MERCOSUL RIO DE JANEIRO SUMMIT: WHITHER MERCOSUL?

UNCLAS SECTION 01 OF 03 BRASILIA 000082

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E.O. 12958: N/A
TAGS: ETRD ECON PREL ECIN EFIN BR
SUBJECT: MERCOSUL RIO DE JANEIRO SUMMIT: WHITHER MERCOSUL?

REF: 06 BRASILIA 1655

This cable is sensitive but unclassified, please protect
accordingly.


1. (SBU) Summary: Mercosul members are facing more than the usual
number of institutional challenges as they prepare for the bloc's
biannual summit, to take place January 18-19 in Rio de Janeiro. In
an implied slap at Mercosul dispute resolution mechanisms, Argentina
recently requested WTO consultations over Brazil's imposition of
anti-dumping duties on imports of Argentine PET resins. The ongoing
Uruguay-Argentina dispute over the closure of a cross-border bridge
by Argentine protestors opposed to Uruguay's construction of a
cellulose plant on the border continues to fester. Brazilian
businesses, faced with Argentine insistence on "voluntary trade
restraints" on appliances and delays in implementing the automobile
trade provisions of the bloc, are openly questioning their
government's trade strategies. Meanwhile, the Brazilian government
seems more focused on preparing a package of deliverables to assuage
the very public complaints of the bloc's smallest members, Uruguay
and Paraguay, that the trade grouping is not meeting their needs.
The discussion of these institutional challenges likely will be
overshadowed by Venezuelan President Hugo Chavez's recent
declaration of socialism and Bolivia's application to upgrade its
associate membership to full membership -- with special
considerations. A trade agreement with the Gulf Cooperation Council
(GCC) is likely to be signed. End Summary.

Institutional Challenges
--------------


2. (SBU) The biannual Mercosul summit, to take place January 18-19
in Rio de Janeiro, will present Mercosul leaders with a series of
institutional challenges. This is true at least from the point of
view of the Brazilian foreign ministry (Itamaraty),for which
Mercosul is a tool not only for regional economic and political
integration, but also for the consolidation of what Brazil sees as
its natural leadership role in the region. Given this view,
Itamaraty, which dominates GoB Mercosul policy-making, often
foregoes confrontation to try to shore up the unity of the bloc.
Brazilian industry has complained loudly and almost completely
ineffectually against the policy line Itamaraty has staked out in
many Mercosul disputes, primarily involving Argentina.


3. (SBU) Brazilian industry frequently complains that Itamaraty is
selling out hard Brazilian commercial interests for the mere
appearance of Mercosul unity. They point to Argentina's extraction
from the Brazilians of concessions to: a) delay the liberalization
of the automotive trade regime between the countries; b) impose
"voluntary restraints" on Brazilian exports of white goods and small
appliances; and, c) Argentina's implied slap at Mercosul dispute
resolution procedures in deciding to take Brazil to the WTO over the
latter's imposition of anti-dumping duties on Argentine PET-resins.
Meanwhile, the dispute between Uruguay and Argentina over the
former's plans to build a cellulose plant on its border with the
latter, continues to fester, also unaddressed by Mercosul dispute
resolution mechanisms. The GoB, essentially, acquiesced to
Argentina's insistence that Mercosul not address the problem.
Brazilian Vice Minister of Foreign Affairs Samuel Pinheiro Guimaraes
had a summit preparatory meeting recently with his Argentine
counterpart in an attempt to work through may of the big issues.

BRAZIL SEEKS TO INJECT "GREATER COHESION"
--------------


4. (SBU) The GoB is attempting to assure the success of the summit
by putting together a package of deliverables, particularly for the
smaller countries, which have been complaining recently about the
bloc's lack of benefits and the manner in which Brazil and Argentina
have decided major issues without consultation. President Lula
reportedly instructed his ministers to find ways to eliminate
bureaucratic hurdles to trade and give the bloc "greater cohesion."
Foreign Minister Amorim told the press that his ministerial team is
coordinating the effort. Lula met with six ministers shortly before
departing on vacation, and they agreed to extend a USD 30 million
credit to Bolivia for the purchase of 100 tractors. Also at the
request of the Bolivians, the GoB is considering supporting the
construction of a bio-diesel plant in Bolivia. Brazil also has

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agreed to consider Paraguay's request to re-negotiate the pricing
structure for energy generated by the huge bi-national hydroelectric
dam at Itaipu, although precisely how this will be done remains to
be worked out as the pricing was part of a bilateral treaty.


5. (SBU) Lula reportedly also agreed to a proposal to facilitate
trade with Uruguay by increasing the number of Customs officials at
the border, thus speeding processing times and addressing a
long-standing Uruguayan complaint. The GoB reportedly also will be
loaning USD 20 million to Paraguay for customs systems improvements
to enhance legitimate trade and improve Paraguayan customs'
enforcement ability. Perhaps most significant will be a Brazilian
undertaking to find a way to eliminate the double-charging of the
Mercosul Common External Tariff (TEC) by Brazil on products
initially imported into the customs union via Uruguay and Paraguay.
(Note: If implemented, this would be a big step towards making
Mercosul function more like a true customs union.) This would
improve market access to Brazil for the smaller members.

Local Currencies to be Used in Argentine-Brazil Trade?
-------------- --------------


6. (SBU) Also likely to be announced is the establishment by the
Brazilian and Argentine central banks of a local-currency clearing
house mechanism to facilitate payments on Argentina-Brazil trade.
According to a Brazilian Central Bank contact, the clearing house
would be aimed, at least initially, at enhancing market access by
small businesses. These businesses find the costs of the current
mechanisms, which require two foreign exchange transactions as the
local currencies must first be converted first dollars and then into
the currency of the trade partner, eat up much of the margin on
their small import/export transactions. To this end, the central
banks will set up a clearing house, guaranteed by a U.S. dollar
account in a neutral institution (reftel). All currency trading
would be settled daily so the central banks are not exposed to undue
currency risk. Whichever central bank has a surplus in the other's
currency at the end of the day would be paid in dollars from the
guarantee account.

BOLIVIA APPLIES FOR FULL MEMBERSHIP
--------------


7. (SBU) On the heels of Venezuela's recent entry into the bloc as a
full member, President Evo Morales of Bolivia has been pressing for
an answer to Bolivia's long-standing application for full membership
in Mercosul. Bolivia, along with Chile, has been an associate
member since 1996, as neither country was willing to adhere to the
Mercosul Common External Tariff (TEC) given other trade commitments.
This is reportedly still an issue for Bolivia, which continues to
ask that the TEC not be applied to it. Former Brazilian foreign
minister Celso Lafer recently publicly criticized the idea of full
membership for Bolivia without its first meeting the entry criteria,
arguing that this would sharpen the institutional crisis created by
Venezuela's recent "hasty" Mercosul accession.

MERCOSUL-GCC AGREEMENT
--------------


8. (SBU) A trade agreement between Mercosul and the Gulf Cooperation
Council (GCC) reportedly will be signed by the Mercosul leaders and
GCC General Secretary Abdul Rahman, who is to participate in the
summit. The text of the agreement, rules of origin and list of
covered products were agreed upon during a December 2006 meeting in
Riyadh. Negotiations on the agreement were launched during the 2005
Arab-South America summit in Brasilia.

A Parliament and Civil Society Representatives
-------------- -


9. (SBU) The Mercosul summit also is expected to make progress
towards the establishment of a regional parliament. Each of the
five full Mercosul members will have power to nominate nine
deputies, nine senators, and an equal number of back-ups (suplentes)
to the Parliament. The idea is to progressively harmonize the trade
legislation of the bloc, although it's not yet clear how this will
be implemented. The first deputies of the Mercosul Parliament will
have a four-year mandate. In addition, social movements, labor
unions, and non-governmental organizations will be given a voice in

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certain Mercosul debates on integration by formalizing channels for
direct communication between the member states' governments and
civil society representatives.


10. (SBU) Comment: Mercosul is facing some difficult institutional
issues, as its political dynamic is becoming increasingly detached
from the economic integration agenda. But the summit in Rio de
Janeiro will likely be dominated by Venezuelan President Chavez and
his recent declaration of "socialism or death." The Brazilian
government continues to calculate that the best way to moderate
Chavez is by including him in regional fora and eschewing
confrontation. Whatever influence they have gained over Chavez by
including him in Mercosul, however, appears to be coming at
substantial cost to the institution.

SOBEL