EUROPEUM Institute for European Policy

During the beginning of the 14th G20 Osaka Summit, on June 28th, the European Union and MERCOSUR announced an ambitious – but controversial – trade agreement that promises to increase the political dialogue, the investment cooperations and to open a free market of goods and services between the blocs. The Mercosur (Southern Common Market, in Spanish initials) is a regional integration process, comprising as founders and currently active members Brazil, Argentina, Paraguay and Uruguay.

Together, the four countries cover roughly 70% of the South American territory, and, combined, a population of about 270 million inhabitants. [1] With a GDP of US$ 2,5 trillion (2018) [2], it stands as the largest trade bloc in Latin America and the fifth economy in the world. [3]

To be implemented gradually, the agreement provides over time the removal of duties on 91% of the goods exported by EU companies [4], expanding its presence in a region where, thus far, the EU is not designated as a preferential partner. First and foremost, the agreement represents a signal to the world that the EU stands as an important international stakeholder outside of the polar powers of the United States and China, positioning itself against the commercial dispute through tariff barriers. Opening markets represents an opportunity to strengthen the competitive potential, at a time when protectionism and the trade war between the US and China have contributed to a gradual slowdown of the global economy. [5]

Furthermore, chapters dealing with sanitary and phytosanitary measures, respect for labour rights, sustainable development and transparency also bring up the advantages of a multilateral agreement, such as rule-based trades and the interregional governance, especially on environmental, human rights and food safety issues.
As a core for the mutual economic benefits, the agreement removes high customs duties over time in order to expand and strengthen integration, while allowing national industries a grace period for adapting to this new trade regime involving both benefits but also regulations. Industrial products exported by EU key sectors, like cars and car parts, shall be liberalised of duties, which are currently taxed up 35% and 18%, respectively. In the same way, the text encompasses machinery (currently taxed up to 20%), chemicals (up to 18%) and pharmaceuticals goods (14%).

The agreement also provides export benefits to European farming communities; at present time, the Mercosur countries impose high tariffs on products such as wine and sparkling wines, up to 27% on the former and 35% on the latter. Whiskey and other spirits are currently taxed up to 35%, and canned peaches on 55%. [6] In return, the agreement eliminates import duties on 92% of Mercosur goods exported to the EU, mainly on the agricultural industry, such as roasted coffee, tobacco, fishery and fruits (avocados, lemons and limes, melons and watermelons, inter alia). Some others may have expanded access to the European market through quotas, for instance in the case of beef, poultry, pork, ethanol, rice and sweetcorn.

Most importantly, the agreement provides a substantial opportunity for the EU to enlarge its competitiveness in South America. Asian countries have the largest share in the Mercosur market, with approximately 37.95% of the imports, out of the domestic trade among the Mercosur members. Subsequently are NAFTA and the EU, both with nearly 21.8%. If considered the countries in isolation, the Mercosur bought in 2018 about 23,4% of their goods from China, 17,30% from the US Americans and only 6,51% from Germany. [7] The expectations is an increase in the EU’s presence, due to the tax and tariff exemption.

Additionally, the agreement covers important political aspects not necessarily related to import-export per se, such as food safety, animal and plant health, environmental protection and labour conditions, trade in services and establishment, government procurement, intellectual Property Rights, and easing of customs procedures.

Nevertheless, due to political developments external to the EU-Mercosur agreement itself, broad consensus on its efficacy and political legitimacy has not been achieved. Concerning agri-food industry and environmental policies of the Mercosur bloc, particularly pertaining to Brazil, who is currently chairing the Mercosur Presidency, there is still a clear divergence between the EU and Mercosur at political, if not at trade, levels.

The logging of numerous protected areas of the Amazon rainforest since the inauguration of Jair Bolsonaro, as well as the liberalization of countless agrochemical products and their use, raise concerns amongst the EU’s increasingly climate change-aware political leadership and the general public.

Coupled with the decision of Brazilian President Bolsonaro to threaten withdrawal from the Paris Agreement on Climate Change, several European leaders, chief amongst them French President Emmanual Macron, has asserted their opposition. “If Brasil left the Paris accord, as far our we are concerned, we could not sign a trade deal with them. For a simple reason: we’re asking our farmers to stop using pesticides, we’re asking our companies to produce less carbon, that has a competitiveness cost.” While no irrevocable actions have been taken by Brazil at this stage, it remains unclear and uncertain to which extent Bolsonaro is willing to sacrifice progressive policies in his pursuit of a culture war.
The chapters related to the subsidies, sustainable development and the dispute settlement try to ensure safeguards to protect the environment and the local economies. However, although the text explicitly states that subsidies can be granted when they are necessary to achieve a public policy objective, the details of eventual compensations in case of accrued losses, especially in the farms and livestock industries, might prove controversial and play a determining role during the public debates and political discussions within the EU. [8]

Countries like France, Ireland and Poland must be cognizant about the agreement implications and its potential impact on their extensive agri-food industry by the South American exports, which this new agreement enables. Together, these countries represent about 31,73% of the cereal production and 26,81% of the oilseeds and protein crops within the EU, while simultaneously having seen a decrease in their beef and veal production (-2,4% and -4,5% in the cases of France and Poland, respectively). [9]

Like in similar agreements carried out by the EU, national parliaments still have to receive a forward draft, in order to comply with the validation procedures, during the legislative process. The way in which national states and their representatives in the EU institutions will conciliate the industrial interests on the exports and the agricultural resistance, in addition to the environmental concerns, will prove revelatory in regards to how each EU Member State weighs the above-stated concerns in relation to each other, and thus indicative of how they may conduct themselves under the new EU leadership and its ambitious agenda.
Should the agreement be signed by all parties in the end, there is still the conundrum of Brazil’s domestic political situation and how it might impact the wider agreement, potentially to the detriment of other Mercosur countries. The enlargement of the agribusiness industry over the sustainable development represents a clear obstacle to increasingly climate-conscious European leaders – and for good reason; the Amazon more than earned its moniker of the “world’s lungs”. Ultimately, a new EU-Mercosur agreement is in everybody’s interest and to mutual benefit if properly negotiated, yet at this point, it remains unclear whether internal Mercosur divisions, namely due to Brazil’s turn to the right, will prove an obstacle to the detriment of all parties involved.

Helder Hermani

 

 

[1] United Nations – Economic Commission for Latin America and the Caribbean.

[2] International Monetary Found (2018).

[3] EU-Mercosur trade agreement: The Agreement in Principle and its texts.

[4] Key elements of the EU-Mercosur trade agreement.

[5] Indeed, the IFM annual World Economic Outlook shows a decreasing of the Real GDP growth, over the last 3 years (3.8% in 2017, 3.6% in 2018 and an expectation of 3.3% in 2019). Source.

Several articles can reinforce the argument about the influence of the trade war in the lower growth expected for this year. Interesting what says Song Seng Wun, South East Asia economist, more specifically about the Asian market: “This trade war is coming at a time when global growth is slowing down after ten years of relatively stable times. Even if by some miracle a fairy taps her magic wand and the trade war disappears, all that would happen is that things would just be less bad – rather than really bad.” Source.

[6] Key elements of the EU-Mercosur trade agreement.

[7] MERCOSUR Stats.

[8] Latest Cereals and Oilseed production data update: 27/06/2019.

[8] Comparison period: Jan-Apr 18/19.

 

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