In 1995, Mercosur signed a framework agreement with the European Union (EU) that signaled a commitment to pursue free trade agreements (FTA) between the two blocs.
Since then there has been several failed negotiations and ultimately a postponed dream to establish one of the largest FTA in the world, outside of the implementation failure of the Trans-Pacific Partnership agreement.
However, resumed negotiations in 2015 culminated in draft proposals between Mercosur and the EU on May 2016 (Brussels), led both blocs to an understanding that executing an agreement is highly possible.
One of the paradigm shifts was the support that the Brazilian government received from the private sector, which until then, demanded more protectionism to curb the entry of foreign imports. These barriers have not produced the desired effect they sought since even more foreign products have entered into the country, despite the presence of significant customs barriers.
Despite the lack of progress in negotiating a FTA, government negotiators and the private sector worked closely between 2012 and 2015 to remove trade barriers. This resulted in an offer by Mercosur to liberalize import requirements for 90% of products traded with the EU.
The EU, recognizing the trade opportunities with Mercosur and seeing creeping protectionism from the U.S. and the UK, aggressively sought new business partners. Each of these recent developments suggests that a trade agreement between these parties is likely.
Although there is a broad economic interest in the signing of this agreement by all Mercosur countries, Brazil has an added incentive to finalize a trade agreement with the EU. Industry National Confederation data shows that the current trade between Brazil and the EU reached US$100 billion in 2011.
According to the U.N., 69% of all the current trade between Mercosur and the European bloc in 2015 occurred with Brazil. Of the US$54 billion exported by the EU to Mercosur, US$38 billion was destined for Brazil.
On the other side, Brazil exports to the EU increased from €23 billion in the period of 1995 to 2004 to €46 billion in 2015, showing the vigorous trade between the most important economic blocks in the world.
Agricultural issues have been demystified by the Confederation of Agriculture for not only Brazilians, but especially European agri-businesses. For Brazilian farmers, the restrictions on foreign exports of their products have caused them to focus their sales on a lucrative Brazilian domestic market.
All signs indicate that both parties want to sign an agreement by year-end, so that the technical definitions can be finalized in the first half of 2018. This would eliminate the potential for interrupted negotiations and uncertainty caused by Brazil’s presidential election in 2018.
FTA does have risks and the EU has always vigorously enforced compliance with FTA rules of origin. Mercosur companies interested in exporting to the EU under the auspices of a trade agreement will need to implement tighter controls to adapt to the EU’s stringent reporting requirements and enforcement of origin determination.
These companies will be better equipped to ensure compliance and prepare for potential EU customs audits if their organization is committed to automating their trade activities.
Brazil has further indicated its interest by entering into discussions with the European Free Trade Association (EFTA), the group of countries in Europe which are not part of the EU.
Executing agreements with the EU and EFTA would result in the largest foreign trade agreement signed among developed countries; an enormous opportunity for the 750 million individuals residing in European and Mercosur countries.