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EU-Mercosur trade deal: what it all means

EU-Mercosur trade deal: what it all means

Brussels and South American bloc hatch an agreement creating market of close to 800m people

When one of the world’s longest-running trade negotiations finally came to a successful end on the 11th floor of European Commission headquarters in Brussels, emotions ran high. “President, I congratulate you,” said Jorge Faurie, Argentina’s foreign minister, in a sentimental audio message to his country’s president, Mauricio Macri, who then made it public via a tweet.

Choking back tears, Mr Faurie said after two decades: “We achieved . . . an EU-Mercosur deal.”

Friday’s agreement between the EU and the South American bloc of Brazil, Argentina, Uruguay and Paraguay, was hailed by both sides as a “landmark” in global policymaking and a coup for their exporting companies.

Cecilia Malmstrom, the EU’s trade commissioner, noted that the talks ended precisely 20 years after they began — on 28 June 1999. Jean-Claude Juncker, European Commission president, called it a “truly historic moment”.

But what does this decades-in-the-making agreement really mean?

What’s in the deal?

It creates a market of close to 800m people for goods and services comprising almost a quarter of the world’s gross domestic product. In terms of tariff reduction, it is the largest deal the EU has struck: duties on EU exports to Mercosur are expected to be cut by €4bn a year. It is also the first sweeping trade agreement signed by Mercosur since its launch in 1991.

Its scope goes far beyond tariffs, including access to public procurement contracts, protection for regional food specialities and greater freedom to provide services.

What are the big wins for both sides?

For Mercosur, the deal eliminates tariffs on 93 per cent of exports to the EU and grants “preferential treatment” for the remaining 7 per cent. Negotiators said that one of the biggest prizes for the South American bloc was increased access to the European market for agricultural goods — notably for beef, poultry, sugar and ethanol. Brazilians expect tariffs on orange juice, instant coffee and fruits to be zeroed, which would be “a huge victory for the agribusiness sector”, said André Perfeito, economist at broker Spinelli in São Paulo.

For the EU, the biggest gain is a vastly improved export environment for its companies, which will now have an advantage over other parts of the world that still face Mercosur’s traditionally high tariffs and other trade barriers. The agreement will ultimately remove duties on 91 per cent of goods that EU companies export to Mercosur.

Some of the most important wins for Europe include the slashing of duties on cars and car parts, chemicals, machinery and textiles, and improved market access for EU wine and cheese.

What is its wider significance?

The deal sends some powerful political messages.

Ms Malmstrom said it was proof that the international trading system would endure, despite strains arising from Donald Trump’s protection and Chinese state-backed capitalism.

“I think the international environment helped to convince us that this is a good thing to do, that we are doing the world a favour,” she said.

For the Mercosur countries, the deal also sends another signal: that they are ready to open up their economies, especially the more insular Argentina and Brazil, in a pursuit of growth. It may also give Mercosur, which has been moribund for years, a new lease of life. Mr Faurie put it simply: Mercosur has been “a very closed economic space . . . this is a very clear message of where we are going”, in comments echoed by Brazilian officials.

How and why did it come together now?

Both sides have worked intensively in recent years to close the deal — culminating in a three-day sprint to the finish last week. Negotiations, Argentine officials claim, gained “renewed impetus” following the election of their free-market president Mr Macri in 2015.

Ms Malmstrom also highlighted the rise of Jair Bolsonaro, Brazil’s president, saying that the new government in Brasília “really put this as one of their priorities”.

For Wagner Parente, chief executive of BMJ Consultants in São Paulo: “There was a window of opportunity to sign this deal as both Bolsonaro and Macri were behind it.” Diplomatic sources in Brasília and Buenos Aires said they were keen on inking a deal before the October presidential election in Argentina, amid fears of a return to leftwing populism.

What opposition does the deal face?

It has been denounced by the EU farm lobby as a sellout of European interests. Copa Cogeca, a group representing EU farmers, said “agriculture has been the trade-off chapter to facilitate gains in other sectors”.

One of the wariest leaders has been France’s Emmanuel Macron, who previously said the deal could not go ahead if there was any wavering by Mr Bolsonaro on Brazil’s international environmental commitments. He has also warned Brussels not to sacrifice EU farmers.

The French president gave the agreement a cautious welcome on Saturday, saying it was “good at this stage, it goes in the right direction, but we will be very vigilant”.

The agreement still needs to be ratified by the national parliaments of all member countries of both blocs, as well as by the European Parliament and EU Council.

If Mr Macri loses the October presidential election to the leftwing populist ticket of Cristina Fernández de Kirchner and Alberto Fernández, there is a risk Argentina may opt not to stay in.

“It is not clear what the concrete benefits are for our country. But it is clear what the damage for our industry and Argentine employment would be,” Mr Fernández said. “An agreement like that is nothing to celebrate but provides plenty of reasons to worry.”

By Jim Brunsden in Brussels, Andres Schipani and Bryan Harris in São Paulo, and Benedict Mander in Buenos Aires

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