House of Commons - Trade and Industry

Select Committee on Trade and Industry Seventh Report

6 MERCOSUR'S FUTURE, TRADE RELATIONS WITH THE EU, & THE DOHA ROUND

178. Mercosur is widely thought to be modelled on the European Union, yet although some see it as an embryonic 'EU in South America' its level of integration falls some way short of that of the EU. Even within the Mercosur countries themselves, we noted that there was a considerable degree of scepticism about the future of the organisation. Mercosur faces significant challenges as its development has been hindered by national interests, internal asymmetries, and disputes between members which have even been taken to the WTO. The Argentine and Brazilian economic crises, subsequent devaluations and trade disputes have been politically problematic for Mercosur.

179. For example, there is a continuing dispute between Argentina and Uruguay over a $1.7 billion paper mill being built by a Finnish company—"the largest ever private investment in the country",[441] equivalent to 10% of its GDP[442]—on the Uruguay River, which forms the border between the two countries. Argentina claims that it will be environmentally damaging and contravenes a bilateral treaty. The associated blockades of bridges over the river are thought to have cost Uruguay $800 million in tourism and trade, equivalent to 4% of Uruguay's GDP.[443] This dispute has proved intractable, with Argentina taking Uruguay to the International Court of Justice in The Hague, and Uruguay going to the Court of Mercosur claiming that the blockades contravene the bloc's free movement of goods principle.[444] While inter-bloc trade disputes are not unique to Mercosur (other examples include the lumber dispute cases between Canada and the US through both NAFTA and the WTO) some have seen Brazil's apparent reluctance to mediate over the pulp mill issue as an indictment of Mercosur's ability to deal with disputes.

180. The British Chambers of Commerce in Brazil suggested that each of the member countries should be treated separately because "Mercosur does not act together".[445] The UN has also highlighted the lack of macroeconomic co-ordination within Mercosur, despite agreements in 2000 to do this and adopt deficit, debt and inflation targets, saying that "the development of sufficient incentives for compliance with the declared goals proved to be difficult, and, following the Argentine crisis in 2001, this endeavour came to an end."[446]

181. The UK Government is supportive of regional integration, but the Trade Minister emphasised that the development of Mercosur "will be at their pace"[447] and that it was "not for us to intervene in any way".[448] The CBI said that as an example of increasing regionalisation Mercosur "certainly is very, very important, and it is important for business because it reduces the barriers to trade within a region and to investment within that region, and that thereby has an escalating effect in terms of the investment that goes into that region."[449] However, there were "issues currently with the degree of integration", particularly regarding investment and services.[450]

182. UKTI noted that, while the customs union should mean access to other countries "in practice, this opportunity seems to be viewed more as a peripheral benefit than either a determining factor in investment decisions or an attractant to the Brazilian market in its own right."[451] UKTI's understanding was that "companies target Brazil for the size and sophistication of the domestic market and not primarily as a gateway to wider Mercosur. […] UK companies seeking to adequately service the Brazilian market are unlikely to have the capacity to simultaneously seek to penetrate the rest of Mercosur."[452] UKTI attributed this to a number of factors including the lack of a genuine Mercosur single market,[453] and said it was "perceived as unlikely that UK companies (with an interest in Brazil) will decide to operate from another country—instead of entering the Brazilian market directly."[454]

IMPERFECT CUSTOMS UNION & EXTERNAL TARIFFS

183. Mercosur has been called an 'imperfect customs union', with estimates that the common external tariff covers around 80% of products, with a range of exceptions including for sensitive products.[455] There are varying estimates of the exact proportion of total trade within Mercosur that is free of tariffs, but UKTI suggested that this was over 95%.[456] In line with their relative economic situation, both Paraguay and Uruguay have special arrangements under the transition arrangements towards the common external tariff (CET).

184. Despite past agreements to consolidate the CET and remove unilateral restrictions on free trade between them, such imperfections persist. The CBI told us that the CET "still contains many exceptions and certain restrictions remain available to Mercosur member countries. Meanwhile, trade in services, public procurement, tax and investment policies remained largely untouched".[457] It called for further improvements and harmonized customs rules throughout Mercosur countries,[458] as well as seeing benefits in harmonisation across the bloc of anti-dumping regulations, which "as well as a uniform competition policy, would also benefit Mercosur by enhancing regional integration".[459] The CBI had heard reports of additional duties being levied beyond standard import tariffs, with levels varying by country.[460]

INTERNAL ASYMMETRIES

185. Because of the asymmetries between the two smaller counties in Mercosur and Brazil and Argentina (and now Venezuela), Uruguay and Paraguay continue to argue for special treatment within the bloc. In 2004 Mercosur members talked about establishing a structural convergence fund to help the bloc's smaller members.[461] However, progress has been slow, and Uruguay and Paraguay continue to be dissatisfied with their access to Argentine and Brazilian markets. Uruguay has rising trade deficits with Mercosur countries.[462] A 2004 Economist article called Mercosur "an odd quartet" and drew some comparisons with the EU:

463

UKTI told us that it was "quite clear that Argentina and Brazil do not take seriously the economic needs of their smaller neighbours, who entirely lack the political or economic clout to impose them."[464]

186. Uruguay in particular has been actively considering negotiating a bilateral free trade agreement (FTA) with the US, which, without the involvement of its Mercosur partners, would violate the Mercosur common external tariff and so undermine the customs union, and potentially lead to its withdrawal from the bloc,[465] or its becoming an associate member like Chile. In something of a compromise Uruguay reached a Trade and Investment Framework Agreement (TIFA) with the US in January 2007. This is in some ways similar to the UK-Brazil JETCO,[466] but has been seen by commentators as a stepping stone to a full FTA,[467] with signs since that Uruguay may yet intend to pursue this course. It has recently been reported that the Brazilian Minister of Development, Industry and Foreign Trade has said that although Brazil would not consider a bilateral FTA with the US, a Mercosur—US FTA could be considered.[468]

187. The issue has prompted expressions from the bloc's larger members of greater support for its smaller members. There have been proposals for a development fund, to which Brazil would contribute the lion's share, and at the January 2007 Rio summit Brazil's President Lula da Silva said that national interests would need to be put aside to tackle inequalities within Mercosur, and specifically that Brazil and Argentina should look beyond their own interests for the sake of the bloc.[469] While no specific actions were taken at the time, in February 2007 Brazilian and Uruguayan ministers reached five bilateral deals on promoting trade and investment, cooperation over developing bio-fuels, and a new permanent commission on energy and mining.

A 'SOUTH AMERICAN COMMUNITY OF NATIONS'?

188. The proposed Free Trade Area of the Americas has foundered amid opposition from Mercosur countries and Venezuela in particular. However, there have been attempts to amalgamate Mercosur and the Andean Community, South America's two blocs, into a single Community of Nations.[470] The members of both blocs, along with Chile and Caribbean Community members Surinam and Guyana, committed themselves to advancing this in December 2004.[471] However, little progress has been made, with former Andean Community members Venezuela and Bolivia looking to Mercosur membership. The second CSN summit was held in Cochabamba, Bolivia in December 2006, and agreed to set up a group to study the possibility of a continent-wide union and a South American parliament.[472]

EU-Mercosur relations

189. Mercosur signed its first free trade agreement with Chile in June 1996, and has since reached free trade agreements covering most of South America. It is also nearing an interregional free trade agreement with the Gulf Cooperative Council countries (Saudi Arabia, Bahrain, Qatar, the United Arab Emirates, Kuwait and Oman) which is expected to cover goods, services and investment.[473]

190. The EU is Mercosur's largest partner for trade and investment, taking a third of Mercosur trade, compared with a quarter taken by the US,[474] while Mercosur is the EU's 9^th largest trade partner, with over half of exports to the EU being agricultural products. Since November 1999 the EU and Mercosur have been negotiating an interregional Association Agreement on a bloc to bloc basis. The trade talks include liberalisation of trade in goods and services; improved access to government procurement; a better investment climate; IPR protection; co-operation on competition policy; agreements on sanitary and phytosanitary measures, wines and spirits, trade defence instruments disciplines, and a Business Facilitation Action Plan; and a binding dispute settlement system.[475] While the political and co-operation parts were nearly concluded, difficulties on the trade chapters caused the talks to be suspended in October 2004.[476] A September 2005 ministerial meeting saw no progress, and both sides agreed to focus on multilateral Doha Round trade talks at the WTO. Sporadic technical meetings continue, including a meeting in Rio in November 2006.[477]

191. The European Commission's new trade strategy outlined in October 2006 specifically proposed the reinvigoration of EU-Mercosur negotiations, alongside completing negotiations with the Gulf Co-operative Council (GCC) countries, and more controversially the opening of new negotiations with ASEAN, South Korea and India. Among these, completing talks with Mercosur and initiating talks with ASEAN and South Korea were protities.

192. In April 2007, the Council of Ministers agreed negotiating mandates for the European Commission for the new free trade talks with India, ASEAN and South Korea, with negotiations expected to start within months.[478] The same meeting of the General Affairs and External Relations Council also agreed Commission mandates for talks both with the Central American countries and with the Andean Community—with which the EU is the second largest trade partner[479]—with a view to concluding association agreements incorporating a free trade agreement, similar to the prospective arrangement with Mercosur.[480] The bilateral and regional approach is regarded with scepticism by some, as undermining the multilateral rules-based WTO system, or at least as a second-best to a multilateral trade deal, although the Council conclusions emphasised the importance of the Doha Round and the WTO-compatibility of the proposed new agreements.[481] However, it is beyond the scope of this inquiry to examine this issue in greater detail.

193. Any EU-Mercosur agreement is likely to be similar to those already reached between the EU and South Africa, Chile and Mexico. The trade relationship would be asymmetric in favour of Mercosur, within WTO rules on trade agreements. In the meantime, exports from all Mercosur countries are eligible for preferential access to the EU market through its Generalised System of Preferences, although in some cases, such as Brazil, exports of some products to the EU are not eligible if they have been 'graduated' from the preference system.[482] The real income gains from a full FTA with Mercosur—not including Venezuela—have been estimated at 2% of GDP for Mercosur and 0.1% of GDP for the pre-2007 enlargement EU25,[483] with these income gains coming mostly from tariff reductions and also from trade facilitation.[484] A 2004 Mercosur—EU Business Forum simulation suggested that the cost of no agreement would be $3.7 billion a year for goods trade, or $5 billion a year with services and investment included.[485]

194. UKTI said that an inter-regional agreement would be "unlikely to deliver the same level of economic benefits [to the UK] as an FTA with another country or regional bloc due to the relatively low level of UK trade with the region", noting that other EU countries with greater exports were likely to benefit more.[486] However, it said that importers were "likely to benefit greatly, particularly the food and drink manufacturing industry, which would benefit from a reduction of the high tariffs applied by the EU to agricultural and food product exports from Mercosur", noting that EU tariffs for these goods ranged from 19% to 75%, and that, given that the UK is the fifth largest food and drink exporter, this had the potential to "boost the UK's export performance in other markets […] as well as supporting the manufacturing sector".[487] The CBI generally agreed with the recommendations of the Mercosur—EU Business Forum that an agreement should address "non-tariff barriers and trade facilitation issues, balanced rules of origin and tariff liberalisation for the bulk of trade within ten years."[488] The CBI stated that UK businesses had an interest in lowering the price of imports of commodities from Brazil through lower EU agricultural tariffs,[489] although, having received no evidence from UK agricultural interests on this point, we cannot reach a definitive conclusion on the balance of advantage. The CBI also noted that the EU was seeking to guarantee free movement of its goods within the Mercosur bloc.[490]

195. As part of the new trade strategy, the European Commission outlined its new market access strategy in April 2006 which proposes "market access teams" in key markets "to spot potential barriers before they appear and to tackle existing obstacles to trade", including non-tariff barriers and problems over intellectual property rights. Although not explicit, the focus is thought to be on China, Russia and India, but reportedly Brazil is also to feature, along with Norway, Switzerland and the US.[491]

The importance of the Doha Round

196. We previously examined the EU's negotiating position for the Hong Kong WTO ministerial meeting in December 2005, and this Report gives us an opportunity to examine progress in the multilateral Doha Round, formally the Doha Development Agenda (DDA). The Round covers a broad range of issues, but in terms of trade with the Mercosur countries the EU's aims are for Brazilian and Argentine tariffs on industrial products to be lowered, further and deeper liberalisation of trade in services, and advances in trade facilitation and customs processes, as well as building a more solid framework for regional trade agreements, of which EU—Mercosur would be one example.

197. The European Commission told us that the slow progress in the Mercosur talks was in part due to challenges facing the bloc and "parallelism" with the Doha Round.[492] The regional talks were suspended pending an outcome to the Doha Round "since it was envisaged that any Free Trade Agreement would have to reflect the final deal and liberalise further."[493] There appears to be general agreement among witnesses that a deal in the WTO should be the overwhelming priority,[494] even the "jewel in the crown"[495] according to the CBI, with acceptance that the EU—Mercosur talks are unlikely to see "significant advances" while the Doha Round remains unresolved.[496] UKTI also said: "We now await the outcome of the DDA before it is possible to make any further substantive progress."[497]

198. Agriculture is the key to both sets of negotiations. The Doha Round is an important way of addressing concerns over agriculture, especially as regards subsidies. The CBI suggested that as "some of the most gritty issues within an EU—Mercosur negotiation", including agricultural subsidies for example, could not be resolved multilaterally, "it is unlikely that they will be solved at a regional or bilateral level."[498] It said that the two sets of talks were "intimately tied", and that the EU had been "unwilling to offer Mercosur greater market access until the DDA level of liberalisation has been ascertained."[499]

199. In Doha it is broadly recognised that the 'advanced' developing countries—Brazil and India in particular, but to an extent countries such as Argentina—would be willing to liberalise trade in industrial products and services subject to concessions on agricultural tariffs and subsidies from the EU and the US. UKTI told us that Brazil was "probably one of the more willing to be flexible if the right deal on agriculture is on the table."[500]

200. Brazil has an important role to play in completing the Doha Round. It is a potential beneficiary of a successful outcome due to its comparative advantage in agriculture. As the Trade Minister noted, Brazil has the "crucial" leadership and spokesperson role of the G20 group of developing countries at the WTO,[501] which also includes fellow Mercosur members Argentina, Paraguay, Uruguay and Venezuela, as well as India and China. Brazil is also part of the G4, or 'New Quad', alongside the EU, the US and India, and the G6—the G4 plus Japan and Australia—which are both important in attempts to resolve the key issues in the Doha Round. Brazil has said that it will be the first non-developed country to grant exports from the group of 32 Least Developed Countries in the WTO duty- and quota-free market access, expected in the first half of 2007.[502] However, Brazil and the G20 will not resolve the Doha Round alone, which requires concessions from all parties, including the US, the EU and other WTO groupings of which Brazil is not a part. The latter include the G33 (though this does include G20 members China, India and Venezuela), and the G90, which is made up of the African, Caribbean and Pacific Group (ACP), the African Union, and the Least-Developed Countries (LDC) group.

201. The WTO rules on regional trade agreements (RTAs) are part of the DDA, and a successful conclusion is likely to bring greater clarity as to what is permissible and potentially to include specific 'special and differential treatment' for developing countries, such as longer transition periods or reduced product coverage, in so-called 'North-South' trade agreements of which EU-Mercosur would be an example. While the CBI saw "pros and cons" of RTAs, they said that "when we look at a market like Mercosur we can see advantages so long as the negotiations build on the WTO process, complement that liberalisation and, in particular, expand into areas such as enforcement of intellectual property rights where the WTO is not currently involved."[503]

202. We are broadly supportive of an EU-Mercosur agreement, which should be consistent with trade rules and beneficial to both parties, and which unlike the Doha Round offers an opportunity to address the many non-tariff barriers to trade and to liberalise services further, both of which are important for UK businesses. We note the proposals within the new Commission trade strategy to pursue trade agreements with a number of partners, including some that we have previously carried out inquiries on: India and ASEAN. It is important that the existing and proposed EU negotiations should not in any way detract from Doha, but seek to build on a successful multilateral outcome which should include strengthening the WTO rules on preferential regional trade agreements.

203. However, there remains considerable uncertainty regarding the fate of the Doha Round. The US presidential fast-track negotiating authority—important for the US to remain a credible negotiator in the WTO talks—has effectively expired, and there is continuing uncertainty over whether Congress will renew it in the immediate future. Ultimately, should the opportunity of Doha be lost, our major trading partners are likely to pursue regional and bilateral preferential trade agreements with renewed vigour, which would encourage the EU to accelerate its regional and bilateral initiatives. If Doha fails, then completion of the EU-Mercosur talks, and bilateral initiatives such as the JETCOs set up between the UK and Brazil, India and China are likely to take on even greater significance. As the Trade Minister noted: "The service sector is one of the areas where I believe we can make major gains for the UK, but the problem that remains is the removal of barriers, whether or not we have Doha."[504]

441 'Finnish Botnia Plant To Start Operating Aug 2007 - Uruguayan Minister', Latin America News Digest (via Factiva), 23 March 2007, Back

442 'Court paves way for pulp mills in Uruguay', Financial Times, 14 July 2006 Back

443 'Mill dispute with Argentina costs Uruguay more than $800m', Financial Times, 6 February 2007 Back

444 'Finnish Botnia Plant To Start Operating Aug 2007 - Uruguayan Minister', Latin America News Digest (via Factiva), 23 March 2007 Back

445 Appendix 6 (British Chamber of Commerce in Brazil), para 1.3 Back

446 United Nations, World Economic Situation and Prospects 2007, January 2007, pp79-80: http://www.un.org/esa/policy/wess/wesp2007files/wesp2007.pdf Back

447 Q 151 Back

448 Q 152 Back

449 Q 137 Back

450 Ibid. Back

451 Appendix 26 (UKTI), para 9 Back

452 Ibid., para 10 Back