Mercosur, the #1 trading bloc in South America and the fourth-largest trading bloc in the world overall, is expected to finally sign a free trade agreement with the European Union by the end of the year. The agreement, more than 15 years in the making, is being hailed as the biggest trade deal in Mercosur’s 24 years of existence.
Subsidies for European farmers and tariffs on industrial goods were among the deal’s main stumbling blocks, leading to its delay. The onset of the agreement should no doubt cause members of the global trade community to consider its potential impact on their business operations.
Economic Push Factors Have Risen
The rise in global trade alliances and deepening economic and trade linkages between Mercosur and the EU has added new urgency for a successful conclusion of the deal, which is estimated to add €9 billion worth of trade gains. EU exporters would benefit tremendously from preferential access to Mercosur, which is four times the geographic size of the EU with a market of 250 million people and a growing middle class.
For Mercosur, preferential access to the EU would compensate for the loss of the EU’s Generalised Scheme of Preferences (GSP) benefits, which allow exporters from developing economies to pay low or no export duties. Mercosur members (excluding Paraguay) are now classified as high-middle-income economies and therefore no longer qualify for the GSP.
In 2014 industrial products and agricultural products from Argentina, Brazil, Paraguay, Uruguay, and Venezuela accounted for 54% and 45%, respectively, of the €44.7 billion worth of imports to the EU, according to the European Commission. Exports that year from the EU to those five members of Mercosur totaled €55.2 billion, of which 95% were industrial products and 4.5% were agricultural products. Notably, while the value of total imports from Mercosur declined from €48.8 billion in 2010 to €44.7 billion in 2014, exports to Mercosur rose from €44.5 billion to €51.2 billion in the same period.
Seeking the Delicate Balance between Liberalisation and Protectionism
Finding common ground among various Mercosur member countries has been a major sticking point. The bloc’s positions on restricting market access fall in two camps: pro-liberalisation (Brazil, Paraguay, and Uruguay) and pro-protectionism (Argentina and Venezuela).
The pro-liberalisation nations were ready to move forward with the pact. For Brazil, gaining access to the EU market would enable some of its manufacturers to reduce their dependence on China, which has been faltering lately. In a similar vein, Paraguay and Uruguay, constrained by their small domestic markets, have recognized the obvious potential of accessing the EU, particularly given the recent economic deceleration in their main regional trade partners.
Argentina, however, wanted additional time to examine the list of 4,000 goods to be covered in the first phase of tariff reductions. The country was also concerned that it would lose the lucrative Brazilian market for industrial products to more competitively priced alternatives from the EU.
Tensions between the conflicting positions by Mercosur members culminated in June with Brazil threatening to leave Argentina behind and push through its own bilateral agreement with the EU. However, a compromise was reached after a flurry of high-level intergovernmental meetings: Individual Mercosur members could liberalise markets (cut tariffs) at their preferred pace within 15 years of the deal.
Notably, the issue of protectionism is also evident in the EU, particularly among members that are heavily reliant on agriculture. Such members fear that Mercosur agricultural products could pose a significant competitive threat.
A Mercosur-EU trade deal should be especially good news for export-oriented firms. In any case, the expansion of trade with the EU is a key issue for Mercosur businesses in particular as economic growth in South America is slowing.
Michelle Campbell is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in the UK, she covers the Latin American region for D&B Macro Market Country Insight Products. In addition to her experience in the financial services sector, Campbell has worked as a visiting lecturer in the UK and in the Caribbean. Michelle holds a master of science degree in economics from the University of the West Indies in Trinidad.