Progress on EU-Mercosur Deal Sparks Hopes of a 'Game Changer'

(Bloomberg) -- Brazil and Argentina may be on the verge of shaking off their well-earned reputation for protectionism, if the European Union and the Mercosur customs union finally sign a deal after nearly two decades of talks.

Negotiations between the two organizations are said to be going smoothly, with a South American diplomat involved in the talks estimating the chances of an agreement at 70 percent. Serious obstacles remain, but there has been significant progress over the past week during talks in Brussels, the person said.

A deal has the potential to transform the relatively closed, high-tariff economies of Brazil and Argentina, the two largest members of Mercosur, which also includes Uruguay and Paraguay. An iPhone X costs at least twice as much in the stores of Brasilia and Buenos Aires as it does in the U.S., thanks in part to the South American nations’ historically high levels of import tariffs and subsidies to local companies. Lifting the barriers to the world’s largest trade bloc would provide a significant boost for the two countries struggling out of recession, given that annual bilateral trade is already worth over $100 billion.

"If Mercosur closes a deal of this magnitude with the EU, it’ll be a game changer for economic recovery in Brazil and Argentina," said Matias Spektor, a professor of international relations at Brazil’s FGV business school, adding that it would signal to the rest of the world a recovery from "ten years of economic populism."

For Michel Temer and Mauricio Macri, the presidents of Brazil and Argentina respectively, an agreement would consolidate their efforts to open up their economies, leaving a lasting legacy of reform.

"Progress in the EU-Mercosur talks will be positive for pro-market leaders of the region," said Juan Cruz Diaz, managing director of the Cefeidas Group, a regulatory risk advisory company based in Buenos Aires. "An agreement will be a strong political signal that will reinvigorate Mercosur."

Officially both sides are committed to reaching an accord before the end of the year, with European Trade Commissioner Cecilia Malmstrom telling reporters in November that there was a "realistic chance" of an agreement before 2018. Work is ongoing to prepare for a possible exchange of offers, and member states are being consulted, according a Commission official told Bloomberg on condition of anonymity.

Meanwhile, Macri told Bloomberg News last month that he was determined to sign a deal this year.

But France’s President Emmanuel Macron appears to be in no rush, telling a gathering of farmers and food producers in October that he was not in favor of hurrying to conclude negotiations.

Agricultural products and soft commodities, where Mercosur has clear productivity advantages over the EU, may prove to be the main snag, according to Marco Maciel, Bloomberg Intelligence’s Brazil economist.

"The European agricultural sector is very important for the EU and has strong lobbies and influence on the European community and politics," he wrote.

--With assistance from Charlie Devereux and Viktoria Dendrinou

To contact the reporters on this story: Samy Adghirni in Brasilia Newsroom at sadghirni@bloomberg.net, Carolina Millan in Buenos Aires at cmillanronch@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Bruce Douglas

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