THE MERCOSUR RIO SUMMIT: USELESS FOR URUGUAY

C O N F I D E N T I A L MONTEVIDEO 000089

SIPDIS

SIPDIS

FOR WHA/BSC, EB/TPP, WHA/EPSC
DEPT PASS USTR
USDOC FOR ITA/MAC/BASTIAN
TREASURY FOR OASIA FOR JASPER HOEK
SOUTHCOM FOR POLAD

E.O. 12958: DECL: 01/24/2017
TAGS: ECON ETRD PREL ECIN AORC UY
SUBJECT: THE MERCOSUR RIO SUMMIT: USELESS FOR URUGUAY


Classified By: Ambassador Frank Baxter for reasons
1.4 (b) and (d).


1. (C) Summary: The following was gathered from press
reports and from our close contacts within the GOU. It
represents the view from Uruguay, where dissatisfaction with
Mercosur has been steadily growing. President Vazquez's
expectations for the Rio Mercosur Summit were reportedly
"very low" and the Uruguayan delegation returned in a sober
mood. Vazquez called for justice in addressing Uruguay's
demands, not "welfare" or "hand-outs." The foreign ministers
of Argentina and Uruguay clashed over the paper mills issue
and presidents Chavez and Morales launched into diatribes
against Colombia's Uribe (who had been invited to attend) for
cozying up to the U.S. An axis of moderates )Chile's
Bachelet, Vazquez and Uribe- appeared to have formed, as
Brazil seemingly lacked leadership and Argentina adamantly
refused any concessions. Bolivia began the process for
induction into the bloc.


2. (C) Summary (cont.): The feeling here is that the GOU has
given up on this "new" Mercosur characterized by a weak
Brazilian presence and a bombastic Chavez. While still
playing lip service by attending summits (albeit for a few
hours) and pledging their commitment to a "more and better
Mercosur", the Uruguayans appear to have lost any illusions
as to what Mercosur can do for Uruguay. Vazquez has clearly
opted for a trade policy based on opening up to
extra-regional markets, negotiating free trade agreements and
following up the Chilean example. End Summary.

The Expectations
--------------

3. (U) President Vazquez left for the Summit with "very low"
expectations, saying that "Mercosur as it stands is of no use
for countries like Uruguay or Paraguay". He landed in Rio
late, stayed for only 14 hours, and was the only president
absent in a dinner offered by Brazilian President Lula. All
South American presidents (except for Peru's),and the prime
ministers of Peru, Guyana and Panama were in attendance.
Vazquez did not meet with Brazil's President Lula and avoided
bumping into Argentine President Kirchner. In his speech, he
avoided referring to the paper mills dispute with Argentina.


The Atmospherics
--------------

4. (U) Vazquez started his speech by stating that Uruguay's
integration in Mercosur remained his priority (he repeated
his leitmotiv of "more and better Mercosur"),but he soon
turned critical. He complained about Uruguay's large trade
deficit with Mercosur and urged Paraguay's President Duarte
(who now has the pro tempore presidency of the bloc) to
convince Mercosur members of the need for more flexibility.
Vazquez called for "justice" in addressing asymmetries,
noting that "solidarity and generosity will come later."
"The smaller Mercosur members are members in their own right,
not subjects for welfare or hand-outs," he warned.


5. (U) Foreign ministers Gargano of Uruguay and Taiana of
Argentina clashed loudly on the pulp mills issue. Gargano
argued that Argentina was violating Mercosur's articles of
incorporation and the ruling of the Mercosur Tribunal by
continuing to block the access bridges between the two
countries. He also complained about continued GOA obstacles
to Uruguayan exports of recycled tires and bicycles. Taiana
interrupted Gargano, and the clash got wide press coverage.
Gargano, normally a fervent supporter of Mercosur, stood up
and walked out of the meeting. He did not show up for the
group photo of foreign ministers. After the meeting, Gargano
faulted Lula for not showing sufficient leadership to correct
the problems within the trading bloc, though Lula was quite
conciliatory in his statement, admitting that each country
has different needs which have to be considered. As for
Economy Minister Astori, he came with Vazquez and did not
show up for the ministerial meeting.


6. (U) A vignette illustrates best the acrimony and pettiness
of the whole Rio Summit. Brazil's gesture of serving
Uruguayan mineral water at the Summit dramatized the
difficulties of the organization, as the water had to be
brought in by military aircraft due to regulatory problems
preventing its shipment across the border. Meanwhile, the
Argentinean delegation replaced their bottles for an
Argentine brand, prominently displayed in front of them. In
Uruguay, after the summit, former President Batlle used the
mineral water incident to illustrate Mercosur,s troubles.
Mercosur "isolates Uruguay from the world," he said, "and
puts it into a situation where it is not in control of its
destiny." He added that the smaller members are just being
ignored.


7. (C) Bolivian President Morales attacked Colombian
President Uribe by saying that "the U.S. put billions of
dollars into Colombia with the excuse of fighting drugs."
Uribe later spent about 40 minutes explaining Colombia's
situation. Chavez labeled Uribe's reaction as exaggerated
and Uribe reacted again. A GOU Economy Ministry participant
told us that the Summit resulted in a clear cut division,
with Colombia, Chile and Uruguay on the one side, and
Venezuela and Bolivia on the other. The loss of leadership
by Brazil, and Lula in particular, was striking, this
participant added, with Chavez trying to run the show. He
qualified Chavez as a "megalomaniac" and Morales as
"intelligent but ignorant."


8. (U) As predicted, Chavez used the Summit to take over the
show and convey his message of a South America united against
imperialism. In his over half an hour long speech (he had 11
minutes allotted),Chavez criticized multinationals and
called for more government intervention in the economy. He
proposed three ideas to strengthen Mercosur: 1) he urged
countries to join Telesur (a cable channel currently
supported by Argentina, Brazil, Cuba, Uruguay and Venezuela),
2) he promoted the creation of Banco del Sur (a development
bank funded with a percentage of international reserves of
member countries) to break dependency on the IMF and the
World Bank, and 3) he proposed strengthening the energy chain
in the Southern Cone through the creation of Petrosur, a
long-term project to integrate all state-owned oil companies
(PDVSA and Petrobras signed an agreement).

The Results
--------------

9. (U) The Summit's advances were modest at best. Among them:

- A working group was established to alleviate asymmetries
between small and large countries and to work on making more
flexible the rules of origin Uruguayan and Paraguayan goods.
Prior to the summit, Brazil had offered to cut Mercosur
content from 50% to 30% for the smaller economies. The
initiative was strongly opposed by Argentina, which
successfully delayed the measure. Brazil's ForMin Amorim
suggested that Brazil may grant some of these measures
unilaterally.

- The double imposition of the Common External Tariff (CET)
for Uruguayan and Paraguayan goods was eliminated.

- Mercosur's FOCEM, a structural fund created in 2004,
approved its first set of projects. It granted $8.4 million
for three projects in Uruguay, $34 million for Paraguay, and
$16 million for a regional program against foot-and-mouth
disease.


10. (U) Bolivia began the process to seek full membership,
and Mercosur accepted the Bolivian proposal of launching a
working group to address its integration. The group has a
six-month term, extendable for six additional months.
Bolivia's ForMin Choquehuanca reportedly stated that Bolivia
will "not join Mercosur with eyes closed (...) this will take
a year or more." Uruguay's MFA Director of Integration
Amorin noted that the fact that Bolivia does not want to
rescind its membership in the CAN (Andean Community) will
makes induction difficult, as CAN has its own common external
tariff. Most observers see Morales's move as political,
since Mercosur and Bolivia already trade close to 95% of
their goods freely. Bolivian sales to Mercosur )mostly gas-
account for half of total exports and are almost five times
as large as exports to the CAN. As for Gargano, he was
satisfied at the prospect of incorporating Bolivia and wished
that Ecuador could soon follow. He labeled it as a "gigantic
step ahead", with no turning back. Vazquez was much more
guarded. While reportedly supporting Bolivia's membership,
he demanded that the same flexibility conceded to Bolivia be
extended to Uruguay's requests.


11. (U) MERCOSUR and the Gulf Cooperation Council (GCC)
issued a joint declaration on negotiations towards a FTA, to
be concluded no later than June 2007. Negotiators have met
three times over the last three months.


12. (U) The GOU presented a report on "Uruguay and Mercosur"
and the GOP another on "Asymmetries in Mercosur from a
Paraguayan Perspective." The GOU's document was very
critical of Mercosur and made several proposals: to
strengthen institutions; to resume work on eliminating
non-tariff barriers in the short-term; to harmonize tax and
fiscal policies, and incentives to investments; to start
coordinating macro-economic policies; to promote joint
ventures between firms from members states; to alleviate
rules of origin; to restructure the CET; and to grant
flexibility in trade negotiations with third countries.


13. (U) Mercosur launched three new institutes that had been
previously approved: 1) a "Social Institute" to develop
social projects; 2) a training center for government
officials on regional integration, to be based in Montevideo;
and 3) an "Observatory of Democracy" aimed at consolidating
regional democracies and monitor elections in member states.

Comment: "New" Mercosur of no use to Uruguay
--------------

14. (C) In an interview with "El Pais" of Madrid, Vazquez
criticized the Rio Summit, and Mercosur summits in general,
for their lack of concrete results. As for Astori, he
pointed out that no solutions had been found for Uruguay's
concerns, "neither in the documents nor in the speeches," but
he pledged to continue to press for results. The feeling is
that the GOU has given up on Mercosur and in particular on
this "new" Mercosur characterized by a lack of Brazilian
leadership and bombastic Chavez showboating. The Uruguayans
will still pay lip service by attending summits (albeit for a
few hours) and pledging their commitment to a "more and
better Mercosur", but they appear to have lost any illusions
as to what Mercosur can do for Uruguay. Vazquez has clearly
opted for a trade policy based on opening up to
extra-regional markets, negotiating free trade agreements and
following the Chilean example. The Economy Ministry Trade
Policy Director told us that Vazquez and Bachelet were
planning to conduct a joint trip to the Far East in late
March or early April. End Comment.
Baxter