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### Viewing cable 05BRASILIA91, MERCOSUL SUMMIT: NO PARTY, BUT NO FUNERAL

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05BRASILIA91 | 2005-01-10 14:15 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    UNCLAS SECTION 01 OF 05 BRASILIA 000091

    SIPDIS

    SENSITIVE

    STATE PLEASE PASS TO USTR
    NSC FOR MIKE DEMPSEY
    DEPT OF TREASURY FOR FPARODI
    USDOC FOR 3134/USFCS/OIO/WH/EOLSON
    USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD

    SENSITIVE

    E.O. 12958: N/A
    TAGS: ECIN ETRD PREL ECON BR
    SUBJECT:  MERCOSUL SUMMIT: NO PARTY, BUT NO FUNERAL
    EITHER

    REF:  LIMA 5732

    ¶1. (SBU) Summary and introduction.  Diplomatic
    restraint enabled the 27th Mercosul presidential
    summit to conclude on December 17 without incident,
    but widespread dissatisfaction with meager economic
    benefits flowing from the bloc, and bitter trade
    disagreements between Brazil and Argentina clouded the
    event.  Limited trade agreements with India and the
    Southern Africa Customs Union were finalized; new
    associate members Colombia, Venezuela, and Ecuador
    were welcomed.  However, tough issues on reforming the
    Protocol of Ouro Preto and on eliminating exceptions
    from the Common External Tariff were set aside.  The
    trade initiatives that were announced, such as the
    eventual elimination of double CXT applications, will
    have no immediate impact.  Held in Ouro Preto, Brazil
    to mark the tenth anniversary of the 1994 Protocol of
    Ouro Preto, the GoB had hoped for a strong
    reaffirmation of the Mercosul ideal.  While President
    Lula asserted that Mercosul is a "destiny," the lack
    of political will to remove final impediments to
    formation of a customs union and lingering doubts over
    the pact's economic importance continue to cloud
    Mercosul's future.  End summary and introduction.

    The Return to Ouro Preto
    ------------------------

    ¶2. (U) The 27th Mercosul Summit in Ouro Preto, Brazil
    concluded on December 17, 2004 without incident, but
    intra-bloc differences clouded the affair.  The
    meeting marked the 10-year anniversary of the Protocol
    of Ouro Preto, which provided a permanent framework
    for establishment of Mercosul's customs union and
    institutions, and the turnover of the 6-month pro
    tempore presidency from Brazil to Paraguay.  President
    Lula was joined by the presidents of Uruguay,
    Paraguay, and Argentina, despite earlier doubts about
    President Kirchner's participation following President
    Lula's rejection on December 8 of the Argentine demand
    that Mercosul adopt a trade safeguard mechanism.  The
    Presidents of Mercosul Associate Members Chile,
    Bolivia, Peru, and Venezuela also attended, as well as
    the President of Panama, who conveyed an interest in
    his country becoming an Associate Member.

    ¶3. (U) As the highlight of Brazil's presidency, the
    GoB had hoped the summit would provide a stronger
    reaffirmation of the Mercosul ideal of regional
    integration.  Mercosul has been a top priority for the
    Lula administration and despite frustration in
    Brazil's private sector and in some government
    quarters, particularly within the Ministry of
    Development and Trade, the GoB's commitment to the
    bloc so far has been unwavering.  President Lula
    presented a stirring defense of Mercosul and suggested
    naysayers were exaggerating its difficulties.  He
    underscored Brazil's commitment to the bloc when he
    declared "Mercosul is more than an option, it is a
    destiny."

    ¶4. (U) While reiterating the political importance of
    Mercosul, other leaders' public remarks revealed
    frustration with the bloc's inability to move forward
    in a decisive, effective and equitable way to form a
    genuine customs union, let alone the long-term goal of
    a common market.  President Kirchner admitted that the
    regional bloc is essential for Argentina, but warned
    that "the benefits can't be all in one direction," in
    a veiled reference to his country's trade frictions
    with Brazil (septel).  The economic asymmetries among
    the bloc's members and the lack of consistency in
    Mercosul trade policy, including the exceptions-
    riddled Common External Tariff (CXT), were seen as
    continuing concerns.  Former Argentine President
    Duhalde, in his capacity as president of the Mercosul
    Commission of Permanent Representatives, complained
    that only 30 percent of the measures approved by
    Mercosul have been approved by national legislatures.

    Timid Advances on Trade and Integration
    ---------------------------------------

    ¶5. (U) Given the strained atmosphere, the GoB's
    ambitious agenda for the meeting had to be scrapped.
    Leaders did not discuss changes to the Ouro Preto
    Protocol, despite Brazil's preparation of a package of
    reforms, including a proposal to change the Mercosul
    decision-making mechanism from consensus to majority-
    voting.  Other fundamental, yet sensitive issues, such
    as revision of the CXT and the bloc's automotive
    policy, were also put aside for the sake of a
    convening a "successful" meeting.  The lack of clear
    advances in eliminating exceptions to the CXT raised
    doubts among Brazilian commentators about Mercosul's
    ability to establish a customs union in accordance
    with the bloc's Objective 2006 program adopted in July
    ¶2003.

    ¶6. (U) While Foreign Minister Amorim defended the Ouro
    Preto outcome as marking an important moment in
    "consolidating Mercosul," most summit initiatives have
    been characterized as timid.  For instance, the
    announced regulations for the Government Procurement
    Protocol merely harmonize regulations issued pursuant
    to bilateral agreements that already enable businesses
    in the four countries to compete for government
    procurement contracts at the federal level on an equal
    basis.  Furthermore, the new regulations are not yet
    final, but must be approved by national legislatures.
    Likewise, a fifth round of services negotiations
    resulted only in "progress" toward converging norms
    for financial and construction services.

    ¶7. (U) During the summit, Paraguay finally relented
    under pressure from Brazil and Uruguay to one of the
    more important initiatives -- to eliminate double
    application of the CXT on goods entering one of the
    member countries for final destination in another.
    However, for the near-term this will have no economic
    effect; set to commence in 2005, the initiative will
    only cover goods whose applied tariff is zero, as an
    MFN rate or through a tariff preference regime.  The
    result is one less bureaucratic process for these
    imports, but status quo for all others.

    ¶8. (U) The Mercosul partners committed to formulate by
    2008 a mechanism for the gradual elimination of double
    tariff application on goods with applied tariffs above
    zero.  But whether this effort will come to fruition
    is less than certain given Paraguay's sensitivity;
    tariff revenues reportedly account for approximately
    18 percent of that country's tax revenue.  Paraguay's
    Foreign Minister Rachid was quoted as saying three
    conditions would have to be met before double tariffs
    could be eliminated: 1) creation of a computerized
    customs system for tracking products; 2) establishment
    of a single customs code; and 3) formation of a fund
    to transfer a part of the CXT collected to Paraguay.
    (Note. Elimination of the double duty has been a key
    demand of the European Union in its free trade
    negotiations with the Mercosul.)

    ¶9. (U) Finally, leaders announced their intent to
    create a Fund for Structural Convergence, though no
    financing commitments were made.  The fund, slated to
    come into existence in 2006, is supposed to provide
    financing for projects to reduce regional structural
    differences and lift the competitiveness of the
    Uruguayan and Paraguayan economies; a definitive
    proposal for establishment of the Fund isn't expected
    until May 2005.

    Trade Agreements Inked
    ----------------------

    ¶10. (U) Representatives from India and the Southern
    Africa Customs Union (including South Africa's Trade
    Minister) were on-hand in Ouro Preto to finalize
    partial trade preference agreements with Mercosul,
    which the Brazilian private sector views as shallow
    accords with little commercial consequence.  The
    agreements aren't expected to expand trade
    substantially; the agreement with India covers only
    902 products, about 450 for each side, for which
    tariffs are reduced by 10 to 100 percent, with 20
    percent as the norm.  The agreement with the SACU
    covers 1,907 products (approximately 1,000 for each
    side), with tariff reductions ranging from 20, 50 and
    100 percent.  Nonetheless, Mercosul leaders,
    particularly President Lula, count these as important
    accomplishments and steps in a broader process of
    strengthening economic and political relations with
    these strategically important developing countries.

    ¶11. (U) Much ado was also made as Ecuador, Venezuela
    and Colombia joined Bolivia, Chile and Peru as
    Mercosul Associate Members.  Note, associate
    membership only requires signature to Mercosul's
    democratic clause and a free trade agreement with the
    bloc; Associate Members may participate in the bloc's
    political consultations, but are not required to
    comply with any internal rules or adhere to the bloc's
    negotiating positions.  The free trade agreements with
    the Andean community countries were again lauded as
    providing the base for the launch of the South
    American Community of Nations on December 8 in Cuzco,
    Peru (reftel).  However, Bolivia's President Mesa
    raised concern about unfocused efforts at regional
    integration, stating that "we have to be brief and
    eliminate what could be a confusion of roles, a
    repetition of objectives and a duplication of
    efforts."

    ¶12. (SBU) Perhaps to buoy Mercosul's image as a
    dynamic and sought after trade partner, the GoB
    invited a number of diplomatic representatives to the
    Mercosul Council of the Common Market meeting the day
    before the summit.  By and large the invitees
    represented countries that are engaged to some degree
    in trade discussions with Mercosul.  These range from
    discussions to seek closer commercial relations
    generally, to the launching of trade negotiations.
    Representatives from the following countries attended:
    Panama, Mexico, Costa Rica, Cuba, Guatemala, Guyana,
    Nicaragua, Dominican Republic, Suriname, Trinidad and
    Tobago, India, South Africa, Botswana, Lesotho,
    Namibia, Swaziland, Canada, Australia, China, Egypt,
    Israel, Japan, New Zealand, Pakistan, and Switzerland.
    The EU delegation received a faxed invite four days
    prior, but was unable to send a representative.  (The
    USG did not make the list.  During a December 20
    conversation with Sao Paulo Consul General, Sao Paulo
    Federal Deputy Joao Herrmann, a member of the Foreign
    Relations Committee, lamented the USG absence in Ouro
    Preto, suggesting that it demonstrated the failure of
    both sides to place appropriate emphasis on the
    bilateral trade relationship.)

    On the Political Side...
    ------------------------

    ¶13. (U) In keeping with recent efforts to expand
    Mercosul's political dimensions, leaders directed the
    Mercosul Joint Parliamentary Commission to formulate
    procedures for the installation of a Mercosul
    Parliament in 2006.  The body may initially have
    members that are appointed, with gradual evolution
    toward a more representative body.  Other
    announcements included: establishment of a high-level
    meeting to discuss human rights within the Framework
    Agreement on Regional Security Cooperation; agreement
    to develop a Mercosul passport; agreement to establish
    funds for cooperation in education and promotion of
    artistic expression; agreement on the transfer of
    convicts; and the promise to establish a high-level
    group to study employment growth.

    Comment
    -------

    ¶14. (SBU) The inability of Mercosul leaders to once
    again grapple with basic deficiencies that are
    compromising Mercosul's development as a customs union
    has stoked skepticism in Brazil's private sector
    regarding the bloc's viability and usefulness
    (septel).  Nonetheless, commitment to Mercosul runs
    deep within the ruling PT, most importantly with
    President Lula himself.  Continuing trade difficulties
    not withstanding, the GoB will continue to push for
    more, not less, integration within Mercosul, and as
    the big country in the bloc will seek to keep the
    project alive.  As one editorial noted, while the
    summit wasn't a party, it wasn't a funeral either.

    Danilovich

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