393) Assim marcha a América Latina...(ou não?)

MERCOSUR/VENEZUELA: REGIONAL (DIS)INTEGRATION RISKS
OXFORD ANALYTICA - Wednesday, May 3 2006

EVENT: The presidents of Argentina, Brazil and Venezuela held a summit in Sao
Paulo on April 25-26.

SIGNIFICANCE: The summit followed a similar meeting the previous week between Venezuelan President Hugo Chavez and his counterparts from Bolivia, Paraguay and
Uruguay, in which the two largest members of Mercosur did not participate. The
meetings point to increased discord within the bloc, which the presence of Venezuela has done nothing to diminish.

ANALYSIS: Brazilian President Luiz Inacio Lula da Silva and Argentine President Nestor Kirchner held a bilateral meeting in Sao Paulo on April 25, with Venezuelan President Hugo Chavez invited to participate the following day. The meeting was organised hastily following a similar 'mini-summit' held the previous week in Asuncion between Chavez and the presidents of Bolivia, Paraguay and Uruguay, at which Chavez -- who brought Venezuela into Mercosur in December (see MERCOSUR: Venezuelan influence to prove limited - December 13, 2005 < http://www.oxan.com/Display.aspx?S=EDF&SD=20051213&PC=LADB&SN=1 >
-- suggested that the bloc's demise might not be unwelcome, if it served to
advance broader regional integration. These comments in turn came only days
after he had withdrawn Venezuela from the Andean Community (CAN), which he declared
"dead" following the commitment of Peru and Colombia to free trade agreements
(FTAs) with the United States.

Regional rifts. These developments have generated considerable concern in Buenos Aires and Brasilia, at a time when divisions within Mercosur are already clear:
* The continuing dispute between Argentina and Uruguay over the installation
of two cellulose plants in the latter country, and their possible environmental
impact (see ARGENTINA/URUGUAY: Pulp plants pose pollution problem - February 7,
2006
< http://www.oxan.com/Display.aspx?S=EDF&SD=20060207&PC=LADB&SN=1 >
), has only served to highlight Mercosur's political vacuity. Argentina, which currently holds the bloc's presidency, has rejected Uruguayan requests for mediation by the Mercosur Council, while Brazil has refused to intervene, supporting Argentina's position that the conflict is bilateral rather than regional.

* The Asuncion summit involved only the two smaller members of the bloc, Paraguay and Uruguay, who have recently redoubled their complaints that they have been ill-served by a Mercosur in which decisions have been taken exclusively by,
and for the benefit of, Brazil and Argentina (see MERCOSUR: Regional ructions
roll back trade accords - January 26, 2006
< http://www.oxan.com/Display.aspx?S=EDF&SD=20060126&PC=LADB&SN=1 >
). The subsequent bilateral encounter between Lula and Kirchner only serves to illustrate this point.

* The ostensible reason for Chavez's presence, to discuss provision of natural gas to Paraguay and Uruguay, is open to the perception that Chavez is seeking
to increase his own influence with Mercosur's smaller partners to the detriment of their larger neighbours. Moreover, the proposed pipeline from Bolivia to Paraguay and Uruguay would purportedly exclude Argentina and Brazil.

Irritation over Chavez's involvement arguably is greater in Brazil, where it is perceived that Chavez has encouraged Bolivian President Evo Morales's 'nationalisation' of Bolivia's hydrocarbons sector, to the detriment of Brazilian oil company Petrobras (see BOLIVIA: Opposition grows to Morales - May 2, 2006
< http://www.oxan.com/Display.aspx?S=EDF&SD=20060502&PC=LADB&SN=1 >
). The move is to be the subject of an impromptu summit in Puerto Iguazu,
Argentina, with Lula, Kirchner, Chavez and Morales tomorrow (from which Uruguay and
Paraguay are again excluded).

Mercosur future. Although Chavez's presence in Asuncion arguably heightened existing tensions, his own influence in Paraguay and Uruguay is questionable and
does not represent the principal risk to Mercosur's continuity:
* Vazquez subsequently visited Mexico, where he called for that country to
become an associate member of Mercosur in order to inject greater balance into the
bloc, which he warned was in danger of becoming "isolated" and "without a destiny". Uruguay has doubled its exports to Mexico since entering into an FTA two years ago.

* Vazquez is currently in Washington, where he will meet President George
Bush tomorrow. Both Vazquez and Paraguayan President Nicanor Duarte Frutos have
made clear their interest in negotiating trade accords with the United States
(already Uruguay's largest export market), something which would in itself represent
a grave blow to Mercosur.

On May 1, Vazquez told reporters in Washington that Uruguay may downgrade its Mercosur status from full to associate membership, if Mercosur appears likely to
block a trade deal with the United States. If the move is confirmed, Paraguay could well follow suit -- in effect putting an end to any aspirations that Mercosur could develop into an EU-style common market or a stepping stone to broader regional integration.

Frustrated friends? Although the Sao Paulo summit theoretically focused on the pending plan to construct a 10,000-kilometre gas pipeline from Venezuela to Argentina via Brazil (see LATIN AMERICA: Pipeline favours politics, not markets -
March 27, 2006
< http://www.oxan.com/Display.aspx?S=EDF&SD=20060327&PC=LADB&SN=2 >
), Lula and Kirchner both reportedly took the opportunity to criticise Chavez's presence in Asuncion, and to make clear their disapproval of his apparent intervention in the Southern Cone and disregard for the future of Mercosur. If
anything, Chavez's intromission appears to have achieved greater harmony between
Brasilia and Buenos Aires than has been seen in some time. However, his bid for
greater regional influence may prove misguided:
* Brazil has long regarded itself as the natural regional leader, and has
been at the centre of efforts to extend regional integration, which Chavez's recent
actions appear to be undermining. It will not readily accept competition from
Venezuela for that role. Although Chavez has cultivated support among some Brazilian grassroots organisations critical of Lula's less radical approach to
social reform, and which Lula does not wish to alienate, this does not weigh as
heavily as the blow to Brazil's position as a regional representative in global fora
that Mercosur's collapse could represent.

* In Argentina, there is no significant pro-Chavez constituency that could
offset the apparent challenge to Argentina's own regional position -- Chavez's
local admirers are already almost without exception Kirchner supporters, and insufficient numerically to carry great political weight. Moreover, although
Venezuela has been a major purchaser of Argentine debt in recent months, the relatively comfortable debt financing position in 2006 and 2007 implies that this role is not crucial for Argentina at present.

If in fact Brazil and Argentina adopt a more distant relationship with Chavez, this would suggest that his real allies within the region are relatively few, and confined to countries of limited economic and political weight. With only Bolivia and Cuba as yet signed up to his Bolivarian Alternative for the Americas (ALBA), and continuing interest among smaller countries in reaching bilateral FTAs with the United States (favouring Washington's own preferred regional trade strategy), it would appear that prospects for Bolivarian integration are poor, despite the weakness of the existing regional bodies such as Mercosur and the CAN.

Mercosur-EU summit. The deep divisions within Mercosur have been highlighted only days before the EU-Mercosur summit scheduled for May 11 in Vienna. While the summit may aim to restart the long-stalled talks for a trade accord between the two blocs, in practice it is difficult to envisage prospects for serious negotiations at a time when Mercosur's future is in doubt and there appears to be no viable interlocutor to represent its aspirations as a whole. Moreover, EU Trade Commissioner Peter Mandelson has reportedly expressed support for Finnish company Botnia's cellulose plant project in Uruguay, rejecting Argentine claims that it does not meet environmental standards. The frictions surrounding this issue, which Argentina is to present before the International Court of Justice, will also reduce any prospect of a substantive summit.

CONCLUSION: Chavez's increasingly active approach to a divided Mercosur has served largely to magnify its weaknesses, and may paradoxically undermine his own goal of gaining greater influence in the region -- arguably to the benefit of Washington. The bloc approaches its forthcoming summit with the EU in a debilitated state which makes serious negotiations unlikely and calls into question its longer-term future.