The Mercosur-EU trade deal can survive a political change in Argentina

After the historic political agreement reached last week to move towards ratification of a free trade agreement between the Mercosur trade bloc and the European Union, questions and doubts have arisen about whether it will actually happen.

BNamericas spoke to Jimena Blanco, an analyst specializing in the Americas and research director at risk consultancy Verisk Maplecroft, about the political risk associated with the agreement and the real possibility of it being approved by the various parties.

Blanco believes that ratification is a complex process that will face obstacles in many countries. However, the situation seems to be more favorable than adverse at present. The actors will have to take advantage of the traction of the political agreement to move forward to ratify while it still remains relevant.

BNamericas: What's your general opinion of the agreement announced?

Blanco: What has been reached now is a political agreement. For now there's no certainty in the timeline for its ratification and entry into force, particularly considering the political changes that could take place in Argentina and Uruguay this year, the uncertainty in the European Union regarding certain aspects that have to be approved by the European Commission and the European Parliament, and other aspects that have to be approved by the parliaments of the 27 individual members. Obviously the European Union, on the other hand, is itself dealing with Brexit.

If it [the trade deal] goes into effect, we won't see the impacts of the treaty for at least 5-10 years in real terms. What the treaty has in particular is that it gives a very broad timeline for the readjustment of the rules, for the preparation of Mercosur SMEs, because there's an explicit acknowledgement that, by not making this adaptation, there could be an important impact in this segment.

BNamericas: In which industries could the impact of the treaty be seen most strongly?

Blanco: Infrastructure could see a more direct impact, because there's a chapter that refers to the participation of European companies in Mercosur tender rounds. There are plans for the creation of funds and specific financing mechanisms to facilitate European foreign direct investment in the region in the infrastructure area. So, there was discussion of ports, roads, airports, railways. All of these have been mentioned as key areas of interest for European investment in the region.

BNamericas: We have seen some resistance from French unions, the Argentine auto industry and the Brazilian steel industry . What are the areas that most strongly oppose the agreement?

Blanco: There are certain members of both sides that have strong unions. France is one case and Argentina, as a counterpart in Mercosur, as well. The political changes that are coming in the region and in European countries, with their own elections, are always used by the opposition as a tool to generate fear. In the case of Argentina it's interesting, because many of the concepts included in the treaty were negotiated by the previous administration.

On both sides there's fear of the loss of employment, of the need to protect industries that aren't competitive. French agriculture is an example of a subsidized industry that, without subsidies, would have problems competing with the Mercosur agricultural industry. That's why, in the treaty, maximum quotas have been set for the export of duty-free cheese. There's something similar with the Argentine or Brazilian automotive industry, but if we look at the portfolio of products exported by Mercosur countries to Europe and vice versa, there's great compatibility and there's no direct competition in many products. And in those that do [compete], measures have been taken where the complete elimination of tariffs will take from 10 to 15 years.

BNamericas: Alberto Fernández [one of the Argentine presidential candidates] has already expressed some skepticism about the benefits of the treaty. What effect can the Argentine elections in October have on ratification?

Blanco: Let's assume that Alberto Fernández actually wins the election and becomes president; and is not a puppet of Cristina Fernández [de Kirchner], as is feared in some parts of Argentina. He's economically much more pragmatic and his economic team is more pro-market than Cristina Fernández was. From the point of view of the executive branch, I would expect them to continue with the application of the treaty, but fine-tuning the details to ensure the protection of the domestic market and the way in which trade will be liberalized so the industrial base in Argentina isn't destroyed, which could make negotiations in congress slower.

In that case, we should see how the three factions of Peronism are interrelated. That is, if they unite and decide to ratify the treaty, they would have the majority to pass it. The issue is that, whoever wins [some of the Peronists support Mauricio Macri], none of the coalitions will have an absolute majority. Then, you'll have to negotiate with part of the opposition to approve the treaty after the election. The issue is to see how the congressional chambers are composed and how the Peronist factions are realigned, but it's not impossible for a Fernández-Fernández administration to approve it.

BNamericas: Given all these conditions and thinking not solely of Argentina, what is the possibility of the treaty, in some form, actually coming to pass?

Blanco: I'd say it's 60-40 in favor. I think that, at present, the interests of Latin American countries are more in favor than against the treaty, and in Europe as well. That doesn't mean there are no obstacles, but there's a possibility that it will be approved over the next two years. After two years, a certain amount of traction is lost and it becomes more difficult. From this point of view, this is something that will be an area of focus in Argentina and Brazil in the next two years, and in the EU as well.