Tax & Accounting Blog

Mercosur and EU FTA

Blog, Global Trade, ONESOURCE July 22, 2016

Twelve years after the first discussions about a possible Free Trade Agreement between MERCOSUR[1] and the European Union, members of the two blocs met in Brussels on 12 May 2016 and exchanged a list of commercial offers between them. This exchange, which occurred for the first time since 2004, included almost all agricultural goods.  These items were important on the export agenda of Mercosur, though items such as meat and ethanol were left out of the negotiations.

The twelve years’ delays in negotiations are due to several factors.  For example, there were repeated attempts to postpone this decision by some countries in the euro zone.  France, Ireland and Hungary, with discreet support of Lithuania, Poland and Estonia at a meeting of the European Commission in November 2015, demonstrated against the resuming of negotiations with Mercosur. Representatives of the agricultural and industrial sectors of these countries objected strongly that genetically modified foods could not enter the country and that the restrictions in the industrial and services industries would remain high.

Another reason for the reluctance in arriving to a positive decision was supported  by the future TTIP Agreement  (Transatlantic Trade and Investment Partnership), the long-awaited agreement between the European Union and the United States, which is a high priority in the European Commission’s negotiations flows.  However, as expected, the influence of countries such as Germany and the United Kingdom encouraged the resumption of the negotiations, so with that, the exchange of the list of offers ensued.

As noted, expectations for some of the main products of the Mercosur export agenda were not included. The agricultural protectionism imposed by a strong “lobby” led by France and supported by Ireland, Hungary and others prevailed, with the European bloc eliminating free access for two of the main products (meat and ethanol).  Let’s take a further look at these two products and the significance to Mercosur.

Exports of meat from Brazil (and Mercosur)

Meat is one of the main products in Brazilian exports, and dependent upon the market, the status for this product will be maintained. According to the United Nations Food and Agriculture Organization (FAO), it is estimated that by 2024 the global consumption of meat (beef, pork and chicken) will grow 15%Brazil already accounts for 7.7% of the agricultural global market and could reach 10% of this share by 2018.

In order to demonstrate this growth, according to the Brazilian Refrigerators Association (Abrafigo) and the Ministry of Development Industry and Foreign Trade (MDIC) data, exports of meat in February of 2016 increased 25% compared to the same period of 2015.  This growth represents 98,149 tons in 2015 to 123,129 tons in 2016, also representing revenue of $477.2 million and an 11% increase for the same time comparison.

Among the 5 largest importers of Brazilian meat, there was a significant growth in two months of imports from two of members from the euro zone – Germany and the United Kingdom.

  • Russia: a growth of 13.2%, with an estimate of 24 million tons
  • China: a growth of 56.1%, with an estimate of 12 tons
  • Iran: a growth of 80.8%, with an estimate of 12 tons
  • Germany: a growth of 42.9%, with an estimate of 2 tons
  • United Kingdom: a growth of 17%, with an estimate of 5 tons

This is not surprising in that these two countries provided the most influence on the re negotiations.

Because of the imposed restrictions by the European Union for meat from Mercosur, it is clear this will negatively impact trade flows not only from Brazil, but also countries such as Uruguay and Argentina.

Foreign Trade Experts from Uruguay did not hesitate to qualify this development as “bad news”.  The removal of meat being allowed tariff reductions for European countries has also lead to many companies of this sector speaking negatively about waiting for more than ten years for a FTA with Europe and then being faced with the removal of meat in the agreement as being hard to take.

The Uruguayan government had already quantified the benefits of a possible opening of Europe to the entry of meat within the FTA. Assuming that the tariffs reduce by 50%, this would get $55 million more in these negotiations and in the case of achieving a doubling of the volume of the quota also would increase $100 million a year” according to conclusions of a study entitled “Posibles implicaciones para el sector cárnico de un acuerdo comercial entre el Mercosur y la Unión Europea”, published by the Universidad de la República y el Instituto Nacional de Carnes (Inac).

In Argentina, the reactions were also quite negative for the sector, since the Argentine meat is very important for the export agenda of the country.

The President of the Consortium of Export of Argentine Meat, Mario Ravetino, stated that the private sector of Mercosur has proposed that the negotiations would include a quota of volume to be imported by EU without customs duty of 300 tons, which would be distributed among the four MERCOSUR countries (Brazil, Argentina, Paraguay and Uruguay) and that it would add to existing quotas, such as the Hilton quota and the quota 481[2].

However, the European bloc does not offer even a volume or time to discuss the access of meat.  In the view of European experts, in a statement, the president of Copa-Cogeca, Thomas Magnusson, said that a free trade agreement with Mercosur would have an impact “catastrophic” for the agricultural sector of the European Union, especially for beef.  He expressed regret that the European Union has advanced with the exchange of offers despite the warnings of 20 ministers of the bloc. According to him, the European agricultural sector can lose up to € 7 billion, of which Mercosur is already the major exporter of agricultural commodities to the continent supplying 86% of beef imports and 70% of chicken.

Positive ways to leverage business

The incompatibilities of interests and the uncertainties are assuredly expected in the flow of the negotiations.  Even without these key commodities not included in the negotiations, the FTA is still important to Mercosur.

There are more than 9,000 tariff items in negotiations between both blocs.  The resumption in negotiations on the EU-Mercosur Free Trade Agreement should be welcomed with a lot of positivity by various other sectors of the national economy and Mercosur. The European Union is the main partner of the Mercosur market with 20% of global trade, and involves significant geographic, political and economic strategies; so continuing to work through the agenda is crucial to this FTA.

Great opportunities x Grand Challenges

In fact, the negotiations with the European Union will generate numerous opportunities for member countries of Mercosur to understand how international negotiations and the framework of new international agreements with FTAs are handled.

Such opportunities will generate many challenges for everyone.  In particular the pressure of Europe in all sectors will require adjustments to the current rules in several areas (i.e. intellectual property, origin, government procurement, labor laws, environment, and many others negotiated in current international agreements).

Origin Verification – Are we ready?

When it comes to the rules set out in the agreements the European Union is relentless in requiring correctness when establishing the rules of origin. In fact, there are many requests for “Origin Verification”[3] from the governing authorities.

Currently, Brazilian exporters do not suffer from this constant pressure for origin verification by countries that Brazil has FTAs with. However with the requirements imposed by the European Union, this poses to be a hugely different reality for Brazil.

For the companies located in countries that currently have an FTA with Europe, they are already practiced in responding about the origin of goods that access the market with reduced or eliminated tariff.

Is Brazil prepared to receive the auditors of these countries to verify the information of our operations? Are the declarations of origin of our materials properly managed, so that we can actually prove that our products are eligible?  Do the documents related to the operation, such as Certificate of Origin, demonstrate where goods are managed and stored, therefore meeting the Rules of Origin? Does the company system calculate correctly using methodologies of existing agreements such as fungible materials, indirect and intermediate materials, or even De Minimis (tolerance)?

Are we prepared for this FTA and the requirements to comply?

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[1] Mercosur or Mercosul is a sub-regional bloc. Its full members are Argentina, Brazil, Paraguay, Uruguay and Venezuela. Its associate countries are Bolivia, Chile, Peru, Colombia, Ecuador and Suriname.

[2] Quota for high quality beef for animals corralled in the last 100 days or feedlot; established by the European Union.

[3] The process in which the authority of the importing Party requests information about the origin of the goods to the competent authority for the issuance of the Certificate of Origin (Indirect Origin Verification) or when the authority of the importing Party requests information about the origin of the goods to the exporter directly (Direct Origin Verification).