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Sep 27, 2017 | 09:15 GMT

7 mins read

Mercosur Makes Moves to Go Global

A shift in attitude by Mercosur's two biggest economies, Argentina (represented by President Mauricio Macri, speaking) and Brazil
(ANDRES LARROVERE/AFP/Getty Images)
Highlights
  • Mercosur's trade negotiations with the European Union and the Pacific Alliance will gain traction in the next quarter.
  • Trade negotiations with China and South Korea are unlikely to make significant progress over the next year.
  • Other trade talks in their infancy, such as the ones with India, Canada and the EFTA, may advance. 

The Common Market of the South, a South American trade bloc, has left its protectionist past behind, setting a different course toward the global market. The bloc's two largest economies, Argentina and Brazil, have gradually shifted their priorities to concluding major trade negotiations with other countries and economic blocs. A reduction in trade over the past four years of over 30 percent within Mercosur, the Spanish acronym by which the bloc is known, as well as political and economic changes in Argentina and Brazil, have provided Mercosur with a powerful incentive to open its markets to trade. The process won't be a quick one, though. If a single member of Mercosur objects to aspects of a prospective trade agreement, it can significantly delay a deal's signing. As Mercosur sets its sights on the global market, one major impediment to its trade ambitions could be a lack of consensus among its members.

Eyes on Europe

A free trade deal between Mercosur and the European Union, which began on again, off again negotiations in 1998, has never been as close as it is now. The starting point for future negotiations will begin on Oct. 4 when the two sides exchange offers. Argentina and Brazil had been reluctant to include sectors such as industry, services and government procurement in the EU talks. But this attitude changed in the past year as more liberal trade policies have gained traction within Mercosur. Brazil, for example, has announced that it will review tax incentives to its industrial sector and is open to including services and government procurement in the negotiations — granted that the European Union gives more access to the country's agricultural exports. The bloc's smaller members, such as Uruguay and Paraguay, do not have a strong industrial base to protect and are eager for their agricultural exports to gain more access to the European market.

Not every EU member is eager to open their markets to Mercosur. Domestic farm lobbies in Ireland, Poland and France oppose a deal that would include larger quotas for South American beef and sugar. Opposition to Mercosur's ethanol exports provides another sticking point in the talks. In September, French and German producers of colza oil (a machine lubricant) boycotted Argentine biodiesel exports and threatened to take their case to the World Trade Organization (WTO). French and German producers argued that Argentina created unfair competition by not taxing its biodiesel exports. However, the case is unlikely to produce any meaningful result since the WTO ruled in favor of Argentina in a similar case last year.

There is great expectation that after almost two decades of negotiations, Mercosur and the European Union may sign some sort of preliminary agreement during the WTO meeting in Buenos Aires in December. Historically, Mercosur has always been at the mercy of Argentina and Brazil, and the governments of both countries want Mercosur to reach a free trade agreement with the European Union. Still, full ratification of any trade agreement may take at least a year, since approval within Mercosur must be unanimous.

Progress on Pacific Alliance Talks

Another Mercosur trade negotiation that is gaining traction is with the Pacific Alliance. With the exception of Mexico, each of the other members of the Pacific Alliance, Colombia, Peru and Chile, are also associate members of Mercosur. Both blocs will meet Dec. 21 in Brasilia to conclude negotiations for the reduction of non-trade tariff barriers. Countries from both blocs have worked to reduce or eliminate many tariffs, but non-tariff barriers such as sanitary measures on exported agricultural products are still in place. For example, Colombia and Peru have already reduced almost 90 percent of tariffs in their trade with Brazil. Earlier this year, Brazil reached a vehicle trade agreement with Colombia and Peru that will gradually eliminate tariffs over the next two years. But producers from both countries still complain about bureaucratic restrictions and non-tariff barriers for agricultural goods.

As the United States pushes for the renegotiation of the North American Free Trade Agreement, Mexico has been considering Argentina and Brazil as options for diversifying its corn and soybean imports. Mexico has been conducting negotiations on its own with individual Mercosur member countries. According to Mercosur's rules, Mexico is the only nonmember country with which Mercosur countries can sign a bilateral trade agreement without the approval of the other members. Mexico and Brazil plan to hold another round of negotiations in November to discuss the elimination of trade tariffs for over 3,000 products. Additionally, trade between Mexico and Brazil has already jumped 19 percent in the first half of this year in comparison to the same period in 2016.

Divided Opinion on Asian Deals

Mercosur has maintained a unified front in trade negotiations with its regional neighbors and Europe, but gaining a consensus in trade negotiations with China and South Korea has been more difficult. If the bloc can reach an agreement, Uruguay and Paraguay could significantly increase their agricultural exports to those countries. Argentina has also expressed some optimism with the two negotiations even though there is reluctance from Buenos Aires' domestic industries to give greater market access to China and South Korea's highly competitive industrial sectors.

Meanwhile, according Uruguayan diplomatic sources, Brazil was the only country that opposed a trade agreement with South Korea and China. A trade agreement that could lift non-tariff barriers on Brazil's agricultural products could grant Brasilia greater access to Asian markets. However, the fear that Chinese and South Korean manufacturing products may put Brazil's industry out of business prevent it from pushing for a trade negotiation. Brazil has long shielded its manufacturing and automotive sectors from foreign competition in the hopes of advancing economic growth. South Korea's competitive electronics and automotive industries put Brazil on edge. In the case of China, the reluctance to negotiate comes from the fact that around 80 percent of Brazilian exports to China are soybean and iron ore products, which already have low trade barriers.

 
Mercosur's trade with the European Union and China

In the Early Stages

Mercosur has come to a consensus on three other vital trade negotiations, moving forward with talks with the European Free Trade Association (EFTA), Canada and India. These negotiations are still in their initial stages. Negotiations with India, for example, do not involve a free trade deal exactly, but the reduction of tariffs for a list of 4,000 products. In 2009, Mercosur and India reached an agreement to reduce tariffs for a list of over 450 products but both wanted to expand this list. Mercosur has constantly reported trade surpluses with India. Last year, Mercosur's trade surplus with India reached $3.4 billion. Total trade between Mercosur and India reached almost $14 billion.

In talking with India, Mercosur hope to gain greater access to its agricultural exports, but Indian policies protecting its agricultural sector present a challenge. Additionally, India is interested in expanding trade in services and industry, two sectors that Mercosur continues to shelter from foreign competition. Therefore, negotiations between Mercosur and India will likely move slowly in the next year.

Mercosur and the EFTA announced in January the conclusion of preliminary talks on a free trade agreement. Since the announcement, the trade blocs have held two rounds of negotiations, and a third may take place by the end of the year. The EFTA is pursuing the talks to keep up with the European Union in regard to access to South America's largest pharmaceutical markets. Mercosur, for its part, wants to increase its agricultural exports with that trade bloc. Trade between Mercosur and EFTA reached over $5.5 billion last year with the EFTA reporting almost a $2 billion trade surplus.

Significant progress is also not expected for at least a year on a deal with Canada. The case of Canada is a bit more delicate since Brazil has taken Canada to a trade dispute settlement panel at the WTO. Brazil argues that Canada has subsidized aircraft manufacturer Bombardier to the tune of more than $3 billion, damaging Brazilian competitor Embraer. This dispute could slow negotiations between Mercosur and Canada as the governments in Brasilia and Ottawa both have threatened to impose trade retaliation over past disputes between Bombardier and Embraer.

Mercosur has been undergoing a process of gradual trade liberalization in the last year that is facilitating trade negotiations with individual countries and economic blocs outside South America. However, the South American bloc's rigid decision-making process giving all full members veto power over any deal will continue to hamper its ability to conclude trade talks.

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