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Mercosur and the EU conclude negotiations on important trade agreement

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Ricardo Marletti Debatin da Silveira and Rogério Gaspari Coelho of Machado Associados explain how the Mercosur states and the EU will benefit from their important new trade agreement.

On June 28 2018, after 20 years of negotiation, the Mercosur states – Argentina, Brazil, Paraguay and Uruguay – and the EU reached an agreement on the trade aspects of an association between the two blocs. This agreement is set to promote tax cuts, customs and trade facilitation and liberalisation of more than 90% of the trade flow between the two blocs within 10 to 15 years of it entering into force. The accord comprises three pillars: free trade, cooperation, and political dialogue. 

The trade agreement will address the following issues: trade in goods, rules of origin, sanitary and phytosanitary measures, trade remedies, safeguards, technical barriers to trade, competition, customs and trade facilitation, services and establishment (market access), public procurement, intellectual property rights (geographical indications), dialogues, state-owned enterprises, subsidies, small and medium enterprises, trade and sustainable development, transparency and dispute settlement.  

Mercosur charges high import duties on many products, such as 35% for cars, 20% for wines and spirits, 35% for shoes and 28% for certain types of cheese. The agreement will allow vast tariff cuts and, as regards Brazil, will impact not only on import duty but also on the other indirect taxes levied on import transactions. Those taxes are the IPI (excise tax), the PIS-imports (contribution for the social integration programme), COFINS-imports (contribution for social security funding) and the ICMS-imports (state-VAT). As the import duty is included in the taxable basis of such taxes, the tariff cuts will greatly increase the competitiveness of EU products in Brazil. 

The main indirect tax and trade aspects arising from the agreement are the following:

‒ Market access components to be gradually implemented over a 10-year period for the EU and over a 15-year period for Mercosur countries;

‒  For most products, within 10 years Mercosur will liberalise 91% of its imports (91% of tariff lines) from the EU, and the latter will liberalise 92% of its imports (95% of tariff lines) from Mercosur;

‒ Industrial goods: 100% liberalisation regarding EU imports and more than 90% concerning Mercosur imports; passenger vehicles will be subject to transitional quotas for Mercosur;

‒  Agricultural goods: 82% (77% of tariff lines) of the Mercosur exports to the EU will be liberalised and 96% (94% of tariff lines) of the latter’s exports to Mercosur will be liberalised;

‒ Some Mercosur products, such as beef, poultry, pork, sugar, ethanol, rice, honey and corn, will be subject to transitional quotas, and others such as orange juice and cachaça (a Brazilian spirit) will have a mixed transitional treatment (that is, in relation to quota, price, and whether the products are in bottles or bulk packaged, and so on);

‒ EU exports of spirits, wine, sparkling wine, milk powder, infant formula, cheese, garlic, and chocolate will be subject to transitional quotas;

‒ Key EU products, such as olive oil, spirits and whisky will be 100% liberalised;

‒ Services are also addressed in line with WTO rules, preserving, nevertheless, regulatory competences and excluding some sensitive and strategic areas;

‒ Movement of professionals for business purposes, investment liberalisation in services and non-service sectors;

‒ Questions related to postal and courier services, telecommunications, financial services, e-commerce and maritime services; and

‒ (k) Rules pertaining to public procurement.  

The customs and trade facilitation chapter of the draft agreement is particularly noteworthy. The measures it foresees will enhance transparency, diminish bureaucracy, foster automatisation, speed up customs clearance, and allow cost reduction. Authorised economic operator programmes will be mutually recognised, once adopted on equal grounds by both parties.  

The agreement foresees the use of drawback and other special customs regimes, which are important for facilitating the flow of trade, considering their indirect tax effects.

The wording of the agreement is yet to be technically and legally revised, and it must also be approved. In the case of Mercosur, approval by the legislative houses of Brazil, Argentina, Paraguay and Uruguay is required. As far as the EU is concerned, the agreement requires approval by the European Parliament, the council, and its member states.

The trade flow of goods between the Mercosur countries and the EU in 2018 totalled approximately EUR87 billion ($96 billion), and a great increase in the commercial flow between the blocs is expected. Once the trade agreement enters into force, Mercosur and the EU will represent the largest free trade area in the world, with 780 million people and approximately a quarter of the world’s GDP.

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