EU-MERCOSUR: Does Their New Association Agreement Mean Much?

By Thomas Andrew O’Keefe*

29/06/2019 Coletiva de Imprensa UE-Mercosul

Press conference about the trade agreement between the Mercosur and the EU / Palácio do Planalto / Creative Commons

After nearly two decades of intermittent negotiations, the European Union and the four core MERCOSUR nations (Argentina, Brazil, Paraguay, and Uruguay) have finally inked a trade agreement, but its real impact won’t be felt for years, if ever. When the negotiations began in the mid-1990s, the EU was the largest trading partner of the MERCOSUR countries, and the United States was number two. Today China is in first place, the European Union is second, and the U.S. is fourth, behind intra-Latin American trade (EU investors, however, continue to have the largest stock of foreign direct investment assets in the MERCOSUR region). When ratified, the EU-MERCOSUR Association Agreement, signed in Brussels on June 28, will exempt a little more than 90 percent of two-way trade from tariffs.

  • About 93 percent of MERCOSUR exports will eventually obtain duty-free access into the EU market, the bulk as soon as the agreement comes into effect. Agricultural commodities such as beef, chicken, corn, eggs, ethanol, honey, pork, rice, and sugar only get reduced duties, with many also subject to quotas. Another 100 MERCOSUR agricultural items are completely excluded from any type of preferential treatment.
  • Some 91 percent of European exports will get duty-free access to MERCOSUR, but gradually as tariffs are reduced over a 10-year period. The phase-out is over 15 years in the case of European automobiles, furniture, and shoes. MERCOSUR tariffs on the remaining 9 percent of primarily EU manufactured goods will remain in place permanently.
  • The agreement offers service providers from any signatory country full access to the markets of all the other signatory states.

MERCOSUR showed greater flexibility with the EU on agricultural subsidies than it had with the United States, a position that contributed to ultimate rejection of the Free Trade Area of the Americas (FTAA). Subsidies in the EU-MERCOSUR agreement are permitted if “necessary to achieve a public policy objective.” The MERCOSUR countries also capitulated on the use of anti-dumping tariffs on intra-hemisphere trade. The new accord, however, does authorize governments to impose a duty that is less than the margin of dumping if it adequately removes injury to the affected domestic industry. It also includes provisions for ensuring that sanitary and phytosanitary (SPS) measures as well as technical norms are not abused and become disguised impediments to free trade, although it permits enforcement of the European “precautionary principle” notion to restrict the importation of genetically modified food, for example, where the risks to health are not scientifically conclusive.

The agreement – now being “legally scrubbed” and translated into the EU’s 23 official languages – faces an elaborate, multi-year ratification process in the EU, where individual countries and the European Parliament must approve it, as well as each MERCOSUR government. Agricultural forces are already lining up in many European countries in opposition. In the meantime, the accord’s greatest impact is a signal by Brazilian President Bolsonaro and Argentine President Macri that they’re making progress on their stated objective to return MERCOSUR to its original trade focus – in contrast to their predecessors – and to claim an economic “victory” when growth in both countries remains stagnant.

  • Despite the flexibility MERCOSUR showed on agricultural subsidies and anti-dumping, its main sticking points with the United States in the FTAA, a free trade agreement with the United States seems remote as the Trump administration – in contrast to the Europeans – is unlikely to offer meaningful concessions based on the lesser developed status of the MERCOSUR countries. Neither will the Association Agreement with the EU reverse or even slow the region’s shift toward trade with China and the rest of Asia.

August 6, 2019

* Thomas Andrew O’Keefe is the President of New York City-based Mercosur Consulting Group, Ltd. and a lecturer at Stanford University. He is the author of Bush II, Obama, and the Decline of U.S. Hegemony in the Western Hemisphere.

Increasing the Benefits of Trade Agreements

By Antoni Estevadeordal and Joaquim Tres*

Trade 1993-2016

Source: IDB (Full-sized images at bottom of page)

Latin American and Caribbean countries were major players in global trade liberalization in the 1990s but have since been held back by complex rules, infrastructural obstacles, and the poor flow of information.  The successful conclusion in 1994 of the Uruguay Round of multilateral trade negotiations and the establishment of the World Trade Organization (WTO) fueled growth and optimism in the region, but the slow progress of the Doha Round drove the region into the silent tide of regional trade agreements (RTAs), which now govern about half of world trade.  Latin American and Caribbean countries have concluded some 70 RTAs – a far cry from the handful of sub-regional customs unions and free trade areas in place in 1994.  As a result, tariffs applied by Latin American countries have dropped from an average of 40 percent to 10 percent during this period.

Despite these policy advances, Latin America and the Caribbean’s participation in international trade is still limited.  Whereas the region and the developing nations of Asia had a similar share of world trade in 1962 (around 6 percent), Latin America’s global trade share has remained relatively unchanged – and that of Developing Asia has grown to nearly three times its previous size.  Latin America registers lower levels of intra-regional trade – 18 percent – compared to 37% in Developing Asia and 61% in the European Union.  Our research indicates that Latin America and the Caribbean could close this gap through a series of measures:

  • Harmonizing the different rules of origin in the RTAs and the wide array of sanitary, phytosanitary, and technical standards that qualify market access.
  • Improving infrastructure and reducing inefficiencies at border crossings to reduce transportation and logistics costs, which amount to three times more than existing tariffs.
  • Harnessing the power of information and communications technology to reduce costs through one-stop shops and process automatization, such as the trade single windows being introduced in several countries in the region. The cost of information about consumer preferences, market demand, and foreign regulations is the first barrier that potential exporters face.
  • Simplifying and reducing administrative burdens through expedited and secure customs and other trade facilitation measures. Some experts estimate that, worldwide, some 75 percent of delays are due to inefficient processes (compared to 25 percent due to inadequate infrastructure).

The main lesson for Latin America and the Caribbean is that trade agreements are a necessary – but not sufficient – condition to achieve economic development potential.  Increasing companies’ participation in international value chains is key to unleashing trade as an engine for economic growth and poverty reduction.  Trade-driven growth in the region, much of it from South American commodities, enabled a reduction of poverty from 22 percent in 2002 to 12 percent by creating new employment opportunities and the fiscal capacity to fund poverty reduction initiatives such as conditional cash transfers (Mexico’s Programa Oportunidades, for example).  By our calculation, trade facilitation measures such as customs and border simplifications can increase Latin American and Caribbean exports by as much as 15 percent, translating into a 5 percent increase in export-supported jobs that pay almost 20 percent more than jobs at non-exporting firms.  It is within policymakers’ grasp to create the enabling environment for firms to export, especially for the small and medium-sized enterprises that may represent the next generation of exporters.

May 9, 2016

*Antoni Estevadeordal and Joaquim Tres are, respectively, the manager and principal specialist of the Integration and Trade Sector of the Inter-American Development Bank.  Click here to access the IDB’s new course on trade agreements, and here and here for related studies.

Trade 1993-2016 v2

Source: IDB