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Viewing cable 07BRASILIA82, MERCOSUL RIO DE JANEIRO SUMMIT: WHITHER MERCOSUL?

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Reference ID Created Released Classification Origin
07BRASILIA82 2007-01-17 11:15 2011-07-11 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Brasilia
VZCZCXRO9936
PP RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHBR #0082/01 0171115
ZNR UUUUU ZZH
P 171115Z JAN 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 7852
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 1509
UNCLAS SECTION 01 OF 03 BRASILIA 000082 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR CRONIN 
STATE PASS USAID FOR LAC 
TREASURY FOR OASIA - J.HOEK 
NSC FOR FEARS 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSON/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA 
STATE PASS USAID FOR LAC 
 
E.O. 12958: N/A 
TAGS: ETRD ECON PREL ECIN EFIN BR
SUBJECT: MERCOSUL RIO DE JANEIRO SUMMIT: WHITHER MERCOSUL? 
 
REF: 06 BRASILIA 1655 
 
This cable is sensitive but unclassified, please protect 
accordingly. 
 
1. (SBU) Summary: Mercosul members are facing more than the usual 
number of institutional challenges as they prepare for the bloc's 
biannual summit, to take place January 18-19 in Rio de Janeiro.  In 
an implied slap at Mercosul dispute resolution mechanisms, Argentina 
recently requested WTO consultations over Brazil's imposition of 
anti-dumping duties on imports of Argentine PET resins.  The ongoing 
Uruguay-Argentina dispute over the closure of a cross-border bridge 
by Argentine protestors opposed to Uruguay's construction of a 
cellulose plant on the border continues to fester.  Brazilian 
businesses, faced with Argentine insistence on "voluntary trade 
restraints" on appliances and delays in implementing the automobile 
trade provisions of the bloc, are openly questioning their 
government's trade strategies.  Meanwhile, the Brazilian government 
seems more focused on preparing a package of deliverables to assuage 
the very public complaints of the bloc's smallest members, Uruguay 
and Paraguay, that the trade grouping is not meeting their needs. 
The discussion of these institutional challenges likely will be 
overshadowed by Venezuelan President Hugo Chavez's recent 
declaration of socialism and Bolivia's application to upgrade its 
associate membership to full membership -- with special 
considerations.  A trade agreement with the Gulf Cooperation Council 
(GCC) is likely to be signed.  End Summary. 
 
Institutional Challenges 
------------------------ 
 
2. (SBU) The biannual Mercosul summit, to take place January 18-19 
in Rio de Janeiro, will present Mercosul leaders with a series of 
institutional challenges.  This is true at least from the point of 
view of the Brazilian foreign ministry (Itamaraty), for which 
Mercosul is a tool not only for regional economic and political 
integration, but also for the consolidation of what Brazil sees as 
its natural leadership role in the region.  Given this view, 
Itamaraty, which dominates GoB Mercosul policy-making, often 
foregoes confrontation to try to shore up the unity of the bloc. 
Brazilian industry has complained loudly and almost completely 
ineffectually against the policy line Itamaraty has staked out in 
many Mercosul disputes, primarily involving Argentina. 
 
3. (SBU) Brazilian industry frequently complains that Itamaraty is 
selling out hard Brazilian commercial interests for the mere 
appearance of Mercosul unity.  They point to Argentina's extraction 
from the Brazilians of concessions to: a) delay the liberalization 
of the automotive trade regime between the countries; b) impose 
"voluntary restraints" on Brazilian exports of white goods and small 
appliances; and, c) Argentina's implied slap at Mercosul dispute 
resolution procedures in deciding to take Brazil to the WTO over the 
latter's imposition of anti-dumping duties on Argentine PET-resins. 
Meanwhile, the dispute between Uruguay and Argentina over the 
former's plans to build a cellulose plant on its border with the 
latter, continues to fester, also unaddressed by Mercosul dispute 
resolution mechanisms.  The GoB, essentially, acquiesced to 
Argentina's insistence that Mercosul not address the problem. 
Brazilian Vice Minister of Foreign Affairs Samuel Pinheiro Guimaraes 
had a summit preparatory meeting recently with his Argentine 
counterpart in an attempt to work through may of the big issues. 
 
BRAZIL SEEKS TO INJECT "GREATER COHESION" 
----------------------------------------- 
 
4. (SBU) The GoB is attempting to assure the success of the summit 
by putting together a package of deliverables, particularly for the 
smaller countries, which have been complaining recently about the 
bloc's lack of benefits and the manner in which Brazil and Argentina 
have decided major issues without consultation.  President Lula 
reportedly instructed his ministers to find ways to eliminate 
bureaucratic hurdles to trade and give the bloc "greater cohesion." 
Foreign Minister Amorim told the press that his ministerial team is 
coordinating the effort.  Lula met with six ministers shortly before 
departing on vacation, and they agreed to extend a USD 30 million 
credit to Bolivia for the purchase of 100 tractors.  Also at the 
request of the Bolivians, the GoB is considering supporting the 
construction of a bio-diesel plant in Bolivia.  Brazil also has 
 
BRASILIA 00000082  002 OF 003 
 
 
agreed to consider Paraguay's request to re-negotiate the pricing 
structure for energy generated by the huge bi-national hydroelectric 
dam at Itaipu, although precisely how this will be done remains to 
be worked out as the pricing was part of a bilateral treaty. 
 
5. (SBU) Lula reportedly also agreed to a proposal to facilitate 
trade with Uruguay by increasing the number of Customs officials at 
the border, thus speeding processing times and addressing a 
long-standing Uruguayan complaint.  The GoB reportedly also will be 
loaning USD 20 million to Paraguay for customs systems improvements 
to enhance legitimate trade and improve Paraguayan customs' 
enforcement ability.  Perhaps most significant will be a Brazilian 
undertaking to find a way to eliminate the double-charging of the 
Mercosul Common External Tariff (TEC) by Brazil on products 
initially imported into the customs union via Uruguay and Paraguay. 
(Note: If implemented, this would be a big step towards making 
Mercosul function more like a true customs union.)  This would 
improve market access to Brazil for the smaller members. 
 
Local Currencies to be Used in Argentine-Brazil Trade? 
--------------------------------------------- -------- 
 
6. (SBU) Also likely to be announced is the establishment by the 
Brazilian and Argentine central banks of a local-currency clearing 
house mechanism to facilitate payments on  Argentina-Brazil trade. 
According to a Brazilian Central Bank contact, the clearing house 
would be aimed, at least initially, at enhancing market access by 
small businesses.  These businesses find the costs of the current 
mechanisms, which require two foreign exchange transactions as the 
local currencies must first be converted first dollars and then into 
the currency of the trade partner, eat up much of the margin on 
their small import/export transactions.  To this end, the central 
banks will set up a clearing house, guaranteed by a U.S. dollar 
account in a neutral institution (reftel).  All currency trading 
would be settled daily so the central banks are not exposed to undue 
currency risk.  Whichever central bank has a surplus in the other's 
currency at the end of the day would be paid in dollars from the 
guarantee account. 
 
BOLIVIA APPLIES FOR FULL MEMBERSHIP 
----------------------------------- 
 
7. (SBU) On the heels of Venezuela's recent entry into the bloc as a 
full member, President Evo Morales of Bolivia has been pressing for 
an answer to Bolivia's long-standing application for full membership 
in Mercosul.  Bolivia, along with Chile, has been an associate 
member since 1996, as neither country was willing to adhere to the 
Mercosul Common External Tariff (TEC) given other trade commitments. 
 This is reportedly still an issue for Bolivia, which continues to 
ask that the TEC not be applied to it.  Former Brazilian foreign 
minister Celso Lafer recently publicly criticized the idea of full 
membership for Bolivia without its first meeting the entry criteria, 
arguing that this would sharpen the institutional crisis created by 
Venezuela's recent "hasty" Mercosul accession. 
 
MERCOSUL-GCC AGREEMENT 
---------------------- 
 
8. (SBU) A trade agreement between Mercosul and the Gulf Cooperation 
Council (GCC) reportedly will be signed by the Mercosul leaders and 
GCC General Secretary Abdul Rahman, who is to participate in the 
summit.  The text of the agreement, rules of origin and list of 
covered products were agreed upon during a December 2006 meeting in 
Riyadh.  Negotiations on the agreement were launched during the 2005 
Arab-South America summit in Brasilia. 
 
A Parliament and Civil Society Representatives 
--------------------------------------------- - 
 
9. (SBU) The Mercosul summit also is expected to make progress 
towards the establishment of a regional parliament.  Each of the 
five full Mercosul members will have power to nominate nine 
deputies, nine senators, and an equal number of back-ups (suplentes) 
to the Parliament.  The idea is to progressively harmonize the trade 
legislation of the bloc, although it's not yet clear how this will 
be implemented.  The first deputies of the Mercosul Parliament will 
have a four-year mandate.   In addition, social movements, labor 
unions, and non-governmental organizations will be given a voice in 
 
BRASILIA 00000082  003 OF 003 
 
 
certain Mercosul debates on integration by formalizing channels for 
direct communication between the member states' governments and 
civil society representatives. 
 
10. (SBU) Comment:  Mercosul is facing some difficult institutional 
issues, as its political dynamic is becoming increasingly detached 
from the economic integration agenda.  But the summit in Rio de 
Janeiro will likely be dominated by Venezuelan President Chavez and 
his recent declaration of "socialism or death."  The Brazilian 
government continues to calculate that the best way to moderate 
Chavez is by including him in regional fora and eschewing 
confrontation.  Whatever influence they have gained over Chavez by 
including him in Mercosul, however, appears to be coming at 
substantial cost to the institution. 
 
SOBEL