On June 28, 2019, during the Osaka G20, and after twenty years of negotiations, the EU and Mercosur finally struck a political agreement for a Free Trade Agreement (FTA). It aims to eliminate 91% of all tariffs in the bilateral trade and to remove other non-tariff trade barriers. Although the road ahead of the agreement’s start date is still long, it is still interesting to discuss some of the possible implications of this bilateral trade agreement.
The European Union and Mercosur reached a political agreement “for an ambitious, balanced, and comprehensive trade agreement”, as announced by the European Commission on June 28th, 2019. Created in 1991, Mercosur is an economic and political bloc comprised of five countries: Brazil, Argentina, Uruguay, Paraguay, and Venezuela. The new free trade agreement will include the EU and four Mercosur countries, excluding Venezuela, whose membership has been on indefinite suspension since 2016.
EU-Mercosur trade at a glance
The EU is Mercosur's second-biggest trading partner, after China, accounting for one-fifth of Mercosur's total trade in 2018. The two largest economies within Mercosur, Brazil and Argentina, accounted for around 95% of the total trade with the EU. Both imports and exports went through a decrease from 2011 to 2016, but have been slowly rising since. However, overall the bilateral trade has been rather stagnant these past couple of years.
Table 1: 2011-2018 EU-Mercosur Trade Value (Euro), Data source : Eurostat
What to expect
The agreement between the EU and Mercosur aims to eliminate 91% of all tariffs in the bilateral trade and remove other non-tariff trade barriers. It can increase the demand for shipping on this route in the long run. As a comparison, the EU-Chile FTA, which entered into force in 2003, significantly increased the volume of EU exports starting in 2010, which corresponds to the year when this FTA fully removed tariffs on EU manufactured industrial goods. The container shipping volume on the EU to Chile route also increased accordingly[1].
Table 2: 2008-2014 EU export to Chile, Data source: Eurostat
As for this EU-Mercosur FTA, the tariff elimination policy will focus on industrial goods, agricultural goods, and raw materials, which are the main trading goods in this bilateral relation. The detailed tariff elimination schedule has yet to be set and made public. According to the agreement in principle, some of the tariff elimination should go as follows:
Table 3: Tariff elimination schedule on some key goods. Data generated from the agreement in principle.
European investors may benefit from the liberalization of the maritime shipping market as well. Currently, sea freight services represent about 27% of total EU exports of trade in service to Mercosur. With the long-term perspective of increased shipping demand, and the liberalization of the maritime shipping market, the EU-Mercosur trade in sea freight services could grow significantly.
More specifically, for the first time, the agreement covers international maritime services (transport and related services) in Mercosur. This may give the EU a “first comer” advantage in engaging in these countries’ maritime shipping market, and to further expand its network in Latin America. Although we don’t have all the details yet, this text will be likely to include the definition and principles of the specific maritime shipping services that EU investors can supply in Mercosur countries, if we use the latest EU-Vietnam FTA as a reference.
So much to expect, but…
The prospects are promising. However, ratification may only happen in the distant future. This agreement has raised concerns from various sectors, and especially from the European agricultural industry. Lifting restrictions on the import of agricultural products from Mercosur countries has raised oppositions from the EU agricultural sectors and food industries, mentioning that the low-price of Mercosur agricultural products will damage the competitiveness of local agricultural products in the EU. Furthermore, the current Amazon fire draw substantial concerns regarding Brazil’s climate policy: French President, Emmanuel Macron, and Irish Prime Minister, Leo Varadkar, mentioned to block the deal unless Brazil makes actual movement in addressing the environment issue5.
A long ratification process means shippers will have to wait a long time before enjoying the agreement’s benefits, but it also means that this potential agreement will be continuously exposed to political and economic changes as well as new emerging issues. This can trigger demands to amend or modernize the agreement, bringing uncertainties and further delay to the application of the FTA. This is particularly true under the current wave of trade protectionism in some EU and Mercosur member states.
Moreover, a lengthy ratification process can potentially result in missed opportunities for the EU in the Mercosur market. After all, the EU is not the only one interested in investing in Latin America. In recent years, China has become increasingly more involved in this region, with several port acquisitions, such as Chancay in Peru and Paranagua in Brazil. So far, China has not signed any FTA with any Mercosur country. This FTA in the making certainly makes the EU more competitive in the Mercosur market. But again, this is all up to the agreement being ratified quickly. Meantime, Mercosur countries’ capability of addressing issues like climate change and food standard will be a notable factor shaping the ratification process.
So many promises on the table, yet time is ticking.
Photo by chuttersnap on Unsplash
[1] The decrease in 2014 can be a result of multiple reasons: Chile’s economy slowing down, leading to a 20% decrease of Chile’s overall import from other countries in 2014; growing engagement of U.S and Asian engagement in Chile; high tariff on European Products; High Ocean freight rates, very long transit times and poor Liner services via Panama, which makes Valparaiso hard to reach.
[2] In this chart the EU and Mercosur refers to the EU eliminating tariffs on goods imported from Mercosur. For instance, for the first line, it refers to the EU eliminating 100% of the tariff imposed on Mercosur industrial goods in a transitional period of 10 years. For agricultural products, some of the sensitive goods are quota based, with the volume being phased into six annual phases, 10 years, or 12 years. For details please see: https://www.cacec.com.ar/uploads/medialibrary/ArchivosVarios/ARCHIVO_2_1562087863.pdf
[3] https://www.cacec.com.ar/uploads/medialibrary/ArchivosVarios/ARCHIVO_2_1562087863.pdf
[5] https://www.bbc.com/news/world-latin-america-49450495