Is Latin America closer to a free trade agreement with the EU?

Is Latin America closer to a free trade agreement with the EU?
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Latin America and the EU have long sought to create a free trade agreement, yet internal discord and divison within Mercosur has hampered efforts. Despite this, there appears to be renewed hope as South American elections signal a potential paradigm shift in regional thinking.

In 1999, the European Union and Mercosur entered into lengthy negotiations around an interregional agreement to strengthen their relationship, charting a path towards a free trade deal between the two economic blocs.

Mercosur is the largest customs union in Latin America. With a combined GDP of $3.8 trillion, the bloc differs from other Latin America trade unions by intending to create a common South American market with a political integration agenda.

Despite this potential and longstanding negotiation, progress has been sluggish. There has been no unanimity between Mercosur’s countries on the benefits of an agreement with the EU, even though the bloc’s legal framework requires that Mercosur members – Brazil, Argentina, Paraguay, Uruguay, and Venezuela – negotiate trade agreements with third countries as a group.

In opposition to this state of affairs, smaller blocs in the region have succeeded in implementing agreements with the EU. In June 2012, members of the Andean Community (Peru, Colombia and Ecuador) signed a comprehensive trade agreement with the EU, and, in 2015, the Caribbean community (CARICOM) launched an Economic Partnership Agreement (EPA) with their European counterparts.

Protectionism and political constraints

Even though Mercosur has a strong internal structure in comparison to other regional blocs, there has been a lack of political coordination among its leaders, hindering the decision-making process.

The region’s historical protectionist legacy has made countries apprehensive to take part in free trade agreements, especially Argentina and Brazil. Argentina, under the Kirchner government, faces unstable currency policies, with the peronist-nationalist tradition representing an extra hurdle. Moreover, Argentina opposes the EU’s agricultural subsides, thus blocking Mercosur’s trade talks.

Similarly, Brazil, since the failure of the Doha Development Round and the European crisis (2008), has changed its priorities and started to adopt protectionist measures. Furthermore, Brazil has rigid customs regulations and high taxes on industrial value-added products, thus hampering possibilities of free trade.

Winds of change

In spite of the aforementioned hardline stances of Brazil and Argentina, Paraguay and Uruguay have been more progressive, considering an agreement with the EU as benefical to their economic development.

To this end, Uruguay’s foreign affairs ministry stated this year that a free trade agreement with the European Union would be satisfactory, encouraging Mercosur members to unilaterally negotiate treaties with the European Union. Since the election of Horacio Cartes, Paraguay has adopted a relatively liberal economic approach, orientating towards an interregional free-trade agreement

Conversely, as a new member, Venezuela prefers to withdraw from negotiations, and tends to be neutral. Having yet to adopt Mercosur’s common external tariff, Venezuela claims that it cannot open its market to the EU. However, despite ongoing regional difficulties surrounding the agreement, new perspectives appear to be on the horizon.

Elections in Argentina take place in October, and the winds of change seem to be blowing. Kirchner’s opposition has gained strength and, so far, Mauricio Macri is favoured by almost 50% of the electors in Buenos Aires’ primary. If Macri wins, it is expected that Argentina will undertake a U-turn on economic and trade policies — Macri has already given interviews stating a favorable approach towards an EU agreement.

Brazil’s position is also shifting. The new foreign trade minister, Armando Monteiro, maintains that Brazil needs to expand foreign trade in order to strike against stagnation. Monteiro also stated that reviewing Mercosur rules and granting more freedom to its members to carry out negotiations individually with third countries would be positive for the region.

Alternatives towards a free trade agreement with the EU

Unsurprisingly, the long-lasting negotiation has disheartened the European Union. Recent political developments, however, herald a positive outlook for a EU-Mercosur trade agreement.

Germany’s foreign minister has recently reaffirmed his country’s desire to speed up the talks, and a new meeting is scheduled for June. On the other side of the Atlantic, Uruguay is expected to back a proposal granting autonomy for Mercosur members, allowing them to individually engage in bilateral negotiations with other countries and trade blocs.

Among Mercosur members, a range of other alternatives are under consideration to foster free trade alliances with third parts, including the EU. The options encompass waiver provisions to downgrading Mercosur status from a customs union to a free trade zone.

It is too early to determine which model will emerge from the reform of Mercosur’s deficient legal framework. Nevertheless, simply having the debate might itself push Mercosur to finally reach a deal to expand its trade alliances.

Categories: Economics, Latin America

About Author

Gabriel Petrus

Gabriel Merheb Petrus is a former advisor to President Dilma Rousseff's Chief of Staff, in Brazil, and partner at Barral M Jorge & Associates, a Brazilian consulting firm specialized in government relations, public affairs and corporate intelligence. He holds a Bachelor of Laws degree from the Federal University of Parana, a master's degree in International Relations from the University of Brasilia and a master of Public Administration from the Fundação Getúlio Vargas.