ANOTHER MERCOSUR SUMMIT WITH FEW CONCRETE RESULTS

C O N F I D E N T I A L ASUNCION 000596

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E.O. 12958: DECL: 07/07/2027
TAGS: ECON ETRD PA PGOV PREL
SUBJECT: ANOTHER MERCOSUR SUMMIT WITH FEW CONCRETE RESULTS

REF: A. A) FBIS DOCUMENT LAP20070629055004


B. B) ASUNCION 77

Classified By: A/DCM Bruce Kleiner; Reasons 1.4(b),(d)


1. (C) SUMMARY: Paraguay hosted the 33rd Mercosur Summit on
June 29 and passed the rotating Mercosur Presidency to
Uruguay. Six regional presidents attended from Brazil,
Argentina, Uruguay, Bolivia, Ecuador and Chile and endorsed a
38-point Declaration offering form but little substance.
Venezuela's President Chavez declined to attend as he had a
prior commitment in Iran and sent Vice President Jorge
Rodriquez in his stead. President Chavez's absence made the
Summit less of a spectacle than in the past, although
peripheral events made the Summit more interesting.
Paraguay's bilateral meetings with Brazil and Argentina
yielded agreements on a tax regime and dam cooperation. An
alternate "Summit" attended by 1,500 individuals calling
economic reform, comments by opposition presidential
candidate Fernando Lugo in Spain, and a gaffe by President
Duarte added to the intrigue. END SUMMARY.

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WHAT THE PRESIDENTS SAID
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2. (U) The Summit participants emphasized a wide range of
issues in their formal remarks. Paraguay's President Duarte
spoke about the importance of strengthening and consolidating
Mercosur despite its many critics. He emphasized the
importance of reducing barriers to the free flow of goods and
people within the bloc and expressed support for greater
energy integration. Uruguay's President, Tabare Vazquez,
announced that the free circulation of goods and people as
well as the reduction in assymetries within the bloc would be
Uruguay's priorities during its term as Mercosur President.
President Lula admitted that Mercosur had not met founding
members' expectations and lent support to efforts to address
assymetries among members. He also urged members to embrace
biofuels. President Kirchner of Argentina emphasized energy
cooperation in the face of recurring crises. He acknowledged
economic differences among members but noted that large
discrepancies also exist internally within member states.


4. (U) Chile's President Bachelet spoke to the importance of
addressing climate change within Mercosur as well as
encouraging sustainable forestry. Ecuador's President Correa
urged the creation of a Monetary Fund of the South that would
pool the foreign reserves of South American countries with
the eventual goal of moving toward a single currency and
mitigating the need to rely on international financial
institutions in times of crisis. He also emphasized the
importance of the creation of Banco del Sur. Bolivia's
President Morales challenged Mercosur to concentrate on
social issues and -- without naming names but clearly
referring to Brazil and Venezuela -- called for nations in
the region to lay aside their differences and avoid competing
for regional hegemony. President Morales also called for
greater regional energy cooperation. Venezuelan Vice
President Rodriguez urged members to deemphasize commercial
issues and focus more attention on poverty reduction,
sovereignty, and the rightful possession of natural resources
by the people.

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THE OUTCOMES
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5. (U) The Mercosur Summit Declaration (Ref A) offers 38
points ranging from human rights to energy. Few, however,
relate to economic issues. Paraguay benefited from the
extension until 2022 of a 40 per cent Mercosur content
requirement for products sold as internal goods within the
bloc. Products produced in Brazil and Argentina must use at
least 60 per cent Mercosur content to qualify as internal
goods, encouraging them to import content from smaller,
less-developed members such as Paraguay. The Common Market
Committee agreed to come up with a plan by January 2008 to
improve the free flow of goods between members. The members
agreed to establish a fund to aid small- and medium-sized
enterprises (PYME),which should benefit Paraguayan
businesses. The Declaration acknowledged structural
differences and committed the Mercosur to focusing further on
increasing market access for goods produced by Paraguay.
Paraguay could potentially benefit from members' commitment
to energy integration as it seeks to capitalize on its
potential biofuel -- sugar-based ethanol and biodiesel --
capacity. Finally, the Declaration formally thanked Paraguay
for hosting the Summit.

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AGREEMENT ON TRI-BORDER TAX REGIME
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6. (U) During the Summit, Brazil and Paraguay held a
concurrent bilateral meeting and reached agreement on a new
tax regime that would apply a 25 per cent tax rate to the
so-called "sacoleiros" who earn their living transporting,
often by foot, merchandise purchased in Ciudad del Este
(CDE),Paraguay across the Friendship Bridge to Foz do
Iguazu, Brazil. A tax agreement has been a high priority for
Paraguay as a way of increasing tax revenues and formalizing
the informal work force that facilitates much of the commerce
between the two cities. The tax regime will go into affect
once ratified by both countries. Paraguay preferred a tax
rate closer to 18 per cent, but Brazil insisted on a rate
just over 50 per cent. The two countries compromised at the
25 per cent level, a level acceptable to the Paraguayans but
possibly too high to encourage "sacoleiros" to register and
pay the tax. Astrid Weiler, former Director of Intellectual
Property and now an advisor to the Tax Adminitration on CDE
formalization efforts, told EconOff that time would tell
whether the new rate leads to the desired outcome. The GOP
had estimated that a rate over 22 percent would render the
legal route uncompetitive, but Weiler stated that the proof
would be in the number of individuals who choose to sign up
if the plan is implemented. The biggest hurdle will be
ratification of the agreement by Brazil's Congress. The
agreement partially fulfills a commitment made by President
Lula during his official visit to Paraguay in May.
Paraguay's Foreign Minister told the press that President
Lula had also promised to negotiate special state tax rates
within Brazil, since it would be considered a federal tax in
Brazil.

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TECHNICAL LEVEL REACTION -- NOT MUCH PROGRESS
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7. (C) EconOff met with several Ministry of Foreign Affairs
(MFA) officials, including Didier Olmedo, the MFA's
Director-General of Economic Policy and the GOP's chief
technical-level coordinator of Mercosur issues. Olmedo
repeated negative sentiments expressed in reftel with respect
to Venezuela, which MFA officials see as aspiring to first
achieve membership to the club without first negotiating the
terms. They complained that Venezuela has rejected the base
agreements underlying Mercosur and has refused to name
specific tariff lines they would adjust each year as part of
Mercosur's entry process. For these MFA officials, Mercosur
wold be better off if Venezuela were to withdraw its request
for full membership as Chavez threatened while visiting Iran.


8. (C) Olmedo and his advisor, former Vice Minister of
Industry Raul Cano, also a career diplomat, expressed
pessimism about the outcomes of the Summit. They
acknowledged the diffuse nature of the Summit's declaration
and the lack of tangible progress towards a freer flow of
goods within the bloc, Paraguay's first priority. The
extension of the forty percent rule until 2022 is positive,
but it is not enough to attract investment to Paraguay if
investors face uncertainty about what sorts of obstructions
and non-tariff trade barriers they will face if exporting to
Brazil or Argentina.


9. (C) Olmedo commented that Brazil was "against the ropes"
in the meeting of the Common Market Committee, since all the
founding members of Mercosur have complained about Brazilian
protectionism. Another sore spot is Brazil's aggressive use
of what Paraguay considers unfair incentives to attract
investment. One example is the free trade zone in Manaus.
Cano claimed that goods effectively subsidized with tax
breaks enter Manaus or are produced there but end up in other
Mercosur countries, while Brazil makes it difficult for goods
to flow the other way. Olmedo enjoyed a comment made by
Uruguayan Finance Minister Astori in the meetings in which he
reportedly told his Brazilian counterpart that if Brazil
insisted on non-conforming flexibility, then Uruguay would
also pursue its own flexibilities with respect to trade
agreements outside the bloc.


10. (C) In a separate meeting, Vice Minister of Commerce
Guillermo Alcaraz expressed similar skepticism about the
outcomes and the chance that Brazil's bureaucracy will act on
President Lula's conciliatory words about greater
integration. On the bilateral agreement with Brazil aimed at
creating a special regime for the "sacoleiros," Alcaraz
suggested that the Federation of Industries of the State of
Sao Paulo (FIESP),a powerful commercial assocation, would
successfully fight attempts to improve access to Brazil's
market. Alcaraz also admitted that no funds from the
Mercosur Structural Convergence Fund (FOCEM) had made it to
Paraguay to date, but he was optimistic that Paraguay would
see part of the promised assistance by year end.

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THE ALTERNATIVE SUMMIT
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11. (U) A small alternative summit took place near the venue
of the Mercosur Summit with the reported participation of
about 1,500 individuals. The "Summit of the Peoples of the
South" called for the renegotiation of the bilateral
agreements for the Itaipu (shared with Brazil) and Yacyreta
(shared with Argentina) hydroelectric plants. The group also
called for greater equity for rural farmers displaced by
large agro-industrial operations, particularly those related
to soy cultivation. At one point, a group reported to number
about 500 caused some disturbances with police as they tried
to approach the Mercosur Summit venue.

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A NEW DAM?
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12. (U) Press reports indicated that Presidents Duarte and
Kirchner agreed during the Summit to work toward completion
by the end of 2008 of the complimentary works needed to raise
the reservoir level of the existing Yacyreta dam (and thus
increase its energy output by about a third). They also
agreed to begin work on a third major bi-national dam
commonly known as Corpus that would be located on the Parana
River upstream from Yacyreta but downstream from the Itaipu
Dam shared with Brazil. The new dam would reportedly cost
USD 4.5 billion and would be financed by Argentina.

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PRESIDENTIAL CANDIDATE LUGO'S ROLE MODELS
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13. (U) The press reported comments made on June 29 by
presidential candidate Fernando Lugo in Spain expressing his
admiration for the presidents of Venezuela, Bolivia, and
Ecuador for their courage to "make breaks with the past."
Lugo said he believes Paraguay needs a break with the past as
well, but in its own way and without copying the experiences
of others. Lugo has proven reluctant or unable to articulate
a policy platform, preferring instead to say that he is
"listening to the people" while on a tour that took him to
the United States, Argentina, and Spain.

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A SMALL GAFFE?
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14. (U) The press highlighted a comment in Guarani made by
President Duarte while President Bachelet spoke about the
importance of addressing global warming. He reportedly
commented to his Agriculture Minister that she was "speaking
nonsense" but didn't realize there was an open microphone
nearby. The Foreign Ministry issued a clarification and
contacted the Chilean Ambassador claiming that Duarte was
referring to something the Agriculture Minister had said
about the Alternative Summit participants.

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COMMENT
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15. (C) The Summit yielded few tangible outcomes, although
the Declaration and bilateral meetings offered Paraguay
potential economic benefits. The concerns expressed by MFA
officials are valid, because the benefits depend on whether
Brazil, Argentina, and Mercosur fulfill their commitments.
Paraguay has had a difficult time getting positive results
from Mercosur, largely as a result of insufficient access to
Brazilian markets. However, the country continues to remain
in the bloc and seek any benefit it can. The tax agreement
with Brazil for a 25 per cent levy on the sacoleiros is a
positive step, but the regime must still be approved by the
two countries and demonstrate that it can adequately regulate
the informal Triborder economy. Paraguay and Argentina's
agreement to cooperate further on dams could also benefit the
country through additional electricity and revenue
generation. Mercosur's acknowledgement of economic
disparities between members could aid Paraguay in the long
run, although future summits would first need to address
these disparities. The country demonstrated its ability to
coordinate a major event. If nothing else, Paraguay's status
as host directly benefited the local economy and helped
improve its standing in Mercosur.
CASON