Brazil & Southern Cone - May 2013 (ISSN 1741-4431)

Following his convincing victory in last month’s presidential election [RBS-13-04], President-Elect Horacio Cartes wasted little time in addressing the thorny issue of Paraguay fully rehabilitating its status in the Southern Common Market (Mercosur), from which it has been suspended since June 2012. Cartes has said that he is personally convinced that Paraguay is much better off in Mercosur than outside of it; and has pledged to do everything he can to lift the country’s suspension once he assumes office on 15 August. His comments generated optimism that Paraguay’s precarious current situation - and Mercosur’s institutional crisis - will soon be resolved. However, his position is not wholly shared by many of his conservative colleagues in the traditional Partido Colorado and the reality is that in order to resolve the current situation some very delicate political negotiations are still needed, both within Paraguay itself and between Paraguay and its regional neighbours.  

Throughout his campaign, Cartes, a successful businessman, time and again said that in his opinion Paraguay should reintegrate into Mercosur. He argued that as a landlocked country, membership of the (admittedly imperfect) customs union with its main trading partners, Argentina and Brazil, is critical for Paraguay.

Yet despite his assertions, certain domestic sectors have been re-thinking the utility of membership of the regional bloc.

Local business people grouped in the industrial union (UIP), to which Cartes is affiliated, have long complained about the inconsistent implementation of the Mercosur rules, in particular the regular flouting of provisions establishing the free movement of goods and services. They argue that this has rendered Mercosur woefully inefficient, to the point that many now consider it pointless, as it has failed to deliver on its promises of economic benefits. In addition, the fact that Mercosur membership impedes a country from signing trade agreements with third parties (Mercosur must negotiate all economic agreements as a bloc) is increasingly seen as a serious impediment that has hindered the economic development of the individual members. Industrialists in Uruguay – and also in the dominant member Brazil – have also complained about this point. Uruguayan producers hanker after a bilateral free trade deal with the US, for instance; likewise their Brazilian counterparts often argue that Brazil would be better off pursuing free trade talks with its European and US partners bilaterally, rather than having to be weighed down at the table by its ‘troublesome’ neighbours (for which read Argentina)

Following Paraguay’s political suspension from Mercosur (it was never economically suspended and so continued to benefit from the various regional market trade provisions), the UIP’s president, Eduardo Felippo, emerged as one of the most visible proponents of the idea that Paraguay should consider leaving Mercosur altogether. He argued that given the increasingly dysfunctional state of Mercosur, Paraguay would be much better off leaving the bloc altogether, and could then re-negotiate bilateral agreements with each its regional neighbours individually and, more significantly, pursue trade agreements with other partners.

Paraguay’s two main traditional parties: the ruling Partido Liberal Radical Auténtico (PLRA) and the Asociación Nacional Republicana-Partido Colorado (ANR-PC), which fielded Cartes in the elections, have also adopted a critical stance against Mercosur. With the exception of some leftist parties, the local political class rejected Paraguay’s political suspension from Mercosur (and the Union of South American Nations [Unasur]) as illegitimate and unwarranted. The suspensions were imposed after Paraguay’s congress impeached the former leftist president, Fernando Lugo (2008-2012). Mercosur considered the process ‘undemocratic’, despite the fact that it was carried out in strict accordance with Paraguay’s constitution. Mercosur’s subsequent decision to take advantage of Paraguay’s absence to expedite Venezuela’s admission as full member - overriding the express opposition of Paraguay’s congress, which was blocking Venezuelan entry - further irritated. The political consensus was that Mercosur imposed its will on Paraguay, gravely undermining its sovereignty. In this domestic political scenario, Cartes will have his work cut out to convince the local political class to abandon its lingering hostility.

A test of Cartes’ negotiating skills

The key for Cartes will be to obtain assurances from Mercosur that Paraguay’s sovereignty will be respected and that changes can be introduced to make the bloc more effective.

Cartes has one significant leverage point. Venezuela’s irregular entry into the bloc (i.e. without the unanimous consent of all Mercosur members, as per the founding treaty rules) still has the potential to blow up into major institutional crisis for the bloc. If Paraguay’s senate continues to reject Venezuela’s entry, then this would lead to an unprecedented situation, whereby one member is not recognised by all of the other partners. Paraguay could well argue, not least to the watching international community, that the Mercosur integration project has failed and is no longer working on either the economic or the political front and has been hijacked for ideological reasons by the bloc’s dominant left-wing governments. Bar Paraguay, all the other Mercosur countries have left-leaning governments, all of which have a strong degree of affinity with each other.

Such accusations might be particularly worrisome for Mercosur given the rapid consolidation of the region’s newest economic bloc, the Pacific Alliance. Indeed, along with a host of other Latin American countries, Paraguay has already expressed an interest in joining the Pacific Alliance (see sidebar).

After his electoral victory, all four Mercosur heads of state (including Venezuela’s President Nicolas Maduro, accused of fomenting an army coup in Paraguay during Lugo’s impeachment) were quick to contact Cartes to congratulate him and express their willingness to restore relations. Brazil in particular has stressed the need to resolve Paraguay’s (and Mercosur’s) ‘situation’. Cartes may look to take advantage of this ‘disposition’ in future talks.

• Getting to work

Much still needs to be done in the home front first. Since being proclaimed president-elect on 10 May, Cartes has embarked on a campaign aimed at changing the negative domestic attitude towards Mercosur. In a series of interviews with a local daily, Ultima Hora, Cartes emphasised Mercosur’s relevance to Paraguay, stating that the country “must return to Mercosur without making much of a fuss, but demanding changes and results”, making it clear that he would demand concessions Mercosur but failing to specify what these might be.

The problem for Cartes is that it is still not clear exactly what sort of concessions would be enough to convince Paraguay’s senate to sanction Venezuela’s admission which, effectively, is a pre-condition for Paraguay’s suspension to be lifted. The ANR-PC, which previously adopted a party stance against Venezuela’s entry, won a simple majority in the incoming senate (19 seats in the 45-seat chamber). Similarly, the PLRA, the second largest group in the senate, has also consistently voted against admitting Venezuela. The general consensus in Asunción is that Cartes will find it difficult to convince all of the ANR-PC senators to vote in favour of Venezuela, and will have the same problem with the PLRA. Notably, on 16 May Cartes held a meeting with Lugo, who was elected a senator, to discuss “the possibility of developing a common political agenda in congress”. Along with Lugo, four other members of Lugo’s Frente Guasú coalition won senate seats; Cartes may end up needing their support.

• Pacific Alliance

On 8 May Paraguay’s deputy foreign minister, Antonio Rivas, said that the country had formally submitted an application to join the Pacific Alliance trade bloc as an observer State, the first step to join the bloc formally. Rivas said that the move was part of a policy to “strengthen” trade relations with partners outside Mercosur. The decision to submit the application likely was discussed by the transition teams overseeing the handover period. Cartes stresses that even though he wants Paraguay back in Mercosur, “I want Paraguay to have trade ties with Mercosur, Asia-Pacific and Europe equally”.

• RTA negotiations suspended

On 13 May president-elect Horacio Cartes asked the incumbent Federico Franco to suspend talks with the mining multinational firm, Rio Tinto Alcan (RTA), about an aluminium processing plant in the country. The US$3.5bn investment project has been in the pipeline since 2009, but progress stalled under the Fernando Lugo administration (2008-2012) on environmental concerns. Following Lugo’s ouster in mid-2012, his replacement Franco advanced the project and inked a memorandum of understanding with RTA. However as part of the handover, Cartes has requested that all public tenders and contract negotiations be suspended, pending an audit and analysis by his transition team.