IMPLICATIONS OF VENEZUELA'S LEAVING THE CAN AND

UNCLAS CARACAS 002736

SIPDIS

SIPDIS

NSC FOR DTOMLINSON/SCRONIN
USTR FOR BHARMON

E.O. 12958: N/A
TAGS: ETRD ECON EPET BEXP VE
SUBJECT: IMPLICATIONS OF VENEZUELA'S LEAVING THE CAN AND
JOINING MERCOSUR: THE ROAD AHEAD


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1. (U) SUMMARY: Venezuela's April withdrawal from the Andean
Community (CAN)and subsequent July Mercosur accession has
cast much of Venezuela's trade law into limbo, while its
agreement to open the country's doors to Brazilian and
Argentine imports by 2012 raised alarms among local
manufacturers and agricultural producers. However, in purely
commercial terms, at least for now, little has changed.
Venezuela still has four years to adopt MERCOSUR's common
external tariff (CET)(if it ever does) and appears committed,
per Article 135 of the Cartagena Accord, to uphold its market
access rights and obligations with CAN countries for the next
five years, or until replacement agreements are negotiated.
CAN and Venezuelan negotiators agreed in August to conclude
negotiations no latter than October 30 on an agreement
establishing temporary norms applicable for trade in goods,
rules of origin, safeguards, dispute settlement, sanitary and
phytosanitary measures, and technical barriers to trade. At
the strategic level, most analysts agree that lying behind
this economically disadvantageous move were Chavez's
political desires: (1) to punish CAN members Colombia and
Peru, for signing free-trade agreements with the United
States, and to influence their recent presidential elections;
(2) to seek freer hand in deepening the state's role in the
Venezuelan economy; and (3) to shape the future direction of
MERCOSUR. END SUMMARY.

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LEAVING THE CAN CREATES LEGAL LIMBO FOR VENEZUELAN TRADE
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2. (U) On April 22, 2006, the BRV formally advised the Andean
Community Secretariat
that it terminated the Cartagena Agreement, the CAN's
founding document. Originally conceived in 1969 as a
regional integration project among current member countries
and Chile (Venezuela joined the group in 1973; Chile left it
in 1976),the CAN is more than just a trade bloc. It seeks a
level of integration much deeper than MERCOSUR. The pact
boasts various EU-style legislative, executive, and judicial
institutions, as well as a developed body of
agreement-implementing decisions and resolutions covering not
only tariffs, but also: non-tariff trade barriers; dispute
settlement; sanitary and phytosanitary permits; product
standards, testing, labeling, and certification; rules of
origin; government procurement; and intellectual property
rights. In addition, under the Andean Community's umbrella,
Colombia, Ecuador and Venezuela signed a cooperation
agreement to deepen ties among their respective automotive
sectors. These CAN-implementing decisions and resolutions
had a supranational nature and become an integral part of
Venezuela's trade law and regulatory framework.


3. (U) Under Article 135 of the Cartagena Agreement,
tariff-related decisions and resolutions in the event of a
member's withdrawal from the pact remain in force between the
CAN and the departing member-state for five years from the
date of its formal withdrawal, unless otherwise agreed.
However, the treaty does not state what has or will become of
the non-tariff-related regulations. On August 10, 2006, the
BRV signed a memorandum of understanding with its former CAN
partners addressing some of this uncertainty. The MOU
confirms that the tariff regime will remain in place between
the BRV and the CAN for five years from the date of
Venezuela's denunciation and that the automotive agreement
will persist pursuant to its own provisions, i.e., for

ten-year renewable terms from September 16, 1999. The MOU
also states that the CAN and Venezuela will establish a
working group to create transitional rules regarding tariffs,
safeguards, dispute settlement, sanitary and phytosanitary
measures, and technical barriers to trade. This work is
reportedly to be completed by October 30. The MOU does not
address, however, what will become of CAN decisions and
resolutions regarding the remaining array of issues --
notably IPR and product standards, testing, labeling and
certification -- which these implementing documents have
covered over the years. And more importantly for firms doing
business in or with Venezuela, the BRV has made no effort to
clarify such issues.


4. (U) It is no surprise, therefore, given the BRV's
prevarication, that no single opinion on the matter prevails
in the Venezuelan legal community. One view holds that all
CAN decisions and resolutions remain part of Venezuela's
domestic law unless or until the National Assembly passes
legislation expressly repealing them. The BRV's termination
of the Cartagena Agreement was not sufficient to make them
void. Certain articles of the BRV's constitution, understood
in light of recent judgments by Venezuela's Constitutional
Court regarding treaty law, imply that CAN decisions and
resolutions were automatically incorporated into the
country's domestic law upon their promulgation by the
relevant CAN institutions. For some, then, unless the
legislature repeals these regulations they will continue to
benefit and/or burden foreign companies doing business in
Venezuela. At the same time, however, because Venezuelan
companies now hail from a non-member state, they will not be
benefited or burdened by these same regulations when doing
business in CAN countries.


5. (U) An opposing view holds that only those CAN decisions
and resolutions expressly ratified by the National Assembly
continue to be part of Venezuela's domestic law after the
BRV's termination. According to this view, the BRV's
withdrawal from the Cartagena Agreement rendered void all
CAN-promulgated regulations not so ratified by the Venezuelan
legislature, and restored to life those conflicting domestic
laws that had been in force prior to, and superseded by, the
regulations' promulgation. In the absence of clarification
from the BRV, the National Assembly, or the Constitutional
Court, foreign and domestic firms doing business in Venezuela
will not know which of these views, if either, is correct.
(COMMENT: This legal murkiness is precisely the sort of
business-environment uncertainty in which the BRV seems to
revel and private firms trying to make investment decisions
in Venezuela seem to flail. END COMMENT.)


6. (U) The same principles animating the conflict of opinion
regarding CAN regulations will apply to MERCOSUR's less
extensive treaty-implementing decisions, resolutions, and
directives. To some Venezuela's inscription as an official
member in MERCOSUR automatically incorporated into the
country's domestic law the new trade pact's attendant
regulations, adding another layer to the legal confusion left
by the BRV's withdrawal from the CAN. Others hold that only
National Assembly ratification of MERCOSUR regulations will
suffice to do so.

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MERCOSUR: VENEZUELA'S OIL-FOR-FOOD PROGRAM?
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7. (U) While disagreement reigns in Venezuela's legal
community regarding the implications of leaving the CAN for

MERCOSUR, local manufacturers and agricultural producers are
generally in accord about the ramifications for them. In the
absence of protective measures to staunch the flow of
Brazilian and Argentine imports, the move implies much
tougher times ahead and continued deindustrialization of the
Venezuelan economy. Simply stated, Venezuelan
manufacturers,farmers and ranchers fear that tariff-free
trade with industrial and agricultural giants such as Brazil
and Argentina will put them out of business.


8. (U) While it is unlikely that Venezuela will actually
reach zero-level tariffs with its new MERCOSUR trading
partners in the near to medium term, the protocol under which
it joined the pact foresees tariff-free trade among the
parties by 2014, as well as the adoption of the MERCOSUR
Common external tariff (CET)in four years. According to the
protocol's liberalization timetable, most Venezuelan exports
will be tariff-free to Argentina and Brazil by January 2010
and to Paraguay and Uruguay by January 2013, while most
imports to Venezuela from its four MERCOSUR partners will be
tariff-free by January 2012. The timetable also provides for
a deadline extension to January 2014 for "sensitive
products." In addition, Venezuela agreed to a significant
list of immediate-entry exceptions for Paraguayan and
Uruguayan products: while scores of items from beef to
benzetimide were included, total Venezuelan imports from the
two countries were a paltry USD 82 million in 2005.
(Comment: The fact that the BRV has agreed to take on the
MERCOSUR tariff framework, which does not really fit the
non-oil commercial priorities of the Venezuelan private
sector, speaks significantly to the motivations for joining
MERCOSUR. End Comment.)


9. (SBU) Whatever the timetable, however, history suggests
that the BRV is unlikely to agree to eliminate tariffs with
MERCOSUR members with respect to all or even most products
anytime soon. Eduardo Porcarelli, a former Director-General
of the Ministry of Production and Trade, noted in a recent
presentation regarding BRV trade policy that over its
decades-long relationship with the Andean Community,
Venezuela only reached zero-level tariffs with respect to 45
percent of intra-CAN trade. The remaining 55 percent was
still subject to varying tariff levels at the time of the
BRV's withdrawal from the pact.


10. (SBU) That track record is some comfort to local
producers, who see this shift in Venezuela's trade policy as
decidedly disadvantageous to them. Supporting their
concerns, Porcarelli and other analysts note, for example,
that former CAN partner Colombia was Venezuela's number one
Latin American market for non-oil exports, primarily
manufactures. (NOTE: In connection with their concerns about
leaving the CAN, Venezuelan producers also highlight that
Chavez also announced, shortly after the CAN withdrawal,
Venezuela's withdrawal from the G-3 FTA, a separate trade
pact comprised of Colombia, Mexico, and Venezuela. Mexico was
the second largest Latin American buyer of non traditional
Venezuelan exports. END NOTE.)


11. (U) Manufacturers, agricultural-sector contacts, and
analysts concerned with the BRV's shift in trade policy
generally highlight two distinctions between trade with their
former partners in CAN and with their new partners in
MERCOSUR: complementarity and magnitude. Regarding
complementarity, analysts note that Venezuela's trade with
CAN countries (especially Colombia) consists of a relatively
diversified group of value-added products, mostly
manufactured and assembled goods. Porcarelli, for example,

states that 100-200 separate products account for roughly 75
percent of Venezuelan exports to Colombia; by comparison,
just ten Venezuelan products account for fully 80 percent of
its exports to the United States, and crude oil for roughly
50 percent of the total. Analysts fear that Venezuela is
exchanging a diversified export market in CAN for just
another oil destination in MERCOSUR and that doing so will
exacerbate an existing trend toward over-reliance on its
petroleum sector for economic output.


12. (U) With respect to magnitude, analysts most frequently
express concern with the relative size of the Brazilian and
Argentine economies -- five times and roughly equal to
Venezuela's, respectively -- and Venezuela's substantial and
growing trade deficit with MERCOSUR countries. Between 2000
and 2005 Venezuela's trade balance with MERCOSUR fell from a
slight surplus of roughly USD 200 million to a deficit of
nearly USD 2.5 billion. According to the Venezuelan
Association of Exporters, in 2005 Venezuela exported USD 240
million in goods and services to Brazil, while it imported
USD 2.4 billion; the analogous figures for Argentina were
exports of USD 140 million and imports of USD 507 million.
Opening Venezuela's doors to MERCOSUR, the most concerned of
local analysts fear, will eviscerate what remains of
Venezuela's domestic manufacturing and farming sectors and
transform the country into one that exports hydrocarbons and
imports just about everything else.

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IT'S ALL POLITICS
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13. (U) While such dire predictions are unlikely to be
realized, it is difficult to see Venezuela's divorce from the
CAN and marriage to MERCOSUR as economically advantageous for
the country. Local analysts and private sector contacts
generally agree that Chavez's play was purely political.
Chavez himself made clear that, in his view, Colombia's and
Peru's signing free trade agreements with the United States
made Venezuela's continued participation in the CAN
inconsistent with his Bolivarian revolution. And the timing
of Chavez's announcement to leave the pact -- in the middle
of Colombian and Peruvian presidential campaigns -- further
suggests that politics, not economics, drove his
decision-making. Commercial common sense would have
counseled Chavez to negotiate the terms of the separation
before, not after, terminating the Cartagena Agreement, in
order to ensure a smooth transition. Chavez clearly hoped
with the snap announcement to surprise his favored
candidates' opponents and signal to Colombian and Peruvian
voters that Presidents Alvaro Uribe's and (then candidate)
Alan Garcia's support for FTAs with the United States came
with consequences for their countries' relationships with the
BRV. Chavez lost his wager.


14. (U) But beyond snubbing the United States and its
regional free-trade allies, analysts argue that exchanging
the CAN's stronger institutional framework for MERCOSUR's
more embryonic one will enable Chavez to (1) deepen the BRV's
role in Venezuela's economy without running afoul of CAN
treaty obligations and (2) shape the development of MERCOSUR
and it's institutions to create a pact more to his liking.
On the first point, in a recent interview with a leading
Caracas daily, El Nacional, Italo Luongo, lawyer and
professor of political studies at the Central University of
Venezuela, argued that, in joining MERCOSUR, Chavez is
affirmatively seeking to undermine Venezuela's private sector
firms so that he can garner more political support for his

state-led Bolivarian economic model.


15. Regarding designs for MERCOSUR, Chavez has stated
repeatedly that he wants the pact to take on a stronger
political dimension, and following the formal adhesion
ceremony in July he stated that the organization's members
should someday integrate their armed forces. A possible
impediment to Chavez's grand vision for Mercosur is its
democracy clause, which calls for the expulsion of members
which adopt undemocratic practices. The Brazilian paper O
Globo argued in a recent editorial that Chavez's plans to
remain in power indefinitely through the "manipulation of
democratic instruments" directly conflicts with the democracy
clause.


16. (SBU) COMMENT: Leaving the CAN and joining MERCOSUR is
yet another BRV policy change that favors Chavez's political
ambitions but makes little economic sense. The worst fears
of Venezuela's manufacturers and farmers are, however,
unlikely to come to pass because, as happened with the CAN,
domestic politics and pragmatism will likely forestall the
BRV from eliminating tariffs on much intra-MERCOSUR trade.
At the same time, for all of its rhetoric to the contrary,
the BRV will likely eventually negotiate replacement trade
agreements with CAN members to maintain commercial links with
them. Nevertheless, the trade-law confusion created by the
move has added further murkiness to an already uncertain
business environment, negatively affecting private-sector
investment. Moreover, some local producers will no doubt
succumb to Brazilian and Argentine competitors.


17. (SBU) Such deleterious economic effects are a price
Chavez is clearly willing to pay to further his aims both at
home and abroad. Chavez will no longer need to contend with
CAN treaty obligations and institutions as the BRV
contemplates deepening "twenty-first century socialism" at
home, such as with the so-called "Anti-Monopoly" law now
coursing through the National Assembly. And MERCOSUR will
provide Chavez with a less developed, and therefore
potentially more malleable, regional integration vehicle.
Venezuela's private sector may suffer, but nobody ever said
the Bolivarian revolution would come cheap.

WHITAKER