Every cloud has a silver lining? As the conflict between the US and China continues to grow, not only does the uncertainty keep rising but also the pressure to mitigate the collateral damage the ongoing trade war may cause the rest of the world. The EU and the MERCOSUR countries might try to alleviate the pain by pushing forward negotiations for an interregional free trade agreement.
The global economy could be at stake
The trade dispute between the US and China has put many countries around the world in an uncomfortable position. As tensions rise and the measures become more severe, the possibility that the ongoing trade war will harm the real economy in the US and China – as we already suggested in January – becomes increasingly more likely. Since the US and China are the largest economic partners of many countries around the world, the stakes of such a development are extremely high. Hence, now more than ever, countries around the world should reconsider their external economic relations. For the Southern Common Market (or MERCOSUR for its initials in Spanish and Portuguese) this may imply strengthening its economic relationship with the EU.
EU-Mercosur Negotiations: Lots of effort. Little action.
Building a strong economic relationship has been a common interest of the EU and the South American bloc, founded in 1991 by Argentina, Brazil, Paraguay and Uruguay, since the late 1990s. However, over the last twenty years both parties have failed to reach an agreement, partly due to a lack of consensus and partly because of the political instability in the MERCOSUR countries. In 1999, both regions committed to strengthening their existing relations to lay a foundation for an Interregional Association. It should cover trade and economic matters, such as market access and liberalization, as well as cooperation and exchange of information and services in regard to institutional building and technical assistance. However, thirty-eight rounds of negotiations later the EU and MERCOSUR are still searching for a common ground on the rules of origin for agricultural goods, government procurement and subsidies, among others.
What you might have missed during last week’s tensions
Although the progress towards an agreement has been very slow and the negotiations were even temporarily interrupted, the common interest of the EU and MERCOSUR to strengthen their economic ties has persisted over the years. In fact, according to last week’s statements of an official of the Foreign Trade Secretary of Brazil the blocs might be closer than ever to sealing an agreement. This has not been the first time that officials claimed to reach the final round of negotiations; however, the current global order might be pushing the EU and MERCOSUR together.
First, if the current trade war affects the real economies of the US and China, their demand for foreign goods will inevitably decrease. This would especially harm the MERCOSUR countries as their economies are heavily dependent on exports of commodities to both the US and China. In the case of Brazil, for instance, 34% of its exports, which are to 59% agricultural or mining and fuel products, go to China and the US.Although the impact of the international dispute on the region is so far limited this dependency raises economic risk for the medium and long-term. Increasing the European demand for MERCOSUR products in the short-run could minimize the damage of this scenario, as it would gradually decrease the dependency on the American and Chinese economy. Making the market more attractive through the commercial advantages of a free trade agreement may be motivating the South American counterparties to move forward with the negotiations.
Second, tariff and non-tariff trade restrictions will gradually make imports coming from China and the US – such as cars, electronics, soybeans, cereals and nuts – more expensive for consumers in the EU and MERCOSUR. Reaching an interregional free trade agreement could be a means to facilitate the total or partial substitution of Chinese and American goods with South American and European products.
Third, the American and Chinese economies have been important targets for foreign investors for decades. However, the increasing tension between the two superpowers, the underlying protectionist rhetoric of the conflict and its possible economic negative effects are discouraging for European and South American investors. As a consequence, it is becoming increasingly more important to search for markets beyond the US and China. This is likely an additional factor helping the process of negotiations as both European and South American investors could profit from each other’s markets. According to the European Commission, for example, 60,500 EU companies could profit from better commercial terms after a free trade agreement.
Fourth, in a time where protectionism and nationalism are gaining increasingly more relevance around the world, Europe is eager to fight for multilateralism in an attempt to redirect global affairs towards international cooperation. Reaching an agreement with MERCOSUR after 20 years of difficult negotiations is therefore now, more than ever, in the political interest of the EU.
Whether the EU and MERCOSUR will achieve their long-standing goals is still uncertain. However, if both blocs were to reach an interregional agreement, the world economy would form its largest free trade pact so far. Most importantly, the EU and the MERCOSUR would set an example of cooperation in a time where it seems easier to fight than to put effort into finding common ground.