Credit: Adobe Stock Images
Note: this piece originally appeared in Portuguese in Revista Relações Exteriores, a Brazilian publication which provides analysis of major international events. Fernando Vieira works as a columnist in the field of political intelligence, macroeconomic analysis, and Brazilian foreign policy.
To read the original piece, click here.
The sealing of the political and economic agreement between MERCOSUR and the European Union (EU) in July 2019 has created an environment of optimism among the engaged members in promoting institutional and economic integration. For both trade blocs, the last few years have marked a significant setback towards these objectives: flagged by the finalization of the U.K.’s exit from the EU, the suspension of Venezuela from MERCOSUR, and the rising ideological divergences of Argentina from its regional partners.
For the Southern Cone, the resurrection of the treaty is an opportunity to revitalize economic activities, especially agribusiness, which drives a large portion of the gross domestic product in the Plata basin. In light of the 2020 reports from the Economic Commission for Latin America and the Caribbean (ECLAC), the unorganized struggle of regional integration, which has riddled MERCOSUR, demands the partnership of the EU as the next step in the region’s socioeconomic development. In its initial stage, however, the MERCOSUR agreement was indispensable for the integration and institutionalization process, as well as for the improvement of technology and infrastructure in the region.
This article explores the obstacles that interest groups face in ratifying the agreement, evaluates the political and socioeconomic configuration of the Plata Basin, and the advantageous and harmful elements of the deal, which is challenged by the negligence of Brazilian environmental policy, asymmetric ideologies in MERCOSUR, and the lobby from agrarian states in Europe.
The concept of regionalism in ECLAC as a theoretical prerogative for global MERCOSUR integration
The regionalism presented in ECLAC is the product of studies on macroeconomic policies capable of reversing the region’s precarious socioeconomic situation and driving progress. Created by the United Nations Economic and Social Council (ECOSOC) in 1948, ECLAC builds and relies on regional cooperation and economic complementarity to overcome economic underdevelopment. Since its foundation, the solutions presented by the Latin American economic scholars have been divided into two sub-currents: closed regionalism and open regionalism
Between the 1940s and 1980s, the principle of import substitution, which induces endogenous industrial activities, guided economic policy in Latin America. The most concrete example of this collective effort was the signing of the Latin American Free Trade Association (LAFTA) in 1960. The agreement’s guidelines established the expansion of the national production indexes of manufactured goods associated with the promotion of intra-commercial exchange in South America as targets. The autarchic beliefs formed in this agreement resulted in a forced regional industrialization, advocating for the protection and state stimulus of the nascent industries as a means of raising income, employability, and quality of life. From the perspective of economists Raul Prebisch and Celso Furtado, closed regionalism outlines that Latin American dependence on external trade flows constitutes a structural and insurmountable barrier to economic maturation and emancipation.
Throughout the second half of the 20th century, Latin American economies were successful in promoting an autonomous and minimally interlinked industry. However, as trade barriers—in the form of a market reserve guaranteed protections—to the domestic industry grew, they deepened the disparity between the industrial centers and the economic periphery. Consequently, according to the Brazilian economist Gustavo Franco, recurring fiscal deficits and subsequent external indebtedness accrued through years of industrialization that were accentuated by the deterioration of the world’s political and economic environment. Although industrialized, the continent went through the 1980s with stagnating GDP, budget strangulation, lagging economic activity, high unemployment, dizzying inflation, concentration of income, and the deterioration of the general well-being of society.
Economic instability and the rise of Latin American democracies in the 1980s prompted the replacement of the old macroeconomic policy paradigms. Corroborated by the ECLAC management of Gert Rosenthal (1988 – 1997) and the “Dependency Theory” developed by Fernando Henrique Cardoso (FHC) and Enzo Faletto, the growth of free markets in the region generated new solutions to Latin America’s financial hardships. Faced with a depressed economic outlook, citizens across the Southern Cone elected governments touting reforms to reduce state participation in the private sector. The various trade restriction mechanisms blamed for the region’s dearth of technological advancement were repealed and replaced by legislation less hostile to foreign and domestic private industry.
The creation of regulatory agencies by FHC is an important example of the licensing and inspection processes of these newly elected officials. The consensual diagnosis aimed not only at industrialization, but also the consolidation of a disruptive production, equipped Southern Cone governments with the latest technology in capital goods and consumer goods. The inability to achieve enhanced technological development coupled with fiscal restrictions persuaded decision makers to seek foreign investments as a way of economic modernization. According to the FHC and Falleto, this set of new policies, also known as open regionalism, worked to merge state industrial development with foreign technological practices, new regulatory practices, and the transfer of technology.
The opening of individual trade and the consequent regional economic integration to the global economy soon became a mutual and coordinated effort. As a result, the metamorphosis of LAFTA in 1980 into the Latin American Integration Association (LAIA) and the creation of the MERCOSUR Custom Union in 1981 was accomplished thanks to the interest in modernizing and acquiring technology by both Latin American and foreign partners in order to avoid economic asymmetries. The MERCOSUR Custom Union brought the economies of Argentina, Brazil, Paraguay, and Uruguay closer to full integration into the global economy. In this vein, the bloc’s internationalization process began with the negotiation of the agreement between the MERCOSUR Customs Union and the EU’s common market in 1999.
However, the rise of the neo-developmentalist governments of President Luiz Inácio Lula da Silva of Brazil and President Néstor Kirchner of Argentina stopped the progress of these negotiations. Although both Presidents shared the desire to combine public and private capital, they prioritized subsidies to domestic state technological activities, undermining foreign companies in certain strategic industries. Therefore, the initial 15 years of the 21st century in the Southern Cone are marked by the general easing of restrictions on international flows of capital, however, political leaders still remained resistant to competition in segments of the economy that were particularly underdeveloped.
The attempt to induce the modernization of the national industry again incurred the macroeconomic imbalance and the failure of the productive economic revolution in both Brazil and Argentina. The replacement of both leaders from 2015 and 2016 amid acute institutional and economic crises brought Brazil and Argentina back into alignment with the global economy. Intensified by the political turn over, negotiations resumed from where they left off. On the other side of the Atlantic, the French agriculture lobby began to take shape as the most substantial resistance to the MERCOSUR-EU agreement. Despite the opposition, the essential Latin American contribution to European food security paved the way for the continuation of the negotiations without many obstacles until its signing in 2019. Once the neo-developmental project was complete, MERCOSUR set out to reverse fiscal deficits and the stagnation of GDP through expanding gains in the trade balance and the increased acquisition of foreign direct investment (FDI). With a strengthened domestic consumer market and new policy aimed at technological advancement, the bloc generated a more sustainable and diversified economy.
Content and objectives of the commercial and political agreement
Brussels and Asunción, after twenty exhausting years of negotiation, signed a more complex treaty than traditional free trade agreements. The commitment will mean closer ties in the areas of intellectual property, investments, dispute settlements, sustainable development, the elimination of commercial barriers of various kinds, government procurement, harmonization of regulatory practices, and the transparency of government activity. Political dialogue, cooperation, and free trade underpinned the negotiations and will guide the future of the partnership.
The removal of trade barriers is a key nuance of the agreement that will come into effect quickly. As opposed to the political agreements of the treaty, which are dependent on the individual ratification by each EU member country, the economic agreements require only provisional approval in the European Parliament and by each member of MERCOSUR. The initial impacts will focus on increasing the bloc’s exports, particularly in the agriculture, mineral extraction, textiles, chemicals, and machinery.
More generally, customs tariffs will be gradually eliminated on 92 percent of EU imports from MERCOSUR member states over a ten-year period (before the agreement, only 24 percent of imports from the EU were exempt). In the agricultural sector, 82 percent of the total volume of agricultural products exported to the EU will be exempt from taxes, while most other types of goods will benefit from expanded quotas. In addition, the Southern Cone countries will maintain their preferential supplier status.
On the other hand, within 15 years, 91 percent of goods imported into MERCOSUR member countries from the EU––including automobiles, pharmaceuticals, luxury items, chemical products, and clothing––will be exempt from taxation. Some food items, such as cheeses, chocolates, and alcoholic beverages, will also enjoy expanded quotas during this 15-year transition period. Finally, with regard to sanitary and phytosanitary regulations, the agreement aims to foster mechanisms for dialogue and exchange between the EU and the countries of MERCOSUR, with the aim of eventually standardizing inspection and licensing processes for productive export zones.
Source: Bolsa de Comércio de Rosário
The vast scope of the treaty highlights the intention of both trade blocs to finalize an ambitious trade agreement, the objectives of which transcend mere commercial calculations. While the agreement promises significant mutual economic gains, its regulatory modernization devices, followed by its potential to reduce bureaucratic obstacles in the FDI and production apparatuses of the MERCOSUR countries, represent its most significant benefits for the sustainable development of the Plata region. The reaffirmed commitment to incorporate and adhere to WTO and OECD-recommended administrative practices, contained within the agreement, will also serve to make MERCOSUR member states more economically innovative, competitive, and internationally credible.
Turning to the agreement’s chapter on intellectual property, producers of cachaça in Brazil, and of regional wines in Argentina and Chile, will likely benefit from their products being granted protected geographic designations. In turn, European producers of spirits such as prosecco and cognac will benefit from reciprocal designations in the MERCOSUR countries. With respect to government procurement––governmental purchases of goods and services––the agreement emphasizes that MERCOSUR members must permit increased competition in contractual disputes, in order to facilitate the more efficient management of public budgets. However, the agreement protects certain areas considered sensitive, such as public health and food safety, from competition from European companies.
Given the sharp macroeconomic deterioration of national economies across Latin America, especially in the initial months of the COVID-19 pandemic, the short-term increase in foreign exchange earnings from agricultural exports to the EU, enabled by this agreement, will be critical to the preservation of government revenues in the MERCOSUR countries. Over the medium- and long-term, growing trade surpluses, combined with reformed regulatory standards that aim to entice foreign direct investment, may strengthen the domestic development of high-value, sophisticated economic sectors.
If this scenario comes to fruition, the European investment enabled by the free trade agreement, coupled with domestic public policies oriented toward the respective national interests and needs of the MERCOSUR countries, will have effectively created South American economies in which the costs of research and development have been socialized. To this end, the agreement provides for partnerships and investment facilitation in the areas of information technology, telecommunications, financial services, construction, advertising, and consulting.
These treaty provisions––representing the attempts of the MERCOSUR countries to spur foreign investment and domestic development in diverse economic sectors––indicate a desire, on the part of decision-makers in the Southern Cone, to reduce the economic vulnerabilities that result from an over-dependence on commodity exports. In order to transition away from commodity-centered economic models, and their associated vulnerabilities, the MERCOSUR countries are increasingly seeking to reform their regulatory spheres, absorb new technologies, and attract new foreign investment; the free trade agreement with the EU constitutes a major step in this direction.
However, while the agreement represents an effort by the MERCOSUR countries to promote economic diversification and multi-faceted economic development, the primary commodity sectors nevertheless still represent essential sources of income, employment, and government revenues. Therefore, MERCOSUR’s multilateral integration into the global economy must support the promotion of its most competitive commodity sectors without compromising the formation and development of its member states’ secondary and tertiary economic sectors. The free trade agreement with the EU must strive to balance the immediate needs of MERCOSUR member states to increase commodity revenues with the need to attract strategic technological partnerships and modernize production networks (especially in disruptive sectors with high potential for growth and innovation).
Opportunities and risks in the MERCOSUR development agreement
Despite the signing of numerous free trade agreements, and the formation of various multinational bodies and organizations, the project of political, economic, and cultural integration in Latin America remains a work in progress. While there do exist some examples of successful integration between Latin American nations––for instance, the negotiations surrounding the Itaipu Dam between Brazil and Paraguay––efforts at regional cooperation and integration often collapse due to ideological disagreement and mutual distrust. Regardless of the ideological orientation of the government, the political division, often provoked by internal socioeconomic dynamics, persistently disrupts the construction of foreign policy strategy that would make further regional integration possible.
The recent effective dissolution of the Union of South American Nations (UNASUR), and its subsequent replacement by the ephemeral Forum for the Progress and Development of South America (PROSUR), are emblematic of this lack of a pragmatic approach to regional relations and integration among the nations of South America. This phenomenon was even more starkly illustrated by President Jair Bolsonaro’s response to the 2019 Argentine election, in which the Kirchnerist candidate, Alberto Fernández, emerged victorious. Neglecting the significance of his country’s bilateral relationship with Argentina, President Bolsonaro refused to even meet or speak with his Argentine counterpart until the end of November 2020 (over a year after President Fernández’s election).
President Fernández, to be fair, did the Argentine-Brazilian relationship no favors himself, with his threats to derail future MERCOSUR free trade agreements, and attacks on the EU-MERCOSUR agreement. Fortunately, amidst the chaotic economic circumstances created by the COVID-19 pandemic, both President Bolsonaro and President Fernández moderated their respective rhetoric, and re-committed themselves to strengthening MERCOSUR’s regional and global integration through mutual cooperation. Undoubtedly, the pandemic represented an external shock that offered both Brazil and Argentina few other options to avoid a deeper economic crisis. While MERCOSUR has at times been plagued by the same political demons that have doomed other efforts at regional integration, due to its promotion of a convergent export agenda that serves the national interests of all of its constituent states, MERCOSUR remains well-positioned to continue to boost intra-bloc integration and institutionalization in the future.
The agreement between MERCOSUR and the EU, however, will not only stimulate the convergence of production chains within the MERCOSUR member countries. The consequent increase in demand for the agricultural, extractive, and manufacturing sectors may, in addition to economic gains, also promote the modernization of infrastructure in Argentina, Brazil, Paraguay, and Uruguay. The mutual interests of the MERCOSUR countries in facilitating exports may encourage cooperation with respect to the construction and improvement of logistical corridors linking the Chaco region to the major ports of Buenos Aires, Montevideo, and Santos. The Bioceanic Corridor––the in-progress, transcontinental road project that would span Brazil, Paraguay, Argentina, and Chile, connecting the port of Santos to the Chilean ports of Iquique and Antofagasta––is exemplary of these efforts to maximize the efficiency and competitiveness of the MERCOSUR export sectors.
For the sake of both sustainability, innovation, and optimization, however, it is advisable that the MERCOSUR countries seek to incorporate diversified methods of transport into existing and future logistical networks; the inland waterways abundant in the Southern Cone, for instance, represent an opportunity to expand the transport of export goods via inland navigation. In this way, the objective of productive complementarity, stimulated initially by ECLAC’s theses, now has the potential to be extended to the sphere of intra-regional infrastructure. Given the crucial importance of infrastructure to continued economic growth and development, it is imperative that decision-makers in the countries of the Plata Basin commit to improving and better-integrating existing infrastructure networks. Efforts such as the Financial Fund for the Development of the La Plata Basin (FONPLATA) and the Initiative for the Integration of the Regional Infrastructure of South America (IIRSA), represent well-publicized and productive initial steps; however, they have not yet spurred a commitment to sustained, coordinated action.
Source: Inter-American Development Bank
The greatest risk to the EU-MERCOSUR free trade agreement comes from European concerns about the disastrous state of environmental policy in Brazil. The fires in the Amazon and the Cerrado that persisted throughout 2020, associated generally with the expansion of agriculture, provide ample support for the narratives promoted by the agreement’s opponents in the EU. Aided by Brazil’s environmental negligence, two major European sources of opposition to the agreement have emerged: those European states in which “green” environmentalist parties have a significant presence in national legislatures and European Parliamentary delegations; and those states in which domestic agricultural interests wield significant political influence.
Germany, Europe’s largest and most robustly-industrialized economy, does not represent a significant font of opposition to the MERCOSUR-EU trade agreement; however, other EU member states, both small (for example, Ireland and Austria) and large (for instance, France and Italy), have vehemently opposed the deal, arguing that increasing trade with Brazil will effectively contradict the EU’s stated goal of reducing greenhouse gas emissions by 60 percent by 2030. Although “land-grabbing” and illegal logging arguably represent the most concrete causes of ecological devastation in Brazil, European critics of the agreement have thus far centered their opposition around agricultural-related deforestation; this strategy has the effect of promoting and defending domestic agrarian interests within the EU.
Source: European Parliament
President Jair Bolsonaro’s strategy of minimizing, and even denying, environmental deterioration threatens Brazil’s development now and in the future. Especially following President Joe Biden’s victory in the United States presidential election, American relations with Europe will likely have a “green” inclination, guided by the promotion of a more decarbonized and sustainable economy. Under the terms of this new transatlantic arrangement, the allocation of investment funds in the international capital market will increasingly depend on the commitment of states and companies to operate under environmentally, socially, and ethically responsible governance. The ability to attract international investment, therefore, will depend on more than potential profitability alone.
The growing influence of ESG-oriented (environmental, social, and corporate governance) investments can be seen, from the perspective of the MERCOSUR countries, as either an opportunity for the sustainable development of several non-agricultural sectors, or as an obstacle to the construction of a more modern, diversified economy. For the group of European countries interested in breaking or postponing the ratification of the agreement, the high rates of deforestation and the reckless statements by the Brazilian Minister of the Environment, Ricardo Salles, will only serve to strengthen their resistance. More broadly speaking, such behavior will continue to harm Brazil’s international reputation, provoking the withdrawal of international resources necessary for fiscal stability. Just last year, for example, investors representing major international funds warned that Brazilian environmental policies were “creating widespread uncertainty about the conditions for investing.” International skepticism of President Bolsonaro’s leadership, management strategy, and regulatory efforts may also serve to damage Brazil’s long-term potential to attract FDI in critical segments of the economy, such as infrastructure and technology.
