MERCOSUR TURNS 15 - A SOMBER QUINCEANERA

C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 000661

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E.O. 12958: DECL: 04/04/2016
TAGS: ETRD ECIN PGOV PREL BR
SUBJECT: MERCOSUR TURNS 15 - A SOMBER QUINCEANERA

REF: A. BRASILIA 362

B. MONTEVIDEO 254

C. 3/22 2006 CRS REPORT "MERCOSUR AND U.S. TRADE
POLICY"

D. 2/3/2006 CRS REPORT "BRAZILIAN TRADE POLICY AND
THE UNITED STATES"

E. BRASILIA 653

F. MONTEVIDEO 305

G. BRASILIA 117

Classified By: Charge d'Affaires Phillip Chicola, based upon Reasons 1.
5(B) and (D)


1. (SBU) Summary. The fifteenth anniversary of the Treaty of
Asuncion, which created Mercosul, took place on March 26, but
was barely noticed in Brazil. Instead of an elaborate
birthday celebration, the only events marking the date here
were scattered ) and poorly publicized ) retrospective
seminars. The reason, of course, is that the alliance is in
the midst of a troubled adolescence, with intra-bloc trade
lagging and junior members of the partnership rebelling
against their larger neighbors. Meanwhile, economic
asymmetries and political tensions make dialogue among member
countries difficult. Within GOB circles, there is a vigorous
debate ongoing regarding the economic usefulness of Mercosul
) though the pro-Mercosul forces continue to have the upper
hand. It is too early to tell how all this will work out,
but the consensus in Brazil is that intra-Mercosul relations,
especially given the recent entry of Venezuela into the bloc,
will get worse and may never get much better. End Summary.

Debate Within Brazil on Mercosul
--------------

2. (SBU) Mercosul is not universally loved in Brazil. As
post has previously reported (ref A),industry groups and
certain government policymakers are openly questioning
whether Mercosul benefits Brazil economically at all. This
line of thinking posits that Brazil could export much more if
it were free of the constraints imposed upon it by the
Mercosul customs union; specifically, without such baggage as
the Mercosul common external tariff (or its Mercosul partners
in general) Brazil would have greater success negotiating
trade agreements with its main partners, such as the U.S. and
the EU. The numerous exceptions of free trade within the
bloc, such as the Automotive Accord, restraints on sugar, and
the bilateral Brazil-Argentina safeguards mechanism (MAC),
are seen by this faction as further irritants.


3. (SBU) However, within the GOB the dominant camp, lead by
the Foreign Ministry, continues to embrace the alliance,
noting that any economic negatives are more than outweighed
by the political elements ) i.e., the existence of a forum
for settling regional quarrels (especially between Brazil and
Argentina),which gives Brazil a nearly undisputed leadership
role. In addition, pro-Mercosul partisans argue that with
Argentina, Paraguay, and Uruguay along for the ride, Brazil
gains a force multiplier in its efforts to cement its role
not only as the dominant player in South America but as the
natural leader of the developing country G-20 bloc in the WTO
Doha Round negotiations. Concentrating first on South-South
integration, this reasoning continues, will provide Brazil
greater leverage when confronting the developed world at the
negotiating table.

Lagging Intra-Mercosul Trade
--------------

4. (U) Theory, unfortunately, has not coincided with reality.
The level of intra-Mercosul trade has ebbed and flowed over
the years in a sine-curve like fashion. In 1998, Mercosul
absorbed about 17 percent of Brazilian exports. In 2005,
this figure was a mere 9.9 percent. Meanwhile, as a whole,
Mercosul only absorbs about 20 percent of the exports of its
member countries. In comparison, the corresponding figure
for intra-bloc exports within the EU is 65 percent, and for
NAFTA, 70 percent.

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Economic Asymmetries and Political Tensions
--------------

5. (U) There is no shortage of work analyzing the mediocre
performance of the Mercosul bloc to date. Ref C looks at the
issue in terms of asymmetries. "From the outset, Mercosu(l)
struggled to reconcile a basic inconsistency of partial
economic union: how to achieve trade integration, while also
ensuring that the benefits would be balanced among members,
and that each country would retain some control over its
trade, production, and consumption structure. At the heart
of the problem are the 'natural asymmetries' that exist among
four economies with inherently large discrepancies in size,
structure, resources endowment, and level of development . .
. . These differences can be compounded by 'policy
asymmetries' that arise from incongruities in fiscal,
monetary, industrial, exchange rate, and other policies.
Either type of asymmetry can distort trade flows, causing
large imbalances that threaten the stability of the
agreement."


6. (SBU) Political and cultural tensions complicate
intra-bloc relations as well. The Brazil-Argentina rivalry
casts its shadow over much of Mercosul decision-making.
However, there are other fault lines as well. There is no
love lost between Brazil and Paraguay, as evidenced by the
continuing friction over cross-border contraband and the
general Brazilian disdain for things Paraguayan. (When foot
and mouth disease resurfaced in Brazil in 2005, one of the
first, and still most popular, explanations was contamination
from unvaccinated Paraguayan cattle.) And while Uruguay and
Paraguay both have issues with each other ) as do Brazil and
Argentina ) the two smaller countries complain about the
larger countries and vice versa. The current flap between
Argentina and Uruguay (ref F) regarding the latter's
construction of paper mills on a common border river is just
the latest example of this. From the Brazilian point of
view, Paraguay and Uruguay should just be glad that they are
part of the show. As one prominent Sao Paulo business leader
commented to us, "Why should we pay attention to the
Uruguayans when their GDP is less than that of Santo Amaro (a
suburb of Sao Paulo and home to a number of multinational
companies)?"

Enter Chavez
--------------

7. (SBU) Now into this turbulent state of affairs steps
Venezuela. As ref B notes, Caracas' entry will only increase
the lack of coherence within Mercosul. From an economic
point of view, Venezuela does not fit in as its
petroleum-dominated economy provides yet another layer of
asymmetry as does its Andean Community tariff structure.
Trying to reconcile Venezuela's Andean Community Common
External Tariffs with those of Mercosul could take years.
Moreover, Brazilian industry leaders point out that removing
GOV tariff barriers will not have any great differential
impact as local businesses already are selling as much as
they could ever expect to Venezuela. On the import side, few
fear competition from what are seen as inefficient Venezuelan
manufacturers.


8. (C) The calculation of President Lula and Foreign Minister
Amorim appears to have been that Venezuelan accession would
promote regional stability by subsuming Chavez within the
multilateral Mercosul framework. In fact, FM Amorim recently
told a visiting US delegation that Venezuela,s entry into
Mercosul was "more of a political hope than an economic
reality." Ref G. Yet, politically, such a move threatens to
increase tensions as by siding with either Brasilia or Buenos
Aires the vocal Chavez could destabilize the Brazil-Argentina
relationship - in a way that neither tiny Uruguay or Paraguay
ever could. Moreover, a fundamental tenet of Brazilian
foreign policy is that Brazil should serve as the leader of
South America. If Chavez covets that role, however, then
Brazil-Venezuela conflict within Mercosul is inevitable. In

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view of the above, dissension within Mercosul is likely to
get worse before it gets better.

What Does the Future Hold?
--------------

9. (C) What might complicate the situation even further would
be any USG move, in response to Montevideo's continuing
veiled hints, to seek to initiate FTA talks with Uruguay.
Such a step would enrage Brazil government officials, who
would certainly see it as an effort to diminish GOB influence
by splitting Mercosul. Without a doubt, both Brazilian
officials and the local media would be very vocal on this
point. That said, whether Brazil would take any significant
actions in reply is another question. With the FTAA already
at an impasse (ref E),the GOB's ability to respond on that
front is limited. And given that Brazil has clearly made the
success of the Doha Round its highest trade priority, it
would seem counter-productive as well to retaliate in that
forum. The GOB could conceivably try to compensate for the
"defection" of Uruguay by speeding efforts to upgrade Bolivia
to full membership. Adding Bolivia ) with all its
uncertainties - to the club, however, would certainly lead to
even less cohesion, especially while Brazil and the Morales
government continue to spar over issues such as energy sector
investment and access to natural gas.


10. (U) Post welcomes the opportunity to hear views from
other concerned Mercosul posts and looks forward to
contributing to any ongoing discussion.

Chicola