briefing on prospects of eu-mercosur trade deal 2

8/10/2019 Briefing on Prospects of EU-Mercosur Trade Deal 2

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The European Union-Brazil Trade Relationship: Prospects for an EU-MercosulFree Trade Agreement

The VII European-Brazil Summit held on 24 February 2014 in Brussels concluded with awide-ranging Joint Communique that included, among many commitments, a strongreaffirmation of the proposed European Union-Mercosul Free Trade Agreement. Theproposed agreement, which has its origins in talks dating to 1999, would provide acomprehensive trade accord between the EU and Argentina, Brazil, Paraguay, andUruguay, with Venezuela being the only member of Mercosul (Mercado Comum do Sul)not participating. While there are many technical and political issues to be resolved, theremay be signs that changing economic and political dynamics are leading the parties to theconclusion that deepening the trade and investment relationship is important.

At the conclusion of the EU-Brazil Summit, Jos Manuel Barroso, the President of the

European Commission, said he had seen progress on the Mercosul side and that wecould have an agreement in the foreseeable future. Brazilian President Dilma Rousseffsaid that there now was a very real will...to complete the agreement.

The EU-Brazil Trade Partnership

The EU and Brazil have a strong mutually beneficial trade relationship. The EU is Brazilslargest trading partner accounting for 20.8% of its total trade and Brazil is the EUs 8thlargest foreign market, accounting for 2.2% of total EU trade (2012). Trade between theEU and Brazil has grown by 200% over the past decade to a total of 76.9 (BRL247.2)billion in 2012 with EU exporting37.3 (BRL120.0) billion and importing35.8(BRL115.1)billion (European Commission data). Agroindustry goods account for nearly half of EUs

imports from Brazil, whereas mineral products represent the second largest category,followed by wood, paper and chemical products. Major EU exports to Brazil includemachinery and appliances, chemicals, transport equipment, base metals and minerals.

Falling commodity prices and a decline in quantity of imports from Brazil shifted the tradebalance negative for Brazil in 2012 and 2013 for the first time since 1999.

The EU is the biggest foreign investor in Brazil with investments in many sectors of theBrazilian economy. Around 50% of the FDI flows received by Brazil during the last 5 yearsoriginated in the EU. The total value of the EUs investment stock in Brazil amounted to

238.9 (BRL768.0) billion in 2011. The total value of Brazils investment stock in the EUwas 77.8 (BRL250.1) billion in the same year.

EU Challenges and Perspectives

The EU has been very active in seeking far-reaching trade agreements in recent years, inparticular in the wake of the financial and economic crisis. The failure of the Doha Roundresulted in a focus on bilateral trade deals with countries around the world, resulting inagreements with Mexico, Chile, South Korea, Colombia, Peru and more


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recently with Singapore and Canada. Negotiations are ongoing with India, Malaysia,Vietnam and Thailand. The most substantial, intensive and ambitious talks are currentlybeing conducted with Japan and the United States.

The trade data above demonstrate the importance of the Brazilian market for the EU. Atthe same time, existing tariff (12 % average customs tariff) and non-tariff barriers formanufactured products and services are relatively high. This suggests that there issubstantial potential for future growth in exports and investment. The EU consistentlyencourages Brazil to reduce tariff and non-tariff barriers, and to maintain a stableregulatory environment for European investors and traders. The EU sees the EU-Mercosul

Association Agreement as a possible vehicle to reduce these barriers.

However, the EUs appetite for negotiating an agreement with Mercosul must be evaluatedagainst the backdrop of its efforts in reaching trade deals with other countries that areeither larger, have more potential, or perceived to be easier to reach. Under the EUs

system, trade deals are negotiated by the European Commission on the basis of amandate from the governments of all 28 Member States, and require approval by theEuropean Parliament. All the stars must be aligned politically for any deal to be agreedand it requires substantial effort and energy from all EU parties concerned both beforeand during the negotiations.

The prospect of any potential trade agreement depends on the political capital that needsto be expended and the administrative resources that are available and always incomparison to what is necessary to reach deals with other countries. In the case ofMercosul, the EU will be watching closely as to whether the Mercosul countries are ableto bridge their internal differences. In addition, it remains to be seen whether EU MemberStates and institutions will be able to generate the necessary political excitement and

support and administrative resources for a deal with this region while negotiations with farlarger countries (U.S. and Japan) are still continuing.

In any case, the negotiations will not be easy. The offensive interests for the EU are inareas where Brazil and the other Mercosul countries have traditionally been protectionist:manufacturing, investment, public procurement and intellectual property. Likewise, theoffensive interests for the Mercosul countries are typically in the agri -food sector, whicha number of EU countries are likely to continue to protect. When the talks were reopenedin 2010, the European beef and pork producers expressed concern that any deal withMercosul could significantly reduce their production (a Commission 2011 study predicteda drop of 150,000 tonnes in beef production and a price drop of 8 %). In addition, someEU countries such as France and Italy might be inclined to support existing tariffs on the

imports of cars into Brazil given the high volume of cars they produce in Brazil.


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Brazil Challenges and Perspectives

Brazil has been inching cautiously towards a free trade agreement with the EU for years.Recent developments include more vocal support from both industry and agriculturesectors. Historically, the industrial sector has been reluctant to move ahead aggressivelywith trade liberalization because of competitiveness concerns, while agriculture hasworked to open foreign markets, including trying to address the protectionist EU commonagricultural policy. Regulatory reforms would present another set of challenges.

There are many reasons Brazil might like to move ahead with a FTA. First, Mercosul hasbecome an increasingly difficult customs union to manage and may not serve Brazilseconomic interests indefinitely. Second, there are limitations to growth of the domesticmarket. Third, Brazils lack of competitiveness is linked to a relatively closed trade policy.Fourth, the rise of so-called mega-agreements, particularly the Trans-Atlantic Trade andInvestment Partnership (TTIP) between the United States and the EU, could leave Brazilin a disadvantageous global trade position. Fifth, over-dependence on commodity exportsto China to the detriment of a more diverse export profile has proven to be a vulnerability.

Despite increasing Brazilian support for the agreement, including strong statements fromPresident Dilma Rousseff, many challenges and concerns remain. Brazilian industry,particularly the automotive sector, will lobby for staged implementation to build inadjustment time. Agriculture will be difficult to keep at the negotiating table unless there isclear movement on opening the EU markets. Dealing with sensitive and vulnerableindustries and sectors will be crucial to concluding an agreement.

Reactions in Brazil to the EU-Brazil Summit were mixed. While some sources reportedmovement on the trade accord in a positive light, others noted that progress has lapsedbefore and that there are some very real challenges that will be difficult to overcome. In

addition, Brazil faces national elections in October at all levels of government, the resultsof which could change the political outlook, but which is difficult to predict with respect tothe proposed EU trade agreement.

Outside of Brazil, the Mercosul common market, which has become increasingly difficultto manage, could inhibit progress on negotiations. Venezuela is not participating and

Argentina remains reluctant to support a comprehensive trade and investment agreementfor protectionist reasons. It is possible, however, that remaining Mercosul countries couldmove ahead, although the implications of the customs union are far from clear. Howdifficult the situation is within Mercosul was illustrated when their internal meeting todevelop a common position for the talks with the EU (which had been scheduled for March7) was canceled by Brazil because of the ongoing unrest in Venezuela, the inauguration

of Chiles President and a range of domestic issues.


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Looking Ahead

It is unclear when Mercosul will be meeting to discuss its position on the talks. On March21, the EU and Mercosul are scheduled to hold technical discussions, but this meetingmay be delayed if Mercosul is unable to make progress internally. Should sufficientagreement be found, it is possible that formal offers could be presented shortly thereafter,initiating the negotiation process. Judging by the challenges outlined in this paper and thespeed of such negotiations between other countries, this is likely to continue for a longtime.

briefing on prospects of eu-mercosur trade deal 2

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