The Impact of Mercosur and European Union Free-Trade Agreement

Mercosur and European Union Free-Trade Agreement May Lead the Way for Prosperity and Growth for Latin America

At the G20 Summit on June 28, 2019, it was announced that a free-trade agreement (FTA) had been signed between the European Union (EU) and Mercosur. Mercosur, is a trading bloc composed of Argentina, Brazil, Paraguay, Uruguay and Venezuela (suspended since 2017) and, as associate members, Bolivia, Chile, Colombia, Ecuador and Peru. Negotiations between Mercosur and the EU have gone on for over 22 years and were finally unlocked, with support from leaders on both sides.
This agreement is compounded by three main pillars: political dialogue, cooperation and most importantly, free trade. In addition to increasing access to different markets, the agreement will bring predictability for trade tariffs, helping the industry engage in long-term planning, which increases efficiency and competitiveness.

Together, the Mercosur and EU countries account for US$20 trillion in annual GDP, (approximately 25% of the global economy) and comprise around 780 million people (over 10% of the world population). The EU is the second largest commercial partner of Mercosur, which in turn is the eighth largest outside partner of the EU. In 2018, total trade between the two alliances was about US$90 billion.1

As for foreign direct investment (FDI), the EU is the largest investor in Brazil, which is the main economy in South America and largest Mercosur bloc member. In 2017, European investment in Mercosur accounted for nearly half a trillion dollars.1

Currently, 24% of Brazilian exports are commercialized free of tariffs within the EU. After the agreement is finalized, 92% of imports will enter free of tariff in the EU, including lines with partial tariff revocation. Conversely, in a 10-year period, the agreement removes duties on 91% of imports that EU companies export to Mercosur.1 The agreement will leverage trade between the regions but more importantly, it will incentivize investments in the development of Mercosur countries. FDI and mergers and acquisitions (M&A) activity in all sectors, including infrastructure, in the Mercosur countries and particularly in Brazil, given its relevance for the region, will likely be positively impacted in the mid-term.

The agreement terms go far beyond tariffs — including access to public procurement contracts, protection for regional food specialties and easier access to both regions’ companies, to provide services in the counter-part region. It will likely speed up the trade process and reduce costs, diminishing bureaucracy and increasing transparency for both parties. This agreement is the largest deal the EU has struck. In fact, it’s predicted to cut duties between the blocs by four billion euros per year.

From a European perspective, the industrial sector will likely be most favorably impacted. Some of the most important gains for Europe include the trade of fully assembled cars and car parts, chemicals, machinery and textiles, as well as improved market access for European wines and cheeses.

The EU is the largest importer of agriculture products in the world and Brazil is currently the EU’s second largest supplier. One of the biggest benefits for the Mercosur bloc and in particular, Brazil, will be greater access to the European market for agricultural goods (mainly beef, poultry, sugar and ethanol).

Although the agreement is signed, it needs to be translated into 23 languages, followed by a technical analysis. The process of review and clarification could re-open substantive negotiations and the agreement must be ratified by each parliament of the Mercosur countries and by the European Parliament. The review could also lead to caveats in specific sectors in regional economies (for example, the textile industry in Brazil and farmers and livestock producers in Europe), so the parliaments’ discussions may delay the enactment of the agreement.

Ultimately, the final agreement will likely be beneficial to the economy and social welfare of the countries involved, especially for long-term investment, free movement of goods and services and production. The Brazilian government projects an addition of over US$100 billion a year in exports, for 15 years after the settlement and an increase in investments of over US$113 billion for the same period.

1 Resumo Informativo elaborado pelo Governo Brasileiro - Acordo de Associação MERCOSUL - UNIÃO EUROPEIA; July 4th 2019.

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