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The EU trade agreement with Mercosur: trade and sustainability

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Townsend Matthew
Matthew Townsend

Partner

London

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Renard Francois
François Renard

Partner

Hong Kong

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Benson Jonathan
Jonathan Benson

Counsel

London

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07 November 2019

The discussions at the recent “G7” summit concerning the fires in the Amazon rainforest highlighted the growing focus on the relationship between trade and sustainability issues.

Prominent in those discussions was the role that the EU-Mercosur Association Agreement (the Agreement) should play in influencing the environmental policies of Brazilian president Jair Bolsonaro. The Agreement will create a new trade framework between the EU and the four Mercosur countries, Brazil, Argentina, Paraguay and Uruguay, that aims to consolidate a strategic political and economic partnership and create opportunities for sustainable growth.

On 28 June 2019, after two decades of negotiations, it was concluded in a ground-breaking moment, which marked the EU as the first major partner to agree a trade pact with Mercosur, further cementing political and economic relations between the two blocs.

In this bulletin we outline some of the key points in relation to the Agreement. We particularly focus on sustainability issues which we predict will be, in light of the growing international focus on climate change, at the forefront of the EU’s deliberations on trade in the coming years.

The current trading situation

Mercosur is a trade alliance between Brazil, Argentina, Paraguay and Uruguay. Currently, these economies have protectionist trade regimes, including high import duties and technical standards that do not generally align with international standards. Despite these barriers, EU firms exported EUR45 billion of goods to Mercosur in 20181 and EUR23bn of services in 20172. So, if these barriers are broken down, there may be significant market opportunities for EU businesses, opening up a market of 260 million consumers in the Mercosur region.3

The key trade-related features of the EU-Mercosur trade agreement

Abolition of tariffs

Key to the trade part of the Agreement is the extensive liberalisation of the trade in goods. Over a transition period, the EU will remove duties on 92% of its imports from Mercosur, while Mercosur will remove duties on 91% of imports from the EU.4

For industrial goods, Mercosur will eliminate tariffs on 90% of goods imported from the EU in the following sectors: cars (currently at 35%), machinery (currently at 14-20%), chemicals (currently at up to 18%) and pharmaceuticals (currently up to 14%).5 The EU will eliminate duties on 100% of industrial goods imported from Mercosur over ten years.6

For agricultural goods, Mercosur will eliminate tariffs on 95% of EU agri-food exports by value.7 The EU will liberalise 82% of agricultural imports, with the remaining imports being subject to partial liberalisation commitments or excluded altogether.8 The European Commission has estimated that the Agreement will save EU companies EUR4bn worth of duties per year. However, the tariff reductions envisaged by the Agreement are not without controversy. In particular, EU farmers and their representatives have expressed concern that the deal amounts to “unfair competition for some key European production sectors, putting their viability at stake”.10

Encouraging high standards

The European Commission has stressed that the Agreement will promote high standards in food safety and animal and plant health. It will be a strict requirement that all food imported to the EU must comply with the EU’s own standards. Additional safeguards are included in the form of Geographical Indications that will protect 357 EU products from imitation. Some of the well-known products included on the protected list are Münchener Bier from Germany, Comté from France, Prosciutto di Parma from Italy and Polska Wódka from Poland.

Customs and trade facilitation

On a practical level, the intention is that market access will be made considerably easier by implementing faster, simpler and more predictable procedures, which will be automated wherever possible. Small and medium-sized companies in particular should benefit from a new online platform providing easy access to information on market requirements and customs rebates. Nevertheless, there will continue to be challenges due to the nature of the Mercosur market itself. Unlike the EU, Mercosur is not a single market, with several sectors being excluded from its reach, and a range of non tariff barriers existing between its members.

Other topics

Other topics covered by the trade provisions in the Agreement include rules of origin, trade remedies, the trade in services and rules on establishment, public procurement, competition, intellectual property rights and dispute settlement.

Sustainability issues in the EU-Mercosur trade agreement 

Importantly, the Agreement will contain a chapter on “trade and sustainable development”. This area of the Agreement has received great attention, particularly due to concerns over the commitment by the new Brazilian President, Jair Bolsonaro, to protect the Amazon rainforest and combat climate change. 

The Agreement is premised on the notion that trade should not increase at the expense of the environment or labour conditions. Both sides have committed to respect multilateral environmental agreements, such as the Convention on International Trade in Endangered Species of Wild Fauna and Flora and the 2015 Paris Agreement on climate change.

Other commitments that will be included relate to fighting deforestation, and responsible business practices. The obligations will include a commitment to promote corporate social responsibility in line with international guidance, such as that of the OECD or the UN Guiding Principles of Business and Human Rights. There will also be thematic articles on trade-related aspects of natural resources including combating illegal logging and illegal fishing.

With regard to enforcement, the “trade and sustainable development” chapter will be subject to its own dispute settlement procedure. Complaints concerning non-compliance will be considered first in formal government consultations. Thereafter, if the matter is not resolved, an independent panel of experts can be asked to examine the matter and their recommendations will be made public. Notably, there is no binding, independent dispute resolution mechanism in the Agreement in respect of sustainability issues. 

The treatment of sustainability issues has given rise to criticism of the Agreement. The Greens/EFA group in the European Parliament commented that the agreement is “a bad compromise” and pays only “lip service” to international climate change goals.11 Fern, an organisation focused on protecting forests, has detailed some of the impacts of cattle ranching in Mercosur, stating that cattle pasture makes up more than 71% of deforested land in South America.12 As a consequence, Perrine Fournier, a campaigner at Fern, recently stated “this trade deal is a double whammy for the planet: it will exacerbate deforestation and encourage the production of big, dirty cars”.13

Next steps

The trade part of the Agreement has been agreed in principle, but the final text of the Agreement has not yet been settled. Once the final text is agreed between the parties, we expect that the agreement will need to be approved by the EU Member States and the EU institutions, including the European Parliament. The politics of this process can be complex, as Wallonia’s objections to the EU-Canada Comprehensive Economic and Trade Agreement (the so-called “CETA”) in 2016 demonstrated, and sustainability issues are likely to play heavily in the debate, especially as both President Macron of France and Prime Minister Varadkar of the Republic of Ireland have threatened to veto the deal if Brazil does not honour its environmental commitments.14 The process may also be lengthy as, for example, most of CETA has been provisionally in force since September 2017, but the ratification process in the EU is on-going. On the Mercosur side, the Agreement will need to be ratified in accordance with the constitutional arrangements of the four countries concerned.

Conclusion

At a time of increased trading tensions, the Agreement is a powerful political signal that Mercosur and the EU reject protectionism and support the international rules-based trading system. However, the reaction to the Agreement, particularly in relation to sustainability issues and the opening up of the EU’s agricultural market, demonstrates that such agreements are now subject to intense scrutiny and have become highly politicised across the EU. Despite this, for many businesses in the EU and Mercosur, the Agreement represents a significant step forward in liberalising trade between the two trading blocs and is broadly welcomed. Businesses in the UK will also need to see if they will be able to take advantage of the Agreement in light of the outcome of the UK’s departure from the EU. 

If you have any questions in relation to the Mercosur Agreement or any other international trade issues, please contact one of our specialists or your usual contact at Allen & Overy.

References

  1. http://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157953.pdf
  2. http://trade.ec.europa.eu/doclib/press/index.cfm?id=2040
  3. http://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157954.pdf
  4. http://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157964.pdf
  5. http://trade.ec.europa.eu/doclib/press/index.cfm?id=2040
  6. http://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157964.pdf
  7. http://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157964.pdf
  8. http://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157964.pdf
  9. http://europa.eu/rapid/press-release_IP-19-3396_en.htm
  10. https://www.confagri.pt/content/uploads/2019/07/EU-mercosur-exiting-commission-opens-Pandoras-box-of-double-standards.._.pdf
  11. https://www.greens-efa.eu/en/article/press/das-mercosur-abkommen-ist-ein-fauler-deal/
  12. https://www.fern.org/news-resources/eu-consumption-of-beef-and-deforestation-91/
  13. https://www.fern.org/news-resources/eu-mercosur-deal-sacrifices-forests-and-rights-on-the-altar-of-trade-1986/
  14. https://www.independent.co.uk/news/world/europe/macron-amazon-forest-fires-veto-mercosur-eu-trade-deal-brazil-a9076181.html