GOA view of MERCOSUR Economic Priorities: Lesser

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E.O. 12958: N/A
TAGS: ETRD PREL AR
SUBJECT: GOA view of MERCOSUR Economic Priorities: Lesser
Expectations

Ref: Buenos Aires 1127

Brasilia 1034


1. (SBU) SUMMARY: Foreign Affairs Ministry (MFA) and Economy
Ministry contacts are skeptical that MERCOSUR will make progress on
its key economic priorities going forward: 1) revise the common
external tariff (CET); 2) coordinate macroeconomic policy; 3)
eliminate double collection of tariffs; 4) address asymmetries of
smaller countries; 5) discuss how to handle non-tariff barriers; 6)
manage enlargement, i.e. the applications of Venezuela and Bolivia
for full membership. Most of these items have essentially been on
the MERCOSUR agenda since its founding. MFA and Economy Ministry
contacts predict that the addition of Venezuela to MERCOSUR will
further complicate the already difficult progress toward more
liberalized trade. End Summary.

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The Future of MERCOSUR
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2. (SBU) Ernesto De la Guardia (DLG -- PROTECT),Counselor in the
Ministry of Foreign Affairs' MERCOSUR office, described during
recent meetings with Econoff GoA perspectives on the current
MERCOSUR economic agenda. He declined to predict the likelihood of
any of these changes occurring, noting that in six years of working
MERCOSUR issues, he has seen little forward progress. Adrian Makuc
(PROTECT),National Director of External Trade in the Ministry of
Economy, also expressed skepticism recently, during separate
meetings, about the probability of seeing significant change in
MERCOSUR norms in the future. They provided specific comments on
MERCOSUR priorities going forward.


3. (SBU) REVISE Common External Tariff (CET): DLG attributed
MERCOSUR's inability to achieve a single CET to the fact that
phase-out periods for individual country CET exceptions were
continuously being extended (Note: MERCOSUR countries agreed to
extend them again in 2006, through the end of 2008. End Note). He
also blamed MERCOSUR's special regimens, which all members had
agreed to, but only apply to individual members. As an example, he
pointed to Argentina's duty-free entry for many capital goods,
instituted in January 2003 and extended last year through December

2008. DLG stated that GoA goals were to see lower duty rates -
preferably zero - for capital, information and telecom goods.


4. (SBU) COORDINATE MACROECONOMIC POLICIES: DLG stated that the
ultimate goal for MERCOSUR - in theory, at least - is to achieve the
degree of coordination seen by the European Union, with a common
monetary policy, a common tax policy, and free movement of labor and
services. He said that this could also include standardizing
subsidies and incentives (a GoA priority area),but noted that
Brazil - with its individual state tax regimes - is having the most
difficulty in moving forward on this objective.


5. (SBU) ELIMINATE DOUBLE TARIFF COLLECTION: Currently, goods
imported into one member country and later sent to another member
(unless substantially transformed) face tariff collection on both
entries. This is an obvious contravention of the principle of the
CET, but DLG noted that efforts to eliminate it are requiring a
great deal of coordination among the members. He said that there
were ongoing efforts to harmonize the laws regulating each country's
Customs agency, and predicted they could be completed by the end of

2007. If successful, implementation will be targeted in 2008, along
with development of information sharing and a method for
transferring collected duties. The current plan is for this to be
active by 2009, at which point double collection would end.


6. (SBU) ADDRESS ASYMMETRIES: Paraguay and Uruguay, as the smallest
members overall of MERCOSUR, argue they have benefited less from
MERCOSUR. Given the less than liberalized nature of the trade bloc,
investors most often locate in the larger countries (Argentina or
Brazil),which gives them the benefits of intra-bloc commerce with

the added security of a large domestic market, as a hedge against
continued or increased protectionism by other members. In 2006, in
an effort to address limited investment in Paraguay and Uruguay, the
four members allocated $100 million to a fund (called the FOCEM, the
Fund for Structural Convergence) designed for improving
infrastructure in the two small countries, mainly Paraguay.
However, DLG commented that this amount was nearly insignificant,
and Makuc noted that the fund had actually been agreed upon in 2003,
though not funded until 2006.


7. (SBU) ADDRESS NON-TARIFF BARRIERS: DLG noted that Uruguay had
presented a proposal and timetable to completely eliminate all
non-tariff barriers (NTBs) by the end of 2008. DLG said the GoA
considered this proposal unacceptable, as it even called for the
elimination of sanitary/phyto-sanitary (SPS) requirements, which the
GoA considers essential. He also noted that the Uruguayan proposal
would preclude import licensing requirements, including automatic
ones, which the GoA applies to "nearly everything." Makuc observed
that Brazil also frequently uses NTBs, such as applying new SPS
rules on short notice and stepping up truck inspections at the
border during peak shipping season.


8. (SBU) HANDLE ENLARGEMENT: DLG noted that Brazilian ratification
of Venezuela's request for full membership would prove difficult,
especially in light of increasing tensions between the two countries
(see Ref B). (Not clear why difficult with Paraguay?) Both DLG and
Makuc noted that, nearly a year after signing an accession
agreement, the GoV had yet to provide a timetable for adhering to
MERCOSUR protocols. They doubted one would be forthcoming. Makuc
also expressing the concern that economic reforms would take even
more of a back seat to political objectives once Venezuela was able
to participate in MERCOSUR votes. DLG echoed this comment, giving
as an example Venezuela's proposal for MERCOSUR to declare the U.S.
a "terrorist government." He wondered how many more such ideas they
would present as a full member. On Bolivia, DLG stated that several
obstacles remain for the GoB to become a MERCOSUR membership while
remaining in the CAN (Andean Community),including different tariff
nomenclatures and different extra-bloc standards on IPR, services,
and government procurement. DLG was skeptical of the GoB's
continuing trade negotiations with the EU as part of CAN, and said
they appeared to be a ploy to get the U.S. to extend ATPDEA benefits
to Bolivia.

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Still At Square - Or Article - One
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9. (SBU) DLG pointed out to Econoff that many of the objectives in
the Treaty of Asuncion - the founding document of MERCOSUR, signed
in 1991 - have never been fulfilled. These include the "free
circulation of goods, services and factors," the "elimination of
customs duties and other non-tariff restrictions," the "adoption of
a common [external] trade policy," and "macroeconomic and sectoral
policy coordination" (which would include trade, agriculture,
fiscal, monetary, foreign exchange and capital, services, customs,
transportation, communication policies, and "others agreed upon").
DLG also provided Econoff with MERCOSUR decision (number 26/03),
dated December 2003, which lays out a "work program" for the
following three years. Many of the goals, such as eliminating
double tariff collection and harmonizing the Customs code, remain on
the current agenda, unfulfilled. Meanwhile, the remaining economic
goals - apart from forming ad hoc groups on biotechnology and
government procurement - are not only unfulfilled, but are now
essentially off the agenda. These include harmonizing extra-bloc
antidumping and safeguard measures, creating a regional capital
market, allowing free movement of labor, and facilitating business
expansion within multiple MERCOSUR countries.


10. (SBU) Makuc argues that two factors explain the limited progress
on MERCOSUR's agenda. One is that "Brazil is very clear in what it
wants" from MERCOSUR: a leadership role, which it will use for a

larger role in world politics, such as its quest for a permanent
seat on the United Nations Security Council. He said that creating
additional tension in the bloc would harm the perception of Brazil
as a leader, so Brazil is not likely to act as an agent of change.
The second is the reluctance of all members - including Argentina -
to eliminate protectionist measures and integrate economically.
According to Makuc, Brazil doesn't want "to bother the other
MERCOSUR members," which would be the result of pressing for
increased liberalization.

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Comment
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11. (SBU) While the MERCOSUR priorities that DLG described would
contribute to liberalizing trade among the members, the fact that
they were all on the agenda in 2003, and many were even in the
founding document of the bloc, is evidence of the lack of progress
to date. Also significant is that the current working agenda is
considerably less ambitious than it was in 2003. The GoA officials
comments that Brazil seems content not to push for further reform
indicates that the status quo will likely continue, especially
considering Argentina's comfort level with managed trade mechanisms
(as an example, see Ref A for background on GoA policies in the auto
sector). Given Venezuela's focus so far on political proposals, it
is even more unlikely that the GoV's full inclusion would accelerate
the economic integration process.


12. (U) For more Buenos Aires reporting, visit our classified
website at: http://www.state.sgov.gov/p/wha/buenosaires.< /a>

WAYNE