Mercosur and EU: understand why the agreement wasn’t closed – and that’s not bad news

Neoliberal agreement took two decades to be written, but there may be other options

Translated by: Ana Paula Rocha

Brasil de Fato | São Paulo (SP) |
The good relationship between Macron and Lula suggested that the agreement would be closed soon - EBC

At the end of 2023, the Mercosur and European Union agreement, which had been discussed for over twenty years, stopped again. The Brazilian government itself and, particularly Itamaraty (Brazil’s Ministry of Foreign Affairs) had expectations that the text agreed upon in 2019 would finally continue the process of being approved by the legislative power and then ratified by the executive power to come into force.

What went wrong? That's a difficult question.

First, it is important to understand that the text handed to Lula was negotiated by the most neoliberal ideas in Mercosur. In Brazil, after the ousting of then-President Dilma Rousseff in 2016, there were attempts to resume the agreement by indicating to the European negotiators that the parameters would be different: without concerns about the national industry, use of developmental policies or demands for more balanced counterparts.

On August 31, 2016, Michel Temer took power as Brazil's new president and in less than two months, negotiations officially resumed. It is no exaggeration to say that this recovery was part of the coup's economic agenda.

Despite this, the new round of talks scheduled for July 28, 2019, took too long to end. Mauricio Macri, the president of Argentina (2015-2019), was at the rotating presidency of Mercosur and preparing for his presidential campaign.

He thought that announcing a pre-agreement would help him to be reelected. At the time, the Bolsonaro government was in the first year of his term. Paulo Guedes, the czar of the country’s economy, maintained the same view defended by Temer’s negotiators that to be as open as possible economically speaking parallel to commitments to restrict active industrial policies, wouldn’t be “commitments”, but “necessary measures”.

That was quite reasonable for most of the so-called “PSDB [Temer’s party] widows” occupying high-ranking positions at the Itamaraty. Codified in a Free Trade Agreement, these norms would even bind subsequent governments.

The Europeans took advantage of the good faith of their South American interlocutors. There was also another move that should be understood within the context of the US-China trade rivalry.

The German government took a more active stance to defend its manufacturing sector and positions outside Europe, among which Mercosur stands out. To do this, Germany was interested not only in commercial space for its products but also in changing the rules of public purchase, transparency, competition, and restrictions on the activities of state-owned companies, among other factors. In general, the EU countries still maintain the largest stock of Foreign Direct Investments in Mercosur (the term used for referring to investments by multinational companies), more than the US and China. However, after becoming Mercosur’s main trade partner, China also began to increase its investments.

Nevertheless, we can affirm that the resumption of negotiations by governments that adopt a neoliberal approach corresponds to a general effort by some European authorities to defend the competitiveness of the continent’s companies and, more strategically, to the European politics of asserting itself in today's world, alongside China and the US. The agreement could contribute – although modestly – to this effort.

After negotiations concluded in mid-2019, the speech of the two parties emphasized the importance of the agreement for resuming Mercosur's growth. On the European side, it also emphasized the inclusion of norms to protect the environment and labor rights. The official website of the European Commission even uses a recurring expression in Chinese diplomatic vocabulary: win-win. It's pure joy: growth, jobs and sustainable development for all the parts involved. In Argentina, the Peronist candidate Alberto Fernandez won the elections and criticized the agreement, but didn’t show alternative options.

But, then, a big confusion emerged. Is the text agreed upon in 2019 good or bad? That’s an old problem: who defines what is the national interest that Itamaraty negotiators should defend? According to the Brazilian commercial press, the agreement would be very good for Brazil, almost a concession by Europeans.

Well, there is no doubt that Mercosur's agribusiness and financial sectors achieved important things, although the Europeans made harsh negotiations regarding even these points. On the other side of the Atlantic, the top winner would be the European industry, especially the German industry. Note that, at the end of the transition deadlines, manufactured products will enter Brazil with zero rates and quotas, while quotas will remain for agricultural products from Mercosur.

Therefore – and traditionally - part of the European agriculture sector is cautious or against the agreement. It has also been taken into consideration by countries where this economic sector is more influential in politics, particularly in France, but also in Ireland and Poland.

However, if in Europe’s case, powerful sectors led by the German industrial sector and the European Commission itself were enthusiastic about the agreement, why was the process not continued before the October 2022 presidential elections? Even more so, knowing that there was a great chance that, in Brazil, a government with a different approach to economic policy would win the elections, as in fact happened.

That can be explained by a set of factors: the diversification of Europe’s internal opposition and a change in the general context due to the Covid-19 pandemic and the war in Ukraine. First, the previously mentioned traditional opposition by European agribusiness, which has its importance, particularly in France, a country that had presidential elections in April 2022.

Second, genuine opposition from environmental groups has gained greater political importance and, coupled with partner groups in Brazil, they understand that any agreement that encourages agro-export expansion ends up having a negative impact on the environment, even alleging pressure for greater deforestation. Furthermore, environmental issues gained greater strength and political visibility in the last European elections.

Although the traditional position follows this argumentation, these are very different groups, something that isn’t always understood by the Itamaraty's negotiators. Added to this is the advancement of the radical right, which rejects globalization and defends economic nationalism, hostile to any new free trade agreement.

The pandemic, in turn, changed a lot of Europe’s vision – following what happened in the US – on the use of public money and state regulation to sustain techno-industrial policies. An example is the support to restructuring the automobile industry focusing on its electrification and preventing excessive dependency on Chinese imports.

We are talking about the same European Commission that didn’t hesitate to file a complaint to the World Trade Organization (WTO) against 2013 Dilma’s Program to Boost Technological Innovation and Density of the Automotive Vehicle Production Chain, also known as Inovarauto. The program provided incentives for technological innovation and protection of the vehicle production chain through tax incentives. In other words, it was very similar to what Europeans themselves began to do.

The war in Ukraine, which started soon after the pandemic, had another consequence: the priority agendas changed drastically. The biggest problem for the European industry, particularly the German industry, is the cost of energy, which drops its competitiveness compared to its Chinese and American competitors. For instance, pay attention to the huge interest, especially by Germans, in Brazil’s Northeast potential to produce green hydrogen.

Given this set of forces for and against, with a variety of priorities on both sides of the Atlantic, what prevailed during the Bolsonaro government was inertia. Why? At the end of the day, what caused this inertia was Bolsonaro’s image among the European public in a context that included elections in Germany (2021) and France (2022).

Angela Merkel, Germany’s former PM at the time, even tried but did not get to convince the European and German parliaments that it would be better to tie Bolsonaro’s government to this agreement with environmental protection clauses instead of letting him “free” from it. In sum, those in Europe who advocated for a successful implementation of the agreement negotiated in mid-2019 wanted the two best things: an agreement in the way the ultraliberals Temer/Bolsonaro/Macri had agreed, but in a photo with Lula.

It was no longer imaginable to implement this agreement with Bolsonaro in the Brazilian government. Thus, those involved expected to buy time before European public opinion, including the German and French elections. How would the European Commission explain it to the Bolsonaro government? The trick was the “side letter” that later fell into Lula’s lap along with the 2019 text.

The European Commission explained to Mercosur's negotiators that there was strong opposition by legislative leaders and public opinion because they did not consider the environmental protection clauses enough. At the same time, both sides agreed that it wasn’t desirable to reopen negotiations considering its complexity and the fact that it involved 27 countries just from the EU side.

Reopening negotiations could stimulate many opportunist movements of all kinds. The magic solution was a “side letter” that would be declaratory as if it was an additional commitment with no legal effect on the agreement itself.

Therefore, reopening the negotiations about the content of the letter wouldn’t be to reopen the agreement. The Bolsonaro government agreed because it was anxious to sign the agreement to please an important part of its supporters, in addition to it being a big step for Paulo Guedes towards more economic liberalism. They also agreed that the European Commission would send the draft of the side letter. That's where the malice of the Europeans lies. They kept stalling and never sent a version until Lula took over the presidency. They knew that the Bolsonaro government would accept any text, no matter how humiliating it could be, just for the agreement to advance.

However, the Europeans lacked sensitivity, in light of Lula's election, to simply downplay the letter. This behavior would emerge in the most questionable form possible in February 2023. Apparently, they were convinced that their friend Lula would sign the agreement, even though it was not perfect.

Emanuel Macron, the French president, received Lula in France as a statesman even before the 2022 Brazilian election. A representative of Germany’s Social Democratic Party, the majority force in the German government in 2023, had even visited Lula in prison in the city of Curitiba. Besides, there were clear signs from many groups with representatives in the Lula administration and Congress that advancing in negotiations would be a positive thing for the new government.

The mainstream media and think tanks financed by the biggest beneficiaries of the agreement, such as CEBRI, made their own game. It also included the conviction of the Europeans, who were more realistic, that with Brazil's acceptance, the other Mercosur governments would follow.

To the Europeans, it was important to advance with the agreement in 2023, because the elections of the European Parliament will happen in June 2024. It wouldn’t be convenient to have divergences about the agreement during the electoral campaign, no matter how small this issue would be on the general agenda at stake in the coming elections. Besides, after the elections, things could become even more complicated because the European Commission will have a new composition, that is, negotiators will probably change. The second semester of 2023 also looked promising because Brazil was at the rotating presidency of Mercosur and Spain was the country’s counterpart leading the EU.

Up until now everything was alright, following the script, each part defending its stance or interests. But what about the Lula government? What is the Lula government’s stance and its members regarding the text negotiated in mid-2019 by its political opponents? That’s where things get a bit complicated.

On many public occasions, Celso Amorim [chief advisor of the Special Advisory to the Presidency of the Republic], the main designer of the government’s current foreign policy, criticized the agreement and even – correctly – called it a neocolonial proposal. There are two clear precedents: first, Lula’s and Amorim’s thoughts about the Free Trade Area of the Americas (FTAA), when they publicly mentioned the strong asymmetry between the parties, the risk to Brazil's industrial base and the limitations of economic sovereignty. Everyone knew the government's position on the issue, whether one agreed or not.

The second precedent was a business roundtable organized by the Mercosur-European Union agreement that started in the second term of former President Fernando Henrique Cardoso, and fell into Lula’s lap in his first term. In 2024, they got very close to a deal.

However, there was a clear understanding that the agreement alone would not guarantee economic growth and would tend to go against the Lula government's announced effort to resume the industrialization process. In the end, the government program that elected him in 2003 provided for an effort to recover the role of Brazilian industry using mechanisms such as local content, government purchases and credit from public institutions.

In 2004, the political will was clear: to conclude an agreement that would contribute to the recovery of manufacturing in Brazil and Argentina. The EU's proposals to include issues such as government procurement were, therefore, rejected. Secondly, with regard to tariff and quota offers, the EU wanted a lot of space for its manufacturing and little for Mercosur's agricultural exports, not to mention subsidies, of course. The biggest difference with the situation in 2023 is that, at the time, a significant part of the Brazilian business community was not interested in closing the agreement on those terms. That was also true of the FTAA negotiations.

The text that was going to fall into Lula's lap in 2023 had been publicly known for three and a half years. Of course, it wouldn't be a major issue in the 2022 election campaign, but it was a relevant topic for the neoliberal governments of Temer and Bolsonaro.

The ambiguity begins in the Guidelines for the Lula/Alckmin government, which correctly states that it is necessary to increase competitiveness. However, when listing some instruments, it mentions "expanding relevant international trade agreements". Would any "relevant" trade agreement increase the competitiveness of the Brazilian economy? And what would be "relevant"?

Although it doesn't make it explicit, the agreement was the most important on the agenda. It seems that the topic was included in the Lula/Alckmin government's guidelines at the request of one of the smaller parties in the coalition. What matters here is that there was no clear statement that the European Union-Mercosur Agreement needed to be renegotiated.

There was no lack of reasons: the 2019 text suits perfectly with Paulo Guedes’s ultraliberal vision, but not with Lula government guidelines when they talk about the new industrialization on an ecological and digital basis nor records of attempts to informally start a discussion with privileged interlocutors from the European part about some key clauses that should be changed in order to advance the agreement during the Lula government.

There were clear positive signals from the vice president [Geraldo Alckimin] and other members of the federal government who are close to the interests covered by the agreement. Alckmin even said the agreement would increase the competitiveness of Brazilian industry because it would allow more modern capital goods to be imported without tariffs. This idea was – and is – probably shared by Itamaraty negotiators. But it remained a mystery what Lula was going to do with the agreement.

There was an obvious dilemma. The agreement as it stands is anachronistic. In a twisted way, [French President] Macron defined it right. It's an agreement that basically defends the idea that liberalizing trade creates win-win conditions for all parties involved, regardless of the asymmetries between them. Moreover, this was the prevailing view in the 1990s. Today, the European Union and the US have rediscovered, as already noted, the importance of active government policies to stimulate and strengthen endogenous industrial-technological capacities.

On the other hand, it would be unrealistic to imagine that one could start from scratch to draw up an agreement that could meet the challenges for the members of Mercosur to resume their journey out of a peripheral condition in a world that needs to respond to climate crises and in which competition is intensifying over control of fourth industrial revolution technologies.

Soon, the dilemma was to bury this agreement and move on to intensify bilateral partnerships with the main partners that do not involve the Common External Tariff, including the European Commission itself. Another option was to identify some small, more emblematic changes so that it could be suggested that the agreement would be more acceptable to the Lula government.

Apparently, the government's ultimate intent was to make it appear that this was the path. It is, in fact, reasonable to argue that Brazil and Mercosur in general are interested in strengthening relations with Europe to gain more power and autonomy in dealing with the US and China.

But it's not that clear. The question remains why preparations for this negotiation were not seen from the beginning, making clear the exact points to be renegotiated. Without a doubt, a renegotiation was out of question for the Europeans.

At the beginning of June 2023, Valdis Dombrovskis, the European Commission’s negotiator, insisted that it would not be appropriate to reopen negotiations, considering that they resulted from a two-decade-long process involving many countries. This was on the eve of Brazil's rotating presidency of Mercosur and Spain in the European Union.

In the end, Lula decided to make two criticisms clear. The first was harsher and it insisted on the aforementioned “side letter”, which he considered an aberration. Everything indicates it would make him sign a document in which he contradicts norms in the constitution and ordinary Brazilian legislation, in addition to the treaties of which Brazil is part.

Note that the content of the letter was never made public. However, as explained before, it has no legal binding on the agreement but only a declaratory or interpretative character. Therefore, focusing on real criticism seemed like a way of postponing the process without actually attacking the central problem: the actual content of the agreement.

In this regard, Lula focused his criticism on clauses about government purchases. The text would make it difficult to use this instrument for stimulating industrialization, employment and technological policies. But there are many other issues that could raise doubts about the agreement, such as the automobile sector, something always so dear to President Lula.

The automobile sector, including auto parts, is of great interest to Europe (particularly to Germany) and is a sensitive topic in Brazil and Argentina. The 35% tariff charged on the import of European cars would fall to 17.5% within ten years, with a temporary quota of 50,000 cars for Mercosur in the first seven years, 32,000 of which for Brazil. Automakers tend to use this quota to export luxury cars (e.g. Audi, BMW).

In 15 years, the rate will fall to zero. No mention of technology transfer or investment obligations in the country. About auto parts, import tariff reductions may occur at three different periods, depending on the item: 10 years, 12 years and 15 years.

The 15-year transition seems smooth and modest. But what does it mean? The automobile sector is going through a brutal restructuring with the advancement of electric cars. It requires investments and new technologies, both for products and new processes. Production and distribution are beginning to be drastically affected by Industry 4.0. In the next 15 years, when the sector will undergo these drastic changes, Mercosur will open its market without quotas and zero tariffs. What will still be produced here?

According to market logic – and it will be the only one left – it will be the parts and components with lower added value, perhaps final assembly, if that. Modernity will arrive, but in the form of consumption for some and not as an endogenous technological capacity. European industry will also be able to design its environmental and safety standards.

It is worth remembering that, for several years until 2015, the car market in Brazil was the fourth largest in the world, behind only China, the USA and Japan. In 2014, more cars were sold in Brazil than in Germany.

Wellington Damasceno, director of the ABC Metalworkers’ Union, said that “in the case of the European Union and Mercosur, most headquarters operating on the South American continent are of European origin. The tendency is for these companies to concentrate production in their countries of origin, take production from South America and increase their exports here, respectively.”

Brazil’s Ministry of Development, Industry, Commerce and Services stated that the political decision to close the agreement had been taken at the beginning of the presidential mandate, and that the obstacles would be technical and limited. What is not clear is the opinion and strategy of the government's core group of people and Lula himself: drag it with its feet until it becomes unviable? Blame Europeans' intransigence with the side letter? At the same time, perhaps an understanding that Europe was also in another phase and that opposition to the agreement would be intense.

This may explain Macron's response at a press conference in the final phase of the agreement revision (“I'm against it”), followed by a statement from Lula a few days later that the new text was “more balanced, but still insufficient” and “if there is no agreement, that’s it.” It almost seemed like a previously arranged move. A few days earlier, Celso Amorim had accurately summarized the agreement: “It offers us little and demands a lot from us”, even claiming that, despite the advances, there were still “serious shortcomings”.

Anyway, it reaffirmed that there was a renegotiation of the 2019 text that was not limited to the side letter, despite the clear indication from the Europeans that this would not be convenient to guarantee the progress of the agreement. It was not very clear at what point the European Commission agreed to renegotiate part of the text, and there were no public demonstrations about what the clauses were. Perhaps the perception that Lula was not going to move forward with the agreement without making adjustments generated an “open passage” at the last minute. Until a new final text is reached, negotiations are being carried out under secrecy.

Apparently, attempts were made to negotiate the exclusion of some sensitive sectors from the restrictions imposed by the agreement, particularly in the health sector and the green technology sectors.

The European Commission says it defends public and transparent diplomacy. It was the Commission that first made public, in 2019, the full negotiated text before the Itamaraty did so. But there is no record of the supposed new round of negotiations.

The last official round of negotiations recorded was in April 2019 and the last record of a dialog with civil society on book trade agreements in Latin America was in December 2022. The only reference to this new round of negotiations that should have been initiated during Brazil's rotating presidency of Mercosur – which we found on the European Commission website – is a statement also reproduced on the Itamaraty website on December 7, 2023, the very day it became clear that there would be no unblocking of the agreement.

The text says that “the EU and Mercosur are engaged in constructive discussions to end outstanding issues under the Association Agreement. In recent months, considerable progress has been made.” Therefore, neither party wanted to reveal what exactly was revised, but the impression is that both parties agreed to send a positive message: we are moving forward and the text is improving. We are curious: improving in what? For whom? Why is this excessive secrecy? It was announced that the renegotiation is expected to be concluded in February, with the president of Paraguay, Santiago Peña, in the rotating presidency of Mercosur. It will be?

At the Mercosur Social Summit, held on the eve of the Presidential Summit, there was no doubt about the nature of the agreement, nor any reason to confuse the language. The final declaration states that the implementation of the agreement “[...] would mean the deepening of the capitalist, extractive, colonialist, patriarchal, racist model, strengthening the most retrograde and violent elites in our region, threatening the environment and socio-biodiversity, besides putting at risk the sovereignty of our peoples and territories.”

To make things more complicated, Javier Milei was elected president of Argentina during the process of closing the deal.

Although he expressed his disagreement with Mercosur during the election campaign, it was not long before he expressed interest in the agreement through Diana Modino, the current Minister of Foreign Affairs. That should not be surprising: the Macrismo sectors that were at the forefront of negotiations, in 2019, approached Milei, and his agenda coincided with the neoliberal vision of the agreement.

It is difficult to assess the fate of the text so carefully negotiated by the neoliberals in the Macri, Temer and Bolsonaro governments, a text supposedly improved – but not enough – under the Lula government. The fact is that there is great space to qualify and expand relations with European partners around an agenda of interest to the Lula government, and that does not necessarily need this agreement.

An example was Lula's visit to Berlin, at the beginning of December, in the same period that it became clear that the agreement would remain “in the freezer” for a little longer, without knowing whether its expiration date would be delayed. During this visit, Lula signed several agreements with the German government focusing on energy issues, environmental transition and technological cooperation.

Recently, a topic that has been discussed a lot is Brazil's potential to attract a new cycle of investments from international companies looking for geographical locations with the availability of green, cheap, safe and abundant energy, a phenomenon known as powerhoring. It is another example of a strategy that involves another type of agreement. Basically, Brazil misses a comprehensive policy with bold initiatives and clear rules to advance the promised new industrial policy, whose general lines were announced in the middle of last year. It is urgent to encourage productive investments and advance the generation of endogenous industrial-technological capacity. In the end, this strategy should indicate the parameters of negotiations with partners, and not the other way around.

*Giorgio Romano Schutte is a professor of International Relations and Economics at the Federal University of ABC and a member of the Observatory of Foreign Policy and International Insertion of Brazil.

** That's an opinion article and does not necessarily express the editorial line of Brasil de Fato.

Edited by: Rodrigo Durão Coelho