Mercosur won't slap sanctions on Paraguay, eyes China By Guido Nejamkis and Ana Flor MENDOZA, Argentina (Reuters) - The Mercosur trade bloc, which includes regional heavyweights Brazil and Argentina, will not impose economic sanctions on Paraguay despite concerns over the ousting of the country's president, officials said on Thursday. Paraguay's Senate removed Fernando Lugo from office last Friday in an impeachment trial that lasted a matter of hours, prompting criticism in the region and beyond. Mercosur responded by banning Paraguay from attending a summit in Argentina this week. Brazilian Foreign Minister Antonio Patriota said that punishment would stand until democracy was fully restored in Paraguay. A clause calling for democracy in the Mercosur bloc "first refers to the suspension of (a country's) participation in meetings, and then there's a second phrase on the suspension of rights and obligations," Patriota told reporters at the trade gathering in Mendoza, a small city in western Argentina. "The decision was that we would limit ourselves to the first phrase," Patriota said. Paraguay is one of South America's poorest countries. The landlocked, soy-exporting nation of 6 million people has a long history of political instability and military rule. The UNASUR group of South American nations will hold an emergency meeting in Mendoza on Friday to discuss Lugo's swift removal, which was sparked by clashes over a land eviction that killed 17 police and peasant farmers. UNASUR could also suspend Paraguay from its organization, saying Congress denied Lugo the right to a proper defense. Many countries in the region have called their ambassadors back from Paraguay's capital Asuncion, permanently or for consultations. Lugo, a former Roman Catholic bishop, admitted it would take a miracle to get him reinstated. Paraguay'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. "They don't have a right to kick us out of any meeting," Paraguayan Foreign Minister Jose Felix Fernandez Estigarribia said in Asuncion. We are the government of Paraguay, elected by the Congress that removed Lugo from office. Mercosur will also refer on Friday to China's proposal that the two sides evaluate a possible free-trade agreement, Patriota said. Another Brazilian official said on condition of anonymity that this would probably be a "generic declaration." Chinese Premier Wen Jiabao asked the leaders of Brazil, Argentina and Uruguay this week to consider carrying out feasibility studies on the creation of a free-trade zone between China and Mercosur. China is a key market for the bloc's commodities exports but it also sells goods that compete with domestic production. 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. Uruguay's government said it would support a free-trade accord between Mercosur and China. But proposals by Uruguay and Paraguay, the bloc's smaller members, often get ignored by their more powerful counterparts. Paraguay does not even have diplomatic relations with Beijing because it has ties with Taiwan. China, the world's second-largest economy, considers the island a breakaway province. In South America, Chile and Peru are the only countries that have free-trade agreements with China. Additional reporting by Daniela Desantis and Didier Cristaldo in Asuncion and Malena Castaldi in Montevideo; Writing by Hilary Burke; Editing by Lisa Shumaker