Publications /
Opinion

Back
Mercosur-EU trade agreement: Better Late than Never...
Authors
July 3, 2019

Twenty years after negotiations began between Mercosur and the European Union (EU), a trade agreement between ministers was reached last Friday in Brussels. Its first phase, from 1999 to 2014, had among the motivations on the European side not to be left behind while the US then pursued a Free Trade Agreement for Latin America (FTAA). Symptomatically, such enthusiasm cooled after FTAA negotiations came to a halt and the United States embarked on bilateral agreements with some countries in the region. This time, the US bilateralism of the Trump era has been answered by the EU with the search for agreements with Canada, Japan, Mexico and Mercosur. On the Mercosur side, in the recent period, there has been an unprecedented alignment favorable to the conclusion of an agreement.

It is a broad agreement, covering both tariff and regulatory issues, including services, government procurement, trade facilitation, technical barriers, sanitary and phytosanitary measures and intellectual property. In this sense, it is in line with the perception that, in the current stage of evolution of world trade, there is little point in focusing on tariffs alone, without addressing the so-called "behind-the-border" factors.

Assuming its validation by national congresses of Mercosur and the EU, in addition to the European Parliament, its implementation will lead to zero import tariffs on 90% of trade between blocs. On the Mercosur side, tariff reductions for some products will take more than a decade to complete, while most import taxes on the EU side will be zeroed at the start of the agreement.

Based only on tariff reductions, the simulations made by the Brazilian Ministry of Economy regarding the impact of the tariff changes contained in the agreement suggest an increment of US$ 87.5 billion in 15 years to the country's Gross Domestic Product (GDP), as well as an increase of US$ 113 billion in investments. The impact on GDP can reach US$ 125 billion if one considers the reduction of non-tariff barriers and the likely effect on the total factor productivity (TFP).

As we have argued -  (Canuto et al, 2015), (Canuto, 2018)  - Brazil pays a price for its exacerbated commercial closure. What the country produces could be done with higher levels of productivity and competitiveness, even if abdicating to produce domestically what it would import, if it could have access to better and more advanced equipment and technology. In the case of the agreement with the EU, higher agricultural exports accompanied by leaner, but more efficient and competitive domestic industrial production chains should be set against the current scenario. Raising the sophistication and value-added of what is produced in the country depends mostly on other factors and not on trade barriers against external competition.

In addition, the lack of competition in services and other protected segments implies a toll charged on all its public and private users. The inclusion of communication, construction, distribution, tourism, transport and professional and financial services in the Mercosur-EU agreement should bring positive impacts on the quality and costs of their domestic availability, besides export opportunities that may also open up.

From the Brazilian standpoint, three additional aspects should be highlighted. First, the implications of the Mercosur-EU agreement should not be reduced to estimates of GDP gains. The simulations of the Ministry of Economy, considering only the tariff changes, point to, as of 2040, something like a permanently higher GDP at 0.5% per year. The agreement and its effects should be seen only as one of multiple items contributing to the revitalization of the country's economic growth. In fact, it also showed a possible path to be followed towards other trading partners. The Mercosur-EU agreement should be seen as a possible inflection point in the country’s long trajectory of trade closed-ness (Canuto, 2015).

Second, the agreement will intensify the urgency and need for structural reforms that improve the business environment and thereby reduce the waste of human and material resources and increase productivity. The tax reform, as well as the other items of the reform agenda to reduce the burden of investing and operating in Brazil, will have its priority reinforced by the agreement (Canuto, 2019).

Finally, it should be noted that the inclusion in the agreement of commitments regarding food security, environmental sustainability, adherence to the Paris Agreement, labor rights, rights of indigenous communities and others strengthen a Brazilian association to the European style of "globalism", assuaging fears widespread abroad that the country would turn to opposite directions after Brazil’s President Bolsonaro came to government.

 

The opinions expressed in this blog post are the views of the author.

RELATED CONTENT

  • Authors
    August 29, 2023
    At the August 22-24 BRICS summit in Johannesburg, the leaders of Brazil, Russia, India, China and South Africa said they wanted to use more of their national currencies for cross-border payments, which are currently dominated by the U.S. dollar and other global convertible currencies. Like China and the other BRICS, several other countries have also sought to develop alternative external payment mechanisms. Pairs of countries have agreed to settle commercial and financial transactio ...
  • April 4, 2023
    Face à l’essor des cryptomonnaies, les banques centrales sont en train de réagir en lançant leurs propres monnaies numériques. L’objet de ce Policy Brief est de faire le point sur la préparation des monnaies numériques de banques centrales (MNBC) par les autorités monétaires, un processus qui concerne tous les pays, émergents, en développement, et plus avancés. Il s’agit aussi d’analyser les conditions et certaines des conséquences (pour les banques, pour l’inclusion fin ...
  • April 4, 2023
    Faced with the rise of cryptocurrencies, central banks are responding by launching their digital currencies. The purpose of this Policy Brief is to provide an update on the preparation of central bank digital currencies (CBDs) by monetary authorities, a process that concerns all emerging, developing, and more advanced countries. It is also about analyzing the conditions and some of the consequences (for banks, for financial inclusion, for the conduct of monetary policy...) of such a ...
  • Authors
    Selassie Tay
    February 15, 2023
    Background The African Union in 2018 agreed to implement the world’s second-largest free-trade area measured by number of countries, people, and geographical size, with the signing of the African Continental Free Trade Agreement (AfCFTA). This agreement will ultimately lead to a continent-wide free trade area consisting of 54 countries with 1.3 billion people and a combined GDP of $3.4 trillion[1]. This equates to about 19%-20% of the GDP of the European Union and China, which are ...
  • Authors
    August 2, 2022
    L’invasion russe de l'Ukraine a incité l'Union Européenne, en coordination avec d’autres puissances mondiales, à monter en urgence une réponse coordonnée de sanctions sans précédent. La plus emblématique d'entre elles est l'embargo partiel contre le pétrole et autres produits raffinés russes, qui signifie en essence la transition du commerce pétrolier d’une logique économique vers une logique géopolitique. D'où la montée en flèche des cours du pétrole et d'autres matières premières. ...
  • Authors
    Moubarack Lo
    Amaye SY
    August 1, 2022
    Avant la pandémie Covid-19, le continent abritait les économies à la croissance la plus rapide du monde et plusieurs pays africains montraient les premiers signes de transformation structurelle et de progrès vers l’émergence économique. Plus de deux ans après la pandémie et les ondes de choc qui en ont résulté, deux questions cruciales se posent : dans quelle mesure le choc sanitaire Covid-19, exacerbé par la crise ukrainienne, a-t-il constitué un tournant dans le processus général ...
  • May 20, 2022
    Traders have worried that the war involving Russia and Ukraine could stoke inflation, further disrupt supply chains and derail the global economic recovery. Scarcity of food has led to ri ...
  • February 28, 2022
    La guerre russo-ukrainienne aura des répercussions économiques et politiques dans les années à venir. Dans cette note, nous nous intéressons aux implications économiques de la guerre sur l’économie africaine à court et à long terme. Le conflit survient alors que l’Afrique s’efforce de mettre son économie sur la voie de la reprise, dans un contexte de pressions inflationnistes mondiales et de volatilité des marchés financiers et des matières premières. Alors que les exportateurs d’én ...
  • February 28, 2022
    The Russian-Ukrainian war will have major economic and political repercussions. In this note, we focus on the war’s economic short and long term implications on the African economy. This conflict comes at very arduous context, where Africa is still struggling to set its economy on the recovery path, amid global inflationary pressures and highly uncertain context. While natural resources countries, especially energy exporters, are sensing opportunities from the crisis, other countrie ...