Mercosur welcomes Venezuela, suspends Paraguay

MENDOZA, Argentina Fri Jun 29, 2012 9:00pm EDT

MENDOZA, Argentina (Reuters) - The Mercosur trade bloc - which includes regional heavyweights Brazil and Argentina - will make Venezuela a full member next month, uniting South America's biggest grains and energy exporters.

At a presidential summit on Friday, Mercosur's leftist leaders also decided to extend Paraguay's suspension over the ouster of President Fernando Lugo until democracy is restored via new elections, scheduled for April 2013.

No economic sanctions were adopted against Paraguay but its officials will be banned from participating in Mercosur meetings. The suspension opened the way for Venezuela to be incorporated into the bloc since opposition in Paraguay's Congress was the only remaining obstacle after a six-year wait.

Brazilian President Dilma Rousseff praised the joining of forces, saying "food and energy security are becoming more and more relevant" globally.

The Mercosur customs union - which groups Brazil, Argentina, Uruguay and Paraguay - also agreed to allow individual members to raise tariffs on imports from outside the bloc to up to 35 percent on 200 products to protect local industry.

This doubled the number agreed in December and reflected worries that dumping could increase as global growth drags.

Argentine President Cristina Fernandez called on South America to band together more broadly to better confront global economic woes, just after making the announcement on Venezuela's membership.

Venezuela has the world's biggest crude oil reserves and belongs to OPEC. Socialist firebrand Hugo Chavez has governed there since 1999 and he is running for re-election again this year, despite his battle with cancer.

The Andean nation will be fully incorporated into Mercosur on July 31 at a meeting in Rio de Janeiro.

"This is a historic day for ... integration," Chavez told Telesur television station by telephone. "This is win-win for everybody."

Alicia Barcena, head of the United Nations' Economic Commission for Latin America and the Caribbean, said she viewed the move positively.

"Mercosur has a third of the world's water reserves, a third of arable lands, more than 45 percent of soy production ... and now with Venezuela's incorporation there's an expectation that energy integration could increase," she said on the sidelines of the summit in the western Argentine city of Mendoza.

INFIGHTING, CHINA

Being a full member of Mercosur requires that countries end tariffs between member states and adopt a common tariff that ranges up to 20 percent, with some exceptions.

The bloc is rife with internal divisions, however. Brazil and Argentina, which are often at odds over trade, have limited each other's imports despite Mercosur accords that promote free trade among member countries.

Argentine officials said earlier this month that they had reached a deal with Brazil to ease the entry of Argentine goods including lemons, king prawns and medicines.

However, Brazilian Industry Minister Fernando Pimentel told Reuters: "There's still no agreement that would motivate a change on the (non-automatic import) licenses."

Chinese Premier Wen Jiabao proposed this week that his country and Mercosur evaluate a possible free-trade agreement.

Mercosur did not address this in its final declaration. But a separate, joint statement was later released, saying officials from China and Mercosur would meet to "explore mechanisms and actions aimed at increasing and facilitating trade."

Analysts say Brazil and Argentina would probably be wary of a deal with China as both nations take protectionist measures aimed at shielding local industry from imported goods.

PARAGUAY PUNISHED

Paraguay's suspension from Mercosur meetings came after its Senate dismissed Lugo from office a week ago in an impeachment trial that lasted a matter of hours.

Neighboring governments wanted to send a stern warning about the consequences of removing a democratically elected leader, but they ruled out penalties that could hurt ordinary people in Paraguay - one of South America's poorest countries.

"We are not in any way applying economic sanctions because our aim is to improve our people's quality of life," Fernandez said. "(But we cannot) tolerate these 'gentle coups' or movements that - under a veneer of institutional correctness - shatter the constitutional order."

Paraguay is a landlocked, soy-exporting nation of 6 million people, sandwiched between Brazil, Argentina and Bolivia. It has a long history of political instability and military rule.

The country's new president, Federico Franco, was Lugo's vice president and one of his fiercest critics. Franco has defended the constitutionality of the impeachment trial, which Paraguay's top court upheld.

Just after the Mercosur gathering, the UNASUR group of South American nations met in Mendoza to discuss Lugo's swift removal, which was sparked by clashes over a land eviction that killed 17 police and peasant farmers.

UNASUR also suspended Paraguay, saying democracy was best defended through regional unity.

Paraguay's new foreign minister said the decision to suspend his country from Mercosur and incorporate Venezuela was "illegal."

"The government deplores that other member states have sanctioned Paraguay and its government so as to incorporate a new member before the conclusion of a necessary approvals process," minister Jose Felix Fernandez Estigarribia said.

(Additional reporting by Daniela Desantis in Asuncion and Jeb Blount in Rio de Janeiro; writing by Hilary Burke and Helen Popper; editing by Mohammad Zargham)