There is a saying in business that a bad decision is better than no decision at all. During the uncertain times in which we live, paralysis is not the best way forward. And paralysis is even worse when applied to international trade, which has been immersed in constant change for the last 20 years. Among these changes, one of the most obvious has been an explosion in the number of free-trade agreements. However, the free-trade agreement between Mercosur and the European Union (EU), which was successfully negotiated, is far from being approved.
Having jumped over many hurdles, the agreement still faces opposition from some European farmers due to fears of unfair competition, and from some environmental associations because of the risk of higher deforestation in the Amazon rainforest. The delay in the process for approving the agreement, whose halt will have reached two years in June without any clear view of being resolved, does nothing to solve any of these questions.
With or without the Mercosur-EU agreement, all products sold in the EU – European or foreign – must follow EU rules, which should dispel the fears of unfair competition. Moreover, agricultural products imported from Mercosur, which make up less than 5% of all EU agricultural imports, must meet EU regulations. In the case of beef, the increase in the quota that would result from the agreement would be equivalent to just two steaks of beef per European per year. On the other hand, the EU agricultural industry has a lot to gain from the agreement, particularly produce with high value added such as wine or dairy products.
The macroeconomic impact of the agreement, although positive, will be somewhat modest. The European Commission estimates that EU GDP will rise by just 0.1% while Mercosur GDP will increase by 0.2%
These quotas also apply to sugar cane. Other products, like soya, already arrive in the EU duty free and therefore the agreement will not lead to additional imports of this product coming from Mercosur. Therefore, these safeguards confront some of the fears of negative impacts in the Amazon because of the agreement. The truth is that the macroeconomic impact of the agreement, although positive, will be somewhat modest. The European Commission estimates that EU GDP will rise by just 0.1% while Mercosur GDP will increase by 0.2%. Besides, all the countries involved in the agreement, including Brazil, have ratified the Paris Accord. In addition, the commitment to protecting human rights and the environment is shared among all parties. The disagreements regarding human rights and the environment are not in the actual norms but in the effective application of the rules. The same difficulties that Brazil faces when protecting the Amazon are shared by France in the Amazon rainforest of French Guiana.
The good news is that the Mercosur-EU agreement is not just a commercial one, but also political, which would facilitate bilateral contacts and reciprocity between both regions. Without the agreement, not only will trade opportunities be lost but also Europe’s ability to forge a strategic alliance with Mercosur, which would reinforce Mercosur’s commitment to social inclusion and the fight against climate change.
The economic integration between both regions is a fact. There is more EU investment in Brazil than in China and India put together. For that reason, EU SMEs, which have been severely damaged by the Covid-19 crisis, could be the biggest beneficiaries of the lower import tariffs brought by the agreement. Besides, expanding EU exports to Mercosur would lead to further integration of regional value chains, something fundamental for the growth and stability of SMEs.
This is a common trade strategy. Between 1999 and 2020, the EU signed 37 free trade agreements while Mercosur only managed to negotiate bilateral agreements with India, South Africa, Egypt and Israel. As a result of these negotiations, EU import tariffs are lower than 2% while the average Mercosur import tariff is above 10%. Thanks to the agreement, European firms would be the first to jump this tariff wall that keeps Mercosur apart from the rest of the world.
The EU-Mercosur agreement will boost efficiency and allow trade diversification. Around 60% of EU exports go to other EU countries, and this figure is equal to 69% in the case of Spanish SMEs. Diversification makes the EU and Mercosur more resilient to sudden economic changes, like the ones due to Covid-19. Moreover, the agreement would facilitate the purchase of EU technology that would lead to more efficient production and lower emissions, making Mercosur’s economic growth more sustainable.
The provisional application of the agreement requires the European Commission to present the agreement to the European Parliament, but the Commission will not do that until there is a simple majority in the Parliament in favour of it. Negotiations between the EU and Mercosur have gone on for the last 20 years, and, if approved, this trade agreement will be the largest in terms of population involved. The Mercosur-EU agreement will bring more commerce, but also social and environmental benefits. Keeping the agreement hostage to doubt will only make these benefits disappear.
Óscar Guinea is an economist at the think tank European Centre for International Political Economy. Twitter: @osguinea. Isabel Pérez del Puerto is a journalist and communicator in financing for development.