BRAZIL: INTEGRATION A/S CARDOSO ON MERCOSUL

UNCLAS SECTION 01 OF 03 BRASILIA 002243

SIPDIS

DEPT PASS USTR FOR KATE DUCKWORTH
DEPT PASS DOC/ITA/MAC/WH/OLAC ANNE DRISCOLL
DEPT PASS TREASURY IA LUYEN TRAN

SENSITIVE
SIPDIS

E.O. 12958:N/A
TAGS: ECON ETRD EINV EFIN PREL BR
SUBJECT: BRAZIL: INTEGRATION A/S CARDOSO ON MERCOSUL

Ref a) Brasilia 2174 b) Brasilia 2177


1. (SBU) SUMMARY: MRE A/S for Integration Afonso Cardoso stressed
the political importance of Mercosul for Brazil as a unifying force
for economic development in a recent meeting with EconCouns.
Cardoso underlined his views on Mercosul's strengths, highlighted
recent integration decisions he felt would have important political
and economic implications in the region, and reviewed on-going
internal and regional Mercosul progress on trade issues. Cardoso
stressed Mercosul had taught national companies how to compete
globally, had helped the region acknowledge and address development
disparities, was creating mechanisms to enhance political buy-in for
economic integration, and fundamentally provided motivation for its
members to work together rather than at cross-purposes. END
SUMMARY


2. (U) Afonso Cardoso is the Director of the Integration Department
(A/S equivalent) at MRE, reporting to U/S for South America Enio
Cordeiro. Cardoso expects to take up his new duties as Ambassador
to Angola in January. With his departure, MRE is splitting his
Integration Department, which is responsible for Mercosul, into two
Departments. The Internal Integration Department, headed by former
DCM to Argentina Bruno Bath, is to be responsible for the "internal
everyday life" of Mercosul (the various internal working groups and
committees). The External Integration Department, led by Paulo
Franca coming from UNESCO Paris, is to be responsible for ALADI
negotiations as well as Mercosul negotiations in the region, such
as with Mexico and Central America (NOTE: see ref a regarding
responsibility for Mercosul negotiations outside South America).
Both new Department heads have previously served in the Integration
Department.

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Mercosul
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3. (SBU) The ultimate objective of Mercosul, stated Cardoso, is not
simply to create a strong customs union among Mercosul members.
Mercosul countries aim to solidify their position internationally
and become more effective as a united group voice. He asserted that
Mercosul is both a Customs Union and a Free Trade Area. He
acknowledged exceptions to the CXT, but said they were few and that
Uruguay and Paraguay had more than Argentina and Brazil. Cardoso
claimed that the "only areas where trade is not completely free
among us is sugar and automotive." He said auto sector is now
covered by a series of bilateral agreements between individual
Mercosul members. Member countries are currently working on a
Mercosul Automotive Policy to liberalize intra-Mercosul trade, which
Cardoso was "confident" would be agreed in 2008. On sugar, "even
our Mercosul partners are afraid of us," joked Cardoso. However, he
added, ethanol is beginning to change the equation as other Mercosul
members begin to produce more of the biofuel, an evolution Brazil
welcomes. Cardoso said Brazil hopes, as a result, other Mercosul
members' protectionism against its commodity sugar will decrease
over time.


4. (U) He emphasized that Mercosul had provided a space and an
opportunity for companies in the region to have a first taste of
expanding beyond their own borders, learning to become
multinationals instead of national companies and developing
strategies to expand globally. Cardoso underlined that Mercosul had
helped its economic actors learn regionally in order to qualify
themselves to act internationally. Cardoso emphasized both the
political and economic significance of this development as Brazilian
and partners companies become important players in the global
economy.

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Moving Toward Integration: Mercosul Structural Convergence Fund and
Parliament
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5. (U) Until 2003, Mercosul members did not discuss development
assymetries among themselves, according to Cardoso. From 2003 on,
the four agreed that if they wanted to achieve real integration, not
just trading relationships, assymetries would need to be recognized
and addressed. Cardoso characterized the establishment of the
Mercosul Structural Convergence Fund in 2006 as "a turning point;"

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the first time developing countries created a financing mechanism by
themselves and for themselves. Cardoso stressed that the political
decision actually to acknowledge asymmetric development among
Mercosul members had enormous implications in helping the four
countries work more effectively together politically and
economically. Cardoso emphasized that countering limitations to
further integration caused by fears that Paraguay and Uruguay could
not keep pace was in Brazil and Argentina's interest as well as that
of the smaller countries. The Fund's annual endowment is 100
million dollars (the lion's share from Brazil and Argentina and
symbolic contributions from Uruguay and Paraguay; disbursements are
in inverse proportion) to finance regional projects. The fund is
also intended to finance national projects to improve physical and
social infrastructure. For example, the fund is being used to
combat Foot and Mouth Disease in the region and has, per Cardoso,
funded a waste management project as well as a road repair project
in Uruguay. All projects must be approved by all four governments.



6. (SBU) Cardoso felt that the decision to create a Mercosul
Parliament in 2010 would also eventually be significant in
Mercosul's evolution. While details remain in negotiation (number
of seats per country, etc),Cardoso felt the symbolic and,
eventually, political impact of a Congress directly elected by the
citizens of the region had enormous long-term implications for
regional integration. The Parliament would be "extremely important
to create a political legitimacy for economic integration issues."
Cardoso added he did not mean in the next two or three years, "more
like twenty years."


7. (U) Finally, Cardoso noted that Brazilian and Argentinean
agreement to move toward settling accounts in local currencies was
an important integration step that one day could be expanded to
include Paraguay and Uruguay when their Central Banks are in a
position to participate.

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Mercosul Internal Work
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8. (SBU) Cardoso commented that "it can be daunting to keep track"
of all the work within Mercosul to ensure progress is made. Cardoso
said members discuss moving toward common SPS and TBT standards,
"but progress is tough." He added members are also working on
Mutual Recognition Agreements (MRAs),"which are easier." He said
Brazil's standards body IMMETRO is developing an inventory of
standards to work on with Argentina and Uruguay. With Paraguay, he
said, work is more concentrated on helping that country develop
standards competency; MRAs would be for a later stage. On
investment, there is "lots of talk, little progress." Mercosul has
an agreed services protocol, and in the near future, Cardoso
expected Mercosul would conclude its first external agreement on
services, with Chile.

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FTAs, ALADI, ASSOCIATE MEMBERS, NEW MEMBERS
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9. (SBU) Cardoso asserted that Brazil can no longer negotiate
bilateral FTAs; new FTAs must be negotiated via Mercosul. Cardoso
affirmed that Brazil is pursuing starting FTA negotiations with
Mexico (ref B). Mercosul has put forward a request to negotiate,
but Mexico has not as yet affirmed willingness to engage, according
to Cardoso. He noted that Mexico already has much more ambitious
bilateral market access agreements with Argentina, Paraguay and
Uruguay than with Brazil (Brazil's agreement only addresses the auto
sector). He predicted that Mexico's fear of Brazil's agro-business
sector will be the main difficulty in convincing Mexico to negotiate
with Brazil. "Mexico tells us, 'one United States is enough for
us.'"


10. (U) He noted that individual Mercosul members also have many
bilateral ALADI agreements with countries outside Mercosul. These
agreements predate Mercosul's creation. Cardoso explained that all
ALADI countries that have established FTAs with Mercosul (Chile,
Bolivia and the Andeans) became Mercosul associate members. These
associate members are permitted to participate in non-trade
discussions (for example, on health and social issues. Cardoso

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commented that Chile and Bolivia participate quite a bit).
Associate members may not participate in or observe trade
negotiations. Cardoso explained that proposed new members, pending
ratification (Venezuela),can participate in trade and other
negotiating sessions, but have "voice but no vote."


11. (SBU) COMMENT: Cardoso provided a thoughtful perspective on
Mercosul at the end of his tour as Department Director. By
definition, Cardoso's job obligations require staunch assertions
that the CXT and free trade area within Mercosul function well and
with only very limited exceptions. The realities of Mercosul's
significant weaknesses by accepted definitions of a customs union
tell a different story. The more interesting facet of the
conversation was Cardoso's emphasis on how the political and the
economic are inextricably linked in thinking about Mercosul,
something we have heard from diplomats at all levels in Itamaraty.
For Brazil, the creation of a forum that encourages these four
countries to talk together and to work together is crucial for
creating the political conditions that make economic integration and
development possible. With a keen appreciation of the political
usefulness of the Mercosul concept, this was not an interlocutor
eager to whine about the acknowledged challenges anticipated in
economic negotiations when Venezuela becomes a full member.
Instead, Cardoso emphasized the importance for Brazil of Mercosul as
a unifying force in the region and beyond, a context in which
Venezuelan membership is perceived as a positive. END COMMENT

CHICOLA