Developing Global Free Trade: Linking The Eurasian Economic Union With Brazil & Mercosur

(Part 1 of our 5 Part BRICS/EAEU Free Trade Series)

How Mercosur Companies Could Access Eurasian, Russian & Chinese Markets

Op/Ed by Chris Devonshire-Ellis

Russia’s President Putin has just returned from Brazil and the annual meeting of BRICS nations this time held in Brasilia. With the Presidents and Prime Ministers from China, India and South Africa also all attending, the scene has been set for 2020’s stint as Russia as the BRICS Chair, which starts in just six weeks.

President Putin has already stated that he wishes to use Russia’s Chairmanship of the BRICS grouping to further enhance its status within the UN. Meanwhile, the Brasilia summit’s Declaration, agreed by all member countries states stated that the BRICS bloc had expressed common goals of “expanding trade and innovation.”

There are significant global trade issues to examine here: most notably exactly how such trade can be increased. At present, the BRICS countries represent over 3.1 billion people, or about 41% of the world population. As of 2018, these five nations have a combined nominal GDP of US$18.6 trillion, about 23.2% of the global total, a combined GDP (PPP) of around US$40.55 trillion (32% of World’s GDP PPP) and an estimated US$4.46 trillion in combined foreign reserves. The IMF has projected that the BRICS nations will account for over 50% of global GDP by 2030.

Achieving that growth will require some planning, and innovation on the part of the countries concerned. This can reasonably be expected to include advancing Free Trade Agreements. To this end, Brazil is a lead player in the South Americas, with its influence and membership of Mercosur, while Russia has a similar role in the development of the Eurasian Economic Union. India has a prominent role within the South Asia Free Trade Area (SAFTA) while South Africa is a major strategic partner in the Southern African Development Community (SADC). China, although it alone isn’t a dominant player in a specific Free Trade grouping, does of course have the Belt & Road Initiative. What the BRICS grouping does do, is potentially provide a common bloc through which other Free Trade blocs can be added. Although BRICS itself is not a Free Trade grouping, its prominence and intended actions almost certainly mean it is a platform for instigating just that – and the BRICS 2019 Brasilia Declaration expressed exactly this scenario.

In this series of articles, I will examine each of the possible scenarios that may occur in the development of Free Trade within the BRICS nations.

Mercosur

Brazil is the dominant member of the Mercosur Customs Union, which has as its current main members, Argentina, Brazil, Paraguay and Uruguay. Mercosur operations involve free intra-zone trade and a common trade policy between member countries. It is the world’s fourth largest trading bloc after EU, NAFTA, and ASEAN, with an annual GDP of about US$ 5 trillion.

Mercosur is home to more than 250 million people and accounts for almost three-fourths of total economic activity in South America. It also includes Venezuela, however the country has been suspended from Mercosur since early 2016 for not coming into compliance over agreed tariff changes. Associate members include the rest of South America, namely Bolivia, Chile, Ecuador, Guyana, Peru and Suriname, along with Mexico and New Zealand as Observer nations.

Associate members do share some of the free-trade benefits, although in several cases these are still awaiting legislative approval.

Back to enhancing Mercosur however, and we can turn to Uruguay’s Finance Minister Danilo Astori, who has said that “Each Mercosur country should have a multiplicity of memberships. Mercosur must have joint international policies, an agreement on moderate protection from third parties and above all must have agreements with other trade blocs.”

Mercosur & The BRICS Nations

In terms of the BRICS nations overall, developing Free Trade is beginning to come into effect. Mercosur does have a Preferential Trade Agreement with India and another with the Southern African Customs Union. In terms of China, although individual trade between Mercosur nations and China is increasingly, of the major members only Uruguay has signed off on China’s Belt & Road Initiative.

The Mercosur nations have been in collective attendance at Russia’s St.Petersburg International Economic Forum, with initial discussions with representatives from the Eurasian Economic Union almost certain to have been instigated. We can examine each of these relationships as follows:

Mercosur & India
While the PTA between India and Mercosur is presently limited to just 450 products, the two sides have raised their ambitions and are currently negotiating at providing preferential access to about 3,000 items. India wants to export processed foods, more engineering goods and a wider range of pharmaceuticals to the Mercosur.

Under the existing agreement signed in 2009 India has brought down duties in the range of 10 per cent to 100 per cent on 452 items. These include meat products, chemicals, raw hides and skins, leather articles, wool, cotton yarn, glass and glassware, iron and steel, machinery and equipments, optical, photographic and cinematographic apparatus. India has preferential access in the Mercosur for organic chemicals, pharmaceuticals, essential oils, plastics & articles, rubber and rubber products, tools and implements, machinery items, electrical machinery and equipments. A full text of the Mercosur-India PTA can be found here.

Mercosur & The Southern African Customs Union

The Southern African Customs Union (SACU) consists of Botswana, Lesotho, Namibia, South Africa and ESwatini. The SACU Secretariat is located in Windhoek, Namibia. SACU was established in 1910, making it the world’s oldest Customs Union. Specifically, the Mercosur – SACU Preferential Trade Agreement grants tariff preferences on 1064 products, eliminating tariffs on nearly half of these. 167 positions will receive a 50% preference, 144 positions will receive one of 25%, and 283 positions will receive one of 10%. The agreement entered into force on April 1, 2016, and covers the textile, manufacturing, machinery, chemical, and mineral sectors, among others, and thus marks a milestone in South-South relations. A full text of the Mercosur-SADC PTA can be found here.

Mercosur & China
In terms of China, only Uruguay thus far among the Mercosur nations has signed off on China’s Belt & Road Initiative, with Montevideo signing off a Belt & Road MoU in August last year. China is Uruguay’s most important trading partner, purchasing 27% of Uruguayan exports. Uruguay wants to deepen that relationship, increasing cooperation in several other areas in addition to trade, while offering attractive conditions for Chinese investors, particularly in the area of infrastructure. Uruguayan Foreign Minister Rodolfo Nin Novoa identified as key investment projects Uruguay’s Central Railroad, a new fishing port, and rural electrification in the country’s north, and “expressed the hope” that Uruguay can serve as an “entry point” for China into the region, and help promote closer ties between China and Mercosur.

Mercosur & The Eurasian Economic Union
Mercosur has recently agreed an FTA with the European Union, although this is yet to be ratified. Under the deal, EU tariffs on goods such as beef, poultry and sugar will be reduced over a 15-year time span allowing the South American bloc to utilise its agricultural advantage and penetrate the single market.

In exchange, Mercosur agreed to open itself to the European industrial sector and withdraw its double-digit tariffs including the majority of tariffs on chemicals, machinery, and cars. According to the Commission’s estimates, the agreement will generate over 4 billion euros in savings for European exporters. However, opposition to the deal is mounting, with Brussels in some disarray, and pushback from Mercosur members, some of whom are becoming closer to Moscow. That means a potential deal with the Eurasian Economic Union (EAEU) could be in the offing if problems begin to arise with the EU project. The EAEU is less likely to be seen as a trade threat by the Mercosur bloc, while the advantages of Brazil aligning itself with Moscow and Beijing via the BRICS alignment will only become more apparent as trade corridors increase. This will become more relevant as and when China also completes its negotiations with the EAEU over tariffs on the FTA it signed off with the EAEU last year. That is significant as the EU appears unlikely any time soon to agree an FTA with China. An EAEU-Mercosur FTA could alleviate part of that problem.

The Eurasian Economic Union is supported with Russia as the lead partner, and also includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan. It sits in the geographical space between the European Union and China, and has recently been very active in negotiating other Free Trade Agreements, with Iran, Singapore and Vietnam all signing off deals and several currently under negotiation. The map below explains the current situation:

China is a keen supporter of the EAEU, and sees it as a cornerstone of the Belt & Road Initiative’s overland Eurasian transportation system. Uruguay, which has thus far gone it alone among the Mercosur countries in joining China’s Belt & Road Initiative, will be keen to see how its commitment to the BRI pans out in terms of trade and investment. Brazil, Paraguay and Uruguay, not to mention the associate members, will also be watching closely. To some extent, a Mercosur-EAEU FTA deal then rides on the following points:

• Consideration that the EAEU may be less of a trade threat to Mercosur than the EU
• Ability to link into China’s Belt & Road Initiative via the EAEU
• Applicable tariff content of China’s own FTA with the EAEU
• Political relations with Moscow
• Likelihood of additional Free Trade potential with other EAEU prospective FTA

These are quantifiable points, although partially dependent upon the political landscape. Brazil for example currently enjoys good relations with the United States and may not be so willing to upset Washington by seeming to develop trade ties with Moscow. Others revolve around trade issues (such as China agreeing tariff reductions with the EAEU) which will become more apparent over time. Nonetheless, in the longer term, and given the huge network of Chinese and Russian Free Trade and Economic Zones emerging along the Belt & Road Initiative – including the Eurasian Economic Union, closer study is warranted. Benefits for Mercosur based companies would be as follows:

• Access to Eurasian Economic Union Free Trade and Special Economic Zones to process/manufacture Mercosur originated products & goods for further export to EAEU nations, in addition to China;
• Access to sourcing Russian/Chinese products and goods for import back to Mercosur;
• Mixing Mercosur/EAEU/Chinese products for final export to other global markets.

Clearly, product specific examination needs to be conducted concerning the viability of such an arrangement, as well as Rules of Origin and related Product Tariffs understood. Nonetheless, there is enough substance between both Mercosur and the Eurasian Economic Union to given credibility to the potential of such an alliance.

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