Free trade? Merco-sure!
Daniel Abreu Costa // 24 June 2019
For almost 20 years, EU negotiations with Mercosur, the South American trade bloc, have been a great challenge. Mercosur’s economic and political issues, French agricultural opposition and current EU trade policy have been the three main factors to the lack of ratification of a free trade agreement (FTA). It seems that winds of change have begun to blow. Now, an FTA seems imminent as there is a strong political drive in both blocs for an agreement. The EU ought to take advantage of these developments and strive to close the deal.
An FTA between the EU and Mercosur has been stuck for the past 20 years due to numerous obstacles. Mercosur’s process of economic integration is still incomplete and riddled with flaws; for instance, they have an uncoordinated trade policy towards third countries. In 2016, Brazil announced new antidumping investigations on imports from China whilst Argentina did not. It is clearly not as cohesive as its European counterpart; thus, it’s harder for members to negotiate as a bloc. Furthermore, certain Mercosur countries have seen their membership suspended. Paraguay was suspended from membership between 2012-2014 as their democratic order was broken and Venezuela’s membership was suspended when Maduro cracked down on the opposition in 2016.
It is not only the Latin-American side, who created some obstacles to a free trade agreement. Another important factor for the FTA not being finalised is the strong lobby of French farmers who have criticised the standards of South American beef production. They argue that such an FTA could leave them out of business because of the farming practices in Mercosur counties. Yet, the fundamental problem is not how cattle is farmed in Mercosur countries. The primary issue for agricultural negotiations lies in the EU’s interpretation of the precautionary principle that creates extensive regulatory burdens for European farmers. This makes them less competitive in global markets, as their products are more expensive. Instead of aiming to reduce European red tape which could allow them to be more competitive, farmers often demand restraints on international competition, for a price that will be paid by European consumers. Nevertheless, it seems that farm groups have lost their strong influence with French policymakers. Now, France is no longer such a stumbling block in the FTA negotiations, and it will allow South American farm products increased entry to the European market.
Mercosur countries, under the leadership of Brazilian president Bolsonaro and his Argentinian counterpart Macri, are unprecedentedly pushing to get a deal done. Such an FTA between the EU and Mercosur would be the biggest trade deal in history, opening opportunities with the world’s fifth-largest economy, where over 260 million new customers live.
The proposed FTA would eliminate high customs duties in key sectors including some with a large volume of trade, such as cars (35%), machinery (35-20%) or textiles (35%). EU companies already based in Mercosur countries could also import goods more easily and thus become more competitive. This FTA would also create opportunities for EU farmers. EU companies export huge quantities of olive oil, fruit, and wine to Mercosur countries and producers would greatly benefit from the removal of tariffs. The agreement will also address the export taxes imposed by Mercosur on raw materials like soybeans (23.5%) which will affect the security of supply and competitiveness of the EU livestock sector which relies on such crops.
Taken together Mercosur countries are the largest exporters of beef, sugar, ethanol and frozen poultry. Any realistic FTA will have to include market access for such products. European tariff rates quotas (TRQs) will only allow limited market access for such products – Mercosur countries will only be able to export 99,000 tonnes of beef a year – and at the same time, this will protect EU farmers. Likewise, Mercosur has asked for a 15-year transition for the import of cars. The protection of industries with a comparative disadvantage limits growth and makes consumer goods more expensive in both regions.
Many countries within Mercosur have a protectionist trade policy, so an FTA with the EU would enable at least the partial liberalisation of such markets. Brazil and Argentina have already started talks in reducing the common external tariff (14%) to around 5% or 6% in the long term. This opportunity ought to be seized by the EU to promote a more efficient trade regime in the Americas.
Striking a trade agreement requires both parties to achieve a beneficial outcome. If the EU wants to increase its access to these major Latin-American markets and reap the benefits of this partnership, it needs to be open to concessions in the areas that are of critical importance for Mercosur. This will not only enable the EU companies to export more but also allow for consumers on both sides of the Atlantic to enjoy cheaper and higher quality products due to increased competition. The new Commission should focus on achieving such a deal so that Europeans enjoy the gains of a landmark FTA.
EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).