The European Union-Brazil Trade Relationship: Prospects for an EU-Mercosul

Free Trade Agreement

The VII European-Brazil Summit held on 24 February 2014 in Brussels concluded with a
wide-ranging Joint Communique that included, among many commitments, a strong
reaffirmation of the proposed European Union-Mercosul Free Trade Agreement. The
proposed agreement, which has its origins in talks dating to 1999, would provide a
comprehensive trade accord between the EU and Argentina, Brazil, Paraguay, and
Uruguay, with Venezuela being the only member of Mercosul (Mercado Comum do Sul)
not participating. While there are many technical and political issues to be resolved, there
may be signs that changing economic and political dynamics are leading the parties to the
conclusion that deepening the trade and investment relationship is important.
At the conclusion of the EU-Brazil Summit, Jos Manuel Barroso, the President of the
European Commission, said he had seen progress on the Mercosul side and that we
could have an agreement in the foreseeable future. Brazilian President Dilma Rousseff
said that there now was a very real will...to complete the agreement.
The EU-Brazil Trade Partnership
The EU and Brazil have a strong mutually beneficial trade relationship. The EU is Brazils
largest trading partner accounting for 20.8% of its total trade and Brazil is the EUs 8th
largest foreign market, accounting for 2.2% of total EU trade (2012). Trade between the
EU and Brazil has grown by 200% over the past decade to a total of 76.9 (BRL247.2)
billion in 2012 with EU exporting 37.3 (BRL120.0) billion and importing 35.8 (BRL115.1)
billion (European Commission data). Agroindustry goods account for nearly half of EUs
imports from Brazil, whereas mineral products represent the second largest category,
followed by wood, paper and chemical products. Major EU exports to Brazil include
machinery and appliances, chemicals, transport equipment, base metals and minerals.
Falling commodity prices and a decline in quantity of imports from Brazil shifted the trade
balance negative for Brazil in 2012 and 2013 for the first time since 1999.
The EU is the biggest foreign investor in Brazil with investments in many sectors of the
Brazilian economy. Around 50% of the FDI flows received by Brazil during the last 5 years
originated in the EU. The total value of the EUs investment stock in Brazil amounted to
238.9 (BRL768.0) billion in 2011. The total value of Brazils investment stock in the EU
was 77.8 (BRL250.1) billion in the same year.
EU Challenges and Perspectives
The EU has been very active in seeking far-reaching trade agreements in recent years, in
particular in the wake of the financial and economic crisis. The failure of the Doha Round
resulted in a focus on bilateral trade deals with countries around the world, resulting in
agreements with Mexico, Chile, South Korea, Colombia, Peru and more

recently with Singapore and Canada. Negotiations are ongoing with India, Malaysia,
Vietnam and Thailand. The most substantial, intensive and ambitious talks are currently
being conducted with Japan and the United States.
The trade data above demonstrate the importance of the Brazilian market for the EU. At
the same time, existing tariff (12 % average customs tariff) and non-tariff barriers for
manufactured products and services are relatively high. This suggests that there is
substantial potential for future growth in exports and investment. The EU consistently
encourages Brazil to reduce tariff and non-tariff barriers, and to maintain a stable
regulatory environment for European investors and traders. The EU sees the EU-Mercosul
Association Agreement as a possible vehicle to reduce these barriers.
However, the EUs appetite for negotiating an agreement with Mercosul must be evaluated
against the backdrop of its efforts in reaching trade deals with other countries that are
either larger, have more potential, or perceived to be easier to reach. Under the EUs
system, trade deals are negotiated by the European Commission on the basis of a
mandate from the governments of all 28 Member States, and require approval by the
European Parliament. All the stars must be aligned politically for any deal to be agreed
and it requires substantial effort and energy from all EU parties concerned both before
and during the negotiations.
The prospect of any potential trade agreement depends on the political capital that needs
to be expended and the administrative resources that are available and always in
comparison to what is necessary to reach deals with other countries. In the case of
Mercosul, the EU will be watching closely as to whether the Mercosul countries are able
to bridge their internal differences. In addition, it remains to be seen whether EU Member
States and institutions will be able to generate the necessary political excitement and
support and administrative resources for a deal with this region while negotiations with far
larger countries (U.S. and Japan) are still continuing.
In any case, the negotiations will not be easy. The offensive interests for the EU are in
areas where Brazil and the other Mercosul countries have traditionally been protectionist:
manufacturing, investment, public procurement and intellectual property. Likewise, the
offensive interests for the Mercosul countries are typically in the agri-food sector, which
a number of EU countries are likely to continue to protect. When the talks were reopened
in 2010, the European beef and pork producers expressed concern that any deal with
Mercosul could significantly reduce their production (a Commission 2011 study predicted
a drop of 150,000 tonnes in beef production and a price drop of 8 %). In addition, some
EU countries such as France and Italy might be inclined to support existing tariffs on the
imports of cars into Brazil given the high volume of cars they produce in Brazil.

Brazil Challenges and Perspectives

Brazil has been inching cautiously towards a free trade agreement with the EU for years.
Recent developments include more vocal support from both industry and agriculture
sectors. Historically, the industrial sector has been reluctant to move ahead aggressively
with trade liberalization because of competitiveness concerns, while agriculture has
worked to open foreign markets, including trying to address the protectionist EU common
agricultural policy. Regulatory reforms would present another set of challenges.
There are many reasons Brazil might like to move ahead with a FTA. First, Mercosul has
become an increasingly difficult customs union to manage and may not serve Brazils
economic interests indefinitely. Second, there are limitations to growth of the domestic
market. Third, Brazils lack of competitiveness is linked to a relatively closed trade policy.
Fourth, the rise of so-called mega-agreements, particularly the Trans-Atlantic Trade and
Investment Partnership (TTIP) between the United States and the EU, could leave Brazil
in a disadvantageous global trade position. Fifth, over-dependence on commodity exports
to China to the detriment of a more diverse export profile has proven to be a vulnerability.
Despite increasing Brazilian support for the agreement, including strong statements from
President Dilma Rousseff, many challenges and concerns remain. Brazilian industry,
particularly the automotive sector, will lobby for staged implementation to build in
adjustment time. Agriculture will be difficult to keep at the negotiating table unless there is
clear movement on opening the EU markets. Dealing with sensitive and vulnerable
industries and sectors will be crucial to concluding an agreement.
Reactions in Brazil to the EU-Brazil Summit were mixed. While some sources reported
movement on the trade accord in a positive light, others noted that progress has lapsed
before and that there are some very real challenges that will be difficult to overcome. In
addition, Brazil faces national elections in October at all levels of government, the results
of which could change the political outlook, but which is difficult to predict with respect to
the proposed EU trade agreement.
Outside of Brazil, the Mercosul common market, which has become increasingly difficult
to manage, could inhibit progress on negotiations. Venezuela is not participating and
Argentina remains reluctant to support a comprehensive trade and investment agreement
for protectionist reasons. It is possible, however, that remaining Mercosul countries could
move ahead, although the implications of the customs union are far from clear. How
difficult the situation is within Mercosul was illustrated when their internal meeting to
develop a common position for the talks with the EU (which had been scheduled for March
7) was canceled by Brazil because of the ongoing unrest in Venezuela, the inauguration
of Chiles President and a range of domestic issues.

Looking Ahead
It is unclear when Mercosul will be meeting to discuss its position on the talks. On March
21, the EU and Mercosul are scheduled to hold technical discussions, but this meeting
may be delayed if Mercosul is unable to make progress internally. Should sufficient
agreement be found, it is possible that formal offers could be presented shortly thereafter,
initiating the negotiation process. Judging by the challenges outlined in this paper and the
speed of such negotiations between other countries, this is likely to continue for a long
time.