The Mercosur/European Union economic agreement

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By PAULO NOGUEIRA BATISTA JR.*

There are many reasons for concern about this poorly conducted negotiation, in addition to the fact that it is an agreement with a neoliberal essence.

Negotiations between the European Union and Mercosur for a comprehensive economic agreement are entering what appears to be the final stretch, with negotiators from Itamaraty and the Ministry of Development and Industry eager to reach an agreement. President Lula has declared that he wants to close with the Europeans by December 7th, the date on which he hands over the presidency of Mercosur to Paraguay, but added that if he does not resolve the issue by then he will abandon negotiations that have already taken more than 20 years. I hope they are really abandoned and left on the agenda. I will explain why.

It is no coincidence, reader, that this agreement was not reached after more than two decades of attempts. Europeans have always been – and continue – very resistant to accepting a minimally balanced negotiation and also insist on intrusive clauses that restrict development policies. Not even the Fernando Henrique Cardoso government, nor even the Michel Temer government, both liberal and surrender-oriented, were able to complete this negotiation. It took the presence of Jair Bolsonaro and Mauricio Macri for total surrender to occur and a scandalously unequal agreement to be reached in 2019.

So what do Lula government negotiators do in 2023? They make the huge mistake of resuming negotiations with the Europeans, accepting Jair Bolsonaro's legacy as a starting point. They thus placed themselves in the position of begging for adjustments to a terrible agreement. They ended up raising few relevant points, with limited ambition, not touching the neoliberal essence of what was accepted by Jair Bolsonaro.

That's where we are. The points raised by Lula government negotiators are so limited that even if they were fully accepted by the European side they would not result in anything minimally acceptable.

Neoliberal essence of the agreement

What is the essence of the agreement? The almost total opening of the Brazilian market, via the elimination of import taxes, to unequal competition with corporations and other European companies that have, as a general rule, technological superiority, a larger scale of production, access to credit under more favorable conditions, among other advantages . Companies that, in addition, rely on subsidies from their States, which have great financial capacity to support their industrial, service and agricultural companies.

Brazilian companies, on the other hand, suffer from a set of adverse factors known as the “Brazil cost” – extraordinarily high interest rates, scarce credit, exchange rate instability and recurring periods of currency appreciation, infrastructure and logistics deficiencies. Import tariffs, eliminated by this agreement, are only partial compensation for the various factors that undermine the systemic competitiveness of the Brazilian economy and its companies.

Industry and family farming would be the biggest losers. It is no surprise that entities representing family farmers are against this agreement. One of its main problems lies in the fact that it almost completely liberalizes trade in what is produced by Brazilian family farmers, including trade in those goods that allow a minimum of added value in the countryside.

This will inevitably harm production and employment in rural areas. Small farmers will be subject to unimpeded competition with imports of European products produced, often with the support of high government subsidies. This entire part of the agreement inherited from Jair Bolsonaro's government was not questioned by Lula government negotiators.

There are many reasons for concern about this poorly conducted negotiation. A little-known aspect is that the agreement with the European Union constitutes the gateway to other agreements of the same type, ready or almost ready, and which are just awaiting the finalization of understandings with the Europeans – the agreements with Canada, with the Association European Free Trade – EFTA, with Singapore and South Korea – all in the format of the agreement with the European Union, inspired in turn by the FTAA, which we rejected during the first Lula government.

It should also be noted that it is unlikely that the United States, Japan and China, among others, will watch this passively. They will press, sooner or later, for the same concessions that were made to the Europeans – all the more so as it will become clear to everyone that the Europeans obtained them without making minimally significant concessions to Mercosur.

The Brazilian economy will be tied up in a web of outdated neoliberal agreements, which obey liberalization doctrines never practiced by developed countries and successful emerging countries, such as China, but exported to unwary countries in the developing world. Nowadays, these are even less accepted doctrines, since all the main developed countries are seeking reindustrialization, the internalization of production chains and protecting production on national or regional soil.

What do we gain, after all, from this agreement?

The question that remains unanswered is the following: what will Brazil gain if this agreement is concluded? Additional access for our exports? Very little, almost nothing. Some of the main commodities that we export (coffee beans, soybeans, oil, among others) no longer face barriers in the European Union. The quotas offered for some other agricultural products in which we are competitive (such as beef, sugar and rice) are small and insufficient (lower or close to current exports); others are innocuous (they concern products in which European competition capacity would hardly allow space for Brazilian production, as is the case with pork).

As for our industrial exports, the reduction in European import tariffs, provided for in the agreement, is residual, since the average European tariff is already very low, due to the tariffs consolidated in the WTO and preference regimes.

Would European investment here increase? We never needed this type of agreement to be the largest recipient of direct investment in Latin America and one of the largest in the world. The agreement with the Europeans even tends to reduce investments or cause disinvestment in Brazil. Why invest here if they can supply the Brazilian market from their headquarters, free from tariff barriers?

It should not be claimed that industry associations and business unions are in favor of the agreement and that, therefore, there would be no reason to worry about its effects on the sector. The people who command and are represented in these industrial unions are mostly fictitious industrialists. Some are owners or executives of maquiladoras that import industrial products and parts and limit themselves to assembly with low added value and low job creation.

Or worse: they are mere importers who use their marketing structures to place products they receive from abroad on the domestic market. Or they are financiers who depend more on financial income than on operational income. Others are mere bureaucrats from employers' unions, who make a career in these entities and have little or no real weight in business terms. Furthermore, representatives of subsidiaries and branches of foreign companies have a strong presence in these employers' entities, which ultimately follow the headquarters' strategy.

Small and medium-sized Brazilian entrepreneurs, in industry and agriculture, responsible for a large part of production and employment, are not effectively represented by these entities.

To worsen the situation created by the agreement with the Europeans, we would also be limited in the possibility of controlling and taxing exports – something that may be necessary for several reasons, including security, economic development and the protection of strategic interests. With few exceptions, the agreement prohibits quantitative restrictions on exports. And, in its original format, it prohibited taxes on exports.

From what I know, Brazilian negotiators are trying to get Europeans to agree to the possibility of taxing some critical minerals. If the list is small, it will only scratch the surface of the problem. If it's an exhaustive list, it won't help. With the rapid development of technology, the mineral that will be critical tomorrow is not perceived as critical today.

See how far we've come! We currently do not have any legal limitations to use the export taxation instrument. But now we are reduced to the position of asking Europeans for the possibility of some exceptions to the prohibition on taxation. In exchange for what? Again, it's the question that doesn't want to be silenced.

Time to walk away from a dangerous negotiation

Since the beginning of the year, what is being done by Brazilian negotiators is only damage control (damage control) – and still very incomplete. The negotiating team includes technicians and diplomats committed to reaching a result and dominated, for the most part, by a completely anachronistic liberalizing orientation. They leave a lot to be desired – not to use stronger words.

Now, with the election of Javier Milei, another weak argument has emerged (to say the least) – that failure to conclude an agreement with the Europeans could lead to Argentina's exit and the end of Mercosur. Now, a campaign is a campaign, a government is a government. Many campaign bravado is being and will be abandoned by Javier Milei. There are many Argentine business interests that would be heavily harmed by the country's exit from Mercosur, including important financiers of Javier Milei's campaign.

As far as I know, there is no support in the Argentine Congress for taking the country out of Mercosur; If the government tries, it will probably be defeated. The president-elect is already moderating his speech, on this and several other points where absurd theses prevailed during the election campaign. Therefore, this supposed risk for Mercosur is a story to scare little children.

And even in the highly unlikely hypothesis that Argentina were to break with Mercosur, would this be a reason for Brazil to enter into a harmful agreement with the Europeans?

Frankly, I can't understand how this deal is still on the table. We would already have to do what Australia recently did, which abandoned similar negotiations due to European intransigence. While Australia acts with sovereignty, Brazil falters in the face of the European Union.

*Paulo Nogueira Batista Jr. is an economist. He was vice-president of the New Development Bank, established by the BRICS. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa). [https://amzn.to/44KpUfp]

Extended version of article published in the journal Capital letter, on December 01, 2023.


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