Last June 28th, the Strategic Association Agreement between the Southern Common Market (Mercosur) and the European Union (EU) was signed, coinciding with the end of the G20 Summit, held in Osaka, Japan. This is one of the largest trade agreements signed between blocs at a time when protectionist practices are increasingly common.
The strategic partnership between Mercosur and the EU involves integrating a 773 million-person market accounting for almost a quarter of the world’s gross domestic product (GDP) with more than $100 billion (88 billion euros) in bilateral trade of goods and services. The document signed between the two trade blocs foresees that more than 90% of each bloc’s exports will receive tariff benefits within a maximum period of 10 years.
In this special report from IDEAS LLYC, we share some information fundamental to understanding the agreement’s relevance, as well as offer a local perspective on what it means for both the European Union and key Mercosur parties Argentina and Brazil.
The treaty from the Argentine perspective
The impact of this agreement’s implementation will be considerable for Argentina. Until last June 28th, Mercosur—and particularly Brazil—were the country’s main trading partners, accumulating, in general, trade agreements worth barely 9 percent of world GDP. As a result of these events, this figure has jumped to 30 percent, implying huge progress for the country’s commercial integration.
Likewise, a quantum leap in the country’s competitiveness will be essential. This could mean, for example, lowering logistics costs; improving port, road, rail and telecommunications infrastructure; or modernizing regulatory frameworks.
- 63 percent of Argentine exports to the EU are agricultural goods.
- 92 percent of the companies that export manufactures in Argentina are micro, small or medium exporters.
- Argentina is only involved in 2 percent of the EU’s FDI.
- The European Union is a strategic partner for Argentina from the historical, cultural, geopolitical and commercial points of view. Currently, it is the country’s second-largest export destination, accounting for more than $9 billion in 2018.
- Today, trade with the EU accounts for 15 percent of Argentina’s annual foreign trade.
- The EU countries that sell most to Argentina are Germany (accounting for 30.8 percent of EU imports), Italy, Spain, France and the United Kingdom.
The treaty from the Brazilian perspective
Although the industry considers the agreement positive, the agricultural sector should experience the most benefits in the short-term.
- 90 percent of Mercosur’s exports to the EU will not pay tariffs for a period of up to 10 years. Today, only 24 percent of what Brazil sells to Europeans has this privilege.
- Tariffs on many agricultural products will be eliminated once the agreement enters into effect.
- Export tariffs will be eliminated on all Brazilian industrial products.
- There will be a guaranteed barrier on use of the name “cachaça” for similar liquors produced outside Brazil, as well as in the names of certain types of cheese.
- Expected GDP increase of $87.5 billion over 15 years.
- 6 percent increase in Brazilian exports to the European bloc in 10 years, with the potential to create 778,400 jobs.
- Increased export competitiveness and growth in sales to EU countries.
The treaty from the European perspective
After the positive words following the signing, the remaining challenge for all member states lies in ratifying the agreement. The EU’s complex decision-making process can take up to two years. France and Ireland have already expressed their doubts about ratifying it until they are convinced it will not adversely affect their agriculture sectors. Spain and Germany, the main automobile exporters (together with the United Kingdom), have been the main drivers behind the negotiations, since they will benefit from opening Mercosur’s markets, which have traditionally been closed to these exports.
In the explanation of the agreement, the European Commission highlighted the following:
- Reduced tariffs on European products that have traditionally had problems accessing Mercosur markets. The main ones are automobiles and spare parts, machinery, chemical and pharmaceutical products, as well as textiles and footwear.
- Eased customs procedures. Both blocs will simplify customs procedures, as well as review technical and standardization regulations to prevent regulatory divergences from blocking product entry.
- Export of services. The service sector is one of the EU’s main exporting areas. Now, European companies will have fewer barriers to accessing services such as telecommunications, finance, business and transport.
- Access to public contracts, from which European companies were excluded. According to the agreement, they can now compete on equal terms with Mercosur companies.
- Guarantee that European food safety standards will not be adapted to promote the entry of Mercosur products under any circumstances; this was one of the points that created the most controversy throughout the negotiations.
- Environmental and labor sustainability. The European Commission emphasized that trade between both blocs must uphold the Paris Agreement on climate change and workers’ rights.
- As usual in EU trade agreements, cultural and creative industries are excluded, and their protection is enhanced by national legislations.
- Advantages for SMEs, which would be provided with a specific platform to offer clear information on the entry requirements for these markets.
- Tariff reductions on agricultural products, specifically dairy products, confectionery, spirits and wines. Additionally, the agreement guarantees the protection of the 357 European designations of origin.