Competing for airtime with the ongoing Copa América, the news began to bubble to the surface on June 28th. After decades of negotiation, Mercosur and the European Union had finally signed a trade agreement. Complementing previously agreed upon political and cooperative treaties, this accord is the final piece of the trifecta of deals composing the comprehensive Association Agreement between the two blocs.
Those in support of the agreement are lauding it as a victory for economic liberalism – an apparent affront to the wave of protectionist policies that seems to be sweeping the world. Of course, those in opposition have been just as quick to criticize its shortcomings and identify those who stand to lose. In Argentina, where presidential elections are slated for later this year, candidates have already begun their posturing around which groups have been sold out by the agreement.
Whatever your viewpoint, the agreement is undeniably historic. It marks Mercosur’s (made up of Argentina, Brazil, Uruguay, and Paraguay) first agreement with a major economic power. Until now, Mercosur’s trade deals have been limited to a smattering of one-off agreements with smaller countries. Collectively, this agreement will cover an estimated 780 million people and a quarter of the global economy. Perhaps even more importantly, it has raised deeper ideological questions about how a part of the world - one which has often embraced nationalistic regimes - intends to insert itself into the global economy.
The full text of the agreement has not yet been made available, rendering a comprehensive analysis impossible. However, this article will use the information that is presently obtainable to better understand the implications of the trade agreement in its current state. In line with Quarterra’s expertise, we will focus only on the agriculture sections of the agreement and will principally assume a Mercosur point of view.
A Long Time Coming
Collectively, Mercosur and the EU already trade nearly $100 billion USD worth of goods each year, along a surprisingly even split. On top of goods, the two blocs trade about $38 billion USD worth of services, of which the EU is responsible for about two thirds. According to the European Commission, the European Union is the second most important market for Mercosur exports, with agricultural products occupying some of the top spots.
Despite their close economic ties, the two trading blocs have struggled to cement their relationship in a formal agreement. In fact, the signing of this trade agreement represents the culmination of twenty years of negotiations. Agriculture proved to be a key sticking point throughout the history of the negotiations, with European farmers, in particular, concerned that South American agricultural products, exempt from European quality and environmental standards, would flood the market.
Of course, agriculture isn’t the only issue. Mercosur countries fret about competition from Europe’s more mature and efficient industrial sector. In addition, apprehension from environmentalists and social activists has also created friction on the path towards a trade deal.
While these anxieties all remain relevant, they were overcome by the political motivation to get an agreement inked. In the shadow of the recent European Parliament elections and a looming Brexit, I believe the current European Commission was anxious to make a pro globalization statement. Furthermore, the current leaders of Mercosur, especially Argentina and Brazil, are keen to elevate the image of their respective administrations and countries as serious, legitimate, and integrated into the global economy.
The signing of the agreement is significant and an achievement in its own right. It is important to recognize, however, that a long and surely bumpy road, lies between this point and the agreement’s activation. First, the agreed text will be legally assessed. Then, a final agreement must be ratified by each member country and the European Parliament. Only then will the agreement enter into force. In the best of cases, this process would take several years. But opposition, shifting governments, and political pressure are likely to string the agreement out over an even longer period of time.
The Devil is in the Details
Several sections of the agreement will impact agricultural trade between the two blocs. In many cases, these sections have been especially developed to address pain points or quell concerns from particular stakeholders. The key pieces of the agreement most relevant for agriculture include:
Market Access: The agreement employs a system of tariffs and quotas to manage trade flow. For agricultural products exported from Mercosur, the EU will eliminate tariffs on 81.7% of products. Another 17.7% of exports will have defined quotas. The remaining products have been deemed sensitive and will be excluded from the agreement. In return, Mercosur will eliminate tariffs on 95% of EU agricultural exports. In most cases, quotas and tariffs will be implemented over an extended period of time to give the markets the chance to adjust and accommodate the shifts in trade.
Geographical Indicators: Intellectual property rights, and especially the use of geographical indicators, have taken center stage in many recent trade negotiations as they have become a popular tool for creating non-tariff trade barriers. The Mercosur-EU agreement attempts to confront this issue head on by creating a “structured bilateral framework with clear legal commitments and opportunities to discuss [intellectual property rights] in detail.” As part of the agreement, Mercosur pledges to recognize 355 EU geographic indicator names, while Europe has accepted 220 names from Mercosur. The list of these names has not yet been made available.
Food Safety: A chapter on sanitary and phytosanitary requirements will attempt to address the food safety concerns of European consumers, while preventing these requirements from being twisted into non-tariff barriers. According to the European Commission, the agreement makes no concessions with respect to current European food safety policy and emphasizes cooperative work toward a more responsive and transparent system under the WTO umbrella.
Environment & Social Issues: Both EU and Mercosur agree to uphold certain standards with respect to the environment, child labor, discrimination, and collective bargaining. Casting a side eye at Brazil’s recent threats to leave the Paris Climate Accord, the agreement commits member countries to implement the multilateral climate deal. Furthermore, language specifically addressing deforestation, biodiversity, and overfishing, is intended to promote thoughtful environmental stewardship.
These sections, along with the many others not listed here, all seem like building blocks for a strong and sustainable trade agreement. Nevertheless, as with any complicated policy, the devil is in the details. Until the full text of the agreement is released, we can only speculate as to its strength and staying power.
Though we wait with bated breath for the full text, we have graciously been afforded a few teasers. Generally speaking, the agreement is expected to be favorable for Mercosur’s farmers, as they have been granted increased market access to the European market. The below chart outlines some of the known elements of the agreement. This list is by no means exhaustive, and only includes what items have been made available by the European Commission.
While this chart refers only to European and reciprocal concessions it is important to understand that Mercosur will also permit additional imports of products such as olive oil, fresh fruit, canned fruit, vegetables, confections, and beverages. Wine, a product close to the heart of both blocs, will be governed by a special appendix that has yet to be made public.
One of the agricultural products that has caused the most discussion in the agreement is beef. As it stands, the provision will be a modest win for Mercosur, as each of the four countries is a meaningful beef exporter. This is also the part of the agreement that is generating the most grief for European farmers, especially in France and Ireland. It is unclear how Mercosur will distribute the quota between their exporting countries.
At first glance, the agreement appears to offer new intriguing opportunities to Mercosur’s agricultural communities. Expanded access at reduced tariff rates will allow Brazil, Argentina, Uruguay, and Paraguay to capitalize upon their rich agricultural tradition and natural resource wealth to expand exports and bolster their own economies. Of course, some sectors will face new competition from more competitively priced European imports. But, on balance, the agreement should be a positive one for Mercosur agriculture.
Before we pop the (French) champagne, however, it will be critical to review the full document in detail and perform complete diagnosis. Furthermore, if the agreement is to become a reality, Mercosur’s agricultural sector must support policy makers with the next push forward in the process. The agreement has already created controversy in Europe and South America with several countries, namely France, balking at the agreement in its current form.
The EU Mercosur trade agreement could turn out to be an unexpected boon for South American farmers. The road forward will not be straightforward. However, a long and arduous journey just might be worth it in order to reach new European consumers.