Perhaps the most exciting aspect of the recently concluded EU Mercosur association agreement is simply that it involves a trade agreement among economic giants. In other words: it’s not the most exciting of trade agreements.
There is a lot of novelty, however. But it lies not in the trade concessions per se. It lies in how the signatories agreed to handle policy differences in the area of climate change affecting trade, setting possibly a precedent for other agreements Brussels is currently pursuing in Asia.
A rare EU FTA with a large emerging market group
Bilateral FTAs are rarely successfully concluded among the large and powerful countries of this world.
The EU has never been able to conclude a meaningful trade accord with economies and countries that are large in terms of population and/or their economy. Famously, TTIP negotiations with the world’s superpower United States faltered in 2016.
Trade agreement negotiations with India (1.4 bn people), relaunched in 2022, are proving predictably difficult. Although negotiations with Indonesia (285 million people) are reportedly doing well, the devil will be in the detail if and when the deal is concluded.
Mercosur hosts around 300 million people, the EU around 450 million. Brazil, the largest Mercosur country, despite its weaknesses, is a major global economy with a sizeable industrial sector.
The EU has been a demandeur for the agreement – it wants new export outlets in the face of rising uncertainty over access to markets in China and the United States. It needs to secure sources of critical minerals for its clean tech industry which the South Americans hold abundantly. This has given Brussels’ counterparts some leeway in the renegotiation that followed an initial conclusion of the agreement in 2019.
FTAs are always asymmetric exercises, where the larger and more powerful among the players can set the tone and agenda and shape the outcomes which are inevitably skewed in its favour. The asymmetry can also be found in the Mercosur deal, with the South Americans making greater efforts in reducing trade barriers than the European side.
What’s notable about the EU Mercosur trade agreement is that it is one of the least trade liberalising among the recent FTAs signed by Brussels with emerging markets be it Vietnam in 2016 or Chile and Mexico more recently (African EPAs are another matter).
Tariff elimination phase-outs take longer for the Mercosur countries than for Vietnam, and public procurement commitments are less ambitious than in other recent EU trade agreements – even with the not-yet adopted updated agreement with Mexico.
For Mercosur, the step of concluding a free trade agreement with the EU is a historic milestone. Going to nil on most import duties, even if slowly (see here), is no small feat for large and complex countries such as Brazil or Argentina with a long history of protectionism.
From this experience the South Americans will move on to signing other trade agreement with other partners.
It seems that the South Americans’ deal with the EU is one of the factors that may hold the Mercosur group together. It has faced significant questions over its future due to individual members – one day Uruguay, Argentina the other – threatening to go it alone on trade.
On trade: old-school with moderate market liberalising ambition
Now to the substance.
In many ways the EU-Mercosur accord is already out of date. Last-minute politically-charged negotiations over autos and agriculture seem utterly old-fashioned when the real trade policy deal today is digital and to some extent lies with skills and mobility.
The deal sealed on export restrictions on critical minerals reeks more of the 19th century than the 21st: a scramble for resources in the soil.
The agreement has no digital trade chapter at all – contrary to most recent EU trade accords.
Tellingly, Brazil and Paraguay were not on the list of proponents of the last version of the WTO’s Joint Statement Initiative, which, despite not being in force, already offers a baseline global standard for what’s the norm in global digital trade policy.
The EU-Mercosur accord will be below this norm. There is no commitment or placeholder for future negotiations on digital trade at all.
This is very different compared to the recently updated agreement with Mercosur neighbour Chile, for which digital is a key tool in its attempts to diversify its economy away from commodities. Negotiations with the EU on digital were of the highest importance for Santiago.
So what makes this agreement interesting or innovative?
In all its old-fashioned-ness, the Mercosur accord can be seen as setting a very interesting precedent for negotiations Brussels is pursuing with India and Indonesia in particular – although Malaysia, Thailand or the Philippines will certainly watch this with interest.
2015 Paris Agreement on climate an “essential element”
A special focus of attention is the inclusion of the Paris Agreement as an “essential element” of the Association Agreement.
The package deal with Mercosur has two aspects to it: a general political cooperation agreement and more strictly a trade agreement. Thus far these two are wrapped into one, but they may be separated in future.
The general political framework agreement’s text is not public. Only the draft trade accord was made public by Brussels last week.
We know that usually the EU’s association accords have two “essential elements” to them: compliance with core United Nations human rights norms and non-proliferation of weapons of mass destruction.
The EU has sought in recent years to add the 2015 UNFCCC Paris Agreement to the list of “essential element” clauses of its association agreements.
“Essential element” means that non-compliance with the commitment can lead to the suspension of the whole agreement, most importantly the trade accord.
The EU’s first full success was with New Zealand with which a new trade agreement is in force since May.
The text of the EU New Zealand free trade agreement states that the Paris Agreement is to become an “essential element” of their separately held and concluded Partnership and Cooperation Agreement. The related language in this text is short.
Mercosur won’t just accept unilateral EU decisions
The EU-Mercosur agreement language in contrast is more extensive.
“[R]ecognizing the role of trade in contributing to the response to the urgent threat of climate change, each Party shall remain a party, in good faith, of the UNFCCC and its Paris Agreement1,” the draft new Mercosur accord says.
“Parties agree that [this] constitutes an essential element of this agreement,” the text continues.
Then the text offers details on how a decision might be taken to suspend trade concessions on the grounds that the Paris accord on climate has been breached.
The parties to the agreement “shall intensify their efforts to consult and cooperate in order to resolve the issues in a timely and amicable manner and shall hold consultations under the auspices of [a dedicated cooperation council] with a view to reaching a mutually acceptable solution,” says the draft text.
“Urgent consultations” within 15 days are foreseen. “Where the [council] is unable to reach a mutually acceptable solution within 90 days of the date of notification, the notifying [p]arty may take appropriate measures.”
The text stresses that suspension of trade concessions only applies to certain – as yet unspecified – parts of the agreement.
The text also makes clear that there may be reciprocal action as a result: “The notifying and the notified [p]arty shall be released from the obligation to perform the suspended parts of this [a]greement in their mutual relations during the period of the suspension.”
This shows that the South American bloc won’t just accept to see a whole deal fall apart on the basis of a unilateral decision by the EU.
Compensation for detrimental regulation
The above adds to the mechanism requested and obtained by the South Americans to allow one party to retaliate if a future “measure applied by the other party nullifies or substantially impairs any benefit accruing to it under the covered provisions in a manner adversely affecting trade between the parties, whether or not such measure conflicts with the provisions of (…) of the agreement”.
Under “measure” they negotiators understand: “a law, regulation, rule, procedure, decision, administrative action, requirement or practice”.
In other words, if a party legislates in a way that de facto reduces market access without formally violating the terms of the trade agreement, there may be remedies – typically partial lifting of trade concessions under the agreement. These remedies may however only be take following due process and an arbitration decision.
This clause a response to the South Americans’ experience with the EU reforestation regulation, which the South Americans perceived – and indeed some European capitals conceived – as a means to curtail their market access to Europe.
The mechanism applies only to future “measures”. Brussels denies it applies to the deforestation regulation – but where does the text say it may not apply to any implementing decision under the EUDR? We shall see how all this works out in practice.
Last but not least the cooperation mechanisms foreseen in the agreement were amended to ensure that the EU finances are more effectively mobilised to the aims of sustainable development in the recipient countries.
“EU will also seek to establish a specific MERCOSUR programme as a main channel to streamline cooperation (…) and can also make use of existing programmes and instruments to channel assistance to MERCOSUR Parties, using both bilateral and regional programmes, loans and budgetary guarantees to development finance institutions,” the text promises.
This deal will inject a dose of realism into the discourse of those in Brussels thinking they can always seek maximum concessions from trading partners in bilateral FTAs without offering much in return, and that regulating above other countries’ heads is an exciting prospect to the rest of the planet.
In today’s world, being a unilateralist gets more difficult as the size and political clout of your counterpart grows.
Yet the Mercosur agreement also offers hope to those who want rules-based trade relationships whilst pursuing climate goals, that there is a way forward, the cooperation is the answer, and that fundamental disagreements can be dealt with in a both legal and diplomatic manner that respects the basic principles of reciprocity and sovereignty enshrined in international law.
