Mercosur – EU: a huge deal… if it goes through!

At a time of heightened global trade tensions and faltering multilateralism, the accord sends a powerful message that mutually beneficial economic openness is still worth striving for. The 2015 election of market-oriented Mauricio Macri as President of Argentina in 2015 gave some impetus to the discussions from 2016 onwards, while the rightward shift in Brazil, with the 2018 election of Jair Bolsonaro to the Presidency, further catalysed the conclusion of an agreement.

Click here for full analysis, published by Mosoj Global Services.

Reductionists have characterized the agreement as a ‘cows for cars’ deal, with European auto exporters gaining access to previously high-tariff Mercosur markets while the agriculture sectors of Brazil and Argentina, in particular, gaining limited tariff-free access to the similarly-protected and subsidized European market for farm produce.

EU exporters are set to benefit from cuts in tariffs amounting to €4bn on annual trade flows while securing improved access to raw materials. By becoming the first major trading block to secure preferential trade access to Mercosur, the EU gains a first-mover advantage over North America and China, for example.

For the Mercosur, the EU deal is much deeper and broader than any that it has concluded to date. It will widen access to a lucrative export market, particularly for its primary products, helping reduce dependence on China. This is likely to be a boon for the mining and agro- industrial sectors in all four Mercosur countries, while the fact that Paraguay and Uruguay are smaller and more open means that, in proportional terms, they may benefit even more than their larger neighbours.

Mercosur leaders also see the deal as a template for future deals, such as with Canada and EFTA countries. Within Latin America. The accord may also give further domestic impetus for market-oriented reforms in the Mercosur countries as well as regional impetus towards economic integration, including a further deepening of cooperation with the Andean Community and the Pacific Alliance.

The politics of ratification are fraught, both in the Mercosur and in the EU. One of the chief cheerleaders, Argentina’s market-oriented President Macri, faces a tough re-election battle in October against an opponent that has already signalled dissatisfaction with the Agreement. Brazilian President Bolsonaro will not face re-election until October 2022, but to push through ratification before then will require he draws on a pool of political capital that is shrinking as his administration pursues pension reforms and faces multiple scandals.

On the EU side, the Agreement requires ratification by about 40 different bodies: the European Council, the European Parliament, 28 national parliaments and a number of regional legislative bodies. Any one of these can become a potential veto player, with a tactical coalition of farmers and environmentalists already mobilizing opposition in several countries.

To pre-empt opposition from civil society, EU negotiators pushed the inclusion of a dedicated chapter on ‘Trade and Sustainable Development’. While it contains a range of safeguards for workplace rights and environmental protection, the dedicated dispute settlement procedure will amount to no more than moral suasion in the absence of further concrete enforcement mechanisms. Critically, it is domestic legal frameworks, and the political will and capacity to enforce them, that will be decisive.

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