Argentina and Brazil push for a Mercosur agreement with the EU

Argentina and Brazil push for a Mercosur agreement with the EU

2017 promised to be a decisive year for the trade agreement between Mercosur and the European Union given Brazil and Argentina’s strong efforts to finalize the deal. However, due to disagreements in the agricultural sector, the deal is now expected to occur in 2018. A potential agreement can strongly influence economic recovery for Argentina and Brazil, boost investment in the region, and ultimately liberalize trade and investment, services, and access to public procurement.

Most recent trade agreement negotiations

Last year, Brazilian President Michel Temer and Argentinian President Mauricio Macri combined efforts in order to finalize a trade agreement with the 28 countries of the European Union. Mercosur members – Argentina, Brazil, Uruguay, and Paraguay (Venezuela is currently suspended for violating the democracy rule of the bloc) – had hoped that new concessions (olive oil and whisky) presented at the end of 2017 would cause the EU to better its terms on the controversial agriculture portion of the deal. Mercosur leaders expressed that with the new terms, 90% of trade with the EU would have zero import taxes.

The EU had originally offered 70,000 tons a beef and 600,000 tons of ethanol a year, tariff free. Mercosur countries, especially Brazil and Argentina, claimed that this was insufficient and unacceptable, as they were hoping for at least 100,000 tons of beef as originally offered back in 2004 and 1 million tons of ethanol. However, strong resistance from France and Ireland to agricultural imports has now delayed the negotiations. The EU is expected to respond to the new terms and submit a new proposal in early 2018. Current annual bilateral trade is over U$100 billion.

Argentina and Brazil

After 10 years of populist leaders and reduced trade within Mercosur, pro market presidents took office in Argentina in 2015 and Brazil in 2016. Domestic political changes combined with economic recession in Argentina and Brazil triggered a more liberal trade policy, as both presidents made trade liberalization a priority. Temer and Macri see a potential deal with the EU as a way to consolidate the new economic agenda and openness of their countries – especially during a time of rise in protectionism in the US and UK. For Temer and Macri, a deal would be an important victory in international politics as they face internal dissatisfaction.

A Mercosur-EU trade agreement would create a market of over 750 million people. This deal would mean that Argentina and Brazil would open their products to a whole different set of consumers as they intensely look for new markets. And even though both countries have had recent economic recovery, there is a strong fear that this recovery, which was pushed by public consumption, can slow down once inflation picks up again.

From an investor perspective, a deal with the EU promises to help set the economic agenda in both countries, increase market and demand, create a positive trade balance with more exports, foster economic growth and access to industry and services, drive resilience, and, more importantly, increase investments.

A main portion of the deal is public procurement, in which governments in Mercosur countries can hire companies from the EU to provide goods and services or construction – infrastructure that can make Argentina and Brazil more competitive. EU investments in Brazil and Argentina are particularly important, as they bring confidence to other potential investors. On the other hand, the EU is particularly interested in public contracts with Brazil that alone are worth U$170 billion.

What’s in store for 2018

Negotiations are likely to resume in late January, as representatives of the EU and Mercosur are expected to meet in Asuncion, Paraguay at the end of the month.

A potential barrier in terms of timing is that Brazil’s presidential election is set for October 2018, which may stall negotiations slightly. However, given that President Temer has no aspiration for re-election, negotiations are likely to continue to pick up as he will be solely focused on a domestic pension reform and the trade deal to continue economic recovery. However, if the deal is delayed until after Brazilian elections, the efforts toward a trade deal may change depending on who wins. At the same time, Paraguay is scheduled to have elections in 2018 and its current president, Horacio Cartes, holds the presidency pro tempore of Mercosur.

On the EU side, the internal context may also delay a 2018 deal, as France has a new president and Germany faces difficulty to form a government after the elections. Moreover, the renewal of European Parliament occurs in 2019, and the command of the European Commission would make it an even tougher year to pass the deal.

If the deal doesn’t occur in the first semester of 2018, there is a good chance that the agreement may be delayed until 2020. Nevertheless, the current leaders of Argentina and Brazil have expressed the importance of the deal for their economic recovery and will likely continue their joint efforts.  

Categories: Europe, Latin America

About Author

Lorena Valente

Lorena Valente is an Associate at Promontory Financial Group, an IBM company. Previously, she was a Consultant for the World Bank Macroeconomics and Fiscal Management Brazil Team. She has also held positions at the Inter-American Development Bank, Albright Stonebridge Group, and McLarty Associates where she performed political and economic risk analysis for Latin America, with a special focus on Brazil. She earned her MA in International Economics and Latin American Studies from Johns Hopkins SAIS, and her BA summa cum laude in Political Sciences from the George Washington University. Originally from Brazil, she speaks Portuguese, Spanish, and English. *Views and opinions expressed are the sole responsibility of the author and are not endorsed by Promontory.