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 This message is sensitive but unclassified. Please treat accordingly. ¶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. -------------- -------------- LEAVING THE CAN CREATES LEGAL LIMBO FOR VENEZUELAN TRADE -------------- -------------- ¶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 �0A;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. -------------- MERCOSUR: VENEZUELA'S OIL-FOR-FOOD PROGRAM? -------------- ¶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. -------------- IT'S ALL POLITICS -------------- ¶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