VZCZCXRO0638
RR RUEHRG
DE RUEHSO #0222/01 1051550
ZNR UUUUU ZZH
R 151550Z APR 09
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 9108
INFO RUEHBR/AMEMBASSY BRASILIA 0255
RUEHRG/AMCONSUL RECIFE 4349
RUEHRI/AMCONSUL RIO DE JANEIRO 9113
RUEHBU/AMEMBASSY BUENOS AIRES 3474
RUEHAC/AMEMBASSY ASUNCION 3721
RUEHMN/AMEMBASSY MONTEVIDEO 2895
RUEHSG/AMEMBASSY SANTIAGO 2721
RUEHLP/AMEMBASSY LA PAZ 4097
RUCPDOC/USDOC WASHDC 3264
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SECTION 01 OF 02 SAO PAULO 000222 
 
SIPDIS 
SENSITIVE 
 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
STATE PASS NSC FOR ROSSELLO 
DEPT OF TREASURY FOR LINDQUIST 
 
E.O. 12958: N/A 
TAGS: ECON ETRD BR
SUBJECT: BRAZIL: MUDDLING THROUGH WITH MERCOSUL 
 
REF: 08 Sao Paulo 497 
 
SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY 
 
¶1.  (SBU) Summary: Mercosul is overly politicized and structurally 
defective, particularly for a major emerging economic power like 
Brazil, according to participants in a 4/7/09 Consulate-sponsored 
roundtable.  However, membership in this organization provides some 
economic benefits to Brazil even if the country often finds itself 
at odds with some of members' protectionist policies.  Brazil's 
policy of "muddling through with Mercosul" is entirely consistent 
with the general thrust of the country's foreign policy in South 
America, which seeks to avoid conflict, maintain stability, and 
advance regional integration, even as Brazil's own emergence as a 
major economic power causes its interests to diverge increasingly 
from those of its neighbors.  End Summary. 
 
¶2.  (SBU) The Consulate General in Sao Paulo hosted a roundtable on 
Mercosul on April 7, 2009.  Participants included a director for 
International Trade at the Federation of Industries of Sao Paulo, 
Mario Marconini, former Brazilian Ambassador to the U.S. Rubens 
Barbosa, Fundacao Getulio Vargas Professor Eliana Cardoso, Brazilian 
Society of Studies on Transnational Companies (SOBEET) 
representative Luis Alfonso Lima, Funcex representative Fernando 
Ribeiro, and National Confederation of Industry (CNI) representative 
Lucia Maduro. 
 
Mercosul: For Brazil It's Politics vs. Economics 
--------------------------------------------- --- 
 
¶3.  (SBU) Roundtable participants agreed that Mercosul is more of a 
political than an economic instrument.  Ambassador Barbosa 
characterized the organization as one of the "most politicized 
entities" of President Lula's administration.  All agreed that 
Brazil's Mercosul challenges -- laid out below -- turn on the 
contradiction between Brazil's political inclinations and the 
country's economic self-interest.  Nonetheless, Brazil will likely 
stick with the status quo for now.  Mercosul membership costs little 
and still provides some benefits -- for now.  Until this calculation 
changes drastically, Brazil will "muddle through" with Mercosul. 
 
¶4.  (SBU) Roundtable participants laid out a number of areas where 
Brazil finds itself constrained by Mercosul: 
 
-- Institutional Obsolescence:  Mercosul's "Factory Defect" 
 
      FIESP's Mario Marconini said that Mercosul possesses a 
"factory defect" in that the organization requires that members 
adopt a common market within four years, a process that took the 
European Union forty years. 
 
-- Brazil Too Big for Mercosul... 
 
      Brazil is an economic powerhouse compared to Mercosul's other 
members and these economic asymmetries have led to fractures within 
the membership.  While Brazil has led an aggressive campaign for 
international investments and markets for its world class 
industries, there are other, smaller fractures among the membership 
of Mercosul.  Most notably, Mercosul was unable to resolve a dispute 
between Argentina and Uruguay over international investments in 
paper mills in Uruguay.  Ambassador Barbosa noted that Brazil pushed 
hard for more open trade at the WTO, a position that clashes with 
the instincts of many Mercosul members like Argentina and pending 
member Venezuela. 
 
-- ... But Wants to Be Popular 
 
      Ambassador Barbosa observed that Brazil's desire to be popular 
with its neighbors, motivated in part by ambitions to be a regional 
leader, causes the country to sweep economic differences with other 
Mercosul members under the rug.  Brazil, for example, ignores 
attacks from other Mercosul members and had recently made a 
strategic decision to ignore a series of new tariffs that Argentina 
imposed on imports.  Brazil calculates that its trade surpluses more 
than compensate for these minor indignities.  Marconini noted, for 
 
SAO PAULO 00000222  002 OF 002 
 
 
example, that Argentina's new tariffs will affect only 20 percent of 
Brazil's exports to that country.  Consequently, it is "simply not 
worth the trouble" for the GOB to raise a fuss over this issue. 
 
Venezuela: A Problematic Partner 
-------------------------------- 
 
¶5.  (SBU) Caracas' possible membership in Mercosul encapsulates many 
of the contradictions described above.  Brazil already has 
outstanding access to the Venezuelan market and the country's 
inclusion into Mercosul is likely to create complications for 
Brazil, given the two countries radically different approaches to 
trade.  Nevertheless, panel participants treated Venezuelan 
accession to Mercosul as a given, that the GOB has already made a 
political decision to support Venezuela's membership.  Lucia Maduro 
noted that Caracas already enjoys Mercosul member benefits without 
having to adhere to Mercosul rules.  Ambassador Barbosa observed 
that bringing Caracas into the Mercosul fold was a way of preparing 
for a post-Chavez Venezuela and the expansion of the organization to 
other areas of the hemisphere, including the Caribbean. 
 
The Case for "Muddling Through" 
------------------------------ 
 
¶6.  (SBU) The consensus of the group was that Brazil would almost 
certainly "muddle through" with Mercosul for now, rather than either 
leaving the organization or pushing for fundamental reforms. 
Mercosul continues to provide some economic benefits, according to 
SOBEET's Alfonso Lima.  Trade within the bloc has increased more 
than trade with other markets.  Professor Cardoso noted that Brazil 
often can export lower quality products to Mercosul members that are 
not competitive elsewhere and that other countries are now using 
Brazil as a platform to export to the rest of Mercosul.  In 
addition, she commented that Mercosul gives Brazil a unique 
laboratory in which to learn about "real world" trade problems that 
can arise among nations. 
 
¶7.  (SBU) Despite these benefits, Ambassador Barbosa, Mario 
Marconini, and Fernando Ribeiro argued that membership in Mercosul 
was likely to be a wasting asset and most agreed that the 
organization would lose the relatively little utility it currently 
has within the next 20 years.  The asymmetry between an increasingly 
world-class, world-competitive Brazil and its protectionist fellow 
members is simply too great.  For now, however, the costs of the 
organization are relatively low and it still provides strategic, 
political benefits to Brazil in the region. 
 
Comment 
------- 
 
¶8.  (SBU) Brazil's approach to Mercosul fits in well with previous 
analyses of the country's overall foreign policy that seeks to 
maintain regional relationships while also aspiring to greater 
international stature (Reftel).  While Brazil's emergence as a 
global economic power includes vigorous defense of the country's 
economic self-interest and a positioning appropriate to global 
opportunities, Brazil also remains wedded to maintaining good 
relations and stability in South America.  This is patently the 
rationale in the short-term behind the GOB's support of Venezuelan 
membership in Mercosul, in light of the challenges Venezuela's 
inclusion would introduce into the Mercosul dynamic.  Thus Mercosul 
serves Brazil's long-term political interests of advancing South 
American integration even if the economics of the entity provide 
only marginal benefits in what is undoubtedly a lop-sided grouping 
of economies.  So long as these perceived political benefits 
dominate Brazil's calculus, Brazil will not rock the regional boat 
by either leaving or pushing for the reform of Mercosul, even if 
those observers who weigh economic interests more than political 
interests question the wisdom of this approach.  End Comment. 
 
¶9.  (U) This cable has been cleared by the Financial attach in Sao 
Paulo and the Embassy in Brasilia. 
 
WHITE