EU-Mercosur trade talks

At last, Brazil is keen on a trade deal

Dec 14th 2013 | BRASÍLIA | From the print edition

WHILE Roberto Azevêdo, the new Brazilian boss of the World Trade Organisation,

armtwisted his way to a multilateral deal in Bali (see article (http://www.economist.com

/news/finance-and-economics/21591625-global-trade-talks-yield-deal-first-time-almost-

20-years-unaccustomed) ), back home another trade negotiation is reaching a crucial stage.

The European Union and Mercosur—comprising Argentina, Brazil, Paraguay, Uruguay and

Venezuela—have set an end-of-January deadline to swap opening bids in a long-mooted

bilateral deal. (Venezuela, only recently admitted and in terrible economic shape, will not take

part.)

Success would help stagnant Europe to export its way back to growth and open new markets

for Mercosur’s efficient farmers. Failure would leave Europeans overpaying for food and South

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America’s biggest economy, Brazil, languishing on the sidelines of globalisation. And

Mercosur, which in recent years has neglected trade liberalisation in favour of leftist political

rhetoric, would dwindle even further into irrelevance.

Trade talks between the EU and Mercosur started in 2000. They stalled over similar issues to

those which dogged the WTO negotiations: European unwillingness to expose cosseted

farmers to competition and South American desire to shelter industry from high-quality

imports. But changing calculations have brought both sides back to the table.

Europe now sees a new market for its manufacturers in the emerging middle classes of Brazil.

Austerity makes EU farm subsidies ever more unaffordable: though recent reforms have

trimmed them, they still gobble €50 billion ($70 billion) a year. And cheaper food looks

tempting to politicians fearing the electoral consequences of falling living standards.

Mercosur’s renewed interest in a deal is in part down to the expiry of existing trade

preferences. In January all Mercosur countries except Paraguay lose the preferential access

the EU grants to developing countries, since they are now deemed too rich to need it. But

within Brazil, at least, the shift in attitudes goes deeper, says Carlos Abijaodi of the National

Confederation of Industry. Until recently its businessmen thought that their vast, sheltered

domestic market meant they could profit in splendid isolation. But imports from China have

shown that even swingeing tariffs cannot keep out competition, if it is cheap enough. “They’ve

learnt that they can’t protect themselves from globalisation.”

Even FIESP, the São Paulo industrialists’ lobby, which has long promoted industrialisation

via high tariffs and big subsidies, is now changing its tune. A recent policy paper called for

trade agreements with not only the EU but also the United States. Brazilian industry could

compete on equal terms if the government tackled the long-standing custo Brasil (“Brazil

cost”) by cutting red tape and taxes and improving infrastructure, says Rubens Barbosa, a

former diplomat involved in Mercosur’s creation who now advises FIESP.

Mr Barbosa blames Mercosur’s failure to strike trade deals on the left-wing statists now in

power in Argentina and Brazil, who are unpersuaded by liberalisation and see trade in

political rather than economic terms. In the past 13 years more than 350 trade deals were

registered at the WTO. But Mercosur signed just four, with Peru, Egypt, Israel and the

Palestinian Authority. Big regional negotiations, such as one between the EU and United

States, raise the prospect of a world divided into trade blocks, with Mercosur left out.

That seems not to worry Argentina. Under President Cristina Fernández, it has become more

protectionist, even against Mercosur. Brazilian exporters of food, footwear and textiles have

become used to their products being held up at the border, and to delays in payment because

of exchange controls. Brazil’s exports to Argentina slumped by 21% in 2012 before recovering

a bit this year. But its government’s doctrine of “strategic patience” with its erratic neighbour

means it rarely kicks up much of a fuss.

Brazil’s new-found determination to strike a deal with the EU may provoke a showdown.

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Along with Paraguay and Uruguay, it has prepared its “offer list”, stating the goods and

services it is willing to include in a deal; it is also prepared to liberalise inward investment

and government procurement. A goal agreed in 2010 of including 90% of imports was treated

as “gospel” by Brazil, says an official with knowledge of the deal. But Argentina has prepared a

less ambitious offer for trade in goods, and is dragging its feet on services, investment and

government procurement. Brazil is pushing it to hit the deadline. If it doesn’t, Brazil would be

willing to discuss a two-speed solution, says the official, leaving Argentina on the sidelines.

Even strategic patience has its limits.

From the print edition: The Americas

EU-Mercosur trade talks: Strategic patience runs out | The Economist http://www.economist.com/node/21591629/print

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