Mercosur and EU: Government wing sees agreement at risk – 07/18/2023 – Market

A wing of the government of Luiz Inácio Lula da Silva (PT) sees the free trade agreement between the European Union and Mercosur at risk with the changes proposed by Brazil for the chapter that deals with government purchases.

For the group linked to the economic area, the text shared last Friday (14) with the other countries of the bloc –Argentina, Paraguay and Uruguay– disregards technical arguments, resuming points discussed more than a decade ago and which face resistance from Europeans .

As shown to Sheetthere are internal disagreements in the Lula government on the need to renegotiate specific points of the treaty.

For technicians familiar with the negotiations, who defend “fine adjustments” in the text, Brazil threatens the outcome of the negotiations by putting “several elephants in the same room” in the discussion on public tenders.

Some government interlocutors argue that the side letter —additional protocol used in negotiations– cannot be used as an argument to undermine the agreement, even though each country has autonomy to define its rules in this regard for government purchases, and they refute the revised terms in the draft proposed by Brazil.

The Mercosur-EU agreement signed in 2019 provides that, by assuming commitments in relation to public procurement markets, the two blocs will guarantee greater competition and access in domestic bids. It also establishes that suppliers of goods and services on each side will receive “national treatment” in bids carried out by the counterparty.

One of the points of contention in the government concerns the purchase of medicines and inputs in the public health sector. The Brazilian counterproposal provides for an increase in the exceptions already provided for by the agreement under the argument of the most critical wing that the Covid-19 pandemic has brought new perspectives on the subject, in particular with regard to the supply of medical equipment.

There is a fear that the conditions agreed upon in the original text would stifle public purchases and make it difficult for the government to react quickly in exceptional cases.

The group linked to the economic area, in turn, claims that the Mercosur-EU agreement, according to the rules negotiated in 2019, provides for the list of exceptions for bids carried out by state and municipal government bodies, as well as bids related to public-private partnerships involving inputs from the SUS (Unified Health System) strategic list.

In their view, there must be a distinction between what is or is not considered strategic. According to interlocutors, a complete withdrawal of the sector is being proposed, along the lines of discussions held in 2013, without considering technical nuances, which “very likely” would be objected to by Europeans.

Another point of disagreement is the “offset” clauses, considerations imposed on suppliers for the purchase of goods or services such as technology transfer. This applies to purchases in sectors such as Defense and Health, among others.

In practice, in a transaction for the purchase of equipment, for example, the foreign company must also provide technology so that a factory in Brazil or a labor training center can eventually be set up.

Under the terms agreed, this prerogative has a term of 15 years from the moment the treaty enters into force.

The wing of the government that is against a broader negotiation admits the possibility of discussing a longer period, but considers that the new conditions established in the Brazilian proposal to make the period unlimited and applicable to all sectors go against the interests of Europeans, that they should not accept such terms.

The points agreed in 2019 by the then government of Jair Bolsonaro (PL) are the target of criticism by President Lula. Last Wednesday (12), the Chief Executive stated that Brazil “does not give up government purchases”, because they will be “the possibility of developing medium and small entrepreneurs” in the country. “We’re going to have to have a dispute,” he said.

The speech echoes the declarations made by the president in January, during the visit of the Prime Minister of Germany, Olaf Scholz, when he stated that the text of the agreement would need to undergo changes, citing public purchases as a point of concern.

According to a survey by Sebrae, based on data from the federal government’s purchasing panel, this year more than R$ 17.3 billion in deals by micro and small companies with the public sector have already been approved. The federal government’s public bidding market is worth R$ 166 billion, according to an estimate by an executive interlocutor.

The most pragmatic wing of the government says that micro and small companies will continue to be preserved even in a scenario of potential increase in competition between Brazilian and European companies. In addition, it contests the argument of those who claim that the agreement goes against the bidding law, sanctioned in 2021.

National legislation provides that the margin of preference for domestic manufactured goods and services resulting from technological development and innovation in the country may be up to 20%. According to technicians from this group, this is a possibility, it is not mandatory, and needs regulation by the Executive.

For negotiators of the agreement, the terms taken by Brazil to Mercosur translate President Lula’s position and concerns and favor the sustainable development of the country as a whole.

The wing most favorable to the current terms of the treaty says that the public procurement chapter would not be an obstacle to the neo-industrialization plans of the PT administration and that the Brazilian counter-proposal does not represent the consensual position of all ministries on the Esplanada.

“What is being presented is a no-deal,” says one source, on condition of anonymity.

Negotiations of the Mercosur-EU agreement informally entered the agenda of the Brazilian delegation in Brussels, where Lula is participating in the meeting of Celac (Community of Latin American and Caribbean States) with the Europeans. On Monday (17), the Mercosur foreign ministers met with the European Union Commissioner for Trade, Valdis Dombrovskis.

“At the time, the authorities of both regions expressed their high political interest in working towards the conclusion of the negotiations”, said the Ministry of Foreign Affairs in a note.

“A balanced association agreement could offer solutions that benefit everyone, take advantage of the complementarities of the two regions to boost their economies and integrate trade and sustainable development in order to generate economic opportunities, without disrespecting the environment”, he added.

Still according to the Itamaraty, the negotiating teams of the two blocs should meet as of August to discuss the outstanding points in the negotiations.