In June 2019, the European Union and the Southern Common Market reached an Interregional Agreement after more than twenty years of negotiations. However, with the United Kingdom official exit from the EU, the agreement negotiated with Mercosur will not apply to the country. In this blog, Angélica Szucko aims to discuss the opportunities and challenges that Brexit brings to Mercosur, particularly by seeking a similar trade agreement with the UK.
Written by Angélica Szucko, Postdoctoral Researcher at the University of Brasília, Brazil.
This blog is part of a policy report called "NEXTEUK – EU and UK Relations: Where will we be in 2031?".
In June 2019, the European Union (EU) and the Southern Common Market (Mercosur) reached an Interregional Agreement after more than twenty years of negotiations (European Commission, 2021). However, with the United Kingdom (UK) official exit from the EU, the agreement negotiated with Mercosur will not apply to the country. This article aims to discuss the opportunities and challenges that Brexit brings to Mercosur, particularly by seeking a similar trade agreement with the UK.
Brexit opens up new economic opportunities both for Mercosur and for Brazil, in particular. In 2020, Mercosur's total exports to the UK corresponded to USD 3.3 billion, of which 76.5% were Brazilian. These exports included, mainly, agricultural products, such as poultry, beef, coffee, iron ore, wood, sugar, and fruits. Imports from the UK to the Southern regional bloc, in turn, represented USD 2.8 billion, with 82.4% of them destined to Brazil. The most imported goods were products derived from iron and steel, chemicals, and whiskey (Estadísticas Mercosur, 2021).
Table 1: Exports and imports from Mercosur to UK in 2020 (FOB USD)
Exports
% of total
Imports
Mercosur (4*)
3,318.7 millions
-
2,831 millions
Argentina
625.1 millions
18.8%
407.8 millions
14.4%
Brazil
2,537.6 millions
76.5%
2,331.4 millions
82.4%
Paraguay
116 millions
3.5%
37.9 millions
1.3%
Uruguay
39.9 millions
1.2%
53.9 millions
1.9%
The amounts referring to Venezuela, which is suspended from Mercosur, were excluded.
Source: elaborated by the author based on Estadísticas Mercosur, 2021
Based on these data, we notice that the trade flow between the UK and Mercosur is still relatively limited. Indeed, the British market is not one of the bloc's main export destinations – only 1.3% –, nor a source of its imports – only 1.5% (Estadísticas Mercosur, 2021). However, there is a large potential market to be exploited with the changes brought by Brexit according to three main dimensions.
Firstly, since January 2021, the British government has adopted an independent trade policy and a new tariff regime, in replacement to the EU Customs Union, with some changes such as zero, simplified, or reduced rates for certain goods (Confederação da Agricultura e Pecuária do Brasil, 2021; UK Government, 2021a). To some agricultural products, particularly fruits, a competitive sector for the South American grouping, there were significant reductions in import tariffs compared to those applied by the EU. Apples, for example, benefited from a reduction of approximately nineteen percentage points – from 27.2% to 8% – while the import tariff on lemons and limes went from 25.8% to 12% (Confederação da Agricultura e Pecuária do Brasil, 2021).
Secondly, in addition to this new tariff regime, Boris Johnson's foreign policy has been seeking to expand its commercial partnerships. The country has signed a series of trade agreements, mainly rollover agreements[1], with third countries to maintain favourable trade terms and ensure continuity for UK business (UK Government, 2021b). An agreement with Mercosur is not yet in discussion; however, future trade talks would probably build on the text already agreed with the EU. In this case, both sides could benefit from a reduced time of negotiations, including the approval and ratification stages, since it would not be necessary for the agreement of the other 27 EU member states.
Lastly, the UK traditionally tends to adopt a more liberalizing approach in trade terms, being less protectionist than some EU Member States, which may be in line with the demands from the agricultural sector in Mercosur. The country imports around 50% of the food it consumes, and Mercosur has only a very small share of this market, which could be increased (Nogués, 2018; Invest & Export Brasil, 2021a). In 2019, 64% of UK agricultural imports came from the EU, while only 1.3% had Brazil as their origin, for example (Confederação da Agricultura e Pecuária do Brasil, 2021). Also, in recent years, Mercosur's share has not exceeded 5% of total UK agricultural imports (Nogués, 2018).
However, this opportunity to expand Mercosur’s access to the British market must face two broad challenges. The first one is the challenge of competitiveness with Commonwealth countries, such as Australia and Canada, which are big agricultural producers and already have a close relationship with the UK. Moreover, there are also issues related to a possible rise in the logistical and customs costs of Mercosur exports to the UK in case of substantive changes in British regulatory standards compared to the EU, like the requirement for new or different certifications (Invest & Export Brasil, 2021a). The increase in bureaucracy could lead to more time-consuming procedures and logistical delays at the ports, impacting directly perishable products, such as agricultural goods.
Another challenge for UK-Mercosur relations in this post-Brexit scenario comes from the South American grouping’s internal dynamics with propositions for greater flexibility in the bloc. On the one hand, the idea of a progressive reduction in the common external tariff is highly supported by the current governments of Brazil and Uruguay, whereas it faces some resistance from Argentina and Paraguay. Recently, Brazil and Argentina have agreed to work with the other Members on a reduction of around 10% of the common external tariff, keeping protected the exceptions that already exist in the bloc (Ministério de Relações Exteriores do Brasil, 2021). On the other hand, the flexibilization of the rules for external negotiations of trade agreements with third countries, as suggested by Uruguay at the Mercosur Summit in March 2021 (Uruguay Presidencia, 2021), is opposed by Argentina and Paraguay (Araújo & Araújo, 2021). The Uruguayan proposal foresees a plan for external negotiations that would allow the presentation of individual offers, as well as the adoption of different speeds by each country, both in the negotiation and in the implementation of the agreement (El Observador, 2021), and the country is making the forementioned tariff reduction conditional to a broad flexibilization of those rules for external negotiations.
The Uruguayan insistence on including this issue of flexibilization culminated in the absence of a joint declaration in the summit that commemorated the bloc's thirty years of foundation in March 2021. In addition, Argentina has been hesitant to continue with ongoing trade talks due to concerns about the impact on the country's socio-economic situation (Araújo & Araújo, 2021). The Argentinian stance could hamper future negotiations with the UK, increasing internal pressures for even greater flexibility of the bloc, for example, with the possibility of signing bilateral trade deals instead of a more comprehensive UK-Mercosur agreement.
Despite those challenges, we expect that by 2030 the UK-Mercosur relations will be improved with a potential trade agreement similar to the one negotiated with the EU, which may also be ratified by that time. However, we still need to evaluate how the new UK-EU relationship will change British regulatory standards, which could add extra customs and logistics concerns to Mercosur countries. In addition, the quarrel over the flexibilization of the South American bloc and its internal disagreements might impact the negotiations with both the UK and the EU, either bilaterally or regionally.
[1] See more on: https://ukandeu.ac.uk/the-facts/what-are-rollover-agreements/
References
Araújo, A. L. and Araújo, F. L. (2021). Flexibilização do Mercosul: lições da Comunidade Andina. Observatório de Regionalismo. Available from: http://observatorio.repri.org/2021/05/11/flexibilizacao-do-mercosul-licoes-da-comunidade-andina/ [Accessed 9 December 2021].
Confederação da Agricultura e Pecuária do Brasil. (2021). Brexit e o novo regime tarifário britânico: mudanças e oportunidades para o setor agropecuário brasileiro. Available from: https://www.cnabrasil.org.br/assets/arquivos/Book-Estudo-REINO-UNIDO-1.pdf [Accessed 9 December 2021].
El Observador. (2021). ¿Qué propone Uruguay a sus socios para flexibilizar el Mercosur? Available from:https://www.elobservador.com.uy/nota/-que-propone-uruguay-a-sus-socios-para-flexibilizar-el-mercosur--202142518230[Accessed 9 December 2021].
Estadísticas Mercosur. (2021). Available from: https://estadisticas.mercosur.int/?language=pt [Accessed 9 December 2021].
European Commission. (2021). EU-MERCOSUR. Available from: https://ec.europa.eu/trade/policy/in-focus/eu-mercosur-association-agreement/ [Accessed 9 December 2021].
Invest & Export Brasil. (2021a). O Brasil diante do Brexit. Available from: http://www.investexportbrasil.gov.br/o-brasil-diante-do-brexit#:~:text=Entre%20os%20principais%20impactos%20negativos,barreiras%20tarif%C3%A1rias%20e%20n%C3%A3o%20tarif%C3%A1rias[Accessed 9 December 2021].
Ministério das Relações Exteriores do Brasil (2021). Nota à imprensa n.º 125 Comunicado Conjunto Brasil-Argentina por ocasião da visita a Brasília do Ministro das Relações Exteriores, Comércio Internacional e Culto da Argentina. Available from: https://www.gov.br/mre/pt-br/canais_atendimento/imprensa/notas-a-imprensa/comunicado-conjunto-brasil-argentina-por-ocasiao-da-visita-a-brasilia-do-ministro-das-relacoes-exteriores-comercio-internacional-e-culto-da-argentina[Acessed 9 December 2021].
Nogués, J. J. (2018). O Brexit e o comércio agroindustrial. Available from: https://ictsd.iisd.org/bridges-news/pontes/news/o-brexit-e-o-com%C3%A9rcio-agroindustrial [Accessed on 9 December 2021].
UK Government. (2021a). Tariffs on good imported into the UK. Available from: https://www.gov.uk/guidance/tariffs-on-goods-imported-into-the-uk [Accessed 9 December 2021].
UK Government. (2021b). UK trade agreements with non-EU countries. Available from: https://www.gov.uk/guidance/uk-trade-agreements-with-non-eu-countries [Accessed 9 December 2021].
Uruguay Presidencia. (2021). Uruguay presentó propuesta de flexibilización del Mercosur. Available from:https://www.presidencia.gub.uy/comunicacion/comunicacionnoticias/conferencia-bustillo-arbeleche-mercosur. [Accessed 9 December 2021].
Photo credits: Confederação Nacional da Indústria (CNI). Brexit e os interesses empresariais brasileiros no Reino Unido – Brasília : CNI, 2019