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### Viewing cable 06MONTEVIDEO1097, HOW MERCOSUR HAS CHANGED

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06MONTEVIDEO1097 | 2006-11-16 13:31 | 2011-05-19 00:00 | CONFIDENTIAL | Embassy Montevideo

`

    VZCZCXYZ0000
    RR RUEHWEB

    DE RUEHMN #1097/01 3201331
    ZNY CCCCC ZZH
    R 161331Z NOV 06
    FM AMEMBASSY MONTEVIDEO
    TO RUEHC/SECSTATE WASHDC 6543
    INFO RUCNMER/MERCOSUR COLLECTIVE
    RUEHCV/AMEMBASSY CARACAS 0459
    RUEHLP/AMEMBASSY LA PAZ NOV SANTIAGO 2938
    RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
    RUEATRS/DEPT OF TREASURY WASHDC
    RHEHNSC/NSC WASHDC

` `

    RR RUEHWEB

    DE RUEHMN #1097/01 3201331
    ZNY CCCCC ZZH
    R 161331Z NOV 06
    FM AMEMBASSY MONTEVIDEO
    TO RUEHC/SECSTATE WASHDC 6543
    INFO RUCNMER/MERCOSUR COLLECTIVE
    RUEHCV/AMEMBASSY CARACAS 0459
    RUEHLP/AMEMBASSY LA PAZ NOV SANTIAGO 2938
    RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
    RUEATRS/DEPT OF TREASURY WASHDC
    RHEHNSC/NSC WASHDC
    ,C O N F I D E N T I A L MONTEVIDEO 001097

    SIPDIS

    SIPDIS

    STATE FOR WHA/BSC AND EB/TPP
    DEPT PASS USTR
    TREASURY FOR OASIA FOR HOEK
    COMMERCE FOR ITA/MAC/BASTIAN
    NSC FOR FISK AND CARDENAS
    SOUTHCOM FOR POLAD

    E.O. 12958: DECL: 11/16/2016
    TAGS: ETRD ECON PREL AORC SOCI UY
    SUBJECT: HOW MERCOSUR HAS CHANGED

    REF: A. MONTEVIDEO 567
         ¶B. MONTEVIDEO 465
         ¶C. MONTEVIDEO 448
         ¶D. MONTEVIDEO 254

    Classified By: James D. Nealon, Charge d'Affaires, for reasons
    1.4 (b) and (d).

    ¶1. (C) Summary and Introduction:  This telegram contains a
    healthy dose of subjective analysis designed to   stimulate
    constructive debate on an issue of regional importance.  The
    Embassy is keenly interested in Mercosur, not only because
    its headquarters are located here, but also because we have
    detected a growing impact on Uruguay by that organization.
    Over the past couple of years, Mercosur has evolved from a
    benign trading bloc into a political union with a robust
    foreign policy agenda.  More often than not, this agenda has
    clashed with some USG objectives -- particularly since
    Venezuela became its fifth member. A prime example of
    Mercosur's politicization was manifested by its unflinching
    support for Venezuela's bid for a semi-permanent seat on the
    UNSC.  Earlier examples include Mercosur's anti-FTAA posture
    at the Summit of the Americas in Mar del Plata and the 2005
    accord binding members not to sign Article 98 agreements with
    the U.S.  The unpredictability of two Mercosur leaders
    (Argentina's Nestor Kirchner and Venezuela's Hugo Chavez)
    have further complicated Mercosur politics.  There's been
    recent talk about bringing Bolivia into the bloc, adding the
    fiery Evo Morales into the Mercosur mix.  We note that
    Mercosur fully intends to install a functioning Parliament at
    Montevideo in March 2007.

    ¶2. (C) While Mercosur's exterior veneer portrays an image of
    tight cohesion on political integration and foreign policy,
    severe disputes and backstabbing frequently occur behind the
    scenes. In particular, Uruguay has been the victim of
    Mercosur's lack of solidarity.  The bitter pulp mill dispute
    with Argentina, in which the GOA has used perceived dirty
    tactics to pummel the GOU into submission, and the manifest
    lack of interest on the part of Brazil have elicited comments
    here such as, ""with friends like this, who needs enemies?""
    It is also widely believed here that both Brazil and
    Argentina vetoed Uruguay's hope as the compromise candidate
    for the Latin American UNSC seat.  Neither Chavez nor Lula
    showed up at the recent Ibero-American Summit in Montevideo
    #¿NOMBRE?
    Kirchner did a fly-by appearance and did not meet with
    President Vazquez.  Our GOU contacts, including Presidential
    Chief of Staff Gonzalo Fernandez, have shared with us
    Vazquez's frustration about Argentine and Brazilian
    resistance to Uruguayan efforts to negotiate an FTA with the
    U.S.  Our MFA contacts increasingly answer our demarches with
    what they say is ""the Mercosur position.""

    ¶3. (C) Finally, Mercosur's trade agenda can be assessed as
    little more than a failure.  The 4 1 process with the U.S. is
    all but dead. (In any case, should it now be called 5 1, with
    the addition of Venezuela?) Trade talks with the EU are also
    at a standstill, and all that Mercosur has been able to
    accomplish of late are modest South-South framework
    agreements.  A Common External Tariff (CET) with more ""holes""
    than substance and the increased propensity of Argentina,
    Brazil and Venezuela to deal bilaterally without consulting
    their smaller partners are further evidence of Mercosur's
    unsatisfactory trade policy.  In light of these developments,
    a re-examination of our overall relationship with Mercosur
    may be warranted.  End Summary and Introduction.

    A strengthened political footprint
    ----------------------------------

    ¶4. (C) The entry of Venezuela has clearly altered the power
    balance and dynamics within Mercosur.  A prime example was
    Mercosur's unflinching support for Venezuela's UNSC seat bid.
     For more than 50 successive votes, Mercosur members
    continued to support Venezuela's candidacy.  Mercosur
    solidarity held fast...to a point.  When Uruguay was
    mentioned as a possible compromise candidate, Argentina is
    said to have vetoed the move  and Brazil was reportedly not
    supportive.  In recent months, we have also noted a distinct
    tendency for our MFA colleagues to emphasize that the GOU's
    foreign policy is being coordinated with Mercosur. FM Gargano
    is sycophantic to Venezuela and publicly took credit for
    fast-tracking Venezuela into Mercosur.
    ¶5. (C) It is widely believed that the GOB's strategy for
    embracing Venezuela into Mercosur was that Chavez could
    better be controlled from within the organization than if
    left to his own devices on the outside.  It appears, however,
    that Chavez has proved to be more difficult to contain than
    originally thought. He has openly challenged the Brazilians
    by supporting and allegedly encouraging Evo Morales's move to
    grab Petrobras' assets in Bolivia, and has frequently stolen
    the stage at Mercosur from Brazil's President Lula.

    ¶6. (C) While Lula is widely perceived to have lost some
    regional leadership to Chavez, it is unclear whether this
    will continue to be the case after Lula was re-elected with a
    robust margin.  It also remains to be seen if the
    relationship between Lula and Chavez will be one of
    competition for leadership or if we will see the emergence of
    another bilateral axis similar to the one between Argentina
    and Brazil.  Who will lead Mercosur is open to question.
    Brazil's pro tempore presidency, ending in December, has been
    characterized by inaction, as was expected (ref A).  The GOB
    consistently avoided mediation or to even express an opinion
    in the divisive pulp mill dispute between Argentina and
    Uruguay. Chief of Staff Fernandez told Charge that Lula
    missed the Summit in part so he would not have to show his
    cards on the papermill issue.  Brazil recently proposed a
    postponement of the Mercosur Summit scheduled for December 15
    in Brasilia until January 2007. This delay is read in Uruguay
    as a way for the GOB to come up with face-saving devices in
    order to counter the perceptions of a lack of progress on
    economic integration during Brazil's presidency.

    ¶7. (C) Political integration continues apace, however.  On
    November 1, as a prelude to the Ibero-American Summit,
    Uruguay became the first Mercosur country to ratify
    Venezuela's entry into the bloc, when the lower House
    ratified the protocol of admission in a special emergency
    session at 3:00 a.m.  The opposition complained that the
    motion had been rammed through the House without adequate
    consideration in Commission.  The opposition later had a
    field day ridiculing the Frente Amplio's ""servile act"", when
    Chavez failed to show up at the Ibero-American Summit in
    Montevideo to receive this ""gift"" (Chavez sent $20 million
    funding for a public hospital as a consolation prize.)

    ¶8. (C) The Mercosur Parliament will be launched in March 2007
    in Montevideo and is expected to meet on a monthly basis.
    Until 2010, it will be composed of 18 members per country
    chosen by national parliaments.  Starting in 2011, members
    will be popularly elected within each country and
    representation will be proportional, with criteria still to
    be determined.  While the Mercosur Parliament's authority is
    still unclear, its creation is definitely a first step
    towards political integration for Mercosur members and is
    likely to facilitate common policies on external affairs.
    The Parliament's authority is likely to be limited at first,
    given that both Brazil and Uruguay require constitutional
    amendments to permit for supranationality.

    ¶9. (C) Other political initiatives have emerged.  A Mercosur
    Social Institute and a Democracy Observatory were created at
    the Cordoba Summit in July 2006.  A presidential declaration
    signed in Asuncion in June 2005 exhorted all Mercosur members
    not to sign any agreements susceptible to affect the
    jurisdiction of the International Crimminal Court (ICC), in
    effect prohibiting them from signing Article 98 agreements
    with the U.S.  As for political propaganda, Chavez's Telesur
    TV channel is already broadcasting in Uruguay. As for
    Chavez's calls for a Mercosur common defense policy and joint
    military forces, we had presumed they were going nowhere, but
    press reports on Lula's recent visit to Caracas  indicate
    that he may now support Chavez's idea.

    Economic integration takes a back seat
    -----------------------------------

    ¶10. (C) Meanwhile, economic integration has taken a back
    seat.  What we are seeing is increased bilateralism by the
    larger members at the expense of smaller countries.  The
    Competitive Adaptation Mechanism (or MAC, for its Spanish
    acronym) between Argentina and Brazil, for example, was
    perceived in Uruguay as a significant move backwards for
    economic integration.  Approved in January 2006, this
    bilateral safeguard mechanism is viewed by the GOU and the
    Uruguayan private sector as inconsistent with Mercosur rules.

    ¶11. (C) Mercosur's Technical Secretariat had always been the
    GOU's pet project and its creation in ex-Foreign Minister
    Didier Opperti's times had been trumpeted as an Uruguayan
    success.  According to our contacts within the Secretariat,
    their relationship with the foreign and trade ministries of
    Argentina and Brazil have become increasingly tense.  They
    say they are being sidelined and their reports are
    increasingly being tagged as restricted or confidential, so
    as to avoid wide diffusion.  They also note that the
    elimination of adequate independent technical studies would
    leave the larger countries -which can allot more resources to
    Mercosur- in a relatively much stronger position vis--vis
    the smaller ones.

    ¶12. (C) While the lowering of trade barriers was the original
    justification for Mercosur's existence, the Common External
    Tariff (CET) is still far from being a reality.  In fact, it
    can be argued that the numerous exceptions make for a much
    larger hole than the CET itself (the hole is so massive that
    the ""doughnut"" itself is practically non-existent).  Only
    about $30 billion of the $80 billion of extra-zone imports
    are subject to the CET (or 38% of the total), and only $8
    billion (or 10% of total imports) actually pay effective
    duties within the CET.  That is to say that 62% of all
    extra-zone imports are exempted from the CET, either through
    national or sectoral exceptions, or in their majority through
    special processing zones, such as the Manaus Free Trade Zone
    in Brazil or the Tierra de Fuego FTZ in Argentina.  In
    addition, 22% of extra-zone imports enjoy a zero tariff.
    These figures illustrate the fallacy of the oft-stated
    argument (in particular from the Brazilian Foreign Ministry)
    that an FTA between Uruguay and the U.S. would have been
    incompatible with the CET. This reluctance to allow Uruguay
    some leeway in its trade talks with the U.S. was one of the
    reasons for the GOU's excruciating search for an acceptable
    name to give to what would essentially have been an FTA.

    ¶13. (C) Mercosur itself has lost relevance as an export
    market for its members.  Intra-bloc exports amount to $20
    billion, up from their 2002 low of $10 billion, but down
    significantly as a percentage of total trade.  Exports to
    Mercosur as a percentage of total exports dropped from 34% in
    1998 to 13% in 2002, accounting for just about 14% in 2005.
    The need for individual members -in particular the smaller
    countries- to open up to the rest of the world through
    bilateral trade agreements has become increasingly acute.  In
    this sense, Uruguay has led the way.  It is the only Mercosur
    member to have negotiated a full-fledged FTA with Mexico, as
    a result of a Mercosur framework agreement with Mexico.

    ¶14. (C) Intra-zone trade flows never were positive for
    Uruguay.  Even at the best of times, when Mercosur absorbed
    about half of its exports, Uruguay had a trade deficit with
    the bloc.  In fact, both Uruguay and Paraguay have suffered
    chronic trade deficits with Mercosur.  Mercosur now absorbs
    only about a quarter of Uruguay's exports, about the same
    amount as NAFTA does.  The trend is clearly for a growing
    share of Uruguay's trade going extra-zone, but the GOU fears
    that its competitive advantages with the U.S. will be eroded
    by our FTAs with the rest of the hemisphere.  For the GOU, it
    only makes sense to join the FTA bandwagon, and a solid
    majority of the population would approve of an FTA with the
    U.S., according to the latest surveys (54 percent in favor,
    14 percent opposed.)

    An unsuccessful and confused trade policy
    -----------------------------------------
    ¶15. (C) Venezuela's full membership in Mercosur is likely to
    hamper the bloc's ability to negotiate trade deals.  It also
    makes it very difficult for the U.S. to re-initiate the
    moribund 4 1 dialogue, as a 5 1 with Venezuela appears highly
    unlikely and has already complicated negotiations with the
    EU.  The latest technical meeting between Mercosur and the EU
    on November 6-8 ended up in an impasse.  Meanwhile, Venezuela
    is moving ahead with ALBA, its alternative to the FTAA.
    ALBA's members are so far Bolivia, Venezuela and Cuba, which
    act in coordinated fashion in ALADI.

    ¶16. (C) Mercosur's rigid positions, dictated mostly from the
    Brazilian Foreign Ministry, have prevented the bloc from
    reaching agreements with the developed markets of the U.S.
    and the EU.  All that Mercosur has been able to accomplish
    over the past 2-3 years are South-South agreements, with
    Egypt, Morocco, India, Pakistan and South Africa (Israel
    being the exception).  Though these initiatives would appear
    to indicate an active trade policy, they are mostly
    lightweight framework agreements, which reflect mostly
    Brazil's interests rather than those of the trade bloc as a
    whole.

    ¶17. (C) While Mercosur did negotiate some broader free trade
    agreements, these generally pre-dated the ""new"" Mercosur that
    is now emerging.  Mercosur negotiated FTAs with Chile and
    Bolivia in 1996 and 1997 and set up an umbrella covering a
    net of bilateral agreements between individual members of
    Mercosur and the Andean Community (CAN).  In these
    negotiations with the Andean Community, Mercosur gave up much
    more in terms of duty-free access than CAN did in return.
    Brazil appears to have been the most generous and Argentina
    the most protectionist.  These inter-connected agreements
    between CAN and Mercosur could result in a South American FTA
    by 2015, if ALADI's schedules are not modified or delayed
    (modifications and delays are likely, though, given
    Mercosur's record on exceptions, ""adjustment mechanisms"", and
    the like.)

    Comment: Review USG policy towards Mercosur?
    --------------------------------------------
    ¶18. (C) The increased politicization of Mercosur, its many
    initiatives opposed to USG interests and its changing
    composition (now including Venezuela and perhaps soon
    Bolivia) argue in favor of a review of our policy towards the
    bloc.  At the very least, the recent developments merit
    increased awareness of Mercosur's evolution and intentions.
    It is clearly not the same benign trading zone it was just a
    few years ago, and its leadership appears increasingly at
    odds with US interests.  Among the issues to keep an eye on:
    To what extent does Brazil still call the shots in Mercosur
    and how much influence does Chavez exert on Mercosur
    policy-making?  Embassy welcomes input on these subjects from
    the Department and relevant posts in the region.  End Comment.
    Nealon

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