16 January 2019

Highlights

  • Bolsonaro and Macri relaunch Mercosur with a free-market perspective and, within this framework, the negotiations to establish a free trade agreement with the EU dating back to 1995 seems to get momentum
  • According to some declarations, by the end of 2019, Mercosur and the EU will have signed an agreement creating the world’s largest free trade area

Macri and Bolsonaro Relaunch Mercosur

On 17-18 December, the 53rd meeting of the Mercado Común del Sur (Mercosur) took place in Uruguay under the pro tempore presidency of Tabaré Vázquez, the Uruguay head of state. President Vazquez, in his speech during the event, invited all three other Mercosur members (Argentina, Brazil and Paraguay) to strengthen the Mercosur alliance and especially to enlarge the number of international agreements. Within this framework, the idea of signing an agreement between Mercosur and the European Union (EU) has taken momentum. Moreover, according to Uruguay’s foreign minister, notwithstanding the complexity of the procedure, negotiations with the European Union are going on and there are hopes that it might be clinched by the end of 2019. However, the negotiations between the two blocs has been going on since 1995 and to clinch the deal by 2019 does not seem so realistic. Another sign that the Latin American countries comprising Mercosur, and especially its two main shareholders, namely Brazil and Argentina, are willing to move forward with negotiation with the EU, is the joint press conference by President Macri met President Bolsonaro in Brasilia on 16 January. During their conference the two presidents addressed the Mercosur issue, despite the fact that Paul Guedes, Bolsonaro’s top economy minister, had cast some doubts during the recent elections over the interests of a Bolsonaro government in keeping Mercosur in force. President Macri declared that “Esta relación acelerará los acuerdos en el Mercosur y fundamentalmente el vínculo entre los dos países” (the relationship between the Macri administration and the Bolsonaro one will speed up the Mercosur agreement and bond between the two countries). President Bolsonaro added that “no plano interno, o Mercosul precisa valorizar a sua tradição original, com abertura comercial, redução de barreiras e eliminação de burocracias. O propósito è construir um Mercosul enxuto, que continue a fazer sentido e ter relevância” (in the internal plan, Mercosur will have to come back and increase its original tradition of a commercial openness, barriers reduction and bureaucracy elimination). This means that, based on the intention of the two main shareholders, Mercosur will relinquish its stance as a “Latin American fortress”, generally closed towards outer blocs as it was under the prior “left decade”, namely under the Lula-Rousseff government in Brazil and the Kirchners in Argentina, and will move towards a free-market approach consistent with the new political orientation of its two main countries. 

Origin and What Is Mercosur

Mercosur has been established by the Treaty of Asunción in 1991 and Protocol of Ouro Preto in 1994. Its origins trace back to a 1985 agreement between Argentina and Brazil which, with the Declaration of Iguaçu, created a bilateral commission to integrate the two economies. In the following years, the two countries negotiated several commercial agreements. The 1988 Treaty for Integration, Cooperation, and Development committed Argentina and Brazil to work toward the establishment of a common market within 10 years. Later Uruguay and Paraguay joined the Mercosur project which was signed in 1991, as aforementioned. Full members are Argentina, Brazil, Paraguay and Uruguay. Venezuela was admitted in 2006 as a full member but then suspended in 2016. Associate countries are Bolivia, Chile, Colombia, Ecuador, Guyana, Peru and Suriname. Observer countries are New Zealand and Mexico.

Mercosur is headquartered in Montevideo, Uruguay.

The 1994 Ouro Prêto Protocol established Mercosur’s present organizational structure and conferred on it a legal personality, therefore allowing it to sign agreements with third countries and other international organizations like the EU.

On 1 January 1995, after years of various efforts to reduce tariffs between the four Mercosur members, a free-trade zone and a customs union were formally established. However, full harmonization has never been reached as, in relation to some goods, custom duties are still in force; and, although members agreed to apply a common tariff on imports from third countries, differences on such duties continue to exist.

eu mercosur trade 2015

eu mercosur trade 2016

eu mercosur trade 2017

The Historical Scenario

Mercosur was created at a time when the import substitution industrialization model (ISI) was already being replaced by the free-market model of the so-called Washington Consensus. The ultimate goal, after the failure of the ISI model, was to create a wider, internal, Latin American market, as countries had not to only focus on their internal market, under a protectionist umbrella as it was during the ISI model, but had to create a wider, integrated market, at least on a Latin American level.

However, during the leftist governments of Lula-Rousseff and the Kirchners, in the 2000s years, which implemented strong domestic protectionist measures, the bloc remained highly closed to any external agreement and experienced a substantial negative trend, although it has always remained in force. In those years, with oil prices at their peak, the idea of the “left group” was to rely only on oil revenues, while there was no interest in developing the economy through an open-free-market approach. The admission of Venezuela lies within this scenario as the world’s biggest oil producer and a full member of the left block under the leading charismatic personality of Hugo Chavez.

Moreover, within this scenario, it has to be considered that in 2003, the project of a Free Trade Area of the Americas (ALCA, under the Spanish name), substantially an extension of the North American Free Trade Agreement (NAFTA) promoted by President Bush, has failed due to the strong and explicit opposition of the then leftist leaders bloc (the most important at the time being Brazil, Argentina and Venezuela).

Protests against the ALCA, within an anti-globalist and/or leftist perspective, came mainly from the agriculture sector due to fears that the southern countries would be invaded by US highly subsidized agricultural products. Against this, Mercosur remained the stronghold of a protectionist anti-free market bloc rather than as a supranational entity with the values of open market enshrined into its foundations, such as the EU for example.

From a political point of view, in 2008, upon the initiative of Lula’s Brazil and Chavez’s Venezuela and the Kirchners in Argentina., the Unión de Naciones Suramericanas (Unasur) was established. Unasur is an intergovernmental organization to integrate the Andean Community (members currently are Bolivia, Colombia, Ecuador, Peru) with the Mercado Común del Sur (Mercosur) countries (active members currently are Argentina, Brazil, Paraguay, Uruguay) in a political and economic cooperation, and also in defense policies. Its main aims were to deepen relations among the 12 South American nations.

The fact that Brazil and Argentina, and also smaller Paraguay, are now governed by conservative free-market governments has given support to relaunch Mercosur under a free-market umbrella. Also, the only leftist government of the bloc, President Tabaré Vázquez’s Uruguay, is not as oriented to radical leftist positions as it was under the former Uruguay President José Mujica, and it supports a free trade agreement with the EU.

As aforementioned, the negotiation between Mercosur and the EU traces back to 1995 but with no concrete result up to the moment. Major issues in the negotiation have been that Mercosur countries are mainly exporters of agriculture and cattle (beef) products to the EU, while the European bloc mostly fears such competition for its highly subsidized agriculture sector as well as damages to the vast array of its products protected under rules of origin. On the other hand, Mercosur countries fear that EU industrial products will have a terrible impact on their domestic industries, as European countries are able to produce higher quality industrial products at better prices given their economies of scale. This is particularly true for the automotive industry, which is developed in Brazil and Argentina and which might suffer extensive damage if barriers to entry for the EU producers should be lifted.

Our Forecasts

We expect that the EU-Mercosur negotiations will move forward but it is not sure that by 2019 they will be successfully closed, not so much due to opposition from Mercosur countries but rather as a result of obstacles arising from the EU side.

Business Impact

If the EU-Mercosur agreement will take place, as mentioned above, this will mainly positively impact Mercosur countries’ agriculture and cattle sectors but negatively affect local industries, mainly automotive. From the perspective of international businesses, a disruption in those sectors will open up new opportunities and threats as well as create winners and losers, and which should be carefully monitored according to each company’s main business activity.

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