives.  To some Venezuela's inscription as an official 
member in MERCOSUR automatically incorporated into the 
country's domestic law the new trade pact's attendant 
regulations, adding another layer to the legal confusion left 
by the BRV's withdrawal from the CAN.  Others hold that only 
National Assembly ratification of MERCOSUR regulations will 
suffice to do so. 
 
------------------------------------------- 
MERCOSUR: VENEZUELA'S OIL-FOR-FOOD PROGRAM? 
------------------------------------------- 
 
¶7. (U) While disagreement reigns in Venezuela's legal 
community regarding the implications of leaving the CAN for 
 
MERCOSUR, local manufacturers and agricultural producers are 
generally in accord about the ramifications for them.  In the 
absence of protective measures to staunch the flow of 
Brazilian and Argentine imports, the move implies much 
tougher times ahead and continued deindustrialization of the 
Venezuelan economy.  Simply stated, Venezuelan 
manufacturers,farmers and ranchers fear that tariff-free 
trade with industrial and agricultural giants such as Brazil 
and Argentina will put them out of business. 
 
¶8. (U) While it is unlikely that Venezuela will actually 
reach zero-level tariffs with its new MERCOSUR trading 
partners in the near to medium term, the protocol under which 
it joined the pact foresees tariff-free trade among the 
parties by 2014, as well as the adoption of the MERCOSUR 
Common external tariff (CET)in four years.  According to the 
protocol's liberalization timetable, most Venezuelan exports 
will be tariff-free to Argentina and Brazil by January 2010 
and to Paraguay and Uruguay by January 2013, while most 
imports to Venezuela from its four MERCOSUR partners will be 
tariff-free by January 2012.  The timetable also provides for 
a deadline extension to January 2014 for "sensitive 
products."  In addition, Venezuela agreed to a significant 
list of immediate-entry exceptions for Paraguayan and 
Uruguayan products: while scores of items from beef to 
benzetimide were included, total Venezuelan imports from the 
two countries were a paltry USD 82 million in 2005. 
(Comment: The fact that the BRV has agreed to take on the 
MERCOSUR tariff framework, which does not really fit the 
non-oil commercial priorities of the Venezuelan private 
sector, speaks significantly to the motivations for joining 
MERCOSUR.  End Comment.) 
 
¶9. (SBU) Whatever the timetable, however, history suggests 
that the BRV is unlikely to agree to eliminate tariffs with 
MERCOSUR members with respect to all or even most products 
anytime soon.  Eduardo Porcarelli, a former Director-General 
of the Ministry of Production and Trade, noted in a recent 
presentation regarding BRV trade policy that over its 
decades-long relationship with the Andean Community, 
Venezuela only reached zero-level tariffs with respect to 45 
percent of intra-CAN trade.  The remaining 55 percent was 
still subject to varying tariff levels at the time of the 
BRV's withdrawal from the pact. 
 
¶10. (SBU) That track record is some comfort to local 
producers, who see this shift in Venezuela's trade policy as 
decidedly disadvantageous to them.  Supporting their 
concerns, Porcarelli and other analysts note, for example, 
that former CAN partner Colombia was Venezuela's number one 
Latin American market for non-oil exports, primarily 
manufactures.  (NOTE: In connection with their concerns about 
leaving the CAN, Venezuelan producers also highlight that 
Chavez also announced, shortly after the CAN withdrawal, 
Venezuela's withdrawal from the G-3 FTA, a separate trade 
pact comprised of Colombia, Mexico, and Venezuela. Mexico was 
the second largest Latin American buyer of non traditional 
Venezuelan exports. END NOTE.) 
 
¶11. (U) Manufacturers, agricultural-sector contacts, and 
analysts concerned with the BRV's shift in trade policy 
generally highlight two distinctions between trade with their 
former partners in CAN and with their new partners in 
MERCOSUR: complementarity and magnitude.  Regarding 
complementarity, analysts note that Venezuela's trade with 
CAN countries (especially Colombia) consists of a relatively 
diversified group of value-added products, mostly 
manufactured and assembled goods.  Porcarelli, for example, 
 
states that 100-200 separate products account for roughly 75 
percent of Venezuelan exports to Colombia; by comparison, 
just ten Venezuelan products account for fully 80 percent of 
its exports to the United States, and crude oil for roughly 
50 percent of the total.  Analysts fear that Venezuela is 
exchanging a diversified export market in CAN for just 
another oil destination in MERCOSUR and that doing so will 
exacerbate an existing trend toward over-reliance on its 
petroleum sector for economic output. 
 
¶12. (U) With respect to magnitude, analysts most frequently 
express concern with the relative size of the Brazilian and 
Argentine economies -- five times and roughly equal to 
Venezuela's, respectively -- and Venezuela's substantial and 
growing trade deficit with MERCOSUR countries.  Between 2000 
and 2005 Venezuela's trade balance with MERCOSUR fell from a 
slight surplus of roughly USD 200 million to a deficit of 
nearly USD 2.5 billion.  According to the Venezuelan 
Association of Exporters, in 2005 Venezuela exported USD 240 
million in goods and services to Brazil, while it imported 
USD 2.4 billion; the analogous figures for Argentina were 
exports of USD 140 million and imports of USD 507 million. 
Opening Venezuela's doors to MERCOSUR, the most concerned of 
local analysts fear, will eviscerate what remains of 
Venezuela's domestic manufacturing and farming sectors and 
transform the country into one that exports hydrocarbons and 
imports just about everything else. 
 
----------------- 
IT'S ALL POLITICS 
----------------- 
 
¶13. (U) While such dire predictions are unlikely to be 
realized, it is difficult to see Venezuela's divorce from the 
CAN and marriage to MERCOSUR as economically advantageous for 
the country.  Local analysts and private sector contacts 
generally agree that Chavez's play was purely political. 
Chavez himself made clear that, in his view, Colombia's and 
Peru's signing free trade agreements with the United States 
made Venezuela's continued participation in the CAN 
inconsistent with his Bolivarian revolution.  And the timing 
of Chavez's announcement to leave the pact -- in the middle 
of Colombian and Peruvian presidential campaigns -- further 
suggests that politics, not economics, drove his 
decision-making.  Commercial common sense would have 
counseled Chavez to negotiate the terms of the separation 
before, not after, terminating the Cartagena Agreement, in 
order to ensure a smooth transition.  Chavez clearly hoped 
with the snap announcement to surprise his favored 
candidates' opponents and signal to Colombian and Peruvian 
voters that Presidents Alvaro Uribe's and (then candidate) 
Alan Garcia's support for FTAs with the United States came 
with consequences for their countries' relationships with the 
BRV.  Chavez lost his wager. 
 
¶14. (U) But beyond snubbing the United States and its 
regional free-trade allies, analysts argue that exchanging 
the CAN's stronger institutional framework for MERCOSUR's 
more embryonic one will enable Chavez to (1) deepen the BRV's 
role in Venezuela's economy without running afoul of CAN 
treaty obligations and (2) shape the development of MERCOSUR 
and it's institutions to create a pact more to his liking. 
On the first point, in a recent interview with a leading 
Caracas daily, El Nacional, Italo Luongo, lawyer and 
professor of political studies at the Central University of 
Venezuela, argued that, in joining MERCOSUR, Chavez is 
affirmatively seeking to undermine Venezuela's private sector 
firms so that he can garner more political support for his 
 
state-led Bolivarian economic model. 
 
¶15. Regarding designs for MERCOSUR, Chavez has stated 
repeatedly that he wants the pact to take on a stronger 
political dimension, and following the formal adhesion 
ceremony in July he stated that the organization's members 
should someday integrate their armed forces.  A possible 
impediment to Chavez's grand vision for Mercosur is its 
democracy clause, which calls for the expulsion of members 
which adopt undemocratic practices.  The Brazilian paper O 
Globo argued in a recent editorial that Chavez's plans to 
remain in power indefinitely through the "manipulation of 
democratic instruments" directly conflicts with the democracy 
clause. 
 
¶16. (SBU) COMMENT: Leaving the CAN and joining MERCOSUR is 
yet another BRV policy change that favors Chavez's political 
ambitions but makes little economic sense.  The worst fears 
of Venezuela's manufacturers and farmers are, however, 
unlikely to come to pass because, as happened with the CAN, 
domestic politics and pragmatism will likely forestall the 
BRV from eliminating tariffs on much intra-MERCOSUR trade. 
At the same time, for all of its rhetoric to the contrary, 
the BRV will likely eventually negotiate replacement trade 
agreements with CAN members to maintain commercial links with 
them.  Nevertheless, the trade-law confusion created by the 
move has added further murkiness to an already uncertain 
business environment, negatively affecting private-sector 
investment.  Moreover, some local producers will no doubt 
succumb to Brazilian and Argentine competitors. 
 
¶17. (SBU) Such deleterious economic effects are a price 
Chavez is clearly willing to pay to further his aims both at 
home and abroad.  Chavez will no longer need to contend with 
CAN treaty obligations and institutions as the BRV 
contemplates deepening "twenty-first century socialism" at 
home, such as with the so-called "Anti-Monopoly" law now 
coursing through the National Assembly.  And MERCOSUR will 
provide Chavez with a less developed, and therefore 
potentially more malleable, regional integration vehicle. 
Venezuela's private sector may suffer, but nobody ever said 
the Bolivarian revolution would come cheap. 
 
WHITAKER