What’s preventing the EU-Mercosur trade agreement?

Beatriz Farrugia . Sep 16, 2018

EU-Mercosur deal: 24 years in the making

Brazil’s political future is uncertain; Argentina’s economic landscape is terrifying, and U.S. President Donald Trump is waging a trade war with China. This is the backdrop leading up to the latest round of talks between the European Union and South American trade bloc Mercosur regarding the negotiation of a free trade agreement. The meeting in Montevideo, held between September 10 and 14, was yet another attempt to push forward talks which started over 20 years ago and, while diplomats were optimistic, once again nothing was signed.

The truth is, the ideal moment for the trade agreement between the two regional blocs has already passed.

A window of opportunity opened in 2017. Back then, Brazilian President Michel Temer had some positive economic figures to show for itself, while Argentina’s president Mauricio Macri was preaching for a renewed, more open to the world version of Mercosur, and Donald Trump threatened Europe with trade tariffs.

Those conditions created a perception that increasing trade between South America and Europe would be a win-win situation. “In December 2017, we believed that a deal was coming, but, as we saw, it wasn’t,” says Lucas Ferraz, a professor at the Economics School of Fundação Getulio Vargas (FGV). He points out that they are yet to sign even a political accord. Nine months later, negotiations seem to be on hold as Brazil heads to the polls on October 7 to choose a new president and a new Congress. Brazilian diplomatic instruments usually don’t suffer significant changes, regardless of who is the head of state, but the pace of negotiations can vary depending on who gets elected. Besides, Europe is set to remain distant until it can work out how Brazil’s political landscape will look after the election. “Government changes tend to put the brakes on negotiations of this kind – and there’s no reason to believe that would change now. As no deal has happened in September, the matter should be left for the next administration and won’t advance at least until the second half of 2019. It’s highly improbable that the new president will deal with [the EU-Mercosur agreement] during his or her first 100 days,” says Rogério Lino Pereira, corporate director at Mercosur’s Chamber of Commerce. “This matter, however, should be important for any administration,” he continues. “Brazil’s economic recovery involves international trade deals.” <h2>Brazil not the only problem</h2> Argentina, Mercosur’s second major power, is engulfed by a major currency crisis, with the Argentine Peso losing half of its value against the U.S. Dollar since January. Unemployment stands at 9 percent, inflation rates are at 31 percent over the last 12 months, and the country has demanded a USD 50 billion credit line from the International Monetary Fund. With his country off the rails, President Macri is unlikely to dedicate much effort to such complicated trade negotiations. Also, if Brazil’s and Argentina’s problems weren’t enough, Uruguayan President Tabaré Vázquez has recently said he’s in no rush to sign a deal with the Europeans. Mr. Vázquez stated he would not accept “eternal negotiations” or a “watered-down” version of the agreement. Mr. Trump, who posed a significant threat to European markets, is now the party which will most likely benefit from the situation. The Americans have begun talks of a free trade deal involving sectors which are crucial for Brazil – such as agribusiness. “Everything points to the EU opening its agricultural market to the U.S., reducing the possibility of a deal with Mercosur,” Mr. Ferraz told The Brazilian Report. <h2>What’s preventing the EU-Mercosur deal from happening?</h2> Talks between Europe and the bloc formed by Brazil, Argentina, Paraguay, and Uruguay began in 1999. They were on standby between 2004 and 2010, as Brazil opted for a strategy more centered around the Doha Development Round (which commenced in 2011) and the World Trade Organization. It was during Dilma Rousseff’s administration that Brazil once again went looking for an EU-Mercosur deal. However, conflictingly, Brazil’s protectionist policies created obstacles for getting anything done. “Europe deals with any country, it seems, except for Mercosur – which, in turn, has never managed to ink a sizeable trade deal with anyone,” mentions Mr. Ferraz. “It is not normal to have negotiations lasting for 24 years. These talks usually take three to four years (…) Given that Brazil is by far Mercosur’s biggest economy, it also shoulders the lion’s share of the blame,” says Sandra Polónia Rios, director of the Center for Development and Integration Studies. While the EU is open to trade deals, the bloc keeps protectionist measures in place over the very sectors in which Mercosur countries are strong, principally agriculture. “Europe won’t open its market to South American agricultural producers unless it gets many advantageous conditions in other sectors. Brazil has waited too long to <a href="https://brazilian.report/money/2018/07/18/isolated-brazils-economy-trade/">open its economy</a>, and that must be done if we want to get a deal signed,” says Ms. Rios. In the current stage of negotiations, the most significant barriers are over sanitary controls, the auto industry, agribusiness, intellectual property, medicine patents, and certification of geographic origin rules. The conditions presented by the Europeans now are very similar to the ones they brought forward in 2004, except in regards to beef and ethanol, which have become less advantageous for the South Americans. Back then, the EU offered an import quota of 1 million metric tonnes of ethanol per year (cut down to 600,000), and over 100,000 metric tonnes of beef (slashed to 90,000). Brazil wanted to get the 2004 proposal back to the table and blocked a deal last December. For the auto industry, Mercosur wants tariffs to be zeroed in 15 years – while the EU asks to cut this term in half. When it comes to certification of geographic origin – which is used by food & beverage producers as seals of quality – things get more complicated. Europe initially wanted to protect 300 products, such as Parmigiano-Reggiano cheese. The list has since been reduced by 90 percent, but negotiations continue. As Brazil received waves of European immigrants in the 19th and 20th centuries, many of these types of cheese are also produced in Brazil – in some cases, for over 100 years. Geographic protections would <a href="https://brazilian.report/money/2018/08/07/brazil-international-trade-barriers/">prevent Brazilian companies</a> to export products with certificates established by the EU-Mercosur deal – and things could get as broad as prohibiting Brazilian parmesan cheese. <h2>What is to be gained from the EU-Mercosur deal?</h2> For Newton Roda, an agribusiness expert working at FGV, Mercosur has the potential of becoming a significant supplier of in natura food products to Europe, and even the U.S. “South American countries are huge food producers. However, they lack a strong trade agenda,” he says, adding that a change of posture could see Mercosur become the world leader in ethanol, soybeans, and animal protein (beef, poultry, pork). According to the Mercosur Chamber of Commerce, the bloc exchanges over EUR 46 billion with the EU. That amount would double within five years after a deal is signed. The auto industry, agribusiness, and sugar and ethanol producers would be the biggest winners. “By 2030, for example, we would double the amount of processed rice, wheat, poultry, and pork sold to the EU, and increase exports of fruit and vegetables by 22 percent,” mentions Lucas Ferraz. Mercosur countries would also have access to machinery and equipment produced in Europe, helping to modernize local economic sectors and increase competition. Sandra Polónia Rios regrets the lack of progress in negotiations: “If a deal got signed today, it would not be in effect before 2021. Had we signed it in 2014, the positive effects would have been felt right now.”

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Beatriz Farrugia

Beatriz Farrugia has ten years of experience working for international news agencies. She is currently an editor at ANSA and holds a post-graduate degree in International Relations from Fundação Getulio Vargas

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