HOW MERCOSUR HAS CHANGED

RR RUEHWEB

DE RUEHMN #1097/01 3201331
ZNY CCCCC ZZH
R 161331Z NOV 06
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 6543
INFO RUCNMER/MERCOSUR COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 0459
RUEHLP/AMEMBASSY LA PAZ NOV SANTIAGO 2938
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
,C O N F I D E N T I A L MONTEVIDEO 001097

SIPDIS

SIPDIS

STATE FOR WHA/BSC AND EB/TPP
DEPT PASS USTR
TREASURY FOR OASIA FOR HOEK
COMMERCE FOR ITA/MAC/BASTIAN
NSC FOR FISK AND CARDENAS
SOUTHCOM FOR POLAD

E.O. 12958: DECL: 11/16/2016
TAGS: ETRD ECON PREL AORC SOCI UY
SUBJECT: HOW MERCOSUR HAS CHANGED

REF: A. MONTEVIDEO 567

B. MONTEVIDEO 465

C. MONTEVIDEO 448

D. MONTEVIDEO 254

Classified By: James D. Nealon, Charge d'Affaires, for reasons
1.4 (b) and (d).


1. (C) Summary and Introduction: This telegram contains a
healthy dose of subjective analysis designed to stimulate
constructive debate on an issue of regional importance. The
Embassy is keenly interested in Mercosur, not only because
its headquarters are located here, but also because we have
detected a growing impact on Uruguay by that organization.
Over the past couple of years, Mercosur has evolved from a
benign trading bloc into a political union with a robust
foreign policy agenda. More often than not, this agenda has
clashed with some USG objectives -- particularly since
Venezuela became its fifth member. A prime example of
Mercosur's politicization was manifested by its unflinching
support for Venezuela's bid for a semi-permanent seat on the
UNSC. Earlier examples include Mercosur's anti-FTAA posture
at the Summit of the Americas in Mar del Plata and the 2005
accord binding members not to sign Article 98 agreements with
the U.S. The unpredictability of two Mercosur leaders
(Argentina's Nestor Kirchner and Venezuela's Hugo Chavez)
have further complicated Mercosur politics. There's been
recent talk about bringing Bolivia into the bloc, adding the
fiery Evo Morales into the Mercosur mix. We note that
Mercosur fully intends to install a functioning Parliament at
Montevideo in March 2007.


2. (C) While Mercosur's exterior veneer portrays an image of
tight cohesion on political integration and foreign policy,
severe disputes and backstabbing frequently occur behind the
scenes. In particular, Uruguay has been the victim of
Mercosur's lack of solidarity. The bitter pulp mill dispute
with Argentina, in which the GOA has used perceived dirty
tactics to pummel the GOU into submission, and the manifest
lack of interest on the part of Brazil have elicited comments
here such as, ""with friends like this, who needs enemies?""
It is also widely believed here that both Brazil and
Argentina vetoed Uruguay's hope as the compromise candidate
for the Latin American UNSC seat. Neither Chavez nor Lula
showed up at the recent Ibero-American Summit in Montevideo
#¿NOMBRE?
Kirchner did a fly-by appearance and did not meet with
President Vazquez. Our GOU contacts, including Presidential
Chief of Staff Gonzalo Fernandez, have shared with us
Vazquez's frustration about Argentine and Brazilian
resistance to Uruguayan efforts to negotiate an FTA with the
U.S. Our MFA contacts increasingly answer our demarches with
what they say is ""the Mercosur position.""


3. (C) Finally, Mercosur's trade agenda can be assessed as
little more than a failure. The 4 1 process with the U.S. is
all but dead. (In any case, should it now be called 5 1, with
the addition of Venezuela?) Trade talks with the EU are also
at a standstill, and all that Mercosur has been able to
accomplish of late are modest South-South framework
agreements. A Common External Tariff (CET) with more ""holes""
than substance and the increased propensity of Argentina,
Brazil and Venezuela to deal bilaterally without consulting
their smaller partners are further evidence of Mercosur's
unsatisfactory trade policy. In light of these developments,
a re-examination of our overall relationship with Mercosur
may be warranted. End Summary and Introduction.

A strengthened political footprint
--------------


4. (C) The entry of Venezuela has clearly altered the power
balance and dynamics within Mercosur. A prime example was
Mercosur's unflinching support for Venezuela's UNSC seat bid.
For more than 50 successive votes, Mercosur members
continued to support Venezuela's candidacy. Mercosur
solidarity held fast...to a point. When Uruguay was
mentioned as a possible compromise candidate, Argentina is
said to have vetoed the move and Brazil was reportedly not
supportive. In recent months, we have also noted a distinct
tendency for our MFA colleagues to emphasize that the GOU's
foreign policy is being coordinated with Mercosur. FM Gargano
is sycophantic to Venezuela and publicly took credit for
fast-tracking Venezuela into Mercosur.

5. (C) It is widely believed that the GOB's strategy for
embracing Venezuela into Mercosur was that Chavez could
better be controlled from within the organization than if
left to his own devices on the outside. It appears, however,
that Chavez has proved to be more difficult to contain than
originally thought. He has openly challenged the Brazilians
by supporting and allegedly encouraging Evo Morales's move to
grab Petrobras' assets in Bolivia, and has frequently stolen
the stage at Mercosur from Brazil's President Lula.


6. (C) While Lula is widely perceived to have lost some
regional leadership to Chavez, it is unclear whether this
will continue to be the case after Lula was re-elected with a
robust margin. It also remains to be seen if the
relationship between Lula and Chavez will be one of
competition for leadership or if we will see the emergence of
another bilateral axis similar to the one between Argentina
and Brazil. Who will lead Mercosur is open to question.
Brazil's pro tempore presidency, ending in December, has been
characterized by inaction, as was expected (ref A). The GOB
consistently avoided mediation or to even express an opinion
in the divisive pulp mill dispute between Argentina and
Uruguay. Chief of Staff Fernandez told Charge that Lula
missed the Summit in part so he would not have to show his
cards on the papermill issue. Brazil recently proposed a
postponement of the Mercosur Summit scheduled for December 15
in Brasilia until January 2007. This delay is read in Uruguay
as a way for the GOB to come up with face-saving devices in
order to counter the perceptions of a lack of progress on
economic integration during Brazil's presidency.


7. (C) Political integration continues apace, however. On
November 1, as a prelude to the Ibero-American Summit,
Uruguay became the first Mercosur country to ratify
Venezuela's entry into the bloc, when the lower House
ratified the protocol of admission in a special emergency
session at 3:00 a.m. The opposition complained that the
motion had been rammed through the House without adequate
consideration in Commission. The opposition later had a
field day ridiculing the Frente Amplio's ""servile act"", when
Chavez failed to show up at the Ibero-American Summit in
Montevideo to receive this ""gift"" (Chavez sent $20 million
funding for a public hospital as a consolation prize.)


8. (C) The Mercosur Parliament will be launched in March 2007
in Montevideo and is expected to meet on a monthly basis.
Until 2010, it will be composed of 18 members per country
chosen by national parliaments. Starting in 2011, members
will be popularly elected within each country and
representation will be proportional, with criteria still to
be determined. While the Mercosur Parliament's authority is
still unclear, its creation is definitely a first step
towards political integration for Mercosur members and is
likely to facilitate common policies on external affairs.
The Parliament's authority is likely to be limited at first,
given that both Brazil and Uruguay require constitutional
amendments to permit for supranationality.


9. (C) Other political initiatives have emerged. A Mercosur
Social Institute and a Democracy Observatory were created at
the Cordoba Summit in July 2006. A presidential declaration
signed in Asuncion in June 2005 exhorted all Mercosur members
not to sign any agreements susceptible to affect the
jurisdiction of the International Crimminal Court (ICC),in
effect prohibiting them from signing Article 98 agreements
with the U.S. As for political propaganda, Chavez's Telesur
TV channel is already broadcasting in Uruguay. As for
Chavez's calls for a Mercosur common defense policy and joint
military forces, we had presumed they were going nowhere, but
press reports on Lula's recent visit to Caracas indicate
that he may now support Chavez's idea.

Economic integration takes a back seat
--------------


10. (C) Meanwhile, economic integration has taken a back
seat. What we are seeing is increased bilateralism by the
larger members at the expense of smaller countries. The
Competitive Adaptation Mechanism (or MAC, for its Spanish
acronym) between Argentina and Brazil, for example, was
perceived in Uruguay as a significant move backwards for
economic integration. Approved in January 2006, this
bilateral safeguard mechanism is viewed by the GOU and the
Uruguayan private sector as inconsistent with Mercosur rules.


11. (C) Mercosur's Technical Secretariat had always been the
GOU's pet project and its creation in ex-Foreign Minister
Didier Opperti's times had been trumpeted as an Uruguayan
success. According to our contacts within the Secretariat,
their relationship with the foreign and trade ministries of
Argentina and Brazil have become increasingly tense. They
say they are being sidelined and their reports are
increasingly being tagged as restricted or confidential, so
as to avoid wide diffusion. They also note that the
elimination of adequate independent technical studies would
leave the larger countries -which can allot more resources to
Mercosur- in a relatively much stronger position vis--vis
the smaller ones.


12. (C) While the lowering of trade barriers was the original
justification for Mercosur's existence, the Common External
Tariff (CET) is still far from being a reality. In fact, it
can be argued that the numerous exceptions make for a much
larger hole than the CET itself (the hole is so massive that
the ""doughnut"" itself is practically non-existent). Only
about $30 billion of the $80 billion of extra-zone imports
are subject to the CET (or 38% of the total),and only $8
billion (or 10% of total imports) actually pay effective
duties within the CET. That is to say that 62% of all
extra-zone imports are exempted from the CET, either through
national or sectoral exceptions, or in their majority through
special processing zones, such as the Manaus Free Trade Zone
in Brazil or the Tierra de Fuego FTZ in Argentina. In
addition, 22% of extra-zone imports enjoy a zero tariff.
These figures illustrate the fallacy of the oft-stated
argument (in particular from the Brazilian Foreign Ministry)
that an FTA between Uruguay and the U.S. would have been
incompatible with the CET. This reluctance to allow Uruguay
some leeway in its trade talks with the U.S. was one of the
reasons for the GOU's excruciating search for an acceptable
name to give to what would essentially have been an FTA.


13. (C) Mercosur itself has lost relevance as an export
market for its members. Intra-bloc exports amount to $20
billion, up from their 2002 low of $10 billion, but down
significantly as a percentage of total trade. Exports to
Mercosur as a percentage of total exports dropped from 34% in
1998 to 13% in 2002, accounting for just about 14% in 2005.
The need for individual members -in particular the smaller
countries- to open up to the rest of the world through
bilateral trade agreements has become increasingly acute. In
this sense, Uruguay has led the way. It is the only Mercosur
member to have negotiated a full-fledged FTA with Mexico, as
a result of a Mercosur framework agreement with Mexico.


14. (C) Intra-zone trade flows never were positive for
Uruguay. Even at the best of times, when Mercosur absorbed
about half of its exports, Uruguay had a trade deficit with
the bloc. In fact, both Uruguay and Paraguay have suffered
chronic trade deficits with Mercosur. Mercosur now absorbs
only about a quarter of Uruguay's exports, about the same
amount as NAFTA does. The trend is clearly for a growing
share of Uruguay's trade going extra-zone, but the GOU fears
that its competitive advantages with the U.S. will be eroded
by our FTAs with the rest of the hemisphere. For the GOU, it
only makes sense to join the FTA bandwagon, and a solid
majority of the population would approve of an FTA with the
U.S., according to the latest surveys (54 percent in favor,
14 percent opposed.)

An unsuccessful and confused trade policy
--------------

15. (C) Venezuela's full membership in Mercosur is likely to
hamper the bloc's ability to negotiate trade deals. It also
makes it very difficult for the U.S. to re-initiate the
moribund 4 1 dialogue, as a 5 1 with Venezuela appears highly
unlikely and has already complicated negotiations with the
EU. The latest technical meeting between Mercosur and the EU
on November 6-8 ended up in an impasse. Meanwhile, Venezuela
is moving ahead with ALBA, its alternative to the FTAA.
ALBA's members are so far Bolivia, Venezuela and Cuba, which
act in coordinated fashion in ALADI.


16. (C) Mercosur's rigid positions, dictated mostly from the
Brazilian Foreign Ministry, have prevented the bloc from
reaching agreements with the developed markets of the U.S.
and the EU. All that Mercosur has been able to accomplish
over the past 2-3 years are South-South agreements, with
Egypt, Morocco, India, Pakistan and South Africa (Israel
being the exception). Though these initiatives would appear
to indicate an active trade policy, they are mostly
lightweight framework agreements, which reflect mostly
Brazil's interests rather than those of the trade bloc as a
whole.


17. (C) While Mercosur did negotiate some broader free trade
agreements, these generally pre-dated the ""new"" Mercosur that
is now emerging. Mercosur negotiated FTAs with Chile and
Bolivia in 1996 and 1997 and set up an umbrella covering a
net of bilateral agreements between individual members of
Mercosur and the Andean Community (CAN). In these
negotiations with the Andean Community, Mercosur gave up much
more in terms of duty-free access than CAN did in return.
Brazil appears to have been the most generous and Argentina
the most protectionist. These inter-connected agreements
between CAN and Mercosur could result in a South American FTA
by 2015, if ALADI's schedules are not modified or delayed
(modifications and delays are likely, though, given
Mercosur's record on exceptions, ""adjustment mechanisms"", and
the like.)

Comment: Review USG policy towards Mercosur?
--------------

18. (C) The increased politicization of Mercosur, its many
initiatives opposed to USG interests and its changing
composition (now including Venezuela and perhaps soon
Bolivia) argue in favor of a review of our policy towards the
bloc. At the very least, the recent developments merit
increased awareness of Mercosur's evolution and intentions.
It is clearly not the same benign trading zone it was just a
few years ago, and its leadership appears increasingly at
odds with US interests. Among the issues to keep an eye on:
To what extent does Brazil still call the shots in Mercosur
and how much influence does Chavez exert on Mercosur
policy-making? Embassy welcomes input on these subjects from
the Department and relevant posts in the region. End Comment.
Nealon