The EU-MERCOSUR Association Agreement: The Devil is in the Details
AS PUBLISHED IN GLOBAL AMERICANS ON AUGUST 20, 2019
After two decades, the European Union and the four core MERCOSUR nations—Argentina, Brazil, Paraguay, and Uruguay—finally concluded negotiations for a trade agreement in Brussels on June 28, 2019. Officially known as the EU-MERCOSUR Association Agreement, the accord goes beyond strictly commercial topics to also foster inter-continental dialogue and political cooperation. In addition to the European Parliament, the political-economic agreement must also be ratified by each EU member state, as well as each MERCOSUR government. But before that can even happen, the text must be reviewed to remove internal legal inconsistencies, translated into the 24 official languages of the EU, and formally signed by the parties. This alone could take several months.
A breakdown of the EU-MERCOSUR agreement
The trade aspects of the agreement are divided into various chapters and annexes, including: 1) trade in goods; 2) rules of origin; 3) customs and trade facilitation; 4) sanitary and phytosanitary measures; 4) technical norms—including an annex related specifically to the automotive sector; 5) unfair trade remedies 6) safeguard measures; 7) trade in services—including e-commerce; 8) government procurement; 9) competition policy; 10) intellectual property rights—including an annex on geographical name indicators; 11) subsidies; 12) state-owned enterprises; 13) trade and sustainable development; 14) small and medium-sized enterprises; and 15) dispute resolution.
With the agreement, although 93 percent of all MERCOSUR exports will eventually achieve duty-free access into the EU market, another 7.5 percent—mainly agricultural commodities—will only enjoy preferential tariffs and, even then, some products such as cow and pork meat, chicken, corn, eggs, ethanol, honey, rice, and sugar, will also be subject to quotas. At least 100 agricultural products from the MERCOSUR are completely excluded from any type of preferential treatment. As for imports of European agricultural products by MERCOSUR countries, there are quota restrictions only on those few items that are most competitive with ones produced in the MERCOSUR, such as powdered milk, cheese, and garlic.
Details, details…
While almost all tariffs are eliminated on industrial products made within the MERCOSUR countries—with 80 percent obtaining duty-free access as soon as the agreement comes into force—tariffs are reduced on only 91 percent of EU manufactured goods, generally over a 10-year period. Tariffs on European shoes, furniture, and automobiles imported into the MERCOSUR, however, are phased out over a 15-year period. Meanwhile, import taxes on about nine percent of tariff lines representing manufactured goods imported from Europe will remain in place.
Curiously, the agreement acknowledges that MERCOSUR is not a fully functioning customs union. At present, a product from outside the MERCOSUR is not effectively “nationalized” once it pays the import duty and is admitted into the customs territory of a MERCOSUR member state. If the product should be re-exported to another MERCOSUR country it is currently treated as a “foreign” good and must pay the applicable import duty again. Under the agreement with the EU, however, the MERCOSUR countries commit to periodically review their customs procedures with a view to facilitating the movement of EU goods between their territories to avoid duplication of procedures and controls, including repayment of MERCOSUR’s Common External Tariff.
The EU-MERCOSUR agreement includes provisions for ensuring that sanitary and phytosanitary measures as well as technical norms are not abused and become disguised impediments to free trade. It also contemplates the harmonization or the adoption of new regional technical standards, the mutual recognition of conformity assessment procedures and accreditation certificates and establishes a procedure for recognizing the equivalency of standards. If these provisions are actually enforced, this could eliminate practices that have long undermined MERCOSUR’s own free trade area.
Additionally, the agreement offers service providers from any signatory country full access to the markets of all the other signatory states. It also liberalizes cross-border investments by individuals or firms from the EU into the MERCOSUR and vice versa, as well as cross-border bidding on government procurement opportunities at the central or federal government level. Once again, if these commitments are fully implemented, they would finally bring into force long-standing intra-MERCOSUR proposals to do the same.
On intellectual property rights, during the most recent negotiations, public health advocates and non-governmental organizations voiced concerns that the EU would force MERCOSUR countries to restrict competition from generic pharmaceutical manufacturers, by providing additional time beyond the expiration of a patent to compensate for excessive bureaucratic delays in approving an underlying patent, or in extending the monopoly on data exclusivity. Unfortunately, the draft text of the Intellectual Property Rights chapter is the one that, up to now, has conspicuously not been posted on the EU or individual MERCOSUR government websites. Hence, there is yet no way to independently corroborate what was agreed to in this area.
Given how the U.S.’s refusal to eliminate antidumping and agricultural subsidies ultimately contributed to MERCOSUR’s rejection of the Free Trade Area of the Americas over a decade ago, it is remarkable how MERCOSUR capitulated on both issues with the European Union. Agricultural subsidies are permitted when “necessary to achieve a public policy objective.” Governments are also authorized to continue imposing anti-dumping tariffs when merited legally, although the duty can be less the margin of dumping if it adequately removes injury to the affected domestic industry.
The agreement’s political motives
In view of the fact that some of MERCOSUR’s most competitive exports remain barred or are significantly restricted from entering the European market through quota and subsidy policies, and can potentially face anti-dumping tariffs, the agreement with the EU can best be explained by internal political factors. In particular, the Argentine and Brazilian presidents needed to show progress on the economic front given that policies pursued by both have resulted in little or no growth. Meanwhile, the EU is desperate to project its global relevance while beset by serious internal problems of which Brexit is only the most visible.
Speculation that the EU-MERCOSUR Association Agreement may now incentivize a Brazilian or MERCOSUR free trade agreement with the United States is premature. For one thing, it is inconceivable that the Trump administration would offer differential treatment to the MERCOSUR countries based on their lesser-developed status. Unlike the Europeans, the U.S. is more likely to insist on strict reciprocity in terms of market access. On the other hand, the Trump administration will not demand implementation of the 2016 Paris Climate Agreement—including specific actions by Brazil to halt deforestation in the Amazon—or enforcement of a “precautionary principle” to keep out foodstuffs where the risks to health are not scientifically conclusive, all of which form part of the EU-MERCOSUR agreement.
What’s next?
Despite the significant concessions made by MERCOSUR on agriculture, farmers in many European countries have already announced plans to try to derail ratification of the agreement. A resumption of massive Amazonian rain forest destruction under President Jair Bolsonaro could also result in a French rejection. Less opposition is expected from the MERCOSUR nations, as achieving a trade accord with the EU has been a goal of whatever political party has been in power.
Overall, the entire ratification process is expected to take many years. One thing that could accelerate things on the EU side is that the European Parliament can provisionally apply the trade provisions while it awaits individual member government approval of the political aspects.