US embassy cable - 05BRASILIA91

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, Trade 
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