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Cablegate: Lula Visits Argentina to Address Bilateral Trade Frictions

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RR RUEHWEB

DE RUEHBU #1079/01 2171952
ZNR UUUUU ZZH
R 041952Z AUG 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 1696
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUCNMER/MERCOSUR COLLECTIVE
RHMFIUU/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001079

PASS NSC FOR MICHAEL SMART
PASS USTR FOR KATHERINE DUCKWORTH
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ETRD PREL EAGR WTRO AR BR
SUBJECT: LULA VISITS ARGENTINA TO ADDRESS BILATERAL TRADE FRICTIONS

Refs: (A) 07 BUENOS AIRES 1127
(B) BUENOS AIRES 991

-------
Summary
-------

1. (SBU) Brazilian President Lula da Silva arrives in Buenos Aires
August 3 with a 300-strong delegation of private sector
representatives shortly after a very public split between Argentina
and Brazil on agricultural subsidy and industrial tariffs in
end-game WTO Doha negotiations. Lula's meeting with President
Cristina Fernandez de Kirchner (CFK) will lead off high-level
bilateral trade and investment discussions. While Argentine
officials had earlier chastised Brazil's more flexible WTO Doha
stance on industrial tariffs for "creating tension" in the bilateral
relationship, GoA officials privately downplayed the impact, noting
a GoB side-offer to Argentina in Geneva to cede some of its own WTO
Mercosur trade bloc tariff line exceptions to compensate Argentina.
Other outstanding bilateral frictions to be addressed with the GoB
delegation include growing Argentine frustration over its large and
expanding bilateral trade deficit with Brazil (septel), Brazilian
annoyance over Argentina's blocking of wheat exports to Brazil
during and before Argentina's recent agricultural sector crisis, and
questions by Argentina about whether unilateral selective Brazil
tariff reduction has undermined Mercosur's common external tariff
structure. Venezuela's President Chavez will apparently join Lula
and CFK for a discussion of regional energy and integration issues
at some point Monday, adding a wild card to Monday's events. End
Summary.

--------------------------------------------- -----
Doha Round - Brazil Compromises, Argentina Doesn't
--------------------------------------------- -----

2. (SBU) Brazilian President Luis Lula da Silva arrives in Argentina
on Sunday, August 3, for a two-day state visit with senior Ministers
and a 300-strong delegation of Brazilian private sector
representatives. Venezuelan President Hugo Chavez will join them on
August 4 for a discussion of regional energy and integration issues.
The timing of the meeting is marked by differences over a number of
economic issues, most notably the distinct final positions of the
two countries in the WTO Doha Development Round (DDR)
Ministerial-level negotiations held last week in Geneva. At the
time, Brazil showed more flexibility with respect to developed
country demands for significant industrial tariffs cuts than
Argentina was willing to accept.

3. (SBU) At mid-July meeting of Mercosur foreign ministers in Rio,
Argentina and Brazil sought - unsuccessfully - to find a common
position for the DDR talks. Differences became even more marked in
the final days of late July Ministerial-level discussions in Geneva.
Brazil was one of just seven WTO members (along with the US, EU,
China, India, Japan and Australia) which participated in a reserved
session designed to iron out differences. While Brazil ultimately
accepted developed country compromise positions on agriculture and
NAMA texts, both India and China did not and Doha talks foundered.
Celso Amorim, Brazilian Foreign Minister, is reported to have told
Brazilian press that Brazil "could not be completely held hostage"
by Argentine demands. A senior Brazilian diplomat confirmed to
Ambassador Wayne that Brazil had been upset with Argentina's
inflexible position, but in the end decided to focus on what India
was going to do as Argentina would be unlikely to stand alone if
India joined the consensus. Of course, in the end India did not
join the consensus.

3. (SBU) Alfredo Chiaradia, Argentine Foreign Ministry (MFA)
Secretary of Trade and the GoA's senior Doha negotiator, was
reported in local press on July 27 as saying that Brazil's decision
"creates a certain tension in Mercosur." This was just two days
after Chiaradia's deputy, Nestor Stancanelli, told the press that
Brazil "represents Mercosur" in the Doha talks. Local press on July
31 quoted an unnamed Argentine negotiator as saying that the
position Brazil took "has a very high cost for Mercosur and
Argentina's bilateral relationship" with Brazil. Local press quotes
a "regional diplomat as saying that, while "Brazil's decision was
made known within Mercosur, Argentina came (to Geneva) to kick over
the table."

--------------------------------------------- ---
GoA Officials Downplay DDR Frictions with Brazil
--------------------------------------------- ---

4. (SBU) Ernesto de la Guardia, a Counselor in the MFA Office of
Mercosur Affairs, downplayed the tension in a private conversation
with EconCouns July 31, noting that Brazil had offered during Doha
end-game discussions to cede to Argentina "more than its fair
(trade-weighted) share" of the 14-16% of tariff lines (roughly 1,500
products) exempted from higher tariff cuts on industrial goods which
would have been granted to the Mercosur customs union under a Doha
NAMA deal. Separately, Economy Ministry Secretary of Industries and
Commerce Fernando Fraguio confirmed to EconCouns August 1 that
Brazil had indeed made such a "friendly" offer to the GoA on the
margins of Doha, though the offer was never fleshed out due to the
abrupt end of Geneva negotiations.

--------------------------------------------
Argentina Feels Sting of Bilat Trade Deficit
--------------------------------------------

4. (SBU) Another area of significant concern to the GoA is
Argentina's substantial and growing bilateral deficit with Brazil of
trade in goods. Despite an overall trade surplus of over US$11
billion in 2007, Argentina maintained a deficit with neighbor and
top trading partner Brazil of $4.4 billion. (Septel will have more
details of the bilateral trading relationship.) Argentine concern
over this imbalance is most visible in automobile and auto parts
manufacturing, where the countries have established a series of
managed trade agreements (Ref A). The current agreement, which
lasts until the end of 2008, allows Brazil to export to Argentina up
to 95% more value in cars and parts than it imports from Argentina.
Without such a limit, Argentina's bilateral trade deficit would grow
even more. Leonardo Abiad, advisor to Secretary of Industry
confirmed to Econ Couns August 1 that the GoA planned, in bilateral
discussions with the Brazil delegation, to address trade deficits
and improve Argentine access to Brazilian markets in autos and auto
parts, textiles, white goods and intermediate capital goods.

---------------------------
Problems with Wheat Exports
---------------------------

5. (SBU) Argentina's recently-concluded conflict with the
agricultural sector (Ref B) has had an impact on the bilateral trade
relationship as well. Brazil, which historically has sourced the
bulk of its wheat imports from Argentina, was forced to turn to
North American suppliers in 2008 to replace shipments from Argentina
held back by the GoA's temporary closure of it wheat export
registry. Furthermore, GoA subsidies to the agriculture sector,
including subsidized diesel, have created fallout in Brazil. Local
media reports that Brazilian wheat millers accuse Argentina of
dumping already processed wheat, complaining that GoA subsidies for
wheat growers amount to an export subsidy. Nonetheless, in what
Rosario Solari, Director of International Relations for the
Argentine Exporters' Chamber, termed (to Econoff on July 31) as "a
gesture to Brazil" prior to Lula's visit, the GoA on July 30
authorized the export of 900,000 tons of wheat, most of which will
likely go to Brazil.

----------------------------------
Common External Tariff Undermined?
----------------------------------

6. (SBU) Finally, according to press reports, the GoA has questioned
a Brazilian decision in July 2008 to unilaterally reduce import
tariffs on 141 goods, ranging from paper and auto parts to textiles
and steel. The GoB reduced the duty rates from 14% to 2% for the
remainder of the year. Mercosur accords do allow each member a
limited number of exceptions to the group's Common External Tariff,
and the MFA's de la Guardia told EconCouns that Brazil's move was
indeed permitted under Mercosur norms and that the press reports
about the GoA reation were erroneous.

-------
COMMENT
-------

7. (SBU) At the root of Argentina's bilateral trade frictions with
Brazil appears to be a difference in focus: while an increasingly
confident and globally oriented Brazil is looking outward, Argentina
remains focused on protecting its relatively inefficient industrial
interests, and attempting to ensure adequate domestic supply of
agricultural goods at low prices, despite the risk of limiting
future production and exports. Where Brazil sees opportunities for
the future, Argentina sees threats in the present and in the future
of opening its economy more to the world. In upcoming bilateral
discussions in Buenos Aires August 4-5, Argentina will likely focus
on the practical and work hard to address its burgeoning trade
deficit with Brazil. Chavez' last minute participation in
discussions with Presidents Fernandez de Kirchner and Lula is a
wildcard - beyond putting Venezuela's still-unratified (by the
Brazilian and Paraguayan parliament) accession to full Mercosur
membership on the agenda, it remains unclear whether and how his
presence will impact bilateral GoA/GoB discussions.

WAYNE

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