Mercosur Agreement and European Union - possible effects on agribusiness

The world market received great news at the end of June. After 20 years of negotiations, the agreement between Mercosur and the European Union was signed during the 14th G20 Summit in Brussels. It becomes the second largest agreement in the world in relation to the combined GDP of its participants, behind only the agreement between the European Union and Japan. Together, the two regions account for a GDP of around US$ 20 trillion, approximately 25% of the world economy.

Today, of the ten largest economies in the world, Brazil is the one with the lowest participation in international trade, with less than half the volume transacted by countries with comparable GDPs, such as Italy and Canada.

The agreement between Mercosur and the European Union could represent the most competitive access for Brazilian products to a consumer market of 500 million people, which accounts for more than 21% of the world economy. And products from the agribusiness chain have a prominent position in this negotiation.

The agreement envisages the reduction or elimination of tariffs on more than 90% of products traded between the blocks, with entry into force, in a phased manner, over the next 15 years. Before him, only 24% of Brazilian exports entered the European Union free of tariffs.

To enter into force, the pact must be ratified by the parliaments of each of the blocs' member states, which can be a challenge to overcome. Among the conditions of the agreement are remaining in the Paris treaty and reducing deforestation in the Mercosur region. Other environmental issues may be included, such as the use of certain agricultural pesticides.

But what impact would this agreement have on Brazilian agribusiness?

If the challenges are overcome and the agreement is ratified by the Brazilian parliament, products in the agribusiness chain, which currently represent more than a third of exports to the European Union, will benefit. Imports of machinery and chemicals can also bring positive impacts to the sector.

The European Union is the world's largest agricultural importer. To give you an idea, in 2018, the European bloc imported US$182 billion in the sector and Brazil is among its largest suppliers of agricultural products. With the removal or reduction of tariffs, the country will become even more competitive in exporting these products to the bloc.

According to data from Innovatech, in 2018, among the five export champions from Brazil to the European Union are soy and derivatives (12,80% - export champion) and raw coffee beans (5,50%). Under the agreement, major changes will occur in the agribusiness sector with the removal or reduction of tariffs. For example, vegetable oils would immediately have zero tariffs; roasted and soluble coffee in four years; sugar up to a quota of up to 180 thousand tons would have zero tariffs immediately, among others.

Another important point of the agreement is that the European Union will liberalize 82% of trade volume and 77% of tariff lines in the agricultural sector and will give preferential access to Mercosur. Mercosur, in turn, in agricultural trade, will liberalize 96% of trade volume and 94% of tariff lines.

The new tariff treatment could make Brazil more competitive in the supply of proteins. However, the issue could be an obstacle to the ratification of the agreement by the parliaments of Member States that have a relevant participation in this market.

The agreement reduces tariff barriers, but obstacles may arise, such as: health issues, production traceability, production sustainability and demand for product certification.

In the case of meat, for example, the tariff would be reduced immediately in the following cases: Beef meat would have a tariff of 7,5% up to the quota of 99 thousand tons of carcass weight, 55% chilled and 45% frozen and a zero tariff on the Hilton1 quota ( 10 thousand tons); in the case of pork, the tariff would increase to €83/tonne up to the quota of 25 thousand tons; and in poultry meat 180 thousand tons carcass weight, intraquota zero, 50% with bone and 50% boneless. In the case of fish, the tariff would be zero immediately and for shrimp, extinction would be in four years.

The pact between the economic blocs should bring many opportunities and also some threats for those who work in the Brazilian agribusiness chain. Although not all effects are immediate, you need to be ready so as not to lose the timing. And to prevent this from happening, some basic questions need to be asked.

It is essential for agribusiness entrepreneurs to understand the competitive position and attractiveness of exporting their products in the European market; O timing and how to prepare to take advantage of the opportunities that will arise for the export of products; what is the best strategy to access the market and what are the opportunities to gain competitiveness by importing European machinery, equipment and inputs, such as lower costs and more technology.

For local producers and local subsidiaries of foreign input, machinery and equipment companies, the concerns must be different: whether the business is threatened by the reduction in tariffs on imported products; how liberalization affects its markets; and strategies to defend against competition with European products.

So, much more than understanding how the Mercosur European Union agreement can help or harm agribusiness in Brazil, it is necessary to prepare for the new times that may come. To do this, it is necessary to plan: study the market, analyze the viability of the business; implement and manage. Only then will Brazil be prepared to reap the fruits of this agreement, if it is validated.