The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
The likelihood of a free trade agreement (FTA) between Mercosur and the European Union (EU) is growing. In the most recent round of negotiations held in Brasilia earlier this month, the leaders of both blocs made it clear that they are willing to move towards signing the treaty. Recent advances come within the context of growing protectionism in the United States. While prospects that the treaty will be signed are bright, we shouldn’t get ahead of ourselves. The leaders of both blocs have been negotiating for over 10 years and there are still important obstacles to be overcome.
Analysts believe that a radically different political climate in South American countries is behind the recent advances in negotiations. The new governments of Argentina and Brazil, the main Mercosur countries, are less protectionist and the agreement would represent a political victory for Mauricio Macri and Michel Temer, who are each fighting their own internal political struggles. Additionally, the EU would welcome the signing of the treaty given the impact of Brexit and the election of Donald Trump, who has demonstrated his scepticism of free trade after withdrawing his country from the Trans-Pacific Partnership Agreement (TPP) and revising NAFTA.
In terms of global trade, after the United States and China, the EU continues to be the largest trading partner and the biggest source of foreign investment in Mercosur, a region that accounts for nearly half of Latin American GDP. Last year, bilateral trade between the two blocks was USD 90 billion, with a similar volume in exports and imports. And in 2015, the flow of European investment to Mercosur reached USD 40 billion, according to figures from Eurostat.
The main exports from Mercosur to the EU in 2016 were agricultural products (25%), vegetable products such as soybeans and coffee (20%) and animal products, especially meat (8%). Mercosur’s imports from the EU consisted mainly of machinery and equipment (30%), chemical and pharmaceutical products (25%), and automobiles and parts (19%).
What obstacles do the participating parties face?
The Mercosur-EU agenda is extensive and complex. Some of the most relevant points are sanitary and phytosanitary measures, trade and the facilitation of commerce, services, intellectual property rights, public sector purchases and sustainable development. According to a press release, the parties advanced their goal of having a negotiating text on these matters and reached an agreement on competition policy.
In terms of key obstacles, the treatment of agricultural products remains one of the largest. France, Ireland and Poland fear that an increase in imports of agricultural products from South America will erode their own farmers’ participation in the European market, and therefore they have highlighted as one example their concern about the sanitary standards of some Brazilian meatpacking plants.
Although the EU wants 90% of trade to be tariff-free, it also wants to maintain a quota system for food imports from Latin America. The European bloc has indicated that it is willing to offer a quota of 70,000 tons for South American meat, but this is still insufficient for the Mercosur countries. The South American countries are concerned that the procedures for public procurement and the resolution of investment disputes could harm local businesses.
What opportunities are on the horizon?
Signing this agreement provides a unique political opportunity. The governments of Argentina and Brazil have a key role in bringing the talks to a successful conclusion and there is optimism that the agreement will be closed before the XI Ministerial Conference of the World Trade Organization (WTO), to be held in December in Buenos Aires. The treaty must be ratified by all EU member states, however, and this will require time.
For the Brazilian government, the delay of the agreement beyond 2017, with the October 2018 general elections on the horizon, could complicate the agreement. In addition, Brazil's traditional approach to its gigantic domestic market could also continue to be a barrier to exports, as recently remarked by Welber Barral, a former foreign trade secretary.
In addition to the agreement with the EU, the Mercosur countries remain interested in greater cooperation with the Pacific Alliance, the free trade zone that includes Chile, Colombia, Peru and Mexico. Mercosur is also trying to increase its agricultural exports to Mexico as the country looks to diversify its foreign trade in the midst of the conflict with the United States over the revision of NAFTA. In addition to this, the talks between China and Uruguay that seem to be progressing are being closely watched by the rest of the members of Mercosur.
*Guest blog post from Latinoamerica21.
Ricardo Aceves is a Mexican economist specializing in Latin American macroeconomic issues and currently works as a credit risk analyst at CRIF Ratings in Barcelona. He previously worked as Senior Economist for Latin America at FocusEconomics.
Latinoamerica21 is a blog about current economic, political and social topics in Latin America that is currently published within the newspaper El Observador de Uruguay and Pagina Siete in Bolivia, and will soon be published in other media outlets within the region. The original version of this blog post is available in Spanish: El tratado de libre comercio Mercosur-EU cada vez más cerca
*Guest blog posts do not reflect the views of FocusEconomics.
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Date: November 22, 2017
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