Mercosur and the European Union
Facundo Vila,
Argentine Ambassador to Finland, Estonia and Latvia
Background
In 1991, Uruguay, Paraguay, Brazil and Argentina signed the Treaty of Asunción (TA), laying the groundwork for the most ambitious trade agreement ever in the economic history of Latin America (LA).
Interestingly enough, the TA had far more reaching objectives then mere trade creation, although this was one of the main justifications for the tariff reductions and the elimination of trade barriers, in a way unseen before in the context of the preexisting regional agreements.
Up until the signature of the TA the regional politics were basically driven on the basis of reciprocal mistrust and sometimes even potential military conflicts, arising mostly from border disputes.
Actually this very reason, the idea of eliminating once and for all any political or military conflicts in the region was one of the many lessons that Mercosur countries drew from the European Union (EU) history, given that the Treaty of Rome (TR) ultimately led to the longest peace period in the history of the old continent.
In this same line of reasoning, and in order to make a long story short, the founders of Mercosur thought of the TA as a way to reach further integration not only on the economic domain but also in other areas, once again in a fairly similar way the EU has been doing since the signing of the TR.
Treaty of Asuncion
From a specific economic perspective, the TA and all its related specific agreements has been, al least on paper, the most comprehensive trade and economic agreement in the history of LA, covering not just all economic sectors (with some temporary sectorial exceptions, as it is customary in these processes) but also a wide range of disciplines in areas such as unfair competition, safeguards, dispute settlement, services, etc.
In this respect, even those sensitive sectors that some countries excluded temporarily, like the automotive industry in the case of Argentina, were subjected to a negotiated scheme of increased quotas.
The idea was to improve trade creation in scale and diversity, in a way that was fully consistent with international rules and the WTO commitments of Mercosur countries (WTO corresponding lists of concessions).
Mercosur Trade Dynamics
Mercosur is comprised of 4 national markets whose GDP is in excess of 3 U$ trillion, close to 300 million consumers and an aggregated geographical area that represents the second world´s largest after Russia. In the period 2007/2019 total Mercosur Trade in goods [i] with the world was, on average, around 469 US$ billion dollars, with exports accounting for 250 and imports for 216 US$ billion. The peak was in 2011 with 568 US$ billion, with exports of 300 and imports of 268 US$ billion respectively.
In terms of the main regional trade partners of the South American block, the Asian continent accounted for the largest share in recent years, 45% of total external sales in goods and 41% with respect to imports for 2019.
Likewise, analyzing trade by country of destination, Mercosur main partners were, on average for the last 5 years, China, the United States and the Netherlands, with 25%, 12% and 5% respectively, accounting for 42% of total Mercosur exports.
With respect to the origin of Mercosur imports, for 2019 the country list is led by China with 23%, United States with 17% and Germany with 7%, totaling 47% of all aggregate imports for the South American block.
The top export headings of Mercosur for 2019 were: Oil sedes and oil fruits (13%), Fuels and mineral oils (11%), Metal ores (8%), conversely, the main import items were Fuels and mineral oils (15%), Machines and electrical equipment (14%) and Nuclear reactors, Heaters, Machines, Machinery and Mechanical appliances (13%).
With respect to the corresponding percentages values, for the same period Brasil represented 77.3%, Argentina 18.5%, Uruguay 2.4% and Paraguay 1.8% of total external sales.
When it comes to trade in services, the trade balance is exactly the flipside of what has been described so far for goods. In 2018, the last year with accurate statistics for this sector, Mercosur exports were close to 55 billion US$ and imports from the rest of the world exceeding 97 billion US$.
Analyzing the sectoral break down in terms of the 3 main aggregate sectors, namely managerial services, travel and transport, the percentages are 39.1, 25.9 and 15.7% respectively, representing 89.7% of the total exported by Mercosur.
In a like manner, from the Mercosur import side the values, for the same sectors, were 31.2, 27.8 and 18.6%, accounting for 78% of the total imported by Mercosur.
On a dynamic basis, the increase of intra-trade was phenomenal during the first years of the treaty, due basically to the price effect resulting from the lowering of high duties that since the late 50s were a key part of the trade substitution economic philosophy in LA.
However, once the tariff phase off schedule was complete trade growth showed some signs of slowdown, and the trade flows were basically explained in terms of economic activity and exchange rates changes.
Mercosur EU Agreement in short
Once the agreement is fully enforceable the result will be a global market for goods and services covering nearly 800 million consumers, thus ranking as the largest in the world in terms of population and combined GDP.
The treaty will exceed in scale and scope (given that it does include all sectors and trade disciplines) even those already concluded by the EU with Canada, Mexico and Japan, and will consolidate a long standing trade relationship between two regions whose historical and cultural ties goes way back in time.
In terms of the immediate benefits, Mercosur will increase access for beef, sugar, orange juice, instant coffee and fruit among others.
However, in the medium and long run the objective, particularly from the perspective of the south American block, is to improve also intra industrial trade in areas that will allow Mercosur to position itself in technological value chains that are knowledge intensive.
From the perspective of the EU, in addition to improving market access in sectors where European companies had already a presence, there will be a common legal framework to consolidate EU position as a key player in the area of investments.
In this respect, the benefits will be not only in the area of improved market conditions, but also in terms of a better platform to serve both regional and extra regional markets as well.
[i] Source: SECEM: Mercosur System of Trade Statistics.
Expert article 2704