Mercosur and The European Union Mercosur and The European Union Agree Historic and Ambitious Trade Agreement

On June 28, 2019, the European Union and the Common Market of the South (“Mercosur”), announced they had reached a trade deal after twenty years of negotiations (the “EU-Mercosur Agreement”).  While the agreement in principle is still subject to ratification by the national parliaments of the member states of both blocs, the European Parliament and the European Union Council – a process that could take between one and two years – it lays the ground for an “ambitious and comprehensive trade agreement”,[1] said to be the largest the European Union has ever concluded.

The historic deal creates a market covering a population of 800 million people that represents nearly a fourth of the world’s GDP.  In addition to removing tariffs, the new agreement aims to enhance the economic and political integration of both regions by creating employment and developing a more transparent and predictable regulatory framework.

Trade between Mercosur and the European Union

Mercosur is the economic bloc formed in 1991 by Argentina, Brazil, Paraguay and Uruguay. Venezuela joined in 2012 but was suspended from membership in 2017 for failing to meet the bloc’s basic standards. Bolivia’s accession is pending ratification by the parliaments of Mercosur member states since 2012.  Mercosur created a common market that resulted in the free movement of goods and services, the elimination of tariff barriers and a common external tariff regime.  The economic bloc also pursued the coordination of macroeconomic policies and national legislation among its member states.

The European Union already has bilateral trade and cooperation agreements with Argentina, Brazil, Paraguay and Uruguay.  The new trade agreement pertains to a wider Interregional Framework Cooperation Agreement in force since 1999.  The Framework Agreement – which covers trade, economic matters and cooperation among other areas – was created to strengthen relations between the European Community and Mercosur.  It sought to establish the foundations for a developed interregional association by gradually obtaining reciprocal liberalization of trade and promoting economic cooperation and integration in both regions.

The European Union is Mercosur’s most important trading partner, representing 20% of Mercosur’s trade. With over 260 million consumers and an annual GDP of 2.2 trillion euros, Mercosur is the fifth largest economy outside the European Union and has consistently attracted European investments. As a consequence, over 60,500 European Union companies are present in the region and investment stocks reached 381 billion euros in 2017.[2]

The EU-Mercosur trade agreement: an ambitious agreement twenty years in the making

Negotiations began in 2000 and entered different phases over the past two decades, featuring numerous discussions and forty rounds of negotiations.  One of the main challenges faced was managing the efforts of negotiators from across the political spectrum in a wide variety of sectors.

The main expected benefits of the EU-Mercosur agreement can be classified in three broad categories.  First, the institutional consolidation through the development of political, economic and cultural strategic relationships between both regions, and a transparent normative framework that reduces the discretional application of economic policies.  Second, the promotion of economic development by removing tariff barriers and reducing commercial procedural hurdles.  Third, the consolidation of intraregional development and integration by harmonizing and simplifying customs procedures and technical regulations and standards.

The agreement covers the establishment phase of investment, as European Union FTAs traditionally do.  In line with the new wave of European Union FTAs – with the exception of the Comprehensive Economic and Trade Agreement (CETA) (see our recent post) – the trade deal does not include a chapter on investment protection standards or investor-state dispute settlement mechanisms.  However, the dispute resolution chapter – which covers the interpretation or application of trade provisions and breaches of party obligations – provides for the appointment of a three-arbitrator panel whose decision is final and binding.  Recourse to mediation is possible at any time, before the initiation of a dispute or in parallel to the panel proceeding.  In addition, the trade and sustainable development section provides for a specific dispute resolution mechanism.  If a dispute arises between the parties concerning a member state’s breach, and it cannot be resolved by government consultations, a panel of experts may issue a public report and recommendations.

One of the aspects of the agreement that has drawn significant attention is the parties’ commitment to a “value-based trade agenda” – a recurring theme in recent European Union FTAs – and specifically the chapter on environmental protection and sustainable development.  The agreement is the second – after the Economic Partnership Agreement between the European Union and Japan – to include a clause on the Paris Climate Agreement.  In addition, the precautionary principle, which consecrates the parties’ right to adopt measures that protect the environment, health, and labor rights issues, is reaffirmed.

Reciprocal benefits of the EU-Mercosur Agreement

Specifically, the EU-Mercosur Agreement increases access to both markets for industrial and agro industrial goods by eliminating tariffs and offering preferential tariff regimes.  Mercosur’s agricultural goods’ sector – including beef, poultry, sugar and ethanol – is expected to benefit greatly from increased access to the European market. Intellectual property will be reinforced in Latin America, which will favor European companies in the technology and knowledge-intensive sectors, and offer legal guarantees set to protect from imitation 357 food and drink products recognized as Geographical Indications (GIs).

For the European Union, the increased access to Mercosur’s market gives the bloc an advantage with respect to other players that will continue to face the region’s high tariffs and non-tariff barriers, and will result in over 4 billion euros in savings for European companies.  The European automobile, wine, cheese, chemicals and industrial sectors are projected to profit the most from tariff reductions.  The agreement will moreover allow European companies to bid for public procurement contracts – a market traditionally closed to third countries – by providing a more transparent tendering process.

Comment

In the midst of rising uncertainty in the international trade context, the European Union and Mercosur defy the trend and affirm their commitment to multilateralism and their eagerness to engage in the global economy. The EU-Mercosur Agreement is both a testament to the European Union’s commitment to open rules-based trade and the export of its values through trade, and to Mercosur’s readiness to grow the region’s economies.

The EU-Mercosur Agreement not only aims to multiply the opportunities for European companies to enter and consolidate their presence in a market with immense economic potential, but at the same time, it will impel the economic reforms and modernization processes that are taking place in Mercosur. However, some voices from both sides of the Atlantic are already being raised against what some have termed the “cows-for-cars” agreement, citing the potential impact of the deal on deforestation, and the perception that the viability of certain European sectors could be at risk if Mercosur agricultural goods are not held to the same standards. In response, the EU has emphasized that the final text of the agreement (to date, only a general overview has been released), will include a chapter on sustainable development. In any event, such a momentous agreement is certainly likely to have political ramifications, both in terms of domestic regulatory reform and in upcoming electoral processes. It is also likely that the agreement could improve economic relations between Mercosur and other key global economic players.

The European Union has consistently sought cooperation with regional players in Latin America and the Caribbean since the 1990s.  It has concluded trade agreements with the Caribbean Forum (Cariforum) and the Central America group, three members of the Andean Community, and bilateral agreements with Chile and Mexico.  Mercosur was the only key trading partner in the region with which it did not have a preferential trade agreement.  As for Mercosur, it has FTAs with Bolivia, Chile, Colombia, Ecuador and Venezuela, and framework agreements with Mexico and Morocco.  It has also taken steps to establish free trade areas by entering into preferential trade agreements with India, Mexico and the Southern African Customs Union (SACU).  This new deal makes the European Union the first major economic partner to sign a trade agreement with Mercosur, and deepens the regions’ economic cooperation legal framework.

[1]        European Commission, “EU and Mercosur reach agreement on trade”, https://ec.europa.eu/commission/presscorner/detail/en/ip_19_3396

[2]        European Commission, “EU-Mercosur Trade Agreement: Building Bridges for Trade and Sustainable Development”, Key Facts, June 2019, http://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157954.pdf

For more information, please contact Andrew Cannon, Partner, and Florencia Villaggi, Of Counsel, or your usual Herbert Smith Freehills contact.