Twenty years of negotiations, still far from ratification - the EU-Mercosur trade-agreement.

The EU-Mercosur trade-deal has been on the table for the last 20 years. It is an agreement with trade as its centrepiece, but which should be built on moral values and sustainable development. The negotiations ended on June 18th, 2019 but the agreement still hasn’t come into effect because of environmental concerns.

This deal involves 31 countries, 780 million people, a total GDP of 20.5 trillion € and Jean-Claude Juncker -former President of the European Commission- expects it to “save over 4 billion € of duties per year”. If this treaty comes into effect, it will be the biggest trade-deal ever made for both blocks in terms of GDP. Thus, it will give unprecedented opportunities for investors and firms and create some changes for the consumers.

But, if not clearly controlled, create a disruption in the efforts to counter climate change. Mercosur is a South American Trade Bloc established in 1991 and involving Argentina, Brazil, Paraguay and Uruguay (Venezuela was suspended in 2016). This article will first explain the specificities of the trade agreement. Then, it will explore the expected economic, social, political and environmental impacts if it comes into effect.

“Jean-Claude Juncker” by Mueller/MSC licensed under CC-BY-3.0-DE

First, what are the specificities of this trade agreement?

Currently, even though Europe is the second trade partner of Mercosur, exports and imports are relatively low. This is due to current disincentives to trade: extensive bureaucratic processes and especially sky-high tariffs on goods. At the moment, to protect their industry, most Latin American countries apply excessive tariffs on European industrial products. For instance, clothes and cars are taxed at a 35% rate. As most of the European exports are industrial goods –41% of their exports are cars and machinery–, this puts an important barrier to trade. On the other hand, Mercosur mostly exports agro-industrial goods such as soybeans, meat and coffee. These also suffer from high taxes when entering the EU. Adding to these taxes, the entry of agricultural goods is restricted to products meeting high standards, which are not needed in Latin America’s market. So, the main goal of the deal is to loosen these rules and limit tariffs to encourage trade between the two blocks. This is why the agreement specifies that almost 100% of the trade is going to be tax free. And for some exceptions the goods will have limited and fixed tax rates.

This agreement also targets the bureaucratic system of both blocks that slows down imports and entrepreneur’s initiatives. The goods will have fewer custom inspections to avoid delays and extensive paperwork. An online platform for European entrepreneurs is going to be created to help them get into Mercosur’s complex panorama. And, government contracts are going to be simplified to let firms from both blocks get outside their respective markets. This agreement not only targets trade but it also forces the commitment of both parties to the Paris climate agreement. And this article will later show how this detail is the element that is slowing down the implementation of the agreement.

Secondly, how could this trade-deal benefit both parties?

On the one hand, the removal of tariffs and taxes on goods is undoubtedly beneficial to both parties from an economic point of view. In practice, with the abolition of the tariffs, we expect more exported goods to be traded in both markets as they will be more accessible to the consumers and the firms will have more incentives to trade. Thus, European consumers will find cheaper agricultural products as soybeans and meat. And, Mercosur’s consumers will be able to buy cheaper manufactured goods such as cars and machinery. And Mercosur’s and Europe’s firms, respectively in the agricultural sector and in the industrial sector, will be able to expand their activities. This aspect of the agreement is expected to have a positive effect on both economies. By lowering taxes and tariffs resources are redirected to the production of competitive goods and no longer to the inefficient production of some goods that were protected by these rules.

Furthermore, with the facilitation of bureaucratic paperwork for new firms and the help that will benefit European entrepreneurs entering the Mercosur area, markets are expected to be more competitive and high influxes of investments are expected from both blocks. And as we know, a competitive market tends to benefit both the suppliers and the consumers as we get closer to the perfectly competitive market and the Pareto-efficiency. In sum, this deal is positive to both blocks as by removing barriers on trade we get towards perfect competition, thus benefiting the two sides of the market.

“Tractor, La Rioja, Spain” by Raúl Hernández González licensed under CC-BY-2.0

However, if this deal is so good, why is it still stuck?

A first drawback to this deal is linked to competition. Competition is a pillar in capitalist societies and even if from an economic point of view, it brings wealth and increases the societal surplus, as Schumpeter puts it, there is the creation of winners and losers. While the winners may be more, we should not forget the other side of the coin. In the EU the losers of this deal would be in the agricultural sector. As labour and standard rules are easier to meet in Latin America, these products are cheaper to make in countries such as Brazil or Argentina. This creates a price gap that will advantage American firms in the agricultural sector. In the Mercosur, the industry could be a loser. They are considered to be less competitive than European industries. This is mainly explained by the fact that American governments over-protected these firms by putting high tariffs on imported manufactured goods. This prevented the American industries from being exposed to the outside competition, giving them less incentives to be more competitive. So, this sudden opening of the borders could seriously harm this sector if they do not invest fast enough to become more competitive.

In both blocks, it could lead to an overflow of the market with more competitive goods, leading to an excess in supply only favouring the consumers as the prices would be lowered. But this effect should only last in the short term as a balance should naturally be reached over time.

“Big Tropical Forest Fire” by Ramos Keith

But none of the issues reported above are the reason why the agreement still hasn’t entered into force. The main issue revolves around the environment and increasing tensions with Bolsonaro’s government. Last October 7th, the European Parliament symbolically voted against the trade agreement. The main concern being that the Mercosur will not respect its commitment to the Paris Climate Agreement. These concerns are particularly linked to the poor management of the recurring wildfires in the Amazon and the repeated lies told by president Bolsonaro concerning the protection of the environment. Also, NGOs and independent organizations, as Greenpeace and Euroactiv, are asking for the rewriting of the agreement which would put the climate issue in its centre. They want an agreement with real commitment needed from both blocks to the Paris Climate Agreement. A system of enforceable sanctions to make it too expensive to deviate from the agreement and a system of control to verify that all the conditions are met. Furthermore, several domestic European parliaments, as in Austria, the Netherlands and Ireland, voted against the deal. The French government asked for a report to study the impact of the agreement on sustainable development, deforestation and carbon emissions. The Ambec report, issued last September, concluded that it is very likely to produce a rise in deforestation and harm biodiversity.

In closing, the agreement is beneficial to both blocks from an economical point of view. Not only will it increase wealth in both blocks thanks to free trade. But it will also oblige inefficient businesses that existed only thanks to the trade barriers, to reform themselves and become more competitive or allocate their resources in other sectors. From a social point of view, it is mainly positive, even though some sectors will be strongly harmed and would need to be helped to transform their activities. In this matter, the EU is preparing a one trillion euros package to help EU framers with the transition. However, from an environmental point of view the deal is far from being complete. And as of today, this matter is crucial to be able to ratify an agreement not only based on money, but also on values. But the EU cannot afford to blow out of the agreement as it would give too much place to China in Latin America. This agreement is economically and geopolitically necessary for the EU.

Cover picture: “Logo Mercosul” by Prensa Mercosur is licensed under CC-BY-SA-4.0