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Cablegate: Prospects for Brazil's Mercosul Presidency

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P 171532Z JUL 06
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INFO RUEHSO/AMCONSUL SAO PAULO 7467
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RUEHME/AMEMBASSY MEXICO 2011
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RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 001440

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR - MSULLIVAN
TREASURY FOR OASIA
USDOC FOR 4332/ITA/MAC/WH/OLAC
USDOC FOR 3134/ITA/USCS/OIO/WH/RD


E.O. 12958: N/A
TAGS: ECIN ETRD PREL ECON BR

SUBJECT: PROSPECTS FOR BRAZIL'S MERCOSUL PRESIDENCY

REF: A. Buenos Aires 1566

B. Brasilia 918
C. Montevideo 567
D. Brasilia 786


1. (SBU) Summary. Recently, Econoffs met with Julio Laranjeiras,
Counselor for Mercosul at the Ministry of External Relations to
discuss Brazil's ambitious and hopeful integration agenda during its
5-month tenure as Mercosul pro tempore president starting August 1.
Brazil plans to, among other things, move forward the USD 100M
Infrastructure Fund and promote Fasttrack-like trade promotion
authority. Venezuela's recent entrance into the trade bloc,
Paraguayan and Uruguayan complaints about lack of influence over
decision-making, and disputes and GOB fissures over the usefulness
of Mercosul to Brazil as a whole, will all weigh heavily on Brazil's
short 5-month tenure. Despite these and a multitude of other
issues, the Ministry of External Relations remains upbeat about its
chances of progressing a truly supranational agenda. Given the
myriad challenges confronting Mercosul, post is not so hopeful. End
Summary.

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An Ambitious Agenda
-------------------

2. (U) On July 11, Econoff and Econ Assistant spoke to Julio
Laranjeiras, Counselor for Mercosul at the Ministry of External
Relations (MRE), about what he called a critical moment in
Mercosul's 15-year history. On August 1, Brazil will take the reins
for 5 months as pro tempore president of the trade bloc. According
to Laranjeiras, Brazil has an ambitious agenda, but will concentrate
on two specific issues. First, a key priority will be the
institutionalization of the USD 100 million Infrastructure Fund to
improve roads, bridges, port facilities and standards institutions
in the most underdeveloped areas of the bloc (i.e., Paraguay and
Uruguay). These improvements are intended to facilitate trade by
reducing the time needed to get products to market and improving the
end-products made in bloc countries, he said. Brazil's second
priority is the development of Fasttrack-like authority in each of
the participant states to ease incorporation of Mercosul standards
and regulations. Currently, Mercosul regulations require member
country Parliamentary approval, which can be a lengthy process.

3. (SBU) While the main priorities are in themselves ambitious,
Brazil also looks to move forward on broader issues. Specifically,
Brazil would also like to make progress in eliminating double
taxation of goods within the bloc, that is, elimination of taxes
paid twice on goods imported into one member country and
subsequently re-exported to another. The bloc has, on a trial basis,
eliminated double taxation on zero tariff items to accustom
countries to the idea, he noted. Another item Brazil would like to
pursue is the establishment of safeguards against hoof and mouth
disease, given the importance to member nations of meat exports.
According to Laranjeiras, all of the measures get to the heart of
what Mercosul needs--achieving supranationality. Brazil remains
hopeful that its presidency can set the tone for a higher level of
trust among member states and put an end to the beauty contest
nature of the trade bloc's rotating presidency. Laranjeiras
acknowledged that Brazil's presidency faces intra-GOB and
inter-Mercosul challenges, but declared that Brazil hopes its focus
items will allow internal and external critics to better understand
the long run benefits of Mercosul.


Internal Strife: Dissent from Other Ministries
--------------------------------------------- -

4. (SBU) Laranjeiras admitted that most parts of the GOB,

BRASILIA 00001440 002 OF 003


especially in the Lula administration, regard Mercosul as an
Itamaraty/Presidency project, bringing no immediate benefit to
Brazil. Skepticism has increased as Brazil heads into its
presidential election season. He specifically named the Ministry
(and Minister) of Finance as an obstacle, but hinted that Minister
of Development, Industry and Commerce Furlan has been unhelpful as
well. The Finance Ministry objects to Brazil providing 70 percent of
the Mercosul Infrastructure Fund, while other countries in total
will provide only 30 percent (Note: The USD 70 million has been
allocated from Brazil's 2007 budget). When pressed, Laranjeiras
mentioned that other ministries had complained that underdeveloped
areas in Brazil's northeast will get short shrift compared to needy
areas in Paraguay and Uruguay. He also mentioned complaints that
the money could be better used in addressing the serious income
disparities within Brazil. Finally, he has also heard from other
GOB officials that politically Brazil is focused excessively on
external affairs and needs to refocus on internal Brazilian
problems.

External Strife: Paraguay, Uruguay and Argentina and...
--------------------------------------------- ----------

5. (SBU) As Laranjeiras noted, Brazil seeks to level the field for
current members at a time when Paraguay and Uruguay have once again
asserted that they have seen little to no profit from membership in
the bloc and that Argentina and Brazil reap all the benefits.
Paraguay has complained bitterly that non-tariff barriers keep its
products out of the largest target market - Brazil. The
Infrastructure fund, which would target funds for technical
assistance, is meant to address this complaint. Since Brazilian
exports must meet technically higher standards for U.S. and European
markets, the GOB does not contemplate lowering its own to
accommodate Paraguay or Uruguay, but instead helping the two
countries raise their capacity to produce at the requisite level.
In Laranjeiras' opinion, Uruguay's threat to sign a Free Trade
Agreement with the U.S. is plain bluster. He said that his
contacts in Montevideo informed him that Uruguay is nowhere close to
completing the requirements for a trade deal, lacking the capacity
and political will to do so. Meanwhile, Uruguay remains at odds
with Argentina regarding the cellulose processing plants along their
common border, the construction of which the International Court of
Justice has ruled need not be stopped.

6. (U) For its part, although still with observer status, Chile has
weighed in on the future of the trade bloc by pointing the finger at
Argentina as a divisive force. This complaint comes after Buenos
Aires proposed price increases for foreigners who drive to Argentina
to buy gasoline and in the wake of speculation that Argentina will
raise the price of natural gas exports to Chile. Bolivia, another
Mercosul observer, has not endeared itself to the bloc due to its
recent oil and gas nationalization and its threatened expulsion of
foreigners and seizure of foreign-owned (mostly by Brazilians)
Bolivian farm land.

External Strife: Venezuela
--------------------------

7. (SBU) Amidst all the strife enters Mercosul's newest member
state, Venezuela. Overall, Laranjeiras regards Venezuela's recent
ascension to membership as positive for all of South America,
signaling cooperation and engagement instead of isolation.
Laranjeiras noted that according to Brazilian trade experts,
Venezuela's trade structures are better aligned with Brazil and
Argentina than other current members. He also expressed surprise at
how quickly Venezuela moved to accept the terms of accession, saying
that frankly, everyone expected the process to take much longer. He
believed that this indicated seriousness about Venezuela's
engagement that Brazil had not seen before. According to

BRASILIA 00001440 003 OF 003


Laranjeiras, a big benefit to Mercosul is the obvious bankroll that
Chavez seems to be willing to share with his neighbors, especially
at a time when the trade bloc needs an injection of funds. When
pressed on whether Chavez would use his petro-dollar-backed might to
undercut Brazil's and (to some extent) Argentina's influence in the
bloc, Laranjeiras was silent. He also had no answer as to whether
Brazil saw the possibility of Chavez using Mercosul to further his
PetroCaribe agenda. Engaging Venezuela was simply meant to bring a
rogue player into the democratic fold and to broaden the economic
base to further the Mercosul integration agenda. Laranjeiras was
adamant that Mercosul would not allow Chavez to flout democratic
rules for participation. Any anti-democratic behavior on
Venezuela's part would be met with expulsion from the bloc.

Comment
-------

8. (SBU) To put it kindly, Brazil's view of its upcoming tenure is
sunny at best. The culmination of disputes between the larger and
smaller players, the infighting among neighbors, the entrance of
Venezuela and outright hostilities between observer countries and
member countries, mean that Brazil will enter a volatile situation
that will likely worsen. Still smarting from what was largely read
as a misstep in its handling of Bolivia's nationalization of oil and
gas resources, the Ministry of External Relations will need a
deliverable to deflect the harsh light detractors within the GOB
will shine on any and all Mercosul activity during the next five
months. Taking over after Argentina's rocky pro tempore presidency
means Brazil is climbing up a very steep hill and will need more
than hope to emerge from its own upcoming presidency of Mercosul
unscathed. End Comment.


WILLIAMSON

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