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The EU-Mercosur Trade Deal and the Lunacy of Protectionism

Av Federico N. Fernández | 5 juli 2019



The European Union (EU) and Mercosur signed a historical trade deal last Friday. The adjective historical is sometimes misused. However, in this case, it is the most pertinent. The agreement has been negotiated for a staggering twenty years, writes Federico N. Fernández. But why did it take so long?

Indeed, trade talks started on June 28, 1999, with a major relaunch in 2016 after negotiations had been stuck. According to Jean-Claude Junker, the President of the European Commission, “this trade pact makes it the largest trade agreement the EU has ever concluded.”

Mercosur is a regional alliance comprised of Argentina, Brazil, Paraguay, and Uruguay. The combined population of the four nations is 260 million with a GNI per capita of approximately 9,500 euros. This is the first trade deal of this kind signed by the South American nations.

According to Brussels, the pact will eliminate 4 billion euros in annual duties and tariffs for exports coming from the EU. What is more, according to the Financial Times, the EU “estimates that the savings brought about by the tariff reductions would be some four times those delivered by the EU’s recent deal with Japan, and almost seven times those of its agreement with Canada.”

The same article by the FT states one of the most bizarre reasons why the deal took so long:

“For Mercosur, some of the most difficult concessions included slashing tariffs on imported European cars and car parts and opening up its public procurement market; on the EU side, the most controversial issues centred on agriculture.”

So, for South American bureaucrats, politicians, and regulators, it was a major issue that their citizens could have better access to Mercedes Benz or Ferraris. And for their European counterparts, the “problem” were superb Argentine beef and more affordable Brazilian sugar cane. Only through the lenses of the state such a thing could become a deterrent instead of the strongest incentive.

Nonetheless, Emmanuel Macron remained loyal to the agricultural lobby until the very end. The French president made frenetic efforts to get a deal that was not “generous” regarding beef in particular. Incidentally, France is the largest recipient of EU agricultural subsidies, with a grand total of 7,6 billion euros.

In an interesting turn of events, the counteroffensive was mounted by the Spanish Üresident, Pedro Sánchez, who is not known for being in favor of liberalization. He was quickly followed by Angela Merkel (Germany), António Costa (Portugal), Mark Rutte (The Netherlands), and others.

In times when the president of the United States has a dangerous anti-trade rhetoric and there is an escalating tariff war between the United States and China, the Mercosur–EU deal comes as a breath of fresh air. Cecilia Malmstrom, the EU trade commissioner, expressed that this was a “loud, clear message that we believe that trade is a good thing, that it brings peoples and companies together.” It is indeed undeniable that trade agreements have done a lot to increase the volume of global trade and they have been a positive for globalization.

However, trade agreements have a dark side. By their very nature, they are discriminatory. The conditions of relative openness that they bring are only enjoyed by the members. To the outsiders, the situation can be much more complicated. The EU itself is a good example of this. It can be quite open to the inside but it can also be a fortress to the outside. What is more, the enhanced “deep and comprehensive” trade agreements include exotic clauses that have nothing to with reducing import duties.

The ideal free trade agreement should fit on a single page. As the American economist Dan Mitchell says, “My FTA would fit on one page, or a scrap of one page: ‘There shall be no restrictions on commerce between Country A and Country B’.”

In the same way, the ideal trade policy should be unilateral free trade. Countries do not trade. Individuals and companies do, never a country as a whole. The best a nation can do is to leave its citizens and companies alone and let markets work. That would constitute real openness to the world. “Free and extensive trade, unsubsidized, between the peoples of the Earth,” explains Ron Paul, “lowers tensions and makes us all better off. It is, morally and economically, the only proper policy.”

And this policy works. Places like Hong Kong, Switzerland, and Singapore have implemented it. These are, respectively, the eight, seventh, and second richest countries on the planet.

The signing of the EU–Mercosur agreement constitutes, at best, a starting point. Now it has to be ratified by the 28 national parliaments in Europe and four in Latin America. What is more, an unholy alliance between protectionist politicians, agricultural lobbyists, and environmentalists may be forming.

How skeptical the French or Polish parliaments will be remains to be seen. Brazilian diplomats are already warning that the actual implementation “may take years.” The most powerful agricultural lobby group, Copa-Cogeca, has issued a statement in which denounces a “de fact double standard” for Mercosur’s agricultural goods and the threat of “unfair competition.” As we all know, unfair competition is a common false accusation against good old competition.

The environmentalist multinational Greenpeace was also quick to react against the deal. Naomi Ages, the green trade expert, said that “trading more cars for cows is never acceptable when it leads to the destruction of the Amazon, attacks on Indigenous Peoples, and escalating hostility towards civil society.”

Hopefully, Europeans and South Americans will be able soon to access better beef, better wine, and better cars. Not necessarily in that order.

Federico N. Fernández is President of Fundación Internacional Bases (Rosario, Argentina) and a Senior Fellow with the Austrian Economics Center (Vienna, Austria). He is also the president of the Organizing Committee of the International Conference “The Austrian School of Economics in the 21st Century,” which eighth edition will take place in Vienna in November 13th & 14th 2019.

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