David Henig looks at the recent EU-Mercosur trade agreement.
Trade deals traditionally attract exaggerated commentary as to their economic value or cost, which is out of proportion with their usually rather modest impact. Taking an example close to home, there is little evidence that UK agreements trumpeted by ministers of different governments have had any positive impact on exports, but claims by farmers of their imminent destitution due to Australian imports should equally be greeted with extreme scepticism.
This applies equally to the EU-Mercosur trade agreement which has now been approved by member states (despite a handful voting against it). One common misleading statement is to call this a free-trade area of 800 million people, when the reality is a reduction but certainly not elimination of barriers between partners. On the other side are the claims that the EU’s farmers will be devastated by tariff-free quotas for Argentina, Brazil, Uruguay, and Paraguay that are obviously exaggerated given these imports only amount to somewhere between 1% and 2% of domestic consumption of beef and poultry.
Neither is an agreement first discussed in the late 1990s an obviously immediate retort to President Trump’s rejection of global trade rules. Final ratification, assuming European Parliament support, will at least remove a long-standing embarrassment for the institutions of being unable to conclude talks. A marginal potential economic benefit, of up to 0.1% of EU GDP according to the formal impact assessment, will also be welcome, but none of this is a game-changer.
Looking at the wider story around trade agreements is often instructive, not least as they now cover such a wide range of contentious subject areas from climate change to food rules. Doing this for EU-Mercosur turns an apparently positive outcome into something a lot more worrying. Most notable is the breakdown of EU unity at just the moment when major global changes require clear direction, with the struggle to separate economic security from simple protectionism following closely behind. This is a group of member states deeply uncertain of their collective direction.
Mercosur is the first EU trade agreement to be approved by only a majority of member states. This is a core Commission competence, in which member state compromises are expected for the greater good. That a centrist French government no longer feels able to support this process is a potentially fatal blow to the unity that President Macron often proclaims as necessary at this moment. One can only wonder what damage could be done by a far-right successor following this precedent.
This comes on top of structural challenges to the EU trade agenda. Access to its lucrative single market used to be the reason why the EU was able to drive a hard bargain in agreements with third countries. While still attractive, this is being devalued by measures which are not covered in trade agreements such as the Carbon Border Adjustment Mechanism and reduction in tariff free steel quotas. At the same time, the EU is increasingly interested in securing access to critical raw materials. Asking for more while offering less is one of the reasons EU-Australia trade talks fell through, and has been a constant risk in tweaking the deal with Mercosur, for example around climate change provisions.
French demands for so-called ‘mirror clauses’ in the Mercosur trade agreement or more widely would add to the problems. Such suggestions that food imports should meet domestic regulations in terms of how they are produced, for example with regard to pesticide usage or animal welfare, is not new or definitively against world trade rules, but it would be particularly complex to implement in any kind of reasonable manner, leading most observers to believe this is simply a protectionism under a nicer name. There is an underlying message from this and other recent measures, such as those relating to product safety, that the EU is reluctant to admit that global competitors are acting fairly.
Seeing EU-Mercosur as a rebuttal to Trumpian politics is thus premature at best, and some in the bloc seem partial to their own easing of rules to gain benefits. There is, though, an obvious and unresolved tension in the EU’s approach to economic security between a handful of countries seeking a fortress Europe approach, in which traditional industries like agriculture and manufacturing are prioritised, and the majority favouring trade openness even while some protections are offered. Compromise in the case of EU-Mercosur involved promises of extra spending on farming, which inevitably means less elsewhere such as on the net-zero transition or competing in advanced manufacturing.
December’s joint communication on strengthening economic security from the Commission and High Representative failed to deal with this underlying split between member states. That opponents of Mercosur proclaim that they will fight to the very end may make for good politics, but it is the exact opposite of the values upon which the EU was founded. Difficulties even extend to the UK relationship, with many member states and even Commission negotiators openly saying that the issue of UK access to the SAFE programme was mishandled under French pressure.
Trade rules have been breaking down for some time in the face of bipartisan US hostility, global worries about the impact of open economies, and widespread suspicion of China. Europe and the US will no longer set the rules, not least with the rise of Asian economies. Handling this change would be difficult enough for the EU even with a united group of countries, but splits between major players makes it nearly impossible. The battle for Mercosur may be won this year, this though should not cover up how much the EU is struggling for direction in adjusting to a new world.
By David Henig, Director of the UK Trade Policy Project at ECIPE.