ARGENTINA REACHES SAFEGUARDS AGREEMENT WITH BRAZIL

UNCLAS BUENOS AIRES 000258

SIPDIS

SENSITIVE
SIPDIS

FOR WHA/BSC, WHA/EPSC, AND EB/TRA
USTR FOR MARY SULLIVAN
NSC FOR SUE CRONIN
USDOC FOR ALEXANDER PEACHER
TREASURY FOR CHRIS KUSHLIS

E.O. 12958: N/A
TAGS: ETRD EINV ECON PREL AR
SUBJECT: ARGENTINA REACHES SAFEGUARDS AGREEMENT WITH BRAZIL

REF: 05 BUENOS AIRES 01478


1. (U) This cable is sensitive but unclassified. Not for
Internet distribution.

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Summary
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2. (SBU) Argentina and Brazil arrived at a bilateral
safeguards agreement February 1. The widely publicized
agreement is the result of over a year of negotiations, and
is a political triumph for the GOA. Argentine industrial
sectors pressured by Brazilian imports now have a formal
mechanism with which to protect themselves. Because
Argentina already imposed a variety of non-tariff barriers to
Brazilian imports in certain sectors, and because those
sectors comprise a small percentage of total Argentina/Brazil
trade, the new agreement is unlikely to have much practical
effect. End Summary.

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The Agreement
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3. (U) Argentina and Brazil arrived at a bilateral safeguards
agreement February 1. The "Mechanism for Competitive
Adaptation, Productive Integration, and Balanced Expansion of
Trade" (MAC) will permit the application of safeguards if any
industry sector in either country is able to show "a
substantial increase in imports, in a specified period, that

causes or threatens to cause significant damage" to a sector
of industry. (Note: that language closely correlates with
language in the WTO Agreement on Safeguards. End Note.) The
agreement is the result of intermittent negotiations that
began when ex-Economy Minister Roberto Lavagna first
mentioned the possibility of re-introducing a formal
safeguards mechanism to Mercosur in September 2004. Mercosur
members had agreed to phase out safeguards in 1999.


4. (U) The following are the MAC's salient features:

-- It will be managed by a bilateral commission that will
monitor Argentina-Brazil trade. The composition of that
commission is still to be determined, according to GOA Under
Secretary of Industry Carlos Kadich.

SIPDIS

-- Any petitioner for protection must represent a minimum of
35 percent of the national production of a particular good or
sector.

-- Upon receipt of a safeguard petition, the bilateral
commission will instigate negotiations between the relevant
private sector entities on both sides.

-- If those negotiations prove fruitless, the importing state
may impose a quota of imports to be allowed to enter
duty-free, while any further imports would be subject to an
import duty of 90 percent of Mercosur's common external
tariff (CET).

-- It is applicable for periods between one and four years.
Once the safeguard lapses in a given sector, no further
protection can be solicited for at least two years.

-- The decision by a party to the MAC to impose a safeguard
is subject to a non-appealable arbitral panel composed of one
Argentine, one Brazilian, and one third country national.

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Predictable Reactions
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5. (SBU) The GOA's Kadich told Econoff February 2 that the

MAC will be very positive for Argentina. Kadich said the MAC
would allow investors to formulate business plans in the
knowledge that a flood of Brazilian imports will not be
allowed to destroy the value of their investments, and
predicted that it would help Argentina siphon off some
investment otherwise destined for Brazil. Jaime Campos,
Executive Director of the Argentine Business Association
(AEA),a group composed of the CEOs of over 60 major
corporations, also said that he believes the MAC would be a
positive for Argentine industry, although he cautioned that
it would only affect a few sectors. Daniel Barbato, an
official with Argentina's public-private export promotion
foundation ExportAr, discounted the possibility that Brazil
could use the MAC to keep out especially competitive
Argentine products (e.g. wine, rice, wheat). Importers were
(predictably) less optimistic, with General Manager of the
Argentine Chamber of Importers Fernando Passarelli telling
Econoff that the MAC is a "worrisome" development.

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What This Means for Argentina/Brazil Trade
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6. (SBU) Brazil has been gaining overall market share in
Argentina for the past several years, and this has resulted
in private Argentine producers, sometimes with the explicit
backing and participation of the GOA, taking steps to
restrict Brazilian imports in certain sectors. Those
restrictions have taken the form of non-tariff barriers such
as non-automatic license requirements and "voluntary" quota
arrangements between private sector producers. The "problem"
sectors (appliances, textiles, footware, carpets,
televisions, paper) that have been the subject of such
measures account for less than 10 percent of bilateral trade,
however. As a consequence, the newly acquired ability to
implement a more formal safeguard is not likely to have a
significant effect. The question of why Brazil would agree
to an idea it had been resisting for some time and which will
likely anger elements of the Brazilian business community was
addressed recently by Brazilian Political Counselor Julio
Bitelli. He told Econoff that the relationship with
Argentina is central to Brazil's foreign policy, and Brazil
is therefore willing to make concessions to keep its key
partner happy. The MAC agreement is not expected to be much
of a factor for U.S. firms operating in the region, as most
that have operations in Argentina also maintain a presence in
Brazil.

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Comment
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7. (SBU) The MAC is a political triumph for the Kirchner
Administration, which has favored industry, and which will
now claim credit for having taken concrete action to support
a significant consituency after a year in which Argentina's
trade deficit with Brazil doubled to approximately USD 3.6
billion. Balancing Argentina's deteriorating trade position
with Brazil will require more than the relatively quick fix
the MAC provides, however. Many observers believe that
Argentina has become fundamentally less competitive than
Brazil in the production of other-than-primary products
(Reftel). Supporting that theory, Argentina's trade deficits
with Brazil are growing rapidly even as the Brazilian Real
has appreciated by over 30 percent against the Argentine Peso
over the past two years. If Argentina is indeed growing less
competitive, it would be better served avoiding quick fixes
and devoting its energies toward the difficult work required
to create a more welcoming investment climate. End Comment.


8. (U) For other Embassy Buenos Aires reporting, please visit
our classified SIPRNET site at
http://www.state.sgov.gov/p/wha/buenosaires.< /a>
GUTIERREZ