EU-Mercosul Trade Deal: A viable reality?
The European Union and MERCOSUL (Common Market of the South, in Portuguese) are the largest blocs in Europe and Latin America respectively. Given their status, one would expect to see deepening economic integration between both parties. However, since the first talks took place in 1995, the deal has stalled. Now more than 27 years later it still has yet to become operational. The cause lies in key area disagreements that could turn the deal into a stillborn agreement with no practical advantages for either side.
So, why has the EU-MERCOSUL Trade Deal been so hard to achieve?
A short background
Since its inception, MERCOSUL has been in talks with the European Union to craft a trade deal beneficial to both sides. Both the EU and MERCOSUL have complementary economies. While Europe has strong and competitive industries, South America excels at agriculture and livestock production.
Both sides demand huge amounts of goods produced by the other. When the deal was finally reached on the 28th of June 2019, some 180,000 metric tons of poultry, the same amount of sugar, 60,000 tons of rice, and 450,000 tons of ethanol were agreed to enter the EU tax-free.
From MERCOSUL’s side, it compromised to protect some 357 geographical indications and ended import duties on machinery, wine, spirits, dairy, pharmaceuticals, chemicals, and machinery. More than bilateral compromises, the deal sends a strong message in defence of the liberalisation of markets, and protection of globalisation in a growing protectionist sentiment within the two blocs and elsewhere.
Paradoxically, the deal signed almost three years ago has failed to create an effective understanding of common rules, regulations and standard quality levels, at least not enough to be ratified by the EU and each National Parliament. These problems stem from the highly protectionist policies perpetrated by both sides. While MERCOSUL imposes high import duties on manufactured products coming from outside the bloc, the EU has pretty tight regulations and sanitary rules on imports of agricultural products. On top of this, the CAP (Common Agricultural Policy) provides billions of euros in subsidies for European farmers; hindering competitiveness in the sector within Europe. Finally, there is a dispute over environmental protection, and accusations from both sides on the unwillingness of the other to compromise on their agricultural policies.
Political Scenario
The current political scenario plays against the deal’s ratification. The EU is split almost in half between supporters and opponents. France is the major player on the opposition side. Being the coutnry that receives the largest amount of subsidies from the EU for its agriculture, the French government and farmers fear that competition from MERCOSUL agri-products will put many producers out of the market.
This fear is shared by other farmers in Austria, Ireland, Poland, and Belgium, that have been strongly lobbying for the rejection of the deal. More industry-oriented economies, on the other hand, that produce manufactured goods needed in South America, tend to be more pro-deal. In particular, Germany has shown large support for the deal with its robust pharmaceutical and automobile industries. The Netherlands, Sweden, Spain, and Portugal also have a more supportive view and are focused on the benefits of the deal.
In South America, the situation is similarly troubled. With two governments openly hostile to each other in Argentina and Brazil — by far the two largest economies of MERCOSUL — the South American bloc has been overshadowed in their foreign policy.
While Brazil’s president, Jair Bolsonaro, advocates for closer cooperation with the United States and has been focusing efforts on getting Brazil inside OECD, Argentina’s Alberto Fernández, has prioritised a more protectionist policy, in an attempt to take his country out of an everlasting economic crisis and staggering inflation rates that have been consuming the purchasing power of Argentines.
Both presidents have publicly displayed hostility towards each other and have never paid each other an official visit, a sign of the bilateral crisis between Brazil and Argentina. The implications of this are substantial, as the two South American economies are akin to that of France and Germany in Europe. The protectionist impetus that comes from both Europe and South America has hindered discussions and improvements to the document agreed upon in 2019. The status quo advocates from both sides of the Atlantic seem reluctant in letting go of subsidies and benefits in the name of a more dynamic and open economy.
Environmental Scenario
The protection of the environment is also a key factor for the stalled deal. As a leading actor in this field, the European Union has been advocating for a more sustainable supply chain not only in Europe but also for their trade partners.
Since the election of Mr Bolsonaro in Brazil, deforestation and illegal activities in the Amazon region of the country have proliferated. Backed by the agriculture lobby inside the National Congress, the Brazilian government loosened many policies regarding forest protection and the protection of indigenous land. Between January and April 2022, a total of 1.953 km² of land was deforested — an area almost the size of Luxembourg — an increase of 69,4% if compared with 2021 numbers.
Due to this, Brazil and some European countries have openly exchanged accusations, with Germany and Norway blocking the sending of resources for the Fundo Amazônia, aimed at increasing and developing forest monitoring and preservation. France, however, has been openly critical of Brazil’s environmental policies. President Macron has even threatened to put forward the idea of making the Amazon an international area, removing it from the Brazilian sovereign area, triggering accusations of a “colonialist mind” by many politicians in Brazil.
With such disagreements in the environmental area, many actors in civil society have openly opposed the ratification of the deal by the EU and its Member States. Farmers in the EU have also made the argument that MERCOSUL nations only have competitiveness in the agricultural field, because of the considerably lower standards of land management and pesticide used within many countries in South America; making competition with these nations unfair.
Conclusion
The Brazilian elections in October 2022 may be a game-changer for MERCOSUL. If the leftist Worker’s Party, under the leadership of former president Lula da Silva, manages to win, a common ground could be found on the environmental matter.
In the case of victory, da Silva is expected to deepen contact with Argentina and other key Brazilian neighbours, reshaping Brazilian foreign policy to a more globalist and liberal approach. Moreover, although he may face opponents like Macron along the way, da Silva has had historically better relations in Europe compared to Bolsonaro. This could mean a substantial change in the Brazilian position, undertaking a more consensus-building approach and improving the country’s international image.
Regardless of which side will win this year, South America needs to show Europe that it can truly uphold the deal. All MERCOSUL members have a long history of corruption, economic instability, protectionism of their industries, and a never-ending bureaucracy that scares away foreign investors and makes the region technologically backwards. New legislation and a different economic mindset will be necessary if MERCOSUL plans on attracting big European investment in the coming years.
But change should not only come from South America. Europe’s CAP is widely protectionist and anticompetitive, with the reform approved only last year. While the CAP has managed to keep the EU as a space fruitful for the production of more sustainable agricultural practices, it has at the same time limited competition in the bloc; with billions in subsidies and import taxes hindering competition.
Furthermore, the policy faces criticism even within the EU, as it is the sole destination of a third of the EU’s budget. Meanwhile, the agricultural industry’s contribution to the European GDP falls very short of this number. The CAP also faces criticism for practising greenwashing; not being in line with the environmental goals the bloc has set for the next few years. Practising dumping in less developed countries with products that are overproduced in Europe, as well as favouring large producers over local farmers .
As the EU pushes for less regulation and import duties for its manufactured goods in MERCOSUL, it may need to end subsidies and protection to guarantee fair competition between European and South American commodities.
Besides this, Europe can help South America curb its rampant deforestation number. By granting facilitated access to the EU market to certified, environmentally friendly producers and exporters from MERCOSUL, both sides could establish a win-win situation where South American farmers are incentivised to go green, while increasing the supply of in-demand agriproducts in Europe.
In short, even though MERCOSUL does not count for a large percentage of the world’s GDP, its incipient industry, huge population, raw material-rich territories, and even historical and social closeness to Europe, makes it a key area for Europe to leverage its foreign policy and goals. A renewed European participation in the South American markets through such a deal may give the EU confidence to keep pushing for greater participation in the global market.
The deal may find some extra life as the war in Ukraine continues and the supply of goods provided by Russia and Ukraine to the EU is threatened. Many raw materials exported by these two countries are also produces within MERCOSUL, such as wheat, oil, and mineral ore. An agreement then could help Europe further detach itself from its dependence on commodities from the East.
However, as the deal faces backlash from both sides, the turmoil caused by the economic implications of COVID-19 and, more recently, the war in Ukraine provoked by Russia, the deal was sidelined in the European agenda and is still threatened to remain frozen, awaiting better conditions for new negotiations.
