Australia & New Zealand, Latest news, Mercosur, Perspectives

Perspectives: Can the EU really finalise deals with Australia and Mercosur?

The recent Brazilian election has renewed hopes that the EU-Mercosur free trade agreement can be ratified in the next twelve months. EU negotiators hope to complete free trade agreement negotiations with Australia within the same timeframe. Rising protectionism within the EU may however dash those hopes.

In terms of both numbers and range of countries covered, the EU’s free trade agreement programme has been an unquestioned success.

European Commission figures show there are currently 42 trade agreements with 74 partner countries which supported over €1 trillion in exports in 2021 in place.  Much of the world is covered by EU preferential trade agreements, be they in force or currently being negotiated. Russia is for obvious reasons the main exception to this.

Such success does beg the question as to how many more agreements are possible.

For political reasons it is hard to envisage substantial agreements ever being implemented with China or the United States in the foreseeable future.

Negotiations have restarted with an Indian government newly enthused about FTAs, but so far only shallow ones which may turn out insufficient in basic market access to satisfy EU trade policy stakeholders.

Free trade agreements with the Mercosur bloc and Australia would thus seem to be the most obvious candidates for progress in the next 12 months. They are at different stages, the former awaiting ratification after an agreement in principle was reached in 2019, while negotiations for the latter are entering their endgame.

There are however significant commonalities between Mercosur and Australia. In particular both are major agricultural exporters where recent elections have delivered governments with greater interest in climate change mitigation.

The politics in Australia and Brazil may never be better to make progress on these FTAs. This is a key moment for EU trade policy, particularly for what it would mean if these agreements do not materialise.  Failure to make progress on both will suggest the free trade agreement agenda is virtually finished.

Reasons for optimism on Mercosur and Australia

Life for EU exporters is becoming more difficult. After the Covid-19 downturn came inflation, and now growing protectionism in particular in China and the US.

The transition to a low-carbon economy presents a range of other challenges for key exporting sectors. For the automotive sector it means a move from an area where the EU has competitive advantage, i.e. in fossil-fuel powered cars, into electric vehicles, where China has a much stronger position.

Various unilateral or ‘autonomous’ legislative measures such as the coming corporate sustainability due diligence legislation and carbon border adjustment stand to complicate and probably increase the cost of operating international supply chains.

Enhanced market access to a substantial number of relatively wealthy consumers should therefore be of particular interest to European business. In particular Australia already has FTAs with other key exporters including the UK and China, which disadvantages EU exports, while Mercosur markets are notoriously protected.

Such a positive agenda is likely to be pursued by the upcoming Council presidencies of Sweden and Spain, and both are likely to prioritise progressing these FTAs.

Agriculture not the only obstacle

But there are also strong reasons to doubt that these agreements can see the light.

There has long been scepticism about the Mercosur deal coming to fruition from EU trade watchers who see the difficulty of making deals with substantial agricultural producers like Brazil. Some years ago this author was told by French officials that they could not accept both Mercosur and another FTA with a major agricultural exporter – since the FTA with New Zealand who is also a major agriculture exporter has been completed.

Many EU food producers remain staunchly opposed to the Mercosur FTA as it stands. Meanwhile Australia will surely need at the very least a far more generous sheepmeat quota than that given to New Zealand in that EU FTA, given that their historic WTO country-specific tariff quota for the whole EU (pre-Brexit) was less than a tenth the size of their neighbour.

Opponents of FTAs will put forward food security – indeed broader economic security – as an argument against these FTAs, saying that EU production must not be further put at risk by further FTAs. Economic security does not have to be protectionist, but the argument can easily be used in that way.

Industrial producers and services exporters may not come to the rescue by making a strong case for the FTAs. Encouraged by internal market commissioner Thierry Breton, there are signs of businesses in these areas being more concerned about encouraging EU protectionism than opening other markets.

Brazil’s Lula may also seek changes to the Mercosur FTA on the basis of protecting industry there, which would complicate matters forward.

The Mercosur and Australia FTAs can therefore be considered as hanging in the balance.

The climate change debate as decisive factor

Australian prime minister Anthony Albanese and Brazilian President-elect Luiz Inácio Lula da Silva are both significantly more committed to environmental protection than their predecessors.

This should mean that Australia is prepared to sign up to the EU’s new model ‘sustainable development’ chapter, just as Brazil can agree an expected extra ‘instrument’ on sustainability appended to the Mercosur text.

One could make a strong case that completing Mercosur and Australia FTAs with such provisions would be to show the EU’s global standard setting ability in the best way possible. This would vindicate the method of leveraging the attractiveness of its market to drive and maintain positive change in others.

Given the dominance of the autonomous trade agenda in Brussels at the moment, it is however no longer obvious that the EU wishes to drive positive change through the carrot rather than the stick of imposing extra costs on imports.

In particular the European Parliament has as a whole been seen to be pushing for harder autonomous measures, pursuing less openness.

Successful progression of the Mercosur and Australia FTAs may thus come down to enough willingness within the EU institutions to see them happen at all, rather than any negotiation with the countries concerned. Notwithstanding the market access and climate change opportunities seen and currently put forward by proponents, it seems the protectionists may well have the last word.

Having waited so long for ‘acceptable’ Brazilian and Australian governments, it would be a major disappointment if the EU collectively decided this was not enough.  It would also be the end of any hopes of further trade liberalisation.

 

 David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

 

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