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INFO RUCNMER/MERCOSUR COLLECTIVE
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RUEHLP/AMEMBASSY LA PAZ NOV SANTIAGO 2938
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RR RUEHWEB

DE RUEHMN #1097/01 3201331
ZNY CCCCC ZZH
R 161331Z NOV 06
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 6543
INFO RUCNMER/MERCOSUR COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 0459
RUEHLP/AMEMBASSY LA PAZ NOV SANTIAGO 2938
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 001097 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/BSC AND EB/TPP 
DEPT PASS USTR 
TREASURY FOR OASIA FOR HOEK 
COMMERCE FOR ITA/MAC/BASTIAN 
NSC FOR FISK AND CARDENAS 
SOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 11/16/2016 
TAGS: ETRD ECON PREL AORC SOCI UY
SUBJECT: HOW MERCOSUR HAS CHANGED 
 
REF: A. MONTEVIDEO 567 
     ¶B. MONTEVIDEO 465 
     ¶C. MONTEVIDEO 448 
     ¶D. MONTEVIDEO 254 
 
Classified By: James D. Nealon, Charge d'Affaires, for reasons 
1.4 (b) and (d). 
 
¶1. (C) Summary and Introduction:  This telegram contains a 
healthy dose of subjective analysis designed to   stimulate 
constructive debate on an issue of regional importance.  The 
Embassy is keenly interested in Mercosur, not only because 
its headquarters are located here, but also because we have 
detected a growing impact on Uruguay by that organization. 
Over the past couple of years, Mercosur has evolved from a 
benign trading bloc into a political union with a robust 
foreign policy agenda.  More often than not, this agenda has 
clashed with some USG objectives -- particularly since 
Venezuela became its fifth member. A prime example of 
Mercosur's politicization was manifested by its unflinching 
support for Venezuela's bid for a semi-permanent seat on the 
UNSC.  Earlier examples include Mercosur's anti-FTAA posture 
at the Summit of the Americas in Mar del Plata and the 2005 
accord binding members not to sign Article 98 agreements with 
the U.S.  The unpredictability of two Mercosur leaders 
(Argentina's Nestor Kirchner and Venezuela's Hugo Chavez) 
have further complicated Mercosur politics.  There's been 
recent talk about bringing Bolivia into the bloc, adding the 
fiery Evo Morales into the Mercosur mix.  We note that 
Mercosur fully intends to install a functioning Parliament at 
Montevideo in March 2007. 
 
¶2. (C) While Mercosur's exterior veneer portrays an image of 
tight cohesion on political integration and foreign policy, 
severe disputes and backstabbing frequently occur behind the 
scenes. In particular, Uruguay has been the victim of 
Mercosur's lack of solidarity.  The bitter pulp mill dispute 
with Argentina, in which the GOA has used perceived dirty 
tactics to pummel the GOU into submission, and the manifest 
lack of interest on the part of Brazil have elicited comments 
here such as, ""with friends like this, who needs enemies?"" 
It is also widely believed here that both Brazil and 
Argentina vetoed Uruguay's hope as the compromise candidate 
for the Latin American UNSC seat.  Neither Chavez nor Lula 
showed up at the recent Ibero-American Summit in Montevideo 
#¿NOMBRE?
Kirchner did a fly-by appearance and did not meet with 
President Vazquez.  Our GOU contacts, including Presidential 
Chief of Staff Gonzalo Fernandez, have shared with us 
Vazquez's frustration about Argentine and Brazilian 
resistance to Uruguayan efforts to negotiate an FTA with the 
U.S.  Our MFA contacts increasingly answer our demarches with 
what they say is ""the Mercosur position."" 
 
¶3. (C) Finally, Mercosur's trade agenda can be assessed as 
little more than a failure.  The 4 1 process with the U.S. is 
all but dead. (In any case, should it now be called 5 1, with 
the addition of Venezuela?) Trade talks with the EU are also 
at a standstill, and all that Mercosur has been able to 
accomplish of late are modest South-South framework 
agreements.  A Common External Tariff (CET) with more ""holes"" 
than substance and the increased propensity of Argentina, 
Brazil and Venezuela to deal bilaterally without consulting 
their smaller partners are further evidence of Mercosur's 
unsatisfactory trade policy.  In light of these developments, 
a re-examination of our overall relationship with Mercosur 
may be warranted.  End Summary and Introduction. 
 
A strengthened political footprint 
---------------------------------- 
 
¶4. (C) The entry of Venezuela has clearly altered the power 
balance and dynamics within Mercosur.  A prime example was 
Mercosur's unflinching support for Venezuela's UNSC seat bid. 
 For more than 50 successive votes, Mercosur members 
continued to support Venezuela's candidacy.  Mercosur 
solidarity held fast...to a point.  When Uruguay was 
mentioned as a possible compromise candidate, Argentina is 
said to have vetoed the move  and Brazil was reportedly not 
supportive.  In recent months, we have also noted a distinct 
tendency for our MFA colleagues to emphasize that the GOU's 
foreign policy is being coordinated with Mercosur. FM Gargano 
is sycophantic to Venezuela and publicly took credit for 
fast-tracking Venezuela into Mercosur. 
¶5. (C) It is widely believed that the GOB's strategy for 
embracing Venezuela into Mercosur was that Chavez could 
better be controlled from within the organization than if 
left to his own devices on the outside.  It appears, however, 
that Chavez has proved to be more difficult to contain than 
originally thought. He has openly challenged the Brazilians 
by supporting and allegedly encouraging Evo Morales's move to 
grab Petrobras' assets in Bolivia, and has frequently stolen 
the stage at Mercosur from Brazil's President Lula. 
 
¶6. (C) While Lula is widely perceived to have lost some 
regional leadership to Chavez, it is unclear whether this 
will continue to be the case after Lula was re-elected with a 
robust margin.  It also remains to be seen if the 
relationship between Lula and Chavez will be one of 
competition for leadership or if we will see the emergence of 
another bilateral axis similar to the one between Argentina 
and Brazil.  Who will lead Mercosur is open to question. 
Brazil's pro tempore presidency, ending in December, has been 
characterized by inaction, as was expected (ref A).  The GOB 
consistently avoided mediation or to even express an opinion 
in the divisive pulp mill dispute between Argentina and 
Uruguay. Chief of Staff Fernandez told Charge that Lula 
missed the Summit in part so he would not have to show his 
cards on the papermill issue.  Brazil recently proposed a 
postponement of the Mercosur Summit scheduled for December 15 
in Brasilia until January 2007. This delay is read in Uruguay 
as a way for the GOB to come up with face-saving devices in 
order to counter the perceptions of a lack of progress on 
economic integration during Brazil's presidency. 
 
¶7. (C) Political integration continues apace, however.  On 
November 1, as a prelude to the Ibero-American Summit, 
Uruguay became the first Mercosur country to ratify 
Venezuela's entry into the bloc, when the lower House 
ratified the protocol of admission in a special emergency 
session at 3:00 a.m.  The opposition complained that the 
motion had been rammed through the House without adequate 
consideration in Commission.  The opposition later had a 
field day ridiculing the Frente Amplio's ""servile act"", when 
Chavez failed to show up at the Ibero-American Summit in 
Montevideo to receive this ""gift"" (Chavez sent $20 million 
funding for a public hospital as a consolation prize.) 
 
¶8. (C) The Mercosur Parliament will be launched in March 2007 
in Montevideo and is expected to meet on a monthly basis. 
Until 2010, it will be composed of 18 members per country 
chosen by national parliaments.  Starting in 2011, members 
will be popularly elected within each country and 
representation will be proportional, with criteria still to 
be determined.  While the Mercosur Parliament's authority is 
still unclear, its creation is definitely a first step 
towards political integration for Mercosur members and is 
likely to facilitate common policies on external affairs. 
The Parliament's authority is likely to be limited at first, 
given that both Brazil and Uruguay require constitutional 
amendments to permit for supranationality. 
 
¶9. (C) Other political initiatives have emerged.  A Mercosur 
Social Institute and a Democracy Observatory were created at 
the Cordoba Summit in July 2006.  A presidential declaration 
signed in Asuncion in June 2005 exhorted all Mercosur members 
not to sign any agreements susceptible to affect the 
jurisdiction of the International Crimminal Court (ICC), in 
effect prohibiting them from signing Article 98 agreements 
with the U.S.  As for political propaganda, Chavez's Telesur 
TV channel is already broadcasting in Uruguay. As for 
Chavez's calls for a Mercosur common defense policy and joint 
military forces, we had presumed they were going nowhere, but 
press reports on Lula's recent visit to Caracas  indicate 
that he may now support Chavez's idea. 
 
Economic integration takes a back seat 
----------------------------------- 
 
¶10. (C) Meanwhile, economic integration has taken a back 
seat.  What we are seeing is increased bilateralism by the 
larger members at the expense of smaller countries.  The 
Competitive Adaptation Mechanism (or MAC, for its Spanish 
acronym) between Argentina and Brazil, for example, was 
perceived in Uruguay as a significant move backwards for 
economic integration.  Approved in January 2006, this 
bilateral safeguard mechanism is viewed by the GOU and the 
Uruguayan private sector as inconsistent with Mercosur rules. 
 
¶11. (C) Mercosur's Technical Secretariat had always been the 
GOU's pet project and its creation in ex-Foreign Minister 
Didier Opperti's times had been trumpeted as an Uruguayan 
success.  According to our contacts within the Secretariat, 
their relationship with the foreign and trade ministries of 
Argentina and Brazil have become increasingly tense.  They 
say they are being sidelined and their reports are 
increasingly being tagged as restricted or confidential, so 
as to avoid wide diffusion.  They also note that the 
elimination of adequate independent technical studies would 
leave the larger countries -which can allot more resources to 
Mercosur- in a relatively much stronger position vis--vis 
the smaller ones. 
 
¶12. (C) While the lowering of trade barriers was the original 
justification for Mercosur's existence, the Common External 
Tariff (CET) is still far from being a reality.  In fact, it 
can be argued that the numerous exceptions make for a much 
larger hole than the CET itself (the hole is so massive that 
the ""doughnut"" itself is practically non-existent).  Only 
about $30 billion of the $80 billion of extra-zone imports 
are subject to the CET (or 38% of the total), and only $8 
billion (or 10% of total imports) actually pay effective 
duties within the CET.  That is to say that 62% of all 
extra-zone imports are exempted from the CET, either through 
national or sectoral exceptions, or in their majority through 
special processing zones, such as the Manaus Free Trade Zone 
in Brazil or the Tierra de Fuego FTZ in Argentina.  In 
addition, 22% of extra-zone imports enjoy a zero tariff. 
These figures illustrate the fallacy of the oft-stated 
argument (in particular from the Brazilian Foreign Ministry) 
that an FTA between Uruguay and the U.S. would have been 
incompatible with the CET. This reluctance to allow Uruguay 
some leeway in its trade talks with the U.S. was one of the 
reasons for the GOU's excruciating search for an acceptable 
name to give to what would essentially have been an FTA. 
 
¶13. (C) Mercosur itself has lost relevance as an export 
market for its members.  Intra-bloc exports amount to $20 
billion, up from their 2002 low of $10 billion, but down 
significantly as a percentage of total trade.  Exports to 
Mercosur as a percentage of total exports dropped from 34% in 
1998 to 13% in 2002, accounting for just about 14% in 2005. 
The need for individual members -in particular the smaller 
countries- to open up to the rest of the world through 
bilateral trade agreements has become increasingly acute.  In 
this sense, Uruguay has led the way.  It is the only Mercosur 
member to have negotiated a full-fledged FTA with Mexico, as 
a result of a Mercosur framework agreement with Mexico. 
 
¶14. (C) Intra-zone trade flows never were positive for 
Uruguay.  Even at the best of times, when Mercosur absorbed 
about half of its exports, Uruguay had a trade deficit with 
the bloc.  In fact, both Uruguay and Paraguay have suffered 
chronic trade deficits with Mercosur.  Mercosur now absorbs 
only about a quarter of Uruguay's exports, about the same 
amount as NAFTA does.  The trend is clearly for a growing 
share of Uruguay's trade going extra-zone, but the GOU fears 
that its competitive advantages with the U.S. will be eroded 
by our FTAs with the rest of the hemisphere.  For the GOU, it 
only makes sense to join the FTA bandwagon, and a solid 
majority of the population would approve of an FTA with the 
U.S., according to the latest surveys (54 percent in favor, 
14 percent opposed.) 
 
An unsuccessful and confused trade policy 
----------------------------------------- 
¶15. (C) Venezuela's full membership in Mercosur is likely to 
hamper the bloc's ability to negotiate trade deals.  It also 
makes it very difficult for the U.S. to re-initiate the 
moribund 4 1 dialogue, as a 5 1 with Venezuela appears highly 
unlikely and has already complicated negotiations with the 
EU.  The latest technical meeting between Mercosur and the EU 
on November 6-8 ended up in an impasse.  Meanwhile, Venezuela 
is moving ahead with ALBA, its alternative to the FTAA. 
ALBA's members are so far Bolivia, Venezuela and Cuba, which 
act in coordinated fashion in ALADI. 
 
¶16. (C) Mercosur's rigid positions, dictated mostly from the 
Brazilian Foreign Ministry, have prevented the bloc from 
reaching agreements with the developed markets of the U.S. 
and the EU.  All that Mercosur has been able to accomplish 
over the past 2-3 years are South-South agreements, with 
Egypt, Morocco, India, Pakistan and South Africa (Israel 
being the exception).  Though these initiatives would appear 
to indicate an active trade policy, they are mostly 
lightweight framework agreements, which reflect mostly 
Brazil's interests rather than those of the trade bloc as a 
whole. 
 
¶17. (C) While Mercosur did negotiate some broader free trade 
agreements, these generally pre-dated the ""new"" Mercosur that 
is now emerging.  Mercosur negotiated FTAs with Chile and 
Bolivia in 1996 and 1997 and set up an umbrella covering a 
net of bilateral agreements between individual members of 
Mercosur and the Andean Community (CAN).  In these 
negotiations with the Andean Community, Mercosur gave up much 
more in terms of duty-free access than CAN did in return. 
Brazil appears to have been the most generous and Argentina 
the most protectionist.  These inter-connected agreements 
between CAN and Mercosur could result in a South American FTA 
by 2015, if ALADI's schedules are not modified or delayed 
(modifications and delays are likely, though, given 
Mercosur's record on exceptions, ""adjustment mechanisms"", and 
the like.) 
 
Comment: Review USG policy towards Mercosur? 
-------------------------------------------- 
¶18. (C) The increased politicization of Mercosur, its many 
initiatives opposed to USG interests and its changing 
composition (now including Venezuela and perhaps soon 
Bolivia) argue in favor of a review of our policy towards the 
bloc.  At the very least, the recent developments merit 
increased awareness of Mercosur's evolution and intentions. 
It is clearly not the same benign trading zone it was just a 
few years ago, and its leadership appears increasingly at 
odds with US interests.  Among the issues to keep an eye on: 
To what extent does Brazil still call the shots in Mercosur 
and how much influence does Chavez exert on Mercosur 
policy-making?  Embassy welcomes input on these subjects from 
the Department and relevant posts in the region.  End Comment. 
Nealon