THE POTENTIAL IMPACT OF THE EU-MERCOSUR FREE TRADE AGREEMENT ON MERCOSUR AND BRAZIL’S TRADE SCHEME
Student: PABLO LIZARRETA
Mastertrack: International Trade and Investment Law
Supervisor: Geraldo Vidigal
TABLE OF ABBREVIATIONS
ABNT: Brazilian Association of Technical Regulations
AD: Anti-Dumping
AMN: MERCOSUR Association of Normalization (Standardization)
ANVISA: Brazilian Health Regulatory Agency
BNDES: Brazilian Development Bank
BRICS: Brazil, Russia, India, China and South-Africa (term used to describe the most promising emerging economies worldwide)
BTA: Bilateral Trade Agreement
CAMEX: Brazilian Executive Secretariat of the Foreign Trade Board
CAPs: Conformity Assessment Procedures
CBN: Brazilian Normalization Committee
CBT: Brazilian TBT Committee
CEN: European Committee for Standardization
CENELEC: European Committee for Electrotechnical Standardization
CETA: Comprehensive Economic and Trade Agreement between the EU and Canada
CMC: MERCOSUR Common Market Council
CONFAC: Brazilian National Committee on Trade Facilitation
CONMETRO: Brazilian Council of Metrology, Standardization and Industrial Q uality
CU: Customs Union
DISBT: Brazilian Division for Overcoming Trade Barriers
EU: European Union
FDI: Foreign Direct Investment
FTA: Free Trade Agreement
FOCEM: Fund for Structural Convergence of MERCOSUR
GATT: General Agreement on Tariffs and Trade
GATS: General Agreement on Trade in Services
GDP: Gross Domestic Product
GMC: MERCOSUR Common Market Group
GPA: WTO Plurilateral Agreement on Government Procurement
GTFAC: Brazilian Technical Group on Trade Facilitation
GVC: Global Value Chain
HS: Harmonized System
IAF: International Accreditation Forum
ICCR: International Cooperation in Cosmetics Regulation
IFCA: Interregional Framework Cooperation Agreement
ILA: WTO Import Licensing Agreement
ILAC: International Laboratory Accreditation Cooperation
INMETRO: Brazilian Institute of Metrology, Quality and Technology
IPI: Brazilian Tax over industrialized products
ISO: International Organization for Standardization
LAIA: Latin American Integration Association
LCR: Local Content Requirement
MAPA: Brazilian Ministry of Agriculture, Livestock and Food Supply
MERCOSUR: Southern Common Market
MDIC: Brazilian Ministry of Industry, Foreign Trade and Services
MFN: Most Favoured Nation
MR: Mutual Recognition
NTB: Non-Tariff Barrier
OECD: Organization for Economic Cooperation and Development
PIP: MERCOSUR Productive Integration Program
PPB: Basic Productive Process
PTA: Preferential Trade Agreement
RIP: The European Union’s Regional Indicative Programme in support of MERCOSUR
RoO: Rules of Origin
SACU: South African Customs Union
SDoC: Supplier’s Declaration of Conformity
SDT: Special and Differential Treatment
SECEX: Brazilian Secretariat of Foreign Trade
SINMETRO: Brazilian System of Metrology, Standardization and Industrial Quality
SPS: Sanitary and Phytosanitary
SUASA: Brazilian Unified Agricultural Healthcare System
SWP: Single Window Program
TBT: Technical Barrier to Trade
TFA: Trade Facilitation Agreement
TFEU: Treaty on the Functioning of the European Union
TISA: Trade in Services Agreement
TRQs: Tariff-Rate Quotas
UNECE: The United Nations Economic Commission for Europe
UNCTAD: United Nations Conference on Trade and Development
WP.29: UNECE World Forum for Harmonization of Vehicle Regulations
TABLE OF CONTENTS
1. ABSTRACT...9
2. MERCOSUR...11
a. BACKGROUND AND TRADE REGULATION...11
b. INTEGRATION ISSUES...13
3. AN OVERVIEW OF BRAZIL’S TRADE SCHEME...22
a. INTRODUCTION...22
b. HISTORICAL BACKGROUND...24
c. BRAZIL’S TRADE SCHEME...26
d. THE NEED TO SHIFT TOWARDS A MORE OPEN TRADE POLICY...34
4. EU-MERCOSUR FTA NEGOTIATIONS...37
a. INTRODUCTORY ASPECTS: TRADE RELATED PROVISIONS...39
b. TRADE IN GOODS: GENERAL PROVISIONS...40
c. AN OVERVIEW OF THE DRAFT SPS CHAPTER...43
d. TRADE IN AUTOMOTIVE GOODS...45
e. AN OVERVIEW OF THE TBT CHAPTER...48
f. RoO and TRADE FACILITATION...50
g. GOVERNMENT PROCUREMENT...53
CONCLUSIONS...55
BIBLIOGRAPHY...57
APPENDICES...67
APPENDIX 1: BRAZIL’S REGULATORY ADJUSTMENTS TO LIFT THE EU’S IMPORT BAN ON HONEY...67
APPENDIX 2: BRAZILIAN PROTECTION FOR THE AUTOMOTIVE INDUSTRY: THE INOVAR-AUTO PROGRAM...69 APPENDIX 3: BRAZIL’S ‘WEAK FLESH’ MEAT SCANDAL AND ITS IMPLICATIONS...70 APPENDIX 4: THE EU-MERCOSUR EVERLASTING DISAGREEMENT ABOUT TRADE IN AGRICULTURAL GOODS...74 APPENDIX 5: BRAZILIAN INSTITUTIONAL FRAMEWORK TO ALIGN DOMESTIC STANDARDS AND REGULATIONS WITH THOSE OF RELEVANT INTERNATIONAL ORGANISM...77
1. ABSTRACT
Negotiations for concluding a FTA between the EU and MERCOSUR have been going on for almost two decades. The Agreement is ambitious, since two CUs aim at creating a common Free Trade Area. However, the different integration levels of the blocks and the protectionist measures of Brazil, and other MERCOSUR members, coupled with the EU’s restrictive position regarding agriculture and stringent requirements for imports have prevented a favourable outcome.
MERCOSUR is a common market that encompasses Argentina, Brazil, Paraguay and Uruguay. Even if it is intended to be a CU, its integration shortcomings prevent the block from actually functioning as such and trade policies are deeply fragmented among its members. Consequently, uncoordinated national policies without a clear integration strategy hinder the effectiveness of MERCOSUR as a trade block. Furthermore, MERCOSUR’s participation in FTAs is scarce and concentrated on Latin American countries. Its inter-governmental nature and lack of supranational institutions make it difficult to express a common will separate of that of its members
The study focuses on Brazil’s trade policies and the impact that the foreseeable EU-MERCOSUR FTA will have on EU-MERCOSUR and Brazil. More precisely, this essay analyses the impact that it might have in Brazil’s trade policies and on MERCOSUR’s incomplete integration process. Based on the leaked draft-chapters of the EU-MERCOSUR FTA negotiations, this paper addresses the future implications of the FTA for MERCOSUR, and particularly Brazil, and how it will impact their position regarding international trade.
The thesis begins with an overview of MERCOSUR’s integration process, in which its institutional deficits and integration shortcomings are flagged. Next, an overview of Brazil’s trade scheme is presented, in which its protectionist stances are displayed. After a critical consideration of how MERCOSUR’s weak integration and Brazilian protectionism have not brought about positive results and a need towards a stronger regionalisation and further liberation is needed, the Draft of the EU-MERCOSUR FTA
is assessed. In this regard, it will be analysed how the EU’s leverage can have a positive impact in completing the MERCOSUR CU and liberalizing Brazil’s trade policies. It is argued that the FTA will require capacity-building activities on MERCOSUR’s side to further its regional integration process, strengthen its institutional framework, harmonize diverging uncoordinated domestic policies and complete its journey towards the creating of a CU to successfully conclude the FTA with the EU.
2. MERCOSUR
a. BACKGROUND AND TRADE REGULATION
MERCOSUR is the fourth-largest trading block in the world.1 It is a process of
sub-regional integration that consists of Argentina, Brazil, Paraguay and Uruguay. The process of creating a common market was launched in the early 90’s with the signing of the Treaty of Asuncion. In 1994, with the signing of the Protocol of Ouro Preto, MERCOSUR acquired legal personality and embarked on the process of becoming a CU.2 Indeed, as stated in the Treaty of Asuncion, MERCOSUR originated with the aim
of creating a common international trade block.3
During the transition period that took place between 1991 and 1994 the block initiated the first trade liberalization program and from 1995 to 1999 the adaptation to the CU took place, mainly throughout tariff reductions.4 In the process of adopting a common
trade policy, MERCOSUR enacted CMC Decision 22/94 establishing the CET following the MCN, which is in turn based on the HS.5
The CET, however, has a limited scope. First, sugar and automotive sectors are excluded from MERCOSUR and members resort to BTAs to regulate trade in these areas.6 Furthermore, upon the formation of the CET, it was agreed that members could
1 Mauro Berenholc, ‘Brazil’ in Folkert Graafsma, Joris Cornelis and Konstantinos Adamantopoulos (eds.) The International Trade Law Review (LBR 2015).
2 MERCOSUR, Structure and Agendas (MERCOSUR Official Publication, 2016) 2, 6-8. Venezuela became a party in 2013 but is currently suspended due to breach of democratic principles. Bolivia’s Accession Protocol was signed in 2015 and is currently awaiting the incorporation by MERCOSUR members.
3 Art.1 of the Treaty of Asuncion states that the common market shall involve “The establishment of a common external tariff and the adoption of a common trade policy in relation to third States or groups of States, and the co-ordination of positions in regional and international economic and commercial forums”. 4 MERCOSUR (n. 2), 18.
5 Mauro Berenholc (n. 1).
temporarily maintain a list of exceptions.7 Despite its initial temporary nature, those
exceptions have been extended until 2021 and 2023.8 Consequently, it is difficult to see
how these features fit in the concept of “substantially same duties and regulations of commerce” for purposes of the formation of a CU under Art.XXIV(8) GATT.9 This
incomplete nature of the CET and the characterization of MERCOSUR as a CU have in fact been questioned by many WTO members, such as the EU in the Brazil-Tyres dispute, which argued that Brazil had not proven that the MERCOSUR CET covered 90% of the tariff line, as claimed by Brazil, and that excluding the automotive sector, which covered around 29% of the intra-MERCOSUR trade, would call into question MERCOSUR’s recognition as a CU.10
As regards extra-regional trade relations, by means of CMC Decision 32/00 MERCOSUR members agreed to jointly negotiate FTAs. With respect to decision making, MERCOSUR operates on consensus-based decisions, so each member has a vote, with veto power, and unanimity is required to sign international agreements.11 It is
to be noted that so far MERCOSUR has mainly signed PTAs with Latin American and Caribbean economies, pursuing a Southern integration strategy. Agreements with other economies remain scarce and meaningful economic players do not make the cut.12
Despite the influence of the EU integration model in the formation of MERCOSUR, one of the main differences between the two blocks is that, unlike in the EU, MERCOSUR has not opted for supranational integration.13 Therefore, MERCOSUR is
7 MERCOSUR (n.2), 19. 8 CMC Decision 26/15.
9 Studies suggest that upon its formation, MERCOSUR covered 80-90% of commercial trade between its members and the CET comprised three quarters of the total commercial trade. Frederik Stender ‘MERCOSUR in gravity: an accounting approach to analyzing its trade effects' (2017) IEEP <https://link.springer.com/article/10.1007%2Fs10368-017-0400-8> accessed 16 April 2018.
10 Brazil-Measures affecting imports of retreaded tyres, Panel Report DS332, 12 June 2007, paras. 4.396-4.401.
11 Frederik Stender (n.9), 12.
12 Ibid, 29-31. The list of partners includes inter alia, India, Israel, Palestine, Egypt and SACU.
13 Katharina Luise Meissner, ‘MERCOSUR The Ups and Downs of Regional Integration in South America’ in Sebastian Krapohl (ed.), Regional Integration in the Global South (Macmillan 2016).
an inter-governmental union and its institutions do not have a separate will from that of its members.14
b. INTEGRATION ISSUES
MERCOSUR has achieved a rather lukewarm level of integration. Indeed, given the internal disputes and violations of rules, MERCOSUR is perceived as an assemblage of independent States rather than as a cohesive organization that unites its members around the same trade interests and policies.15
The CET is said to reflect mainly Brazil’s interests (as the main MERCOSUR member) of protecting strategic industries, particularly textiles and machinery with a 35% tariff.16
Consequently, Brazil enjoys an intra-trade surplus at the expense of Paraguay and Uruguay, which are condemned to obtain Brazilian less competitive manufactured goods because high tariffs prevent them from having access to more sophisticated foreign goods.17 In the meantime, Argentina has adopted the most protectionist approach
of all members, which hinders further progress in trade liberalization due to unanimity in decision making.18 Furthermore, as above-stated, the CET has a limited scope and
members still maintain numerous exceptions, which the EU has disputed before the WTO since exceptions go on until this day, notably exceeding the exceptional 10 year
14 In 1992 the EU and MERCOSUR signed an Interinstitutional cooperation agreement with the purpose of helping MERCOSUR’s integration project by transferring EU knowledge on the subject. See European Commission, Press Release <http://europa.eu/rapid/press-release_MEMO-94-62_en.htm?locale=en> accessed 29 May 2018.
15 Inter-American Dialogue, Trade Policy Brazil’s Slow and Uncertain Shift from Protectionism to Free
Trade (Working paper 1379, 2014) p.4.
16 Mauricio Mesquita Moreira ‘Brazil’s Trade Policy: Old and New Issues’ in Lael Brainard and Leonardo Martinez-Diaz (eds.) Brazil as an Economic Superpower? Understanding Brazil’s changing
role in the global economy (BIP, 2009) 1, 16-17.
17 Umberto Celli, Marcus Salles, Diana Tussie, Juliana Peixoto, ‘MERCOSUR in South-South Agreements: in the middle of two models of regionalism’ UNCTAD Virtual Institute (2010) <http://rrii.flacso.org.ar/wpcontent/uploads/2016/11/Celli_Salles_Tussie_Peixoto_Mercosur%20in %20South-South%20Agreements.pdf> accessed 26 July 2018.
period for the effective formation of CU provided for in the Understanding of Art.XXIV GATT.19
Due to those protectionist stances, MERCOSUR has not addressed substantial infrastructure and competitiveness issues and has not encouraged integration in GVCs, remaining an inward-oriented and protective block.20 That said, in 2008 MERCOSUR
approved the PIP to foster competitiveness and further integration of companies into regional production chains.21 However, so far it has not brought about significant
results.
The lack of regional integration has also prevented convergence among the least developed members (especially Paraguay) and deep asymmetries between MERCOSUR members remain.22 Consequently, the so-called upward-convergence that regional
blocks can bring about in its less developed members, as it is the case in the EU, has not taken place and since deep economic asymmetries still remain, MERCOSUR struggles to agree on strategic positions that please the divergent needs of its members.23
Consequently, the block rarely functions under a unified common trade policy before third parties and unilateral action is not uncommon. For example, Brazil unilaterally imposed AD measures on the import of steel from China in 2011.24 Argentina has also
imposed AD measures uncoordinated with the rest of MERCOSUR members, even
19 Brazil-Tryes (n.10) para.3.999.
20 Eduardo Viola, Jean Santos Lima, ‘Divergences Between New Patterns of Global Trade and Brazil/Mercosur’ (2017) BPSR 11-3 <http://www.scielo.br/scielo.php?script=sci_arttext&pid=S1981-38212017000300203&lng=en&tlng=en> Accessed 16 April 2018.
21 MERCOSUR (n.2), 20.
22 Andrés Malamud, Philippe C. Schmitter, ‘The experience of European Integration and the Potential for integration in South America’ IBEI Working Papers (2007), 6 <https://papers.ssrn.com/sol3/papers.cfm? abstract_id=965798> accessed 22 July 2018.
23 Mahrukh Doctor, ‘Prospects for deepening MERCOSUR integration: Economic asymmetry and institutional deficits’ Review of International Political Economy 20:3 <https://doi.org/10.1080/09692290.2012.671763> accessed 22 July 2018.
24 Claire Felter, Danielle Renwick ‘Mercosur: South America’s Fractious Trade Bloc’ Council on
against Brazil.25 In fact, because of ineffective regional integration and lack of common
monetary and competition policies, disputes between Argentina and Brazil have been quite frequent; for instance Argentina raised tariffs and imposed quantitative restrictions as a response to the latter’s unilateral currency devaluation.26
In this regard, the EU has raised questions as to the diverging regulations of commerce applied by MERCOSUR members given the fact that the AB has made it clear that “comparable trade regulations having similar effects do not qualify as same regulations of commerce for purposes of Art.XXIV GATT” and MERCOSUR members straightforwardly apply clear-cut diverging regulations and often retaliate against each other.27 In fact, due to weak regional institutions, uncoordinated action among
MERCOSUR members without any kind of institutional response is not uncommon.28
As regards foreign trade policy, despite the fact that MERCOSUR members are supposed to jointly negotiate and conclude BTAs under the scope of a common MERCOSUR position, they have signed some BTAs independently, as it is the case with the Brazil-Mexico and the Argentina-Mexico free Economic Complementation Agreements.29 These Agreements are based on the so-called Enabling Clause, according
to which developing economies can sign FTAs between them under more flexible conditions than those provided for in Art.XXIV GATT.30 However, the literature
questions the effectiveness of these agreements in tackling structural problems of Southern economies and, what is more, the negative impact that uncoordinated bilateral
25 Chad Brown, Patricia Tovar ‘MERCOSUR is not really a free trade agreement, let alone a customs union’ VOX CEPR’s Policy Portal (17 September 2016).
26 Katharina Luise Meissner (n.13).
27 Brazil-Tryes (n.10), Annex 1, Responses of parties to questions from the panel, para.578. 28 Mahrukh Doctor (n.23).
29 OIA, .Foreign Trade Information System
<http://www.sice.oas.org/TPD/BRA_MEX/BRZ_MEX_E.ASP> accessed 16 April 2018.
30 WTO, 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation (the "Enabling Clause"), paragraph 2(c).
FTAs can have on perpetuating, and even aggravating, economic asymmetries among MERCOSUR members.31
Moreover, MERCOSUR’s regional integration strategy has not yielded the desired outcome. South American economies are limited in size and share many similarities (and structural deficiencies) with MERCOSUR members.32 Since Southern economies
cannot provide the new technology or competitive upgrades that developed economies would, they further perpetuate MERCOSUR’s deficits.33
In 2007 Brazil took unilateral action and signed a strategic partnership with the EU, which could have had distorting effects in the negotiations of the EU-MERCOSUR FTA that were taking place at the time. The EU, however, pointed out that the lack of progress in trade talks with MERCOSUR was the reason behind the Strategic Partnership with Brazil.34 The Agreement, therefore, should not be seen as threat, since
Brazil and the EU expressly agreed on moving forward the negotiations with MERCOSUR and promoting deeper economic relations between the two CUs.35 In light
of the absence of advancement towards an Agreement with MERCOSUR, the EU shifted its priority towards Brazil, as the regional leader.
31 Umberto Celli (n.17).
32 Mauricio Mesquita Moreira (n.16), 13. 33 Ibid.
34 Communication from the Commission to the European Parliament and the Council, Towards an EU-Brazil Strategic Partnership <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/? uri=CELEX:52007DC0281&from=en> accessed 29 May 2018.
35 Joint Statement of the EU and Brazil, Lisbon Summit 2007 <http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/er/95167.pdf> accessed 29 May 2018.
The Strategic Partnership was not a total departure from the interregional integration project with MERCOSUR. In light of the difficulties in pushing forward negotiations with MERCOSUR and the increasing relevance of Brazil-China relations (they signed a Strategic Alliance and agreements on trade and investment), the EU ensure close economic and political ties with Brazil.
See: Katharina Luise Meissner, ‘Resorting to bilateralism: the EU, MERCOSUR, and the Strategic Partnership with Brazil’ Journal of European integration (2017) 40:1 <https://www.tandfonline.com/doi/full/10.1080/07036337.2017.1401616> accessed 29 May 2018.
Brazil, however, has not delivered as expected and has provided strong regional leadership to unite and strengthen MERCSOUR in the same way that Germany or France have done in the EU. This is due to the fact that MERCOSUR members are reluctant to transfer their sovereignty to supranational institutions, which in eyes of many is a key prerequisite to successful regional integration.36 Thus, the
inter-governmental nature of MERCOSUR as oppose to supranationalism is one of the aspects that prevents the bloc, from achieving an efficient level of regional integration that can maximize economic gains.37
The internal side of the common market project has not been accomplished either. Free circulation is a fabrication: only goods produced in MERCOSUR can circulate freely among its members. On the contrary, if a good from a third country enters MERCOSUR and crosses the border to another member, the CET is levied for a second time (also known as the double-recovery). Therefore, free circulation of goods is not extended to third-party goods and only goods complying with MERCOSUR origin requirements (native goods upon issuance of a certificate) are allowed to freely circulate across MERCOSUR.38
In addition to that, as the East-Asian integration process shows, elimination of NTBs is necessary to assure a full regional integration, while MERCOSUR has mainly focused on adopting autonomous policies at a national level that do not have a far-reaching regional impact.39 Consequently, the number of NTBs in place is still considerable.
Despite the fact that MERCOSUR liberalization focused on NTBs alongside tariff reduction, the elimination of the former has been not been accomplished and, actually, the number of NTBs in place has increased.40 In fact, there is plenty of room to
36 Andrés Malamud, Philippe C. Schmitter, (n.22).
37 Andrés Malamud, ‘The Internal Agenda of Mercosur: Interdependence, Leadership and Institutionalization’ in Grace Jaramillo (ed), Los nuevos enfoques de la integración: más allá del nuevo
regionalismo (FLASCO 2008).
38 Marcel Vaillant, ‘Asymmetries and Disparities in the Economic Integration of a South-South Customs Union’ in Juan S. Blyde, Eduardo Fernández-Arias, Paolo Giordano (eds), Deepening Integration in
MERCOSUR, Dealing with Disparities (IADB 2008).
39 Eduardo Viola (n.20).
eliminate NTBs and advance in regional regulatory convergence could bring about US$ 2 billion in wealth.41 In this regard, non-automatic licenses and quotas are among the
most common NTBs in MERCSOUR and Brazil is one of their biggest users.42
Concerning SPS and TBT related regulations, their impact is also considerable. Two aspects must be underscored: first, Brazil is the most regulated market of MERCOSUR and second, regulations are mainly applied in sectors where domestic industries exist, such as the automotive sector and textiles.43 This suggests a protectionist use of
technical regulations to shield domestic industries from foreign and regional competition. Moreover, the level of regulatory divergence between members is also quite high and Brazil holds the most divergent regulation vis-à-vis other MERCOSUR members.44
These problems were acknowledged in CMC Decision 23/15 and by means of CMC Decision 56/15 MERCOSUR created a working group to address regulatory divergence. Its success was moderate and, although progress was made, regulatory divergence remains. In addition, the approach to address this problem varies among MERCOSUR members: Brazil favours regulatory convergence, since it has the leverage to export its regulatory standards to other members, while Argentina prefers signing MR agreements.45 However, MR does not cover substantive regulations: MR is voluntarily
agreed in bilateral agreements between MERCOSUR members, its scope is limited to CAPs and it can be unilaterally revoked at any time.46
41 UNCTAD, Non-Tariff Measures in Mercosur: Deepening Regional Integration and Looking Beyond (UNCTAD/DITC/TAB/2016/1) pp.ix-xi.
42 Ibid., 6-8. 43 Ibid., 12-13. 44 Ibid., 20.
45 Banco Interamericano de Desarrollo, Informe MERCOSUR 22: Renovando la Integración (IDB-TN-1357), pp.48-54.
46 See the example of the Agreement between Brazil and Argentina on toy safety and quality certification Mariana Mota Prado, Vladimir Bertrand, ‘Regulatory cooperation in Latin America: The case of
MERCSOUR’ (2015) Law and Contemporary problems
<https://scholarship.law.duke.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=4746&context=lc> accessed 29 May 2015.
As regards regulatory standards, the AMN is the body tasked with the development of MERCOSUR standards. It mainly relies on international standards promoted by international standardization bodies over regional norms.47 Compliance with these
standards is voluntary, unless they are incorporated in GMC mandatory regulations. In this regard, the latest GMC strategy expressly commits to furthering harmonization among MERCOSUR members and to rely on international standards so as to gain access to international markets and favour exports.48
SPS standards in MERCOSUR are far from the level of harmonization of the EU. Even if the early strategy of MERCOSUR envisaged full-harmonization, with a view to elaborating common rules for all of its members, it did not work due to its technical complexity and was shortly replaced by minimum-harmonization, limited to strictly necessary regulations to facilitate trade within the block.49 Since Brazil is the
‘hub-State’ of MERCOSUR, it attempts to use its leverage to set Brazilian legislation as a model for the regional legislation. Harmonization was also driven by export market requirements, so MERCOSUR members tried to align their measures with the main export destinations. MERCOSUR has adopted the WTO SPS Agreement and has made it an integral part of its legal system.50 However, the SPS regime continues to be
fragmented even if Members agree to promote equivalence and acceptance of requirements of other members.51 National policies differ from one member to another
and alignment is difficult due to reluctance to modify national regimes.52 Nevertheless,
in 2015 the EU and MERCOSUR joined the “Econormas-Project” to foster MERCOSUR regulatory convergence with EU standards for technical regulations and
47 Andrea C. Bianculli, ‘Regulatory governance regimes and interregionalism: exploring the dynamics of EU-MERCOSUR negotiations’ Canadian Journal of Latin American and Caribbean Studies (2016) 41:2 <https://www.tandfonline.com/doi/full/10.1080/08263663.2016.1186393> accessed 29 May 2018. 48 GMC Resolution 45/17 repealing GMC Resolution 56/02.
49 Andrea C. Bianculli (n.47). 50 CMC Decision 6/93. 51 GMC Resolution 60/99.
52 Valentina Delich, Miguel Lengyel, ‘Can developing countries use SPS standards to gain access to markets? The case of Mercosur’ in Marion Jansen, Mustapha Sadni Jallab, Maarten Smeets (eds),
Connecting to global markets Challenges and opportunities: case studies presented by WTO chair-holders (WTO Publications 2014).
safety and quality measures in wood products, electronics, and manufactures and to assist MERCOSUR bodies in developing the capacities of their conformity assessment bodies.53
In any case, this lack of regulatory convergence also yields administrative problems to trade within MERCOSUR, such as customs procedures and border-controls that vary from one member to another, different schedules and timing, bottlenecks in customs points and excessive red tape.54
In this regard, the lack of strong supranational institutions and reliance on the political will of national governments has made it hard to establish a comprehensive regulatory structure in MERCOSUR.55 In fact, many place the blame of the non-synchronised and
divergent economic and trade policies in the inter-governmental nature of MERCOSUR institutions, which does not provide a framework for coordinated policy-making and leads to uncoordinated incorporation of MERCOSUR decisions into domestic legislation of each member.56
FOCEM, created by means of CMC Decision 18/05, is the organism that fosters economic convergence and regional integration in MERCOSUR with the aim of redistributing resources and reducing asymmetries among members. For this purpose, CMC Decision 33/07 established a strategic plan to engage in capacity-building operations that would foster regional integration. Furthermore, the EU itself has supported and funded FOCEM to strengthen its regional institutions and has engaged in capacity-building activities in order to prepare for a potential agreement between the two parties, but the budget of the organism is limited.57 Thus, despite the efforts,
FOCEM has not achieved the desired outcome and economic asymmetries, institutional
53 MERCOSUR, Econormas-project with representatives of MERCOSUR and the EU <http://www.mercosur.int/innovaportal/v/7292/11/innova.front/econormas-realizo-cierre-de-proyecto-con-presencia-de-representantes-del-mercosur-y-union-europea> accessed 2 June 2018.
54 Gabriela Hönnicke Antunes, María Gabriela Basualdo, Jeannette Valverde Chaves ‘La política comercial del MERCOSUR, un breve recuento’ (2012) RI 83 <http://revistas.una.ac.cr/index.php/ri/article/view/5153> accessed 16 April 2018.
55 Ibid.
conflicts and shortcomings and policy divergences among MERCOSUR members are palpable.58
Criticism to MERCOSUR integration shortcomings has lately come from within. Argentina has lately acknowledged the structural integration issues of MERCOSUR, describing it as “the most isolated and protectionist block in the world”.59 It has called
for a renewed regionalism and more openness to the global world, underscoring the crucial impact that the EU-MERCOSUR FTA could have in that process. Brazil has also called for further integration, showing its willingness to include sugar and the automotive industries in the MERCOSUR agenda, and pushing for concluding new FTAs.60 Since MERCOSUR is an inter-governmental organization, the favourable
position of its two most protectionist members is a great opportunity to strengthen bilateral relations and foster FTAs with developed countries such as the EU. MECOSUR has listened to these requests and has emphasized that integration in GVCs, trade facilitation and internationalization are among its key challenges.61
In light of these findings, a stronger multi-level governance structure is needed to address MERCOSUR’s strategic issues. Brazil and the rest of MERCOSUR members have traditionally favoured autonomy over integration, which in turn facilitates control over decisions. However, this stance has hampered effective regional integration and has put brakes to further common strategic position in the international trade and economic area. Thus, some argue that MERCOSUR should consider adopting supranational institutions in light of the limits of its inter-governmental nature, and the deficiencies it has brought about.62 While this proposal is yet to be weighted, the newly
57 Gisela Grieger, ‘EU-Latin America Relations’ European Parliamentary Research Service Briefing (2014) <http://www.eprs.ep.parl.union.eu — http://epthinktank.eu> accessed 22 July 2018.
58 Mahrukh Doctor (n.23).
59 ‘MERCOSUR, the most isolated and protectionist block in the world’ Mercopress (26 December 2017).
60 WTO, 2017 Trade Policy Review: Brazil. WT/TPR/G/358, paras. 2.9, 3.12. 61 Banco Interamericano de Desarrollo (n.45), p. 61.
62 Andrés Malamud, ‘Theories of Regional Integration and the Origins of MERCOSUR’ in Arcílio Toscano Franca Filho, Lucas Lixinski and María Belén Olmos Giupponi (eds), The Law of MERCOSUR (OXFORD 2010).
re-launched FTA negotiations with the EU provide an exceptional framework to address these issues. In fact, effective regional integration will be fundamental and decisive to successfully seal a deal with the EU, which has previously pushed for further integration in MERCSOUR and could use its leverage to shake up MERCOSUR’s institutional deficits.
3. AN OVERVIEW OF BRAZIL’S TRADE SCHEME
a. INTRODUCTION
Brazil is the world’s 8th largest economy. With a $1.8 trillion GDP, it represents 2.39 %
of the global economy.63 Moreover, it is predicted that it will become the world’s 4th
biggest economy by 2050.64
Closedness is a common feature in big economies. Since they have a larger domestic market and a wider variety of resources, they are, to a great extent, self-sufficient and do not need to rely on international trade to meet their needs. However, Brazil’s situation is striking and stands out among other big developing countries. Indeed, Brazil’s inward-oriented economy cannot solely be explained by its size: its trade and economic policies have a significant influence in this matter.
The inward-orientation of an economy can be measured not only by the weight of trade in its GDP, but also by its participation in GVCs and by the level of foreign added-value in its exports.65
63 World Economic Forum, The world’s 10 biggest economies in 2017 <https://www.weforum.org/agenda/2017/03/worlds-biggest-economies-in-2017/> accessed 4 April 2018. 64 PWC Global, The World in 2050 < https://www.pwc.com/gx/en/issues/economy/the-world-in-2050.html> accessed 11 April 2018.
65Otaviano Canuto, ‘The High Density of Brazilian Production Chains’ (The World Bank Blog, 11/13/2014) <http://blogs.worldbank.org/developmenttalk/high-density-brazilian-production-chains> accessed 11 April 2018.
If we take a look at Brazil’s trade statistics, trade in goods and services accounts for 25% of its GDP.66 This figure is considerably lower than that of other BRICS or big
countries.67
In the current economic system goods and services are not produced exclusively in one country. Production is fragmented and spread out among different countries. Following the specialization theory, each country participates in a different stage of the production process, contributing in what they are specialized at, so goods cross borders among different countries during different production stages several times before the final assemblage takes place. However, Brazil’s integration in GVCs is quite low, which consequently impacts negatively on its competitiveness and technological development.68 Closely related to this, Brazil shows a high share of domestic
added-value in its exports, especially in manufactured goods (93%) which are supposed to be highly exposed to GVCs and cross-border production.69
This can be explained by the fact that Brazil’s participation in PTAs is very scarce. On the contrary, under the scope of MERCOSUR, Brazil has favoured multilateralism within the WTO and regional integration with other Southern countries at the expense of bilateral relations with Northern (more developed) economies.70
b. HISTORICAL BACKGROUND
Brazil’s first move towards trade openness took place in the late 80’s by means of unilateral import liberalization. In this period Brazil mainly focused on reducing tariffs
66 WTO (n.6), para. 1.2, data from 2016.
67 World Bank, Trade as % of the GDP <https://data.worldbank.org/indicator/NE.TRD.GNFS.ZS> accessed 11 April 2018.
68 MIT Industrial Performance Center, Brazil in Global Value Chains (Working Paper Series, 16-001), p.13-14.
69 World Bank Group, The Curious Case of Brazil’s Closedness to Trade (Policy research working paper, WPS 7228), p.9.
(the weighted average tariff went from 57% to 30% during its first phase).71 During the
90’s Brazil continued this trend, with the formation of the MERCOSUR CU, by further tariff reductions (the average tariff dropped to 13%) combined with export fostering initiatives such as tax exemptions and financial support programs.72
These changes helped improve Brazil’s productivity and competitiveness but were soon combined with import-substitution measures: a set of protectionist policies to shield domestic infant industries (particularly automotive, electronics and textile) from foreign competitors and foster domestic industrialization.73 It should also be noted that despite
privatization of many industries (e.g. telecommunications, electricity) the State kept relevant participation in several SOEs.74 State interventionism was further supported by
the BNDES, which provides financial assistance to Brazilian companies in very favourable conditions in an attempt to correct market failures.75 BNDES was
responsible for supervising the privatization process and in exchange for financial aid obtained equity in newly privatized enterprises, granting Brazil control over those companies.76
In addition to that, NTBs were not addressed in-depth during this period and, in face of increasing imports, the use of AD measures became a common practice to protect domestic industries.77 Liberalization was therefore incomplete and, in practice,
perpetuated previous protectionist practices.
71 Mauricio Mesquita Moreira (n.16),
72 Pedro da Motta Veiga ‘Brazil’s Trade Policy: Moving Away from Old Paradigms?’ in Lael Brainard and Leonardo Martinez-Diaz (eds.) Brazil as an Economic Superpower? Understanding Brazil’s
changing role in the global economy (BIP, 2009).
73 Ibid.
74 Anna Lanoszka ‘Brazil’s Challenges of Post-Interventionist Bargaining: Emerging Economy or State Capitalism’ (2016) GJEME 8(1) <http://journals.sagepub.com/doi/abs/10.1177/0974910115613709> accessed 12 April 2018.
75 David M. Trubek, Fabio Morosini, Michelle R. Sanchez-Badin ‘Brazil in the shadow of Mega-regional trade and investment standards: Beyond the grand debate, pragmatic responses’ (2016) LSRP 1401 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2923821> accessed 11 April 2018.
76 Anna Lanoszka (n.74). 77 Pedro da Motta Veiga (n.72).
The shortcomings of this liberalization process can be explained by Brazil’s approach towards international trade. The underlying protectionism in Brazil’s measures reflects the vision that trade policies, rather than tackling the country’s structural issues (e.g. low competitiveness and productivity and need for technological innovation), should serve as a protectionist mechanism for domestic industries.78 In fact, Brazil’s foreign
policy paradigm is focused on neutralizing external threats and protecting national economic vulnerabilities.79 As a consequence of this misuse of trade policies, Brazil still
drags long-established structural shortcomings that handicap the country in the international arena.
Moreover, trade policies are subordinated to political interests.80 Trade policies are
deeply shaped by political factors rather than economic ones, which miss out on strategic adjustment opportunities and favour measures without a clear economic impact.81 That political paradigm has further favoured regional integration with other
Southern countries under the idea of the North-South cleavage given the fact that the more developed Northern economies posed a bigger risk towards Brazilian incipient industries.82 All this factors explain Brazil’s scarce participation in PTAs with big
economies.
The influence of Brazilian domestic players in shaping Brazil’s trade policies is also an important factor. They mainly belong to the industrial and agribusiness sectors and act as lobbyists, pressuring the government to adopt defensive positions in trade negotiations.83 In fact, these industrial stakeholders organize themselves in business
78 Mahruckh Doctor ‘Brazil’s New Government and Trade: An Evaluation of Policy and Performance’ (2012) 38(6) CS 799-897<http://journals.sagepub.com/doi/pdf/10.1177/0896920512440573> accessed 11 April 2018.
79 Pedro da Motta Veiga (n.72). 80 Ibid.
81 Marcos Troyjo ‘Brazil: Shaping a New Strategy for Global Trade&Investment’ The World Financial
Review (July 28 2014).
82 Carnegie Endowment for International Peace and ILO, Brazil in the Global Economy, Measuring the
gains from trade (2009) 1, 39.
associations, which provide them with considerable power.84 Therefore, economic
priorities risk to be left aside and individual interests are favoured over a sound strategy for Brazilian trade transformation.
c. BRAZIL’S TRADE SCHEME
Lately Brazil has emphasized the necessity to address competitiveness and productivity issues in order to find new commercial partners that can help integrate Brazil in GVCs.85
However, Brazilian policies have not been modified to address these issues and continue to protect the domestic industry with tariff-jumping strategies to foster FDI and import-substitution policies such as complex tax and non-tax incentives and LCRs.86 Indeed, Brazil is the second country in number of LCR impositions since
2008.87
One of Brazil’s main issues is the so-called ‘Brazil cost’ that defines costs related to inefficient bureaucracy, cumbersome transactions procedures, compliance with taxes or poor infrastructure.88 This is mainly due to high transaction costs and Brazil’s
infrastructural deficit which, at the same time, means that transportation expenses are sometimes higher than tariffs.89
Brazil’s external tariffs are mainly determined by the CET, with the exception of some temporary individual derogations and exemptions until 2021.90 Furthermore, the CET
84 Sergio Sauer, Moises V. Balestro, Sergio Schneider ‘The ambiguous stance of Brazil as a regional power: piloting a course between commodity-based surpluses and national development’ (2017) Globalizations 2018 <https://www.tandfonline.com/doi/full/10.1080/14747731.2017.1400232> accessed 11 April 2018.
85 WTO (n.60) paras. 2.9, 3.12 and 4.46. 86 WTO (n.6) para.2.12.
87 Sónia Araújo, Dorothee Flaig ‘Trade Restrictions in Brazil: Who Pays the Price?’ (2017) JEI 32-2 <https://www.e-jei.org/journal/view.php?doi=10.11130/jei.2017.32.2.283> accessed 14 April 2018. 88 MIT Industrial Performance Center (n.68).
89 Mauricio Mesquita Moreira (n.16), 17. 90 WTO (n.6) paras. 3.25, 3.28-3.29.
allows its members to temporary apply tariffs higher than those of the CET to address trade imbalances, which Brazil used between 2012 and 2013.91
Although limited in number, Brazil has signed some PTAs within the framework of MERCOSUR in which tariff preferences are granted. However, preferential tariff schedules are drawn up in LAIA nomenclature and in lack of a correspondence table between LAIA nomenclature and the HS nomenclature used in the CET, traders face difficulties to invoke preferential treatment.92 Consequently, preferential traders often
stick to the MFN tariffs and not invoke the preferential one.
The MDIC implements Brazilian trade policies following the guidelines issued by CAMEX, which is tasked with the design and implementation of those policies, assisted by the SECEX.93
Brazilian standardizing and regulatory bodies try to avoid unnecessary obstacles to trade by adopting international standards and aligning their standards with those of international bodies as much as possible. However, high tariffs and adoption of protectionist measures block the full effectiveness of these regulatory practices (See Appendix 5).
When it comes to Brazil’s tax system, it is considerably cumbersome, with a variety of direct and indirect taxes affecting trade transactions. Cross-cumulation of taxes is not uncommon and, at a procedural level, their collection is complex.94 Under export
support schemes, export-oriented companies can be exempted from a variety of taxes.95
However, Brazilian exports are highly concentrated: the top 1% exporters account for 59% of total exports, while the top 25% encompasses the 98%.96 This is explained by
91 Ibid, 3.32. 92 Ibid, 3.36. 93 Ibid., 2.10. 94 Ibid., 3.37. 95 Ibid., 3.74.
the fact that only big companies (with sufficient access to economies of scale) can achieve a sufficient level of efficiency to overcome Brazil’s trade barriers.97 In fact,
despite a Constitutional amendment exempting exports from indirect taxes, the complexity of the tax system prevents companies from de facto enjoying such exemption.98 In addition to that, the tax system favours the export of agricultural
commodities, enjoying an almost complete tax exemption, over manufactured goods.99
The tax system is also used to favour domestic manufacturers. For instance, as regards the IPI, which applies to both domestic and imported products, for Brazilian products the tax base is the sales price whereas for imported products the tax base is the sales price plus import duties, tariffs and other fees.100
Trade remedies are a common protective mechanism for Brazil. Despite the fact that during the 2013-2016 period the number of investigations declined, AD measures have almost doubled.101 In fact, Brazil was the world’s fifth-biggest user of trade remedies in
2015, mainly used for protecting its domestic industry.102
In addition to granting protection throughout subsides to a variety of industries, the Brazilian government still has a stake in many companies across several industries and some of those SOEs have a dominant position in their competitive markets (e.g.: PETROBRAS).103
97 Otaviano Canuto, Cornelius Fleischhaker, Philip Schellekens ‘The Cost of Brazil’s Closed Economy’ (The World Bank, 5 Februay 2015) < http://www.worldbank.org/en/news/opinion/2015/02/05/the-cost-of-brazils-closed-economy> accessed 13 April 2018.
98 Sónia Araújo (n.87). 99 Sergio Sauer (n.84).
100 Henrique Resaffa Nogueira Martins, ‘The Brazilian Innovar-Auto Program and the WTO Dispute’ (2016) Researchgate <https://www.researchgate.net/publication/311207000_The_Brazilian_Inovar-Auto_Program_and_the_WTO_Dispute> accessed 2 June 2018.
101 WTO (n.6), para. 3.58. 102 Mauro Berenholc (n.1). 103 WTO (n.6), para. 3.171.
In the field of Government Procurement, Brazil is not party to the GPA, although it has been granted an observer status as of 2017, which is deemed as a preparatory step for full membership.104 Brazil requires legal establishment in its territory for companies to
be eligible for public contracts and, in case of equivalence, Brazil favours tenders in which domestic goods or services are used or supplied by domestic producers or by producers that invest in Brazil (direct offsets), even if they are 25% more expensive than other bids. This constitutes a barrier to foreign firms by requiring in-country presence and local-content requirements, which are also seen as corruption-triggering elements.105 Furthermore, some tenders might be restricted to goods and services
developed in Brazil according to the PPB criteria, although they are mostly applied in strategic governmental sectors.106 Furthermore, despite efforts to reduce corruption in
remains widespread among Brazilian institutions and, what is more, institutional barriers to effective accountability remain due to a lack of effective compliance and punishment mechanisms.107
As regards customs administration procedures, non-automatic import licences are the rule in Brazil’s licensing system. For instance, this system is in place for automotive parts.108
CAMEX defines Brazil’s measures regarding import and export procedures and administrative controls and requirements. It is supported by the GTFAC to simplify and harmonize trade procedures and to reduce administrative trade obstacles and barriers. Brazil ratified the TFA in 2016 and created the CONFAC to coordinate implementation
104 European Commission, ‘Trade and Investment Barriers Report 2017’ <http://trade.ec.europa.eu/doclib/docs/2017/june/tradoc_155642.pdf> accessed 23 July 2017.
105 Edwin Broecker, Fernanda Beraldi, ‘Offsets in Public-Sector Procurement: tolos for economic development or avenues for corruption?’ OECD Global Anti-Corruption & Integrity Forum
<https://www.oecd.org/cleangovbiz/Integrity-Forum-2017-Beraldi-Broecker-offsets-public-procurement.pdf> accessed 23 July 2018. 106 WTO (n.6), 3.174, 3.175 and 3.184.
107 Lindsey Carson, Mariana Mota Prado, ‘Mapping Corruption & its Institutional Determinants in Brazil’ IRIBA Working Paper 08 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2497935> accessed 24 July 2018.
activities.109 In this regard, Brazil has implemented the SWP so that all trade-related
formalities and procedural aspects can be completed in a single portal, which will notably streamline trading procedures.110 This program is also aimed at reducing the
number of products that fall under non-automatic licensing procedures.111 Brazil has
created an online platform to provide information for trade matters such as documentation, procedures, tax and financing.112 The measures introduced for electronic
submission and processing of exports and imports-related documents have reduced the compliance time in trade transactions by 72 hours.113 However, despite the efforts,
Brazil ranks 139 out of 190 countries in terms of ease to trade across borders.114
When it comes to economic sectors, agricultural products dominate Brazil’s exports, accounting for over 40% of all exports, although manufactures come close at 37.9%. On the import side, however, manufactures represent over 77% of Brazil’s total imports.115
Consequently, the trade deficit in manufactured goods is quite acute and the qualitative imbalance is clear: Brazil is a supplier of agricultural commodities and imports high added-value manufactured goods. The EU is Brazil’s main trade partner: it accounts for 19% of Brazilian exports and it is Brazil’s main supplier providing over 22% of total imports.116
The manufacturing sector benefits from the highest average tariff protection by way of tariff escalation measures; the higher the stage of processing of manufactured goods, the higher the applied tariff, which disincentives Brazil’s international competitiveness at high added-value productive stages and hinders its integration in GVCs.117 Brazil’s
109 Ibid., 3.7.
110 WTO (n.60), para.4.9. 111 WTO (n.6), para 4.91. 112 Ibid., 2.17.
113 World Bank Group, Doing Business 2018 (Flagship Report, 15th edition), p.37. 114 Ibid., p.149.
115 WTO (n.6), para. 1.20. 116 Ibid., 1.22.
exports of manufactured goods are highly concentrated in South America.118
MERCOSUR is an especially important destination when it comes to high added-value goods.119 Furthermore, most manufactured exports to MERCOSUR are in goods in
which Brazil does not have a competitive advantage, which further reinforces the idea that other MERCOSUR members are condemned to obtain less competitive Brazilian goods because access to manufactured goods from more competitive third countries is handicapped in light of the high CET in this sector.120 Furthermore, Brazilian firms use
the least imported products among all Latin America and developing economies, which further contributes to low competitive levels.121
The Brazilian industry is highly incentivized and many of those incentives are conditioned to the PPB criteria linked to national-content requirements.122 Companies
must demonstrate that production is carried out in Brazil (supporting national industrialization) and complies with the PPB so as to be eligible for incentives. The BNDES also plays an important role in providing industrial-financing aids under fairly favourable conditions.123
Clothing, textiles and transport equipment are the sectors that benefit from the highest tariff protection and non-automatic licensing is the general rule.124
The automotive sector (left out of MERCOSUR integration) is one of the most closed and protected. The government has traditionally favoured tariff-jumping strategies to attract FDI and as a result, foreign producers have not integrated Brazilian activities in
118 Eduardo Viola (n.20). 119 WTO (n.60), para. 3.15.
120 Pedro Moncarz, Marcelo Olarreaga, Marcel Vaillant ‘Regionalism as Industrial Policy: Evidence from MERCOSUR’ (2016) RDE 20(1) <DOI:10.1111/rode.12224> accessed 16 April 2018.
121 OECD Economic Surveys, Brazil Overview (2018) <www.oecd.org/eco/surveys/economic-survey-brazil.htm> accessed 4 June 2018.
122 WTO (n.6), para. 3.109. 123 Ibid., 4.93.
GVCs, which translates into low competitiveness.125 European carmakers dominate a
sector characterized by high taxation, weak competition and border protection (35% tariff), making cars relatively expensive.126 In this regard, the EU challenged the
Brazilian INOVAR-AUTO program before the WTO (See Appendix 2).
The Brazilian agricultural sector is mainly export-oriented, making Brazil the world’s third-largest agricultural exporter; it is the top supplier of soybeans, poultry and sugarcane and it comes third in terms of bovine meat exports.127 The government
supports the sector under the Agricultural and Livestock Plan.128 This implies funding
for credit subsidies, price support mechanisms and various subsidies, although it remains relatively low in comparison to other OECD countries.129 In fact, in the Doha
Round Brazil has maintained an offensive approach pushing for further liberalization in agricultural products, specially cutting out subsidies.130
Brazil maintains quotas for exports of some products to certain destinations. In the case of the EU, sugar quotas are administered on a first-come-first-serve basis, bovine meat is based on past-performance and poultry on a combination or the two previous criteria.131
As regards services, while it is a key contributor to Brazil’s GDP (it accounts for two-thirds of it), it suffers from structural weaknesses, which prevents the sector from playing an important role in the international scene (it accounts for merely 14% of exports).132 Brazil suffers from an acute service trade-deficit and it is a minor
125 Ibid., 4.97. 126 Ibid., 4.98.
127 WTO (n.60), para. 4.48. 128 WTO (n.6), para. 4.12. 129 Ibid., 4.20.
130 Carnegie Endowment for International Peace, Brazil’s Trade Policy in the Doha Round: A
Discussion with H.E Clodoaldo Hugueney, Ambassador of Brazil to the WTO (2006) 1, 2.
component of its foreign trade transactions.133 In 2016 the value of service imports
almost doubled that of exports. This poor performance is due, among other things, to stricter regulations in this area and to the lack of integration in GVCs.134 Considering
Brazil’s commitments under the GATS, they cover less than a third of all service subsectors (less than the average WTO member) and they have not ratified the Fourth Protocol on telecommunications.135 Nonetheless, Brazil has lately expressed the
intention to join the TISA negotiations, which could strongly encourage liberalization in trade in services.136
d. THE NEED TO SHIFT TOWARDS A MORE OPEN TRADE POLICY
The outcome brought about by Brazil’s trade policies can be described as rather half-hearted. Brazil’s policies favour exports of agricultural commodities while overly protecting the domestic manufacturing sector. It is argued that on the one hand, this strategy has had a substantial positive impact in reducing poverty in Brazil but, on the other hand, it has not helped tackle long-standing competiveness and productivity issues.137
While agricultural commodity exports have helped Brazil achieve a considerable trade surplus, it also reflects an important imbalance. To take the case of China as an example, over 80% of Brazil’s exports to China are agricultural commodities, which hover around $200/tonne, while around 90% of Brazil’s imports are manufactured goods, which hover around $2,000/tonne.138
132OECD Services Trade Restrictiveness Index <https://www.oecd.org/tad/services-trade/STRI_BRA.pdf> accessed 13 April 2018.
133 WTO (n.6) para. 4.111. 134 Ibid., 4.112.
135 Ibid., 4.113.
136 David M. Trubek, Fabio Morosini, Michelle R. Sanchez-Badin (n.75). 137 Marcos Troyjo (n.81).
Furthermore, import-substitution and domestic protection measures have not proven to be useful to foster the domestic industry; after the 2008 financial crisis the Brazilian government took additional protectionist measures (incentives, subsidies, LCR) that have not restored the industrialization level prior to the crisis. In fact, production levels shrank below the pre-crisis level.139 Moreover, studies suggest that Brazilian industry
has become increasingly dependent on governmental incentives and subsidies which, in turn, have not helped increase productivity or competitiveness.140
Some argue that, while Brazilian trade liberalization has been limited, it was necessary to allow a smooth transition towards further liberalization; first opening the country to regional trade would pave the way for a subsequent exposure to global markets.141
In any case, that strategy does not come without a price. Favouring regional integration carries a big opportunity cost for Brazil; nonparticipation in the world’s largest markets. In fact, by prioritizing Southern integration Brazil is handicapped in its process of establishing relations with big economies. Despite having signed FTAs with some of the most neoliberal South-American economies (e.g.: Colombia and Chile) Brazil is a latecomer when it comes to agreements with Northern countries.142 Moreover, since
Brazil’s level of domestic protection is considerably higher than that of its potential trade partners, it is argued that unilateral trade liberalization on Brazil’s part will be indispensible to reach new agreements.143
In this regard, Brazil has recently stressed that, while remaining fully committed to supporting the multilateral trading system, PTAs do play a complementary role in
139 Pedro da Motta Veiga, Sandra Polónia Rios ‘Brazil’s Trade Negotiations Agenda: Moving Away
from Protectionism?’ (2015) BI Brief
<https://www.bakerinstitute.org/media/files/Research/64566124/BI-Brief-08xx15-LAI_BrazilTrade.pdf> accessed 14 April 2018.
140 WTO (n.6) para. 3.108.
141 Inter-American Dialogue (n.15) p.3.
142 David M. Trubek, Fabio Morosini, Michelle R. Sanchez-Badin (n.75).
143 Pedro da Motta Veiga ‘Trade Liberalization in Brazil: When and How?’ (2017) BI Brief <https://www.bakerinstitute.org/media/files/files/2f3bdfef/BI-Brief-032117-LAI_BrazilTrade.pdf> accessed 14 April 2018.
contributing to economic and social development.144 In fact, Brazil’s former Foreign
Minister announced Brazil’s intention to develop greater relations with the EU, the US and Japan and to join the OECD, which would require implementation of tax and transparency reforms that could strongly benefit the Brazilian economy.145
In addition to that, trade liberalization measures contradict the widespread assumption that domestic manufacturing industry would be negatively affected. On the contrary, studies suggest that lower import tariffs in manufactured goods would allow cheaper importation of intermediate goods. Those inputs could be incorporated in the Brazilian production chain (replacing inefficient domestic goods) and would, as a consequence, generate cheaper outputs. As a result, Brazilian manufacturers would produce cheaper goods, which would be more competitive in global markets, leading to an increase in exports.146 This increase in competitiveness would hence facilitate Brazil’s integration
in GVCs, which would bring about further technological learning and skills acquisition, doing away with current commodity-dependency and helping shape a new long-term economic strategy based on stronger competitiveness and innovation.147
All things considered, the need for a shift in Brazil’s trade policies is undisputable. Unilateral amendments are not only necessary for domestic development and sustainable growth but also for successfully opening up the country to FTAs. In fact, unilateral action is a prerequisite for successfully pulling the bilateral agenda. In this regard, a better regulated and more dynamic Brazil would remarkably facilitate concluding FTAs with main economies.148 Reduction of local-content requirements and
barriers to foreign companies will be necessary to open up the industrial market . Furthermore, it should be coupled with efforts to further regional integration in
144 WTO (n.60) para. 1.4.
145 Michael Fox ‘Brazil Rolls Back Regional Integration’ (2017) NACLA 49:3 <https://www.tandfonline.com/doi/full/10.1080/10714839.2017.1373945> accessed 14 April 2018. 146 Sónia Araújo (n.87).
147 MIT Industrial Performance Center (n.68).
MERCOSUR so as to coordinate domestic policies towards a common strategy and, thus, maximize trade gains in new FTAs.
4. EU-MERCOSUR FTA NEGOTIATIONS
Talks between MERCOSUR and the EU started in 1999 but stalled several times. The two parties signed an IFCA in 1995 that came into force in 1999.149 The EU had
previously concluded bilateral agreements with all the MERCOSUR members separately and, by concluding the IFCA, aimed at strengthening and deepening integration between the two parties to pave the way for a future FTA. Both territories intended to achieve further liberalization and market-access, regulatory approximation and strengthen cooperation.
Negotiations were suspended in 2004, given the fact that considerable differences between the parties obstructed the advancement of the negotiations. Negotiations re-launched in 2010 for a short 2-year period, until they stalled in 2012. In 2016 negotiations were again resumed and this time odds are in favour of concluding an agreement.
Traditionally it has been argued that the EU kept a stringent position in protecting its agricultural market while MERCOSUR was not ready to open its industrial market to third-party competition (See Appendix 4).150 However, from the very beginning of the
negotiations the deficits in the regional institutional capacity of MERCOSUR have been an issue towards concluding the agreement.151 In this regard, the EU has persistently
pointed out during previous negotiation rounds that further regional integration and the effective completion of the CU are essential.152 In this regard, the EU put in place the
149 Interregional Framework Cooperation Agreement between the European Community and its Member States, of the one part, and the Southern Common Market and its Party States, of the other part.
150 Enrique Gomez Ramirez, Eleni Lazarou, Laura Puccio, Giulio Sabbati, ‘EU trade with Latin America
and the Caribbean’ EPRS-PE 608.793 (2017)
<http://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_IDA(2017)608793> accessed 29 May 2018.
151 Mahrukh Doctor (n.23).
RIP to support the completion of the MERCOSUR internal market and the strengthening of its institutions throughout several capacity-building projects.153
On the one hand, Brazil and other MERCOSUR members have shown willingness to lessen protectionist domestic policies. In this regard, the more liberal political stance of Brazil and Argentina has been a crucial element in resuming and furthering negotiations with the EU.154 This is a result of the inter-governmental nature of MERCOSUR, which
makes its foreign agenda more vulnerable to political contingencies than the supranational structure created by the EU.
Furthermore, as of 2014 Brazil, Argentina and Uruguay no longer benefit from the EU GSP and Paraguay remains the only MERCOSUR member covered by that system.155
Consequently, MERCOSUR members have lost a wide set of unilateral benefits in terms of reduced-tariff exports to the EU.156 Signing a FTA with the EU would
undoubtedly help relieve the impact of the withdrawal from the GSP.
The EU, on the other hand, has always had not only economic but also strategic interests in MERCOSUR. When negotiations first launched, in 1999, the EU’s interest was partly a reaction to curb the US’s influence in its attempt to build a FTA of the Americas.157 The current reactivation of negotiations with MERCOSUR also shows a
strong strategic interest in strengthening the EU’s global commitment towards free trade
153 European Commission Press Release, ‘EU-Mercosur: European Commission adopts Regional Programme in support of further Mercosur Integration’ <http://europa.eu/rapid/press-release_IP-02-1376_en.htm> accessed 23 July 2018.
154 Enrique Gomez Ramirez, Eleni Lazarou, Laura Puccio, Giulio Sabbati (n.150).
155 Following classification of Brazil, Argentina and Uruguay as high/upper middle income countries by the WB, they cease to benefit from the reformed GSP. Paraguay is still considered a low/lower-middle income country and it is covered by the GSP system. See: European Commission, Revised EU trade scheme to help developing countries applies on 1 January 2014 <http://trade.ec.europa.eu/doclib/docs/2013/december/tradoc_152017.pdf > accessed 29 May 2018. 156 If a FTA is signed between the EU and MERCOSUR providing a similar level of preferential access to the EU, Paraguay would also cease to benefit from the GSP. See European Commission, The EU’s
Generalised Scheme of Preferences (GSP)
<http://trade.ec.europa.eu/doclib/docs/2012/december/tradoc_150164.pdf> accessed 29 May 2018. 157 Katharina Luise Meissner (n.35).
in light of increasing protectionist trends, and in securing EU-influence in a region where China is increasingly present.
Moreover, the current IFCA with MERCOSUR can be defined as an “old generation” agreement. It dates from the 90’s and does not deeply touch upon many issues that concern the EU, such as regulatory cooperation and sustainable development. Therefore, the EU is pushing to modernise and establish a comprehensive relation with MERCOSUR.158 Even if market access is an important aspect of the negotiations, the
EU has also a particular interest in addressing NTBs. The EU is therefore seeking the furthering of its regulatory governance model through this FTA as a way of gaining influence in the South American region.159
a. INTRODUCTORY ASPECTS: TRADE RELATED PROVISIONS
In the introductory provisions to the FTA, both parties recognise the regulatory autonomy of each party to achieve legitimate policies, and MERCOSUR wants to include a provision referring to the differences in economic and social development between the EU and MERCOSUR.160
On the other hand, the EU is proposing a special section on regional integration. The EU is inclined to recognise the differences of the parties as regard their level of regional integration, but wants to include a commitment to ensure free circulation of EU goods in MERCOSUR within the sense of Art.29 TFEU. The EU also emphasizes that MERCOSUR should work towards establishing common customs procedures and, while that is accomplished, goods imported from the EU should be given MFN treatment of any MERCOSUR member in customs treatment. Furthermore, the EU is also calling for free movement of EU goods within MERCOSUR and for the avoidance of duplicative procedures, controls and import checks as regards CAPs with SPS and TBT measures.
158 Enrique Gomez Ramirez, Eleni Lazarou, Laura Puccio, Giulio Sabbati (n.150). 159 Andrea C. Bianculli (n.47).
