The Mercosur-EU agreement is a trap – 10/05/2023 – André Roncaglia

This week a new round of negotiations took place in the free trade area between Mercosur and the European Union (EU). Commercial and technological asymmetries make the agreement a bad deal for Mercosur.

The agreement is an affront to President Lula’s plans to reindustrialize the country. A study by the Global Development Center showed that the Mercosur industry will suffer the biggest losses — notably the automotive and machinery and equipment sectors.

The premises of the agreement reflect an outdated geopolitical paradigm. New technological rivalries between countries have isolated Europe in its search for leadership in the green transition. The agreement with Mercosur offers a way out.

Environmental concern appears in a symbolic and selective way (degradation), reinforcing commercial asymmetries. By excluding CO2 emissions from the concept of “respect for the environment”, the EU protects itself from possible sanctions on its industrial exports and subjects Mercosur producers to all types of discretion, via non-tariff barriers.

On the agricultural side, increased competition with European producers could disrupt Brazilian family farming chains, responsible for a significant part of the domestic food supply. In a conservative scenario, an LSE study predicts an avalanche of dairy products (+ 90%) and rice (+ 47%) of European origin, for example, threatening tens of thousands of jobs in Brazil and Argentina.

The agreement liberalizes our industrial goods market in exchange for little gain for Mercosur agribusiness. In trade managed through quotas, Brazil already exports more than they guarantee. Maintaining the European tariff of 66% on our fresh meat exports prevents Brazil from accessing this market niche, where prices are 20% higher than those for frozen meat.

Another disadvantage is the restriction on taxation of international e-commerce; in other words, consumers can be taxed for consuming digital services online, but multinational companies cannot (Argentina is expected to lose US$186 million in revenue per year). This measure weakens the fight against global inequality that Lula wants to undertake as president of the G20.

It gets worse: by determining that state-owned companies act exclusively in accordance with commercial considerations in transactions of goods or services, the agreement limits the action of these companies as vectors of development (provided for by the New PAC). State-owned companies such as Petrobras may be questioned regarding their investment policies, prices and requirements for local content, compromising the mission of reindustrializing Brazil. The risk is so evident that Maurício Macri’s Argentina excluded the country’s state-owned energy companies from the application of this rule.

Europeans are not fools. They must be more flexible in relation to the government purchases chapter, allowing exceptions and compensation mechanisms. Goodwill has a second intention.

This is where the green neo-colonization that Lula wants to avoid comes into play. The EU seeks to ensure the supply of minerals critical to the production of batteries and other green technologies, going so far as to ban export taxes, permitted by the WTO. Brazil is on its way to becoming one of the world’s largest producers of these inputs and Argentina has immense lithium reserves. By inhibiting the processing of these minerals and zeroing tariffs on European industrial products, the agreement compromises President Lula’s agenda of regional productive integration and his Ecological Transformation Plan.

There is a positive agenda in energy transition and critical chains that can benefit both blocs, but the agreement does not follow this route. In practice, we once again specialized in commodities. Europe plays at a standstill and wins by a landslide.

“It’s a trap, Bino.”

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