Viewing cable 06MONTEVIDEO254
Title: MERCOSUR - LOVE IT OR LEAVE IT? URUGUAY'S QUANDARY

IdentifierCreatedReleasedClassificationOrigin
06MONTEVIDEO2542006-03-14 11:47:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Montevideo
VZCZCXYZ0000
RR RUEHWEB

DE RUEHMN #0254/01 0731147
ZNY CCCCC ZZH
R 141147Z MAR 06
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 5541
INFO RUCNMER/MERCOSUR COLLECTIVE
RUEHBO/AMEMBASSY BOGOTA 2487
RUEHCV/AMEMBASSY CARACAS 0391
RUEHLP/AMEMBASSY LA PAZ MAR SANTIAGO 2808
RUMIAAA/CDR USSOUTHCOM MIAMI FL
RUEHC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
RUEHUB/USINT HAVANA 0062
,C O N F I D E N T I A L MONTEVIDEO 000254 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR WHA/AS SHANNON AND EB/AS WAYNE 
DEPT ALSO FOR WHA/BSC BARNES, CROFT AND MURRAY 
DEPT PLEASE PASS USTR 
TREASURY FOR OASIA FOR DOUGLAS 
COMMERCE FOR ITA/MAC BASTIAN 
NSC FOR FISK AND CRONIN 
SOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 03/10/2016 
TAGS: ECON ETRD PREL PGOV PINR AORC UY
SUBJECT: MERCOSUR - LOVE IT OR LEAVE IT? URUGUAY'S QUANDARY 
 
REF: A. MONTEVIDEO 229 
     ¶B. MONTEVIDEO 207 AND PREVIOUS 
 
Classified By: Charge d'Affaires James D. Nealon for reasons 
1.4 (b) and (d). 
 
¶1. (C) Summary:  The GOU's perception of Mercosur has 
undergone an extraordinary change over the past year, going 
from wide-eyed enthusiasm to deep disillusion to even 
questioning the wisdom of full membership.  After initial 
declarations prioritizing the ""deepening of Mercosur"", the 
GOU experienced a series of disappointments, from a 
lackluster presidency pro tempore to recurring market access 
problems with its larger neighbors.  It also witnessed the 
increasing tendency of Brazil and Argentina to negotiate 
bilateral agreements without consulting the other Mercosur 
members, and the emergence lately of Venezuela as a third 
member of this axis.  The severe paper mills dispute with 
Argentina, possibly one of the worst crises ever between the 
two countries, has severely strained Mercosur, as has 
Brazil's conspicuous silence on the issue and lack of 
leadership. 
 
¶2. (C) While some in the political opposition long questioned 
the relevance of Mercosur membership, the debate is now 
permeating the Frente Amplio (FA) itself, with prominent GOU 
members questioning whether the status of associate member 
would not be more appropriate.  Additionally, the emergence 
of the U.S. as Uruguay's leading export market has generated 
a broad-based discussion over the usefulness of a Free Trade 
Agreement (FTA) with the U.S., with some couching the debate 
in terms of a choice between Mercosur and the U.S. 
President Vazquez himself confirmed to us privately that he 
wants to start discussions on an FTA (ref A).  Seen from 
Uruguay, Mercosur is probably at its most moribund state 
ever.  FTA negotiations between Uruguay and the U.S. would 
affect the dynamics of Mercosur and may break down the Summit 
of the Americas anti-FTAA ""consensus"".  In the end, however, 
Uruguay will almost certainly remain a Mercosur member but 
will push hard for more freedom of action in international 
trade negotiations.  End Summary. 
 
-------------------- 
The initial euphoria 
-------------------- 
 
¶3. (C) Although Mercosur was already showing strains when the 
FA took office in March 2005, it was clearly the FA's number 
one foreign affairs priority (8 out of 25 foreign policy 
points in the FA's platform called for a stronger Mercosur). 
The number two priority was Latin American solidarity.  In 
his inaugural speech before a joint session of Congress, 
President Vazquez emphasized his ""committment to Mercosur and 
to integration as a strategic priority in Uruguay's 
international agenda...this administration wants more and 
better Mercosur.""  He also called for Latin American 
brotherhood, stressing that ""we will actively develop our 
relations with all other Latin American countries, without 
exception, for we feel we are equal brothers.""  Vazquez's 
first foreign trip upon being elected was to Argentina, and 
his first outside trip after taking office was to Brazil. 
 
¶4. (C) Enthused by the prospects of a stronger and expanded 
Mercosur, which would join together the ""progressive"" 
governments of the region, ForMin Gargano gushed that a 
virtual arc of progress"" was taking shape, from the 
Caribbean (Cuba and Venezuela) through Brazil, Argentina, 
Uruguay and Chile.  Vazquez's first actions were to renew 
relations with Cuba and to sign agreements with Venezuela, 
Argentina and Brazil.  Presidents Kirchner, Lula and Chavez 
were shining stars.  However, Gargano's initial notion that 
Cuba could somehow join Mercosur was quickly shot down, after 
the other Mercosur members and his own GOU pointed out that 
Cuba did not meet the ""democracy clause"" necessary to join 
the bloc.  Gargano backed out in humiliation, having to admit 
Cuba's lack of democratic credentials. 
 
------------------ 
Reality bites back 
------------------ 
 
¶5. (C) In the meanwhile, economic integration --Mercosur's 
raison d'etre-- was taking the back seat.  There were 
numerous meetings, hyperbolic talk of a South American 
Community of Nations and of a Mercosur Parliament, but little 
was done in terms of trade facilitation.  Little was achieved 
either during Uruguay's pro tempore presidency of Mercosur, 
apart from the institution of a new dispute settlement 
mechanism (which, incidentally, was not activated for the 
paper mill dispute between Argentina and Uruguay).  There was 
no progress on the harmonization of the Common External 
Tariff (CET), a crucial issue.  The highlight of Uruguay's 
presidency, from ForMin Gargano's standpoint, was the 
induction of Venezuela into Mercosur as a ""member in the 
preparatory stages of accession"".  Chavez appears content 
with this status, which allows him access to a bigger bully 
pulpit to express his views.  He does not seem in any haste 
to implement the hard measures necessary to comply with 
Mercosur's CET.  High-level contacts at the Mercosur 
Secretariat and at the GOU's Economy and Foreign ministries 
view suspiciously Venezuela presence within Mercosur and 
doubt that Chavez will ever bite the bullet to become a full 
member. 
 
¶6. (C) Uruguay's presidency also saw the GOU becoming 
increasingly irrelevant to its two large neighbors. 
Presidents Lula and Kirchner picked without consultations 
Argentina's Chacho Alvarez to replace Duhalde as Mercosur 
President.  They also repeatedly met and negotiated bilateral 
agreements, without consulting the GOU.  All in all, 
Argentina and Brazil held eight bilateral working-level 
meetings in 2005, which resulted in the signing of 30 
bilateral protocols, and in the creation of a bilateral 
commercial safeguard mechanism (MAC) in January 2006.  GOU 
contacts tell us that the governments of Argentina and Brazil 
negotiated the entry of Venezuela into Mercosur on a 
bilateral basis, and that ForMin Gargano tried to take the 
credit for a fait accompli.  There is now some evidence of a 
tri-lateral axis emerging between the GOA, GOB and GOV, which 
met five times without Uruguayan participation.  Meanwhile, 
repeated problems of market access for Uruguayan exports into 
Argentina (bicycles, tires) and into Brazil (rice) continued 
to highlight the dysfunctionality of the trading bloc and 
perceived bullying by its larger members. 
 
¶7. (C) Finally, the serious crisis with Argentina over the 
building of giant paper mills on the Uruguayan side of a 
joint river (ref B) exacerbated the relationship between the 
two neighbors and glaringly exposed Mercosur's failings. 
Vazquez is incensed that Kirchner allowed the bridges leading 
into Uruguay to be blockaded, thus disrupting the free flow 
of goods between the two countries and violating the first 
article of the Treaty of Asuncion establishing Mercosur. 
Compounding the offense is the fact that Argentina currently 
holds the presidency pro tempore of Mercosur.  The conflict 
has caused significant damage to the Uruguayan economy by 
reducing the flow of Argentine tourists at peak summer season 
and hampering the flow of goods and imports of raw materials. 
 Some estimates put the amount of damage at $200 million so 
far. 
 
¶8. (C) With pretensions to regional leadership, Brazil has 
historically been the guiding force of Mercosur and has used 
it extensively as a tool in international trade negotiations. 
 From the four plus one mechanism with the U.S. to 
negotiations with the EU to Mercosur's position vis-a-vis the 
FTAA, officials from this and previous governments in Uruguay 
tell us that Brazil called the shots.  The GOU willingly went 
along, as membership in such a large trade bloc was perceived 
as providing added weight in negotiations.  No significant 
trade agreements have materialized, however, with this 
policy.  Mercosur rejected the FTAA at the recent Summit of 
the Americas and the perrenial negotiations with the EU are 
at a standstill.  The increasing perception in Uruguay is 
that following Brazil's lead has not generated any advance 
with Uruguay's major markets.  It appears that Brazil's 
leadership has waned over the past few months, as President 
Lula is absorbed with his re-election efforts.  Lula does not 
appear to be putting much effort into re-launching Mercosur 
but prefers to appease Kirchner and accept Chavez.  Brazil, 
the traditional leader of Mercosur, has also remained 
conspicuously silent in this paper mill dispute, when it 
would have, in better times, offered and/or provided 
mediation.  Ex-GOU Finance Minister Alfie recently declared 
that ""Brazil's position in this, as the most important member 
of Mercosur, has been absolutely tepid."" 
 
¶9. (C) While Mercosur may have benefitted its larger members 
in many aspects over time, it has been a wash for Uruguay. 
Uruguay's initial thoughts when joining the trading bloc were 
that its tiny market would expand sixty-fold and that foreign 
direct investment (FDI), especially from Brazil, would devlop 
its industrial base.  The reality is that sales to Mercosur 
peaked seven years ago and FDI never really occurred.  The 
percentage of Uruguayan exports going to Mercosur 
(principally Brazil and Argentina) is now practically where 
it was in 1993.  Exports to Mercosur peaked in 1998 at 55% of 
total exports, but shrunk to 22% by 2005, a mere 12% above 
1993 levels in dollar value.  Meanwhile, the economic and 
financial crisis of 1999-2002 resulted in a diversification 
of Uruguay's foreign trade to extra-zone markets, in 
particular NAFTA, which absorbed 30% of exports in 2005 (with 
the U.S. taking in a whopping 24% of total exports).  Exports 
to the U.S. in 2005 were 412% up from their 1993 levels.  The 
new reality is clear: Uruguay sells more to the outside 
world, without trade agreements, than to Mercosur within the 
framework of the CET.  This new reality is sinking in fast, 
not only with the opposition, which has doubted the benefits 
of membership for a while, but also within the GOU and the 
FA. 
 
------------------ 
Where do we stand? 
------------------ 
 
¶10. (C) Starting from such a basis of euphoria made the 
letdown even harder for Uruguay.  While Mercosur has had its 
ups and downs with successive GOUs, for the first time the 
disappointment appears to be generalized within public 
opinion.  The opposition, opinion leaders and even average 
Uruguayans are incensed at the way Uruguay has been treated 
by Argentina and Brazil.  As when it was launched in 1992, 
Mercosur has turned into an everyday topic of discussion, but 
for other reasons.  Most sectors of the FA, and Vazquez 
himself, realize that the ""virtual arc of progress"" has 
failed to deliver.  At the same time , the most active 
proponents of Mercosur, Gargano in the lead, are being blamed 
for the organization's failures.  Gargano has become the 
laughing stock of politicians, journalists and even officials 
within his own ministry. 
 
¶11. (C) Economy Minister Astori started a debate early in the 
year by advocating negotiation of a Free Trade Agreement 
(FTA) with the U.S.  The idea of ""going with the U.S."" is 
gaining strength, the more so as Mercosur's failings become 
apparent.  Even Vazquez made a surprising remark to his 
Cabinet about the benefits that an FTA with the U.S. brought 
to Vietnam. (Note: He privately told us that he wants an FTA 
with the U.S. and will pitch it to POTUS at their May 4 
meeting in Washington. End Note.  See ref A).  Discussion of 
the benefits of an FTA with the U.S. has made front-page news 
for the past three months in Uruguay. 
 
--------------- 
What comes next 
--------------- 
 
¶12. (C) In this broad-based discussion engulfing the country, 
politicians and commentators have staked their positions as 
to what Uruguay's future should be.  They range from leaving 
Mercosur to becoming an associate member like Chile or 
Bolivia to staying within the bloc but with freedom to 
undertake bilateral trade talks with outsiders.  Pablo 
Mieres, leader of the small Independent Party, advocates that 
Uruguay plainly leave Mercosur.  He admits having gone 
full-circle, from his beginnings as a fervent proponent of 	
Mercosur.  Mieres lists four factors that led to his 	
turnaround: 1) the paper mills conflict with Argentina	 2) 
the growing bilateral and exclusive relationship between 	
Brazil and Argentina	 3) the increasing number of exceptions 
to the CET which benefit the larger countries and harm 	
Uruguay's exports to the region	 4) Uruguay's declining 
overall trade with Mercosur.  Uruguay is straight-jacketed 	
within Mercosur, Mieres claims, and the only way forward is 	
to negotiate bilaterally with other markets, whether Mercosur 	
partners like it or not. 	
 	
¶13. (C) Ex-Finance Minister Alfie, a prominent Colorado 	
Senator, advocates that Uruguay change its status from full 	
member to that of associate member.  He argues that Mercosur 	
membership is a hindrance to the country's development, as 	
Uruguay cannot pursue an independent trade policy and carries 
no weight within the organization.  For Blanco Party leader 
Senator Larranaga, ""Mercosur has never been in as bad a shape 
as it is now"".  Ex-ForMin Abreu, also a Blanco, sees Mercosur 
as a ""process stuck in neutral"", with diverging views among 
its members regarding even its essence.  Still, Abreu does 
not believe that leaving Mercosur is an option for Uruguay. 
 
¶14. (C) President Vazquez recently admitted that ""Mercosur is 
going through one of its worst moments"".  He stressed that 
Mercosur is not a club where there are VIP members and 
others.  Integration is not built (...) with bullying (...) 
or with deals under the table.""  Economy Minister Astori 
believes that Mercosur's priorities are erroneous: ""The 
regional parliament is a very important objective,"", he says, 
but it will only be achieved when the commercial and 
economic problems are resolved.""  Meanwhile, a group of 
factions within the Frente Amplio prepared a draft document 
to be discussed in the FA's March 25 plenary.  According to 
press reports, the document criticizes the functioning of 
Mercosur and is sharply critical of GOA/GOB bilateralism. 
While stating that Mercosur is undergoing a profound crisis, 
it recommends that Uruguay remain in the bloc but proposes 
the opening of trade negotiations extra-zone, in particular 
with the U.S.  If approved by the plenary, the document would 
significantly alter the original FA platform, which rejected 
bilateral trade negotiations and the FTAA. 
 
--------------------------------------------- ------------- 
Comment: Uruguay to stay but press for more freedom to act 
--------------------------------------------- ------------- 
 
¶15. (C) The momentum towards bilateral trade agreements, 
whether it be with the U.S., with China or with other 
important trade partners for Uruguay, appears unstoppable 
--except, of course, if such partners declined the offer. 
Argentina's Kirchner declared early this year after meeting 
with Brazil's Lula that Uruguay was ""free to negotiate an FTA 
with the U.S. if it wished to"".  While Mercosur Decision 32 
of 2000 prohibits members from negotiating individually 
without prior consent from the other members, it is unlikely 
that, if officially asked, Kirchner would deny Vazquez this 
opportunity, given his previous declaration and the fact that 
do so would throw oil on the fire of an already extremely 
tense relationship.  Neither would Lula, who by doing so 
would seriously jeopardize his leadership.  Brazil has been 
willing to give away significant advantages to Argentina in 
order to preserve Mercosur's cohesion.  It would most 
probably be willing to do the same for Uruguay. 
 
¶16. (C)  It is likely, then, that Uruguay will continue as a 
full member of Mercosur, but will press for special 
exemptions to negotiate one or two bilateral trade agreement 
with its major outside trade partners.  A status of associate 
member in the medium-term is not to be excluded, but the 
likelihood of pulling out from the bloc is probably nil. 
Mercosur will continue to limp along, with Venezuela with one 
foot in and Uruguay with one foot out, and may emerge as a 
weakened trade bloc.  Paradoxically, it may become stronger 
in the foreign policy arena, where members still tend to 
coordinate their votes on major issues. 
 
¶17. (C) Uruguay's own evaluation of Mercosur has made us 
ponder whether a USG evaluation of Mercosur's usefulness to 
our own national security goals may not be warranted.  An 
assessment of our relationship with the organization may be 
called for in light of Mercosur's decided anti-FTAA stance, 
its increasing political rather than economic focus, and the 
emerging bilateral and sometimes tri-lateral axis between 
Argentina, Brazil and Venezuela. End Comment. 
Nealon