Wall Street Journal | September 26, 2013
Brazil route to broader Europe trade faces regional roadblock
By Gerald Jeffris
BRASILIA—Brazil’s government is ready to present a proposal that would put 90% of its commerce with the European Union under a free-trade agreement, but the effort could stall on resistance from the country’s existing partners in the regional Mercosur trade bloc.
Mercosur, forged in the 1980s between Brazil, Argentina and smaller neighbors Uruguay and Paraguay, recently added Venezuela as a member. In principle, any agreement between Brazil and the EU would have to involve the other Mercosur partners as well.
Enthusiasm for an EU deal is strong in Brazil, but interest among others in Mercosur remains uncertain.
Uruguay and Paraguay are rumored to have offers ready for a deal, but have not formalized them yet. Venezuela has requested more time to prepare an offer.
In Argentina, officials recently said they will not revise trade policies for at least another two years, casting doubt on whether they even plan to make a serious offer.
"The big question for us is whether Argentina is prepared to go forward and, if not, whether Mercosur has a Plan-B," said a top European diplomat in Brazil who requested not to be named.
Brazilian trade groups say the country needs to take a bold approach to overcome the customary Mercosur inertia and protectionism that threaten the region’s global competitiveness.
"It’s important for Brazil to push for this accord," said Mauro Laviola, director for international negotiations at the Brazilian Foreign Trade Association, or AEB. "Everybody around the world has been negotiating with everybody else, so we can’t stay out of this."
Hurt by a global slowdown and increasing international competition, Brazil saw its total trade with Europe diminish to $96 billion in 2012 from $99 billion the previous year, with its surplus falling to $1.2 billion from $6 billion.
Brazilian officials say new regional and global factors are making the EU deal, in discussion since 1999, all the more urgent.
One threat is the "Pacific Alliance" between Chile, Peru, Colombia and Mexico, and that group’s expanding trade with Asian countries. In addition to squeezing Mercosur’s regional market share by allowing competition from large Asian economies, the alliance also threatens to peel away smaller Mercosur partners such as Paraguay, which has reportedly expressed interest in greater trade with the alliance countries.
Another pressure point is free-trade negotiations between the U.S. and Europe.
"If that accord goes through, it will have a big impact on global commerce, so we need to defend our position," said Carlos Abijaldi, director of industrial development at Brazil’s National Confederation of Industries.
Meanwhile, a series of long-standing EU trade preferences for most Mercosur countries will expire at the end of the year. Mercosur members stand to lose preferential tariff exemptions on between 10% and 20% of trade, by volume, with Europe. Brazil alone stands to lose preferences on as much as 12% of export volume to the EU.
Business leaders see advantages for both sides.
Brazil and its Mercosur allies see prospects for opening European markets to foodstuffs, textiles and steel. On the EU side, an accord could help open the pharmaceutical, chemical and information-technology segments of the South American economy. The latter could prove particularly helpful in increasing EU market share in the Mercosur banking automation and financial industries.
But before it can gain back any lost market share, Brazil is faced with bringing some of its hesitant Mercosur partners on board.
As with Brazil, Uruguay will soon lose EU preferences on more than 10% of its EU trading volume.
Argentina, meanwhile, stands to be the most penalized, losing tariff preferences on between 18% and 20% of its export volume to Europe. That alone could be enough to push the country into talks, according to some.
"Either Mercosur countries become more dynamic in these large trade negotiations or the bloc will lose space in its own region," said Evaldo Alves, chairman of the department of international negotiations and foreign trade at Brazil’s Getulio Vargas Foundation School of Management.
But even if more hesitant partners such as Argentina and Venezuela fail to match the breadth and timing of offers from partners such as Brazil or Uruguay, negotiators are hopeful the EU will accept an umbrella agreement that would allow for different proposals from the different Mercosur members.
"If not all countries agree to a similar offer, there’s speculation that the accord could still be negotiated as long as the EU agrees to a joint proposal," said Mr. Laviola of the AEB.
Representatives from the EU said such a proposal could be acceptable.
"What’s most important for us is that Mercosur has an internal agreement," said a European negotiator, who wished not to be named. "What we can’t have is a situation where they show up without a proposal."
European and Mercosur officials have set a deadline to review offers by the end of this year, so as to start talks over a possible accord in 2014.
But even if Mercosur can come up with a joint proposal, doubts remain about how long it would take to negotiate a final accord and put it into effect. While some regional accords have taken as long as five or six years to negotiate, Brazilian trade officials are hopeful that a Mercosur accord with the EU might go into effect in as quickly as two years, if talks go smoothly.
Write to Gerald Jeffris at firstname.lastname@example.org