Brazil’s Trade Stuck between Mercosur and EU

Brazil’s Trade Stuck between Mercosur and EU

Brazil, being one of the BRICs and a country that economists fantasize about after having reached the verge of depression from looking at the EU, is facing a dilemma that it will have to confront by next year.

Due to its growth and increasing wealth (social unrest aside), Brazil will be re-classified as an upper-middle-income country. On the surface, this sounds like good news, indicating a country on the path to prosperity. However, there are kinks in the EU trade agreement, which cause Brazil to worry. As it is, Brazil stands to lose its EU trade preferences next year, as determined by the Generalised Scheme of Preferences. The only way to iron out those kinks is to negotiate a trade deal.

Brazil GNI

Source: World Bank

Brazil’s trade with the EU makes up about 37 percent of total trade between the EU and Latin America ($80 billion of bilateral trade), and in terms of investments, Brazil accounts for 43 percent of all the EU investment stocks in the region. During the last five years, bilateral trade between the EU and Brazil has grown by 8.4 percent per year on average, with Brazil exporting mainly primary products, such as agricultural, fuel and mining products to the EU. Some manufactured products, such as machinery and transport equipment, compose about a fourth of the trade as well. The EU’s exports to Brazil consist mainly of manufactured products, such as machinery, transport equipment and chemicals. The EU runs an overall trade deficit with Brazil in goods but has a surplus in commercial services trade, according to the European Commission.

Since 1995, Brazil has tried to forge a trade agreement with the EU, along with the four other members of Mercosur: Argentina, Paraguay, Uruguay and Venezuela. The quest is getting urgent now, given the loss of its trade preferences and the fact that the Brazilian economy is stuck in a bit of a rut with only 0.9 percent growth last year. A future EU-Mercosur Association Agreement is currently under negotiation (estimated $130 billion per year), and Brazil hopes to see it signed and implemented soon, although the government does not rule out the possibility of bilateral talks as well.

Asymmetries within Mercosur mean that members may need different paces of trade liberalisation to maximise gains. For example, Argentina’s balance of trade problems imply a need to move slowly with trade agreements, whereas Brazil and Uruguay both wish to accelerate the process. “There are objective conditions that create strong incentives for an advance on the EU-Mercosur front,” Brazilian foreign minister Antonio Patriota said in an interview with the Financial Times. But there is also “anticipation that each [Mercosur] country may be able to negotiate at separate speeds.”

Thus, Brazil finds itself pitted between the EU and its Mercosur partners, trying to please both and yet do what is best for the Brazilian economy. Acknowledging the fact that Brazil quite urgently needs an agreement to be reached, a bilateral agreement between Brazil and the EU could be the better option. “It’s good to get on with your neighbours, but the rest of the world is doing trade deals and Brazil risks getting left out,” says Arminio Fraga, former head of the Central Bank of Brazil.

Simon Everett, trade professor at St. Gallen University has also chimed in: “Breaking off from Mercosur would make commercial sense for Brazil. Given Argentina’s hidden protectionism, any trade partner [such as the EU] knows a deal with Mercosur wouldn’t be worth the paper it’s written on.” According to the WTO, it is permissible to have separate tariffs within a trade area, so the hurdle for Brazil to consider is a question of diplomatic courtesy and commitment to Mercosur. As 2014 draws closer, perhaps pragmatism will get the better of politeness.


Categories: Economics, Latin America

About Author

Mikala Sorenson

Mikala Sorensen is an Economist with regional expertise in Europe. She holds a first class honours degree in Philosophy, Politics and Economics from the University of York and a Masters in Economics from the University of Copenhagen. Having interned at the Danish OECD-delegation in Paris and currently working at the Danish Ministry of Finance, she specialises in politics and macroeconomics. Analysis for GRI is an expression of her own views.