Lula and the agreement between Mercosur and the European Union – 09/29/2023 – Rodrigo Zeidan

Looks like it’s time for truth. Will there be an agreement between Mercosur and the European Union? Paraguayan President Santiago Peña gave the Europeans an ultimatum: if the agreement is not reached by December 6, when Lula hands him the rotating presidency of Mercosur, the bloc will end negotiations.

With the decoupling (decoupling) of economies such as the American and European economies and China, global value chains are rearranging themselves around the world. The European Union is the largest investor in South American economies. It would be time to encourage investments to revitalize our industry. Unfortunately, the chance of this happening is minimal. Regional political leaders ignore trade integration with the rest of the world. In Brazil, we are still stuck in the import substitution model, a disaster for decades.

The Mercosur-EU agreement has been in the works for 20 years and an initial version was signed in 2019. To a large extent, negotiations are at a standstill because of the Europeans. France, for example, wants additional environmental commitments. But Lula also does not want to ratify the agreement, to “protect” the national industry. If it passes as it is, the government procurement market would be opened: European companies could win contracts in tenders in Brazil, Paraguay, Uruguay and Argentina and vice versa. Lula’s argument, straight out of the 70s, is that nothing could stop Brazil from pursuing a “sovereign industrial policy”.

The import substitution model began in the 1930s, but was boosted by military governments, whose legacy of hyperinflation and economic closure is a disaster that accompanies us to this day. In this model, the local market is closed to competition, subsidizing national companies so that they can reach adequate production scales. To function correctly, there are three main conditions: correct identification of the sectors to be protected, substantial tariffs and specific subsidies so that local production grows efficiently and, mainly, their withdrawal as industries mature.

Brazil failed in all three dimensions (who doesn’t remember the disastrous IT Law, which to this day, indirectly, makes computers much more expensive than in the rest of the world?). Brazil has been an industrial country for 50 years, but local businesspeople continue to believe that if the market opens, the industry will disappear.

The result is that Brazil is the most closed country in the world to international trade (except for Sudan), with an average relationship between the sum of exports and imports and GDP, from 2010 to 2022, of less than 28% (the world average is 92%, and the median is 77%). For countries in conflict, this ratio is 51%. Highly indebted poor countries? 56%. Latin America? 47%. Middle-income countries? 48%.

Lula has the strength to untie this knot. With a reduction in tariffs, some Brazilian companies would go bankrupt, but several others would increase investments. New iPhone factories? India. The more than US$150 billion invested in electric battery factories? Apart from some investments (small, on a global scale, from WEG and BorgWarner), not in Brazil.

The main barrier to the Mercosur-European Union agreement is not the environmental demands of Europeans. It is the desire for “sovereignty of industrial policy” by South Americans. That only delivers deindustrialization.

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