Why Lula resists the Mercosur-European Union agreement – 07/08/2023 – Market

President Lula (PT) has taken the free trade agreement between Mercosur and the European Union to the spotlight frequently since returning to the Presidency. He insists that he wants to sign the pact, which has been dragging on for more than 20 years, but he repeats in his speeches three main points of resistance.

The PT criticizes what he calls “threats of sanctions” by the European bloc, unequal terms that would lead Brazil to be just an “exporter of raw materials” and even the opening of public tenders to foreign companies, items that in his view make the text “impossible to be accepted”.

He reiterated those clashes in May, alongside Venezuelan dictator Nicolás Maduro; in June, before European bloc leader Ursula von der Leyen and French President Emmanuel Macron; and also this week, in front of the presidents that make up Mercosur. His position was followed by Argentine Alberto Fernández, but contradicted by Uruguayan Luis Lacalle Pou, who criticized the delay.

Officially negotiated since 1999, the agreement between the two blocs was concluded in 2019, in the first year of the Jair Bolsonaro (PL) government, but has not yet been signed by the parties. The main impasse for this now is an addendum to the text, called a “side letter”, proposed by the Europeans earlier this year to reinforce environmental commitments.

Below, understand each of the topics that have created tensions and stopped discussions once again.

“Strategic partners do not negotiate based on distrust and threat of sanctions”

The phrase spoken last Tuesday (4th) by Lula, at the Mercosur summit, refers to the so-called “side letter” proposed by the EU. To understand what this addendum says, you need to go back and explain that the thousands of pages agreement concluded in 2019 has a chapter called Trade and Sustainable Development.

This chapter requires the parties to undertake to comply with environmental commitments signed in the past, such as the Paris Agreement, including reducing greenhouse gas emissions. But he is the only one who does not foresee a mechanism called “dispute settlement”, common in EU agreements.

This device means that, in practice, the sides can impose sanctions on those who do not comply with the agreement. Faced with increased environmental pressure in Europe and the threats seen in the Bolsonaro government, the EU decided to propose this addendum to the chapter – which is confidential, but was leaked by a European environmental NGO.

Consultant Pedro da Motta Veiga, member of the Amazon Trade and Environment Observatory (OCAA), believes, however, that the EU proposal is common practice on the continent and is lighter than it seems: “The letter repeats articles from the Paris Agreement , for example, and at the end it brings a box that proposes that, in the future, countries sit down to discuss the possible possibility of foreseeing sanctions, without using that word”.

Even so, the Brazilian government considered the proposal a form of imposition. “A commercial partner cannot impose conditions: ‘If you don’t do this I will punish you, if you don’t comply with the Paris agreement I will punish you’. It turns out that the rich countries do not comply with any of the agreements,” Lula declared live on third.

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“We have no interest in agreements that condemn us to the eternal role of exporters of raw materials, ores and oil”

This was another sentence spoken by Lula in Mercosur, which reflects his view that the agreement concluded is unbalanced. The text foresees that European products will have reduced import tariffs in Mercosur (mainly in the industrial, agricultural and food sectors) and that South American exports will have preference in the EU.

Today, half of the products exported by Brazil to the bloc are primary, with emphasis on crude oil, coffee and soybeans, and the other half have greater added value, such as soybean meal. In exchange, the country imports only industrialized products from Europe, such as medicines and vehicle parts.

Pedro da Motta Veiga, from OCAA, believes that Mercosur made more concessions because it has more closed markets. “Any agreement that Brazil and Argentina sign will seem unbalanced, because we have higher tariffs for products”, he says. He also considers that Brazil exports much more raw materials to China, our biggest trading partner, than to the EU —almost 80% of exports to the Asian giant are primary.

The discussion is important because the European bloc ranks second in the Brazilian market. On the other hand, Brazil accounts for 78% of the European Union’s trade with Mercosur. Despite the war in Ukraine and the pandemic, in 2022, trade between the two reached the highest value in the last ten years, with our exports exceeding imports.

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“If we deliver government purchases, what will be left over for the [empresa] small and medium Brazilian?”

This is one of Lula’s arguments, made during a meeting with Nicolás Maduro in Brasilia and on other occasions. He is referring to the Government Procurement chapter of the agreement signed in 2019, which guarantees “domestic treatment” to foreign suppliers contracted by the governments of the countries.

As with any free trade agreement, however, the device provides for limits and exceptions. The opening does not apply, for example, to purchases by state and municipal agencies, state-owned companies and public foundations, as well as construction equipment, mining, truck accessories, pesticides, strategic inputs from the SUS and food safety programs.

It includes bids for goods initially starting at BRL 2.3 million and construction service contracts and public works concessions starting at BRL 55 million —amounts that reduce with the duration of the agreement. Some defend that this does not affect, therefore, small and medium-sized companies, but the government sees damage to industries.

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.