1. European Union and Mercosur
Trade Sustainability Impact Assessment in Support of the Association Agreement Negotiations between the
European Union and Mercosur
Workshop, 13 March 2018
Dr Max Mendez-Parra
Team Leader

2. Content Background to the project Phases and methodology
Economic analysis
Social analysis
Environmental analysis
Human rights analysis
Sectoral analysis
Conclusions

3. Introduction Activities of the EU-Mercosur SIA started in July 2017
The SIA includes an examination of how the anticipated trade agreement might impact on economic, social, human rights and environmental issues or have any other possible unintended consequences in the EU and Mercosur.
The SIA is guided by three core objectives, 1) Analysis of possible impacts 2) Prioritization of a participatory process; 3) Development of policy recommendations.

4. Methodology CGE Modelling results as input to different components
In-depth sectoral analysis including cross-cutting issues
Quantification of non-tariff barriers and analysis of regulatory issues
Literature review of key impacts on economic, social, environmental and human rights impacts
Analysis of key impacts
Stakeholder input via questionnaires, roundtables, and workshop

5. Stakeholder Consultation Process
Electronic Communications
Raising awareness and facilitating stakeholder engagement through
Dedicated Website
Address
Dedicated Twitter Account
Dedicated Facebook Page
Online Public Consultation
Commencing in August, the 12 week consultation aims to
Generate Ideas Through Stakeholder and Target Country Engagement
Identify Groups Impacted by AA
Validate Findings through External Input
Roundtables
Five Roundtables in Brussels
One Roundtable in Buenos Aires
Interviews
Group Seminars with Agricultural Sectors in Sao Paulo and Buenos Aires
Civil Society Dialogue
Stakeholders invited to contribute during implementation phase through
Month 3 CSD Presentation for Preparation of Inception Report
Month 6 CSD Presentation for Preparation of Interim Report
Month 13 CSD Presentation for Preparation of Final Report
Partner Country Workshop
One Day Workshop in Sao Paulo
50 Participants from Mercosur Countries
Joint Opening Plenary
Parallel Events on Sectorial Specific and Thematic Specific Issues

6. Economic analysis

7. CGE results
As requested by Commission, the project generated a confidential set of simulations using the CGE model.
These results were produced following the discussions about the setting of the model including its calibration.
Two scenarios:
Ambitious: Elimination of tariffs in 100% of products except partial reductions on sugar, meat in EU. 10% reduction on NTBs in Mercosur
Conservative: Elimination of tariffs in 100%/90% for industrial goods in EU/Mercosur. Partial reductions on sugar, meat, cereals, dairy in EU. 10% reduction on NTBs in Mercosur. 5% reduction on NTBs in Mercosur

8. Economic Analysis: Baseline
Aims to provide counterfactual by outlining the main economic and social policy expected in EU until 2032 without the implementation of the EU- Mercosur AA.
The GTAP model will be adjusted to include recently concluded negotiations
Common Agriculture Policy (e.g. end of sugar quotas)
EU-Singapore, CETA, SADC and West Africa EPAs, Central America, Peru, Ecuador, Colombia
No changes on default market access status for Mercosur members
Scenarios and sectoral aggregations for CGE modelling simulation will be agreed upon with the Commission.
Descriptive statistics of current total and bilateral trade structures, trends and trade policies (e.g. tariffs)

9. EU-Mercosur trade
EU goods imports from selected countries (% of total extra-EU28 imports)
Mercosur exports to selected markets (% of total extra-Mercosur exports)

10. Economic analysis: commentary
The fall of the relative importance of the EU/Mercosur in each others trade suggests changes wrt to previous assessment made
Welfare effects (trade reorientation) although still important
Different levels of protection/regulation within Mercosur would indicate a priori larger benefits for Brazil and Argentina.
Sectors present particular issues that complicate a general assessment.
However, the analysis allows to indicate certain red lines in both the EU and Mercosur in their offensive and defensive interests.
Initial CGE assessment indicates that Mercosur will see substantially higher impacts in both, income and trade.
Paraguay would present minimum effects. This may be suggested by a very narrow coverage of goods traded with the EU and low participation in regional value chains.
However, needs to provide a detail evaluation and explanation of the results.

11. Social analysis

12. Social Analysis Aim Methodology
Assess the impact of including a trade and sustainable development chapter in the AA along with the consideration of different institutional mechanisms to foster cooperation on labour standards and encourage the diffusion of best practices in workers’ rights.
Methodology
Quantitative
CGE model results aim to provide insights on job creation and wage differentials across labour categories in different sectors
Gini Coefficient to be developed based on CGE model results to analyse change in inequality and impact on poverty before and after liberalisation in EU, Mercosur and other countries
Qualitative
Desk research and academic literature, specifically relevant studies on EU and Mercosur relations respectively, as well as studies on Mercosur country experience with other trade negotiations will be relied on for the analysis
Party compliance to core ILO conventions will additionally be investigated to assess potential effects

13. Environmental analysis

14. Environmental Analysis
Aim
The analysis will focus on GHG emission and climate change; energy use; land use; resource use and efficiency; waste production; ecosystems and biodiversity; and trade in environmental goods and services
Methodology
Baseline
Benchmark of current environmental Mercosur performance against EU using indicators of environmental quality (i.e. Environmental Performance Index), and overview of current regulations and obligations.
Quantitative Analysis
Based on CGE modelling, the study aims to analyse the scale, structural, technology and product effects in terms of both welfare and GHG emissions using the emission intensity factors in GTAP data base and model.
By employing the GTAP POWER dataset and model, results can be explained in terms of changes in various sectors and a Log Mean Divisia Index (LMDI) based on input-output tables will be used for separating these different effects.
Complementary Qualitative Analysis
Literature review of academic and grey literature
Results of the stakeholder consultation

15. Environmental analysis
Impact of the AA on CO2 emissions, land intensity and energy demand in the EU and Mercosur countries in relation to the sectors most affected by the AA.
Among these sectors are some environmentally sensitive sectors mainly in the animal production and agricultural sectors.
The sectors that tend to expand their output (vegetables & fruits, electrical equipment, bovine meat) are low CO2 emission intensity.
We can anticipate that the expansion of the agricultural and animal sectors could put pressure on land and water and have implications for land degradation, soil erosion and biodiversity, which is already a concern in all four Mercosur countries.

16. Human rights analysis

17. Human Rights Analysis Aim Methodology
Builds on quantitative and qualitative analysis conducted throughout the study by furthering qualitative analysis of the human rights impacts not covered by the social and environmental analysis
Methodology
Baseline
Literature review of current human rights records of EU and Mercosur partners, existing human rights commitments, and previous studies on impact of FTAs to establish background and identify country specific issues
Analysis
Assessment according to 3 step process outlined in “EC’s Guidelines on conducting analysis of human rights impact in impact assessments for trade-related policy initiatives”
Screening: identification of measures to be assessed in regards to human rights issues
Scoping: collection of data for each measure
Detailed assessment: examination of supply and demand side factors of human rights in assessment of collected data in establishing effects on specific rights, populations affected, and impact on the potential agreement as a whole.
Cross-Linkages
The study analysis as a whole, but particularly the human rights and social analysis, focuses on women and vulnerable groups in the EU and Mercosur members.
Where measures are found to have potentially negative impacts on gender equality, the study will identify additional measures for gender equality promotion

18. Sectoral analysis Agriculture: Beef; Sugar and Ethanol; Dairy; Beverages Manufacturing: Car and car parts; Machinery; Textiles and garments; Pharmaceutical and chemicals Services: Business and –professional; Construction and engineering; Financial Services

19. Agriculture Beef Dairy Sugar and Ethanol Beverages
Consumption falling in the EU (10% fall between during the last 15 years)
Mercosur major import partner, but increased competition. Imports represent 3.89% of EU consumption in
Consumption of beef in Mercosur is high. Potential frictions in the domestic market
Dairy
Consumption expanding in Mercosur, approaching to the EU levels
Little trade between both partners. High tariffs in both partners.
Assessing impact of geographical indications.
Lower levels of income in Mercosur may limit EU exports
Sugar and Ethanol
EU has experienced reformed its sugar policies. Tariffs remain very high.
Brazil, the most important world exporter, supplies 12% of EU import demand
Concerns with respect to the EU’s trade and development policies
Beverages
Except on fruit juices, Mercosur accounts for a small share of EU imports of beverages. Tariffs remain high in the EU.
The EU, on the other hand, presents already high shares in the Mercosur imports.

20. Manufacturing Textiles and garments Machinery Automobiles/auto-parts
Even after the agreement, Mercosur is uncompetitive with respect to other suppliers of textiles and garments to the EU.
EU imports mostly limited to wool and raw cotton.
High tariffs in Mercosur plus a low competitiveness in the EU suggests some potential trade diversion, especially in the lower quality products.
In some products (e.g. swimwear), there is potential trade creation.
Machinery
Almost 30% of the EU exports to Mercosur are machinery (4% in imports)
High tariffs applied in Mercosur (17% on average).
Possible trade reorientation towards the EU. This exposes Mercosur producers to far greater competition (especially in Brazil).
In a context of value chains, the agreement may lead to further specialization.
Automobiles/auto-parts
The EU produces around 18 million units and Mercosur 3 millions.
In the EU and Mercosur, the bulk of automotive trade (including auto-parts) corresponds to intra-regional flows. 75% in the EU and 54% in Mercosur. –i.e. they are “regional automotive spaces”.
25% of Mercosur imports come from the EU. Only 2.5% of the Mercosur exports go to the EU.
Marginal share of exports and imports to and from Mercosur in the EU

21. Services Financial Services Business and Professional Services
Highly regulated in Mercosur, specially in Brazil. Mode 3 provision severely restricted.
Potential positive effects for EU banks
Government owned-banks competing with private in Mercosur
Business and Professional Services
Growing exports from Mercosur, specially in areas such as software.
Protection levels vary by country. Brazil substantially more restrictive.
EU presents lower levels of protection.
High proportion of SMEs and individual providers. Limitations under mode 4 in both EU and Mercosur.
Construction/Engineer
Growth potential in Mercosur countries.
Protection levels vary by country. Brazil presents substantial restrictions to operate.
Mode 4 restrictions complicate the provision of engineering services in particular.

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