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E.O. 12958: N/A 
TAGS: ETRD PREL AR
SUBJECT: GOA view of MERCOSUR Economic Priorities: Lesser 
Expectations 
 
Ref:  Buenos Aires 1127 
 
      Brasilia 1034 
 
¶1. (SBU) SUMMARY:  Foreign Affairs Ministry (MFA) and Economy 
Ministry contacts are skeptical that MERCOSUR will make progress on 
its key economic priorities going forward: 1) revise the common 
external tariff (CET); 2) coordinate macroeconomic policy; 3) 
eliminate double collection of tariffs; 4) address asymmetries of 
smaller countries; 5) discuss how to handle non-tariff barriers; 6) 
manage enlargement, i.e. the applications of Venezuela and Bolivia 
for full membership.  Most of these items have essentially been on 
the MERCOSUR agenda since its founding.  MFA and Economy Ministry 
contacts predict that the addition of Venezuela to MERCOSUR will 
further complicate the already difficult progress toward more 
liberalized trade.  End Summary. 
 
---------------------- 
The Future of MERCOSUR 
---------------------- 
 
¶2. (SBU) Ernesto De la Guardia (DLG -- PROTECT), Counselor in the 
Ministry of Foreign Affairs' MERCOSUR office, described during 
recent meetings with Econoff GoA perspectives on the current 
MERCOSUR economic agenda.  He declined to predict the likelihood of 
any of these changes occurring, noting that in six years of working 
MERCOSUR issues, he has seen little forward progress.  Adrian Makuc 
(PROTECT), National Director of External Trade in the Ministry of 
Economy, also expressed skepticism recently, during separate 
meetings, about the probability of seeing significant change in 
MERCOSUR norms in the future.  They provided specific comments on 
MERCOSUR priorities going forward. 
 
¶3. (SBU) REVISE Common External Tariff (CET):  DLG attributed 
MERCOSUR's inability to achieve a single CET to the fact that 
phase-out periods for individual country CET exceptions were 
continuously being extended (Note:  MERCOSUR countries agreed to 
extend them again in 2006, through the end of 2008.  End Note).  He 
also blamed MERCOSUR's special regimens, which all members had 
agreed to, but only apply to individual members.  As an example, he 
pointed to Argentina's duty-free entry for many capital goods, 
instituted in January 2003 and extended last year through December 
¶2008.  DLG stated that GoA goals were to see lower duty rates - 
preferably zero - for capital, information and telecom goods. 
 
¶4. (SBU) COORDINATE MACROECONOMIC POLICIES:  DLG stated that the 
ultimate goal for MERCOSUR - in theory, at least - is to achieve the 
degree of coordination seen by the European Union, with a common 
monetary policy, a common tax policy, and free movement of labor and 
services.  He said that this could also include standardizing 
subsidies and incentives (a GoA priority area), but noted that 
Brazil - with its individual state tax regimes - is having the most 
difficulty in moving forward on this objective. 
 
¶5. (SBU) ELIMINATE DOUBLE TARIFF COLLECTION:  Currently, goods 
imported into one member country and later sent to another member 
(unless substantially transformed) face tariff collection on both 
entries.  This is an obvious contravention of the principle of the 
CET, but DLG noted that efforts to eliminate it are requiring a 
great deal of coordination among the members.  He said that there 
were ongoing efforts to harmonize the laws regulating each country's 
Customs agency, and predicted they could be completed by the end of 
¶2007.  If successful, implementation will be targeted in 2008, along 
with development of information sharing and a method for 
transferring collected duties.  The current plan is for this to be 
active by 2009, at which point double collection would end. 
 
¶6. (SBU) ADDRESS ASYMMETRIES:  Paraguay and Uruguay, as the smallest 
members overall of MERCOSUR, argue they have benefited less from 
MERCOSUR.  Given the less than liberalized nature of the trade bloc, 
investors most often locate in the larger countries (Argentina or 
Brazil), which gives them the benefits of intra-bloc commerce with 
 
the added security of a large domestic market, as a hedge against 
continued or increased protectionism by other members.  In 2006, in 
an effort to address limited investment in Paraguay and Uruguay, the 
four members allocated $100 million to a fund (called the FOCEM, the 
Fund for Structural Convergence) designed for improving 
infrastructure in the two small countries, mainly Paraguay. 
However, DLG commented that this amount was nearly insignificant, 
and Makuc noted that the fund had actually been agreed upon in 2003, 
though not funded until 2006. 
 
¶7. (SBU) ADDRESS NON-TARIFF BARRIERS:  DLG noted that Uruguay had 
presented a proposal and timetable to completely eliminate all 
non-tariff barriers (NTBs) by the end of 2008.  DLG said the GoA 
considered this proposal unacceptable, as it even called for the 
elimination of sanitary/phyto-sanitary (SPS) requirements, which the 
GoA considers essential.  He also noted that the Uruguayan proposal 
would preclude import licensing requirements, including automatic 
ones, which the GoA applies to "nearly everything."  Makuc observed 
that Brazil also frequently uses NTBs, such as applying new SPS 
rules on short notice and stepping up truck inspections at the 
border during peak shipping season. 
 
¶8. (SBU) HANDLE ENLARGEMENT:  DLG noted that Brazilian ratification 
of Venezuela's request for full membership would prove difficult, 
especially in light of increasing tensions between the two countries 
(see Ref B). (Not clear why difficult with Paraguay?)  Both DLG and 
Makuc noted that, nearly a year after signing an accession 
agreement, the GoV had yet to provide a timetable for adhering to 
MERCOSUR protocols.  They doubted one would be forthcoming.  Makuc 
also expressing the concern that economic reforms would take even 
more of a back seat to political objectives once Venezuela was able 
to participate in MERCOSUR votes.  DLG echoed this comment, giving 
as an example Venezuela's proposal for MERCOSUR to declare the U.S. 
a "terrorist government."  He wondered how many more such ideas they 
would present as a full member.  On Bolivia, DLG stated that several 
obstacles remain for the GoB to become a MERCOSUR membership while 
remaining in the CAN (Andean Community), including different tariff 
nomenclatures and different extra-bloc standards on IPR, services, 
and government procurement.  DLG was skeptical of the GoB's 
continuing trade negotiations with the EU as part of CAN, and said 
they appeared to be a ploy to get the U.S. to extend ATPDEA benefits 
to Bolivia. 
 
---------------------------------- 
Still At Square - Or Article - One 
---------------------------------- 
 
¶9. (SBU) DLG pointed out to Econoff that many of the objectives in 
the Treaty of Asuncion - the founding document of MERCOSUR, signed 
in 1991 - have never been fulfilled.  These include the "free 
circulation of goods, services and factors," the "elimination of 
customs duties and other non-tariff restrictions," the "adoption of 
a common [external] trade policy," and "macroeconomic and sectoral 
policy coordination" (which would include trade, agriculture, 
fiscal, monetary, foreign exchange and capital, services, customs, 
transportation, communication policies, and "others agreed upon"). 
DLG also provided Econoff with MERCOSUR decision (number 26/03), 
dated December 2003, which lays out a "work program" for the 
following three years.  Many of the goals, such as eliminating 
double tariff collection and harmonizing the Customs code, remain on 
the current agenda, unfulfilled.  Meanwhile, the remaining economic 
goals - apart from forming ad hoc groups on biotechnology and 
government procurement - are not only unfulfilled, but are now 
essentially off the agenda.  These include harmonizing extra-bloc 
antidumping and safeguard measures, creating a regional capital 
market, allowing free movement of labor, and facilitating business 
expansion within multiple MERCOSUR countries. 
 
¶10. (SBU) Makuc argues that two factors explain the limited progress 
on MERCOSUR's agenda.  One is that "Brazil is very clear in what it 
wants" from MERCOSUR:  a leadership role, which it will use for a 
 
larger role in world politics, such as its quest for a permanent 
seat on the United Nations Security Council.  He said that creating 
additional tension in the bloc would harm the perception of Brazil 
as a leader, so Brazil is not likely to act as an agent of change. 
The second is the reluctance of all members - including Argentina - 
to eliminate protectionist measures and integrate economically. 
According to Makuc, Brazil doesn't want "to bother the other 
MERCOSUR members," which would be the result of pressing for 
increased liberalization. 
 
------- 
Comment 
------- 
 
¶11. (SBU) While the MERCOSUR priorities that DLG described would 
contribute to liberalizing trade among the members, the fact that 
they were all on the agenda in 2003, and many were even in the 
founding document of the bloc, is evidence of the lack of progress 
to date.  Also significant is that the current working agenda is 
considerably less ambitious than it was in 2003.  The GoA officials 
comments that Brazil seems content not to push for further reform 
indicates that the status quo will likely continue, especially 
considering Argentina's comfort level with managed trade mechanisms 
(as an example, see Ref A for background on GoA policies in the auto 
sector).  Given Venezuela's focus so far on political proposals, it 
is even more unlikely that the GoV's full inclusion would accelerate 
the economic integration process. 
 
¶12. (U) For more Buenos Aires reporting, visit our classified 
website at:  http://www.state.sgov.gov/p/wha/buenosaires.< /a> 
 
WAYNE