The Mercosur-EU Agreement and the Race to Supplant the US as Trade Leader
By John Bostwick, Managing Editor, Radius
US Vice President Mike Pence delivered a joint press conference in Buenos Aires this month with Argentina’s President Mauricio Macri. A reporter for one of the city’s newspapers asked Pence through an interpreter: “Since the beginning of the Trump administration, negotiations between Mercosur and the EU have sped up for a trade agreement. Does the United States feel any threat to its predominant position on that front?”
Reporters and commentators had been raising similar questions for months, but Pence dodged this one. In fact, he didn’t once mention Mercosur or its ongoing trade-agreement negotiations with the EU during the course of the entire Buenos Aires press conference, the transcript of which is nearly 5,000 words.
You can argue that Vice President Pence should have answered the question, but he can be forgiven for losing sight of the exact state of the Mercosur-EU free trade agreement negotiations. They’ve been dragging on intermittently for over 17 years, with 28 separate rounds of talks already held. It does appear, however, that negotiations are finally gaining momentum. As the Buenos Aires reporter hinted, this momentum may be attributable in part to the current US administration’s protectionist trade strategies. I’ll get to that, but first here’s a brief overview of Mercosur and its negotiations with the EU.
Mercosur and Its EU Negotiations
Mercosur (Mercosul in Portuguese) is a portmanteau word containing elements of the Spanish term El Mercado Común del Sur, or the southern common market. It refers to a South American trading bloc established in 1991 that includes Argentina, Brazil, Paraguay and Uruguay. (Venezuela joined in 2012, but its membership was suspended in 2016 due to the country’s ongoing political and economic crises.)
The European Commission (EC) website explains that current trade between Mercosur and EU countries is governed by a 1999 inter-regional Framework Cooperation Agreement, along with bilateral agreements. Negotiations for a comprehensive trade agreement between the blocs began in 1999. According to Reuters, negotiations were broken off in 2004, only to resume in 2010. Ten rounds of talks took place between 2010 and 2012, when the process was again halted.
That herky-jerky negotiation history reflects the torturous nature of hammering out trade agreements between two economically powerful blocs, each comprised of countries with myriad industries intent on protecting their own interests. (Negotiations have also been slowed in part because of the leftist policies of President Macri’s predecessors in Argentina.) The high-level statistics presented in the EC summary, however, make clear that the two blocs already engage in significant trade. That activity has grown steadily over the last couple of decades.
To give an idea of what’s at stake with the proposed free trade agreement, the EC summary notes that “the EU is the biggest foreign investor in the [Mercosur] region, rising from 130 billion euros in 2000 to 387 billion euros in 2014.” According to Euractive, some experts predict that a free-trade agreement could double the EU’s exports to Mercosur. Exports would be dramatically increased through the elimination of existing tariffs, which now cost European exporters 4.4 billion euros annually. Predominant EU exports include vehicles, parts and machines, along with commercial services.
On the Mercosur side, trade with the EU accounted for 21 percent of its total trade in 2015, with exports to the EU rising from 32 billion euros in 2005 to 42 billion euros in 2015. Nearly 50 percent of Mercosur exports are agricultural products, including meats.
Mercosur-EU trade agreement talks resumed (yet again) last fall. In April, Reuters reported that Argentina’s foreign minister said the blocs are aiming to have an agreement finalized by the end of this year or the first quarter of 2018. Members on both sides of the table have hinted that an announcement about finalizing the agreement could be made this December, when the World Trade Organization’s trade ministers will meet in Buenos Aires.
Filling the Gap Left by the US
Argentina’s foreign minister also told Reuters that “a US retreat from global trade talks had opened a window for the European Union to become a strong player in multilateral accords between regions.” This impetus provided by the US's "retreat from global trade talks" is, of course, at the heart of the question raised to Vice President Pence at the joint press conference in Buenos Aires.
The rekindling of the Mercosur-EU trade talks, and the sudden sense of urgency about them, is part of a worldwide trend of governments looking to push through trade deals. Shawn Donnan of The Financial Times explains that “the most obvious motivating reason is the vacuum they see as having emerged with Mr. Trump’s ascent to power. For the first time that anyone can remember, the US is not setting the global trade agenda. And that opportunity, which may pass, is one that is too good to miss for trading powers such as China or the EU and Japan.”
The CEO of an Argentina-based firm specializing in trade has a similar take, telling Euractiv, “The United States is turning more protectionist and we need to counter that. Trump’s position has convinced others to side with pursuing international trade integration.” He adds that any Mercosur-EU agreement signed in December will likely be “a strong political agreement … rather than a full trade agreement.”
Challenges to Ratification
Any finalized Mercosur-EU agreement must be ratified by member-state legislatures. Achieving ratification won’t be easy. As mentioned, each member country in each bloc will have industries clamoring to protect their own interests. Given the number of countries involved, implementation of a finalized agreement would likely occur in 2019 or later.
An article published last week in Ireland’s Independent addresses the subject of Mercosur-EU beef negotiations and speaks to the ratification challenges that lie ahead. The beef negotiations “have prompted a backlash from [Members of European Parliament] and [European] farmers’ groups.” A spokesperson for the Irish Farmers’ Association is quoted as saying, “The stark reality is that without the UK market [following Brexit], the EU beef sector would become 116 percent self-sufficient and there is simply no room for any additional beef imports. … The EU Commission must insist that beef is excluded from the Mercosur trade discussions.”
An article in The Economist indicates that France is also particularly eager to keep beef tariffs in place. For these and other reasons, “the EU wants 90 percent of bilateral trade to be tariff-free, but would still retain a quota system on Latin American food imports.”
An editorial in The Financial Times says that Mercosur-EU trade deal negotiations have taken a genuinely promising turn that may actually lead to a signed agreement this year. In the end, however, the deal may amount to little more than window dressing intended “to score symbolic points” for an EU that’s used to “being mocked as the protectionist laggard of global governance.”
The Times editors worry that no meaningful trade liberalization will result from the agreement since each bloc will likely continue to protect certain powerful but vulnerable industries, such as beef producers on the EU side and manufacturing and services on the Mercosur side. If the final deal fails to lift tariffs in these and other competitive markets, then it will not truly liberalize trade between the blocs, and Brussels will fail to “supplant Washington as the world’s trade hegemon.”
Whatever the ultimate terms of the Mercosur-EU deal, the accelerated negotiations between the two blocs provide evidence that globalization is far from dead, despite recent protectionist tendencies in the US and elsewhere. If the trend continues, it’s conceivable that US multinationals will be drawn to Mercosur countries like Brazil not just for their significant local markets, but as a means of engaging in tariff-free trade with the even larger EU market.