Government has internal disagreement over EU-Mercosur agreement – 05/07/2023 – Market

The advance of the free trade agreement between the European Union and Mercosur comes up against both new conditions requested by the Europeans and internal disagreements in the Lula government on the need to renegotiate specific points of the treaty.

The obstacles put at risk the promise of President Luiz Inácio Lula da Silva (PT) to end the negotiations later this year — an outcome that, in practice, does not depend only on Lula, but on the approval of 31 member countries of the two blocks.

The Chief Executive himself criticizes the terms agreed in 2019 by the then government of Jair Bolsonaro (PL). In January, during a visit by the Prime Minister of Germany, Olaf Scholz, Lula said that the text needs to undergo changes. He cited government purchases as a central point of concern, arguing that they “make small and medium-sized Brazilian industries grow”.

The agreement provides that, by assuming commitments in relation to public procurement markets, the European Union and Mercosur will guarantee greater competition and access in domestic bids. It also establishes that suppliers of goods and services on each side will be treated as if they were domestic in the bids carried out by the counterparty.

This is a topic seen as crucial for Brazil because it corresponds to a significant portion of the country’s GDP (Gross Domestic Product) and because it is the mechanism through which the government can exercise its public policies to meet development goals and reduce inequalities.

It is under debate, for example, the difficulty in the so-called off-services, when specificities are placed in a public tender, such as those involving technology transfer.

According to interlocutors accompanying the conversations, the point is the target of contestation by the Ministry of Management and Innovation. There is a fear that the conditions agreed in the original text will stifle public purchases and make it difficult for the government to react quickly in exceptional cases, such as a pandemic.

Sought, the folder said that, at the moment, “it is carrying out a review of the agreement that had been initiated in the past administration”.

The argument finds echoes in other political wings of the Lula government, such as the group linked to former chancellor Celso Amorim –today head of the president’s Special Advisory Office– and the Civil House. The current content of the agreement in this device would affect areas such as Health, Education and Science and Technology, which are more dependent on public policies.

In the PT administration, there is an understanding that the negotiated agreement contains a “very large imbalance” and is unfavorable for the South American bloc – formed by Brazil, Argentina, Paraguay and Uruguay. In the view of Brazilian authorities, the signing of the commercial treaty only makes sense if it walks along the lines of social development and reindustrialization.

In this context, the fact that Mercosur and the EU are currently negotiating an additional term on environmental commitments serves as an argument for those who defend the renegotiation of other parts of the agreement. In the assessment of a member of the government heard by the Sheetthe inclusion of additional requirements that were not in the original proposal already constitutes, in practice, a reopening of the treaty – even if not in a formal way.

It is the understanding, for example, of the Civil House. Sought after, the folder indicated that the presentation of the complementary instrument –called a side letter– “necessarily” opens a round of studies, discussions and debates so that a position of Brazil and Mercosur can be established.

“Additionally, the presentation of new terms of the agreement in the format of the European side letter also gives rise, in an analogous way, to the elaboration of a counterproposal”, he says, in a note.

The Brazilian negotiators, together with their South American peers, plan to mirror the European strategy and accommodate Mercosur concerns, in addition to reinforcing some points of interest, through an additional document that is still being worked on.

The articulation to deepen negotiations on certain issues, however, collides with the interest of ministries linked to the economic area, such as Finance; Planning and Budgeting; and Development, Industry, Commerce and Services, in addition to Itamaraty – more inclined to close the free trade agreement once and for all.

The more pragmatic ones consider that the treaty, although unsatisfactory and below expectations by the Brazilian government even after being negotiated in the last two decades, would bring benefits to the country, such as greater diversification of exports. They also believe that an eventual reopening of the agreement could imply an indefinite extension of the discussions.

In the interpretation of government interlocutors, there are also ways to reach terms more favorable to Mercosur using loopholes in the original text itself. In terms of government purchases, for example, there is an article that deals specifically with modifications and rectifications of coverage, which would enable a review of more uncomfortable issues.

Behind the scenes, some involved have the perception that the deliberation took on more political than technical contours. This would be symbolized, for example, by the decision to hold meetings at the Civil House, instead of discussing the issue in other government bodies.

The Civil House, in turn, states that, “as the body responsible for coordinating the government, it needs to hear the observations and analyzes under construction by the various bodies that are working on the material of the agreement, its terms, annexes, references and, now, the side letter.”

In general, conversation participants see different currents in the country acting to influence the outcome of the agreement. One wing considers that the current terms are incompatible with the Lula government’s agenda. Another sees room to negotiate conditions in a way that aligns with the interests of the PT administration, while some individual actors want to close the treaty anyway.

In the last two groups, the perception is that not concluding the agreement is problematic and does not suit Brazil. According to people familiar with the discussions, other Mercosur partners —mainly Uruguay and Paraguay— are also firm in defending the position of not reopening the treaty.

For the Civil House, possible divergences between the ministries are “natural and healthy”.

In Brazilian diplomacy, more than a free trade agreement, the agreement with the European Union is seen as an important element of the country’s insertion in international geopolitics and demonstrates Mercosur’s negotiating credibility.

The final point in the negotiations, on the other hand, also involves the reaction of Europeans to Mercosur’s counterproposal. There is skepticism about the ratification of the proposal in the European Parliament amid resistance from countries such as France, Austria and Ireland. A meeting between the parties is scheduled for the end of May, in Buenos Aires.

The Brazilian government sees a window of opportunity for concluding the agreement in the second half of the year, when Brazil will assume the rotating Presidency of the South American bloc and Spain, which is also interested in the agreement, will preside over the Council of the European Union.

In the closing speech of the Brazil-Spain Business Forum, in Madrid on April 25, Lula called the context a “happy coincidence” and spoke of engagement in dialogue with Europeans so that “good news” could be had later this year.