Author Archives: Augusto Pinho de Bem

About Augusto Pinho de Bem

Pesquisador em Economia da FEE

The trade agreement between Mercosur and the European Union: insurmountable obstacles?

The prospect of a free-trade agreement between the Common Market of the South (Mercosur) and the European Union (EU) has been on the agenda of politicians, businessmen and researchers for many years. In fact, the attempt to formalize a free-trade agreement (FTA) between Mercosur and the EU dates back to 1995, when the Framework Agreement on Interregional Cooperation (FAIC) was signed. Since then, despite repeated remarks of mutual interest on the conclusion of the agreement, the parties have not reached an understanding on the issue yet, so there are still doubts about the concrete possibilities for its implementation. Recently, with the election of Mauricio Macri in Argentina, Michel Temer’s inauguration in Brazil and the suspension of Venezuela in Mercosur, it has been speculated that the agreement might be closer to its conclusion. In our view, however, despite these events, several obstacles to a positive outcome for those in favor of the treaty remain.

In general terms, the main obstacles to the viability of the free-trade project between Mercosur and the EU are threefold: (a) there is a significant fear by European agricultural producers that the agreement entails insurmountable damage, for they see the competition with South American producers as a risk to their very existence on the market; (b) as a result of this fact, some South Americans have misgivings about a positive outcome, even if they support the agreement, believing that the Europeans will not give up their agricultural protectionism; (c) finally, in South America, there are political groups that express a general opposition to the signing of an FTA with the European Union, since they consider that it represents a capitulation of national interests to those of the Europeans, making it impossible for South American countries to implement an autonomous regional development strategy.

Contrary to what is often suggested by media analysts and pundits, the biggest obstacle to the conclusion of the agreement between Mercosur and the EU has always been the resistance of European farmers, who are fearful of South American competition. Ever since the very start of the negotiations, agricultural sectors in Europe have expressed concern that this treaty would prevent them from competing in the food market. In fact, these producers already receive protection and subsidies within the European Union, through the Common Agricultural Policy (CAP), one of the most important policies of the EU.

The CAP was established in 1962, and its main goals are to ensure the regular supply of foodstuffs, maintaining a balance between the city and the countryside, valuing natural resources, preserving the environment and granting farmers an income in accordance with their productivity. By doing that, the CAP aims to consolidate a single large common market within which agricultural products can move freely, but with preference for products produced in the European Union. While the CAP is intended to increase agricultural productivity, safeguard regular supplies to consumers and ensure the stabilization of reasonable prices, its central objective is to protect European farmers from international competition so as to prevent rural exodus.

The importance of the agricultural sector to the European Union is clear when the data provided by the European Union Statistics Office (Eurostat) are analyzed. In 2016, for example, there were 8.73 million individuals employed in agricultural activities in the rural area, which represented 3.99% of all employees.1 In absolute terms, Romania (19.37%), Poland (18.94%), Italy (9.45%), Spain (8.71%) and France (8.32%) were the most important countries. In terms of total employment, Romania (20.73%), Greece (11.74%), Poland (10.41%), Lithuania (7.68%) and Latvia (7.60%) were the largest ones.

As regards the labor force in the agricultural sector, it is important to highlight the fact that most of these people are allocated in the form of family farming. Fifteen out of the twenty-nine countries in the bloc employ more than 80% of the labor force in this modality, and in only four of them the family farming sector corresponds to less than 60% of the total. This way, we can see the importance of this segment, which could become quite vulnerable without the existing protection in the EU. It is for this reason, therefore, that the European Union’s public policy makers give centrality to the CAP in order to avoid negative economic and social impacts which would most likely weaken the European agricultural sector.

As the primary sector in South America is much more competitive than in Europe, it is in the best interest of the Mercosur countries to liberalize the European Union’s agricultural market, given the vast possibilities this process might entail in terms of exports to this region. Consequently, this is precisely the point that represents the biggest obstacle to the adoption of a free-trade agreement between the two blocs, since European agricultural producers are strongly pushing for the maintenance of the current barriers. These, in turn, are justified because they are seen as essential for the survival of the CAP, which was so painstakingly built. In addition, the European Union is still feeling the significant effects of the 2008 economic and financial crisis, which has led to double-digit unemployment rates in several countries. In these circumstances, there is a strong fear that the disruption of the agricultural sector will have a negative impact in terms of job losses and income if agricultural markets are opened up.

Due to the EU’s stance, skepticism among members of Mercosur about the viability of the agreement has increased. Regarding that, we should note that Paraguay and Uruguay — because of the representativeness of their agricultural sectors — have always been more favorable to the implementation of the agreement, while Brazil and Argentina, although having never renounced the project, have become hesitant about the benefits of the negotiations. In general, especially in media outlets, South American resistance is associated with the rise of progressive governments in the region, especially those of Luís Inácio Lula da Silva and Dilma Rousseff in Brazil and those of Néstor and Cristina Kirchner in Argentina.2 This ideological characterization, however, does not truthfully represent the negotiations, although bearing some resemblance to reality.

Regarding Brazil, for example, some signs of discredit could already be noted during Fernando Henrique Cardoso’s (FHC’s) second term, when, in 2001, in a speech at the French National Assembly, he stated that he hoped for a trade association between Mercosur and the European Union, but pondered the risks that protectionist aspirations could supplant the spirit of free trade. In fact, FHC’s remark had a strong symbolic component, since France had already made explicit its opposition to the agreement. In the French perspective, the FTA would be extremely damaging to its farmers and jeopardize the very meaning of the CAP, a position not welcomed by the Brazilian government. Despite the occasional differences, FHC’s stance was kept during Lula’s administration, which also emphasized the benefits of free trade and pointed to European protectionism as the main obstacle to the progress of the negotiations.

Dilma’s administration expressed willingness to resume the negotiations on the agreement, which had been interrupted between 2004 and 2010. However, although some conferences to discuss the viability of the process had been held, resistance to the openness to the European agricultural sector remained, which hindered a broad understanding on the subject. Despite this, there has always been some reluctance among some groups of the Workers’ Party (PT) to the treaty, interpreted as a gesture of subservience to the large European capitalist groups, which would preclude an autonomous development project. It should be observed, however, that these sectors have always been outnumbered within the Brazilian government, which has never abandoned the rhetoric of defending free trade and the benefit of an FTA with the European Union, provided that the Europeans agree to liberalize their agricultural market.

As for Argentina during the Kirchners’ administrations, a different situation is seen. Rather than welcome the supposed benefits of free trade, the Argentinians were suspicious of the benefits of the agreement for assuming that it would block their attempts at reindustrialization and jeopardize the survival of their remaining industrial groups, such as auto parts, chemicals, electrical equipment and capital goods. Thus, in addition to demanding a longer term for the implementation of the agreement, the Argentinians demanded the inclusion of an ample list of industrial sectors that would not be part of it, which was considered unacceptable by the European representatives. Because of this posture, Cristina Kirchner’s position in Argentina was considered a major obstacle for the parties to arrive at an understanding, so her departure and Macri’s inauguration were seen as a trigger for the agreement.

In fact, the political transition in Argentina is a favorable element to the progress of the negotiations between Mercosur and the European Union, since the list of restrictions of the Argentinian government no longer constitutes an obstacle for the treaty to be signed. However, as already stated above, the biggest obstacle for the talks to move forward is the European agricultural protectionism, which will hardly cease to be an impediment. Although some analysts prefer to hold the Kirchners’ governments accountable for hampering the process, a more thorough look reveals that negotiations have been stalled since the late 1990s, years before the emergence of a wave of progressive governments in South America.

1The data series used were Total Employment — All Categories, which includes total employment under the categories of the Nomenclature of Economic Activities (NACE) and Total Agriculture Forest and Fishing Employment, which refers to the total number of employees in agriculture, forestry and fishery. Both series include individuals between 15 and 64 years of age.

2The Venezuela of Hugo Chávez and Nicolás Maduro will not be analyzed in this article because the country only joined Mercosur in 2012 and was suspended in 2016, so it does not represent an obstacle to the negotiations with the European Union.

Can America feel great again?

The 2016 U.S. election showed a polarization which was barely seen in the political scene of the United States in the past century. The primaries of the two major parties of the country were extremely competitive and presented fratricidal features. On the Republican side, the constellation of traditional politicians was surpassed by Donald Trump and his populist rhetoric, creating a great divide in the party. As for the Democrats, the victorious candidacy of the Establishment, represented by Hillary Clinton, faced Bernie Sanders’s platform of socialist shades, causing fractures that were observed in the party’s national convention held in July 2016.

Several U.S. electoral disputes throughout the twentieth century showed great cleavages around political and social issues. At the same time, in adverse economic situations, the American voters tended to punish incumbent governments. The turbulent 1968 elections, amid the civil rights movement and the Vietnam War, the 1976 election, which took place under the aegis of Watergate, and even the fierce 2000 election, which took place under the impact of the Clinton-Lewinsky scandal, can be considered disputes of social and political nature. On the other hand, the 1932 elections, in the midst of the Great Depression, those held in 1980, which took place in the throes of oil shocks, and the 2008 ones, at the height of the subprime crisis, were resolved in the incontestable government party replacements by the opposition party. This U.S. election, at first sight, reproduces the dispute of different social and political views. Topics such as racial conflicts, immigration, gender issues and the fight against terrorism are in evidence in the media and in political speeches. However, the interpretation of the meaning of Donald Trump’s and Bernie Sanders’s candidacies undergoes a significant economic transformation that occurred in the United States in the last decades of the twentieth century.

 

Since the mid-70s, American society has had an increase in income inequality. This represents a shift in the virtuous growth trajectory of the ‘Golden Age’ that took place in the post-war period. The Golden Age was characterized as a period in which economic growth and distribution of relatively equitable income coexisted in a compatible manner. Thus, both the personal income distribution (PID), which indicates the income earned by individuals or households, and the functional income distribution (FID), which represents the proportion of the national income appropriated by capital providers (profit shares) and labor providers (wage share), have shown changes over the period.

According to Graph 1, the Gini coefficient[1] for U.S. households showed expressive raise in the period between 1967 and 2014. The data show a persistent increase trend in income inequality in the U.S. households which started in the mid-70s and reached 2014, the last year of available data.

texto-3-final-grafico-1

The functional income distribution, in its turn, has also changed. Regarding the data, some issues associated with the measurement of the wage share are worth mentioning. The social accounting standards establish that the wage share should  include the total compensation paid to workers, which comprises paid wages and social security contributions. The share of capital, on the other hand, involves the aggregation of profits, property income and other income sources apart from work. A third component lies in the so-called mixed incomes. These yields are obtained in activities in which there is no clear distinction between labor and capital income. Graph 2 shows the evolution of the wage share with adjustments for mixed incomes.[2] There is a mild upward trend in this segment until the beginning of the 80s. This trend is followed by a period of large fluctuations that occur within a general downward trend in the wage share.

The process of concentration of the PID in the U.S. has generated a vast literature that discusses the various individual and household characteristics, in order to explain this phenomenon. Topics such as education, race, gender, age and professional choices have subsidized a profusion of studies that are replicated around the world. The goal of this type of analysis is to grasp the wage inequalities.

As regards the FID, it started receiving more attention in the late 90s. The 2008 crisis and its strong consequences, both economic and political, deepened such analyses, generating a stimulus for further research on the FID and its relationship with the PID in the USA. In other words, besides the inequality among wages, the inequalities among labor income and capital income are also sought to be understood. Regardless of the degree of relevance of the wage share contraction over the personal income distribution, the fact is that American society is going through distributive issues that seemed to have been overcome in the mid-60s.

texto-3-ingles-grafico-2There are many explanations for this trend, and some of them carry elements that are linked with the political rhetoric that is present in the troubled U.S. electoral scene. Two major groups of explanations can be cited: one focuses on the effects of neoliberalism and financialization on the United States, and the other one tackles the recent standards of technical progress.

The adoption of neoliberal policies in the early 80s was characterized by a change in the main goal of economic policy, which switched the focus from achieving full employment to controlling inflation. This coincided with the advance of the financialization process, in which the relative importance of the financial capital progressively increased in comparison with that of the productive capital, shaping both the economic structure of the country and the behavior of its companies. In macroeconomic terms, the counterpart of the emphasis on fighting inflation corresponded to a tolerance towards higher rates of unemployment, in a general context, observed over the 80s, in which both the workers’ bargaining power and their unions were weakened. This was associated with both the reduction of the share of industry in the employment and a greater exposure to the international competition with low labor cost countries, observed in the 90s. As illustrated in Graph 3, these changes are associated with a new relationship between the workers’ remuneration and the labor productivity. Wages began to grow below productivity, breaking the pattern of the ‘Golden Age’.

The behavior of companies, in its turn, shows a twist from the traditional investment and growth strategies aimed at long-term results to the prioritization of costs reduction, the distribution of short-term dividends and the value of their shares. This is expressed in the general orientation of ‘prioritizing the creation of value for shareholders’. Inserted in a context of flexibilization of labor relations and weakening of trade unions, whose starting point was the defeat of the air traffic controllers’ strike, in 1981, during the Reagan administration, these processes resulted in an increase in wage dispersion at the expense of lower wages, combined with a reduction in the wage share.

texto-3-ingles-grafico-3

The standard of technical progress is also pointed as one of the causes of the increase in inequality in the U.S. From a conventional perspective, the existence of technical progress is discussed in terms of two characteristics: it may have a bias in favor of skilled labor and, at the same time, an increase in the productivity of capital. These two characteristics may have contributed to the increase in income inequality. However, recent studies have shown limitations in demonstrating that these processes  have effectively caused such an increase.

With the recovery of the economy after the 2008 crisis, discussions about income inequality took shape again due to the acceleration of the income concentration standard. To face this crisis, the federal government and the Federal Reserve System (Fed) made use of unusual fiscal and monetary measures that injected millions of dollars into financial institutions and companies with problematic balance sheets and also acted as a ‘last-resort negotiator’, buying private securities, thus preventing the collapse of the financial market and the risk of paralysis of the economy. In the labor market, however, the recovery followed the pattern observed since the late 80s, known as the ‘jobless recovery’, in which production recovers faster than employment and the labor market stabilizes in conditions that are worse for the working class than in the previous cycle.

Besides the slower recovery in terms of output since World War II, the current scenario of the U.S. economy is the one that shows more dramatic results in terms of concentration of additional income gains. From the post-war period until the late 70s, the expansion of the average income of the poorer 90% was higher than that of the 10% at the top. Such a pattern was reversed and deepened from the 80s on. Between 2001 and 2007, 98% of the increase in the average income was allocated to the richer 10%, which was intensified even more after the crisis: from 2009 to 2012, the richer 10% appropriated 116% of the growth in income in the period, which means a drop of 16 percentage points in the average income of the poorer 90%, and 95% of the earnings ended up in the hands of the richest 1% in society.

Considering the fact that most of the American population is in worse material conditions than that experienced in the pre-crisis period, there are enough elements for the emergence of political forces not linked with the current status quo. Such forces, expressed in Trump’s and Sanders’s candidacies, seem to represent the frustrations faced by most of American society. The revival of the slogan used in Ronald Reagan’s campaign in 1980 by Donald Trump in 2016 — ‘make America great again’ — indicates that many sectors of American society seek a return of the shared prosperity pattern experienced in the period prior to neoliberalism. Apparently, America can only feel great again when the regressive trends of its income distribution are reversed.

[1] It is worth noting that the Gini coefficient varies between 0 and 1 and measures the inequality of the distribution of personal income. Thus, the closer to 0, the more equal the distribution of income; the closer to 1, the more unequal the distribution.

[2] The correction is performed considering that the proportion of labor income in the mixed income is identical to that observed in the compensation paid to employees and in the share of capital.