Political Resistance to Regulatory Reforms in the EU-Mercosur Trade Agreement

Written by Oliwia Borek (Ambassador to Ireland) and edited by Ryan O’Connor

The European Union (EU) and Mercosur (a trade bloc consisting of Argentina, Brazil, Paraguay and Uruguay) reached a political agreement concerning their Trade Agreement in 2019. This deal has significant economic and political implications for both blocs, and it has already witnessed a great level of political resistance from interest groups in their member states. This article delves into the implications stemming from the removal of non-trade barriers and increased regulatory harmonisation between Mercosur and the EU resulting from the trade deal. It focuses specifically on the impact of the agreement’s public procurement and intellectual property rights provisions on relevant interest groups in Mercosur, explaining the political resistance facing these regulatory provisions within the Mercosur states.

The article firstly provides an overview of the EU-Mercosur Trade Agreement, outlining its aims and economic significance. It then explores the resistance arising from two of the agreement’s regulatory provisions relating to public procurement and intellectual property rights. The article provides a valuable insight into the political resistance faced by the EU-Mercosur Trade Agreement within the latter states and explores two of its often-overlooked yet influential provisions.

Context and Aims of the EU-Mercosur Trade Agreement

Trade relations between the EU and Mercosur are currently based on the 1999 inter-regional Framework Cooperation Agreement, as well as bilateral framework cooperation agreements the EU has signed with individual Mercosur states. Although negotiations concerning the establishment of the EU-Mercosur Trade Agreement began in 2000, a political agreement regarding the trade deal was not reached until 2019. Negotiations and revisions of specific Trade Agreement provisions have since continued, and while both the EU and Mercosur expressed their desire to ratify the agreement by the end of 2023, the process has faced indefinite delays (European Commission, n.d.-a). 

The economic significance of the EU-Mercosur Trade Agreement derives from both the high level of trade between the two blocs and the ambitious scope of its provisions. In terms of goods, the EU is Mercosur’s second largest trade partner, accounting for 16.2% of the bloc’s total trade in 2021. The EU’s 2021 exports to Mercosur totalled €45 billion, while its imports summed to €43 billion. The most traded products include animal feed, petroleum oils, medicinal products and motor vehicle parts (Eurostat, 2021). The EU additionally exported €17.2 billion worth of services to Mercosur in 2020 and is the largest foreign investor in that region, reaching an accumulated stock of €330 billion in investment by 2020 (European Commission, n.d.-a). 

The EU-Mercosur Trade Agreement aims to further increase the level of trade and investment between the two blocs by reducing tariff and non-tariff trade barriers, as well as establishing more consistent rules for trade and investment (European Commission, n.d.-b). As is typical for contemporary trade deals, the agreement goes far beyond tariff measures. Its key focus is on the harmonisation of regulations between the two blocs. This will largely involve Mercosur bringing its rules and regulations closer to the standards of the EU, thereby integrating Mercosur firms into the international market at large (Baltensperger & Dadush, 2019). All in all, the agreement is the most extensive trade deal negotiated by Mercosur to date (European Commission, n.d.-b). 

Resistance to Government Procurement Provisions

Government procurement refers to the acquisition of goods and services by government entities and state-owned enterprises. The government procurement process is subject to a range of regulations both on the national and international levels (OECD, 2019). The EU-Mercosur Trade Agreement aims to open up government procurement of goods, construction services and infrastructure for firms in both blocs. This means that Mercosur firms will have the same access to the EU procurement market as EU firms and vice versa. However, due to the greater competitiveness of EU firms, EU states may have more to gain from these provisions than their Mercosur counterparts (Ghiotto & Echaide, 2019).

A key element of government procurement is the bidding process, which sees governments request offers from suppliers of goods and services and choose the offer best suited to its technical and financial needs (OECD, 2019). Following the enactment of the EU-Mercosur Trade Agreement, this bidding will take place internationally, involving firms from both the EU and Mercosur. However, as the EU has more firms operating on an international level, Mercosur firms will be largely outnumbered in international public bidding. As a result, they may face a significant disadvantage in attaining public procurement contracts (Ghiotto & Echaide, 2019).

An additional imbalance arises from the differing specialisations of the EU and Mercosur economies. Mercosur produces a greater quantity of agricultural goods and a smaller quantity of manufacturing goods and services. However, it is the latter that is purchased more often by government and state entities. As a result, home-biased government demand for these goods and services is likely to be substantial and consequently increase the domestic output of Mercosur states. The contrary is true in the case of the EU. As EU firms produce a greater quantity of manufacturing goods and services, government demand is unlikely to influence its domestic output in these sectors (Trionfetti, 2000).

As such, it is in the interest of Mercosur firms to resist provisions which will expand preferential access to the bloc’s national public markets for EU firms. Mercosur firms are more dependent on government demand in the manufacturing and services sectors which the Trade Agreement seeks to regulate. Therefore, they are therefore more likely to face losses if EU firms absorb a portion of the public market. Mercosur firms will also reap fewer benefits from their expanded entry into the EU’s government procurement market, given the lower quantity and competitiveness of international firms from Mercosur available to participate in relevant bidding processes (Woolcock, 2013). 

Moreover, the Trade Agreement’s government procurement provisions apply to several sectors which are predominantly occupied by local Small and Medium sized Enterprises (SMEs) or cooperative organisations. This includes the public education sector, with local SMEs largely reliant on the provision of services such as catering and the management of bookstores under the ownership of universities (Ghiotto & Echaide, 2019). This is significant as small Mercosur firms will be especially vulnerable to increased competition from EU corporations in the context of the EU-Mercosur trade deal. Trade liberalisation initiates adjustments in economic activity within sectors in the liberalising economy which force firms with lower levels of productivity to exit the market. These are generally small, import-competing firms which cannot withstand increased competition from foreign firms in their local markets (Sen, 2017). Though the Trade Agreement incorporates some protections for these interest groups, local organisations have emphasised the likelihood of market exits and job losses in the manufacturing and service sectors amongst Mercosur SMEs (Baltensperger & Dadush, 2019). Granting preferential access to EU firms in the public procurement market may therefore result in further losses for Mercosur SMEs, which will face significant losses in their public market share. This will additionally threaten the creation and maintenance of local jobs (Ghiotto & Echaide, 2019).

Resistance to Intellectual Property Rights Provisions

Intellectual property rights (IPRs) are legal protections granted to innovators which guarantee them the exclusive right to economically exploit their intellectual property for a set period of time. IPRs can be divided broadly into two categories: those which aim to encourage innovation, including patent and copyright laws, and those which seek to uphold the integrity of the marketplace, including trademarks and geographical indicators (WTO, n.d.). IPRs are often a point of contention in the creation of trade agreements between developed and developing countries, as they can act as a tool for firms from the former to reap higher monopoly rents in developing markets. As has been described in the literature, with regards to IPRs, ‘the advanced countries’ gains are largely the developing countries’ losses’ (Rodrik, 2018).

Accordingly, Mercosur initially rejected the EU’s proposition to include provisions regarding IPRs in the Trade Agreement. Their resistance concerned the legal effects and economic costs of the EU’s proposals, most pressingly in the area of access to medicines (Blasetti & Correa, 2021). This is because those IPR provisions create a de-facto monopoly of production on medicines, whereby local firms must pay a royalty to produce the same type of medicine. As a result, production costs and prices for consumers increase. An impact assessment of the EU’s IPR proposal estimated that government expenditure would have to increase by approximately $640 million in Brazil alone to counteract price increases due to proposed patents on HIV and hepatitis C medicines (European Public Health Alliance, 2017). 

As a result of this early political resistance, the IPR provisions which were ultimately enacted in the EU-Mercosur Trade Agreement contained significantly more limited commitments. However, the one remaining issue which has the potential to disadvantage Mercosur firms in the international market is that of geographic indications (GIs) (Blasetti & Correa, 2021). GIs are indicators on products which have a certain quality or reputation as a result of their specific geographical origin. They allow those with authority over the indication to prevent its use by another firm whose product fails to meet the applicable standards (WIPO, n.d.). The Trade Agreement’s provisions regarding GIs are particularly ambitious and include the mutual recognition of 355 products originating in the EU and 220 products originating in Mercosur (Velli & Pantaleo, 2022).

The Mercosur states face a variety of legal challenges regarding those GI provisions, stemming primarily from the lack of harmonised IPR standards across the bloc. This is a particularly pressing issue for Mercosur producers who wish to add value to their productions based on these new rules (Blasetti, 2020). However, GI provisions also have particular consequences for SMEs. By limiting its provisions to specifically listed GIs, the Trade Agreement has come under scrutiny for de-facto discrimination against non-listed GIs. This is significant as non-listed GIs are generally produced by small local producers. By not extending the benefits of its GI provisions to SMEs, the Trade Agreement may therefore deepen the divide between SMEs and international producers even after legalities are resolved by the Mercosur states (Velli & Pantaleo, 2022). This issue has faced political resistance from SMEs from member states in both blocs – however, it also largely contributes to the broader challenge of the competitiveness deficit amongst Mercosur firms (Blasetti, 2020).

Conclusions

This article has discussed several reasons behind the political resistance encountered by the EU-Mercosur Trade Agreement among interest groups within Mercosur states. Specifically, it highlighted two key regulatory provisions –  public procurement and intellectual property rights regulations – poised to have a negative impact on firms within the Mercosur states. This explains the political resistance the Trade Agreement has faced from Mercosur firms and SMEs. Given that it has not been ratified as of March 2024, these provisions may yet undergo further modifications prior to its enactment. Future studies should seek to measure the actual impact of the Trade Agreement following its ratification, with a particular focus on its effect on Mercosur firms and SMEs. In the long-term, an analysis of the Trade Agreement’s impact on Mercosur’s overall industrial development will also be  insightful.

___

References

Baltensperger, M., & Dadush, U. (2019). The European Union-Mercosur Free Trade Agreement: prospects and risks. Bruegel. http://www.jstor.org/stable/resrep28500

Blasetti, R. (2020). Geographical Indications: A Major Challenge for MERCOSUR. GRUR International, 69(11), 1113–1122. https://doi.org/10.1093/grurint/ikaa124

Blasetti, R., & Correa, J. (2021). Intellectual Property in the EU-MERCOSUR FTA: A brief review of the negotiating outcomes of a long-awaited agreement. (Research Paper No. 128). South Centre.  http://hdl.handle.net/10419/232254

European Commission. (n.d.-a). EU trade relations with Mercosur. Policy.trade.ec.europa.eu. https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/mercosur_en

European Commission. (n.d.-b). The EU-Mercosur agreement explained. Policy.trade.ec.europa.eu. https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/mercosur/eu-mercosur-agreement/agreement-explained_en

European Public Health Alliance. (2017). Unhealthy Trades: The side-effects of the European Union’s Latin American trade agreements. https://epha.org/wp-content/uploads/2018/05/Unhealthy-Trade-Mercosur.pdf

Ghiotto, L., & Echaide, J. (2019). Analysis of the agreement between the European Union and the Mercosur. https://www.annacavazzini.eu/wp-content/uploads/Final-REPORT-EU-Mercosur-26.10.2020.pdf

OECD. (n.d.). Public Procurement. https://www.oecd.org/governance/ethics/public-procurement.htm#:~:text=Public%20procurement%20refers%20to%20the

Rodrik, D. (2018). What Do Trade Agreements Really Do? Journal of Economic Perspectives, 32(2), 73–90. https://doi.org/10.1257/jep.32.2.73

Sen, R. (2017). On the Economics of Trade Agreements: Who Gains and Who Loses?. The Policy Observatory. https://openrepository.aut.ac.nz/server/api/core/bitstreams/423b1320-2352-4caa-a57c5cdaba39d918/content

Trionfetti, F. (2000). Discriminatory Public Procurement and International Trade. The World Economy, 23(1), 57–76. https://doi.org/10.1111/1467-9701.00262

Velli, F., & Pantaleo, L. (2023). The Protection of GIs in EU Bilateral Instruments: Some Reflection in Light of the EU-MERCOSUR Trade Deal. European Papers-A Journal on Law and Integration, 2022(3), 1471-1487.

Woolcock, S. (2013). Policy Diffusion in Public Procurement: The Role of Free Trade Agreements. International Negotiation, 18(1), 153–173. https://doi.org/10.1163/15718069-12341248

WIPO. (n.d.). Geographical Indications. https://www.wipo.int/geo_indications/en/

WTO. (n.d.). The Economics of TRIPS: A series of primers on economic questions concerning Trade Related Aspects of Intellectual Property Rights. https://www.wto.org/english/tratop_e/trips_e/trips_econprimer1_e.pdf