Latin America Advisor

A Daily Publication of The Dialogue

How Revolutionary is the E.U.-Mercosur Trade Agreement?

Representatives of the European Union and member countries of the South American Mercosur trade bloc announced they had reached a deal after two decades of negotiations. // Photo: European Commission. EU-Mercosur Negotiations // Photo: European Commission.

After 20 years of on-and-off again talks, the Mercosur trade bloc, consisting of Brazil, Argentina, Uruguay and Paraguay, and the European Union have reached an agreement to strengthen commercial ties. The deal would form one of the world’s largest free trade areas and includes the elimination of nearly 90 percent of tariffs on both sides. How significant is the Mercosur-E.U. trade deal, and what are its most important provisions? Which sectors in the South American countries stand to gain or lose the most from the agreement? What challenges will the deal face before its final approval, and to what extent could presidential results in Argentina and Uruguay in October affect its implementation?

Shunko Rojas, partner at Quipu and former undersecretary of international trade at the Argentine Ministry of Production: “The Mercosur-E.U. Agreement (MEUA) constitutes the first modern and comprehensive agreement concluded by Mercosur countries, and their most important decision on integration into the global economy in the last 25 years. The European Union, in turn, becomes the first economy to achieve preferential trade agreements with all Latin American countries, a goal that the United States was not able to accomplish with the Free Trade Area of the Americas (FTAA). This agreement now sets the base of a minimum common denominator for a deeper integration in the region. Moreover, the successful conclusion of the agreement reinvigorates the external agenda of Mercosur, boosting current negotiations with European Free Trade Association (EFTA), Canada, Korea and Singapore, as well as the convergence with the Pacific Alliance, and also opens up a unique window of opportunity for eventually advancing an agreement with both the United Kingdom and the United States. The MEUA takes Argentina and Brazil closer to the OECD, and the institutional anchoring provided by the agreement will not only make it more difficult and unlikely for future governments to adopt arbitrary restrictive measures but will also act as a catalyzer for reforms resulting in a substantial improvement in the business environment for trade and investment. The agreement now has to be ratified by the European Parliament (no need for individual members’ ratification) and the Mercosur countries’ congresses. Ratification is expected by 2021. Regardless of the winning candidates in the October presidential elections in Argentina and Uruguay, the prospects for passing the agreement in both congresses is good. In the case of Argentina, were President Macri re-elected, ratification will be a priority. If Fernández is elected instead, although the process will be more cumbersome, the deal will probably pass. This is either because there is enough genuine support among provincial governors or because not passing the agreement may mean a huge economic setback for Argentina. If Brazil ratifies the agreement but Argentina does not follow suit, Argentina faces the enormous risk of trade diversion and losing the Brazilian market, its largest export destination. In turn, for Uruguay, the ratification process is not expected to face major challenges.” 

Joe Healy, president of the Irish Farmers’ Association (IFA): “It’s a bad deal for farmers, it’s bad for the environment, and it’s bad for standards. We see this as a sell-out of Irish and European farmers because Brazil in particular does not meet our standards on food production. It’s hypocritical of the E.U. Commission to talk about climate action and then encourage more exports from the Amazon rainforest, where the size of a football pitch is cut down every minute. The Joint Research Centre has shown that our beef production is four times more efficient than beef produced in Brazil. With the increasing threat of Brexit and the potential loss of our largest beef export market to the United Kingdom for 290,000 tons of beef exports, it is illogical for the E.U. Commission to do this deal with Mercosur. The E.U. beef market is already oversupplied, due to existing substandard South American imports, and it is 102 percent self-sufficient. With the United Kingdom out, this self-sufficiency would increase to 116 percent. We want our government to join forces with other member states and oppose this deal as it is bad for agriculture and rural economies.”

Ignacio Bartesaghi, dean of the business studies department at the Catholic University of Uruguay: “For Mercosur, the Strategic Association Agreement with the European Union represents a substantial improvement in access for agricultural products, either through the elimination of tariffs or the increase of quotas. The most benefited products would be beef, pork, poultry, rice, dairy products, honey, sugar and ethanol. Moreover, there are gains in other goods due to lower tariffs, as is the case for fruits, wool and hides, as well as other prepared foods. The South American industrial sector could be affected, in the case of the automotive industry, plastics, chemicals, medicines, machines and electrical products. The agreement includes provisions for services and incorporates some of the most modern disciplines of international trade, such as provisions on the environment, labor, geographical indications, e-commerce and cumulation of origin. The inclusion of these topics is a qualitative leap for the Mercosur agenda and its potential relationship with other actors at a global level. In any case, for a better use of the deal, all Mercosur countries must undertake the pending internal reforms that still affect competitiveness. As for the debates on the deal, in addition to those already initiated in France and which will surely occur in the European Parliament, they are expected in Argentina, especially if there is a change of government. Part of the Argentine industrial sector and trade unions there have shown their discontent with some of the concessions granted, alleging lack of consultation and little transparency in what the Macri government agreed to. Although a less intense debate is expected in Uruguay, since historically all political parties and the private sector have supported the closure of the negotiations, recent union declarations indicate that there will be a strong internal discussion prior to implementation.”

Welber Barral, senior consultant at BMJ Consultores Associados and former Brazilian foreign trade secretary: “This is a relevant agreement for Mercosur, since it is the largest and most ambitious trade agreement signed by the bloc. Moreover, it will propel other agreements currently under negotiation (with the European Free Trade Association, Canada and Korea). The agreement also indicates a commitment from Mercosur to more trade opening and more compliance with international trade rules. On the other side, it will imply a greater market access for Mercosur products, especially in the highly protected European agricultural market. The agreement will eliminate import tariffs for more than 90 percent of the products between the two blocs. Most products that will not have the tariffs eliminated will have import quotas without the incidence or reduction of tariffs. Even so, the elimination of tariffs will be different for each product, ranging from zero to 15 years. Competition with European companies may boost the competitiveness of certain sectors in Mercosur and at the same time raise pressure on the local governments to improve the business environment and offer solutions to those sectors most affected. It is necessary to be realistic about the concrete effects of the agreement, which will only begin after it has been approved by the respective national parliaments. Brazil, for example, takes an average of four and a half years between the signing of an agreement and its entry into force. In the European Union, the average time to approve trade agreements is three to four years. President Macri had an important role in the latter phase of negotiations, and the final result is positive for his electoral campaign (although not sufficient per se to guarantee a favorable electoral result).”

Peter Hakim, member of the Advisor board and president emeritus of the Inter-American Dialogue: “The E.U.-Mercosur trade agreement should be welcomed and applauded. It has the potential to bolster the economies of all the participating nations and could prove to be a shot in the arm to the deeply troubled economies of Brazil and Argentina. It should help to open the way for their broader presence in the global economy—with opportunities not only for increased trade, but also for badly needed investment and new technologies. Still, full analysis has to wait for the pact’s formal ratification by 28 E.U. legislatures and their four Mercosur counterparts. That process will take time, probably two years or more—and governments will change. Presidential elections in Argentina this October, for instance, could well produce new leadership opposed to free trade. Some E.U. signatories (particularly France, Poland and Ireland) have already expressed considerable unease with the possible upsurge in agricultural imports from Mercosur. Many E.U. nations, most vocally France, also bitterly object to Brazil’s sharp cutbacks in its protection of Amazon forests and other environmental policies. The Bolsonaro agenda includes much more that offends many Europeans (last week, the president defended child labor)—and could stall ratification of the trade deal. The largest challenge confronting the E.U.-Mercosur trade arrangement is precisely what kept the Mercosur pact from achieving its ambitious aims: Argentina and Brazil’s failure, first, to adhere to the pact’s provisions, and even more importantly, to implement and stick with the domestic economic reforms needed to take advantage of the new commercial and investment opportunities. Both countries are today committed to actively pursuing intense reform programs to repair their economies, restore stable growth, increase productivity and improve the climate for business. Their success is what will shape and determine what the E.U.-Mercosur pact will be able to achieve.”

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