29 July 2019

Highlights

  • Potential reduction of US$4.5 billion in tariffs affecting nearly 800 million consumers
  • Major industrial and agricultural sectors could see significant expansion in exports
  • Opposition by affected EU industries could significantly delay ratification

On 28 June 2019, Mercosur, the Latin American trade group comprised of Argentina, Brazil, Paraguay and Uruguay, plus several associate members, and the European Union (EU) concluded a comprehensive trade agreement after 20 years of negotiations.  European Commission President Jean-Claude Juncker expected that the agreement would reduce duties by more than US$4.5 billion per year. It is the largest single trade agreement entered into by the EU. In its official press release, the EU said that “The new trade framework – part of a wider Association Agreement between the two regions – will consolidate a strategic political and economic partnership and create significant opportunities for sustainable growth on both sides, while respecting the environment and preserving interests of EU consumers and sensitive economic sectors. The agreement upholds the highest standards of food safety and consumer protection, as well as the precautionary principle for food safety and environmental rules and contains specific commitments on labour rights and environmental protection, including the implementation of the Paris climate agreement and related enforcement rules.”

Key elements of the agreement are:

  • Removal of the majority of Mercosur-member tariffs on EU exports, some of which have been as high as 35% (cars, clothing and footwear)
  • Implementation of legal guarantees protecting 357 high-quality European food and drink products recognized as Geographical Indications (GIs), including names such as Tiroler Speck (Austria), Fromage de Herve (Belgique), Münchener Bier (Germany), Comté (France), Prosciutto di Parma (Italy), Polska Wódka (Poland), Queijo S. Jorge (Portugal), Tokaji (Hungary) or Jabugo (Spain)
  • Opening new business opportunities for EU companies selling under government contracts, and to service suppliers in the information technology, telecommunications and transport sectors, among others
  • Simplification of border checks, reduction of administrative processes and limitation on the use of export taxes by Mercosur countries. A new online platform providing easy access to all relevant information is expected to particularly help SMEs on both sides of the Atlantic
  • Mutual commitment to effectively implement the Paris Climate Agreement
  • A dedicated sustainable development chapter will cover issues such as sustainable management and conservation of forests, respect for labor rights and promotion of responsible business conduct
  • Participation of civil society organizations in actively overseeing the implementation of the agreement, including any human rights, social or environmental concerns
  • Establishment of a new forum for the parties to work closely together on a more sustainable approach to agriculture and, as part of the political dialogue under the broader Association Agreement, address the rights of indigenous communities
  • The agreement also safeguards the EU and Mercosur's right to regulate in the public interest and preserves the right to organize public services in the way they consider appropriate
  • The EU’s rigorous food safety standards will remain unchanged and all imports into Mercosur countries will remain subject to them

The trade agreement is part of a wider new Association Agreement still under negotiation between the EU and Mercosur countries. It is composed of a political and cooperation pillar – on which negotiators already reached a general agreement in June 2018 in Montevideo – and the trade pillar. Beyond trade, the agreement will enhance political dialogue and increase cooperation in areas such as migration, digital economy, research and education, human rights, including the rights of indigenous people, corporate and social responsibility, environment protection, ocean governance, as well as fight against terrorism, money laundering and cybercrime. Both parties must still finalize this broader agreement before it is sent for approval to EU member states and the European Parliament for approval

Despite being hailed as a major free-trade milestone in an environment dominated by the United States’ increasingly vocal hostility to multi-lateral trade agreements, there is growing opposition to the deal within the EU, particularly among farmer’s associations and environmentalists. On 11 July 2019, the Irish Parliament voted to push its government to lead opposition to the agreement within the European Parliament. The Irish beef industry is particularly worried about competitive imports of Latin American beef.

Ultimate implementation of the deal, and the resultant tariff reductions, may still be far off. Given the large and vocal concerns by agricultural sectors in many major EU countries such as Italy and France, ratification in both the European Parliament and national parliaments is expected to be long and contentious. The previous major EU trade agreement, the EU-Canada free trade agreement (CETA), has been ratified by only 13 EU member states since the ratification process began early 2017.

Business Impact Assessment

Given the opposition and expected delays in ratification, it is too soon to access the economic impact on specific industries in either Mercosur or the EU. However, once ratified, European exporters in the following sectors may particularly benefit from the agreement, since the elimination of tariffs should significantly reduce local prices: cars, car parts, machinery, chemicals, pharmaceuticals, clothing and footwear, knitted fabrics, chocolates and confectionery, wines, spirits, and soft drinks. Imports of EU dairy products will also be duty-free, subject to quotas, which should make EU cheese products more competitive.

Mercosur-member national certification requirements for certain products will remain in place, most notably Brazil’s NR12 regime applicable to most industrial equipment imports.

Mercosur exports are expected to benefit from elimination of EU tariffs on 93% export products. The other 7% will receive “preferential treatment” by the EU.  Exporters of agricultural products should benefit the most, in particular, beef, poultry, sugar and ethanol.

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