Identifier
Created
Classification
Origin
05BRASILIA91
2005-01-10 14:15:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Brasilia
Cable title:  

MERCOSUL SUMMIT: NO PARTY, BUT NO FUNERAL

Tags:  ECIN ETRD PREL ECON BR 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 05 BRASILIA 000091 

SIPDIS

SENSITIVE

STATE PLEASE PASS TO USTR
NSC FOR MIKE DEMPSEY
DEPT OF TREASURY FOR FPARODI
USDOC FOR 3134/USFCS/OIO/WH/EOLSON
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD

SENSITIVE

E.O. 12958: N/A
TAGS: ECIN ETRD PREL ECON BR
SUBJECT: MERCOSUL SUMMIT: NO PARTY, BUT NO FUNERAL
EITHER

REF: LIMA 5732

UNCLAS SECTION 01 OF 05 BRASILIA 000091

SIPDIS

SENSITIVE

STATE PLEASE PASS TO USTR
NSC FOR MIKE DEMPSEY
DEPT OF TREASURY FOR FPARODI
USDOC FOR 3134/USFCS/OIO/WH/EOLSON
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD

SENSITIVE

E.O. 12958: N/A
TAGS: ECIN ETRD PREL ECON BR
SUBJECT: MERCOSUL SUMMIT: NO PARTY, BUT NO FUNERAL
EITHER

REF: LIMA 5732


1. (SBU) Summary and introduction. Diplomatic
restraint enabled the 27th Mercosul presidential
summit to conclude on December 17 without incident,
but widespread dissatisfaction with meager economic
benefits flowing from the bloc, and bitter trade
disagreements between Brazil and Argentina clouded the
event. Limited trade agreements with India and the
Southern Africa Customs Union were finalized; new
associate members Colombia, Venezuela, and Ecuador
were welcomed. However, tough issues on reforming the
Protocol of Ouro Preto and on eliminating exceptions
from the Common External Tariff were set aside. The
trade initiatives that were announced, such as the
eventual elimination of double CXT applications, will
have no immediate impact. Held in Ouro Preto, Brazil
to mark the tenth anniversary of the 1994 Protocol of
Ouro Preto, the GoB had hoped for a strong
reaffirmation of the Mercosul ideal. While President
Lula asserted that Mercosul is a "destiny," the lack
of political will to remove final impediments to
formation of a customs union and lingering doubts over
the pact's economic importance continue to cloud
Mercosul's future. End summary and introduction.

The Return to Ouro Preto
--------------


2. (U) The 27th Mercosul Summit in Ouro Preto, Brazil
concluded on December 17, 2004 without incident, but
intra-bloc differences clouded the affair. The
meeting marked the 10-year anniversary of the Protocol
of Ouro Preto, which provided a permanent framework
for establishment of Mercosul's customs union and
institutions, and the turnover of the 6-month pro
tempore presidency from Brazil to Paraguay. President
Lula was joined by the presidents of Uruguay,
Paraguay, and Argentina, despite earlier doubts about
President Kirchner's participation following President
Lula's rejection on December 8 of the Argentine demand
that Mercosul adopt a trade safeguard mechanism. The
Presidents of Mercosul Associate Members Chile,
Bolivia, Peru, and Venezuela also attended, as well as

the President of Panama, who conveyed an interest in
his country becoming an Associate Member.


3. (U) As the highlight of Brazil's presidency, the
GoB had hoped the summit would provide a stronger
reaffirmation of the Mercosul ideal of regional
integration. Mercosul has been a top priority for the
Lula administration and despite frustration in
Brazil's private sector and in some government
quarters, particularly within the Ministry of
Development and Trade, the GoB's commitment to the
bloc so far has been unwavering. President Lula
presented a stirring defense of Mercosul and suggested
naysayers were exaggerating its difficulties. He
underscored Brazil's commitment to the bloc when he
declared "Mercosul is more than an option, it is a
destiny."


4. (U) While reiterating the political importance of
Mercosul, other leaders' public remarks revealed
frustration with the bloc's inability to move forward
in a decisive, effective and equitable way to form a
genuine customs union, let alone the long-term goal of
a common market. President Kirchner admitted that the
regional bloc is essential for Argentina, but warned
that "the benefits can't be all in one direction," in
a veiled reference to his country's trade frictions
with Brazil (septel). The economic asymmetries among
the bloc's members and the lack of consistency in
Mercosul trade policy, including the exceptions-
riddled Common External Tariff (CXT),were seen as
continuing concerns. Former Argentine President
Duhalde, in his capacity as president of the Mercosul
Commission of Permanent Representatives, complained
that only 30 percent of the measures approved by
Mercosul have been approved by national legislatures.

Timid Advances on Trade and Integration
--------------


5. (U) Given the strained atmosphere, the GoB's
ambitious agenda for the meeting had to be scrapped.
Leaders did not discuss changes to the Ouro Preto
Protocol, despite Brazil's preparation of a package of
reforms, including a proposal to change the Mercosul
decision-making mechanism from consensus to majority-
voting. Other fundamental, yet sensitive issues, such
as revision of the CXT and the bloc's automotive
policy, were also put aside for the sake of a
convening a "successful" meeting. The lack of clear
advances in eliminating exceptions to the CXT raised
doubts among Brazilian commentators about Mercosul's
ability to establish a customs union in accordance
with the bloc's Objective 2006 program adopted in July

2003.


6. (U) While Foreign Minister Amorim defended the Ouro
Preto outcome as marking an important moment in
"consolidating Mercosul," most summit initiatives have
been characterized as timid. For instance, the
announced regulations for the Government Procurement
Protocol merely harmonize regulations issued pursuant
to bilateral agreements that already enable businesses
in the four countries to compete for government
procurement contracts at the federal level on an equal
basis. Furthermore, the new regulations are not yet
final, but must be approved by national legislatures.
Likewise, a fifth round of services negotiations
resulted only in "progress" toward converging norms
for financial and construction services.


7. (U) During the summit, Paraguay finally relented
under pressure from Brazil and Uruguay to one of the
more important initiatives -- to eliminate double
application of the CXT on goods entering one of the
member countries for final destination in another.
However, for the near-term this will have no economic
effect; set to commence in 2005, the initiative will
only cover goods whose applied tariff is zero, as an
MFN rate or through a tariff preference regime. The
result is one less bureaucratic process for these
imports, but status quo for all others.


8. (U) The Mercosul partners committed to formulate by
2008 a mechanism for the gradual elimination of double
tariff application on goods with applied tariffs above
zero. But whether this effort will come to fruition
is less than certain given Paraguay's sensitivity;
tariff revenues reportedly account for approximately
18 percent of that country's tax revenue. Paraguay's
Foreign Minister Rachid was quoted as saying three
conditions would have to be met before double tariffs
could be eliminated: 1) creation of a computerized
customs system for tracking products; 2) establishment
of a single customs code; and 3) formation of a fund
to transfer a part of the CXT collected to Paraguay.
(Note. Elimination of the double duty has been a key
demand of the European Union in its free trade
negotiations with the Mercosul.)


9. (U) Finally, leaders announced their intent to
create a Fund for Structural Convergence, though no
financing commitments were made. The fund, slated to
come into existence in 2006, is supposed to provide
financing for projects to reduce regional structural
differences and lift the competitiveness of the
Uruguayan and Paraguayan economies; a definitive
proposal for establishment of the Fund isn't expected
until May 2005.

Trade Agreements Inked
--------------


10. (U) Representatives from India and the Southern
Africa Customs Union (including South Africa's Trade
Minister) were on-hand in Ouro Preto to finalize
partial trade preference agreements with Mercosul,
which the Brazilian private sector views as shallow
accords with little commercial consequence. The
agreements aren't expected to expand trade
substantially; the agreement with India covers only
902 products, about 450 for each side, for which
tariffs are reduced by 10 to 100 percent, with 20
percent as the norm. The agreement with the SACU
covers 1,907 products (approximately 1,000 for each
side),with tariff reductions ranging from 20, 50 and
100 percent. Nonetheless, Mercosul leaders,
particularly President Lula, count these as important
accomplishments and steps in a broader process of
strengthening economic and political relations with
these strategically important developing countries.


11. (U) Much ado was also made as Ecuador, Venezuela
and Colombia joined Bolivia, Chile and Peru as
Mercosul Associate Members. Note, associate
membership only requires signature to Mercosul's
democratic clause and a free trade agreement with the
bloc; Associate Members may participate in the bloc's
political consultations, but are not required to
comply with any internal rules or adhere to the bloc's
negotiating positions. The free trade agreements with
the Andean community countries were again lauded as
providing the base for the launch of the South
American Community of Nations on December 8 in Cuzco,
Peru (reftel). However, Bolivia's President Mesa
raised concern about unfocused efforts at regional
integration, stating that "we have to be brief and
eliminate what could be a confusion of roles, a
repetition of objectives and a duplication of
efforts."


12. (SBU) Perhaps to buoy Mercosul's image as a
dynamic and sought after trade partner, the GoB
invited a number of diplomatic representatives to the
Mercosul Council of the Common Market meeting the day
before the summit. By and large the invitees
represented countries that are engaged to some degree
in trade discussions with Mercosul. These range from
discussions to seek closer commercial relations
generally, to the launching of trade negotiations.
Representatives from the following countries attended:
Panama, Mexico, Costa Rica, Cuba, Guatemala, Guyana,
Nicaragua, Dominican Republic, Suriname, Trinidad and
Tobago, India, South Africa, Botswana, Lesotho,
Namibia, Swaziland, Canada, Australia, China, Egypt,
Israel, Japan, New Zealand, Pakistan, and Switzerland.
The EU delegation received a faxed invite four days
prior, but was unable to send a representative. (The
USG did not make the list. During a December 20
conversation with Sao Paulo Consul General, Sao Paulo
Federal Deputy Joao Herrmann, a member of the Foreign
Relations Committee, lamented the USG absence in Ouro
Preto, suggesting that it demonstrated the failure of
both sides to place appropriate emphasis on the
bilateral trade relationship.)

On the Political Side...
--------------


13. (U) In keeping with recent efforts to expand
Mercosul's political dimensions, leaders directed the
Mercosul Joint Parliamentary Commission to formulate
procedures for the installation of a Mercosul
Parliament in 2006. The body may initially have
members that are appointed, with gradual evolution
toward a more representative body. Other
announcements included: establishment of a high-level
meeting to discuss human rights within the Framework
Agreement on Regional Security Cooperation; agreement
to develop a Mercosul passport; agreement to establish
funds for cooperation in education and promotion of
artistic expression; agreement on the transfer of
convicts; and the promise to establish a high-level
group to study employment growth.

Comment
--------------


14. (SBU) The inability of Mercosul leaders to once
again grapple with basic deficiencies that are
compromising Mercosul's development as a customs union
has stoked skepticism in Brazil's private sector
regarding the bloc's viability and usefulness
(septel). Nonetheless, commitment to Mercosul runs
deep within the ruling PT, most importantly with
President Lula himself. Continuing trade difficulties
not withstanding, the GoB will continue to push for
more, not less, integration within Mercosul, and as
the big country in the bloc will seek to keep the
project alive. As one editorial noted, while the
summit wasn't a party, it wasn't a funeral either.

Danilovich