McLARTY FIRST TAKE: EU & Mercosur draft strategic association agreement

June 28, 2019

KEY POINTS

On June 28, 2019, the European Union (EU) and Mercosur agreed on a draft strategic association agreement, following 39 rounds and almost two decades of negotiations.
The agreement reflects Europe’s desire to show the United States it has other commercial options, and Mercosur’s effort to begin to (slowly) liberalize its economies.
The agreement eliminates around 90% of tariffs between the trade blocs, with phase-ins for European exports to Mercosur.
European tariffs are expected to reduce more quickly, with 85% zeroed immediately.
Both sides now must perform technical and legal revisions of the agreed text to finalize the agreement, then pursue passage.

The Deal

The region-to-region agreement removes around 90% of tariffs of goods and services between the blocs and establishes preferential treatment for the remaining 10%.

For industrial goods, the EU will reduce tariffs on 100% of imports from Mercosur, eliminating 93% of tariffs and establishing preferential treatment for 7% of goods. Mercosur will reduce tariffs on about 90% of EU exports. While the EU will immediately implement tariff reductions and eliminate tariffs on 85% of all Mercosur imports, Mercosur will have up to 15 years, variable by product, to reduce tariffs on a gradual basis.

For agricultural goods, the EU will remove tariffs on 80% of Mercosur exports to the region, including orange juice, coffee and fruit. For the remaining items, the EU will offer tariff rate quotas and/or preferential treatment. Mercosur’s exports of beef, sugar, and ethanol will be subject to tariff rate quotas. The text does not seem to make reference to GMOs.

Mercosur countries have agreed to provide legal guarantees protecting geographical indications for 357 European food and drink products. Certain goods from South America, such as cachaça (Brazilian distilled spirit) will also enjoy geographical protections.

For trade in services, the agreement establishes common guidelines and regulatory alignment on telecommunications, postal services, financial services, e-commerce, among others.

The full accord is expected to be published this weekend and reportedly includes chapters addressing: 1) market access; 2) rules of origin; 3) sanitary/phytosanitary measures; 4) technical barriers to trade (with automotive annex); 5) trade remedies; 6) safeguards; 7) competition; 8) customs; 9) trade facilitation; 10) antifraud; 11) services; 12) government procurement; 13) intellectual property (including geographical indications); 14) dispute resolution; 15) regional integration; 16) dialogues; 17) state-owned companies; 18) subsidies; 19) wines/distilled spirits; 20) institutional themes; 21) sustainable development and; 22) small/medium enterprises.

Next Steps

Both sides must now perform technical and legal revisions of the settled text to finalize the agreement.

In the EU, the text must be approved in the Council of Ministers, which forwards the deal to the European Parliament. If not approved there are additional steps. Once approved in the European Parliament, it would move to the legislative branch of each EU member country if the final text includes investment dispute settlement provisions, as was the case with Europe’s deal with Canada.

Within Mercosur, the agreement must be approved by the legislative branches of each member countries.

The agreement will be ready for implementation once all member-countries of the EU and Mercosur have approved the deal, a complicated task. There is a reason this negotiation took twenty years. And if the European Parliament doubts Brazil’s commitment to the Paris Accords or environmental protection, expect a fight.

Questions? Contact Kellie Meiman Hock: kmeiman@maglobal.com

*Note: Since the text is not yet released, the above reflects the characterization of European, Brazilian, and Argentine governments.