EU-MERCOSUR DEAL: A COMPREHENSIVE ANALYSIS
A unfavorable international context, in which president Trump is imposing protectionist measures against the liberal model of tariff reduction, as well as a slowdown of the Chinese and North American economies, recently drove Europe and the Mercosur countries to establish a trade agreement. Over €100bn a year in trade and a market of 773 million persons would be the result of removing protectionist tariffs between the EU and the Latin American customs union Mercosur, made up of Argentina, Brazil, Uruguay and Paraguay. With the EU being the second largest buyer of Mercosur goods after China, and Mercosur being the EU's eighth international trading partner, both parties are interested in more access to each other's markets, which has, until now, been hindered by high tariffs on goods.
Interests at stake
This deal has been on the table for more than 20 years with no solution in sight - until recently. So, who is interested in this deal happening? And why now? In order to understand this, we must first take a look at the industries that have traditionally been interested in having more access to each market. The Mercosur countries have traditionally produced an excess of farm products, such as meat, soy coffee, beverages and tobacco, while Europe is interested in selling vehicles, machinery, pharmaceuticals, chemicals, and transport equipment. The EU would benefit from the cost reduction which would be achieved over the next ten years from lowering tariffs on vehicles (currently at 35 per cent) and pharmaceuticals (14 per cent). South American businesses demand an immediate reduction of European tariffs for goods such as chocolate (currently at 20 per cent) and wine (27 per cent).
With the international atmosphere becoming increaseingly hostile, now is the time to act. Trump has threatened to impose car tariffs that would directly impact car manufacturers in Europe - especially German ones. The lowering of tariffs on vehicles can thus be seen as the EU's response to a general protectionist attitude from its main trading partner. Add to that the Chinese economy's slowdown and the result tipped the scale in favour of the EU making new trading friends.
In South America, the situation is not looking too good either: Argentina country has been in crisis since 2018, with a low credit score because of its previous defaulting. President Macri, who is facing tough competition from Alberto Fernandez for reelection this year, is looking to cement his image at home as the man who can lead Argentina out of the crisis by stimulating international trade. As for Brazil, the biggest industry in the bloc, its economy has been stagnating for four years, with strong support from the agricultural sector to push this deal forward. At first sight, the deal may thus sound like win-win situation for businesses to export at lower costs to what used to be more expensive markets. After all, the Europeans had been wanting to liberalize trade with South America since the 2000s, so why are we even talking about this?
Vulnerabilities
Certain sectors have voiced concerns about this deal. European farmers stated that the deal will increase the influx of beef which is not subjected to the same sanitary standards as the European ones. The agreement addresses these complaints with a reduction of extra beef exports to an annual quota of 99.000 tonnes. The Argentinian and Brazilian automobile sectors have also voiced concerns, as buying European cars would be much more affordable than they have been until now. The Latin American car market is notorious for how much more expensive vehicles are than in Europe or North America.
Further concerns have been raised by environmentalists, who warn that more Amazonian forest will be destroyed and transformed into cattle rearing or soybean cultivation areas. And these concerns are not far-fetched. While Brazilian president Bolsonaro is in favor of using burnt former Amazonian forest land for business development, unprecedented amounts of the forest are burning down in fires faster and in greater quantity than previous years. Obviously, it's not exactly a coincidence that more terrain for cattle rearing is being created at the same time that an increase in beef exports (and profits) is in sight. What could be the effects of this deal, if it ever does get ratified by all parties? Is it just positive growth for all economies involved, as politicians ensure?
Possible effects-will history repeat itself?
In order to predict what may happen if the deal is ratified, let's see what happened to another Latin American country sealing a trade agreement with a much more developed economy. NAFTA has been largely considered a failure, with some American jobs crossing borders into lower-wage Mexico, and with many small Mexican farmers seeing their ability to make a living utterly destroyed by corn competition coming from the U.S. Generally, complex financial factors spanning over the two decades that NAFTA has been in place make it difficult to make clear-cut decisions on whether it was a good or a bad deal, but it gives us some lessons that Latin American countries should heed.
Firstly, it was thought that the Mexican economy would gain by declining unemployment and rising salaries triggered by an increased foreign direct investment, which is something that Mercosur countries are also looking forward to. However, boosting FDI and international trade, while it meant benefits for the manufacturing area in the North of Mexico, was one gain tarnished by the loss of jobs in the south, where poor farmers could not compete with industrial prices of corn and lost their means of living. The agreement's benefits were thus limited to certain sectors of the economy while taking away from other areas, failing to spread effects as a whole. The same issue is at stake in the Mercosur-EU agreement; if the agricultural sector wins, while the manufacturing and automotive ones suffer as a result, then could this be a mere redistribution of resources? Furthermore, if the deal incentivizes provoked fires, soils will eventually become arid, making the increase in beef exports a short term gain, leveraged by the possibility of loss of long-term forest soil.
Beyond this, there is an even less anticipated effect which could negatively influence Latin American business for a long time to come. The NAFTA agreement contained provisions which restricted the rights of the Mexican government to regulate foreign companies. This damaged the Mexican economy, preventing them from, in certain circumstances, favoring local contractors in order to stimulate local business. As for Mercosur, let's take the Argentinian example. 92 per cent of the export companies in Argentina are SMEs. Generally, Mercosur is only a customs union whose institutions are much weaker than EU's, with notorious corruption issues at its very core. As such, the deal's provision to allow EU firms to compete for tenure in projects allocated by Latin American governments might negatively affect local businesses
It is clear that the basis of powerful EU economies is having a powerful business sector at home first. Measures should be put in place so that the agreement doesn't end up hurting business at the local level. After all, the EU and Mercosur do not have the same organizational prowess. These countries need to think of protecting their homes and then carefully combine that strength with a good infusion of FDI. On the other hand, the Europeans will gain competitiveness for their companies, through the exemption of US $4 billion worth of duties yearly, profiting industry. However, the accolade about increased beef exports, albeit limited by a quota, may hit some sectors of the farming European industry.As for the diplomatic meaning of the deal, Argentina especially would benefit from gaining financial credibility for foreign investors, after having defaulted on debt payments in the past.
Approval Doubts
The ratification of the agreement has to be approved internally by each EU country. It is facing opposition from domestic farming sectors, most strongly in Ireland, Poland and Belgium, as represented by the COPA-COGECA organization for European farmers. If the accord passes in Europe, the Mercosur area is also an unsure bet. Argentine president Macri is facing tough opposition from the Peronist movement, which, judging from negative remarks about the deal and a general protectionist attitude, is unlikely to ratify the deal if it wins the elections.
Some problems may also arise in Brasil, mainly due to President Jair Bolsonaro's trumpesque position on the environment; he has threatened to pull out of the Paris Agreement and does not seem too rushed to extinguish the Amazonian fires. This has prompted French President Macron to say that he will block the trade deal if the Brazilian president doesn't abide by environmental guidelines. After all, the trade agreement itself, if ratified, has environmental preservation conditions which oblige both sides to comply with the reduction of pollution as indicated by the Paris treaty.
All in all, the future is insecure for the ratification of the pact. If ratified, it would most definitely see some winners and some losers. Whether the net result will be positive or negative, however, remains to be seen.
COMENTARY:
The analyzed article has as its theme the EU-Mercosur agreement. The free trade agreement between Mercosur and the European Union and a free trade agreement signed on June 28, 2019. It was signed between members of Mercosur and the European Union for the establishment of free trade practices between them. The complex negotiations involve several areas, such as regulatory frameworks, customs tariffs, health rules, intellectual property and public procurement. Brazilian companies may, for example, participate in tenders in the European bloc. The article compares what would be the benefits and harms for the European and South American markets if the agreement were confirmed. Mercosur countries traditionally produce an excess of agricultural products, such as meat, soy coffee, beverages and tobacco, while Europe is interested in selling vehicles, machines, pharmaceuticals, chemicals and transportation equipment. The EU would benefit from the cost savings that would be achieved in the next ten years by reducing vehicle (at the time 35%) and pharmaceutical (14%) tariffs. South American companies demand an immediate reduction in European tariffs for goods such as chocolate (at the time 20%) and wine (27%).
There are economic terms that are relevant for the understanding of the article such as: Interest rate (rates at which borrowers are charged or lenders paid for their loan), Tariff (a tax on imports with an attempt to restrict imports, possibly raise revenue for the government), Free trade (trade with no barriers put in place by the government or international organizations), Protectionism (trade policies that protect the domestic economy from the disadvantages of international trade) and Emerging Markets (nations that are investing in more productive capacity).
Governments impose tariffs to discourage consumers from buying imported products by merely making them more expensive to purchase. In the case of the article, there is a tariff imposed on the import of European and South American products. The world price is P1, domestic consumption is Q4, and production is Q1. The imported quantity is the difference between Q4 and Q1. When there is free trade, the equilibrium is where the world supply line(P1) intersects Dat quantity Q4 and P1. By adding the tariff, the price increases and becomes P2. Domestic consumption decreases to Q3, and local production increases to Q2. The difference between Q3 and Q2 is the amount that is being imported. Tariffs will have different impacts on the life of the stakeholders. For the consumers, prices are higher than before, which could cause a loss of higher living standards. The government will gain revenue because of the introduction of a new tariff. Foreign producers will lose revenue because of the decrease in products imported due to the tariff.
Free trade agreements are designed to increase trade between two or more countries. The reduction of tariffs on imports allows companies to expand to other countries. Without tariffs, imports from low-cost countries cost less. This makes it difficult for American companies to compete in these same sectors so that they can reduce their workforce. In this case, South American countries would lose economic strength in vehicle companies. On the side of Europe, meat and pharmaceutical producers would gain competition and lose power.
I do not believe in trade protectionism as an answer to the problems of free trade. High tariffs can protect domestic industries in the short term. In the long run, foreign companies will hire cheap labor work in order to make higher profits. A better solution than protectionism is to include regulations in trade agreements that protect against disadvantages. Developed economies can reduce their subsidies to agribusiness, keeping farmers from emerging markets in business. They can help local farmers to develop sustainable practices. They can market them as such to consumers who value it.
Another problem caused by free trade is the degradation of natural reserves. Emerging market countries usually do not have environmental protections. Free trade leads to depletion of wood, minerals, and other natural resources. As mentioned in the article, the President of France has announced that he will not sign the agreement if Brazil's President Jair Bolsonaro does not comply with environmental guidelines. In 2019, Jair Bolsonaro threatened to leave the Paris Agreement, and he was also not concerned with the fires in the Amazon in 2020. So, it is possible to imagine that environmental preservation is not one of Brazil's priorities in this current government, which can ease the problems of free trade.
BIBLIOGRAPHY
https://www.thenewfederalist.eu/eu-mercosur-deal-a-comprehensive-analysis?lang=fr
https://ec.europa.eu/trade/policy/in-focus/eu-mercosur-association-agreement/
https://www.aljazeera.com/ajimpact/brazil-deforestation-amazon-threatens-eu-mercosur-deal-190816180207913.html