URUGUAY'S FTA AT CROSSROADS WHILE VENEZUELA JOINS

C O N F I D E N T I A L MONTEVIDEO 000616

SIPDIS

SIPDIS

DEPT ALSO FOR A/S TSHANNON, WHA/BSC AND EB
DEPT PASS USTR FOR EEISSENSTAT AND MSULLIVAN
TREASURY FOR OASIA FOR DDOUGLAS
COMMERCE FOR ITAITA/MAC/WBASTIAN
NSC FOR DFISK AND DTOMLINSON
SOUTHCOM FOR POLAD

E.O. 12958: DECL: 07/05/2016
TAGS: PREL ETRD ECON PGOV AORC UY
SUBJECT: URUGUAY'S FTA AT CROSSROADS WHILE VENEZUELA JOINS
MERCOSUR

REF: A. MONTEVIDEO 0567


B. MONTEVIDEO 0555 AND PREVIOUS

Classified By: Charge D'Affaires Linda T. Gonzalez
for reasons 1.4 (B) and (D)


1. (C) Summary: President Vazquez is caught between wanting a
Free Trade Agreement (FTA) with us and Brazil's open
opposition to it. On June 23, Brazil's visiting Foreign
Minister explicitly warned the Uruguayans that an FTA with us
would be damaging to Mercosur and Uruguay. On June 26, GOU
and USTR officials met in Washington to give the GOU's trade
officials a clear understanding of the established
requirements included in a "gold standard" FTA with the U.S.
On July 4, Chavez hosted a big bash in Caracas to celebrate
Venezuela's full entry into Mercosur. Seven Mercosur and
Mercosur-associate Presidents attended. On July 20-21,
Mercosur will host a major summit in Cordoba, Argentina to
cement this process and to welcome Brazil's pro-tempore
presidency. It is rumored that Fidel Castro may attend. It is
likely that the issue of an FTA will surface at the Cordoba
Summit. At any rate, Vazquez will soon have to decide whether
to formally request an FTA with us because time is running
out. If he petitions Mercosur, he may resort to a legal
argument. The bloc's restrictions on individual member
states' negotiating trade preferences could violate Uruguay's
constitution. Vazquez is also bound to assert (ref A) that
Mercosur has not been working well for the small countries in
Mercosur. Most observers doubt that Uruguay would ever pull
out from the trading bloc because the political costs are too
high. Such a move would also be awkward for Mercosur,
especially since Venezuela has just joined. Below are some
recent developments regarding the state of play. End Summary.

Brazilian Formin Objects to FTA
--------------

2. (SBU) On June 23-24, Brazil's Foreign Minister Celso
Amorim visited Uruguay. Beginning with his press conference
upon arrival and at practically every turn thereafter, he
warned his hosts that an FTA with the U.S. would be damaging
to Mercosur and Uruguay. Recognizing the "great unrest among
the small countries" including, "asymmetries", intra-bloc
trade problems and the serious pulp mill dispute between
Uruguay and Argentina, he promised a "New Deal" rectify them
-- once Brazil assumes Mercosur's pro-tempore presidency.
"This is not a regular visit," Amorim declared during a press
conference. He said that, "Brazil believes that we win with
an architecture of preserving and strengthening South
American integration in a very tough, savage world of
economic blocs. It is obvious that sometimes we may obtain
advantages if we negotiate separately, but over the long term
we will all lose."

Negative Reactions
--------------

3. (C) Amorim may have overplayed his hand here, since
there's been considerable backlash to his statements by
opposition and business leaders in Uruguay. Blanco Senator
(and former Foreign Minister) Sergio Abreu bristled at
Amorim's remarks and characterized his "New Deal" offer as a
mere "espejito" (a little mirror) since no concrete offers
were produced. Among a litany of complaints, Abreu cited
Brazil's FTZ in Manaus, which exports more than fifty times
as much (US $20 billion) as does Uruguay. He also questioned
why Amorim "should ask us to comply with one percent of
Mercosur's requirements when 99 percent of them don't work.
Technically, Mercosur's decision 32/00 doesn't only apply to
negotiations for trade preferences outside the bloc. Other
Mercosur obligations are in the text that have not been
fulfilled." Several business leaders labeled Amorim's
statements "paternalistic and devoid of content". and
underscored the failings of the Common External Tariff (CET).
(Note: Of the USD 75-85 billion in imports, only USD 15
billion pay the relevant tariffs. End Note.) Among others.
Senator Carlos Baraibar called Amorim's statements an

"interference in Uruguay's domestic affairs." Mining
Director Luis Ferrari told A/DCM that "insult to injury was
added" when Amorim's economic team refused to discuss the
specifics of the proposed "New Deal" and talked about
football instead. Only Formin Gargano seemed pleased by
Amorim's remarks, while President Vazquez thus far has been
conspicuously silent.

Insiders say "Steady as She Goes"
--------------

4. (C) Charge also spoke to Industry Minister Jorge Lepra and
Econ Minister Danilo Astori regarding Amorim's remarks.
(Note: Astori -- the GOU's most visible proponent for an FTA
-- has lately been having a rough time dealing with domestic
opposition to his economic and fiscal policies --
particularly from the Communist-dominated labor unions. End
Note.) Both ministers indicated the President's continued
commitment to signing an FTA. Although they did not appear
privy to how Vazquez was actually going to achieve it, they
were confident in the President's and his capable Chief of
Staff Gonzalo Fernandez's abilities to manage the
international and domestic political challenges to an FTA.
Other GOU trade officials we spoke with also expressed
optimism on an FTA and opined that Venezuela's adhesion to
Mercosur was still fraught with legal questions and
considerable resentment.

Venezuela and Uruguay/Paraguay
--------------

5. (C) The signing of the protocol of adhesion for Venezuela
was supposed to have taken place during the July 20-21
Cordoba Summit, but was inexplicably moved up to July 4 in
Caracas. Embassy learned that in order to convince Uruguay
and Paraguay to accept Venezuela's entry into Mercosur,
Venezuela had promised both countries immediate duty-free
access on a long list of products. On June 30, Isabel
Masoller (protect) one of the vice-directors of the Trade
Advisory Directorate at the Ministry of Economy said she was
"furious" when she saw the final pared-down list, where key
products (including meat and dairy) had been removed.
Masoller described the negotiations as "indigno" (wretched)
and recommended that the GOU not sign the list. In another
area, we also learned from Uruguay's Ambassador to Venezuela
that Vazquez and Chavez discussed Venezuela's Conviasa
airline's buy-in of Uruguay's embattled Pluna airline. Since
Brazil's Varig (a major stake holder in Pluna) has been in
bankruptcy, the Pluna issue is of immediate, pressing concern
to the GOU. Pluna needs an estimated USD 20 million to stay
afloat. On the cocktail circuit a number of contacts stated
that Paraguay is making noises about Mercosur. However, some
newspapers here characterized Venezuela's entry into Mercosur
as a good thing based on open market access to more than
three-quarters of South America's GDP.

Meeting with Brazilian Ambassador
--------------

6. (C) On June 26, the Charge met with Brazil's Ambassador
Eduardo Dos Santos at his request. Dos Santos was obviously
very curious about what was going on between GOU and USTR
officials in Washington on that day. The Charge offered him
something like the anodyne, "Today we met under the mandate
of Presidents Bush and Vazquez to continue to explore ways to
deepen our trading relationship under the auspices of the
U.S.-Uruguay Joint Commission on Trade and Investment (JCTI).
The meetings were productive and informative. We look forward
to additional discussions in the future." But Dos Santos
came on strong, and said, "Celso Amorim wanted to be very
clear. An FTA with the U.S. is incompatible with Mercosur,
for structural and architectural reasons. We'll support
Uruguay in whatever it decides, but we wanted to be very
clear." Charge asked the Ambassador about other of Amorim's
comments, including that an FTA with the U.S. would "injure"
Uruguay, but he said "no" and that a lot of things had been
reported out of context.



7. (C) Ambassador Dos Santos continued that Celso Amorim had
met with Vazquez and most of his cabinet and he claimed that
there was "unanimity and that nobody was in favor of an FTA."
He said that Vazquez said that President Bush offered him
one, but that he replied "no", that Uruguay just wanted to
deepen trade. The Ambassador persisted about what was going
on in Washington, to which the Charge replied, that no one in
Washington has any intention of breaking up Mercosur, and
that the U.S.-Brazil relationship is very important. Dos
Santos said the proper channel to discuss an FTA was the 4 1
mechanism, to which the charge responded, "You mean the 5 1
mechanism." Dos Santos admitted that this would soon be the
case.

Comment:
--------------

8. (C) Over time, Venezuela's membership in Mercosur is
likely to change the nature of this customs union into
something much more political. We understand that Venezuela
now has the power to veto an FTA. While Uruguay urgently
needs an FTA with us, we doubt it would ever leave Mercosur
in order to achieve this objective. Vazquez is not as
combative as Evo Morales in standing up to Brazil and
Argentina. It would also be technically difficult for
Uruguay to downgrade its Mercosur membership to associate
status. However, Uruguay may choose to highlight Brazil's
2002 trade deal with Mexico, which was negotiated outside the
Mercosur bloc and resulted in lower tariffs on some goods.
It could also argue that Mercosur rules restricting "foreign
negotiations" is illegal under Uruguay's (and Brazil's)
constitution. Most likely, Vazquez will justly complain that
Mercosur has been a raw deal for Uruguay and has not been
acting as a real customs union; therefore it needs an FTA to
compensate for its losses. How Brazil, Venezuela and
Argentina will react to Uruguay's arguments is another
matter. Nevertheless, Vazquez insiders continue to assure us
that he has already thought all of this out. End Comment.
Gonzalez