Posted by on July 10, 2019 7:52 am
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By Federico N. Fernández, President of Fundación Internacional Bases, Senior Fellow with the Austrian Economics Center and TES Contributor



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 most pertinent. Indeed, the agreement has been negotiated for a staggering twenty years. Trade talks started June 28, 1999; the relaunch of the negotiations in 2016 were critical for its conclusion.



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 South Americans.



In 2018 EU exports to Mercosur were valued in 45 billion euros while imports rose to 42.6 billion.



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.”



Protectionist lunacy



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 “problems” were superb Argentine beef and more affordable Brazilian sugar cane. Only when viewed through the lenses of the state could such a thing be seen as a deterrent instead of the strongest incentive.



Nonetheless, Emmanuel Macron remained loyal to the European 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 to secure the deal was mounted by the Spanish president, Mr. Pedro Sánchez, who is not usually known for being in favor of liberalization. He was quickly followed by Angela Merkel (Germany), António Costa (Portugal), Mark Rutte (The Netherlands), and others.



A breath of fresh air, but…



At a time when the president of the United States employs dangerous anti-trade rhetoric amid 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 that 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 they bring are only enjoyed by the members. To outsiders, the situation can be much more closed off and complicated. The EU itself is a good example of this. It can be quite open to the inside but it can also be an impregnable 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 Mitchel 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 8th, 7th, and 2nd richest countries on the planet.



A long way to go



The signing of the EU-Mercosur agreement constitutes, at best, a starting point. Now it has to be ratified by the 28 European parliaments and four in Latin America.



What is more, there are storm clouds ahead: an unholy alliance between protectionist politicians, agricultural lobbyists, and environmentalists may be forming. How skeptical the French or Polish parliaments 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 facto double standard” for Mercosur’s agricultural goods and the threat of “unfair competition.” All too often, “unfair competition” is code for plain old (perfectly fair) competition.



The environmentalist multinational advocacy group 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.” Why a free trade deal would necessarily lead to any of these ills, in areas which are matters of internal domestic policy, remains unclear.



Hopefully, policymakers and public will ignore these red herrings so Europeans and South Americans can soon gain access to better beef, better wine, and better cars (though maybe 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.