Mercosur X EU: better late than never!

Julimar da Silva Bichara, Professor of the Department of Economic Structure and Development Economics at the Universidad Autónoma de Madrid. Email: Julimar.dasilva@uam.es

On 6 December, the Southern Common Market (Mercosur) and the European Union (EU) closed their association or free trade plus agreement, a quarter century after negotiations began. In 1999, the EU was the first trading partner and the main investor in Mercosur; today, 25 years after fruitless negotiations, the EU has lost ground to China and the United States (US), and is now the region’s third largest economic and trade partner. The US has managed to maintain its competitive position on the basis of economic relations based on the strength and sustainability of trade and direct investment in companies in the industrial and service sectors.

China, in turn, has moved to take over the top spot previously held by EU countries, expanding both its trade and business relations, based on a pragmatic economic and political strategy. Moreover, in recent years, it has deepened its financial relations, granting billion-dollar loans to the region’s most indebted countries. China has also offered loans in yuan (in an attempt to replace the dollar as a monetary instrument, which has generated threats from US President-elect Donald Trump) and without demanding conditionalities in terms of economic, social, environmental or structural reforms. Relations with the Asian giant, however, have deepened the structural weaknesses of the South American region and, above all, of countries with industrial economic activity, such as Brazil and Argentina.

In these 25 years, the export structure of Mercosur countries has changed from a region that exports industrial goods to a bloc with exports concentrated in low value-added goods, such as raw materials and agriculture. Mercosur sells mainly commodities to China and imports industrial goods. This structure has negative effects on the long-term sustainability of socio-economic development, accelerating the process of deindustrialisation or reprimarisation of the economic structure, which has increased its international dependence, exacerbating the imbalances in external accounts and the need for financing in countries with chronic fiscal problems.

In 1999, and again in 2019, the agreement between Mercosur and the EU was not fully concluded for reasons that the countries now seem to have managed to overcome, although not with total consensus, due to the noises that the agricultural issue continues to provoke in Europe. Everything indicates that there was an effort to make both sides more flexible. On the EU side, issues such as public procurement (on the part of Mercosur-Brazil and the EU), extension of the deadlines for opening up the automobile sector, and even the acceptance of a compensation mechanism for future unilateral EU measures (dispute settlement and rebalancing) have been addressed; on the Mercosur side, more modest agricultural quotas, the recognition of geographical designations, a specific instrument in the environmental sphere, and the importance of the implications of international trade for sustainable development have been accepted. All of this underlines the enormous effort that has been made on both sides.

Beyond the new geopolitical context, with a certain cyclical component, it is important not to overlook the long-term socio-economic implications of this new chapter in the EU-Mercosur relationship. Every international economic agreement has winners and losers. The secret to its long-term sustainability is to create compensation mechanisms, as has been done very efficiently in the construction of the EU. This new agreement does not specifically create compensation mechanisms such as the European structural funds. However, one can be optimistic, since they have tried to establish innovative safeguard and rebalancing instruments, that is, the creation of a mechanism to prevent unilateral measures taken by the parties after the signing of this agreement from compromising the negotiated trade concessions and unbalancing the outcome of the agreement, such as, for example, quotas for different agricultural products.

However, recent history has shown that international free trade agreements need economic growth and expansion of productive activity in general to be economically and politically successful. In times of crisis, domestic issues become more politically decisive than international economic issues. In any case, as is well known, the agreement still needs to be approved by all EU member states. France, which has always expressed its misgivings about the agro issue, does not seem to be in favour of signing the agreement, as do other countries, such as Austria, Ireland and Italy, which also have reservations.

Although the feeling is that the agreement came late, it is better late than never! The EU needs to think strategically about its role in the current geopolitical chess game and the kind of international relations it wants to build with Latin America and Mercosur. It can no longer improvise or act reactively to events (China and Trump). It cannot lose the initiative, as it has done over the last 25 years. The loss of its position of influence in Mercosur over these years is a reflection of what has happened to it on the international stage.

Mercosur countries have a clear European vocation, their Latin roots are manifested in their institutions, in their democratic values, in the defence of equality and social inclusion, in the search for peaceful and fair relations. This is a comparative advantage for the EU. A stable and economically dynamic Mercosur is an excellent opportunity not only for European business but also for the consolidation of European ideals of defending democracy and social equality. The EU needs to create a win-win socio-economic relationship with the region. I fear that only the creation of a free trade area, with some environmental and social concerns, will not be enough to recover the space lost in the last 25 years. Stagnating on the agricultural issue is from the last century; it is the values that built the very idea of Europe that are perhaps at stake.