Mercosur-EU trade deal a victory for economic pragmatism

. Jun 29, 2019

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Today, we discuss the Mercosur-EU trade deal. Why did it take so long? Who wins from it? And what will be the repercussions for Brazil and South America. 

The week in review

39 kilos. A Brazilian Air Force sergeant was arrested in Seville carrying 39 kilos of cocaine in his hand luggage. The officer was a crew member on President Jair Bolsonaro’s backup plane—which flew in an advance party to Osaka (via Seville), where the G20 summit is underway. The government promised a rapid and rigorous investigation to identify whether the sergeant is a member of a drug ring. He had been a part of at least 29 international military convoys, under Michel Temer, Dilma Rousseff, and Mr. Bolsonaro.

</span></p> <p><b>G20. </b><span style="font-weight: 400;">Mr. Bolsonaro&#8217;s debut at the G20 started off tense, with a public squabble on environmental issues with Germany&#8217;s Angela Merkel and France&#8217;s Emmanuel Macron. But the Brazilian leader later toned down his rhetoric and had informal meetings with the two. In a speech to BRICS nations, Mr. Bolsonaro adopted a moderate tone, defending multilateralism, reforms to the World Trade Organization, and defended reducing protectionism. Early drafts of the speech promoted nationalism and a call against Venezuela.</span></p> <p><b>China.</b><span style="font-weight: 400;"> The meeting between Mr. Bolsonaro and China&#8217;s Xi Jinping was one of the most anticipated at the G20—but it didn&#8217;t happen. The Brazilian president canceled it after waiting for the arrival of the Chinese delegation for 20 minutes after the scheduled time for the get-together. Mr. Bolsonaro did have a brief meeting with Mr. Xi during a BRICS meeting, but the two did not speak in private.</span></p> <p><b>Pensions.</b><span style="font-weight: 400;"> A lack of political guidance from the government and the intense lobbying of pressure groups over parties has stalled the pension reform. A House special committee on the issue was expected to vote on the bill on June 25—but there was no deal to approve it. Representatives will try again on June 2. The main point of contention concerns whether to include state and municipal servants in the reform. More experienced party leaders doubt it will be possible to advance the reform and approve in on a two-round roll call vote in the House before July 17, when lawmakers go on vacation.</span></p> <p><b>Corruption.</b><span style="font-weight: 400;"> A special advisor to the Tourism Minister was arrested in connection to an investigation into the alleged use of dummy candidates to siphon public money from the Social Liberal Party&#8217;s electoral fund during the 2018 election. Tourism Minister Marcelo Antônio is believed to have funneled at least BRL 85,000 to companies linked to his name. To reporters, Mr. Bolsonaro said that he will not hesitate to fire the minister if there&#8217;s anything &#8220;robust&#8221; against him.</span></p> <p><b>Car Wash.</b><span style="font-weight: 400;"> News website </span><a href=""><i><span style="font-weight: 400;">The Intercept </span></i></a><span style="font-weight: 400;">published its latest batch of leaked private messages between Operation Car Wash prosecutors today. It shows prosecutors doubting former Judge Sergio Moro&#8217;s ethics—in the message logs, they call him an &#8220;inquisitor&#8221; and say he is &#8220;tolerated&#8221; because he gets the job done. Many prosecutors were also enraged at Mr. Moro for accepting the nomination as Jair Bolsonaro&#8217;s Minister of Justice. &#8220;It will be difficult for [the probe] not to be seen as part of the Bolsonaro administration,&#8221; wrote one.</span></p> <hr> <h2>Trade: Mercosur&#8217;s internal discrepancies</h2> <p><span style="font-weight: 400;">Mercosur, South America&#8217;s free trade bloc, struck its <a href="">biggest deal</a> yesterday, when diplomats agreed to terms with the European Union (more below). But the truth is that Mercosur has always failed to be a true free trade zone—a big reason for that is the deep imbalance within the member states. “An elephant, a mouse, and two ants”, is how Guillermo Valles Galmés, an Uruguayan delegate to the World Trade Organization, describes the member countries.</span></p> <div class="flourish-embed" data-src="visualisation/451684"></div> <p><script src=""></script></p> <div class="flourish-embed" data-src="visualisation/451708"></div> <p><script src=""></script></p> <hr> <h2>Markets</h2> <p><span style="font-weight: 400;">On Monday, Neoenergia, Brazil 2nd-largest energy distributor, will hold its initial public offering under the ticket NEOE3. The country&#8217;s second IPO of the year was priced at BRL 15.65 per stock, right in the middle of the estimated range, generating a total impact of BRL 3.7 billion. The money raised will benefit shareholders Iberdrola—which will remain Neonergias’ controller—as well as Banco do Brasil and Previ (the bank employees’ pension fund). Suno Research analyst Tiago Reis highlights that the company operates mainly in the Northeast, an area that has been showing a consistent demand for energy and imposes lower taxes. But the high demand for the asset is more connected to Brazil’s bull market—as the company kept the same estimated price it was hoping for on its last IPO attempt last year, while the overall market got more expensive.&nbsp;&nbsp;&nbsp;</span></p> <p><b><i>Natália Scalzaretto, TBR markets reporter</i></b></p> <hr> <h2>Mercosur-EU trade deal a victory for economic pragmatism</h2> <p><span style="font-weight: 400;">On Friday, Mercosur and European Union negotiators announced the two blocs have reached an agreement over a free trade deal—20 years after negotiations started. Despite his anti-globalist rhetoric, President Jair Bolsonaro did not hesitate in cashing in his first victory in foreign policy.&nbsp; “I promised I would trade with the entire world without ideological bias. It wasn’t an empty campaign rhetorical promise, a typical attitude from old politics. (&#8230;) Let’s open our economy and change Brazil for the better,” he tweeted.</span></p> <p><b>Why it matters. </b><span style="font-weight: 400;">The news is to be celebrated, as Brazil is &#8220;arguably the most closed economy in the world after South Sudan,&#8221; wrote Carlos Gois, a former researcher for the International Monetary Fund. The last wave of opening up Brazil&#8217;s markets happened in the early 1990s. It was followed by an extra growth in productivity of 0.4% per </span><i><span style="font-weight: 400;">year</span></i><span style="font-weight: 400;">—which is a lot, considering that the effect is comprised over time.</span></p> <hr> <p><img loading="lazy" class="alignnone size-full wp-image-19922" src="" alt="" width="1200" height="800" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr> <p><img loading="lazy" class="alignnone size-full wp-image-19923" src="" alt="" width="1200" height="800" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr> <p><b>The effects of the deal. </b><span style="font-weight: 400;">The Brazilian government expects Brazil&#8217;s GDP to gain about an extra USD 87.5 billion over the next 15 years—not to mention the major productivity and investment boost Brazil should also receive.&nbsp;</span></p> <p><b>Why it took so long. </b><span style="font-weight: 400;">Negotiations were put on hold between 2004 and 2010, as Brazil opted for a strategy more centered around the Doha Development Round (which commenced in 2011) and the WTO. But throughout the years, main roadblocks were imposed by the industrial sectors in Brazil and Argentina, and agricultural producers in Europe.</span></p> <p><b>What pushed the deal through.</b><span style="font-weight: 400;"> While it would be a mistake to attribute all the credit to Jair Bolsonaro for helping to push for the deal, it would be equally unjust not to recognize his administration&#8217;s merits in getting things done. Mr. Bolsonaro&#8217;s decision to place the Trade Ministry under the Economy Ministry&#8217;s umbrella was instrumental. The former was always dominated by lobbyists linked to industrial sectors—while the latter has historically been pro-trade.</span></p> <p><span style="font-weight: 400;">Rafael Cortez, partner and political scientist at consultancy Tendências, believes the deal is the win for economic pragmatism over the &#8220;anti-globalist&#8221; agenda of current Foreign Minister Ernesto Araújo, of Olavo de Carvalho, the president&#8217;s ideological guru, and his acolytes. &#8220;It reflects a more liberalizing agenda and the construction of two different identities: the one that adopts a political narrative and the other that reaps the economic benefits,&#8221; he told </span><b>The Brazilian Report</b><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">Foreign Minister Araújo, who led the Brazilian delegation to Brussels, was quick to say previous governments in Brazil and Argentina did not have the political desire to make the deal happen, and now Brazil expects the deal to be “part of a process to consolidate South America as a place for democracy and a market economy.”</span></p> <p><b>A slow process.</b><span style="font-weight: 400;"> It will take years before the deal takes effect. Local lawmakers must approve it—and while the Europeans need only one vote from the EU Parliament, each Mercosur country must hold its own congressional vote on the issue.</span></p> <p><span style="font-weight: 400;">The deal was considered to be &#8220;modest&#8221; in regard to two sectors—the auto industry and agriculture. According to newspaper </span><i><span style="font-weight: 400;">Folha de S. Paulo</span></i><span style="font-weight: 400;">, the total liberalization of auto trade should only happen after 15 years. In the auto parts sector, it could take between 10 and 15 years. In the agribusiness sector, EU only accepted quotas for beef at 99,900 tons (below levels previously offered), and 180,000 tons for poultry.

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