Saturday, June 29, 2019

Mercosur-European Union Trade Agreement

Mercosur and European Union reached a political agreement for a Free Trade Agreement (FTA) on 28 June. The new trade agreement is part of a wider Association Agreement between the two sides.

This is a surprising but positive news.  

Surprise, because of three things. First, the negotiations have been going on since 2000 slowly and indifferently and almost forgotten for many years. Even I did not anticipate its conclusion now. Secondly, both Mercosur and EU are in a stage of internal crisis at this time and one did not expect them to focus on conclusion of the deal, which is complicated. Bolsonaro did not show any enthusiasm for Mercosur in the beginning and was skeptical. He and his foreign minister were anti-globalisation and anti-trade extremists as part of their imitation of Trump’s vision. This had put a question mark on the future of Mercosur itself. On the other hand EU was mired in the Brexit crisis. Thirdly, the negotiations faced the great challenge of access to the agricultural exports of Mercosur to EU, which is protectionist especially in the case of agro products. 

Positive, because the FTA with EU will boost trade and prosperity of the members of the Group ( Brazil, Argentina, Uruguaya and Paraguay) .  The FTA gives hope for the future of Mercosur, besides adding to its collective strength. In fact, it is more than positive. It is fantastic news for South America especially after the disruptive Bolsonaro and Argentine economic crisis.

This is the most serious, comprehensive and biggest FTA Mercosur has signed so far. Since EU is a big force, the Mercosur members especially Brazil and Argentina will be forced to discipline themselves more in trade practices. Otherwise, these two big brothers used to change trade policies any time freely without restraint. Brazil will no longer be able to keep its market closed as in the past. In short, it is a game changer for Mercosur.

The deal has a clause mentioning the commitment of both sides to environmental protection and sustainable development under Paris Climate Agreement. Brazilian foreign minister Araujo, who called climate change agenda as a project of cultural Marxists, has to eat his words now. President Bolsonaro has to restrain himself and his rancher friends from poaching into Amazon. Brazil has no choice but to reiterate its commitment on environment. Macron had threatened not to sign any EU-Mercosur trade deal if Brazil pulled out of the Paris climate accord.

The EU-Mercosur deal has to be ratified by the parliaments of the countries on both the sides. This should not take that long since it is considered as a fair and win-win deal by many observers on both sides. 

The conclusion of this large trade deal between the substantial markets of EU and Mercosur is a victory against the trade protectionist challenges and trade wars from Trump and his right wing fellow travellers.  

This is the largest deal both for Mercosur and for EU. It covers a combined market of 800 million people. Mercosur is market of 285 million population and EU has  over 500 million people. It is indeed a formidable combination in global trade.

The deal will boost the  EU bilateral trade with Mercosur which was  €88 billion in 2018 and services which was €34 billion.

The deal is comprehensive with elimination/reduction of tariffs, facilitation of entry into services market, government procurement and E-commerce as well as intellectual property rights. There are environmental and labour protection clauses too.

Elimination of customs duties
The agreement will, over time, remove duties on 91% of goods that EU companies export to Mercosur. For example, Mercosur countries will remove high duties on industrial products, such as:
§  Cars (taxed today at 35%)
§  Car parts (taxed at 14 to 18%)
§  Machinery (taxed at 14 to 20%)
§  Chemicals (taxed up to 18%)
§  Clothing (taxed at up to 35%)
§  Pharmaceuticals (taxed at up to 14%)
§  Leather shoes (taxed at up to 35%)
§  Textiles (taxed at up to 35%)
The agreement will also progressively eliminate duties on EU food and drink exports, such as:
§  Wine (taxed today at 27%)
§  Chocolate (taxed at 20%)
§  Whiskey and other spirits (taxed at 20 to 35%)
§  Biscuits (taxed at 16 to 18%)
§  Canned peaches (taxed at 55%)
§  Soft drinks (taxed at 20-35%)
The agreement will also eliminate import duties on 92% of Mercosur goods exported to the EU. Under this deal, Mercosur would increase exports of beef, sugar, poultry and other farm products to EU. Tariffs on products such as orange juice, instant coffee and fruit are being eliminated. Products such as meat, sugar and ethanol would have greater access to the EU.

The EU has admitted that this agreement presents some challenges to European farmers. It has promised that it will only open up to agricultural products from Mercosur with carefully managed quotas that will ensure that there is no risk that any product will flood the EU market and thereby threaten the livelihood of EU farmers. France, which has regularly expressed concern over the risk of a surge in South American agricultural exports to Europe, welcomed provisions protecting European geographical origin certification for food products and limiting Mercosur exports of sugar and beef.
Trade in services and establishment
Each year, the EU exports more than €20 billion in services to Mercosur countries.
The agreement will make it easier for EU firms to provide services to the rapidly expanding Mercosur market and will provide new opportunities to invest through establishment in both services and manufacturing sectors. It will also ensure a level playing field between EU service providers and their competitors in the Mercosur market.
The services covered include a wide range of sectors and sector-specific regulatory provisions exist for postal and courier services, telecommunications and financial services.
The agreement also contains advanced provisions on the movement of professionals for business purposes, such as managers or specialists that EU companies post to their subsidiaries in Mercosur countries.
The agreement contains general rules regarding e-commerce that aim to remove unjustified barriers to trade made by electronic means, bring legal certainty for companies and ensure a secure online environment for consumers, with their data being appropriately protected.
Government procurement
For the first time, Mercosur countries will open up their government procurement markets. EU companies will be able to tender for contracts with public authorities, such as central government ministries and other governmental and federal agencies, on an equal footing with companies from Mercosur countries.
The trade agreement will also make the tendering process more transparent. Each Mercosur country has agreed to publish contract notices for the procurement covered by the agreement online at a national single point of access.
The EU has offered Mercosur suppliers reciprocal access to the EU procurement market at central level, meaning procurement by EU institutions, and by central government contracting authorities in EU Member States.
Intellectual Property Rights
The agreement includes solid provisions covering Intellectual Property Rights on copyright, trademarks, industrial designs, geographical indications and plant varieties. The section on Intellectual Property Rights also includes comprehensive provisions on the protection of trade secrets.

Mercosur-EU trade

§  The EU is Mercosur's second biggest trade in goods partner, accounting for 20.1% of the bloc's total trade in 2018.
§  The EU's exports to the four Mercosur countries totalled €45 billion in 2018. Mercosur's exports to the EU were €42.6 billion in 2018.
§  Mercosur's biggest exports to the EU in 2018 were agricultural products, such as foodstuffs, beverages and tobacco (20.5%), vegetable products including soya and coffee (16.3%) and meats and other animal products (6.1%).
§  The EU's exports to Mercosur include machinery (28.6%), transport equipment (13.3% of total exports), chemicals and pharmaceutical products (23.6%).
§  The EU exported €23 billion of services to Mercosur while Mercosur exported € 11 billion of services to the EU in 2017.
§  The EU is the biggest foreign investor in the region, with an accumulated stock of investment that has gone up from €130 billion in 2000 to €381 billion in 2017.
§  Mercosur is a major investor in the EU, with stocks of €52 billion in 2017.

Mercosur's major trade partners

China remains as the largest trading partner with 130 billion ( exports-46 bn and imports from Mercosur 84 bn)

 US is the second largest with 92 billion of which 54 bn are exports and 38 bn imports from Mercosur).

India-Mercosur trade

India's trade with the four Mercosur member countries was 11.13 billion dollars in 2018-19. Of this, exports were 4.7 billion dollars and imports 6.43 billion.

The Mercosur-EU should not seriously affect India’s business with Mercosur since the products exported by India are different from EU’s exports. However, there is concern in the case of few products such as pharmaceuticals and cars. The intellectual property clause in the FTA might cause some problems for India’s export of generic pharmaceuticals. 

Preferential Trade Agreement (PTA) was concluded in march 2005. Preferential duty ( 10-20 percent in most cases) is given to 452 Indian products entering mercosur and reciprocal concession to 450 products of mercosur entering India. The PTA has become effective from June 2009.
Duty discount for 452 Indian exports as follows:
10 % : 394 products 
20 % : 45   products 
100%: 13 products 
Duty discount on 450 Mercosur exports:

10 % : 93 products 
20 % : 336 products 
100 % : 21 products 

The two sides decided to expand the PTA by including more items and make deeper tariff cuts. Negotiations have been going on for the last several years. This is a good time for India to press Mercosur to finalize the negotiations for expansion of the India-Mercosur PTA. Mercosur should find it very easy and simple to conclude the expanded PTA with India in comparison to the tough and complicated FTA with EU. President Bolsonaro has said that Mercosur is looking forward to sign trade agreements with more countries.

Monday, June 24, 2019

Latin America is more important for India’s exports than some neighbours and traditional trade partners

India exported more to the distant (15000 km) Guatemala ( 305 million dollars) than to the neighbouring (3400 km) Cambodia ( 196 million$)in 2018-19,.

India’s export of 181 million dollars to the remote and small Uruguay  (15000 km away; population 3.4 million) is more than to Kazhakstan ( 143 milliondollars) which is 1600 km from Delhi and has more than five times population with 18 million.

India exported more (216 m $) to Dominican Republic (DR) than to the near by Uzbekistan ( 201 m) which has double the population of DR.

India’s exports to Central America ( 968 million dollars) are more than to the Central Asian Republics ( 442 m$) although the latter is close by and has more population (72 million) than Central America’s 42 million.

India’s exports to Mexico ( 3.84 billion$) are more than the exports to Myanmar ( 1.2 bn),  Russia (2.4 bn), Canada (2.9 bn) or Egypt (2.9 bn) or Nigeria ( 3 bn).

Mexico is the number one market for India's export of cars at 1281 million dollars.  Car exports to Latin America ( 1839 m) is 26% of India's global exports of 6958 m

Mexico is the second largest destination for India’s vehicle exports with 1.61 billion dollars. This is more than the exports to neighbouring Bangladesh – 1146 million, Nepal -738 m, Srilanka – 473 m. 

India’s vehicle export to Colombia ( 360 m) is four times the export to neighbouring Myanmar -72 m.

India’s motorcycle exports to Colombia ( 216 m) are more than the exports to Srilanka ( 215 m) and Nepal ( 186 m). Colombia is the third largest export destination in the world for Indian motorcycles. In 2014-15 it was the top destination, now overtaken by Bangladesh (261 m) and Nigeria (240 m).

Motor cycle exports to Latin America at 573 m are 27% of India's global exports.
The above statistics should open the eyes of those who might think that Latin America is less important for India’s exports on the ground that the region is too far and less familiar.2018-19 is not the first year that Latin American countries have overtaken neighbours and traditional partners as more important for India’s exports. This trend has started since 2010 when the Indian exporters started exploring the Latin American market more seriously. Even with longer shipping time and heavier freight cost, Indian goods have become competitive in Latin America. Some brands such as Bajaj, Hero, Mahindra and Tata have become popular in the region. Indian motor cycles have become the leaders  with the highest market share in a few countries.

President Juan Manuel Santos riding a Hero motor cycle which is being produced in Cali, Colombia 

The growing importance of Latin America to Indian companies is best illustrated by the success story of UPL. This largest Indian agrochemical firm, has more business in Brazil (1.2 billion dollars) than in India. Brazil's share is 25% of the global business of UPL. Latin America accounts for 1.6 billion dollars (34% ) of the total global revenue of 4.7 bn of UPL. The region’s share is more than that of Europe, US or Asia.


According to the figures just released by the Ministry of Commerce, India’s exports to Latin America increased by 9.6% in 2018-19 ( April to March) reaching 13.16 billion dollars from 12 billion in 2017-18. The Imports from the region went up by 5.3% to 25.73 billion from 24.44 bn in 2017-18. Total trade with the region has gone up by 6.7% to 38.89 bn from 36.45 bn last year.

Mexico has overtaken Brazil as the top trading partner of India in Latin America for the first time in 2018-19. 

Trade with the 19 countries of Latin America is given in the table below:

                                        Figures in millions of dollars

Total trade
Costa Rica
El Salvador
Dominican Republic



Mexico is the top destination in the region, having overtaken Brazil in the last two years.

Vehicles are the leading item of exports to Latin America which accounts for 18% of India’s global vehicle exports.India’s exports of 460 m % of motor cycles to Latin America are 22% of India’s global exports ( 2127 m). Major destination of vehicle exports in the region are: Mexico -1.62 billion dollars, Colombia-360 million, Brazil -319 m, Chile -305 m and Guatemala -90 m.

The region has emerged as a significant destination for pharmaceutical exports.  Major  importersof Indian pharmaceuticals: Brazil – 270 million dollars, Chile -91 m, Peru -70 m, Colombia- 62 m, Mexico – 49 m and Guatemala -43 m. 

The main export items of India to the region are given in the table below

                                                                                      Figures in million US Dollars
Organic chemicals
Equipments and machinery
Chemical products
Iron and steel products
Synthetic fibres 
Plastic products
Aluminium products
Rubber products


Latin America contributes to India’s strategic energy and food security by supplying 12% of India’s global imports of 117 billion dollars of crude and 22% of India’s vegetable oil.
The competition of Latin American crude and edible oil have put pressure on the monopoly suppliers of these items from the Middleast and South East Asia ( Indonesia and Malaysia supply palm oil) to offer to India lower prices and better terms.

The suppliers of crude were: Venezuela – 7.25 billion dollars, Mexico – 4.27 billion, Brazil – 1.6 bn, Colombia – 571 m, Ecuador -128 m and Argentina – 47 m.

The region has abundant reserves and the potential to meet India’s needs of Lithium ( for electric vehicles) and pulses in the long term.

India has started importing raw gold from Latin America in the last five years. Peru is the top supplier at 2.2 billion dollars, followed by Bolivia 849 million, Brazil -541 m, Dominican Republic – 537 m and Colombia -380 m. The direct imports from the region have helped India to cut costs by saving from the margins paid to gold sellers in Switzerland and UAE.

Venezuela continued as the main source of imports in the region with its crude oil supply. But this will go down drastically this year since India has been forced to stop import of Venezuelan oil by the US sanctions. But India can source more crude from other Latin American suppliers.

                                                                                           Figures in million US Dollars
Petrolum crude
Vegetable oil
Equipments and machinery
Wood and pulp
Raw sugar
Iron and steel products
Fruits and vegetables
Plastic products

The Market

Latin America is a large market of 600 million people with a combined GDP of 6 trillion US dollars. The regions’ imports are around a trillion dollars.

The economies of the region are doing relatively well. The GDP of the region is projected to grow by a modest 1.3% in 2019 and continue its growth trajectory in the medium and long term. The average inflation and external indebtedness are in manageable figures. Democracy has become stronger in the region with more political stability.

The only exceptions are Venezuela and Argentina.

Venezuela’s GDP is forecast to shrink by 10%. The country suffers from hyperinflation of several hundred thousand percent, devaluation of the currency by 99%, shortages of essential consumer items and energy shortage. The economic misery is compounded by the political crisis, break down of instituitions and social instability. The US sanctions have made the economic situation worse. 

Argentina’s GDP is expected to contract by 1.2% in 2019. The inflation is over 40% and the country has contracted a debt of 57 billion dollars from IMF. The country is preparing for elections in October. It is hoped that 2020 will see recovery of the economy.

Brazil and Mexico, the two largest markets are set to grow in the coming years with the new Presidential terms starting from the beginning of 2019. 

Moving forward

India’s exports can be increased to 25 billion dollars in the next five years if the exporters, the export promotion councils, the government and the embassies coordinate with a plan of action seriously and systematically. India should get inspiration from the Chinese who have set a target of 500 billion dollars of trade with Latin America by 2025 taking it up from their 2018 figures of 148 billion exports and 157 billion imports. 

The Commerce Ministry of India should revive its Focus LAC programme which had helped in the past in encouraging and supporting Indian exporters to explore the business opportunities in Latin America.

The Indian government should consider extending large Lines of Credit to support Indian exports. While China has given 150 billion dollars of credit to the region, India has given less than 300 million. 

India should open embassies in countries such as Ecuador, Bolivia, Paraguay and Dominican Republic.

This is a good time to accelerate the economic push into Latin America which has started attaching importance to India, the third largest export destination for the region’s exports after US and China. Disenchanted with the protectionist US and Europe and determined to reduce the overdependence on China, the Latin Americans see India as a large and growing market as well as a benign economic partner for win-win in the long term.