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Jul 25, 2018 | 09:00 GMT

7 mins read

The Moment for Mercosur's Trade Agenda Is Now

In the past two years, Mercosur reached a consensus to move toward greater trade liberalization and started pursuing free trade agreements with a number of countries and economic blocs.
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Highlights
  • Mercosur's window of opportunity to conclude free trade negotiations is closing because of Brazil's presidential election in October and Argentinian President Mauricio Macri's declining political capital.
  • Free trade negotiations with the European Union and Pacific Alliance are near the finish line. In the case of the European Union, however, there are a few key sticking points that could stall the talks once again.
  • Mercosur's free trade negotiations with the European Free Trade Association, South Korea, Japan, China, Canada and the Association of Southeast Asian Nations will not be finished by the end of the year and thus are the most vulnerable to disruption.

The window of opportunity for the Common Market of the South to conclude free trade negotiations is closing. For the past two years, Mercosur — as the South American customs union comprised of full members Argentina, Brazil, Uruguay and Paraguay is commonly known — has been pursuing an ambitious trade agenda that includes negotiations with the European Union, European Free Trade Association, Pacific Alliance, Canada, South Korea and Japan. During this period, Mercosur has also held exploratory trade talks with China and the Association of Southeast Asian Nations (ASEAN). However, Brazil's October presidential election coupled with Argentinian President Mauricio Macri's declining political capital will prevent Mercosur from concluding some of these negotiations, especially those with South Korea, ASEAN, Japan and China, all of which are more vulnerable to tightening deadlines caused by political uncertainties.

The Big Picture

The Common Market of the South (Mercosur) has traditionally been slow to pursue free trade deals. Because the bloc's full members have veto power, Mercosur has been vulnerable to its members' domestic politics. But in the past two years, Mercosur reached a consensus to move toward greater trade liberalization and started pursuing free trade agreements with a number of countries and economic blocs. However, October elections in Brazil and Argentinian President Mauricio Macri's declining political capital are threatening this consensus.

Making Progress

Mercosur and the European Union have been negotiating a free trade agreement for more than 20 years, but never before have they been as close to achieving a deal as they are now. Mercosur's members finally reached the consensus their bloc's rules demand on the issue of gradually lifting trade barriers, and each side feels an urgency to wrap up negotiations ahead of October presidential elections in Brazil, which could stall the talks yet again and dismantle Mercosur's once-elusive consensus. Bilateral trade between Mercosur and the European Union reached $94 billion in 2017, and an EU study said a Mercosur-EU free trade agreement could double the European Union's exports to Mercosur. The Confederation of European Business recently urged the president of the European Commission, Jean-Claude Juncker, to conclude talks in the coming weeks. Argentina's foreign minister, Jorge Faurie, said on July 19 that the trade deal could be done by early September.

Graphic: Mercosur Member Countries

Sticking points have thwarted optimism in the past, however. Mercosur and the European Union were expected to sign at least a framework deal in December, but internal disagreements within each bloc interfered. On the EU side, France and Ireland have opposed opening the union's markets to more of Mercosur's agricultural products, while on the Mercosur side, Brazil has been reluctant to lift all of its automotive trade barriers. Mercosur continues to pressure the European Union to give it greater access to its agricultural products, in particular beef, while the European Union wants Mercosur to offer a more ambitious proposal to reduce its automotive tariffs and subsidies. Mercosur has proposed reducing its import tariffs on European vehicles by half. Other points of disagreement between the two blocs include the European Union's push to protect cheese, wine and other food names connected to a geographical location as well as the intellectual property rights of its pharmaceutical products.

Mercosur has also made significant progress in its trade negotiations with the Pacific Alliance, which comprises Mexico, Colombia, Peru and Chile. Unlike Mercosur, the Pacific Alliance is not a common market where every member country has veto power, but a free trade area that allows Mercosur member countries to negotiate bilaterally with each member of the alliance. A Mercosur-Colombia free trade agreement took effect this year, while trade negotiations with Chile are nearing an agreement. Mercosur member countries also signed an auto trade agreement with Peru. Talks with Mexico remain pending, however, as Argentina and Brazil have been trying to take advantage of Mexico's renegotiation of the North American Free Trade Agreement with the United States and Canada to increase their agricultural exports to Mexico.

Graphic: Mercosur's Top Trade Partners, Percent of Total Trade

Starting New Talks

Having made major progress in its trade negotiations with the European Union and Pacific Alliance, Mercosur launched free trade talks this year with South Korea, the European Free Trade Association and Canada. But Argentina's and Brazil's political willingness to move toward greater trade and economic liberalization is likely to fade for these negotiations, which are nearer their beginnings than they are their ends.

The decision to launch trade talks with South Korea in May caused the most controversy within Mercosur. Brazil, in particular, feared its automotive industry, which is protected by import tariffs that reach 35 percent in some cases, could be severely hit by South Korean auto imports. Nonetheless, South Korea's decision to lift restrictions on Brazilian pork helped ease Brasilia's opposition to exchanging offers for a trade deal. Progress has marked Mercosur's negotiations with the European Free Trade Association — its four member states are Iceland, Liechtenstein, Norway and Switzerland — but intellectual property rights regarding the pharmaceutical industry remain a primary sticking point, just as they do with the European Union.

Mercosur's plans to negotiate free trade agreements with Japan, ASEAN and China are also in their initial stages. Talks with Japan will likely begin in November, while negotiations with ASEAN and China are still in the exploratory phase. Mercosur has yet to reach consensus on its negotiations with China. Uruguay and Argentina favor negotiating a free trade agreement, as both countries see an opportunity to expand their agricultural products to the Chinese market. In fact, Uruguay, which assumed Mercosur's rotating presidency in June, has scheduled trade meetings with Chinese officials to take place in September and November. But Brazil, despite the fact that China is its top trade partner, is Mercosur's main obstacle blocking its pursuit of a free trade agreement with China. Brazil fears its manufacturing industry will be severely if not fatally harmed if trade restrictions with China are lifted. A free trade agreement with China also could put Paraguay's plans to continue attracting manufacturing industries from Brazil at risk.

Graphic: Mercosur Trade: Global and With Top Partners

Domestic Problems in Argentina and Brazil

Mercosur's trade negotiations are vulnerable to Argentina's economic headwinds and to the outcome of Brazil's October elections. Argentina's currency depreciation and high inflation rate, coupled with increasingly bigger current account and trade deficits, prompted Buenos Aires to request a $50 billion stand-by loan from the International Monetary Fund in June. The loan decision negatively affected the standing of President Mauricio Macri, who saw his popularity in political polls plunge from 53 percent in April to 41 percent in June. Macri's economic and trade liberalization policies haven't produced the economic results yet that could sustain support for Mercosur's own liberalization trends beyond 2019, when Argentina holds its next presidential election.

The results of Brazil's presidential vote in October could also stall Mercosur's trade negotiations. Although most of the presidential candidates have expressed their commitment to further liberalizing the Brazilian economy, the emergence of center-left candidate Ciro Gomes as a strong contender in the race could disrupt Mercosur's negotiations. Gomes has proposed expropriating oil fields that were auctioned by the government in the past two years; he has also called for state intervention in the production of medicines. Both proposals could put the trade talks with the European Union at risk: pharmaceutical products are one of the points that remain to be negotiated in the trade talks with the European Union, and French oil company Total, for example, spent more than $2 billion acquiring two oil fields in Brazil this year.

Consensus among Mercosur's full members is imperative to successfully concluding free trade agreements while the opportunity to do so exists. This unity, however, may crumble in the coming year, with a new president set to take office in Brazil and presidential elections scheduled in Argentina. Without consensus, Mercosur's trade negotiations with other countries, especially its negotiations with Asian countries, will be postponed indefinitely.

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