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.

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