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Enforcement of international trade regimes between the European Union (EU) and the Common Market of the South (MERCOSUR)?

Christian Russau
Forschungs- und Dokumentationszentrum Chile/Lateinamerika e.V. - FDCL

Translated by Jan Stehle
ed. FDCL-Verlag, Berlin, 2004

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Since the end of 1999 the Common Market of the South (MERCOSUR) and the European Union (EU) have been negotiating a biregional free trade agreement. Apart from the two initial negotiation pillars, “political dialogue” and “cooperation,” the negotiations are about the liberalization of market access. The negotiations can be differentiated into so-called “sectoral issues” (“trade in agriculture and fishery,” “trade in services,” and “trade in industrial goods”) and into so-called “horizontal issues” (“intellectual property,” “market access policy,” “trade and competition,” “trade facilitation,” “trade and investment,” and “government procurement”).

The “liberalization of market access” contains, on the one hand, the gradual reduction of foreign trade tariffs and, on the other hand, the determination of biregionally valid rules for all forms of trade related policy designs. According to these rules, any form of “market-distorting” intervention by the side of local, regional or national governments or legislation would be prohibited by means of an internationally valid treaty. According to this logic, anything that distorts the “free play of the market” would be prohibited.

In the area of “government procurement,” for example, the EU negotiating delegation does not get tired of addressing the issue of liberalization of government procurement under the nice title of “transparency in government procurement,” whereas MERCOSUR, until the beginning of 2004, has not submitted any offer yet concerning this issue. Despite the nice formulation, by “transparency in government procurement” the EU does not mean “democratic control of government procurement,” but rather “equal market access opportunities for European suppliers.” Also the area of “trade and investment” is about establishing rules that will grant more “legal security” to transnational corporations, and at the same time release them from currently valid requirements and obligations. Thus, laws, rules or requirements which could make foreign suppliers feel discriminated against, as opposed to domestic suppliers, would be banned and foreign suppliers would have the possibility of taking legal action at an international arbitration court. This legal process would not be open for domestic suppliers due to the primacy of the national legal course.

The European Union has closed two similar agreements of the “fourth generation” with Chile and Mexico. These agreements have broadly defined all trade relevant policy areas, stating clearly defined rules for all sectoral and horizontal issues mentioned above. According to these rules the market alone, i.e., price and efficiency, should guarantee an optimal allocation of resources while state interventions to cover local or regional necessities are prohibited.

The issue of foreign direct investment plays a central role here: This study wants to investigate the possible impact of an “interregional association agreement,” which comprises broad regulations for all market segments between MERCOSUR and the EU, as occurred, for example, with the EU-Mexico and the EU-Chile agreements. Chapter 1 gives an overview of the current free trade negotiations between the EU and MERCOSUR in the political context of free trade within the WTO and the competing free trade initiatives like, for example, the proposed Free Trade Area of the Americas (FTAA/ALCA/ZLEA). The second chapter deals with the issue of foreign direct investment as the object of international trade regimes. Here the question will be posed whether foreign direct investment can serve as a promoter of development, as is frequently argued by mainstream theory. Chapter 3 gives an overview on European foreign investment in Latin America with particular emphasis on MERCOSUR, while chapter 4 gives an overview of the FDI-legislation in Brazil, and sketches the different actors and interest groups involved, within the context of the current political and legal situation. Special attention will be given to the sectoral issue of services and the position of the European Commission with respect to the Brazilian services sector. Chapter 5 outlines the setting of an “Interregional Association Agreement” between MERCOSUR and the EU on the basis of the interplay of foreign direct investment in bilateral investment treaties, regional free trade agreements and WTO-agreements in interaction with sectoral and horizontal topics under the rules of global free trade.

If the “Interregional Association Agreement” between MERCOSUR and the EU should be concluded with all of its proposed rules, which ultimately gives way to the market as the only criteria, then the threat of the bipolarity of regulation and deregulation will become reality: The deregulation of the national market by the regulation of international trade regimes. In this way, in the context of the interweaving of international treaties between MERCOSUR and the European Union, a completely deregulated market would have again prepared the ideal ground for cross-border profit maximization and the commercialization of all thinkable spheres, by putting trade on a legal basis through the double or triple safeguard of international treaties. The free play of the market will solve it all, as if the sum of market-induced egoisms would in fact lead to an increased welfare for society as a whole.

January 2004