BRAZIL AND ARGENTINA AGREE ON A TRADE SAFEGUARDS MECHANISM;

UNCLAS SECTION 01 OF 02 BRASILIA 000362

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DEPT PLEASE PASS TO USTR - MSULLIVAN
USDOC FOR 3134/USFCS/OIO/WH/EOLSON
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD
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SIPDIS

E.O. 12958: N/A
TAGS: ETRD EIND BR
SUBJECT: BRAZIL AND ARGENTINA AGREE ON A TRADE SAFEGUARDS MECHANISM;
ACCORD ON AUTOS STILL PENDING



1. (SBU) Summary. Tensions between Brazil and Argentina over access
to each other's markets continue. In early February, Brazil and
Argentina finalized their long-running negotiations on a bilateral
trade safeguards mechanism should excessive exports from one country
endanger an industry in the other. While Brazilian industry (and
some within the government) saw the accord as acquiescing to
Argentina's one-sided demands, Foreign Minister Amorim - anxious to
maintain good relations with the country's neighbors to the south --
defended the agreement as fair and balanced. Meanwhile, contentious
talks are still ongoing regarding renewal of the current automotive
export agreement between the two countries. The rancorous
atmosphere surrounding these two sets of negotiations underscores
the difficult nature of the Brazil-Argentina relationship. Many
here are beginning to wonder whether Brazil's traditional policy of
using Mercosul as a device to manage relations with the Argentines
is really worth the trouble. End Summary.

White Smoke on Safeguards
--------------


2. (SBU) After months of acrimonious talks, Brazil and Argentina
finally agreed to a bilateral "competitive adaptation mechanism"
(MAC),i.e., a framework for imposing import safeguards. The
provisions of this mechanism would be invoked whenever businesses
representing 35% of a specific industry filed a request with their
government. Thereupon would follow a series of informal
industry-to-industry meetings and separate government investigations
(possibly lasting up to 340 days),culminating in a potential panel
decision should the two sides prove unable to agree. The three
panel experts -- one Argentine, one Brazilian, and the third from a
non-Mercosul country - would then render judgment, with the
complainant country, should it prevail, receiving authorization to
impose quotas lasting for 3 years (with a possible 1 year
extension). Any exports from the respondent country above the quota
would be subject to the Mercosul Common External Tariff for that
product, minus ten percent.


3. (U) According to the press, the Brazilian export sectors most
likely to be negatively affected by the MAC include footwear,
textiles, appliances, steel, poultry and pork. Certain Brazilian
agricultural producers (wheat, rice, milk, garlic, onions, fruits,
and wine) are considering using the MAC offensively against
Argentina.

But Still Waiting on An Automotive Industry Accord
--------------


4. (SBU) The agreement on the MAC leaves renewal of the automotive
industry accord as the principal item remaining on the bilateral
trade agenda. Under the "flex" system contained in that document,
for every US$2.60 exported by one country (Brazil),the other
(Argentina) must export at least US$1.00. Brazil wants to leave the
formula as it currently stands while Argentina seeks to reduce the
flex ratio to 2.20. In addition, Buenos Aires would like the
agreement to be of indefinite duration and the flex ratio to be
applied individually to every company - instead of the current
practice of applying it to the industry as a whole. Both
governments had hoped to have the agreement done by the end of
November in time for the commemoration of Brazil-Argentina
Friendship Day. However, with Brazilian and Argentine automakers
each pressuring their government's negotiators, achieving consensus
in time, in an atmosphere marked by rancor on both sides, proved
impossible. Therefore, the agreement was extended until March, by
which time negotiators hope to have an interim agreement in place.
A final agreement is not expected until after June.

Brazilian Industry Livid
--------------

5. (SBU) Brazilian business reps, including spokesmen from the
powerful FIESP (Sao Paulo State Industrial Federation) have been
vocal in their criticism of the deal the GOB negotiated on the MAC.
They question why the GOB agreed to such a lengthy safeguard period
(possibly up to 4 years) and point out that under the MAC any space
ceded by Brazilian manufacturers in the Argentina market could well
be filled by third country producers. Specifically, we have been
told that there are studies showing that voluntary limits on

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Brazilian "white goods" exports to Argentina last year resulted in
increased imports from third countries, while not a single
additional unit was produced in Argentina. In industry's view,
government policymakers who already have proven themselves tone-deaf
to input on issues such as the FTAA and the proposed EU-Mercosul
FTA, once again ignored domestic business interests. Meanwhile,
officials at two Sao Paulo-based auto manufacturers have told us
that they fear that the GOB will do so again in the ongoing
automotive accord talks.

Divergent Thinking within the GOB
--------------

6. (SBU) In early February, Emboffs spoke with a well-placed MFA
diplomat who described the situation within the GOB on this issue.
One camp, we were told, recognized that Brazilian business interests
were not being served but felt that given Argentina's worries about
regaining ground for its industry in the wake of its recent economic
meltdown, the importance of maintaining good relations with Buenos
Aires trumped all else. The most prominent spokesman for this point
of view was Foreign Minister Celso Amorim, who, when the terms of
the MAC were announced, publicly characterized it as fair and
balanced. The accord on MAC, under this line of thinking, was the
price for keeping Mercosul intact. And while one-sided concessions
may not make much economic sense, politically they do serve to keep
Argentina and Brazil from butting heads and help advance Brazil's
aspirations for a U.N. Security Council seat.


7. (SBU) A second camp, led by Minister of Development, Industry,
and Commerce Luiz Fernando Furlan, saw the MAC as preemptive
capitulation. Our MFA interlocutor noted that buried within the
text of the agreement was a clause which allowed a party to impose
"provisional" safeguards unilaterally should the situation so
warrant. Incredible as it sounds, our contact said, the Argentines
think the safeguards mechanism will induce foreign investors to
invest in Argentina rather than Brazil. Because of his pro-Brazil
stance, we were told, Furlan was a hated man in Argentina - so much
so that he had not traveled there once during his three years as
Minister.

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


8. (SBU) While Amorim prevailed with respect to the MAC and could
well impose his imprint on any automotive sector accord, he might
not be able to continue his string of wins indefinitely. We heard
that had not Brazilian exporters been constrained by Mercosul in
negotiating agreements to expand existing (and open new) markets,
instead of exporting US$117 billion in 2005 (a record),they could
have done much, much more. Argentina was cited as the culprit in
preventing Brazil from concluding an FTA with key trade partners
like the U.S. and the EU. Clearly, these statements reflect the
dissatisfaction with Mercosul felt by a number of key Brazilian
government and industry actors. The entry of Venezuela into the
bloc and the growing restiveness of the smaller members - Uruguay
and Paraguay, both of which questioned why they were excluded from
the MAC talks - will only feed further rethinking regarding the
economic benefits of Mercosul.


9. (SBU) Recently Amorim told a visiting U.S. delegation that
Venezuela's entry into Mercosul was more "an expression of political
hope than an economic reality." Given the Amorim-led effort to
pacify Argentina, it is becoming increasingly the case that for
Brazil Mercosul is a "political hope, not an economic reality."

LINEHAN