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  Félix Peña

INTERNATIONAL TRADE RELATIONS NEWSLETTER
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AN EXCESSIVELY LONG COURTSHIP?
A window of opportunity is open for the conclusion of the Mercosur-EU partnership

by Félix Peña
May 2010

English translation: Isabel Romero Carranza


 

During the recent Madrid Summit the countries of the European Union and of Mercosur announced the re-launching of the negotiations for a bi-regional strategic partnership agreement. These negotiations were initiated ten years ago and remained at a standstill for six years. Now, they could reach a conclusion by next December.

There are three factors that could explain why these negotiations will be resumed after such a long halt. One of them is the fact that the governments of Argentina and Spain have developed an intense political and diplomatic action aimed at achieving this result. Other factor is the generalized idea that there is no favorable perspective for the conclusion of the Doha Round in the short term. The third factor is the perception that, within the context of the deep transformations of the map of global economic competition and of a financial crisis whose effects still continue to unfold, China's economic prominence will continue to pose challenges to the economies and businesses of Europe and Latin America.

Reaching a bi-regional Mercosur-EU agreement will be no easy task. Political determination and technical creativity will be required to reach commitments that preserve a reasonable balance between the different interests. The knots to be untied are well known and have been thoroughly diagnosed on both sides. This is not a negotiation that is isolated from the other negotiations that the European Union is developing with, for example, India.

The high political costs that an eventual failure of these negotiations could have would indicate that, after such a prolonged courtship, the moment of truth has arrived for the bi-regional partnership. Given the political capital that is being invested it would be difficult to imagine that any new delays would not affect the credibility of the whole process and of those involved. It would be reasonable then to expect the realization of a scenario that is possible, probable and desirable in which a bi-regional agreement is fully concluded in a short period of time.

Other pending issues between both regions could be tackled within the framework of an ambitious strategic partnership. Some of these issues are deeply rooted and their approach will require a strong dose of imagination and creativity as well.


On occasion of the VI Latin America and the Caribbean - European Union Summit (LAC-EU) that took place in Madrid on May 18 (on its results see the Madrid Declaration and the Action Plan approved by almost sixty Heads of State and Government on http://www.eu2010.es/ or click here; for a detailed information on the trade relations between the EU and LAC and with Mercosur see http://trade.ec.europa.eu/), it was announced that the much delayed negotiations between Mercosur and the European Union (EU) will be re-launched (see the text of the Joint Declaration of the IV EU- Mercosur Summit on http://www.eu2010.es/ or click here). Initiated ten years ago these had remained at a standstill after the failed attempt to conclude them in October 2004. Their aim is to achieve an agreement of bi-regional strategic partnership (on the relations between Mercosur and the EU during the last two decades refer to the work published on our webpage - http://www.felixpena.com.ar. On the state of these negotiations as from the 2004 failure, see the following editions of this Newsletter: October 2004; February 2005; September 2005; March 2006; May 2006; October 2006; June 2007; October 2007; April 2008; September 2008; October 2009, and December 2009).

Of the three main aspects of the agreement the one that apparently motivated the standstill was that of preferential trade (for an analysis of the Mercosur-EU negotiations from its beginning see the article by Graciela Molle, "Mercosur-European Union Negotiation", published in the Magazine of the Center of International Economy of the Argentine Ministry of Foreign Affairs, May 2008, number 11, pages 95 to 119, on http://www.cei.gov.ar). Behind the negotiation closed doors it is usually claimed that the two remaining components (political dialogue and cooperation) have already been settled. However no written word on this regard has been released to the public.

It is deemed probable that the attempts to conclude the bi-regional negotiations will be made next December at the end of Lula's Presidency of Brazil. According to the joint declaration of the Mercosur-EU Summit of May 17, "Both sides stressed their commitment to strive for the conclusion of the negotiations without delay. A first negotiating round will take place by early July at the latest". At the time of the Summit Argentina still held Mercosur's pro-tempore presidency which was later passed on to Brazil.

The combination of three factors could explain why after such a long standstill the negotiations will be resumed and even concluded in a short period of time (otherwise it could be concluded that they had not been re-launched at the highest political level).

The first is the fact that both the governments of Spain an Argentina - while holding the joint presidency of the Madrid Summit - developed and intense political and diplomatic action aimed at achieving such result. Months before the Summit they were responsible for bringing back a possibility that even a few days before was considered remote or even impossible. The results indicate that this was an effective action if we take into account the two remaining factors that are mentioned bellow.

The second factor is the general idea that the Doha Round does not offer any realistic expectations for its conclusion in a relatively short period of time. This would be inducing many countries and even the EU to attempt to intensify the development of their own network of preferential trade agreements, i.e. those concluded within the scope of article XXIV of GATT-1994.

The third factor is the perception that, within a context of deep transformation of the map of global economic competition and of the financial crisis whose effects still continue to unfold, China's economic prominence will continue to grow in the world in general and in Latin America in particular. This is perceived as a great challenge by several companies doing business in the region - certainly by European ones but also by those of the region itself -. A sector which is particularly vulnerable to future Chinese competition is the automotive one which in Mercosur has been characterized by a strong European presence. The investments and the demand for equipment and capital goods that will result from the discovery of hydrocarbon sources in the South Atlantic - until now off the coasts of Brazil - may be another driving force behind the interest on the European side to re-launch the negotiations with Mercosur and to conclude them promptly (on the investment requirements that will result from the discovery of new sources of hydrocarbons off the coast of Brazil see the article by José Sergio Gabrielli de Azevedo mentioned in the Recommended Reading section).

Reaching a bi-regional agreement between the European Union and Mercosur will not be an easy task. It will require much political determination - on this regard the signals given off in Madrid may be considered positive - as well as creativity in the technical plane in order to achieve commitments that imply a reasonable balance between interests that appear quite divided at times. The knots that need to be untied are well known and have been thoroughly diagnosed on both sides. Some of them were even made manifest in the negotiations for the Doha Round, a fact that generated links between the bi-regional and the global multi-lateral negotiations. The issue of agricultural products - including processed ones - is not the only one. However recent declarations by EU member countries with strong agricultural interests indicate that it will still be necessary to overcome many resistances - real or apparent - in order to reach an agreement.

Furthermore, it should be noted that this is not an isolated negotiation, neither would be the preferential trade agreement that is eventually achieved. On the contrary, in order to fully understand the Mercosur-EU negotiation in its full dimension it would be necessary to link it - from the perspective of both regions and of its respective member countries- with the network of agreements being promoted by the European Union. This without overlooking the fact that a more complex approach would require taking into account other negotiations as well, such as those that have been concluded or are being developed by the U.S. and even by countries of the region such as Peru, who has recently enacted its own agreement with China.

Within the framework of its global strategy, launched in 2006 (on this subject see the paper "Global Europe", of 18 April 2007, on http://trade.ec.europa.eu/ or click here), the European Union has concluded, also in Madrid, the negotiations for the preferential trade agreements - under different names and formats - with Colombia, Peru an Central America. The texts still need to be polished form the legal standpoint and translated into all the official EU languages. This is probably the reason why they have not become public yet. They will later need to be approved by the respective parliaments and eventually by other relevant internal bodies, such as is the case in Colombia where the Constitutional Court must be involved in order to be ratified and gain validity (see the information on the agreement on www.portafolio.com.co from 21 May, 2010). All this can take some time - between one and two years at best -. At the same time, the European Union has initiated its first negotiation with an ASEAN country - Singapore - and there is a possibility that the negotiation with India, initiated in 2007, might be concluded next October (see the information on http://www.ec.europa.eu/trade).

Knowing what the EU has negotiated with other Latin American countries and particularly what is being negotiated with India might be of great interest for Mercosur negotiators. Due to its relevance the negotiation with India should be followed closely. It includes sectors such as the agricultural, automotive, textile and clothing ones and issues such as those related with services and intellectual property, whose approach in the bilateral India-EU agreement could be useful for the bi-regional Mercosur-EU agreement and vice versa.

An aspect that will require particular attention is how to approach in both negotiations the requirement that the scope of a free trade agreement should comprise what is "substantially all the trade" (article XXIV - inc.8 of GATT-1994). It was a delicate matter in the Mercosur-EU negotiating stage that ended in 2004. It is perhaps the specification of such requirement - i.e. the definition of what is considered to be "substantial trade" - that may offer a key for the degree of flexibility that the commitments and instruments agreed in the bi-regional agreement may have if there is an intention of achieving a reasonable balance of the different interests at play. Such flexibility might be even more necessary if we take into account that if the bi-regional negotiation were to be concluded by the end of the current year it will happen before the closure of the Doha Round.

There is no definition as to what should be understood by "substantially all the trade" in order to appreciate the consistency of an agreement that establishes a free trade area within the GATT rules. Qualitative and quantitative criteria may be used. In fact several proposals have been advanced on this issue both by countries which are now members of the WTO and by experts. However no definition exists to bind those negotiating a free trade zone. It is a known fact that the efficiency of the procedures established by the GATT-WTO system to ensure the consistency of the different modalities of preferential trade agreements with the commitments in the multilateral plane is far from ideal. This is the reason why in the case of the negotiations between India and the EU some specialists argue that the concern for the requirement of what is understood as "substantially all trade" should not be exaggerated. They even suggest that in such agreement some relevant sectors should be excluded, specifically the agricultural and the automotive sectors (see the book by Sangeeta Khorana and other authors included in the Recommended Reading section of this newsletter, particularly pages 10 and 11 and Chapter 2).

The creation of a preferential trade and economic space between different countries or regions does not necessarily need to be concluded in one stage, as would be the case if it was required for example to guarantee from the start the liberation of 90% of the trade of originating products. It would be possible thus to imagine such creation as a gradual process in which the first preferential stock - that may be qualified as "significant" in a valid interpretation of the term "substantial" - is gradually increased through the application, for example, of different modalities and evolutionary clauses.

In the case of an agreement Mercosur-EU, a gradual process of creation of a bi-regional preferential space consistent with GATT rules could be bolstered by including clauses aimed at linking the different agreements that form part of the network that the EU is creating in the region based on the agreements signed in due time with Chile and Mexico. This would enable to provide European businesses situated in different countries - for example Mercosur plus Chile - more appropriate conditions to develop productive integration strategies. Additionally they could benefit from the reduction of duties and any future improvements on the quality of the physical connectivity between the different markets. It would also help articulate the preferential trade strategies with the other issues of bi-regional cooperation that were included in the action plan approved at the Madrid Summit including, among others, those pertaining innovation and technological advancement, social cohesiveness, climate change, energy and bio-diversity.

Is it possible that once that the Mercosur-EU negotiations are re-launched they suffer more delays, become stagnant once again or simply fail? All these are plausible scenarios, either because of the difficulties to untie the knots that are still pending or because of a lack of consensus regarding commitments and instruments that are flexible enough and at the same time are consistent with WTO requirements.

The costs of not concluding the negotiations could be very high this time. If there is sufficient political determination and technical creativity it would be difficult for a country or sector to be willing to assume the consequences of a failure. One outcome could be that instead of a bi-regional agreement the final result is something similar to what happened with the Andean Community of Nations. Due to the inability to move forward in the joint negotiation, the EU opted to close agreements with two countries, Colombia and Peru, with no limitation as to the possibility that the other countries might be incorporated at a later date, as in fact could be the case of Ecuador.

If this eventually happened in the case of Mercosur, it would imply a strong blow to the fundamental idea of building a common market with a deep strategic and political purport and to its natural consequence, which is precisely to negotiate with one single customs territory, with no harm to the flexibilities that it may have, taking advantage of the opportunities provided by article XXIV, clause 8, a, of GATT-1994. A failure in the negotiation that could not be attributed to the EU would imply a fracture within Mercosur between those countries that are willing to negotiate and those who are not, whatever the validity of the arguments used to justify this position. The result could then be similar to what happened with the negotiations between the Andean countries and the EU.

In a certain way, the high political costs of an eventual failure of the Mercosur-EU negotiations would indicate that the moment of truth has arrived for both the bi-regional relation, after such a prolonged "courtship", and for Mercosur's own integration process.

Thereof, it would be reasonable to imagine as a possible and probable scenario the full conclusion of a bi-regional agreement in which both parties have invested much political capital, as was reflected by the results of the Madrid Summit. The greater the flexibility in the planning of the commitments that will be required and of the instruments that will be used, the greater the chances that this scenario will be achieved, even before the end of the current year. If this were the case, a door would probably open for trade negotiations with other countries such as the U.S and China, who would endeavor to obtain preferential treatment in their trade relations with Mercosur as well. Additionally it would also be more feasible to undertake the re-engineering still required by Mercosur (on some advisable measures see the November 2009 edition of this newsletter).

Such scenario - obviously an optimistic one - would allow to creatively face other unresolved issues of the bi-regional relation or that involve countries from both regions, including those issues of great complexity or that have been dragging on for a long time. A bi-regional strategic partnership agreement such as the one being sought may contribute a common ground and an opportunity for an imaginative approach to all those pending issues, even the most sensitive and complex ones.


Recommended Reading:

  • Barón Crespo, Enrique, "El Error del Milenio", Seix Barral, Barcelona 2007.
  • Bernstein, William J. "Un Intercambio Espléndido. Cómo el comercio modeló el mundo desde Sumeria hasta hoy", Ariel, Planeta, Barcelona 2010.
  • CEPAL, "La República Popular de China y América Latina y el Caribe: hacia una relación estratégica", Comisión Económica para América Latina y el Caribe, Santiago de Chile, Abril 2010, en http://www.eclac.org.
  • De Benoist, Alain, "Más allá de la derecha y de la izquierda. El pensamiento político que rompe esquemas", Àltera, Barcelona 2010.
  • Ezeani, Elimma C., "The WTO and its Development Obligation. Prospects for Global Trade", Anthem Press, London-New York-Delhi 2010.
  • Gabrielli de Azevedo, José Sergio, "Esboço de um marco conceitual para anáise da indústria do petróleo, pré-sal e desenvolvimento", en Giambiagi, F.; De Barros, O. "Brasil Pós-Crise", Campus, Elsevier, Rio de Janeiro 2009, ps. 247-265.
  • Giambiagi, Fabio; De Barros, Octavio (orgs.), "Brasil Pós-Crise. Agenda para a próxima década", Campus, Elsevier, Rio de Janeiro 2009.
  • Hinojosa Marinez, Luis M., Roldán Barbero (cords.), "Derecho Internacional Económico", Marcial Pons, Madrid-Barcelona-BsAs 2010.
  • Kagan, Donald, "La guerra del Peloponeso", Edhasa, Barcelona 2009.
  • Khorana, Sangeeta; Perdikis, Nicholas; Yeung, May T.; Kerr, William A., "Bilateral Trade Agreements in the Era of Globalization. The EU and India in Search of a Partnership", Edward Elgar, Cheltenham-Northampton 2010.
  • Maalouf, Amin, "El desajuste del mundo. Cuando nuestras civilizaciones se agotan", Alianza Editorial, Madrid 2009.
  • Mavroidis, Petros C.; Messerlin, Patrick; Wauters, Jasper M., "The Law and Economics of Contingent Protection in the WTO", Elgar International Economic Law, Edwar Elgar, Cheltenham-Northampton 2008.
  • Peña, Félix, "Um desafío para a governabilidade global: reflexôes sobre a Conferéncia de Copenhague", en Revista Política Externa, vol. 18 nº 4, Sâo Paulo, Mar/Abr/Mai 2010, páginas 43-46.
  • Pirenne, Henri, "La Democracia Urbana: una vieja historia", Editorial Capitán Swing Libros, Madrid 2009.
  • Reynolds, David, "One World Divisible. A Global History Since 1945", W.W.Norton & Company, New York-London 2001.
  • Revista Política Externa, "O clima pós-Copenhague", Vol. 18, nº 4, Mar/Abr/Mai, Sâo Paulo 2010.
  • Sader, Emir; García, Marco Aurelio, "Brasil entre o passado e o futuro", Editora Fundaçâo Perseo Abramo-Boitempo Editorial, Sâo Paulo 2010.
  • Tamayo, Juan José, "Islam. Cultura, religión y política", Editorial Trotta, Madrid 2009.
  • Unión de Exportadores del Uruguay, "Exportación Inteligente", Programa Académico UEU-BROU, Jornada Académica 2008, Montevideo 2008.


Félix Peña Director of the Institute of International Trade at the ICBC Foundation. Director of the Masters Degree in International Trade Relations at Tres de Febrero National University (UNTREF). Member of the Executive Committee of the Argentine Council for International Relations (CARI). Member of the Evian Group Brains Trust. More information.

http://www.felixpena.com.ar | info@felixpena.com.ar


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