Lula is against Europeans in bids, but they can make corruption more difficult

Negotiated for more than 20 years, the free trade agreement between Mercosur and the European Union is still at an impasse between the two blocs. The best-known obstacle is related to environmental requirements made by the European bloc. But there is also a lack of understanding on another point: the possibility of European companies competing in tenders to sell products and services to the Brazilian government.

This market generates around US$150 billion (R$750 billion) per year. President Luiz Inácio Lula da Silva (PT) has said that he does not intend to “give up” these operations. In the Brazilian view, allowing European and Brazilian companies to compete for the same bidding market would open up unfair competition for national companies.

But the participation of European companies in Brazilian public sector bids, and vice versa, has more advantages than disadvantages, mainly as a way of making corruption more difficult, according to specialists Arno Gleisner, director of Foreign Trade at the Chamber of Commerce, Industry and Serviços do Brasil (Cisbra), and Rubens Medrano, vice-president of Fecomercio-SP and president of the Federation’s International Relations Council and Director of CNC.

In addition to being subject to more serious punishments in their countries if they are caught in corrupt practices, competition from European companies should help make the bidding market more transparent in Brazil.

But after all, what are these government purchases?

After two decades, Brazil, in 2019, under the management of former president Jair Bolsonaro (PL), finally reached a final version of the agreement between Mercosur and the European Union. In this document, in addition to the terms that include export and import tariff reductions and trade facilitation between the two blocs, there are three chapters, totaling 164 pages, that deal with so-called government purchases.

These purchases, in short, are those that public bodies need to make through private companies in the most varied areas and for different purposes. For example, these purchases can involve everything from vaccines to furniture for an office or public sector building, such as chairs, tables, computers, etc.

In one of the chapters of the agreement signed in 2019, the text provides that both private companies from the four countries that form Mercosur (Argentina, Brazil, Paraguay and Uruguay), as well as from the 27 nations of the European Union, can participate in these tenders between the blocs. In other words, South American and European companies would compete together in procurement tenders carried out by the public sector in both blocs.

Currently, so that companies can sell items and goods to the public sector, they participate in a bidding program: private sector companies interested in selling to the public body make proposals to the government, showing values, quantity, etc. In theory, the one that presents the contract with the lowest cost and the best quality wins.

Lula defends protectionism, but small companies already have protection

In Lula’s view, letting European and national companies compete with each other could harm Brazilian companies. “There’s something I’ve already told everyone, that we won’t give up on government purchases, which will be the possibility of developing medium and small entrepreneurs in this country. So we’re going to have to have a dispute”, Lula said about the theme.

For experts, however, this PT position is, at the very least, exaggerated protectionism. “He [Lula] is concerned and wants to protect national companies from foreign competition. But this argument is not justified since the agreement has a series of clauses that already protect them”, points out Rubens Medrano.

Medrano and Gleisner argue that this model would result in more transparent and, consequently, less corrupt negotiations. European companies are already subject to strict compliance laws in their countries that generate real punishments. As a result, there is less chance that they will have an appetite to get involved in bribery collection schemes or bid-direction schemes in Brazil.

Less competition makes corrupt bidding easier

Not an unusual scenario for Brazilians, overpriced tenders in the various spheres of government are constantly the target of investigations and gain prominence in the media. Whether in the construction of a highway, the implementation of radars or the purchase of new computers for the headquarters of a public body.

“If you have greater competition, you inevitably have more security and transparency”, argues Arno Gleisner. For the specialist, when the number of companies in these bids is smaller, a more favorable scenario for illicit procedures is created.

“When you only have two companies, for example, it becomes easier for them to agree with each other by saying ‘this account here is mine and that other one is yours’. Now, when there are four, six, two Brazilians or two Europeans, for example, it is impossible for this to happen”, points out the Cisbra specialist.

Arno believes that the commitment that some of these countries have to the Organization for Economic Co-operation and Development (OECD) treaty is one of the main reasons for keeping these negotiations more transparent. Due to the rigor imposed by the organization, public sectors in these countries cannot negotiate with companies that have a history of corruption.

Competition can reduce product costs and impact citizens’ pockets

For specialists, if Lula really is blocking the agreement on account of protectionism, his action is even understandable, but it is not technically justifiable. Although the European market is, in fact, more evolved and advanced than the Brazilian one, the competition is not as great as it would be if what was being negotiated were an agreement with companies from China or other Asian countries.

“Some sectors may not be as competitive because our technological development still does not allow us to compete on an equal footing, but I don’t believe this is a really worrying issue, because it’s not as if we were talking about an agreement with Asia”, stresses Arno.

Taking this into consideration, experts evaluate Lula’s protectionism as exaggerated. “Furthermore, if the fear is in relation to healthcare purchases, there are clauses in the agreement that protect those purchases. And regarding state-owned companies, they are even excluded from the agreement. So there is no need to worry”, points out Rubens.

There is still a positivist view of this situation. Arno believes that this competition can open a door to the national market, making it evolve and become an even more developed technological hub.

A People’s Gazette, Arno and Rubens also explain that the entry of the European market into public tenders can directly impact the taxpayer’s pocket. “European competition in government purchases will allow for lower amounts in taxation and purchases by the Brazilian government”, points out Arno. In other words, less costs for the population.

Agreement is subject to further evaluation by Europeans in the coming months

After the text of the agreement was finalized in 2019, the Europeans did not agree with all the terms of the text and did not ratify it. They prepared an additional document, which has environmental restrictions and, among other aspects, prevents the export to the European Union of Brazilian products made in areas of irregular forest deforestation.

This is because the European bloc has imposed very strict rules on itself in the environmental area. In theory, countries that have more flexible environmental rules would have lower production costs and compete unequally with European producers. The Lula government has been criticizing the additional term to the agreement, stating that it would be a protectionist measure for Europeans.

The European Union’s new demands have surprised Brazilians because the European economic strategy is changing. The bloc continues to be seen from the outside for its traditional characteristics of defending the free circulation of goods and investments, economic orthodoxy and fiscal austerity. But Europe has changed since 2019. The aim is to respond to the international trade war, triggered in 2018 by former US President Donald Trump, and Chinese mercantilism, characterized by strict control of the economy by Beijing.

To survive global competition, Europeans have adopted an economic strategy linked to geopolitics, to the detriment of the old free market. Sanctions against Russia, due to the invasion of Ukraine, and the bloc’s dependence on the Chinese market are leading Europeans to try to diversify their markets. Therefore, they have approached countries such as Brazil, Chile, Nigeria and Kazakhstan.

Negotiations between Mercosur and the European Union are taking place in this context. Therefore, although they are willing to negotiate, the Europeans must impose much more restrictions on Brazil than would have been expected of them in the past. But if the agreement is closed, it could yield an increase of R$600 billion to Brazilian GDP.

Brazil expects to send a response from Mercosur to the additional term requested by the European Union in September, in an attempt to unlock the agreement by the end of the year.