Costa & Trebat to Brazil-US Business Council: EU-Mercosur agreement marks step forward on long road
This article appeared in the July 22 edition of the Brazil-US Business Council’s Washington Update newsletter.
By: Carolina Costa, Regional Director, Latin America and Gabrielle Trebat, Regional Director, Latin America
After two decades of negotiation, the European Union (EU) and Mercosur reached a political agreement on June 28 to move forward with a trade agreement between the two blocs. The new framework removes over €4 billion in duties per year—a major commitment to lowering trade barriers against a global backdrop of rising trade tensions that has also been lauded for strengthening key institutions. While the agreement marks a clear achievement for Brazil and its fellow Mercosur members, ratification could be challenging due to concerns about its environmental impact, opposition from European farmers, uncertainties of regulatory harmonization, as well as political uncertainties in some of the key countries, such as the October presidential election in Argentina.
As Mercosur’s first comprehensive agreement with another trade bloc, the announcement marked a major step forward for Brazil’s integration into the global economy. It is also a political victory for the Bolsonaro Administration because it both expands export opportunities for some of Brazil’s key sectors, most notably agribusiness, and creates strong incentives for foreign investors seeking access to European markets.
The tariff reductions included in the agreement are significant – up to 90% of bilateral goods trade – but also cover several politically sensitive items. Because the EU agreed to remove tariffs on 80% of agricultural imports from Mercosur, EU Agriculture Commissioner Phil Hogan has been under pressure to reassure European Ministers that food imports from Mercosur would still be required meet EU safety standards and that the use of tariff rate quotas on key items (including beef) in lieu of full liberalization will help protect farming communities.
However, the EU farm cooperatives’ association (Copa-Cogeca) said the deal was “devastating” and environmental advocacy groups claim it will lead to further expansion of Brazilian cattle ranching and deforestation in the Amazon. Civil society organizations criticized the agreement and could pressure EU member countries – particularly France – to use it as leverage so that Brazil will be forced to comply with its commitments under the 2016 Paris Climate Agreement.
As countries in the EU and Mercosur begin to debate ratification, public responses to the agreement appear to indicate that there are more obstacles in Europe than in South America. Despite concerns that the process could face delays, particularly if the Peronists return to power in Argentina’s October presidential election, none of Mercosur’s member countries are expected to block ratification. Meanwhile, some EU members have publicly stated their concerns about the agreement’s agricultural provisions. French President Emanuel Macron called it a “good” deal, but a government spokesperson later said France was not yet ready to ratify. And while Prime Minister Leo Varadkar said he remains committed to free trade, the Irish Parliament rejected the agreement in a non-binding resolution on June 11, citing potential deforestation and concerns about food safety standards.
Several controversial elements were not included in the initial agreement. Although the two blocs also agreed to exchange information on best practices in agricultural biotechnology, they did not establish a clear path forward on a single set of regulations for genetically modified agricultural crops. And the agreement did not include provisions for investor-state dispute settlement (ISDS), but it did include a state-to-state dispute settlement chapter. Ultimately, this could serve to provide more rapid resolution to conflicts of interpretation, which could be handled under the agreement rather than facing long delays at the World Trade Organization (WTO).
After three decades of relatively limited economic integration within Mercosur – and after member countries played a key role in derailing the proposed Free Trade Area of the Americas with the United States – the new EU trade agreement substantially raises the standard for South American integration. In the short term, it provides a framework for key domestic reforms to improve the business environment. These reforms improve the likelihood of OECD accession for both Brazil and Argentina by making it harder for future governments to adopt arbitrary trade restrictions. In the long term, the agreement could provide additional momentum through further agreements, such as ongoing Mercosur negotiations with South Korea, Singapore, Canada, and the European Free Trade Association (EFTA).