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  Félix Peña

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Common external tariff, agreement with the EU and link with the Pacific Alliance

by Félix Peña
December 2019

English translation: Isabel Romero Carranza


At least three issues appear as most relevant in the perspective of a 2020 Mercosur agenda. These refer to the common external tariff, the effective validity of the agreement with the European Union and the strengthening of ties with the Pacific Alliance. Although not the only ones, these are the issues that may have a greater impact on the future development of subregional economic integration process. Additionally, they could potentially pose the greatest difficulties for achieving an intelligent agreement of the various national interests.

The first relevant issue involves the level of protection that results from the application of the Mercosur external tariff that is finally agreed upon. The second issue refers to the effective implementation of the agreement between Mercosur and the EU. On June 28, it was announced that the negotiations had concluded, at least in the foreign trade chapter. The path down the road that should lead to its effective entry into force, which is estimated will be achieved in approximately two years, has begun. Finally, the third relevant issue is related to the link between Mercosur and the Pacific Alliance. This latter issue is closely linked to the strategy of convergence in diversity within the Latin American regional space.

These three issues are closely interlinked. At the same time, they are essential to help assess the real scope of the international insertion strategy that the Mercosur member countries choose to follow.

The main fronts of international trade negotiations that Mercosur and, therefore, its member countries, choose to address present different options that need to be evaluated. Assessing these options and their relative costs will be, from now on, one of the priorities of the strategic thinking related to the international insertion of any Mercosur member countries.

Such strategic thinking will have to include the necessary adaptation of Mercosur to the new world realities and to the realities of its own member countries, which in some cases are experiencing a full and complex evolution. It is not a matter of falling again for the "refounding syndrome", which has happened with some frequency, often associated with changes in the government of the partner with greater economic power. It may be more practical, effective and therefore advisable to practice the art of metamorphosis. This means to promote gradual changes that allow capitalizing on acquired experiences and the results achieved and, at the same time, introducing the modifications deemed necessary.

This is even more advisable, when a process of integration between countries faces, more than an existential crisis, a methodological one on how to develop the joint work of the participating nations. This seems to be the case today of Mercosur. Hence, no member country has openly raised the idea of withdrawing from the political, economic and legal pact that links it with its partners. This would mean recognizing that none of the partners have a true contingency plan.

In the perspective of a Mercosur Agenda 2020, at least three issues appear as more relevant for the strategy of international trade negotiations. These issues refer to the common external tariff, the effective validity of the agreement with the European Union (EU) and the strengthening of ties with the countries of the Pacific Alliance (PA). Although not the only ones, these are the issues that may have a greater impact on the future development of the negotiating strategy and of the subregional economic integration process itself. They could present the greatest challenges in achieving an intelligent agreement of the various national interests.

The first issue relates to the common external tariff and its level of relative protection. The need to reduce it even drastically has already been raised, especially by the Brazilian government. It is a matter of strong economic sensitivity, especially for some industrial sectors. It may have an impact on the industrial and foreign trade policies of the member countries. At the same time, it can be approached with flexibility, and not only based on theoretical or ideological parameters.

It is also a matter of high political sensitivity at the level of the functioning of Mercosur and its member countries, especially depending on the way that the current common external tariff is modified, which should supposedly be by consensus. It has been suggested that, if there were no such consensus, a country could still individually reduce its external tariff. In fact, one way would be if Mercosur could be transformed into a free trade zone with no common external tariff. A practical and not minor problem is that this would require modifying the constituent pact of Mercosur and, therefore, it would need to be submitted in each member country for the corresponding parliamentary approval. From a political point of view it would be difficult if eventually the necessary majority was not available.

The second relevant issue is the effective implementation of the agreement between Mercosur and the EU. On June 28, it was announced that the negotiations of the trade chapter had been concluded. Then the path of the road that should lead to its effective entry into force began. It is estimated that this may require approximately two years.

With regard to this agreement with the EU, positive and even enthusiastic reactions have been observed in some Mercosur member countries. However, such reactions have not been similar in all countries, nor in relation to all the issues addressed, especially in the trade chapter. The debate on the "fine print" seems to be far from over and it has not always been easy to address it due to the lack of transparency of the negotiations, which have been difficult to follow and to understand by those who were not at the negotiating table. Thus, the parliamentary approval could potentially pose serious difficulties in some Mercosur countries.

In an interpretation that would appear to facilitate the approval process of the agreement, it has been pointed out that in the case of Mercosur the agreement would come into effect as each national Parliament approved it. Although it is not easy to find or verify the text this decision, it would have been agreed at the Mercosur Summit meeting in Santa Fe last July. This bilateral scope of the entry into force would be regarded as a way to facilitate the necessary approval process. It would then be an incentive for the respective Parliaments to approve the agreement.

However, it would be convenient to analyze the impact that such bilateral modality of entry into force of the agreement would have from the perspective of what is prescribed in Article 2 of the Treaty of Asuncion, which establishes that "the Common Market will be founded on the reciprocity of rights and obligations between the States Parties". This is a fundamental rule of Mercosur. It implies recognizing reciprocity in the granting and use of the tariff preferences that are agreed, especially as a result of the combined effect of the common external tariff and the elimination of intra-Mercosur tariffs. The practical effect of what is prescribed in the mentioned article is clear: the tariff preferences granted among member countries cannot be unilaterally liquidated, they can only be modified through joint decisions of all member countries.

This condition can be explained by the need to avoid, at the founding moment, tendencies to develop bilateral negotiation strategies of a member country with third countries, especially those with large markets. We need to remember that at the time when the Treaty of Asunción was negotiated, the US government had already announced its idea of promoting a free trade area of the Americas. Perhaps this has something to do with the reasons that led to include Article 2 of the Treaty: to avoid neutering the preferences granted in Mercosur as a result of unilateral decisions of a member country.

It is natural that there are strong doubts as to whether Mercosur as a whole can effectively achieve the goal of projecting itself to the world as an economic area with a common external tariff and that negotiates as a unit with diverse and, especially, large markets. One option would then be to return to the individual negotiation strategies of each member country, dropping the common external tariff. It would mean either to transform Mercosur into a free trade zone, or eventually abandoning the ambitious political idea that led to the creation of Mercosur. In that case, each country would need to assess what would be the best option for them.

The imaginable alternative plan to transform Mercosur into a free trade zone, in the sense meant by Article XXIV of the GATT-WTO, abolishing the common external tariff (CET) - the elimination of Decision 32 /00 would not be sufficient for legal reasons- could have some high political and economic costs. It would also imply modifying the Treaty of Asunción. It is up to each country to determine whether it is appropriate to face such costs.

The third relevant issue is the link between Mercosur and the countries of the Pacific Alliance. It is an issue that is related with the strategy of convergence in diversity in the Latin American region. Such a strategy was proposed, at the time, by the Chilean government during the Presidency of Michelle Bachelet, and was discussed further in a meeting with the participation of the Ministers of Foreign Affairs and Foreign Trade of the Mercosur countries and of the Pacific Alliance, which took place at the Palacio de la Moneda in Santiago de Chile, on November 24, 2014.

It was clear then that the proposal was not an integration agreement between two sub regional schemes, but to create roadmaps leading to the establishment of multiple communicating vessels between the processes of productive transformation and international insertion of the countries belonging to both blocks (but not necessarily all). The ECLAC presented on that occasion very concrete ideas that are still in force. The participants also recognized that the 1980 Montevideo Treaty, which created the LAIA, provides the institutional framework and appropriate and under-utilized instruments (such as the different types of partial scope agreements) to carry out a strategy devised and shared by the countries of the region.

It is possible to foresee that the countries that currently form part of the Mercosur customs union, and that are the founding partners, will also advance initiatives aimed at expanding the negotiating agenda with other large economic areas, such as China, Japan, India, Korea and the ASEAN in Asia, and the US and Canada in North America. If such initiatives were promoted, they should necessary relate to the strategy of convergence with the countries of the Pacific Alliance mentioned previously, and with the broadest strategy in relation with Central America and the Caribbean, including, most certainly, Cuba. The fact that Cuba is a member of LAIA, can even make the role of this regional organization still more relevant in the development of a more ambitious strategy for the integration of Latin American countries in global international trade.

The three issues of the Mercosur Agenda 2020 are closely linked to each other. At the same time, they are fundamental for the international integration strategy that is chosen by the Mercosur member countries. The issue of the common external tariff is key for at least two reasons. Firstly, due to its impact on the ability to compete with goods and services in other markets. Secondly, it shows that those who negotiate with Mercosur (in this case the EU) do so with a group of countries acting as a unit, which means access to a single market and not to the sum of individual countries. The issue of the agreement with the EU is of great relevance as well. It shows the will and also the capacity to negotiate and to compete with large markets. The signal has been clear, in the sense that Mercosur will also seek to negotiate preferential trade agreements with other markets, including the US and China. Indeed, these two issues have a direct link to the third issue, which is that of the link that Mercosur and the Pacific Alliance develop in the future. The PA countries have different modalities of agreements with Mercosur itself, with the EU, and also with relevant countries of the international trading system, including, of course, China, the US and Canada Connecting these modalities, especially through rules of origin that facilitate business strategies for the development of productive chains, would help provide a greater scope to the corresponding inter-regional preferential trade agreements.

Recommended Reading:

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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. |

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