The free-trade agreement between the Common Market of the South (Mercosur) and the European Union (EU) is a topic for debate among the academic community and entrepreneurs alike. To encourage the debate, Panorama Internacional invited two scholars, our interviewees, to answer some questions that will help us better understand that subject matter. International business consultant Frederico Behrends ponders that, despite the obstacles, the agreement may have a political understanding this year, so that it can be implemented in 2018. Luiz Augusto Faria, lecturer at the Federal University of Rio Grande do Sul (UFRGS), in his turn, reckons Brazil has the advantage of trade preference with Latin America, which would be jeopardized if the free-trade agreement with the EU were signed.
Meet our interviewees:
Frederico L. Behrends is an international business consultant and has been working with foreign trade for more than 40 years. Industrial chemist with a degree from the School of Engineering of the Federal University of Rio Grande do Sul (UFRGS), he is a councelor and consultant for the Foreign Trade Council (Concex) of the Federation of Industries of the State of Rio Grande do Sul (FIERGS) and coordinates the Thematic Negotiation Group (GTNI) at the same institution. Moreover, he has worked as a lecturer in the graduate courses in Foreign Trade at the following institutions: UFRGS, the Regional University of the Northwest of the State of Rio Grande do Sul (Unijuí), the University of Caxias do Sul (UCS), the University of Vale do Rio dos Sinos (Unisinos).
Luiz Augusto Faria is an Associate Professor at the Federal University of Rio Grande do Sul (UFRGS) in the International Strategic Studies Graduate Program and in the undergraduate courses in Economic Sciences and International Relations. He holds a degree in Economics, a Master’s and a Doctor’s degree in the same area from UFRGS. He was a researcher at the Economics and Statistics Foundation (FEE) between 1982 and 2014. He does research on Political Economy and International Economics and works mainly in the analysis of Brazilian economy, economic integration, globalization and foreign relations of both Brazil and the Common Market of the South (Mercosur).
Panorama: In 2015, the big companies accounted for 94.35% of the country’s exported value. Out of this total, 244 companies exported a total of US$145.64 billion. How to conciliate, within the scope of the Brazilian trade negotiations, the interests of a small group of large export companies and the interests of other Brazilian companies that operate specifically in the Brazilian domestic market?
Frederico L. Behrends: There is a consulting mechanism to the private sector regarding international negotiations done by the Brazilian government called Brazilian Business Coalition (CEB in Portuguese). The CEB, which is coordinated by the National Industry Confederation, is formed by class entities such as associations, federations and employers’ unions that seek to influence the Brazilian international integration strategies representing their companies’ interests, including medium and small businesses. Certainly, conciliating the interests of such a heterogeneous vast universe of companies is not an easy task. The difficulties regarding the harmonization of the offering lists are a challenge inherent to all countries, especially those that negotiate as economic blocs. However, it is necessary to find a mutual understanding that can benefit Brazilian companies independently of their size. As for the Brazilian companies that operate exclusively in the domestic market, such an agreement will make them rethink their strategies, due to the sharp demand increase for European products. It will be fundamental for these companies to seek for partnerships, invest in technology for their products and in improvements in their production processes in order to enhance their competitiveness. Today the Brazilian companies possess a kind of tariff “shield” in Brazil that protects them with an average 11% import aliquot.
Luiz Augusto Faria: Economic concentration is a natural tendency of capitalism which can only be modified by specific policies. Europe has been consolidating the two largest budgets of the European Union (EU) for decades, as exemplified by the Common Agricultural Policy and the Regional Development Policy. In these two cases, there is an intention to direct efforts towards the development of small enterprises, either through family farming or through local productive arrangements, with collaborative networks between small firms. In Mercosur, there is a space for what we call SMEs (small and medium-sized enterprises), in which the focus is on policies that promote them. But for this, political initiative is needed. For instance, the automotive agreement was very supportive of the big automakers, which had gains in scale and expertise, but it was disadvantageous for local component suppliers, largely swallowed up by the advance of multinational suppliers. Preventing this from happening depends not only on regional content requirements, but also on credit and other forms of incentives.
Panorama: The negotiation of a free-trade agreement between Mercosur and the European Union has been going on for more than two decades. What is the main obstacle to the conclusion of this agreement?
Frederico L. Behrends: The agreement has gone through several obstacles over the past two decades. After the negotiations started, in 1999, they did not move between 2004 and 2010, when they were then resumed during the Mercosur-EU Summit. Since 2010, important movements have been made, but at a very slow pace, largely due to the lack of interest of the Brazilian and Argentinian governments at that time. The focus of the Brazilian trade policy, for example, was far from the negotiation of free-trade agreements that, when eventually concluded, involved countries with low relevance and exchange potential. In addition, there was also some fear on the part of the manufacturing industry regarding the possibility of entry of better quality European products. On the other hand, agricultural producers have always seen, upon the conclusion of the agreement, a great opportunity to sell to the Europeans, a market of more than 500 million consumers. Today, with the change in the position of the governments of Brazil and Argentina, which are closer to countries with greater economic relevance, and the greater interest of the Europeans after the U.S. reneged on the Transatlantic agreement, there is a possibility that the agreement will have a political conclusion by the end of this year, so that it can be implemented in 2018.
Luiz Augusto Faria: Negotiations began in the last decade of the 20th century, in a political environment dominated by the ideas of commercial liberalism, a belief that sees the increasing import and export flows as a benefit to society per se. Since then, a lot has changed. Mercosur has taken a skeptical position on the free market and adopted policies to promote regional development. In addition, there was the 2008 crisis and the economic stagnation of Europe. Aside from these changes, since the beginning, the focus of the discussions is on access to markets on both sides. The Europeans want greater participation in services and industrial products, and we face the wall of protectionism of the agricultural policy of the European Union. There is little margin for concessions, which is why it is so difficult. Moreover, the importance of the European market to South America has been declining since the late 20th century. Our biggest partner today is Asia, with China ahead.
Panorama: Latin America as a whole is one of the main destinations for Brazilian export of manufactured and semi-manufactured products. In addition, domestic consumption has a consistent relevance in the Brazilian Gross Domestic Product (GDP). In that sense, to what extent would a free-trade agreement between Mercosur and the European Union benefit Brazil?
Frederico L. Behrends: One of the main factors that has made the Latin American market so important and with so much potential, especially for the Brazilian industrial sector, is that over the past three decades regional tariff preferences have been negotiated with several countries within the Latin American Integration Association (ALADI) as well as important economic complementation agreements, such as the ones signed by Mexico, Peru and Chile. Currently the European Union is Brazil’s main trade partner, representing a product exchange of more than US$64 billion, 1/5 of the total. The share of the export of processed products to the European Union has grown by an average of 3.6 percentage points in the last two years. The conclusion of the free-trade agreement between Mercosur and the European bloc, besides being a good opportunity for the manufacturing industry to seek to improve its competitiveness, as far as technology, processes and governance are concerned, might bring a great benefit to the agro-industrial sectors as well as to the agricultural machinery and implements, which are very important industries for our state. Therefore, the impact of a megadeal of this size is quite big, and it is fundamental that both the government — taking into account the execution of structural reforms and investments in infrastructure — and the companies prepare themselves for the opening of the market that the country will promote in the coming years.
Luiz Augusto Faria: Brazil exports industrialized products of higher added value to Latin America and basic products to Europe. It was not like this in the recent past, when we also exported industrialized goods to Europe and the US. It was the use of the exchange rate as an instrument against inflation that hampered the competitiveness of our industry. In the last two or three decades, we have been losing market share to the Asian countries. As long as the exchange rate remains at the appreciated level of the last few years, there is no great prospect of gaining competitiveness in the industrial sector, let alone in the service sector. What we have today is an advantage of trade preference with our neighbors that could be jeopardized by a free-trade agreement with the EU or the US. The loss of competitiveness by the appreciated exchange rate has already led to a very large retrogression in the composition of our trade flows. We have returned to the point in which we used to exchange raw materials for products with greater technological content. In addition, even in the South American market, Brazil and Argentina have been facing a competition with Asia in the supply of industrialized products.
Panorama: Brazil and Argentina, the main economies of both the region and Mercosur, have currently adopted an economic management more in line with the liberal orthodoxy. However, like the United States, Europe is experiencing a more isolationist political and economic process focused on domestic issues. Do these differences in contexts hamper the negotiations?
Frederico L. Behrends: It is possible to perceive, as an aftermath of the global economic crisis of 2008, the strengthening of the criticism about globalization and the integration project that started more than 60 years ago, leading to the alteration of the political balance in several EU countries, with the increase in popularity of far-right parties. However, the European Commission, which is in charge of the international negotiations inside the bloc, does not seem to have altered its trade policy in the search for access to new markets and negotiations considered strategic and relevant. Besides the negotiations with Mercosur, the European Union negotiates with other partners of economic relevance, such as South Korea, Canada, Chile, Mexico, among others. With the election of Donald Trump to the U.S. government and his decision to renege on the Trans-Pacific Partnership (TPP), deals such as the Transatlantic (between the U.S. and the European Union) have not advanced either, which has made the Europeans’ interest in concluding the agreement with Mercosur grow. What caused some sort of apprehension on the part of Mercosur was the tied dispute between Emmanuel Macron and Marine Le Pen in the French election. However, with the victory of the pro-European Union candidate, the perspectives of support remain. In Germany, the elections are going to take place this year; however, the party of Angela Merkel is expected to keep in power. Therefore, there is a mutual interest of the blocs to resume the negotiations as soon as possible, regardless of the sociopolitical issues that affect the European countries, such as Brexit.
Luiz Augusto Faria: That’s another problem. The recent political changes regarding the two major actors of Mercosur bring back the environment of the 90s. An ideological vision, in the bad sense of the term, is becoming predominant once again, proposing unilateral concessions without any kind of compensation. Fortunately, today we have the common external tariff as a precaution mechanism, forcing the opening of the regional market to be negotiated by all countries, which imposes some sort of needed pragmatism and guarantees a greater level of protection. However, Argentina’s indebtedness and the dismantling of the Brazilian oil and infrastructure chain are a sign that we are jeopardizing the possibilities of a future development. It will be a great waste not to use the huge deposits of South American hydrocarbons to boost industrialization and technological development. In addition, the income generated by this sector has the potential to produce a surplus large enough to finance social policies, as required by the Brazilian law, before being modified in the current framework of misgovernment.
Panorama: It is known that the economy of Rio Grande do Sul is extremely interconnected with the dynamism of the national market, which in turn has a strong interdependence with the international economy. It would then be possible to list the state’s economic sectors that would gain and the ones that would lose in a scenario in which the two commercial blocs come to an agreement?
Frederico L. Behrends: Products that have a high competitive differential tend to be more successful within the implementation of an international agreement, for when tariffs are reduced to zero costs go down. Those who have a low competitive differential due to strong competition, lack of value added or outdated technology will certainly have more difficulties. Their advantage will be related to a greater ease in technology transfer and import of inputs. Therefore, it will be fundamental for the companies to analyze their performance, their niche markets and, especially, their competitors in order to create alternatives that will increase their competitiveness. It is also worth mentioning that the agreement will include regulatory convergence, which will stipulate harmonization of production standards for certain products. In general terms, we can highlight that the footwear industry will benefit from the agreement because the European tariff for those products is still significant and affects the competitiveness of the exports of both Rio Grande do Sul and Brazil, despite the current good sales performance of this sector in the European market. With the agreement and, consequently, the tariff being reduced to zero, this industry will possibly gain a lot of competitiveness, since the footwear made in Rio Grande do Sul meets the European quality standards. Besides the footwear, the leather and tobacco industries are also likely to benefit. As a general rule, it is expected that the agreement will bring bigger gains to the Brazilian agriculture and agribusiness. As a consequence, the State of Rio Grande do Sul, due to its strong industrial base linked with the field, should benefit from the Mercosur-EU agreement.
Luiz Augusto Faria: It is hard to make any prospects at this moment, because negotiations are very specific. For example, still in Dilma Rousseff’s term, Mercosur signaled a concession in the dairy sector, in which Europe has a structural production surplus, now directed to its aid to Africa. Since, at the beginning of this chain, we have the family farming of dairy producers, the Landless Rural Workers’ Movement (MST) and the National Confederation of Agricultural Workers (Contag) pressured and the theme was set aside. In today’s political conditions, this sector would have no dialogue with negotiators. Free market advocates always give arguments making use of gains in competitiveness and technological advancements as a result. Although Europe is less averse to technology transfer than the US, as the agreements in the nuclear or military industries show, these results are only achieved through intergovernmental negotiations — away from the market and competition. The experience within the World Trade Organization (WTO) shows how difficult the agricultural issue is for Europe. Selling soybeans to feed the French cows and importing cheese or butter makes no sense.