Buenos Aires Times

economy SPECIAL REPORT

Spats within European Union cast doubt over long-awaited Mercosur trade deal

Talks over the long-awaited, much-trailed free-trade agreement are ongoing, but EU member states are most notably split over proposed quotas for South American beef. President Macri has promised a deal by year-end – but will it happen?

Thursday 23 November, 2017
 Sources in Europe and Argentina say that concerns from EU member states over how much beef the continent should be let in from South America are a major sticking point in the Mercosur trade deal talks.
Sources in Europe and Argentina say that concerns from EU member states over how much beef the continent should be let in from South America are a major sticking point in the Mercosur trade deal talks. Foto:Shutterstock.

With just a few months to go until an end-of-year self-imposed deadline, talks between the Mercosur bloc and the European Union (EU) seeking to seal a long-awaited free-trade agreement are stalling once again, casting doubt over the likelihood of an agreement. 

Sources in Europe have told the Times that concerns from EU member states over how much beef the continent should be let in from South America are a major sticking point, sparking fears that politicians may only seal a deal in name before the year’s end.

“The negotiations remain stuck as there are still many differences. Both blocs may sign an empty political deal before the end of the year, without moving forward on any technical aspects,” Marcelo Elizondo, the head of the DNI international business development consultancy, told the Times.

The long, stop-start talks between the two blocs, which first started in 1999, have reached an impasse many times in the past but both sides recently committed themselves to reaching an initial deal in 2017, with steady progress made since discussions resumed last year.

Nonetheless, experts say that beef has always been, so to speak, the ‘elephant in the room.’

“The negotiations remain stuck as there are still many differences [on both sides]. Both blocs may sign an empty political deal before the end of the year, without moving forward on any technical aspects,” Marcelo Elizondo, the head of the DNI international business development consultancy, told the Times.

Negotiators from both blocs met in Brazil just a few weeks ago for a new round of talks, but there was little success, sources say. The EU reportedly offered an annual tariff-rate quota of 70,000 tons of Mercosur beef, which includes 35,000 tons of fresh beef – made up of high-value ‘Hilton’ beef and young grazing beef – and 35,000 tons of frozen beef.

That figure disappointed Mercosur representatives because it was lower than the 100,000 tons offered in previous talks back in 2004. Europe consumes an average eight million tons of beef per year, which means Mercosur would be shipping per year 137 grams of beef for each EU citizen - enough for around two beefburgers per person.

“The offer is excessively low. There’s a large market for high-quality Argentine goods in Europe, which would be sold [at a] cheaper [cost] than local products. EU farmers shouldn’t be afraid to compete as it leads to innovation. Protectionism doesn’t work,” Luis Etchevehere, the former head of the Argentine Rural Society who was appointed Agriculture minister this week, told the Times.

The Mercosur has now asked for an annual tariff-rate quota of 390,000 tons of beef, hoping tha tthe EU will improve its offer. A new round of negotiations will take place between November 6 and 10, followed by another one in Brussels in early December and, if all goes well, the Mauricio Macri administration hopes to officially announce a deal at the World Trade Organisation summit in Buenos Aires in late December.

Most experts, however, think that’s too optimistic. 

“Even if they sign some kind of deal in December, negotiations would carry on through all of 2018. After that, each EU and Mercosur congress would have to ratify the deal and that won’t be easy,” Belisario De Azevedo, an international negotiations expert at the Abeceb consultancy firm, told the Times, pointing to the role local lawmakers on both sides may play.

European Commission chief Jean-Claude Juncker said last week he “will do everything” to seal a deal before the end of the year, as – due to the size of both the Mercosur and the EU – it would be “the most important trade agreement in terms of volume.”

Nevertheless, Junker’s statements comes as French President Emmanuel Macron called on Brussels to moderate its zeal to conclude talks. “I am not in favour of hurrying to conclude before the end of the year trade negotiations for which the mandate was given in 1999,” Macron recently said.

Recent deals, similar hopes 

The EU recently finalised trade agreements with Canada and Japan and representatives are hoping to seal further deals with Mexico and the Mercosur. Of the two, Mexico is seen as the more straightforward as it involves less stakeholders and centres on upgrading an existing agreement to include more sectors, such as processed food and financial services. It is an open secret that Mercosur that presents a far more daunting challenge.

The prospect of allowing tariff-free quotas for some of the world’s largest producers of beef and sugar, which can be turned into ethanol, has rattled some EU members.

A group of 11 countries, led by France and Ireland, had even proposed postponing the offer entirely, saying they were particularly vulnerable to imports of beef, ethanol, sugar and poultry. The countries said that before making an offer the cumulative impact of past and future trade deals on the agricultural sector should be assessed fully, with safeguard mechanisms put in place.

“We have already made clear that the EU has strong sensitivities in agriculture which must be respected in a reasonable manner,” European Commissioner for Agriculture Phil Hogan said recently. “This means that Mercosur needs to moderate its expectations to what is manageable and acceptable to the EU in agriculture.”

Europe’s agricultural lobby Copa-Cogeca adamantly opposes any deal that includes meat imports from Mercosur, as does the Irish Farmers Association (IFA), which has often held protests against the deal. Allowing beef imports from the South American bloc would cost between 500 and 750 million euros, they estimate.

“We are demanding our government take the strongest possible stance by insisting beef is excluded from any EU market access offer and final agreement with Mercosur. Hogan has to defend farming and the agricultural sector in these negotiations,” the IFA’s National Livestock Chairman Angus Woods told the Times.

“Brazil, Argentina and Uruguay already enjoy tariff-free access for substantial volumes of product. For an EU market that is already oversupplied, it makes no sense for the EU Commission to grant any more access to South American beef imports,” he added. Both the pig-meat and poultry sectors are also vulnerable to potential increased imports from an EU-Mercosur trade deal and need special attention on tariffs, volumes and standards in these negotiations, the IFA claims.

The EU offered additional market access for an extra 40,000 tonnes of poultry meat and an additional 12,250 tonnes of pig meat in their latest offer. Adding to the spat, opposition from farmers is sparking frustration among big European manufacturers in sectors such as cars and machinery, who argue that their ambitions in attractive Latin American markets must not be held back by a small number of farmers. For the EU’s machine builders, a deal with Mercosur would be “bigger than Japan,” some experts have stated.

“Mercosur now has the highest tariffs in the world for machinery apart from India. So, there’s a lot of potential if the barriers are reduced. You can’t protect your industry through tariffs because you would not become competitive,” Ulrich Ackermann, the head of foreign trade department at the German engineering association VDMA, told the Times.

“If the deal comes into force, we don’t expect tariffs to be abolished from the date of entry into force. There can be a transition period of up to 10 years. Then the industrial sector in Mercosur has enough time to adapt to this,” Ackermann added.

Political aims 

With Brazil now holding the pro-tempore presidency of the bloc, Argentina cannot move as fast as it desires in order to secure a deal, which is not seen as such a high priority for the other members of Mercosur.

Uruguay is now putting all its energy into sealing a free-trade agreement with China, while Brazil is facing a complex domestic scenario due to the Michel Temer administration’s difficulties with corruption and political weaknesses. Meanwhile, concerns over the potential effect of the deal on the region’s industrial sector remain high.

“Everybody in the Mercosur agrees the deal has to move forward, something that wasn’t the case a few years ago. But not everybody sees the deal as highly important, [not] as Argentina does. Brazil’s government is weak and is more focused on domestic reforms,” Elizondo said.

Striking such a deal will also be difficult for the EU and will cost political capital. Talks over Brexit – Britain’s exit from the European Union – are the main focus and are one of the reasons why the deal is taking time to move forward.

Adding to the political complications, any deal would have to be passed by every single member of the bloc in its respective parliaments and congresses, a big challenge considering Ireland and France’s open rejection of anything that damages farmers.

While the EU might struggle over what to do with the beef issue, Mercosur has its own pending issues to address as well. European countries want their South American counterparts to implement a strict and explicit intellectual property mechanism, something that doesn’t exist in Argentina or Brazil.

A further complication surrounds state purchases. EU member countries want their companies to start participating in such deals carried out by Mercosur member states. But the lack of a regional framework makes it almost impossible to make a wide and integral offer to the EU, complicating the negotiations.

“More than 15 percent of the GDPs of Argentina and Brazil are state purchases. The EU wants its companies to be treated as locals in Mercosur member countries. But it won’t be easy as there’s no state-purchases deal in the region. That makes it harder for Mercosur to make a solid offer to the EU,” De Azevedo said.

Ensuring preferential access for the European bloc could deliver a big boost to the economies of the Mercosur, especially when one considers the EU is already the bloc’s largest trading partner, accounting for 20 percent of its total trade. 

According to an independent study touted by the European Commission, a trade deal would benefit the Mercosur with overall GDP growth of up to three billion euros. with a 40-percent increase in exports. In contrast, the Mercosur is the EU’s eighth most-important trading partner, accounting for three percent of the EU’s total trade. EU exports to the region have steadily increased over the last years, growing from 28 billion euros in 2007 to 57 billion euros in 2012.

Despite that imbalance, it seems the EU may have to budge if any detailed deal is to be reached. Otherwise the talks may be going on until the cows come home.

“If the EU doesn’t improve its offer, a deal is not feasible,” De Azevedo declared.


Fermín Koop from London. On Twitter: @FERMINKOOP

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