Brazil’s gains come up against Europeans’ ESG barriers

Brazilian exports to the European Union have the potential to increase by US$4.2 billion per year with the completion of the EU-Mercosur trade agreement, according to estimates from credit insurer Allianz Trade. The value corresponds to an increase of just over 8% in annual sales to the 27 countries of the European bloc, considering the 2022 value – US$50.9 billion, according to the Foreign Trade Secretariat (Secex).

However, these gains come up against a series of restrictions established by EU countries. The European bloc has threatened to impose sanctions on Mercosur products coming from deforested areas, and Mercosur countries are seeking compensation in exchange for the additional guarantees of environmental protection demanded by the Europeans.

A study released by the National Confederation of Industry (CNI) at the end of April shows that some of the main barriers to Brazilian products abroad are sanitary and technical, but restrictions of the ESG type (environmental, social and governance, in English) come growing in developed economies.

The entity points out that the emergence of this type of barrier is part of an international process and, especially in the European Union, of consumer protection and sustainability. On the other hand, it creates obstacles, goes against facilitated access to markets and establishes high demands for compliance (set of integrity and transparency controls).

“These are disguised trade barriers that reduce the chance of an agreement”, says the president of the Brazilian Foreign Trade Association (AEB), José Augusto de Castro.

Divergences between the countries of the European bloc also have an impact on implementation. The business leader remembers that it is necessary to find a consensus among the 27 members of the group.

“Among themselves, they think differently. There are those who are more open and those who are more closed,” says Castro. One of the biggest resistance comes from France, whose agribusiness is extremely protected and lobbies the local government strongly.

Another factor that could make it difficult to achieve the agreement are the internal difficulties in the South American bloc. Uruguay wants to create free trade agreements outside Mercosur. There is also the uncertainty arising from the Argentine election, this Sunday (19).

According to researcher Lia Valls, from the Brazilian Institute of Economics at Fundação Getulio Vargas (FGV Ibre), the two candidates in the second round – libertarian Javier Milei and Peronist Sergio Massa – are not excited about the possibility of an agreement.

It is difficult to predict when the agreement will come into force. The core was approved in June 2019, but the European Union demanded additional commitments from Mercosur based on the “Green Deal”, which establishes sustainability standards in the European bloc and which began to come into force in December of that year. Chains such as soy and coffee, for example, could be impacted in Brazil.

Where are the opportunities and what are the fears

Valls says that the biggest opportunities for Brazil are in agribusiness, where the country is most competitive and can face the greatest resistance. “The tariffs charged on Brazilian industrial goods are already low,” he says.

The European Union is already the second largest destination for Brazilian agriculture. Business is on the rise. It was US$18 billion in 2021 and, last year, it increased to US$25.6 billion. It is approximately half of what is sold to China.

According to the director of international relations at the National Confederation of Agriculture and Livestock (CNA), Sueme Mori, the great advantage of the agreement is access to the market with zero tariffs: “The potential is to expand business between the two regions.”

The biggest fears regarding the barriers that could be erected by Europeans are for producers of sugar, ethanol, beef and chicken, says Allianz Trade’s senior economist for Latin America, Roberta Fortes.

“We do not expect soybean import levels [pela União Europeia] increase, as it no longer imposes high tariffs. Furthermore, there are concerns that the agreement could contribute to deforestation due to agricultural expansion in Mercosur countries. However, remaining restrictions on agricultural trade with the EU should limit this impact”, explains Fortes.

Mineral commodities also have a place in the European bloc, assesses the credit insurer. Allianz highlights that the biggest growth opportunities are with petroleum derivatives, ores, coffee, oilseeds and fruits, waste from the food industry, cellulose, iron and steel, and cereals.

With petroleum derivatives alone, the credit insurer projects additional revenue of US$800 million in exports. Last year, Brazil sold US$11.3 billion in derivatives of this energy commodity to the European Union.

EU-Mercosur is also relevant for Brazilian industry

Although the greatest potential benefits of the EU-Mercosur agreement are among commodities, the topic is also relevant for Brazilian industry. A CNI consultation, released this month, shows that three out of every four companies or entities indicated the agreement as the top priority in the South American bloc’s external relationship.

Castro, from AEB, fears that, initially, the industry will be harmed by the conclusion of the agreement because of the “Brazil cost”, which makes our exports more expensive. “It will open the market and reduce the cost for Europeans,” he says.

He considers that, for Brazil, initially, the agreement is good politically, as it strengthens links with the European bloc. Secondly, he sees economic benefits associated with the consequences of tax reform.

Geopolitical issues arouse EU interest

One of the most important arguments for the implementation of the agreement between the two blocs is geopolitical. “Brazil is the third largest food exporter in the world and the only one with room to grow. On the other hand, we have an increase in conflicts that affect the food security of millions of people. The agreement is extremely relevant”, says the director from CNA.

The geopolitical factor is also an issue greatly emphasized by the Spanish Prime Minister and current President of the Council of the European Union, Pedro Sánchez.

The Allianz Trade economist recalls that, although the European bloc continues to be an important market, countries with less environmental protection and more restrictions on human rights in Asia and the Middle East are approaching Mercosur.

An important asset for the completion of the agreement is the large availability of capital stock from European companies. Castro, from AEB, highlights that there are many operations between headquarters abroad and branches in Brazil.

The credit insurer assesses that, if it comes into force, the trade agreement will have broad implications for international trade: the two blocs represent almost a fifth of global GDP.

“By implementing the agreement, it reinforces the idea of ​​multilateralism. It would be the first major agreement involving Mercosur”, says Valls, from FGV Ibre. The decision to implement the agreement will be political.

The current geopolitical context supports Sánchez’s vision. However, it remains to be seen whether he can convince the region’s main economies to give in: France, led by President Emmanuel Macron and whose agribusiness is extremely protected, and Germany, led by Chancellor Olaf Schölz.