Final Report: Sustainability Impact Assessment in Support of the

Sustainability Impact Assessment in Support

of the Association Agreement Negotiations

between the European Union and Mercosur

Final Report

▪ December 2020

SIA in support of the association agreement

negotiations between the European Union and Mercosur

Authors: Max Mendez-Parra (ODI), Elitsa Garnizova (LSE), Daniela Baeza Breinbauer (LSE),

Stefania Lovo (University of Reading), Jean-Baptiste Velut (Université Paris III - Sorbonne

Nouvelle), Badri Narayanan (Infinite Sum Modelling), Matthias Bauer (LSE), Philipp Lamprecht

(LSE), Ken Shadlen (LSE), Valeria Arza (CENIT-Argentina), Martin Obaya (CENIT-Argentina),

Linda Calabrese (ODI), Karishma Banga (ODI), Neil Balchin (ODI)

Luxembourg: Publications Office of the European

Union, 2020

ISBN: 978-92-76-26958-8

DOI:

10.2781/54752

Catalogue number: NG-03-20-817-EN-N

This report is commissioned via LSE Consulting

which was set up by the London School of

Economics and Political Science to enable and

facilitate the application of its academic expertise

and intellectual resources.

LSE Enterprise Ltd, trading as LSE Consulting, is a

wholly owned subsidiary of the London School of

Economics and Political Science.

The LSE

trademark is used under licence from The London

School of Economics and Political Science.

LSE Consulting

LSE Enterprise Ltd

London School of Economics and Political Science

Houghton Street

London, WC2A 2AE

(T) +44 (0)20 7106 1198

(E) [email protected]

(W) lse.ac.uk/consultancy

SIA in support of the association agreement

negotiations between the European Union and Mercosur

Table of Contents

List of Tables 5

Executive Summary 12

1. Introduction 17

1.1. Research Aims and Objectives 17

1.2. Background 18

2. Economic Analysis 20

2.1. Methodology 20

2.2. Literature Review 24

2.3. Scenario Results 29

2.4. Fiscal Impacts 35

2.5. Policy Recommendations 36

3. Social Analysis 37

3.1. Methodology 37

3.2. Baseline 37

3.3. Analysis 54

3.4. Conclusion 62

3.5. Policy Recommendations 62

4. Environmental Analysis 65

4.1. Methodology 65

4.2. Baseline 65

4.3. Analysis of Impact 86

4.4. Conclusion 103

4.5. Policy Recommendations 104

5. Human Rights Analysis 106

5.1. Methodology 106

5.2. Baseline 109

5.3. Analysis 157

5.4. Conclusion 172

5.5. Policy Recommendations 173

6. Sectoral Analysis 175

6.1. Qualitative Analysis 175

6.2. Cross-Cutting Issues 176

6.3. Sectoral Analysis: Agriculture 178

SIA in support of the association agreement

negotiations between the European Union and Mercosur

6.4. Sectoral Analysis: Manufacturing 233

6.5. Sectoral Analysis: Services 281

7. Consultation Process 327

7.1. Roundtables 327

7.2. Civil Society Dialogue Meetings 329

7.3. Written Comments 330

7.4. Questionnaires 333

7.5. Sao Paulo and Buenos Aires Workshops and Consultation Activities 333

8. Policy Recommendations 335

8.1. Recommendations based on the Economic Analysis 335

8.2. Recommendations based on the Social Analysis 335

8.3. Recommendations based on the Environmental Analysis 337

8.4. Recommendations based on the Human Rights Analysis 338

8.5. Recommendations for the Agriculture Sector 340

8.6. Recommendations for the Manufacturing Sector 342

8.7. Recommendations for the Services Sector 343

Bibliography 345

Annex 1. Indicators and Data Sources 358

Annex 2. Roundtable Summaries 361

Annex 3. Civil Society Dialogue Minutes 382

Annex 4: Economic Modelling Results 393

Annex 5: Summary of Comments to Draft Final Report Received by email 404

SIA in support of the association agreement

negotiations between the European Union and Mercosur

List of Tables

Table 1: Mercosur countries overview 19

Table 2: Sectors included 21

Table 3: Regions 22

Table 4: NTB cuts in EU and Mercosur 24

Table 5: Macroeconomic Results for the Conservative scenario 29

Table 6: Macroeconomic Results for the Ambitious scenario 30

Table 7: Sectoral Output changes in the Conservative Scenario 31

Table 8: EU-Mercosur bilateral trade changes by sector in the conservative scenario 32

Table 9: Sectoral Output changes in the Ambitious Scenario 33

Table 10: EU-Mercosur bilateral trade changes by sector in the ambitious scenario 34

Table 11: The incidence of tariff revenue in the Mercosur imports from the EU (2018) 35

Table 12: Union density and concentration among Mercosur members 47

Table 13: Convention 87 and 98 cases brought to CEACR in Mercosur19F 49

Table 14: CEACR cases related to forced labour in Mercosur22F 50

Table 15: CEACR cases related to child labour in Mercosur27F 52

Table 16: CEACR cases related to discrimination in Mercosur30F 54

Table 17: Welfare, real wage and price effects on EU and MERCOSUR Members 56

Table 18: Trade-related MEAs signed by the EU and Mercosur 69

Table 19: CO2 Emissions by sector in Mercosur countries and the EU (%) 74

Table 20: Climate change targets in NDC content and laws 75

Table 21: Electricity sources in Mercosur countries and the EU 77

Table 22: Top 10 countries in terms of annual forest cover loss in the period 2010-15 (plus EU) 78

Table 23: Change in CO2 emissions in the two scenarios (long term impact, % change) 86

Table 24: Percentage Change in other GHG emissions in the two scenarios 87

Table 25: Change in total GHG emissions and GDP in the two scenarios (long term impact, % change) 89

Table 26: Percentage of international partnership by co-inventor country (average 2007-2014) – All patents 96

Table 27: Impact of the EU-Mercosur AA on MEA enforcement 97

Table 28: Selected Human Rights 107

Table 29: Identification of sectoral effects and possible human rights linkages 107

Table 30: Human Rights Indicators 108

Table 31: Commitments to the Right to an Adequate Standard of Living 110

Table 32: Right to an Adequate Standard of Living indicators 110

Table 33: Commitments to the Right to Health 120

Table 34: Right to Health indicators 120

Table 35: Commitments to the Rights of Indigenous Peoples 134

Table 36: Commitments to Gender Equality 148

Table 37: Gender Equality Indicators 149

Table 38: Macroeconomic impacts of the AA in the ambitious scenario 171

Table 39: Beef balance in the EU (in thousands of tonnes carcass weight equivalent) 179

Table 40: Beef balance in Mercosur (in thousands of tonnes carcass weight equivalent) 179

Table 41: EU-Mercosur bilateral trade (in billions of Euros) 180

Table 42: Imports of beef products from Mercosur (in millions of Euros) 182

Table 43: Mercosur beef exports to the EU (in millions of Euros) 182

Table 44: MFN tariff applied by the EU on beef products (2016) 183

Table 45: Animal protection regulation in Mercosur countries 185

Table 46: Bovine meat results in the CGE Model 186

Table 47: Land use in Mercosur and the EU (2015) in millions of hectares 189

Table 48: Share of beef in average household consumption in Mercosur 193

Table 49: Least Developed Countries exports of beef (in millions of Euros) 193

Table 50: Balance sheet of dairy products (in thousands of tonnes) 195

Table 51: EU-Mercosur bilateral trade of dairy products (in millions of Euros) 196

Table 52: EU dairy exports to Mercosur (in thousands of Euros) 198

Table 53: Total Mercosur exports of dairy products (including intra-Mercosur, in millions of Euros) 199

Table 54: EU and Mercosur MFN tariffs applied to dairy products in 2016 (%) 200

Table 55: Summary of results in the dairy sector in CGE analysis (million EUR) 203

Table 56: Greenhouse gases emissions in Mercosur and the EU in the production of milk (2012-13) (in mton) 204

Table 57: EU Sugar Market Balance (Million Tonnes) 209

Table 58: EU Ethanol balance (Million Tonnes) 209

Table 59: Sugar and ethanol production in Brazil (million tonnes) 210

Table 60: Revealed Comparative Advantage of EU and Mercosur in sugar and ethanol 211

Table 61: Share of Mercosur in EU trade 212

Table 62: Top five products imported by EU from Mercosur in the sugar sector 213

Table 63: Top exported products by the EU to Mercosur 213

Table 64: Applied MFN tariffs imposed by Mercosur on sugar and ethanol products 215

Table 65: Share of beverages in total EU-Mercosur trade in 2016 220

Table 66: Top 10 beverage products exported from the EU to Mercosur countries, by total value of exports between

2012 and 2016 221

SIA in support of the association agreement

negotiations between the European Union and Mercosur

Table 67: Top 10 beverage products imported by the EU from Mercosur countries, by total value of imports between

2012 and 2016 222

Table 68: EU shares of total beverage imports of Mercosur countries in 2016 223

Table 69: Mercosur countries’ shares in total EU beverage imports in 2016 224

Table 70: Mercosur countries’ applied MFN tariffs on beverage imports from the EU, by HS 6-digit product, 2016 226

Table 71: EU applied MFN tariffs on beverage imports from Mercosur countries, by HS 6-digit product, 2016 227

Table 72: LDC total and selected LDCs with significant beverage exports to the EU (based on the average export value

from 2012-2016), by product 232

Table 73: EU exports to Mercosur, top 20 most exported T&G products, 2016 236

Table 74: EU imports from Mercosur, top 20 most imported T&G products, 2016 238

Table 75: Top 20 Pharmaceutical and Chemical Exports from the EU to Mercosur 248

Table 76: Top 20 Pharmaceutical and Chemical Imports from Mercosur to the EU 250

Table 77: Extra-EU Exports of SMEs and Large Companies, Pharmaceutical and Chemical 252

Table 78: Extra-EU Imports of SMEs and Large Companies, Pharmaceutical and Chemical 253

Table 79: EU-Mercosur bilateral trade on electronic equipment and machinery (2015-18) (in thousands of Euros) 255

Table 80: Mercosur trade on Machinery and electronic equipment (2015-18) (in millions of Euros) 256

Table 81: Top EU exports to Mercosur average 2015-18 (in thousands of Euros) 258

Table 82: Top EU imports from Mercosur average 2015-18 (in thousands of Euros) 260

Table 83: EU-Mercosur bilateral trade changes in the machinery and electronic equipment and manufactures nec 262

Table 84: Output and total trade changes in the machinery and electronic equipment and manufactures nec 263

Table 85. Labour demand changes in the machinery and electronic equipment and manufactures nec 265

Table 86: Applied tariffs in the automotive industry (selected countries, %, 2016) 268

Table 87: Changes in the Motor Vehicle Sector 279

Table 88: Changes in private consumption 281

Table 89: Composition of EU exports to Mercosur by service type 284

Table 90: Composition of EU imports from Mercosur by service type 284

Table 91: Service Trade Barriers for Selected Service Types 285

Table 92: National composition of GDP, Argentina 286

Table 93: National composition of GDP, Brazil 286

Table 94: Other business services trade between the EU and individual Mercosur countries: EU exports 290

Table 95: Other business services trade between the EU and individual Mercosur countries: EU imports 292

Table 96: CGE-model results in the communication and business services sector in the conservative scenario 295

Table 97: CGE-model results in the communication and business services sector in the ambitious scenario 295

Table 98: Argentina’s current commitments under the WTO GATS agreement in business services240F 296

Table 99: Brazil’s current commitments under the WTO GATS agreement in business services241F 298

Table 100: Uruguay’s current commitments under the WTO GATS agreement in business services242F 301

Table 101: Composition of EU services exports to Mercosur by service type 305

Table 102: Composition of EU services imports from Mercosur by service type 305

Table 103: Service Trade Barriers for Selected Service Types 306

Table 104: National composition of GDP, Argentina 306

Table 105: National composition of GDP, Brazil 307

Table 106: Financial and insurance services trade between the EU and individual Mercosur countries: EU exports 309

Table 107: Financial and insurance services trade between the EU and individual Mercosur countries: EU imports 310

Table 108: CGE-model results in the financial services and insurance sector in the conservative scenario 312

Table 109: CGE-model results in the financial services and insurance sector in the ambitious scenario 312

Table 110: Current commitments under the WTO GTAS agreement, financial services, Argentina 314

Table 111: Current commitments under the WTO GTAS agreement, financial services, Brazil 317

Table 112: Current commitments under the WTO GATS agreement, financial services, Paraguay 320

Table 113: Current commitments under the WTO GTAS agreement, financial services, Uruguay 322

Table 114: Stakeholder Consultation Brussels Roundtables - Findings 327

Table 115: Stakeholder Consultation Partner Country Roundtables – Findings 328

Table 116: Civil Society Dialogue Meetings - Findings 329

Table 117: Online Consultation responses to the Interim Report CSD 330

Table 118: In-country activities - Main Findings 334

Table 119: Selected indicators 358

Table 120: Primary and secondary data sources 359

Table 121: Sectoral Private Consumption changes in the Conservative Scenario 393

Table 122: Sectoral Exports changes in the Conservative Scenario 395

Table 123: Sectoral Imports changes in the Conservative Scenario 396

Table 124: Sectoral Private Consumption changes in the Ambitious Scenario 397

Table 125: Sectoral Exports changes in the Ambitious Scenario 398

Table 126: Sectoral Imports changes in the Ambitious Scenario 399

Table 127: Sectoral Unskilled Employment changes in the Conservative Scenario 400

Table 128: Sectoral Skilled Employment changes in the Conservative Scenario 401

Table 129: Sectoral Unskilled Employment changes in the Ambitious Scenario 402

Table 130: Sectoral Skilled Employment changes in the Ambitious Scenario 403

SIA in support of the association agreement

negotiations between the European Union and Mercosur

List of Figures

Figure 1: Map of Mercosur 18

Figure 2: EU and Mercosur unemployment trends (2000-2019) 38

Figure 3: Informal employment and informal sector in Mercosur countries as a percent of employment (%) 39

Figure 4: Number of people living with less than $1.90 a day (millions, 2011 PPP) 40

Figure 5: Number of people living with less than $1.90 a day (millions, 2011 PPP) 41

Figure 6: Percentage of people living with less than $5.50 a day, 2011 PPP 41

Figure 7: Income inequality in Mercosur (Gini coefficient) 42

Figure 8: Brazil: Convergence in Access to Durable Goods by Households (% of Brazilian households) 42

Figure 9: Income convergence between and within Brazilian states and regions 44

Figure 10: Measures of freedom of association and labour rights protection in Mercosur (2019)* 48

Figure 11: EU employment supported by extra-EU exports: number of jobs in millions 55

Figure 12: EPI for Mercosur and the EU 70

Figure 13: EPI score over time 70

Figure 14: Scores in EPI sub-categories. EU and Mercosur countries in 2018 71

Figure 15: Climate Laws, Institutions and Measures Index and GDP per capita 72

Figure 16: Total GHG Emissions and emissions per capita in Mercosur countries and the EU (2015) 73

Figure 17: Total GHG Emissions by type of gas in Mercosur countries and the EU (2015) 73

Figure 18: Levels of CO2 per capita in 2015 (left) and trends in CO2 per capita since 1970 (right) 73

Figure 19: Levels of methane per capita in 2015 (left); trends since 1970 (right) 74

Figure 20: Levels of Nitrous Oxide per capita in 2015 (left) and trends since 1970 (right) 75

Figure 21: Deforestation in the Legal Amazon states (left) and Cerrado (right) 79

Figure 22: Wood production for Brazil (left) & other Mercosur countries (right) 81

Figure 23: Pesticide use by income levels (2017) and over time (1990-2017) 83

Figure 24: Fertiliser use by income levels (2017) and over time (2002-2017) 84

Figure 25: Exposure to PM2.5 85

Figure 26: Waste generation and collection 85

Figure 27: Decomposition of impact on CO2 emissions: conservative scenario (left) and ambitious scenario (right) 87

Figure 28: Decomposition of impact on GHG emissions: methane (left) and nitrous oxide (right) 88

Figure 29: Decomposition of impact on total GHG emissions: conservative scenario and ambitious scenario 89

Figure 30: Patents applications related to climate change mitigation by applicant’s country (accumulated 2005-15) 96

Figure 31: Poverty Headcount Ratio at $1.90 a day in Northern, Eastern, Western, and Southern EU MS 111

Figure 32: Percentage of population with access to basic sanitation facilities (left) electricity (middle) and

information/communication technologies (right) in the EU 112

Figure 33: Percentage of population undernourished (left) lacking access to basic drinking water services (middle) and

lacking access to clean cooking technologies (right) in the EU 113

Figure 34: Poverty Headcount Ratio at $1.90 a day (% of population) 114

Figure 35: Population living in slums (% of urban) (top left); Access to basic sanitation facilities (top right) % of

population with access to electricity (bottom left); and information/communication technologies (bottom right) 116

Figure 36: Percentage of population undernourished (left) lacking access to basic drinking water services (middle) and

lacking access to clean cooking technologies (right) in Argentina 118

Figure 37: Domestic general government health expenditure (% of GDP); Universal Health Coverage Index score 121

Figure 38: Nurses and midwives, physicians, and specialist surgeons per 100,000 people (left); Hospital beds per 1,000

people (right) 121

Figure 39: Proportion of population spending more than 10% and more than 25% of household consumption on out of

pocket payments 122

Figure 40: Medicine Price Index across EU MS 123

Figure 41: Cause of death (left); mortality rate due to inadequate living conditions per 1000,000 people (right); and

prevalence of anemia (right) 123

Figure 42: Prevalence and Incidence of Mental Disorders (l), and suicide mortality rate per 100,000 people (r) 124

Figure 43: Domestic general government health expenditure (% of GDP) (top left) and Universal Health Coverage Index

ranking (top right) Nurses, midwives, physicians, and specialist surgeons per 100,000 people (bottom left); Hospital

beds per 100,000 people (bottom right) 125

Figure 44: Proportion of population spending more than 10% and more than 25% of household consumption on out of

pocket payments (left) and Risk of impoverishing expenditure for surgical care (right) 127

Figure 45: Medicine Price Index in Argentina and Brazil (top); prevalence and treatment of HIV (bottom left); and rates

of immunisation (bottom right) 128

Figure 46: Cause of death (left) and mortality rate due to inadequate living conditions per 100,000 people (middle) and

suicide mortality rate per 100,000 people (right) 130

Figure 47: Prevalence of underweight children (l); overweight children (r); anemia among children and women (bl); and

stunting (br) 131

Figure 48: Map of Indigenous Communities in Argentina (left); Brazil (middle); and Paraguay (right) 137

Figure 49: Square kilometres of newly demarcated land in Brazil 139

Figure 50: Indigenous Occupational Structure by Sector 140

Figure 51: Percentage of population unemployed 141

Figure 52: Infant Mortality Rate 142

Figure 53: Access to Adequate Living Conditions for Indigenous Peoples 143

Figure 54: Rates of Illiteracy among Indigenous Populations 145

Figure 55: Average years of study among Indigenous Populations 145

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Figure 56: School Attendance 146

Figure 57: Percentage of Indigenous Population Fluent in traditional Language in Paraguay 147

Figure 58: Gender Inequality Index scores among EU Member States 150

Figure 59: Mortality rate (left); Life expectancy (middle); progression to secondary school (right) 150

Figure 60: Unemployment (top left); % of women in wage employment (top right); % of population in vulnerable

employment (bottom left); time spent on unpaid work (bottom right) 151

Figure 61: Employment by Gender and Sector 152

Figure 62: Gender Inequality Index scores among Mercosur partner countries 153

Figure 63: Mortality rate (left); Life expectancy (middle); progression to secondary school (right) 154

Figure 64: Unemployment (top left), % of women in wage employment (top right); % in vulnerable employment (bottom

left); % of time spent on unpaid work (bottom right) 154

Figure 65: Percentage of Female Employment (left) and Male Employment (right) by Sector, 2017 156

Figure 66: Share of sugar & ethanol imports in total imports from Mercosur (%) 212

Figure 67: Applied MFN tariffs imposed by the EU in 2016 (AVE) 214

Figure 68: Tariffs on sugar products 214

Figure 69: Tariffs on Ethanol products 214

Figure 70: EU-Mercosur trade in alcoholic & non-alcoholic beverages, 2012-2016 220

Figure 71: EU beverage production in € billions, by beverage type, 2012-2014 224

Figure 72: Beer & wine production (million tonnes) in Mercosur, 2012-2014 225

Figure 73: EU exports of garment and textile to Mercosur by country, 2012-2016 234

Figure 74: EU exports of garment and textile to Mercosur by type, 2012-2016 235

Figure 75: EU imports of garment and textile from Mercosur, 2012-2016 237

Figure 76: EU import of garment and textile from Mercosur by type, 2012-2016 237

Figure 77: EU net export of T&G to Mercosur, 2012-2016 239

Figure 78: Mercosur average applied tariff by country, HS 50-62, 2005-2016 239

Figure 79: Mercosur average applied tariff by HS code, HS 50-62, 2016 240

Figure 80: EU average applied tariff by HS code, HS 50-62, 2015 240

Figure 81: EU and Mercosur average applied tariff, HS 50-62, 2007-2015 241

Figure 82: EU28 Chemical and Pharmaceutical Exports and Imports 246

Figure 83: EU28 Trade in Chemical and Pharmaceutical Products with Mercosur (Total), in € million 247

Figure 84: EU28 Trade in Chemical and Pharmaceutical Products with Mercosur (% of total extra-EU28 chemical and

pharmaceutical trade) 247

Figure 85: Automotive Intra-Regional Trade Index in EU-28 269

Figure 86: Automotive Intra-Regional Trade Index in Mercosur 270

Figure 87: EU-28 - Motor Vehicle Production 270

Figure 88: Argentina - Motor Vehicle Production 271

Figure 89: Brazil - Motor Vehicle Production 271

Figure 90: Motor Vehicle Production by Type 272

Figure 91: EU-28 - Motor Vehicle Registrations 272

Figure 92: Argentina - Motor Vehicle Sales 273

Figure 93: Brazil - Motor Vehicle Sales 273

Figure 94: EU-28 External Trade in Motor Vehicles (excluding intra-regional trade), EUR mn 274

Figure 95: Mercosur - External Trade in Motor Vehicles (excluding intra-regional trade), EUR mn 274

Figure 96: EU-28 External Trade in Auto Parts (excl. intra-regional trade), EUR mn 275

Figure 97: Argentina, External & intra-regional Trade in Auto Parts, EUR mn 276

Figure 98: Brazil - External Trade in Auto Parts,* EUR mn 276

Figure 99: Bi-regional Trade of Mercosur and EU-28 in Motor Vehicles, EUR mn 277

Figure 100: EU service exports and imports to/from Mercosur 282

Figure 101: EU service exports to selected countries 282

Figure 102: EU service imports from selected countries 283

Figure 103: Importance of the EU as trading partner for Mercosur (services) 283

Figure 104: Share in total Extra-EU28, exports, other business services, 2015 287

Figure 105: Share in total Extra-EU28 imports by sector, 2015 288

Figure 106: Average annual growth rate of EU services exports, 2010 - 2015 289

Figure 107: Average annual growth rate of EU services imports, 2010 - 2015 289

Figure 108: Services trade restrictiveness (STRI) for professional services in Argentina 297

Figure 109: Services trade restrictiveness (STRI) for professional services in Brazil 299

Figure 110: Brazil’s services trade restrictiveness in the business services sector 300

Figure 111. Services trade restrictiveness (STRI) for professional services in Paraguay 300

Figure 112: Services trade restrictiveness (STRI) for professional services in Uruguay 302

Figure 113: Share in total Extra-EU28 exports, financial and insurance services, 2015 307

Figure 114: Share in total Extra-EU28 imports, financial and insurance services, 2015 307

Figure 115: Average annual growth rate of EU exports, 2010 - 2015 308

Figure 116: Average annual growth rate of EU imports, 2010 - 2015 308

Figure 117: Services trade restrictiveness (STRI) for banking services in Argentina 315

Figure 118: Services trade restrictiveness (STRI) for insurance services in Argentina 316

Figure 119: Services trade restrictiveness (STRI) for banking services in Brazil 318

Figure 120: Services trade restrictiveness (STRI) for insurance services in Brazil 319

Figure 121: Services trade restrictiveness (STRI) for banking services in Paraguay 321

Figure 122: Services trade restrictiveness (STRI) for insurance services in Paraguay 321

Figure 123: Services trade restrictiveness (STRI) for Banking services in Uruguay 323

Figure 124: Services trade restrictiveness (STRI) for insurance services in Uruguay 323

SIA in support of the association agreement

negotiations between the European Union and Mercosur

List of Abbreviations

ACP

Association Agreement

African,

Caribbean and Pacific Countries

ARG

Argentina

AVE

Ad Valorem Equivalents

BEC

BNDES

Broad Economic Categories

Brazilian Development Bank

BRA

Brazil

CAP

Common Automobile Policy

CDE

Constant Difference Elasticity

CEDAW

Convention on the Elimination on All Forms of Discrimination Against Women

CERD

CET

Convention on Elimination of all Forms of Racial Discrimination

Common External Tariff

CETA

EU-Canada Comprehensive and Economic Trade Agreement

CETM

Copenhagen Economic and Trade Model

CGE

CLIMI

Computable General Equilibrium

Climate Laws, Institutions and Measures Index

CLS

Core Labour Standards

CMC

Consejo Mercado Comun

CMPED

Centro Mercosur de Promocion de Estado de Derecho

CO2

Carbon Dioxide

CSD

CSR

Civil Society Dialogue

Corporate

Social Responsibility

DDA

Doha Development Agenda

Directorate General

DOM

Domestic

EBA

Everything But Arms

EBRD

European Bank for Reconstruction and Development

European Commission

ECA

European Consumer Agenda

EFTA

European Free Trade Association

EIDHR

EPO

ESAF

European Instrument for Democracy and Human Rights

European Patent Office

Economic and Social Advisory Forum

European Union

FAO

Food and Agriculture Organization

FBD

Food Borne Illness

FDI

Foreign Direct Investment

Finger-Kreinin

FIDH

FMD

International Federation for Human Rights

Foo

t-and-Mouth Disease

FTA

Free Trade Agreement

FTIS

Foreign Trade Information System

GATS

General Agreement on Trade in Services

GDP

Gross Domestic Product

GDyn Model

Dynamic GTAP Model

GHG

Green House Gas

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GPGC

Global Public Goods and Challenges

GSP

Generalized System of Preferences

GTAP

Global Trade Analysis Project

Human Rights

HRC

Human Rights Council

HRIA

Human Rights Impact Assessment

HS6

Harmonized System at 6 Digits

Impact Assessment

ICCPR

International Covenant on Civil and Political Rights

IEA

International Energy Agency

ICESCR

International Covenant on Economic, Social, and Cultural Rights

ILO

International Labor Organization

INADI

National Institute Against Discrimination, Racism, and Xenophobia

IMF

International Monetary Fund

IPPDH

Instituto de Politicas Publicas en Derechos Humanos

ITUC

International Trade Union Confederation

I2E

Import to Export

JRC

Joint Research Centre

LDC

Least Developed Country

LES

Linear Expenditure System

LMDI

Log Mean Divisia Index

LSE

LULUCF

London School of Economics and Political Science

Land Use, Land Use Change and Forestry

MEA

Multilateral Environmental Agreements

Mercosur

Mercado Comun del Sur

MFN

Most Favoured Nation

NAMA

Non-Agricultural Market Access

NGO

Non-Governmental Organization

NTB

Non-Tariff Barriers

NTM

Non-Tariff Measures

NUTS2

Nomenclature of Territorial Units for Statistics Level 2

ODM

Observatorio de la Democracia del Mercosur

OECD

Organization for Economic Cooperation and Development

PCT

Patent Cooperation Treaty

Partial Equilibrium

PRY

Paraguay

RAADH

Reunión de Ministras y Altas Autoridades de DDHH y Cancillerías del Mercosur y Estados Asociados

RAFRO

Reunión de Ministros y Altas Autoridades Sobre los Derechos de los Afrodescendientes

RAPEX

Rapid Exchange of Information System

RAPIM

RBC

Reunión de Autoridades Sobre Pueblos Indígenas

Responsible Business Conduct

RCA

Revealed Comparative Advantage

R&D

Research and Development

RAAM

Reunión de Altas Autoridades de la Mujer

RoW

Rest of World

RTA

Regional Trade Agreements

SADC

South Africa Development Community

SDT

Special Differential Treatment

SIA

Sustainability Impact Assessment

SIA in support of the association agreement

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SENAF

SENASA

National Secretariat of Childhood, Adolescence, and Family

Servicio Nacional de Sanidad

SITC

Standard International Trade Classification

SME

Small Medium Enterprise

SPS

Sanitary & Phytosanitary

STRI

Service Trade Restrictiveness Index

TBTs

Technical Barriers to Trade

TEU

Treaty on European Union

TiVA

Trade in Value Added

ToR

Terms of Reference

TPP

Trans-Pacific Partnership

TRQ

Tariff Rate Quotas

UNCTAD

United Nations Conference on Trade and Development

UNDRIP

Declaration on the Rights of Indigenous Peoples

UNEP

United Nations Environmental Program

UNESCAP

UNFCCC

UNAI

UN Economic and Social Commission for Asia and the Pacific

United Nations Framework Convention on Climate Change

United Nations Academic Impact

UNIDO

United Nations Industrial Development Organization

UN UPR

UN Universal Periodic Review

URY

USPTO

Uruguay

United

States Patent and Trademark Office

VAT

Value Added Tax

WDI

World Development Index

WIOD

World Input-Output Database

WTO

World Trade Organization

WTO MC

World Trade Organization Ministerial Conference

SIA in support of the association agreement

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Executive Summary

The trade relations between the EU and Mercosur are essential for both blocs, given that the EU

is the second trading partner for Mercosur and Mercosur the eleventh trading partner for the EU.

An inter-regional Framework Cooperation Agreement from 1999 currently forms the basis for

EU-Mercosur trade relations. Following negotiations since 2000, in June 2019 the EU and

Mercosur reached a political agreement for an Association Agreement including a trade

component.

This Sustainability Impact Assessment (SIA) provides an examination of the potential economic,

social, human rights and environmental impact of the trade component of an Association

Agreement between the EU and Mercosur, specifically Argentina, Brazil, Paraguay and Uruguay.

This analysis lays the basis for designing flanking and mitigating measures, a number of which

are proposed throughout the study.

The report employs the dynamic version of the GTAP Model known as GDyn to study the impacts

of two scenarios, one conservative and one more ambitious, with respect to the outcome of the

negotiations in terms of tariff and non-tariff measures reductions by both parties. For Mercosur,

the conservative scenario assumes the elimination of tariffs in 90% of the industrial products

and 80% in agricultural products. In the ambitious scenario, Mercosur eliminates tariffs in 100%

of products. The EU eliminates tariffs in all industrial products in both scenarios, applies partial

tariff cuts of 15% in the conservative scenario and 30% in the ambitious scenario in rice, sugar,

ruminant meat and other meat sectors. For the cereals and the dairy sector, cuts of 15% are

applied in the conservative scenario and cuts of 100% in the ambitious scenario.

Quantitative methods are then combined with qualitative approaches to address social,

environmental and human rights impacts of the free trade agreement as well as the specific

economic impacts on ten important sectors.

This qualitative analysis draws on extensive

consultation with stakeholders in both regions through workshops, civil society dialogues,

questionnaires and interviews.

In the conservative scenario, GDP in the EU expands by 10.9 billion Euros (0.1%) and in

Mercosur by 7.4 billion Euros (0.3%) by 2032, in comparison to the modelling baseline without

the FTA. In the ambitious scenario, GDP in the EU expands by 15 billion Euros (0.1%) and in

Mercosur by 11.4 billion Euros.

EU total exports to the world (extra-EU) expand by 0.4% in the conservative scenario and by

0.6% in the ambitious scenario. In Mercosur, total exports to the world expand between 0.5%

in Paraguay and 4.5% in Brazil in the conservative scenario and between 0.7% in Uruguay and

6.1% in Brazil in the ambitious scenario. EU imports increase by 0.9% (1.1% in the ambitious

scenario). In Mercosur, imports expand between 0.1% in Paraguay and 1.3% in Brazil in the

conservative scenario and between 0.0% in Paraguay and 1.4% in Brazil in the ambitious

scenario.

The modelling results provide also some valuable insights for the social analysis. In the

conservative scenario, the agreement reduces consumer prices in Mercosur between 0.4% in

Paraguay and 1.5% in Brazil (between 0.5% and 2.1% in the ambitious scenario in the same

The sectors for in-depth analysis were selected in consultation with the EC.

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countries). In the EU, they increase by 0.2% (0.3% in the ambitious scenario). Real wages for

both skilled and unskilled workers in Mercosur increase slightly in the EU, Argentina, Paraguay

and Uruguay and remain the same in Brazil. The increase in real wages for unskilled workers’

income suggests a positive impact in terms of poverty reduction, although its effect is small in

the conservative scenario and only marginally larger in the ambitious scenario.

Employment reductions in certain manufacturing sectors in Mercosur are offset by increases in

the agriculture and food production sectors. The impact on the EU sectoral employment patterns

is much less significant.

Labour standards in Mercosur are, in general, in line with those observed in countries at a similar

level of development. There are higher levels of informality, which is a product of poor

enforcement of and compliance with national legislation that tends to follow international

conventions. The chapter about social aspects examines freedom of association, forced labour,

child labour and discrimination in the EU and Mercosur countries and assesses the potential

impact of the Agreement on these issues. The trade and sustainable development (TSD) chapter

of the Agreement brings an opportunity to engage and cooperate between both parties to help

to lock in or help renew the social achievements of the twenty-first century in the Mercosur

region. The SIA includes a discussion of the value-added of EU policies on trade and labour

linkage and their efficacy.

The environmental chapter addresses issues such as environmental regulations, greenhouse

gases, deforestation and pollution. Environmental policies in Mercosur (like in many other

developing regions) are, in general, less stringent than in the EU. Yet, Mercosur’s current share

of global greenhouse gas emissions is a third of the EU’s, in large part because Mercosur

countries have on average a cleaner energy mix than EU countries. Brazil and Paraguay have

lower per capita emissions than the EU, whereas Argentina and Uruguay’s emissions per capita

are about the same as the EU’s.

The quantitative analysis presented in the report predicts diversion of emissions resulting from

diversion of production. The overall result is a small decrease in global CO2 emissions offset by

a small increase in emissions of other greenhouse gases. Emissions intensity of economic activity

decreases marginally for the world economy as a whole, i.e. world economies produce less

greenhouse gas emissions for a given amount of GDP, with a small increase in emissions

intensity in Mercosur offset by a small decrease in the EU.

The expansion of animal production (associated with beef production), sugar cane production

and other agricultural products in Mercosur seen in the model is small. Consequently, the

analysis does not anticipate an increase in the use and contamination of water or an

intensification of the use of pesticides.

For the same reason, no significant expansion of the agricultural frontier would be expected as

a result of the Agreement according to the modelling results. This seems realistic especially when

we look at past and current productivity trends. Deforestation in Brazil has been on the increase

since 2012 having previously declined very sharply in the period 2004-2012, while meat

production continued to increase. This period 2004-2012 demonstrates that it is possible to

increase agricultural and meat production without increasing pressure on forests. But such a

positive outcome will be dependent on the choice of flanking policies as set out in the

environmental chapter.

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The human rights chapter assesses the likely impacts of the free trade agreement on human

rights. It covers in detail the right to an adequate standard of living, the right to the enjoyment

of the highest attainable standard of physical and mental health, the rights of indigenous people

and gender equality. The moderate increases in GDP, income and consumption that the

agreement generates in Mercosur in both scenarios can contribute to improving standards of

living. The limited increase in agricultural production is not expected to impact indigenous rights

substantially and it is not expected to raise further conflicts. Nevertheless, this situation and the

consequent risks should be monitored carefully following the implementation of the agreement.

For the same and additional reasons, the agreement will bring limited benefits to the female

workforce in rural areas. However, it may bring benefits to women in urban areas by expanding

their participation in the labour force, especially the workforce allocated to the service sector.

The sectoral chapter builds on the modelling results while also drawing on other sources to

provide a more in-depth analysis of the impacts on ten important sectors:

 In the beef sector, EU imports from Mercosur will increase in both scenarios (30% and

64%, respectively). EU output will fall by 0.7% (conservative) and 1.2% (ambitious). The

sectoral analysis examines the expected impact in the beef sector in more detail, taking

account of the segmentation of the beef market and existing patterns of in-quota and

out-of-quota trade. The section also assesses the potential impact on animal welfare,

taking account of current legislation in the countries concerned and the existing

framework for EU-Mercosur dialogue and cooperation.

 EU dairy exports to Mercosur increase by 91% (conservative) and 121% (ambitious) as

a result of a reduction of high import duties in Mercosur. The recognition of denomination

of origin by Mercosur countries may expand exports of cheese further. For Mercosur

exporters, the agreement expands dairy exports to the EU by 18% (conservative) and

165% (ambitious) but from a low base; and further expansion will depend on more

Mercosur exporters improving sanitary conditions, animal welfare and other quality

features in production.

 EU exports of beverages to Mercosur expand by 36% (38% in the ambitious scenario)

and exports from Mercosur by 28% (35% in the ambitious scenario). In the case of the

EU exports, this is expected to be concentrated in wine and spirits and it will be primarily

attributed to the tariff reduction. In the case of Mercosur, the expansion is likely to be

concentrated in wine. Effects on output and consumption in both Mercosur and the EU

are very small in both scenarios. The potential impact of the Agreement on fruit juices,

which are not covered by the same aggregate as alcoholic beverages and soft drinks in

the model, is addressed in the sectoral analysis regarding historic tariffs and trade flows.

 The agreement will bring an increase of 32% (36% in the ambitious scenario) in the

Mercosur exports to the EU of textiles and clothing. At the same time, EU exports to

Mercosur will expand by 311% (424% in the ambitious scenario). This is the result of the

reduction of very high tariffs in Mercosur on EU exports. Nevertheless, these changes in

bilateral trade fail to translate into important changes in output and consumption in both

the EU and Mercosur. Consequently, the social effects associated with employment in a

sector with a high degree of informality and a large share of women employed tend to be

minimum.

 The reduction of tariffs and non-tariff barriers applied to pharmaceutical and chemical

products in both Mercosur and the EU will expand EU exports to Mercosur by 47% and

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imports by 13% in the conservative scenario. Output in the EU will expand by 0.2%. In

Brazil, it remains unchanged in the conservative scenario and increases by 0.2% in the

ambitious scenario and Argentina, it contracts by 0.2% in both scenarios. In Brazil, both

skilled and unskilled employment fall by 0.5% in both scenarios. In Argentina, they fall

by 0.7%-0.9% depending on the scenario. However, the increase in the trade and lower

import prices generated by the lower tariffs is likely to benefit other manufacturing

sectors and the agricultural sector.

 EU exports to Mercosur of machinery expand by 78% in the conservative scenario and

by 100% in the ambitious scenario. EU imports from Mercosur expand by 17% in the

conservative scenario and by 22% in the ambitious scenario. In Mercosur, the agreement

generates a contraction of production between 1.4% and 3.2% in the conservative

scenario (between 1.4% and 5.1% in the ambitious scenario). Both skilled and unskilled

employment fall by corresponding amounts. However, this increase in trade is likely to

benefit other sectors, both agricultural and industrial, due to improvement in the access

to capital goods. EU exports to Mercosur of electronic equipment will expand by 109% in

the conservative and 149% in the ambitious scenario. EU imports will expand by 16%

(conservative) and 24% (ambitious). In Mercosur, output will increase between 0.4%

and 2.1% (conservative) and between 0.8% and 2.6% (ambitious).

 There will be significant increases in trade in vehicles and vehicle parts between the two

parties with EU exports increasing by 95% and imports by 41% in the conservative

scenario. EU exports increase by 114% and imports by 47% in the ambitious scenario.

EU will expand its output by 0.5%/0.6% in the conservative/ambitious scenario and

Mercosur will contract its output by 1.7%/1.8% (Brazil) and 2.8%/3.2% (Argentina) in

both scenarios. The agreement may lead to reform of the current Mercosur Common

Automobile Policy which may have additional effects on the sector in the region in a more

liberal direction.

 The agreement generates small changes in the trade of business and professional

services with EU imports from Mercosur growing by 6.5% in the conservative scenario

(by 9.2% in the ambitious one) and exports decreasing by 3.4% in the conservative

scenario (and increasing by 1.4% in the ambitious scenario). This is the result of relatively

lower barriers to investment and trade in the sector (in both parties). Nevertheless, in

both scenarios, the agreement generates increases in output in Mercosur which are

associated with the supply of services to other sectors that may see their output

expanded by the agreement.

 The financial sector also experiences modest increases in Mercosur exports to the EU in

both scenarios and output in Mercosur. In the EU financial services output contracts

marginally in both scenarios. EU financial services exports to Mercosur decrease slightly

in the conservative and increase slightly in the ambitious.

There are no significant effects on the outermost regions of the EU or least developed countries

(LDCs). This is the case given the limited impacts on the sugar sector and because Mercosur is

not a major exporter of bananas. Although in relative terms the increases in the textiles and

apparel trade of Mercosur appear large, in absolute terms they are small.

Consumers may experience benefits as a result of lower prices. In the EU, the impact on

consumption tends to be small, although positive in all products. In Mercosur, consumers will

experience larger changes notably as regards vehicles consumption, which increases by

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1.7%/2.2% in Argentina and 0.6%/0.8% in Brazil in the conservative/ambitious scenario with

many other sectors seeing a marginal decline driven in large part by an increase in exports.

Finally, this study formulates recommendations for flanking measures to mitigate any potential

risk of negative impact and to maximise potential benefits.

The main recommendations derived from the economic and sectorial analyses are to gradually

introduce tariff changes in Mercosur, particularly in economic sectors that are more vulnerable

to negative economic impacts (for instance vehicles and machinery). In the same vein, retraining

and upskilling programmes are suggested to support the transition of workers between sectors.

On the EU side, the use of quotas and partial liberalisation measures should be considered for

sensitive agricultural products.

Measures to protect workers (e.g. labour inspection programmes, labour formalisation policies

and supporting freedom of association), together with redistributive programmes, should be

considered to mitigate social impacts and drive benefit from the FTA. Due diligence measures

for businesses at the EU-level would also strengthen potential social benefits.

Recommendations for the environment highlight measures to decrease deforestation and

contamination of water resources in Mercosur countries, as well as fulfilling the Paris Agreement

commitments and fostering the development of green technology and sharing good practices

between parties.

Finally, recommendations for the Human Rights area stress the strengthening of accountability

measures and implementation of institutional frameworks that address changes in labour

conditions, use of land that affects indigenous peoples, access to health and development of

medicine, and gender equality issues.

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1. Introduction

1.1. Research Aims and Objectives

The Sustainability Impact Assessment (SIA) provides an examination of the potential economic,

social, human rights and environmental impact of the trade component of an Association

Agreement (AA) between the EU and Mercosur. This analysis lays the basis for designing flanking

and mitigating measures, a number of which are proposed throughout the study.

Overall, the SIA consists of two complementary components, notably:

(i) Robust analysis of the economic, social, human rights and environmental impacts,

that the association agreement under negotiation could have, in the EU, in the partner

countries and other relevant countries; and

(ii) A wide consultation process involving stakeholders both in the EU and in the partner

countries, which provides opportunities for information-gathering and dissemination

results.

The analysis starts with a screening and scoping exercise, and is then followed by overall and

sectoral impact analyses which lead to conclusions and recommendations.

The SIA comprises of the following elements:

 An overall analysis of the sustainability impacts arising from the negotiations: While

several key sustainability issues to be analysed in the SIA are cross-cutting and

mainstreamed in the analysis, the identified impacts on small and medium enterprises

(SMEs), consumers, least developed countries (LDCs), and the EU’s outermost regions

(OMRs) are summarised in specific sub-sections.

 Economic analysis: Impact of removing tariff and non-tariff measures (NTMs) and the

wider economic impact of the possible effects of the AA.

 Social analysis: Analysis of the social impact, direct and indirect, of the potential

agreement; analysis of the impact of trade opening on employment, working conditions,

and distributional impacts, as well as interaction between the envisaged agreement and

effective implementation of international conventions inter alia Core Labour Standards

(CLS) and fundamental Conventions of the International Labour Organisation (ILO).

 Environmental analysis: Detailed analysis of potential environmental impacts, both direct

and indirect, of the agreement; analysis of the impact of trade opening on the

environment by identifying scale, technology, and product effects, as well as the potential

interaction between the AA and multilateral environmental agreements.

 Human rights analysis: Detailed analysis of potential impacts of the trade part of the

future AA on HR; analysis of the impact of particular measures in the agreement and

their potential impact on the enjoyment of human rights; assess the impact on vulnerable

groups and gender equality.

 Detailed analysis of the specific sectors identified in the inception report.

 Consultation process: the qualitative and quantitative analysis is complemented by

detailed input from stakeholders through the consultation process.

 Policy recommendations and accompanying measures.

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The scope of the project focuses on the Mercosur-4 (Argentina (ARG), Brazil (BRA), Paraguay

(PRY), and Uruguay (URY)). Our analysis uses all relevant data encompassing the period from

2009, when the last SIA was conducted, to the start of the project (September 2017).

1.2. Background

The EU ranks as the second trade in goods partner for Mercosur while Mercosur ranks as the

eleventh trade in goods partner for the EU (Eurostat). In 2018, the majority of exports from the

EU to Mercosur were in the machinery and transport equipment, chemicals and manufactured

goods sectors. Food and live animals, raw materials as well as mineral fuels and lubricants were

the most-featured sectors in EU imports from Mercosur (Eurostat).

In 2015 for Mercosur (Argentina, Brazil, Paraguay and Uruguay), the EU represented nearly 17%

of its exports and 19% of its imports in trade in goods.

On the other hand, Mercosur received

2.6% of EU exports and generated 2.7% of the imports. However, this trade takes place

primarily under the most-favoured-nation (MFN) basis where average tariffs applied by Mercosur

are 13% and by the EU are 6%.

There are also significant tariffs peaks in both schedules.

Moreover, in addition to the tariff barriers, there are numerous and high non-tariff barriers (NTBs)

affecting trade. Multiple regulations exist that affect the trade in services in all provision modes,

especially related to the movement of natural persons as well as Foreign Direct Investment (FDI).

Figure 1: Map of Mercosur

UN Comtrade database.

Non-ad valorem duties excluded.

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Thus, despite both parties having some defensive concerns, the two sides are expected to gain

from an AA. In agriculture, Mercosur has an interest in improved access for its competitive

agriculture sectors where the EU remains defensive. It should be noted, however, that in this

area there are also offensive interests on the EU side associated with inter alia dairy, beverages,

processed agricultural products and the protection of EU geographical indications. Given the

European influence in the region, there are certain conflicts with products from, for example,

Spain and Italy. These issues are addressed both in the overall economic analysis of the AA and

in the analysis of specific sectors.

On the industrial side, some sectors where the EU industry is competitive are considered

defensive by Mercosur countries. The Mercosur manufacturing sector remains heavily protected

across the board using tariffs as well as administrative measures to slow down the flow of imports.

The car manufacturing sectors in Argentina and Brazil are seen as key in their economic

transformation strategies. In fact, the sector is not liberalised within Mercosur and there is a

Common Automobile Policy that regulates the trade within the bloc and protects it from foreign

competition (Brambilla, 2005; Garriz and Panigo, 2015). However, there is also an important

value chain activity involving SMEs and large firms in both countries as well as European firms

(i.e. a significant share of the car manufactures are of European origin). Thus, Mercosur is on

the one hand vigilant as to how the agreement may affect this sector while also alive to the

opportunities that may arise to integrate further into European value chains. Issues pertaining

to the sector of car and car parts are dealt with in a separate section of our report. The machinery

sector, which also figures prominently in the EU's exports, is also addressed in a separate section.

There is no common services policy in Mercosur, as levels of protection differ between members,

beyond some liberalisation existent within the bloc (Quijano, 2009). However, there are barriers,

which hinder the provision of foreign services in key sectors (e.g. financial, communications,

transportation, etc.) in almost every relevant provision mode. The regulatory frameworks in

some sectors tend to be burdensome, affecting the provision and the investments regardless of

the origin (Rozemberg and Gayá, 2015; Gayá, 2017). The existing arrangements within

Mercosur and possible scope for cooperation with the EU in the area of business services are

reviewed in the final sections of this report.

For the EU, the AA presents the opportunity to secure and increase trade and investment with a

region with which it has important cultural and economic links. For Mercosur, an agreement with

the EU will help to address the relative loss of market access that Mercosur faces (i.e. Mercosur’s

competitors gaining better market access through free trade agreements (FTAs) with the EU) as

well as the chronic trade diversion, affecting productivity, competitiveness and poverty in

Mercosur countries due to intra-Mercosur protection (Chang and Winters, 1999; Bohara et al.

2004).

Table 1: Mercosur countries overview

Country Population (total) Surface area (sq. km) GDP (current US$)

Brazil 209,469,333 8,515,770 1,885,482,534,238

Argentina 44,494,502 2,780,400 519,871,519,808

Paraguay 6,956,071 406,752 40,496,953,779

Uruguay 3,449,299 176,220 59,596,885,024

Source: World Bank, 2018 World Development Indicators.

https://databank.worldbank.org/reports.aspx?source=2&country=BRA,ARG,PRY,URY

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2. Economic Analysis

This chapter provides the results for the computable general equilibrium (CGE) analysis of the

trade aspects of the Association Agreement between the EU and Mercosur. The chapter first

provides a review of the existing literature on EU-Mercosur trade relations as well as EU relations

with other Latin American countries, providing contextual analysis. The CGE results feed into all

other chapters of the report.

2.1. Methodology

This section describes how the LSE Consulting team reaches the specific objectives of the SIA;

an overview of analytical methods to address the tasks and structuring of the work. The analysis

provides the potential economic, human rights, social and environmental effects of the trade-

related parts of the anticipated association agreement between the EU and Mercosur. The study

also covers relevant third countries, in particular LDCs, as well as Turkey which is linked to the

EU by a customs union agreement. Each of the sections on economic, sectoral, social,

environmental, and human rights analysis outlines the methodology and tools used. Below we

expand on our approach to the quantitative analysis to be incorporated across all areas, noting

its limitations to account for all deep integration elements (e.g. government procurement).

Moreover, we highlight how the different methodological tools link to the aims of the analysis

and the components of the work.

2.1.1. CGE Modelling

The CGE analysis carried out by the LSE Consulting team is used to assess the economy-wide

effects in the EU, Mercosur and other relevant partners (e.g. LDCs) of the tariff reductions and

some deep integration elements. For example, it is possible to assess the effect of some trade

costs reductions associated with trade facilitation provisions included in the agreement and/or

harmonisation of standards. In addition, the CGE enables us to view - although with limitations

- the effects of the agreement on services. Additionally, potential impacts on the services sector

are demonstrated through descriptive statistical analysis. CGE helps to assess the FTA’s effect

on the domestic economies. In addition to trade effects, CGE allows us to quantify the effects

on production, consumption, consumer prices and income. The results from the CGE analysis

feed into the social, environmental, human rights, and sectoral analysis, as well as cross-cutting

issues (LDCs, SMEs and consumers).

We employ the dynamic version of the GTAP Model, which is known as GDyn. As regards closure

choices, the labour market is assumed to be in equilibrium, i.e. full employment, where

adjustments are made by changes in real wages. Similarly, land supply is fixed and sluggish

among sectors and adjustments are by rent, i.e. land use increases or decreases as value. Factor

productivity is exogenous. However, when a baseline is updated, the total factor productivity

adjusts to GDP.

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2.1.2. CGE Baseline Development

Table 2 and Table 3 show the sectoral and regional aggregations we employ in this model,

starting from the 57 sectors and 140 regions in Global Trade Analysis Project (GTAP) 9.2 Data

Base with 2011 as a base year.

Table 2: Sectors included

Sector number Sector name Notes (GTAP sectors)

1 Cereals 2, 3

2 Rice 1, 23

3 Vegetables, fruits, nuts 4

4 Oilseeds, vegetable oils & fats 5, 21

5 Sugar 6, 24

6 Plant & animal fibres and other crops 7, 8, 12, 14

7 Other food products 25

8 Bovine and other ruminant meats 9, 19

9 Other meats (poultry, pig) 20

10 Other animal products 10

11 Beverages and tobacco 26

12 Dairy products 11, 22

13 Wood and paper products 13, 30. 31

14 Coal 15

15 Oil 16

16 Gas 17, 44

17 Minerals 18

18 Textile, apparel, leather 27, 28, 29

19 Chemicals, rubber, plastic 33

20 Petroleum, coal products 32

21 Metal products 35, 36, 37

22 Non-metallic minerals 34

23 Motor vehicles & transport equipment 38, 39

24 Machinery 41

25 Electronic equipment and other manufacture 40, 42

26 Electricity 43

27 Utility (construction, water) 46, 45

28 Transport 48, 49, 50

29 Communication and business service 51, 54,

30 Financial service and insurance 52, 53

31 Recreational and other services 55, 56, 57, 47

Source: GTAP 9 Data Base.

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Table 3: Regions

Region Observations

1 EU28

2 Turkey

3 Brazil

4 Argentina

5 Uruguay

6 Paraguay

7 Mexico

8 Central America

9 Andean Colombia, Peru, Ecuador

10 Latin America Except for countries mentioned elsewhere

11 USA

12 Other high-income countries

Canada, Japan, Korea, Australia, New Zealand,

LDCs

14 China (and Hong Kong)

15 Other developing countries

16 Rest of the World (RoW)

Source: GTAP 9 Data Base. Note: the outcome of the withdrawal of the United Kingdom from the European Union is not

included in the baseline and all results treat EU28 as a single region.

The baseline scenario constitutes the situation without an agreement and provides a

counterfactual scenario to evaluate the effects of the agreement. The baseline outlines the main

policies (economic, social and environmental) expected in both the EU and Mercosur until the

year 2032 without the implementation of the EU-Mercosur FTA. Concerning the main policy

elements of the baseline scenario, it is difficult to determine whether many of the initiatives

currently discussed will be implemented or not. Thus the baseline includes all trade agreements

concluded by the EU and Mercosur at the time of the inception of this project (September 2017),

i.e. those that were already in force or for which negotiations are finalised for the EU and

Mercosur. The GTAP model already includes FTAs up to 2011. Therefore only the FTAs not

included in the GTAP model need to be added separately. We exclude agreements with countries

whose share in EU overall trade or Mercosur overall trade is below 1% (except for those with

Latin American countries) or which cannot for technical reasons be included in the agreed

regional aggregation. These criteria result in the following list of agreements to be added:

For Mercosur:

 No FTAs concluded in the relevant period and therefore we do not make any changes

herein.

The following GTAP regions were aggregated as LDCs: Rest of Oceania, Cambodia, Lao PDR, Rest of Southeast Asia

(Myanmar and Timor-Leste), Bangladesh, Nepal, Rest of South Asia (Afghanistan, Bhutan and Maldives), Rest of North

Africa (Algeria, Libya and Western Sahara), Benin, Ghana, Nigeria, Senegal, Togo, Rest of Western Africa (Cape Verde,

Gambia, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Saint Helena, Sierra Leone), Rest of Central Africa (Central

African Republic, Chad, Congo, Equatorial Guinea, Gabon and Sao Tome and Principe), South Central Africa (Angola and

Democratic Republic of Congo), Kenya, Madagascar, Mauritius, Mozambique, Rwanda, Tanzania, United Republic of

Tanzania, Uganda and Zimbabwe.

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For the EU:

 Several agreements have been in force since the recent past. FTA with Canada (CETA),

Korea, Southern African Development Community Economic Partnership Agreement

(SADC EPA), West Africa EPA, Central America, Colombia, Peru, and Ecuador, which have

already been dealt with by other SIAs and studies.

The GTAP Data Base is based on 2011 data and therefore omits many recent policy developments.

To avoid shortcomings arising from such omissions, we make the following broad changes to the

data set:

 Corrections on tariffs for sugar and beef to ensure that the baseline accurately reflects

the various tariff regimes (e.g. WTO quotas) under which these products enter the EU;

 Export subsidies from the EU are removed since they are erroneously included in GTAP 9

Data Base.

We employ a macroeconomic baseline comprising Gross Domestic Product (GDP), unskilled

labour, skilled labour and population developed by the modelling team at DG Trade of the EU.

Specifically, the rate of GPD growth is from the International Monetary Fund (IMF), using a

constant annual price rate. The rate of population growth is taken from the ILO. The labour force,

divided into skilled and unskilled labour, is updated using data from CEPII. Since labour is

expressed in terms of value instead than quantity, percentage rates need to be adjusted in order

to shock the baseline figures correctly. We make further adjustments within the baseline, for

the following:

 Introduction of FTAs signed by the EU after 2011 and already in force;

 Taking into account the NAMA custom Union with Turkey;

 Russian import ban and consequences.

In addition, after macro shocks are introduced to update GDP, population and the labour force,

a calibration has to be performed. Input-output tables and policies refer to the year of the

database, 2011. When the shock is applied, sectoral outputs and trade flows must be checked

and calibrated to reflect data for subsequent years.

2.1.3. Policy Scenario

We apply specific assumptions in terms of tariff and NTB reductions in the policy scenario. Full

liberalisation for all industrial goods sectors on the EU side is assumed for both the conservative

and ambitious scenario. For Mercosur, we assume full liberalisation of 90% of industrial goods

in the conservative scenario, 100% in the ambitious scenario.

As regards agricultural goods, for the EU, partial tariff cuts will apply for rice, sugar, ruminant

meat, other meat of 15% in the conservative scenario and 30% in the ambitious scenario. For

cereals and dairy, a partial tariff cut of 15% will apply in the conservative scenario, whereas

100% cuts will apply in the ambitious scenario. For the remaining products, 100% tariff cuts

would apply. For Mercosur, full liberalisation for 80% of tariff lines takes place under the

conservative scenario and 100% under the ambitious scenario.

The scenarios also take into account trade cost reductions to non-tariff barriers to goods and

services trade. For NTBs, we use the variable ‘ams’ in GTAP Data Base, which captures import-

augmented technological change. The base NTBs for non-agricultural goods is based on existing

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negotiations between the European Union and Mercosur

estimates by the World Bank

. The NTB values available are at Harmonized System at 6 Digits

(HS6) level. The following will be assumed:

 EU: No NTB reduction assumed at this stage;

 Mercosur:

o Conservative: 5% of impact of non-agricultural NTBs eliminated;

o Ambitious: 10% of impact of non-agricultural NTBs eliminated.

This study does not model NTB cuts in agriculture. The reason is that given the lack of robust

ad-valorem-equivalents (AVE) estimates on agricultural trade to and from the EU, the available

AVE estimates greatly exaggerate the perceived NTBs imposed within the EU in relation to the

agricultural sector and would result in strongly (and artificially) negative results. Instead, we

carry out a qualitative analysis of agricultural NTBs in the SIA.

Table 4: NTB cuts in EU and Mercosur

Sectors / NTB cuts

Conservative Ambitious

EU Mercosur EU Mercosur

Agriculture 0% 0% 0% 0%

Non-agriculture 0% 5% 0% 10%

Source: Terms of Reference.

Regarding services barriers, the starting point for the approach used in this SIA is the

observation that FTA negotiations usually lead to binding of the existing level of liberalisation in

services trade (for the cases where this level is more ambitious than the GATS commitments)

as opposed to achieving new market access. However, the insurance policy effect of binding

current levels of liberalisation has in itself had a positive effect on services trade. The

methodology applied for this and other simulations aim to translate this insurance effect into a

liberalisation parameter for CGE modelling. The 3% AVE cut used in the modelling for trade in

services is an assumption introduced in an earlier study by Decreux and Fontagné (2011).

2.2. Literature review

In this literature review, we discuss key studies which focus on EU FTAs with either Mercosur or

other Latin American countries, briefly setting out their broad assumptions and results.

Estrades (2012) examines the EU-Mercosur FTA impact on both economies, especially at the

household level. The study uses a multi-sector, multi-region computable general equilibrium

model (MIRAGE) to calculate the impact on households after the FTA is implemented by looking

at the comparable data of Mercosur (especially Uruguay) and EU using GTAP 7 Data Base by

looking at parameters like consumption, consumer price index, Gini index, tax etc. The

methodology assumes that the only easily mobile factor of production is labour in comparison to

the immobile natural resource and land. It includes 4 Mercosur countries, 30 European countries

and 30 sectors. It includes one complete EU-Mercosur tariff elimination (2011-2015) scenario,

and has three more sensitivity scenarios namely sensitive products in both the regions, sensitive

products in Mercosur and sensitive products in EU; in each of the scenarios, the sensitive

As published in the 2012 update of Kee, Nicita and Olarreaga (2008) Import Demand Elasticities and Trade Distortions.

Review of Economics and Statistics 90(4), 666-682.

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negotiations between the European Union and Mercosur

products were exempt from the liberalisation shocks. For the EU, the sensitive products are

assumed to be the ones offered by the EU to Mercosur in 2004, while for Mercosur, the authors

assume the formula given by Jean et al. (2010), which defines the sensitive products based on

initial tariffs, share in aggregate imports and tariff cuts proposed. EU sensitive products mostly

include food and agricultural commodities. Among the 55 tariff lines proposed herein, 44% are

meat products, 24% are dairy products and 10% are cereal products. For Mercosur, they include

motor vehicles and parts, beverages and tobacco products and other food products. The paper

tries to explain the impact of the FTA on a low-income country like Uruguay with parameters

such as poverty, income, consumption, transfer benefits, inequalities etc.

Due to the FTA, income inequality tends to decrease in the Mercosur countries due to the

increase in the demand for unskilled labour and wages while the real income increases and

poverty tend to decrease. The study, which focusses in detail on Uruguay, assesses the impact

on different categories of Uruguayan household. Almost all (over 99%) of households in Uruguay

tend to benefit from the FTA in comparison to the baseline. The FTA affects manufacturing in

the EU and agriculture in Mercosur countries positively.

Secondly, we look at the results of the previous SIA of the AA between the EU and Mercosur (EC,

2007). The SIA uses CGE and econometric techniques for the trade agreement analysis. The

database used is GTAP 6.2 and the baseline is taken as the commodity/services price across the

world. The study also considers the full trade agreement hence no barrier to the trade between

the two blocs. The methodology takes into considerations major trading commodity/products

like grains, vegetables, fruits, chemicals, automobiles, pharmaceuticals etc.

The results from the study, which models full liberalisation without taking account of the partial

liberalisation treatment that tends to be applied to sensitive agricultural products, suggest that

the Mercosur countries will benefit by $9 billion while the EU will benefit by $4 billion. Hence the

study shows that given the removal of barriers and the effect of full trade liberalisation between

the blocs, a sizable amount of the economy can be freed up and both the blocs will benefit. The

previous SIA finds relative per capita increase in the income, consumption, GDP and decreases

in poverty and inequality, especially in Mercosur countries.

The follow-up position paper assesses the economic impact of the FTA to be positive both for

the EU and for Mercosur countries (EC, 2010). In the EU, the manufacturing and services sectors

are predicted to benefit most from an FTA. The EU could reap some benefits from better market

access to Mercosur for some vegetable products via an FTA, as well as from better protection of

geographical indications. In Mercosur, the economic benefits of an FTA are expected to be felt

throughout the whole economy and especially in the agricultural sector. In the EU, the only

sector where a negative social impact would be felt is in agriculture and rural areas where short

to medium term social adjustment costs could occur during a transition period and could add to

the underlying downward trend in baseline agricultural sector employment in the EU. For

Mercosur, the social impacts are expected to be positive over the long term while some

adjustment costs on the short term could occur in the manufacturing sector.

The 2007 SIA also suggests that the expansion of agriculture in Mercosur in response to full

liberalisation could cause social problems to the "traditional agriculture" and result in the loss of

livelihoods for indigenous people. The environmental impact of the FTA in EU countries is not

significant. In Mercosur, the 2007 study finds that full trade liberalisation in the agriculture and

the forestry sector could result in added pressure and potentially significant adverse impacts on

natural resources, forest coverage and biodiversity. The paper recommends developing EU-

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negotiations between the European Union and Mercosur

Mercosur cooperation on the development of measures to reduce particulate and CO2 emissions

from automobiles focusing particularly on technology development. In the services sector, the

paper recommends allowing for an orderly adjustment period in the financial, retailing and

distribution services sectors. This would bring in significant economic benefits to both partners.

Concerning investment, the paper noted that increased foreign investment could contribute

positively to environmental quality by introducing improved environmental control technology.

The downside was that it may put additional pressure on the natural resource stock capital in

Mercosur countries. The paper agreed that the FTA could result in significant improvement for

trade operators but did not focus on specific measures in different sectors in the context of EU-

Mercosur FTA.

A study which combines both GLOBE CGE Model for economy-wide impact and CAPRI Model for

agricultural impact in the two regions concludes that economic losses and adjustment pressures

are to be expected in certain EU agricultural goods (Burrell et al. 2011). The scenarios simulated

include the EU’s offer to Mercosur in 2004, Mercosur request to EU in 2006, Doha agreement

2008, EU’s proposal to Doha context and Mercosur proposal to Doha context. The resultant

impact shows a small decrease in output in various EU agricultural sectors in the less ambitious

scenario with a larger impact in the more ambitious scenarios. EU gains in manufacturing

outweigh the loss in the agricultural sector, which leads to a total increase in the GDP of the

bloc.

In addition to the studies focusing on EU-Mercosur, there have also been several studies on FTAs

between the EU and other Latin American countries. The Centre for Economic Policy Research

(CEPR) (2009) assessed the likely economic, social and environmental impacts of a potential

multi-party trade agreement between the EU, and its member states, and the Andean countries

of Colombia, Ecuador, Bolivia and Peru through use of contemporary quantitative and qualitative

assessment. The authors employed the ICE model which is a multi-regional and multi-sectoral

CGE deriving the economic impacts of the multi-party trade agreement between EU and Andean

countries. The SIA examines two scenarios: modest and ambitious. The modest trade agreement

scenario assumes a 90 percent reduction in tariffs in the trade in goods sector, a 50 percent

liberalisation of trade in services, and measures to facilitate trade and lower non-tariff barriers

corresponding to 1 percent of the value of trade. The ambitious trade agreement scenario implies

a 97 percent bilateral tariff reduction for trade in goods, a 75 percent liberalisation of trade in

services, and trade facilitation measures corresponding to 3 percent of the value of trade. The

model results indicate that all four Andean countries gain in terms of an increase in GDP by 2018.

However, the change expressed as a percentage of baseline GDP is small, ranging from 0.7

percent in Peru to 2.1 percent in Bolivia under the ‘ambitious’ liberalisation scenario and allowing

for an increase in fixed capital formation. For the EU27 countries, no change in GDP results from

the trade liberalisation scenarios. Among the Andean countries, the increase in real income is

expected to be biggest for Colombia, the largest economy studied, and smallest for Bolivia. The

relative income gain is expected to be biggest for Bolivia and Ecuador, where real income is

expected to increase between 0.5 percent and 2 percent of GDP.

The modelling analysis shows modest income gains for all economies in all settings and scenarios,

with the biggest absolute gains occurring in the EU and Colombia, where real incomes are

projected to increase by up to €4 billion and €2.8 billion respectively. In relative terms, the

expected income gains are estimated to be highest for Bolivia and Ecuador, where real income

is expected to increase by between 0.5 and 2 percent of GDP. The impact in the EU is only

marginal, at less than 0.1 percent of GDP. The study found that there is no effect in wages for

unskilled workers in the EU whereas for all Andean countries the effects are very small in the

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short term. The long-term changes in unskilled wages are also very small with the effects being

the highest for Bolivia with a 1.3 percent increase in unskilled workers’ wages under the

ambitious long term trade agreement scenario. In terms of skilled workers, a minimal effect was

estimated with some negative countries having a negative impact.

The employment effect when studied estimated that only Bolivia and Ecuador will be involved in

inter-sectoral shifts in employment leading to adjustment costs. The changes in other Andean

countries are small while in the EU less than 0.5% of labour is affected. While studying the

impact on national trade, it found minimal effects on the EU’s global trade flows. On the other

hand, the Andean countries, experience changes in both export and import flows. Colombia’s

trade is affected the most, with approximately 6 percent increase in both exports and imports

in the short run, and around 9 to10 percent increase taking place in the long run. All other

Andean countries experience important increases in both exports and imports. The global effects

of the FTA are observed where national income effects for Mercosur, USA and the rest of the

world are negative, yet positive for the least developed countries.

Though the EU and Andean trade agreement is not expected to have any significant effect on

CO2 emissions, there will be small albeit negative effects on fisheries and forest land use due to

the liberalisation. The sectoral effects show that the Andean countries experience more

pronounced changes in the output of some of the sectors. There is a significant decline in

agricultural products in Ecuador and small increases in the other three Andean countries. The

vegetables, fruit and nuts subsector is predicted to increase its output significantly in Colombia

(11.2 percent) and Ecuador (8.7 percent), contributing a significant share of the total national

value-added in both countries. A potential EU-Andean trade agreement will have no significant

effect on the EU’s trade flows; while for the Andean countries, imports and exports are expected

to increase by between 3 to 10 percent. Effect on overall employment and wages for both skilled

and unskilled labour is predicted to be minor.

The effect of the FTA on poverty and inequality estimates employment in the large-scale formal

mining sector to increase but the restrictions on workers’ rights will restrain any significant

increase in real wages or improvement in working conditions. Similarly, where trade contributes

to agriculture intensification, positive effects are expected if job opportunities are created mainly

in new large plantations. However, there could be a negative effect if increased trade results in

the dispossession of land and other natural assets. Such an increased economic performance

also in principle should bring in higher public expenditure on health and education but there is

limited impact observed on existing levels of education and health due to the EU - Andean trade

liberalisation. When EU FDI increases in these regions and facilitates infrastructural investments,

there is a possibility of the FTA leading to further deforestation. On a sectoral level, positive

effects are found on the textiles and leather sectors of Bolivia, Colombia and Peru. Higher output

of Colombia’s textiles and motor vehicles sectors will also produce positive chain effects on other

manufacturing sectors composed mainly of SMEs.

To evaluate the effect of FTAs on services, the modelling study estimates NTBs for services trade

as part of the experiment baseline that involves the estimation of a bilateral gravity equation for

services trade, where country importer fixed effects terms are used to estimate potential trade

cost reductions linked to service NTBs. The effect is found to be negative on the changes in

financial services in all countries except Ecuador. Related insurance services decline in all

countries while the impact of construction services are predicted to be positive. The CGE model

explicitly involves trade costs, which include both trade and transportation services. Here trade

facilitation is modelled as a reduction in the resources needed to supply a market. The model

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estimates that trade facilitation offers some benefits, though substantially less than those from

basic liberalisation of goods and services trade. The model results show reduced trading costs

from standard trade facilitation measures in turn create significant welfare gains.

Francois et al. (2012) document the economic impact assessment of the final agreement

between the EU and Andean community, as an update of Development Solutions et al. (2009);

namely Columbia and Peru. The CGE model employed is based on the widely used global CGE

model GTAP (Hertel 1997) with added features from Francois, van Meijl and van Tongeren (2005)

with a partial equilibrium extension. This framework allows for scale economies and imperfect

competition. The basic modelling framework included a partial equilibrium nested with the GTAP

framework outlined by Narayanan et al. (2010) to cover banana trade. Positive impacts on the

GDP of both partner economies (Peru: 0.25 OR 200MEuros; Columbia: 0.4 % or 500M Euros)

and small EU gains (0.05% of GDP). The FTAs will lead to EU’s increase in export to Columbia

and Peru (63% and 48%; 2.5 and 2bn Euros respectively) followed by an increase in imports by

11% and 15%; 390mn and 340mn Euros respectively. Europe’s exports of manufactured goods

are expected to increase significantly. The CGE calculations project an estimated increase of

such exports to Columbia to about 115% while EU exports of manufactured goods to Peru is

estimated to increase to 72%. With an exception of a 6% increase in Peruvian imports from EU

trade in services is estimated to remain largely unchanged. Columbia and Peru are estimated to

have a 30% and 20% reduction in tariff revenues respectively. The study used a partial

equilibrium analysis for the sensitive sector: banana where the impact on the sector in EU is

estimated to shrink by about 1% while it increases by 0.75% in Columbia and 1.22% in Peru.

European firms will be able to export most agricultural, industrial and fishery products duty-free

to Peru and Colombia. Columbia would be positively affected by the deregulation of motor vehicle

exports to the EU as well as a reduction in trade costs on alcoholic beverages and tobacco. The

agreement also provides for more secure market access for services, reductions in non-tariff

measures for agricultural and industrial goods, and improved trade facilitation measures. The

report follows up on the issues highlighted on the SIA report 2009- focus on wages, employment

and labour market adjustment; negligible environmental effects; water pollution due to an

increase in agriculture and mining production.

Finally, Giordano et al. (2007) using CGE concluded that Andean EU FTA would bring in a

moderate decrease in poverty and inequality in both partner countries with rural region incomes

increasing faster than urban regions. Botero et al. (2004) estimated a considerable increase in

the creation of jobs in Columbia to up to 270000 and indicated better growth in skilled wages.

This study shows that wages for both skilled and unskilled workers increased for all member

countries with a negligible increase for EU. Unskilled workers experienced a higher wage increase

as compared to skilled workers and this corroborated with simulations done in EU SIA. The

estimated impact on poverty through FTA are small in Columbia and insignificant in Peru. The

study estimates a transition from small scale to large scale agriculture with a rise in wages and

expects an increase in agriculture and food products for EU imports from Columbia and Peru. In

the manufacturing sector, EU exports to Columbia and Peru are expected to increase

competitiveness. When seen sector-wise, EU exports to Peru in the form of medicaments, cars

and coppers are bound to see an increase while in Columbia where levels of protection are more,

a tariff fall from 35 to 0 will see an upsurge in relative competitiveness of European cars

significantly. In terms of imports from Columbia and Peru, only two categories (sugar and maize

respectively) had a substantive level of trade. Bananas from both regions will benefit from

preferential access to EU markets with trigger import volume restrictions.

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2.3. Scenario Results

All our results explained in this section are based on relative (percent) changes with respect to

the baseline in the year 2032. In other words, for example, a result of 2% GDP implies that the

GDP was higher than the 2032 baseline by 2%.

Table 5: Macroeconomic Results for the Conservative scenario

Region

GDP

EUR

Invest Imports Exports Welfare

Real

Wages

(Skilled)

Real

Wages

(Unskilled)

Consumer

Prices

EU28 0.1 10.9 0.4 0.9 0.4 6.3 0.2 0.2 0.2

Brazil 0.2 4.0 0.7 1.3 4.5 1.4 0.0 0.0 -1.5

Argentina 0.5 3.3 1.4 1.2 1.9 1.5 0.2 0.3 -1.0

Uruguay 0.2 0.1 0.8 0.4 0.8 -0.1 0.2 0.4 -0.6

Paraguay 0.1 0.0 0.3 0.1 0.5 0.0 0.2 0.3 -0.3

Turkey 0.0 0.3 -0.1 0.0 0.1 -0.2 0.0 0.0 0.0

Mexico 0.0 -0.4 -0.1 -0.2 -0.1 0.4 -0.1 -0.1 -0.1

Central America 0.0 -0.1 0.0 0.0 0.0 -0.1 0.1 0.0 0.0

Andean -0.1 -1.1 -0.5 -0.6 0.2 -0.7 -0.2 -0.2 -0.2

Latin America -0.1 -0.6 -0.2 -0.2 -0.1 -0.1 0.0 -0.1 0.0

USA 0.0 -3.2 -0.1 -0.1 0.0 -3.0 0.0 0.0 0.0

Other HICs 0.0 -3.5 -0.1 -0.1 0.0 -2.4 0.0 0.0 0.1

LDCs 0.0 -0.8 -0.1 -0.1 0.0 -0.4 0.0 0.0 0.0

China and HK 0.0 -2.4 0.0 -0.1 -0.1 -3.5 0.0 0.0 0.0

Other Dev 0.0 -2.7 0.0 0.0 -0.1 4.0 0.0 0.0 0.1

Rest of World 0.0 1.4 -0.7 -0.6 0.4 0.4 -0.2 -0.2 -0.2

Source: CGE Modelling Results. All numbers are in % changes relative to baseline, except welfare and GDP, which are

in 2011 Euros in billions. Originally expressed in US$ and transform to Euros using 1.392 USD/Euros in 2011.

Table 5 and 6 show the macroeconomic results for conservative and ambitious scenarios,

respectively. GDP increases in all of the FTA countries, i.e. EU and Mercosur members. Without

an exception, the positive effects in all variables are much stronger in the ambitious scenario,

than in the conservative scenario, just as we would expect. The increase in EU GDP is 10.9 billion

Euros (0.1%) in the conservative scenario and 15 billion Euros (0.1%) in the ambitious scenario.

Given that Mercosur economies are smaller, the positive effects on GDP are larger in relative

terms: ranging from less than 360 million Euros (0.1%) in Paraguay in the conservative scenario

to 4.6 billion Euros (0.7%) in Argentina in the ambitious scenario.

For the EU, a large part of GDP gains comes from increased consumption of cheaper imports,

while a smaller part may come from exports expansion and investment. The increase in exports

leads to an increase in consumer prices. However, the real wages of both unskilled and skilled

labour increase as well, with the former growing more than the latter, bridging the real wage

gap between these two categories. Welfare effects in the EU are the strongest, with 6.3 billion

Euros in the conservative scenario and 8.6 billion Euros in the ambitious scenario.

Similar explanations may be extended to Mercosur countries, with some exceptions. Despite

strong growth in GDP, investment, imports and exports, consumer prices fall in all Mercosur

countries. This is because they have relatively higher tariffs than the EU and therefore, a similar

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relative reduction in tariffs can lead to a greater price reduction in Mercosur than in the EU, so

much so that this can offset the demand-driven upward price pressures. Argentina sees stronger

investment and GDP effects.

For the countries other than EU and Mercosur, the results are quite mixed. Investment in Turkey

is marginally lower. The USA loses slightly in most variables, because Mercosur is an important

partner for them, and the bloc’s deeper integration with the EU can result in some trade diversion

away from the USA to the EU. Mexico has a similar tendency for the same reason. Latin American

and Andean countries gain in terms of exports but lose in most other terms. Central America

sees a small increase in investment, wages and prices, but fall in everything else. Consumer

prices in other high-income countries are marginally higher resulting in a small reduction in other

variables. Interestingly, the same thing happens in LDCs and China and other developing

countries, for the same reason.

Welfare effects are also mostly positive; however, unlike GDP, welfare results depend a lot on

changes in tax revenue. Therefore, tariff reduction has two opposing effects: increased welfare

due to lower prices and greater demand, as opposed to decreased welfare due to tariff revenue

losses. In the only case where we see a small negative welfare result (Uruguay in Conservative

scenario), tariff revenue reduction effects outweigh other welfare gains.

Table 6: Macroeconomic Results for the Ambitious scenario

Region

GDP

EUR

Invest Imports Exports Welfare

Real

Wages

(Skilled)

Real

Wages

(Unskilled)

Consumer

Prices

EU28 0.1 15.0 0.5 1.1 0.6 8.6 0.3 0.3 0.3

Brazil 0.3 6.5 0.8 1.4 6.1 2.1 0.0 0.0 -2.1

Argentina 0.7 4.6 0.7 4.6 1.6 1.4 2.8 2.1 0.3

Uruguay 0.4 0.3 1.4 0.6 0.7 0.0 0.3 0.8 -0.6

Paraguay 0.1 0.1 0.4 0.0 0.8 0.0 0.2 0.3 -0.5

Turkey 0.0 0.4 -0.1 0.0 0.1 -0.1 0.1 0.0 0.1

Mexico 0.0 -0.5 -0.1 -0.3 -0.1 0.1 -0.1 -0.1 -0.1

Central America 0.0 -0.1 -0.1 -0.1 0.0 -0.1 0.1 0.0 0.0

Andean -0.2 -1.4 -0.6 -0.7 0.2 -0.9 -0.2 -0.3 -0.2

Latin America -0.1 -0.9 -0.3 -0.2 -0.2 -0.3

0.0

-0.1

0.0

USA 0.0 -4.5 -0.2 -0.1 0.0 -2.7

0.0 0.0 0.0

Other HICs 0.0 -4.5 -0.1 -0.1 0.0 -2.7

0.0 0.0

0.1

LDCs -0.1 -0.9 -0.1 -0.1 0.0 -0.8

0.0 0.0 0.0

China and HK 0.0 -3.9

0.0

-0.2 -0.1 -1.2

0.0 0.0 0.0

Other Dev 0.0 -3.8

0.0

0.0 -0.1 0.7 0.1

0.0 0.0

Rest of World 0.0 1.4 -0.5 -0.4 0.3 -0.4 -0.1 -0.2 -0.1

Source: CGE Modelling Results. All numbers are in % changes relative to baseline, except welfare and GDP, which are

in 2011 Euros in billions. Originally expressed in US$ and transform to Euros using 1.392 USD/Euros in 2011.

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From Table 7 we may observe that the EU may experience a small decline in output of up to

0.7% in agricultural, food, energy, services and some light manufacturing sectors, but they may

gain in other manufacturing sectors. There is a small diversion of output away from EU to

Mercosur countries in many of these sectors accompanied by a reallocation effect.

Table 7: Sectoral Output changes in the Conservative Scenario

Sectors EU28 Brazil Argentina Uruguay Paraguay

Cereals

-0.3 1.8 0.4 0.2 0.3

Rice

-0.4 1.2 0.6 -0.1 -0.9

Vegetables, fruit, nuts

-0.5 1.9 3.1 2.2 -0.1

Oil seeds, vegetable oils

-0.4 2.3 1.4 0.0 0.1

Sugar

-0.7 1.7 0.9 -0.1 -0.1

Plant and animal fibres

-0.3 1.1 0.5 0.3 -0.2

Processed foods, fish

-0.2 1.5 1.3 1.2 -0.8

Beef and sheep meat

-0.7 1.2 1.3 2.1 0.2

Poultry meat, pork

-0.2 2.4 0.3 -0.4 -0.1

Other animal products

-0.2 1.5 1.3 2.4 -0.1

Beverages and tobacco

0.0 0.2 0.3 -1.4 -0.6

Dairy products

-0.1 -0.2 0.4 -1.5 -0.1

Wood and paper

0.0 0.4 0.1 1.8 -0.9

Coal

0.0 0.2 0.2 0.0 0.0

Oil

0.0 0.1 0.1 0.0 0.0

Gas

-0.6 2.4 1.9 -4.5 -3.4

Minerals

0.0 0.1 0.1 0.0 0.0

Textiles, apparel, leather

-0.1 0.6 0.7 2.2 -0.3

Chemicals, rubber, plastic

0.2 0.0 -0.2 -1.2 -2.0

Petroleum, coal products

0.0 0.1 0.3 -0.3 -0.1

Metal products

0.2 -2.1 -1.1 -4.2 -2.5

Non-metallic minerals

0.2 0.6 0.7 0.1 -0.9

Vehicles, transport equipment

0.5 -1.7 -2.8 -11.5 -2.7

Machinery

0.4 -3.8 -1.9 -1.0 -3.2

Electronic equipment

-0.3 1.6 2.1 1.6 0.4

Electricity

0.0 0.2 0.0 -0.8 0.9

Utilities

0.3 0.6 1.3 0.7 0.3

Transport

0.0 0.3 0.7 0.3 0.0

Telecoms, business services

0.0 0.5 0.8 0.6 0.1

Financial services

-0.1 0.2 0.6 0.2 0.0

Other services

0.0 0.2 0.4 0.0 -0.1

Source: CGE Modelling Results. All numbers are in % changes relative to baseline.

See Table 120, Table 121 and Table 122 in Annex 4 for changes in the sectoral private

consumption, sectoral exports and imports for the conservative scenario.

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Table 8 presents the impact on the bilateral trade in the conservative scenario. The magnitudes

of the changes are naturally larger than the changes in the overall trade. The EU sectors that

expand their exports the most to Mercosur are industrial products and dairy. Mercosur will

expand its exports to the EU in agri-food products. Overall EU exports to Mercosur increase by

52%. Overall EU imports from Mercosur increase by 11%.

Table 8: EU-Mercosur bilateral trade changes by sector in the conservative scenario

Sectors EU imports from Mercosur EU exports to Mercosur

Cereals 6.7 3.8

Rice 8.8 47.8

Vegetables, fruit, nuts 40.0 29.0

Oilseeds, vegetable oils 4.5 37.8

Sugar 15.2 37.5

Plant and animal fibres 12.5 20.3

Processed foods, fish 89.8 33.6

Beef and sheep meat 30.0 11.3

Poultry meat, pork 36.7 39.2

Other animal products 23.6 9.7

Beverages and tobacco 36.5 27.7

Dairy products 18.0 90.9

Agri-food 22.8 35.1

Wood and paper 9.6 65.8

Coal 0.4 12.7

Oil 0.2 11.1

Gas 21.2 114.2

Minerals 0.4 3.2

Textiles, apparel, leather 32.4 310.8

Chemicals, rubber, plastic 12.8 47.6

Petroleum, coal products 0.3 5.2

Metal products 17.4 69.3

Non-metallic minerals 10.2 55.7

Vehicles, transport equipment 40.6 95.0

Machinery 17.3 78.4

Electronic equipment 15.7 109.3

Industrial 7.9 74.3

Goods 13.1 72.7

Electricity 2.5 -2.4

Utilities 6.2 -2.8

Transport 3.2 -1.9

Telecoms, business services 6.5 -3.4

Financial services 6.1 -3.6

Other services 5.3 -3.6

Services 4.5 -3.2

TOTAL 10.6 52.0

Source: CGE Modelling Results. All numbers are in % changes relative to baseline.

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The ambitious scenario results are broadly consistent with the conservative scenario results,

except that the magnitudes tend to be higher in the former, as documented in Table 9 below

and Table 124, Table 125, and Table 126 in Annex 4.

Table 9: Sectoral Output changes in the Ambitious Scenario

Sectors EU28 Brazil Argentina Uruguay Paraguay

Cereals

-0.5 2.4 0.8 -0.2 0.6

Rice

-0.5 1.7 0.8 -0.6 -1.2

Vegetables, fruit, nuts

-0.5 2.2 3.1 2 -0.1

Oil seeds, vegetable oils

-0.5 3.2 1.9 -0.6 0.2

Sugar

-1.0 2.5 1.2 -0.4 0.1

Plant and animal fibres

-0.4 1.3 0.5 0.3 -0.2

Processed foods, fish

-0.3 1.7 1.5 1.0 -1.1

Beef and sheep meat

-1.2 2.0 2.4 4.0 0.6

Poultry meat, pork

-0.3 3.7 0.5 -1.2 -0.1

Other animal products

-0.3 2.2 1.5 3.0 -0.1

Beverages and tobacco

0.0 0.2 0.4 -1.8 -0.7

Dairy products

-0.1 -0.2 0.6 -2.4 -0.1

Wood and paper 0.0

0.6 0.1 1.8 -1.2

Coal 0.0

0.2 0.2

0.0 0.0

Oil 0.0

0.1 0.1

0.0 0.0

Gas

-0.6 -0.1 2.6 -14.7 -9.8

Minerals

0.0 0.1 0.1

0.0 0.0

Textiles, apparel, leather

-0.1 0.9 0.9 1.9 -0.3

Chemicals, rubber, plastic

0.2 0.2 -0.2 -1.9 -2.4

Petroleum, coal products

0.1 0.1 0.4 -0.4 0.2

Metal products

0.2 -2.5 -1.3 -5.4 -3.1

Non-metallic minerals

0.2 0.7 0.8 0.2 -1.1

Vehicles, transport equipment

0.6 -1.8 -3.2 -14.4 -3.3

Machinery

0.5 -5.1 -2.9 -1.4 -4.5

Electronic equipment

-0.4 2.2 2.7 1.8 0.8

Electricity

0.1 0.2 0.0 -1.0 1.0

Utilities

0.4 0.7 1.5 1.2 0.3

Transport 0.0

0.4 0.8 0.4 0.0

Telecoms, business services 0.0

0.7 1.0 0.6 0.1

Financial services

-0.1 0.4 0.7 0.3 -0.1

Other services

0.0 0.3 0.6 0.1 -0.1

Source: CGE Modelling Results. All numbers are in % changes relative to baseline.

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Table 10: EU-Mercosur bilateral trade changes by sector in the ambitious scenario

Sectors EU imports from Mercosur EU exports to Mercosur

Cereals 46.5 5.1

Rice 15.5 61.3

Vegetables, fruit, nuts 40.4 36.8

Oilseeds, vegetable oils 5.9 47.8

Sugar 27.3 47.8

Plant and animal fibres 13.6 25.3

Processed foods, fish 92.8 42.7

Beef and sheep meat 63.7 14.5

Poultry meat, pork 78.8 50.0

Other animal products 23.5 12.2

Beverages and tobacco 38.0 35.4

Dairy products 165.3 120.9

Agri-food 30.7 44.9

Wood and paper 12.1 83.1

Coal 0.4 28.1

Oil 0.1 25.0

Gas 34.4 302.8

Minerals 0.4 4.2

Textiles, apparel, leather 36.5 424.1

Chemicals, rubber, plastic 16.2 60.2

Petroleum, coal products 0.4 9.3

Metal products 22.1 84.9

Non-metallic minerals 12.5 71.7

Vehicles, transport equipment 47.5 114.4

Machinery 24.0 100.5

Electronic equipment 21.6 148.7

Industrial 9.6 94.1

Goods 17.0 92.0

Electricity 4.0 4.3

Utilities 8.6 2.7

Transport 4.5 4.0

Telecoms, business services 9.2 1.4

Financial services 8.5 1.8

Other services 7.3 2.0

Services 6.4 2.1

TOTAL 13.9 67.5

Source: CGE Modelling Results. All numbers are in % changes relative to baseline.

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Based on the results from both conservative and ambitious scenarios, we may observe broadly

that the EU gains overall from the FTA with Mercosur. Small decreases in output in most of the

non-manufacturing sectors are outweighed by increases in others. The GDP gains in Mercosur

countries are larger in relative terms than in the EU, though they are smaller in absolute terms.

Non-EU, non-MERCOSUR countries may be slightly negatively affected due to trade diversion.

2.4. Fiscal Impacts

An additional impact to consider is related to the effect of the tariff rate reductions in government

revenue. The elimination in most tariff lines of the applied duty on the bilateral imports will

reduce the government revenues from import and other customs duties. Table 11 summarises

the importance of import and customs duties in Mercosur’s central government. The share of

import duties in Mercosur goes between 4.1% in Brazil to 10.8% in Paraguay. It is important to

highlight that in federal countries, such as Brazil and Argentina, States and city governments

are not included in the central government accounts. Consequently, these figures can

overestimate the importance of revenue for import in total government revenue

The share of the EU in total Mercosur imports is presented in the second column whilst the third

presents the share of the EU in total dutiable imports. This excludes from the calculation of the

share the imports from each of the other Mercosur members, Bolivia and Chile as they are duty-

free.

The fourth column calculates the share of the import revenue originated from imports from the

EU in the total revenue collection. In a scenario where all imports from the EU are duty-free,

this share suggests how much, in percentage terms, each of the Mercosur countries will lose in

terms of revenue in the central government.

Table 11: The incidence of tariff revenue in the Mercosur imports from the EU (2018)

Share of customs

and import duties

in total Revenue

Collection

Share of EU in

total imports

Adjusted Share of

EU in dutiable

imports

Share of duties

from imports from

EU in total

revenue collection

Argentina 6.9 17.2 25.0 1.7

Brazil 4.1 20.0 22.4 0.9

Paraguay 10.8 11.1 17.0 1.8

Uruguay 5.7 12.6 19.1 1.1

Source: Own elaboration based on World Bank World Development Indicators and WITS

The figures suggest a small impact on government revenue. Assuming that all import from EU

imports is lost, central government revenue would fall between 0.9% in Brazil and 1.8% in

Paraguay. Although the impact on the tariff revenue is, in general, the most visible impact in

fiscal terms; other elements can reduce and increase this impact. On the one hand, there is a

substitution effect that will reduce volumes imported from countries that face the MFN duty in

Mercosur in favour of imports from the EU that after the agreement being implemented will be

duty-free. This could increase the impact in terms of revenue collected from imports.

On the other hand, the increase in consumption and income in Mercosur is expected to raise

revenue in other duties such as excise, sales, VAT and income duties. These duties are the most

important in terms of revenue collection in Mercosur countries (e.g. in Argentina, VAT accounts

In Argentina in 2018, revenue from imports represented, considering all levels of Government and social security,,

3.2% of revenue (Oficina de Prespuesto, 2020)

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for 33% of total government revenue). Moreover, in the case of Argentina, it is expected that

government revenue will increase as the government applies taxes on exports in many products

2.5. Policy Recommendations

 Mercosur should implement a gradual introduction of the related tariff changes

to give the involved actors enough time to accommodate and mitigate the negative

effects in the output of vehicles and machinery.

 The EU should consider the use of quotas and partial liberalisation to minimise

the impact in sectors such as beef, poultry and sugar. This will allow farmers and

producers to reduce their exposure and limit the impact of the agreement.

 Mercosur members should introduce re-training policies to smooth the

transition of workers between sectors. This would help to tackle the structural

changes brought by the agreement to Mercosur economies, such as contracting industrial

sectors and expanding agriculture (including food production) and services.

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3. Social Analysis

3.1. Methodology

Our social analysis builds upon our team’s CGE and sectoral analysis as well as additional

quantitative and qualitative tools to assess the potential effects of an EU-Mercosur trade

agreement on employment and decent work. The analysis assesses the potential impacts on

employment (including in the informal economy), decent work, working conditions, as well as

distributional impacts (including poverty income inequalities). Furthermore, the interaction

between the envisaged agreement and the effective implementation of the international Core

Labour Standards and fundamental Conventions of the International Labour Organisation, as

well as the realisation of the other strategic objectives of the ILO Decent Work Agenda

(employment creation, social protection, rights at work and social dialogue) is investigated.

Other Conventions from the ILO and other UN bodies are taken into consideration, where

relevant. This SIA also assesses how the potential agreement could contribute to the uptake of

internationally agreed principles and guidelines on corporate social responsibility (CSR)/

responsible business conduct (RBC).

The quantitative analysis draws on the CGE modelling results. The qualitative analysis first relies

on desk research on expert sources, academic literature and specific studies not only on EU

trade relations with the Mercosur region and individual Mercosur members but also on the latter’s

experience with other trade negotiations to the extent that they shed light on specific social

effects of trade liberalisation. Second, to further appraise the potential effects of trade

liberalisation on labour markets, this section scrutinises each party’s compliance with core ILO

conventions, relying mainly on the ILO NORMLEX database. Third, the team outlines each party’s

approach to the trade-labour linkage. Last, in each section, the social analysis draws from the

results of stakeholder consultation in Mercosur and EU countries, and more specifically on the

insights from business associations, labour unions, non-governmental organisations (NGOs) and

relevant experts from government and academia.

3.2. Baseline

EU trade policy has become one of the main pillars of the EU’s external action to promote

sustainable development, decent work and core labour standards, whether at the unilateral,

bilateral/regional or multilateral levels. At the unilateral (i.e. non-reciprocal) level, EU trade

policy has designated the ratification and application of the ILO’s eight fundamental conventions

on labour rights as a precondition for obtaining GSP+ status.

In its 2015 Trade for All Strategy,

the EU reasserted its ambition to “promote an ambitious and innovative sustainable development

chapter in all trade and investment agreements”, vowing to achieve “far-reaching commitments

on all core labour rights” and to ensure “high levels of occupational health and safety and decent

working conditions in accordance with the ILO Decent Work Agenda” (EC, 2015a). Combining

economic analysis and policy research, this section examines recent socio-economic trends in

the Mercosur region to assess the prospects of the EU-Mercosur trade agreement to fulfil the

EU’s social objectives.

For more details on GSP, see EU Commission (2020), “Report on the Generalised Scheme of Preferences covering the

period 2018-2019”, available from: https://trade.ec.europa.eu/doclib/press/index.cfm?id=2112

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The baseline provides an overview of current socio-economic trends in both Mercosur and EU

countries, with a specific focus on current trends in employment and wages, poverty and income

inequality (Gini index). In parallel with these economic and political trends in the region, the

second focus of this section is on Mercosur and EU countries’ adherence to and enforcement of

international labour standards (with an emphasis on ILO Core Labour Standards) and the decent

work agenda (including social protection, social dialogue and health and safety at work).

3.2.1. Recent Trends in Employment and Wages

The first decade of the twenty-first century was a period of significant economic development in

Latin America, as witnessed by:

 Sustained growth contributing to better labour market performances;

 A notable decline in both absolute and relative poverty;

 A steady reduction of income inequality, as illustrated by the unprecedented drop in the

regional Gini coefficient falling from 0.57 to 0.52 between 2000 and 2012 (Alvaredo &

Gasparini, 2015); and

 Growing GDP per capita and an expanding middle-class that grew from 23% to 34%

within a decade, overtaking for the first time, the number of people living in poverty

(Vakis, Rigolini & Lucchetti, 2016).

Overall, Mercosur largely benefitted from the regional economic boom of the 2000s as witnessed

by the overall decline in unemployment since the beginning of the twenty-first century. These

trends were particularly beneficial to Argentina, gradually recovering from its financial crisis,

Uruguay and Brazil before the latter was hit by a severe recession in 2015-2017 (Figure 2).

Since spring 2018, Argentina has suffered from a dramatic decline in the value of the peso,

surging inflation (close to 30% on a yearly basis in June 2018) and an economic slowdown that

could soon lead the country to an economic recession and compromise its recent socio-economic

performance.

Figure 2: EU and Mercosur unemployment trends (2000-2019)

Source: World Bank (modelled ILO estimates); Eurostat.

Meanwhile, the average unemployment rate among the 28 EU members fluctuated between 9

and 11%, peaking at 10.9% in 2013, in the aftermath of the financial-crisis-cum-sovereign-

debt-crisis, before gradually falling under 8% in 2017. Of course, average trends on the EU

labour markets mask large disparities between European countries, some of which like Greece

and Spain being severely hit by the financial crisis (with unemployment rate peaking in 2013 at

0.0

5.0

10.0

15.0

20.0

25.0

ARG

BRA

PAR

URU

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27.5% and 26.1% respectively) while others like Germany and Austria proved much more

resilient to the economic slowdown in Europe (5.2% and 5.4%).

Measures of employment participation and unemployment in Mercosur countries must be

contextualised with traditionally high levels of informal employment in the region in both

agricultural and non-agricultural sectors. For non-agricultural activities, the share of informal

workers in Mercosur varies from one third (Uruguay) to two thirds (Paraguay) of the labour

market. Overall, however, the past decade has witnessed a relative decline in informal

employment, particularly significant in Uruguay.

Figure 3:

Informal employment and informal sector in Mercosur countries as a percent

of employment (%)

Source: ILO and World Bank.

The trends are not only the logical result of economic recovery in the aftermath of the 2008-

2009 financial crisis but stem from the adoption of policy reforms that have proved particularly

effective for salaried workers. For instance, after the convertibility crisis, Argentina adopted a

series of labour formalisation policies that included changes in tax administration and policy,

labour inspection measures, social protection policies and active labour market reforms. This

multipronged approach, along with an improving macro-economic context, allowed informal

salaried employment to drop from 49% in 2003 to 33% in 2014 (Betranou and Casanova, 2016).

In the short term, Argentina’s economic recession (2018-2019) may offset some of these socio-

economic achievements. In Uruguay, the combination of counter-cyclical economic policies in

the aftermath of the financial crisis and targeted formalisation reforms – among which tax

incentives encouraging hiring, policies stimulating investment in production and human capital

– enabled the country to reduce informal employment among private-sector wage workers by

half in less than 10 years - from 36.4% in 2004 to 17.1% in 2012 (ILO, 2014).

In the European Union, the incidence of informal employment varies greatly from one country

to another, with some members (e.g. the Baltic states, Sweden) recording fewer than 10% of

workers in informal employment while others are closer to or even above half of the workforce

49.4

42.0

70.0

39.8

47.3

37.1

63.9

33.2

48.1

38.3

64.5

23.5

Argentina Brazil Paraguay Uruguay

2009

2013

2018

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(e.g. Greece, Cyprus).

Under an alternative measure of “undeclared work” using the Labour

Input Method (LIM),

the EU average level of labour informality in the private sector stands at

16.4%, with percentages ranging from 7.1 in Germany to 27.3 in Poland.

Since the early

2000s, the EU has been committed to labour formalisation reforms, advocating a balanced mix

of prevention (e.g. tax benefits and administrative regulations) and awareness-raising, sanctions

and law enforcement, and promoting dialogue and cooperation among EU members.

members have followed these guidelines with mixed results, the incidence of undeclared work

remaining primarily driven by broader labour market conditions and poverty.

Poverty and inequality in the European Union

The number of people living in absolute poverty in the EU is consistently limited, between 2 to

3 million people between 2004 and 2017 (World Bank). In fact, the EU itself applies only a

relative poverty measure to assess its Member States. The limited extent of absolute poverty is

also confirmed by the number of people living with less than $5.50 a day, which was 10.4 million

in 2004, slightly increased after the 2008 financial crisis and recovered to reach 8.6 million in

2017 for the whole of the EU (World Bank).

Income inequality in the EU has been stable with a Gini coefficient of approximately 31 from

2004 until 2017 (World Bank).

Figure 4: Number of people living with less than $1.90 a day (millions, 2011 PPP)

2004 2009 2014 2017

European Union 2.1 2.2 3.3 2.3

Source: World Bank database Poverty and Equity;

https://databank.worldbank.org/source/poverty-and-equity/preview/on

Poverty and inequality in Mercosur

Between 2004 and 2017, both the number and share of people living in absolute poverty declined

in Mercosur countries. The number of poor people living with less than $1.90 per day - the official

international poverty line (IPL) established by the World Bank – decreased in the region, despite

bouncing back in the aftermath of the 2015-2016 recession in Brazil (Figure 5). When adjusted

European Commission (2016), “Undeclared Work,” Figure 1 p. 3, available at:

https://ec.europa.eu/info/sites/info/files/file_import/european-semester_thematic-factsheet_undeclared-work_en.pdf

This includes 1) informal activities, typically cash in hands transactions undertaken by service providers to households

or individuals (e.g. gardening, plumbing) where no business records are kept; and 2) hidden and underground activities

where the transactions themselves are not against the law, but are unreported to avoid official scrutiny (e.g. envelope

wages). See European Commission (2017), “An evaluation of the scale of undeclared work in the European Union and

is structural determinants: Estimates using the Labour Input Method,” available at:

https://op.europa.eu/en/publication-

detail/-/publication/8c3086e9-04a7-11e8-b8f5-01aa75ed71a1/language-en

Ibid. Figure 2 p. 13.

EU Commission’s 2007 declaration on “Stepping up the fight against undeclared work,” the European Commission

identified drivers of undeclared work and available at:

https://eur-

lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0628:FIN:EN:PDF; see also EU Decision 2016/344 of the

European Parliament and of the Council of 9 March 2016 on establishing a European Platform to enhance cooperation in

tackling undeclared work, available at:

For a detailed analysis of undeclared work and policies undertaken by individual members, see EU Commission (2013),

Employment and Social Developments Review in Europe 2013, chapter 4.

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by income levels, other measures of poverty like the $5.50 poverty threshold reveal similar

trends (Figure 6).

Figure 5: Number of people living with less than $1.90 a day (millions, 2011 PPP)

Source: World Bank.

Figure 6: Percentage of people living with less than $5.50 a day, 2011 PPP

Source: PovCalNet, World Bank. * Urban.

In 2015, the World Bank adjusted its international poverty line (IPL) from $1.25 to $1.90. Since 2017, the World Bank

also provides two additional measures of poverty adjusting for income levels, at $3.20 for lower-middle income countries,

and $5.50 for upper-middle income countries. All Mercosur countries are classified as upper-middle income countries,

with the exception of Uruguay, a high-income economy. These international poverty thresholds differ from national

poverty measures that are relative, i.e. set as 50% of the national median income. For a discussion, see World Bank

(2017), “Monitoring Global Poverty. Report of the Commission on Global Poverty,” available from:

https://openknowledge.worldbank.org/bitstream/handle/10986/25141/9781464809613.pdf

2.5

20.5

0.4

0.0

1.1

12.2

0.4

0.0

0.7

7.5

0.2

0.0

0.2

10.1

0.1

0.0

5.0

10.0

15.0

20.0

25.0

ARG BRA PRY URY

2004

2009

2014

2017

25.0

40.3

38.5

13.3

27.4

31.9

9.9

8.9

17.9

19.3

4.3

7.7

21.0

18.6

2.9

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

ARG* BRA PRY URY

2004

2009

2014

2017

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The decline of poverty in Mercosur and the concomitant expansion of the middle class are

logically reflected in measures of inequality. Except for Paraguay, all Mercosur members

experienced a remarkable decline in income inequality between 2004 and 2017.

Figure 7: Income inequality in Mercosur (Gini coefficient)

Source: World Bank.

Other indicators corroborate these trends. A recent IMF study of inequality in Brazil reveals that

access to durable goods dramatically expanded in the decade that preceded the country’s

economic and political crisis (2015-2016) (Figure 8).

Figure 8:

Brazil: Convergence in Access to Durable Goods by Households (% of

Brazilian households)

Source: Góes & Karpowicz (2017) using PNAD and IMF data.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

ARG BRA PRY URY

2004

2009

2014

2017

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However, these aggregate trends at the national level only provide a partial picture of poverty

and inequality in Mercosur countries. First, the incidence of poverty dramatically differs within

the regional bloc. At 2.9% (2017), Uruguay has the lowest poverty rate on the Latin American

continent– is more than six times as high with 18.6% (World Bank). Second, within each country,

geographic disparities can be even more significant, with certain areas being completely

excluded from economic growth. A recent study shows, for instance, that the rate of chronic

poverty,

estimated at a 20% national average for Brazil, can range from 5% in the Santa

Catarina region to up to 40% in Ceará, a ratio close to the high chronic poverty levels of

Honduras (Alvaredo & Gasparini, 2015). Third, the depth and persistence of poverty differ

between rural and urban areas. While urban areas may provide greater opportunities for social

mobility than rural regions, they are also more likely to concentrate larger pockets of poverty.

This means that the social analysis cannot be confined to aggregate indicators but must also

seek to factor in geographic disparities, whether this pertains to poverty, unemployment or

income inequality.

Notwithstanding the persistence of pockets of poverty and social ills affecting most severely

certain regions and segments of the population,

the combination of vibrant economic growth

and targeted social policies played a significant role in reducing regional inequality in the twenty-

first century. This is particularly true for Brazil, a complex continental economy that requires

closer analysis. Despite wide regional economic disparities, Brazil experienced a notable decline

in both intra- and inter-regional inequality between 2004 and 2014, although some of these

gains were undermined by the economic recession of 2015-2016. These trends were evident

under various measures (e.g. Gini, income distribution by quintile), whether tracing inequality

at the state, regional or federal levels (Figure 9). One of the most notable achievements of the

2004-2014 period is the fact that income grew faster in the poorer regions of the North,

Northeast, and Midwest (blue, navy, and yellow lines in the third chart of Figure 9).

Using cross-sectional datasets from Dang et al. (2014) and Dang & Lanjouw (2015), the authors define a household

as chronically poor if it was poor in both 2004 and 2012.

For greater details, see sections on labour rights below and the human rights analysis.

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Figure 9: Income convergence between and within Brazilian states and regions

Brazil: Real Income Per Capita Growth, by Region

and Percentile, 2004–2014 (Average real income

growth per year; average across states per quintile;

adjusted for spatial-price differences)

Brazil: Distribution of Within-State Gini

Coefficients (2004-2014)

Source: Góes & Karpowicz (2017) using PNAD and IMF data.

However, Brazil’s political and economic crisis of 2015-2016 eroded some of the gains achieved

during the previous decade. Not only did unemployment more than double between 2014 and

2017 (reaching a peak of 13.7% in March 2017) but income inequality (Gini) and poverty also

climbed back (Skoufias et al. 2017). These trends were exacerbated by budget cuts in the Bolsa

Familía family poverty relief program that had played a central role in rolling back poverty and

inequality in the previous decade. Although these negative trends jeopardised Brazil’s economic

miracle, the country has begun to recover from the economic recession, e.g. with unemployment

steadily receding from 13.7% in March 2017 to 11.8% in the third quarter of 2019.

3.2.2. Overview of Core Labour Standards in the EU and Mercosur

In its 1998 Declaration on Fundamental Principles and Rights at Work, the International Labour

Organisation (ILO) established four core labour standards that are deemed universal and have

since served as a benchmark for the protection of workers’ rights: 1) freedom of association and

the effective recognition of the right to collective bargaining; 2) the elimination of all forms of

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forced or compulsory labour; 3) the effective abolition of child labour; 4) and the elimination of

discrimination in respect of employment and occupation. These four core labour standards are

protected by the following eight fundamental conventions:

1. Freedom of Association and Protection of the Right to Organise, 1948 (Convention 87)

2. Right to Organise and Collective Bargaining, 1949 (Convention 98)

3. Forced Labour, 1930 (Convention 29)

4. Abolition of Forced Labour, 1957 (Convention 105)

5. Minimum Age, 1973 (Convention 138)

6. Worst Forms of Child Labour, 1999 (Convention 182)

7. Equal Remuneration, 1951 (Convention 100)

8. Discrimination (Employment and Occupation), 1958 (Convention 111)

Since the Declaration on Social Justice for a Fair Globalization in 2008 (the Social Justice

Declaration), the ILO has put increasing emphasis on the “governance Conventions”, i.e.

conventions considered to be the “most significant from the viewpoint of governance.” These

are considered to be “priority instruments” for their importance to the functioning of the

international labour system. They include the Labour Inspection Convention, 1947 (No. 81); the

Employment Policy Convention, 1964 (No. 122); the Labour Inspection (Agriculture) Convention,

1969 (No. 129); and the Tripartite Consultation (International Labour Standards) Convention,

1976 (No. 144).

EU’s approach to labour standards

All EU member states have ratified the eight ILO fundamental conventions since 2007, as well

as the priority convention on labour inspection since 2009. Most of them have also ratified the

main social governance conventions (e.g. employment policy and tripartite consultation) while

many have ratified other conventions supporting the four strategic objectives of the Decent Work

Agenda: employment, social protection, social dialogue and tripartism and fundamental

principles and rights at work (ILO, 2018). The EU has progressively intensified its support in its

internal and external policies and actions for ILO standards, frameworks and initiatives such as

support for core labour standards (2001, 2012), social dimension of globalisation (2004), decent

work (2006), global jobs pact (2009) and social protection floors (2012). Additionally, the EU

has played an instrumental role in the development of many ILO initiatives, among which the

Maritime Labour Convention (2006) and the joint EU-ILO Tackling Child Labour through

Education (TACKLE) program (ILO, 2012). EU Member States are also part of the regular

monitoring of the ILO conventions carried out by the ILO monitoring bodies. Finally, the EU

promotes international labour standards as part of its trade strategy (see below).

The general convergence of EU and ILO policy goals must not obscure national differences in

compliance with ILO standards across the EU. A close analysis of the ILO 2016 report on the

“Application of International Labour Standards” and the latest data available (2015) from the

NORMLEX information system reveals a wide range of compliance issues among EU member

states (ILO, 2016a). Several fundamental labour conventions feature among the most common

conventions subject to direct requests from the ILO. In 2015, the conventions subject to the

greatest number of cases pertain to freedom of association and the effective recognition of the

right to collective bargaining (conventions 87 and 98) and have involved many different EU

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member states. In 2015, the conventions subject to the greatest number of cases pertain to

freedom of association and the effective recognition of the right to collective bargaining

(conventions 87 and 98) and have involved many different EU member states. Direct requests

by the ILO were also brought with regard to the effective abolition of child labour (conventions

138 and 182), and the elimination of discrimination in respect of employment and occupation.

Beyond core labour standards, the 2006 Maritime Labour Convention has been also frequently

subject to compliance issues, as have Governance conventions like Convention 81 Labour

Inspection Convention and Convention 129 on Labour Inspection. However, as explained below,

the presence of direct requests may not necessarily indicate a significant or pervasive issue with

compliance of ILO and may at times signal rising awareness and even progress in a particular

field.

Mercosur’s approach to labour standards

Mercosur members have been supportive of the International Labour Organisation since its

foundations. Their enforcement of international labour standards is conditioned both by

individual members’ ratification of ILO conventions as well as regional institutions. All Mercosur

members have ratified the 8 fundamental Conventions, except for Brazil, which has not ratified

convention 87 on Freedom of association and protection of the right to organise (1948). No

Mercosur member has ratified all four governance Conventions, except Uruguay. Other members

ratified at least two (Paraguay) or three (Brazil and Argentina) out of these governance

conventions, the least ratified convention being – in Mercosur as elsewhere – convention 129

(1969) on Labour Inspection in Agriculture.

3.2.3. Overview of Labour Rights Enforcement in Mercosur Members

The situation of workers’ rights in the Mercosur region is one of the contrasts. On the one hand,

labour movements have traditionally played an important role in Latin American politics,

although this influence differs among Mercosur countries. Burgess (2010) defines four types of

relations between labour groups and the state across Latin America: labour populism, pluralist

welfarism, paternalist dictatorship and conservative oligarchy. Brazil and Argentina are defined

as labour populist regimes with strong unions with close links to the state or a political party.

Uruguay is classified as pluralist welfarism, characterised by relatively generous social policies,

strong rule of law and weak ties between the state and trade unions. Paraguay, despite having

democratically elected governments since 1992, has labour relations and a welfare system that

is in part conditioned by its previous history of paternalistic dictatorship. The nature of these

labour-state relationships has shaped the enforcement – or lack thereof – of workers’ rights and

the scope of social protection among Mercosur members.

Indeed, officially, Mercosur countries have shown support for the ILO since its foundations and

ratified most ILO core conventions. In practice, however, there is a persistent gap between de

jure labour standards and de facto labour standards that stems not only from state-labour

relations, but also the significant incidence of informal employment in the region, the strong

regional disparities among and within Mercosur members, as well as the promotion of labour

market flexibilisation policies by international financial institutions.

The following analysis of fundamental labour rights draws on the NORMLEX database to examine

recent cases submitted to the ILO Committee of Experts on the Application of Conventions and

Recommendations (thereafter CEACR or Committee of Experts). The rest of this section

highlights contentious issues in the implementation of ILO standards in Mercosur countries.

Arguably, comments and requests provided by the CEACR on issues of compliance may not

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always reflect a systemic problem of non-compliance in one country but can also provide

guidelines on how to sustain progress achieved in a particular field such as the elimination of

child labour. Yet, when put in perspective with other measures of labour rights enforcement,

expert sources and stakeholder consultation, they indicate the main challenges of labour rights

enforcement in Mercosur countries.

Freedom of association and right to collective bargaining

Unions’ rights in Mercosur countries are officially well protected given the important political role

played by labour organisations in national and local politics. However, as in most labour

standards in the region, their enforcement on the ground depends on the sector and the region

under consideration. National labour laws protect both freedom of association and the right to

collective bargaining.

As mentioned above, all Mercosur members have ratified fundamental

conventions 87 and 98, with the exception of Brazil, that has yet to sign convention 87. Up until

the 2017 labour reform, Brazilian employees were mandatorily enrolled in a union and organised

labour continues to exert strong influence to protect workers’ rights. The latter reform has been

criticised by Brazil’s Unified Workers’ Centre for undermining not only union rights and collective

bargaining but also for having broader repercussions on working conditions including overtime,

holidays as well as part-time work (ILO, 2018). These issues were raised emphatically by

Brazilian stakeholders during a consultation held in Brussels.

Using ILO statistics, Table 12 compares the levels of union density and union concentration

between Mercosur members, while Figure 10 measures the enforcement of freedom of

association and the overall protection of labour rights based on data from the World Justice

Project.

Table 12: Union density and concentration among Mercosur members

Country

Union density

Union concentration

Argentina 27,7 High

Brazil 18,9 Low

Paraguay 6,7 Low

Uruguay 30.1 High

Source: ILOSTAT, Roberts (2014).

A study of ILO National Labour Law country profiles reveals the large of legal scope of labour standards in each

Mercosur country with regard to trade union and employers’ association regulation, collective bargaining and

agreements, workers’ representation in companies, dispute settlements, labour courts as well as strikes and lock outs.

The World Justice Project (WJP) provides data on the rule of law. The 2019 edition covers 126 countries and

jurisdictions, relying on more than 120,000 household surveys and 3,800 expert surveys to measure how the rule of

law is experienced in practical, everyday situations by the general public worldwide. Performance is measured using 44

indicators across eight primary rule of law factors, each of which is scored and ranked globally and against regional

and income peers. The two indicators displayed here fall under the Fundamental Rights category and are defined in

the following terms: 4.7 Freedom of assembly and association is effectively guaranteed; and 4.8 Fundamental labour

rights are effectively guaranteed. For more details, see https://worldjusticeproject.org/our-work/wjp-rule-law-index

Latest ILO data: Argentina, 2014; Brazil, 2016; Paraguay, 2015; Uruguay, 2013.

Roberts’ defines three types of union concentration in Latin America: 1) “low” union concentration as indicating that

less than 40% of union members belong to the largest labor confederation; 2) a “medium” ranking indicating that

between 40 and 70 % of union members belong to the largest confederation; 3) and a “high” ranking for over 70%.

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Figure 10: Measures of freedom of association and labour rights protection in Mercosur

(2019)*

Source: World Justice Project, 2020. * Dataset does not include Paraguay. Note: Score nearer to 1.0 corresponds to

stronger adherence to the rule of law, score nearer to 0.0 corresponds to weaker adherence.

At the regional level, data from the World Justice Project reveals a contrasted picture among

Mercosur countries. With regard to freedom of association and under a broad measure of labour

rights

, Uruguay and Argentina perform better than most Latin American and Caribbean

countries, while Brazil obtains lower scores than the regional average.

The fact that Mercosur workers are officially free to organise and that unions play a non-

negligible role both in national politics and collective bargaining doesn’t mean that workers in all

sectors are always represented or protected, nor that union rights are fully enforced. In fact,

several reports have documented workers’ rights violations across Mercosur countries. Table 13

draws on the NORMLEX database to review cases submitted to the ILO Committee of Experts on

the Application of Conventions and Recommendations (thereafter CEACR or Committee of

Experts) that reflect contentious issues in the implementation of ILO standards in Mercosur

countries. Cases related to unions’ rights are among the most common complaints brought to

the CEACR.

This includes core labour standards other than freedom of association, i.e. including the right to collective

bargaining, the prohibition of forced and child labor, and the elimination of discrimination.

0.77

0.61

0.84

0.65

0.47

0.80

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

ARG BRA URU

Freedom of association Labour rights

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Table 13: Convention 87 and 98 cases brought to CEACR in Mercosur

ILO Core Labour standards

Examples of cases reviewed by ILO Committee of Experts

Freedom of association

and the effective

recognition of the right to

collective bargaining

(conventions 87 and 98)

 State measures infringing upon freedom of association (A), right to

strike (A), trade union election (A)

 Investigation of killings of trade union leaders (B)

 Inadequate protection of collective bargaining (A, B)

 Inadequate protection against anti-union discrimination (A, B)

Source: ILO Normlex, 2018.

Table 13 illustrates the gap between de jure and de facto labour standards in Mercosur countries

by revealing the wide extent of unions’ rights violations, ranging from political reforms

undermining freedom of association to anti-union persecution and murders of union leaders.

Workers’ rights violations have recently been raised in the ILO Committee of Experts in relation

to all Mercosur members with the exception of Uruguay, where infringements upon workers’

rights are both rarer and more benign. Indeed, Uruguay ranks first in the region in the World

Justice Project Rule of Law Index.

Elimination of all forms of forced and compulsory labour

While both national labour laws and ILO commitments (ratification of conventions 29 and 105)

have made forced labour illegal in all Mercosur countries, this phenomenon has endured in

various forms in the region including agricultural forced labour under conditions of debt bondage

in the Brazilian Amazon region, cattle ranchers in Paraguay’s Chaco region, or domestic workers

throughout the region.

Indigenous populations, internal migrants (often victims of human

trafficking), blacks or mestizos (mixed-race), women and children are the most vulnerable to

these practices. A combination of geographic and socio-economic factors have contributed to

the persistence of forced labour. These include, among others, a weak state presence in remote

areas, low investment in education resulting in poor literacy and numeracy levels, poverty,

unequal land distribution as well as the lack of identity documents that render victims invisible

to national authorities (International Labour Office, 2005; Costa, 2009).

Cases are selected according to three criteria: 1) relevance to core labour standards; 2) nature of ILO comments

(direct requests, as opposed to simple observation); 3) recency of the case (four years maximum).

A = Argentina; B = Brazil; P = Paraguay; U= Uruguay.

The definition of slave labour in Brazil (trabalho escravo) is close to the ILO’s notion of forced labour but goes

beyond it to include unacceptable or degrading working conditions. For convenience purposes, the term forced labour

is used to cover both meanings in this section.

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Table 14: CEACR cases related to forced labour in Mercosur

ILO Core Labour standards Examples of cases reviewed by ILO Committee of Experts

Elimination of all forms of

forced or compulsory

labour (conventions 29

and 105)

 Work of prisoners for private enterprises (A)

 Exploitation and debt bondage of indigenous populations (P)

 Implementation of policies designed to eliminate forced or

compulsory labour (B, P)

 Work imposed on non-convicted detainees (P)

 Implementation of policies to combat human trafficking and

exploitation (A)

Source: ILO Normlex, 2018.

Table 14 sets out the types of cases related to compulsory labour in Mercosur countries. Latin

American governments have responded to these cases, often with assistance from international

organisations like the ILO. Brazil has arguably adopted some of the boldest reforms to combat

forced labour over more than two decades. These efforts began with the creation in 1995 of an

inter-ministerial body to coordinate action against forced labour and have since included: the

creation of the National Commission to Eradicate Slave Labour (CONATRAE), in charge of

coordinating the First and Second National Plans to eradicate forced labour; the establishment

of labour courts in regions concentrating cases of compulsory labour

the drawing up of the

“Dirty List” of companies employing forced labour; the monitoring of companies’ supply chains

and the creation of the Special Mobile Inspection Group (GEFM). Between 1995 and 2008, the

latter has rescued more than 30,000 forced workers. This progress dovetails with the process of

labour formalisation discussed above and confirm that the conjunction of favourable economic

conditions and targeted political reforms can yield substantive socio-economic results.

Like Brazil, Paraguay has a history of cases of forced labour, and more specifically debt bondage

and exploitation of indigenous populations (especially in the Chaco region). In 2017, the CEACR

estimated that least 8,000 workers were victims of forced labour in the Chaco region. Forced

labour in Paraguay has been taken up by the ILO’s Committee of experts for 20 years, in parallel

with efforts undertaken by the United Nations Permanent Forum on Indigenous issues, the

Special Rapporteur on the rights of indigenous peoples and the ITUC for at least 20 years. In

November 2016, the Paraguayan government adopted a new National Strategy for the

Prevention of Forced Labour for 2016-2020, designed to coordinate key government agencies to

combat compulsory labour. Benefitting from ILO technical assistance, this program also aims to

strengthen the labour inspectorate for the prevention and eradication of forced labour, by

improving inspectors’ training, increasing their number and expanding their geographical

distribution. The success of this program will hinge upon the political will of the government of

Paraguay to seriously tackle this decades-old issue.

Other measures in the region include

targeted programmes like Argentina’s long efforts to combat human trafficking such as its

Cases are selected according to three criteria: 1) relevance to core labour standards; 2) nature of ILO comments

(direct requests); 3) recency of the case (four years maximum).

These programs consist of awareness campaigns, new sanctions against offenders, new measures aimed at

increasing the release of forced labour victims through the intervention of mobile police units etc. International Labour

Office, ibid.

This paragraph draws from the Normlex database and more specifically, Discussion: 2017, Publication: 106

ILC

session (2017), Forced Labour Convention, 1930 (No. 29) – Paraguay, available at:

http://www.ilo.org/dyn/normlex/en/f?p=1000:13100:0::NO:13100:P13100_COMMENT_ID:3330959

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national programme to combat trafficking in persons, as well as policies designed to combat

discrimination against indigenous populations.

Despite its long commitment to the prohibition of forced labour, the European Union is not

immune to this phenomenon. A 2012 ILO report estimated the total number of victims of forced

labour in the EU at 880,000, with cases primarily concentrated in sexual exploitation (30%),

domestic work, agriculture, manufacturing and construction

. In 2015, the European Council

decided to recommend that EU Member States ratify the ILO’s new Protocol to the Forced Labour

Convention. Under this Protocol (P29), countries reassert their commitment to 1) prevent the

use of forced labour, especially in the context of human trafficking; 2) improve the protection of

victims; and 3) provide access to compensation. Countries ratifying P29 are required to develop

a national policy and plan of action, while the protocol also enhances international cooperation.

In early 2020, 17 EU members had ratified P29. There is a specific reference to this Protocol in

Article 4.5 of the Trade and Sustainable Development Chapter. In parallel, the European Union

has also devoted attention and resources to fighting human trafficking, most notably through its

“EU Strategy towards the Eradication of Trafficking in Human Beings 2012-2016” and its 2011

Anti-Trafficking Directive – the latter also contributing to the protection of victims, the

development of gender-specific approaches to human trafficking among member states, and the

strengthening of international cooperation.

Effective abolition of child labour

Like forced labour, the situation of child labour in Mercosur members is subject to wide regional

disparities and contingent upon socio-economic factors like poverty, weak government presence

and in low investment in education. The problem of child labour and the various political

responses adopted by Mercosur governments are also linked with other human and labour rights

issues such as forced labour, human trafficking and the situation of indigenous populations,

some of which are discussed in the human rights analysis. Mirroring progress in poverty

reduction and labour market formalisation, the conjunction of favourable socio-economic trends

and targeted policy reforms have yielded tangible results and should continue to do so in the

upcoming years absent political or economic reversals. Table 15 lists cases related to child labour

in Mercosur countries. Analysis of CEACR comments over the past five years reveals not only

persisting challenges regarding the regulation of child or youth employment but also marked

interest in the policies and programs that Brazil, Argentina, Paraguay or Uruguay have developed

over the past decade.

On indigenous populations, see the human rights analysis.

ILO (2012), “Forced Labour: The EU Dimension,” available from: https://www.ilo.org/wcmsp5/groups/public/---

europe/---ro-geneva/---ilo-brussels/documents/genericdocument/wcms_184976.pdf

More recent ILO publications consider Europe as a whole and combine it with Central Asia, bringing the estimated

number of forced workers to 2.6 million. However, countries with the highest levels of forced labour per capita are

primarily located “at the EU’s doorstep” (ILO, 2012) in the Central and South Eastern Europe. ILO (2017), “2017

Global Estimates of Modern Slavery and Child Labour. Regional brief for Europe and Central Asia,” available from

https://www.ilo.org/wcmsp5/groups/public/@ed_norm/@ipec/documents/publication/wcms_597874.pdf

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Table 15: CEACR cases related to child labour in Mercosur

ILO Core Labour standards Examples of cases reviewed by ILO Committee of Experts

Effective abolition of child

labour (conventions 138

and 182)

 Hazardous types of work (B, P, U)

 Work performed in streets and public spaces (B)

 Labour inspection (P)

 Implementation of policies to eliminate child labour (B, A)

Source: ILO Normlex, 2018.

Brazil has adopted a series of reforms since the 1990s that have contributed to the decline of

child labour. This includes legislation banning work for anyone under 16 (1990 State and

Adolescent State (ECA)); conditional cash transfers like the Child Labour Eradication Programme

(PETI) and Bolsa Familía (which absorbed PETI’s cash transfers) that encourage families to take

their children out of work and keep them in school. Combined with other measures to eradicate

forced labour, these policies have achieved significant progress over the past two decades,

although child labour (especially in the Nordeste) remains a persistent challenge to policy makers

to this day.

Likewise, over the past decade, Argentina has adopted several programs to protect child rights

and better enforce conventions 138 and 182. In 2015, it adopted its third National Plan for the

Prevention and Elimination of Child Labour (2016-2020). The previous quadrennial plan (2011-

2015) helped develop a national information system compiling statistical data on child labour

and promoted technical cooperation between national (CONAETI) and provincial (COPRETI)

agencies working on the eradication of child labour. The government also recently adopted

legislation to make education compulsory from age 4 and raised the national minimum age to

16 for agricultural and domestic work. These are only some of the initiatives adopted to eradicate

child labour in Argentina.

This multi-faceted program has led to significant progress over the

past fifteen years. According to a recent ILO-UNICEF report, between 2004 and 2014, the

number of children engaged in work between the ages of 5 and 13 years fell by 66% and by 38%

for adolescents of 14 and 15 (ILO-UNICEF, n.d.).

Paraguay has adopted a similar plan for the Prevention and Elimination of Child Labour and the

Protection of Young Workers (2010-15) that includes similar measures such as data collection,

conditional cash transfers (TEKOPORÃ), targeted programs for the reduction of child labour on

the streets (ABRAZO). Uruguay’s own National Committee for the Elimination of Child Labour

(CETI) adopted a plan of action for the elimination of child labour in waste collection (2011–15).

These examples show that the eradication of child labour is a cause that all Mercosur members

have embraced. Although there is still room for progress in certain regions and specific sectors

of the informal economy, the improving trends of the past decade and a half provide hope for

future progress in this realm.

The EU has minimum requirements in place for the protection of young workers (under 18 years

of age) and their health and safety at work through the EU Directive 94/33/EC on the Protection

of Young People at Work. The employment of young people must be strictly controlled and

protected and includes provisions on permitted working hours, rest periods, etc. It stipulates

Cases are selected according to three criteria: 1) relevance to core labour standards; 2) nature of ILO comments

(direct requests, as opposed to simple observation); 3) recency of the case (four years maximum).

For more details, see DOL: https://www.dol.gov/sites/default/files/images/ilab/child-labor/Argentina_0.pdf

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certain types of employment which are not allowed to be carried out by young people, such as

that which exceeds their mental or physical capacities and if it involves harmful exposure to

dangerous substances. The Directive also prohibits the employment of children (under the age

of 15 or still in full-time compulsory education). Given its links with human trafficking, child

labour has, like forced labour, been the focus of the EU’s aforementioned anti-trafficking

initiatives (i.e. “EU Strategy towards the Eradication of Trafficking in Human Beings 2012-2016”

and its 2011 Anti-Trafficking Directive). Other international efforts include the ILO’s International

Program on the Elimination of Child Labour (IPEC) in Romania and Bulgaria. Since 2003, both

countries have participated in ILO-IPEC programs designed to combat trafficking of children and

eliminate worst forms of child labour.

Elimination of discrimination in respect of employment and occupation

Like many other social indicators and labour standards in Latin America, many traditional forms

of discrimination such as gender, race, or social origin have receded over the past decade,

including in Mercosur countries.

This is partly due to national policies and international assistance

related explicitly or implicitly to conventions 100 and 111. Table 16 presents the ILO Committee

of Experts’ comments and requests to Mercosur countries over the past five years (2012-2017).

In Europe, discrimination at work continues to be taken seriously by EU member states’ policies

as illustrated by the development of some of the broadest and most effective policies to combat

discrimination. Anti-discrimination and gender equity reforms have been adopted at both

national levels (e.g. France, Germany, Ireland, Denmark etc.) and the supranational level, e.g.

within the framework of the “Strategic Engagement for Gender Equality”. The Commission’s

2010-2015 strategy for equality between women and men prioritised five key areas for action:

1) equal economic independence for women and men; 2) equal pay for work of equal value; 3)

equality in decision-making; 4) dignity, integrity and ending gender-based violence; and 5)

promoting gender equality beyond the EU. The 2015 report from the EU Commission underlined

the progress accomplished during the 2010-2015 plan (rising employment rate among women,

increasing participation in economic decision-making) and reasserted the relevance of its

priorities for the 2016-2019 period (EC, 2015b). Despite these reforms, different forms of

discrimination persist, with gender-related discrimination being subject to the greatest number

of direct requests by the ILO CEACR.

For more details on IPEC programs, see: https://www.ilo.org/ipec/Regionsandcountries/europe-and-central-

asia/lang--en/index.htm

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Table 16: CEACR cases related to discrimination in Mercosur

ILO Core Labour standards Examples of cases reviewed by ILO Committee of Experts

Elimination of

discrimination in respect

of employment and

occupation (conventions

100 and 111)

 Occupational segregation and gender pay gap (P)

 Discrimination on sex and sexual orientation; sexual harassment (P,

B, U)

 Measures related to protection against discrimination and equality

(A, U)

 Indigenous peoples (A)

 Domestic workers (A, U)

 Workers with disabilities (A, U)

 Measures related to equality of opportunity and treatment

irrespective of race, colour and ethnicity (B, U)

 Wage gap legislation (U)

Source: ILO Normlex, 2018.

Overall, progress has been uneven across the Mercosur region, with discrimination against

indigenous people, young black men and women persisting in various forms.

For instance, the

CEACR notes Brazil’s important strides in combating discrimination since the early 2000s, most

notably with the creation of a Special Secretariat for Policies to Promote Racial Equality (SEPPIR)

with ministerial rank. The CEACR notes Uruguay and Argentina’s efforts to eliminate racial

discrimination through national programs (e.g. affirmative action measures for citizens of African

descent in Uruguay) but points to uneven progress, encouraging Argentina to step up its anti-

discrimination programs. With regard to gender issues, the ILO Committee of Experts also

identifies wage differentials as one of the most persistent forms of inequality between men and

women in Paraguay, similarly exhorting the Paraguayan government to adopt concrete measures

to raise awareness on this issue and enforce the application of the principle of equal

remuneration, while improving women’s access to a broad range of employment opportunities.

Women’s rights, as well as indigenous rights, are discussed in greater details in the human rights

section.

3.3. Analysis

3.3.1. Wages, income inequality and employment effects

Tapping external sources of growth has become a crucial pillar of the EU’s strategy to boost job

creation and prop up incomes. The Commission’s focus on external trade as a key element of

employment policy stems from the growing significance of export-related jobs for European

labour markets. According to the Commission’s own estimates, the number of jobs supported

by extra-EU exports of goods and services has increased by two thirds (66%) since the beginning

of the twenty-first century, rising from 21.7 to 36 million jobs in 2017.

Cases are selected according to three criteria: 1) relevance to core labour standards; 2) nature of ILO comments

(direct requests, as opposed to simple observation); 3) recency of the case (four years maximum).

Women’s rights and the conditions of indigenous peoples are dealt with more specifically in the human rights

section.

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Figure 11: EU employment supported by extra-EU exports: number of jobs in millions

Source: Arto et al. 2018. (p) = projected.

Manufacturing still represents close to 54% of all jobs supported by extra-EU exports although

the share of services exports has steadily increased (Arto et al. 2018). As mentioned in the

descriptive trade statistics, EU merchandise exports to Mercosur are dominated by

manufacturing goods, including machinery (29%), vehicles and parts (17%). Still, the recent

decline of EU-Mercosur trade in goods, as well as the growing significance of China in Mercosur’s

external trade mean that a further increase of export-related jobs cannot be taken for granted.

However, the rapid increase of EU services exports to Argentina over the past few years – a 36%

increase between 2010 and 2015 – shows that there is considerable potential for job creation in

what some have described as the “sleeping giant” of the EU economy (Hamilton and Quinlan,

2015). This is confirmed by the services sector’s increasing share of jobs supported by EU

exports, which increased from 38% to 42% between 2000 and 2017.

The trend toward the growing scale of services exports does not mean, however, that services

should be fully dissociated from manufacturing and agricultural exports. In effect, 40% of all

employment supported by the primary and secondary sectors correspond to “mode 5 services”

(a ratio that varies from 19 to 62% depending on the sector) (Rueda-Cantuche & Sousa, 2016).

Whether they are affiliated with the services or manufacturing sector, export-related jobs are

known for being high-skilled and better paid than average wages.

Employment and income effects are key to assessing whether the trade agreement will reach

the most vulnerable sectors of the respective societies. We used a CGE model to calculate

changes in the level of employment by sector in each country. This can be also assessed further

European Commission, 2018. New report provides further evidence of link between trade and jobs – MEMO.

http://trade.ec.europa.eu/doclib/press/index.cfm?id=1947

Mode 5 services are labelled as products and, therefore, subject to GATT rules. For more details, see Cernat and

Kutlina-Dimitrova, 2014.

Using data from 164,000 workers, a study by the US International Trade Commission reveals that contrary to what

people might expect, the wage earnings premium is not only greater for blue-collar workers than for white collars but

also more significant in the manufacturing sector than in the services industry. See Riker, 2015.

21.7

26.5

32.5

36.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2000 2007 2014 2017 (p)

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by distinguishing between different types of employment (unskilled, skilled) and different types

of households.

Table 17 summarises some broad social effects of the EU-Mercosur FTA, from our CGE analysis.

Welfare effects are significant for the EU, Brazil and Argentina, while they are essentially neutral

for Uruguay and Paraguay. On the other hand, we see that unskilled labour wages tend to

increase more in real terms than skilled labour wages, such that poorer people who are primarily

unskilled may have their incomes catching up with those of the richer skilled people. Furthermore,

consumer prices fall in all Mercosur members, which is again a positive development for poorer

people in particular. The rise in prices in the EU is a result of greater demand and is in tune with

the real wage increases. All the effects discussed here hold in both conservative and ambitious

scenarios, but the effects of the latter are stronger than those of the former. Therefore, in terms

of real wages and income distribution, we can clearly say that the modelling predicts that the

EU-Mercosur FTA can have positive social effects in the EU and Mercosur countries.

Among the sectors most significantly impacted in Mercosur countries (changes above 2%), the

greatest employment gains are to be expected in the cereals (especially for Brazil), vegetables,

fruits and nuts (Brazil, Argentina, Uruguay), oilseeds, vegetable oils and fats (Brazil), bovine

(Brazil, Argentina, Uruguay), other meat, gas (Brazil, Argentina), agricultural sectors. Job losses

are seen in some manufacturing sectors such as metal products, motor and transport, machinery

sectors (all Mercosur countries in each case).

The impact on EU employment is proportionally much less significant given the bigger size of

European labour markets. All sectors report employment changes under 1% under both

scenarios, with only the sugar and beef sectors reporting job losses between 1.1 and 1.5% in

the ambitious scenario. As pointed out by stakeholders during consultations, these figures do

not take into account the cumulative effects of trade liberalisation on the agricultural sector,

which is beyond the scope of the present study

Table 17: Welfare, real wage and price effects on EU and MERCOSUR Members

Source: CGE Modelling Results.

All values in this table are provided as percentage changes, except for welfare which is provided in EUR billion.

For a discussion, see P. Boulanger et al. (2016), “Cumulative economic impact of future trade agreements on EU

agriculture”, JRC Science of Policy Report, European Commission, available from :

https://publications.jrc.ec.europa.eu/repository/bitstream/JRC103602/lb-na-28206-en-n_full_report_final.pdf

The question of cumulative effects is also raised in the conclusion of the study conducted for the European Parliament

(2018), “Finding the right balance across EU FTAs: benefits and risks for EU economic sectors,” available from:

https://www.europarl.europa.eu/RegData/etudes/STUD/2018/603881/EXPO_STU(2018)603881_EN.pdf

Conservative Scenario Ambitious Scenario

Region

Welfare

(EUR

billion)

Real

Wages

(Skilled)

Real Wages

(Unskilled)

Consumer

Prices

Welfare

(EUR

billion)

Real

Wages

(Skilled)

Real

Wages

(Unskilled)

Consumer

Prices

EU28

6.3 0.2 0.2 0.2 8.6 0.3 0.3 0.3

Brazil

1.4 0.0 0.0 -1.5 2.1 0.0 0.0 -2.1

Argentina

1.5 0.2 0.3 -1.0 2.1 0.3 0.4 -1.4

Uruguay

-0.1 0.2 0.4 -0.6 0.0 0.3 0.8 -0.6

Paraguay

0.0 0.2 0.3 -0.4 0.0 0.2 0.3 -0.5

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See Table 127, Table 128, Table 129, and Table 130 in Annex 4 for changes in sectoral unskilled

and skilled employment in the conservative and ambitious scenarios.

3.3.2. Expected scope of Mercosur-EU FTA and potential impact on core labour

standards

The EU’s approach to the trade-labour linkage

In the trade policy sphere, the EU has given increasing prominence to the promotion of

international labour standards. The current trade and sustainable development chapter builds

upon previous FTAs. As part of the EU-Mercosur AA, trading partners:

 commit to “respect, promote and effectively implement” core labour standards as defined

by fundamental ILO Conventions;

 reassert their right to regulate labour issues and commit to upholding their social

standards;

 commit to promoting decent work as provided by the Declaration on Social Justice for a

Fair Globalization of 2008; and

 recognise the importance of responsible supply chains and supports the dissemination of

good practices e.g. through international collaboration.

The EU has long relied on consultation and persuasion for enforcement, with the notable

exception of the EU’s CARIFORUM economic partnership agreement that, at least on paper,

allows for economic sanctions. This means that unlike in U.S. and Canadian RTAs, failure to

enforce labour provisions could not result in trade sanctions (ILO 2016).

The TSD chapter will establish institutional procedures to:

 monitor the implementation of the agreement through civil society mechanisms such as

Domestic Advisory Groups;

 review alleged violations of the agreement (Panel of Experts); and

 conduct an assessment of the FTA, including by incorporating feedback from stakeholders.

Depending on the political will of EU and Mercosur countries, as well as the assistance provided

by civil society stakeholders (e.g. Trade unions, non-profit organisations, SMEs, business

associations) and external experts (e.g. ILO), these institutional mechanisms could very well

encourage trading partners as well as businesses through RBC/CSR initiatives to build upon the

social progress achieved in the Mercosur region. Yet, at the same time, the persistence of labour

rights violations and the limited evidence on the effectiveness of labour provisions in trade

agreements means that the protection of workers’ rights will require sustained commitment both

in the EU and Mercosur. The need to strengthen the enforcement of the TSD chapter – for both

labour and environmental standards – was a recurrent concern raised by civil society

stakeholders throughout consultations in Brussels and Mercosur countries. Thus, our

environmental analysis includes a detailed discussion of the implementation of TSD provisions

with policy recommendations that are equally relevant to the enforcement of labour standards.

Mercosur's approach to the trade-labour linkage

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Despite Mercosur’s official commitment to the protection of international labour standards at the

national and regional levels, its trade agreements have hitherto provided little scope for the

trade-labour linkage. Indeed, none of the trade agreements signed by Mercosur as a trading

bloc contains any labour chapter. This should not be interpreted as a lack of concern for the

enforcement of labour standards. However, this means that the prospect of an EU-Mercosur

Association Agreement offers great opportunities to strengthen the links between trade

integration and labour protection through the inclusion of a chapter on sustainable trade and

development.

3.3.3. Potential impact on core labour standards

This section provides an overview of the potential impact of the EU-Mercosur AA on core labour

standards focusing primarily on three aspects: the impact on the right of association and

collective bargaining, forced/child labour and discrimination of employment. The potential effects

of the EU-Mercosur AA are discussed in the light of recent policy reforms adopted in the Mercosur

region.

Freedom of association and right to collective bargaining

As previously mentioned, cases relating to freedom of association and the effective recognition

of the right to collective bargaining are among the most common occurrences among those

reviewed by the CEACR. Thus, despite the EU and Mercosur countries’ adherence to conventions

87 and 98 (with the exception of Brazil that has yet to ratify convention 87), there are still many

cases in Mercosur and across the EU, where infringement of freedom of association and the right

to collective bargaining is being reported.

The contrasted experience of union density trends in Argentina and Brazil within a context of

increased trade openness shows the tenuous causal link between increased import competition

(especially from China) and union density. While Argentina’s union membership dropped from

37% to 28% between 2005 and 2014, Brazil’s unionisation rate showed greater resilience, sliding

down from 18.9% in 2005 to 16.2% in 2013, before climbing back to 18.9% in 2016 (ILOSTAT).

Our analysis of the EU-Mercosur AA’s aggregate and sectoral impacts shows that these are not

projected to be significant enough to prompt a set of labour reforms in Mercosur countries or

the EU. This means that the impact that the EU-Mercosur AA might have on worker rights may

depend more on the content and implementation of the TSD chapter than on structural changes

related to the economic impact of the agreement.

Because protecting freedom of association, collective bargaining and the right to strike can face

considerable obstacles to enforcement, the success of the Agreement's provisions on labour will

depend on civil society inclusion in monitoring, sustained resource allocation and feedback loop

mechanisms. First, evidence shows that transnational cooperation among trade unions can lead

to knowledge transfer and resource aggregation (Gordon, Gordon and Turner, 2000). To

overcome monitoring and enforcement problems, the support of transnational alliances and

international institutions could bring new visibility to cases of anti-union practices, as reflected

by the cooperation between North American unions under the North American Agreement on

Labour Cooperation. Yet, as the limited results of NAFTA’s labour side agreement reveal,

awareness is only one step toward effective enforcement of unions’ rights. Indeed, transnational

exchanges and international cooperation by themselves cannot solve all problems and must go

hand in hand with national policies designed to improve enforcement. Second, cooperation with

the private sector, e.g. through targeted certification programs, can help raise awareness about

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corporate social responsibility and help businesses become drivers of social progress through

responsible business conducts. Third, monitoring and labour inspection programs must be

funded adequately to allow sustained participation of labour organisations. Both Brazil’s success

in rolling back forced labour and Argentina’s achievements in labour formalisation prove that

labour inspection can play a crucial role in protecting workers’ rights, a lesson that would likely

apply to freedom of association and collective bargaining. Policy experiments in the region have

shown that the ILO can be a crucial partner in Latin America, not only as a source of international

law protecting workers’ rights through ILO conventions but also as an on-the-ground actor

participating in the very enforcement of labour provisions by measuring policy outcomes,

partnering with employers and workers association.

Forced labour and child labour

The enforcement of national and international labour standards in Mercosur is strongly linked

with one defining feature of the labour market in Mercosur countries: the multi-faceted nature

of informal employment. This is particularly relevant for cases of child labour and forced labour

which, unlike other forms of workers’ rights violations, are concentrated in the informal economy.

Additionally, any attempt to measure the impact of a trade agreement on Mercosur economies

needs to take stock of the duality of employment and the potential effects that informal

employment might have on labour mobility and wages. However, this requires overcoming two

main challenges.

The first issue lies in the conventional exclusion of agricultural jobs from

measures of informality, providing only a partial picture of informal employment. The second is

linked to the complex nexus between trade liberalisation and informal employment.

Since the notion of the informal economy emerged in the 1970s, many studies have attempted

to understand whether increased trade leads to expansion or contraction of informal employment.

A 2009 joint report by the WTO and ILO dedicated to globalisation and informal employment in

developing countries showed that tariff cuts tended to be associated with higher informal

employment (Bacchetta, Ernst and Bustamante, 2009). This process can operate in two ways:

1) firms exposed to increased foreign competition can reduce labour costs by subcontracting

tasks to establishments in the informal sectors; 2) alternatively, they can resort to laying off

workers who, in the absence of better opportunities may seek employment in the informal sector

(Goldberg and Pavcnik, 2003). An extensive literature review conducted by the Organization for

Economic Cooperation and Development (OECD) in 2011 concludes that this relationship is

“complex and context-specific,” i.e. contingent upon the specificities of each economy. Common

determinants shaping the trade-informality nexus include labour market rigidity, capital mobility,

and level of economic development, heterogeneity of the informal workforce, technological

intensity and cultural norms. Adding to this complexity is the wide range of mechanisms

structuring labour market outcomes, as well as the differentiation between short-term and long-

term labour market adjustments – an expansion being more common in the short run but

potentially followed by long-term contraction (OECD, 2013).

Likewise, the literature on trade liberalisation and informality in Latin American economies

provides conflicting findings that are primarily contingent on research design and unit of analysis.

Examining trade reforms in Colombia and Brazil in the 1980s and 1990s, Goldberg and Pavcnik

(2003) find no evidence that trade liberalisation leads to increased informal employment in the

For a discussion of statistical challenges, see ILO, 2013, esp. section 2.1 on “Measurement of the Informal

Economy” and INE Chile, 2018.

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case of Brazil, and weak evidence in the case of Colombia, emphasizing the role of labour market

institutions in shaping trade effects. The evidence in Paz (2014) on the Brazilian case is more

mixed: while a domestic reduction in import tariffs may lead to greater informality, cuts in

foreign tariffs (akin to reciprocal trade agreements) can reduce informal employment, although

these effects are contingent on workers’ education levels.

By contrast, a recent study by Dix-

Carneiro & Kovak (2017) focusing on regional and worker-level impact of trade finds large effects

on informality, especially in the long run (1991-2010). The authors’ combination of longitudinal

and regional (as opposed to industry) data allows them to show that the informal sector

eventually absorbed a significant portion of trade-displaced workers after many years of

unemployment (Dix-(Carneiro & Kovak, 2017).

In the light of this conflicting evidence and the more confined regional scope of tariff liberalisation,

the effects of the EU-Mercosur AA on informality remain uncertain. For the present analysis, the

lessons to be drawn are that the potential impact of the EU-Mercosur AA on informal employment,

child labour and forced labour will be shaped less by sectoral factors than regional disparities,

and labour market institutions, and therefore policy reforms undertaken to address labour

informality. The record of many Latin American countries over the past decade shows that trade

openness can be compatible with stronger enforcement of labour standards provided there is

political will and allocated resources (whether domestic funding or foreign aid).

The diversity of child labour cases in the EU and Mercosur countries (due to sectoral composition,

cultural traditions etc.) and the more consensual nature of the fight against forced and child

labour show that there is ample scope for international cooperation and policy dissemination.

The example of Brazil, which can claim considerable success in the fight against both child and

forced labour, shows the potential benefits of international cooperation. Indeed, Peru and Brazil

have promoted the exchange of experience between their labour inspectorates to better combat

forced labour (Costa, 2009). Another example of policy collaboration was Brazil’s participation

in the “compendium of good practices on addressing child labour in agriculture,” a program

coordinated by ILO International Programme on the Elimination of Child Labour (IPEC) and

sponsored by the US Department of Labour that gathered six other developing and emerging

countries (the Dominican Republic, Indonesia, the Philippines, Tanzania, Thailand and Nicaragua)

(IPEC, 2014).

This type of targeted collaboration between civil society organisations, national governments

and an international organisation is compatible with the EU’s civil society mechanisms and the

Domestic Advisory Groups (DAGs), yet has the advantage of focusing on specific objectives with

greater potential for achieving policy outcomes. The success of Brazil’s above-cited program for

the eradication of slavery confirms that multi-stakeholder action can help promote responsible

business conduct, even in a context of rapid trade liberalization. In this case, signatory

companies to the National Pact for the Eradication of Slave Labour agreed to cut their commercial

ties with business that relied on child labour in rural sectors including cattle farming, soy

production and sugar cane harvesting to improve working conditions in the agricultural sector.

The importance of education levels on labour adjustments to trade liberalization in Brazil is also underlined in

Menezes-Filho and Muendler, 2011.

Gary Gereffi, Penny Bamber, Karina Fernandez-Stark, “Promoting Decent Work in Global Supply Chains in Latin

America and the Caribbean: Key Issues, Good Practices, Lessons Learned and Policy Insights,” ILO Technical Reports 1,

2016.

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Today, this form of multi-stakeholder action could be replicated to address concerns over

deforestation.

The TSD chapter encourages Parties to cooperate on the responsible management of supply

chains using relevant international instruments like the ILO Declaration of Principles concerning

Multinational Enterprises and Social Policy, the UN Global Compact and the OECD Guidelines for

Multinational Enterprises. Although it requires Parties to establish a formal policy framework for

the effective implementation of responsible supply chains, it does not provide specific guidelines

on how to proceed, nor does it set clear priorities or targets. One option to remedy this

shortcoming would be to assign additional responsibilities to DAGS so that they can play a formal

role in both identifying priorities for responsible supply chains and monitoring the

implementation of these provisions.

Elimination of discrimination in respect of employment and occupation

The baseline discussed both old and new forms of discrimination at work in Mercosur members

but underlined a series of proactive measures adopted to promote gender equity, indigenous

peoples’ rights and racial equality. These efforts are in line with the aforementioned initiatives

undertaken by the European Union to tackle traditional and non-traditional types of

discrimination. The proliferation of legislation designed to measure and address gender-, race-

and disability-based discrimination over the past few years provides great potential for

international cooperation both at the ILO and under the cooperative mechanisms of the trade

and sustainable development chapter. Here again, robust stakeholder consultation mechanisms

optimising civil society inclusion are even more crucial since women, but also ethnic minorities

and disabled populations remain underrepresented in both economic and political decision-

making.

Beyond rule-making channels and cooperative mechanisms, the EU-Mercosur AA may also

impact the gender pay gap through trade effects. First, as female graduates outnumber male

graduates in both Mercosur and the EU,

women skilled workers are becoming more likely to

reap more benefits from trade liberalisation between two advanced economies (European

Parliament, 2015). This scenario is, however, conditioned on sustained progress in women’s

participation in economic decision-making. Second, EU and Mercosur multinational corporations

may provide new hiring opportunities for educated women. Third, trade and investment

integration are conducive to changes in management practices, including gender equity and

diversity policies. This is another area where responsible business conducts, encouraged by

public authorities, can play a critical role. Indeed, increased competition between advanced

economies, far from encouraging a regulatory race-to-the-bottom, can encourage companies to

adopt gender equity measures as they compete for skilled workforce. As mentioned in the

baseline section, given that salaries in exporting sectors are on average higher than in other

sectors, an EU-Mercosur AA may contribute – albeit indirectly and marginally – to reduce the

gender pay gap.

A successful example of a sectoral trade agreement improving workers’ conditions was the Cambodia-US Textile

Bilateral Agreement which, thanks to a combination of pre-ratification requirements, legislative reforms, non-state

actor participation, monitoring activities and economic incentives and disincentives, contributed to reduce the gender

wage gap in the textile sector. See ILO, 2016b.

This is also true in all Mercosur countries, as revealed by the World Bank’s Gender Data Portal.

For a broader discussion on the complex links between trade and investment liberalization and the gender wage

gap, see Aguayo-Tellez, 2011.

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3.4. Conclusion

Using qualitative and quantitative tools, our analysis shows that socio-economic effects cannot

be dissociated from the policy context in which trade liberalisation takes place. All else being

equal, the CGE modelling predicts that the EU-Mercosur AA will have the following aggregate

effects on its trading partners:

 Significant positive welfare effects on the EU, Brazil and Argentina, but neutral welfare

effects for Uruguay and Paraguay;

 Minor gains in wages for both unskilled and skilled workers in both EU and Mercosur

countries ranging between 0.2% and 0.4% in the conservative scenario and 0.2% and

0.8% in the ambitious scenario – with the exception of Brazil where wages remain

constant in both scenarios for both categories of workers. Under both scenarios, wage

gains are expected to be more significant for unskilled labour than skilled labour, except

in the EU case, where gains are equivalent;

 A decline in prices in Mercosur members and a relatively small increase in prices in the

EU resulting from increasing demand;

 Sectors expected to record the greatest employment gains in Mercosur include the cereals,

vegetables, fruits and nuts, bovine, other meat, other animal products and gas sectors

while potential job losses can be anticipated for the metal products, motor vehicles and

transport equipment and machinery sectors;

 The impact on the EU employment is proportionally much less significant given the size

of European labour markets, with most sectors expected to record employment changes

under 1% under both scenarios.

The sectoral dynamics anticipated under the EU-Mercosur AA are expected to have limited direct

effects on labour standards in a strict sense. The impact on core labour standards will in part

depend on the impact of the Agreement on the size of the informal sector. The EU-Mercosur AA

can become an opportunity to design institutional mechanisms that could lock-in or help renew

the notable social achievements of the twenty-first century in the Mercosur region. These

institutional mechanisms could also encourage RBC/CSR initiatives to build on social progress.

Examples of successful policies in the region abound and can be emulated within the framework

of the TSD chapter designed to reinforce labour and environmental standards. The

environmental analysis provides policy recommendations on how to improve enforcement of the

TSD chapter to maximise the social impact of the agreement.

3.5. Policy Recommendations

The record of Mercosur countries over the past decade shows that trade openness can be

compatible with stronger enforcement of labour standards provided there is political will and

adequate resources (whether domestic funding or foreign aid). The following recommendations

are designed to help trading parties maximise the positive impact of the agreement and mitigate

its potential risks.

 Mercosur countries, particularly Brazil, should maintain their support for anti-

poverty and redistributive programs with a view to reducing inequality and mitigating

the potential losses incurred from increased competition in the manufacturing sector.

Countries in general should maintain a strong commitment to eliminating poverty.

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 Mercosur countries should design effective adjustment programs and

strengthen retraining and upskilling programmes to facilitate labour mobility for

workers in the most impacted industrial sectors, such as machinery.

 Mercosur countries, especially Brazil and Argentina, should strengthen the

enforcement of labour laws to protect freedom of association and the right to

collective bargaining. In congruence with parties’ commitment to the ILO fundamental

conventions laid out in the TSD chapter, Brazil should ratify ILO Convention 87 on

Freedom of Association and Protection of the Right to Organise Convention with a view

to strengthening international cooperation, bringing visibility to cases of anti-union

practices, and helping to overcome monitoring and enforcement problems, given the

crucial role played by the ILO in enforcing commitments on labour standards and

measuring policy outcomes.

 Mercosur countries should reinforce labour inspection programs to capitalise on

their notable achievements in the region, including Brazil’s success in rolling back forced

labour through CONATRAE and the Special Mobile Inspection Group (GEFM), as well

Argentina’s significant progress in labour formalisation.

 Mercosur countries should provide sufficient support for prevention programs

to eliminate all forms of child labour (e.g. Paraguay’s National Strategy for the

Prevention of Forced Labour and Argentina’s National Plan for the Prevention and

Elimination of Child Labour).

 The EU could encourage and support monitoring and enforcement programs to

tackle child labour with the collaboration of Mercosur government and local

society groups to carry out the European Commission President Ursula von der Leyen’s

“zero-tolerance approach to child labour” in EU trade policy.

 The EU should adopt EU-wide due diligence measures and promote Responsible

Business Conducts/Corporate Social Responsibility to strengthen labour rights.

European companies should be held accountable for monitoring responsible value chains,

with a particular focus on child labour, forced labour and the elimination of discrimination

at work.

Particular attention should be devoted to increasing women’s participation in

decision-making, an area where the WTO’s new Trade and Gender Focal Point – created

after the Buenos Aires Declaration on Trade and Women's Economic Empowerment -

could provide valuable technical assistance.

 Mercosur countries should consolidate labour formalisation policies that have

proved successful in the region and replicate best practices. These include tax

incentives encouraging hiring, labour inspection measures, social protection policies and

active labour market reforms.

See Ursula von der Leyen (2019), “Mission Letter to Trade Commissioner Phil Hogan,” available from:

https://ec.europa.eu/commission/sites/beta-political/files/mission-letter-phil-hogan-2019_en.pdf

The Netherlands’ 2019 “Child Labour Due Diligence Law” is an example of such measures. Delphine Moralis (2019),

“A child labour free Europe: How the new Commission can make it happen” Euractiv, available from:

https://www.euractiv.com/section/global-europe/opinion/a-child-labour-free-europe-how-the-new-commission-can-

make-it-happen/

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 The EU should maximise the positive effects of the EU-Mercosur AA’s TSD

chapter in line with the new Commission’s commitment to the enforcement of

labour provisions in trade agreements.

To achieve this, the following measures are

suggested:

 a more assertive use of dispute settlement e.g. in response to concerns over

violations of freedom of association;

 more open public accountability mechanisms that feed into dispute

resolution. Here, the parties would benefit from clarifying the relations between

Domestic Advisory Groups and bilateral institutions like the subcommittee on trade

and sustainable development;

 targeted and effective ex-post monitoring processes that are essential to

the implementation of the TSD chapter and the protection of core labour standards.

Here, the TSD subcommittee could play a structuring role to identify, coordinate

and monitor core programs implemented on a two or three-year period in

collaboration with international bodies and civil society stakeholders.

See Ursula von der Leyen (2019), “Mission Letter to Trade Commissioner Phil Hogan,” available from:

https://ec.europa.eu/commission/sites/beta-political/files/mission-letter-phil-hogan-2019_en.pdf

The environmental section of this report offers a more detailed discussion of enforcement of TSD provisions.

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4. Environmental Analysis

4.1. Methodology

The environmental analysis will focus on the following environmental topics: climate change

(Greenhouse Gas (GHG) emissions); energy use; land use; forestry; air pollution; waste

production; ecosystems and biodiversity; and trade in environmental goods and services. A

parallel analysis will be conducted for all Mercosur countries although some countries might

receive greater attention when considering certain issues that are of particular importance for

the country.

This section is divided into two parts. The first part provides a baseline of the different areas of

analysis using relevant indicators and a background on the EU-Mercosur environmental

relationship. The second part consists of the quantitative and qualitative analysis of the

environmental impact of an EU-Mercosur AA.

The topics of climate change (GHG emissions), energy use as well as resource use and efficiency,

including land and forest, are analysed in greater depth from a quantitative perspective, while

the topics of MEA compliance and the TSD chapter are studied mainly from a qualitative

perspective. The quantitative analysis is based, in part, on the CGE modelling, and uses the

emission intensity factors in the GTAP database and the Emission Database for Global

Atmospheric Research (EDGAR). In addition, we construct relevant statistics and gather

complementary qualitative information from a variety of internationally recognised sources.

4.2. Baseline

4.2.1. Background: the EU-Mercosur environmental relationship

The EU’s approach to sustainability in trade policymaking

In the trade policy sphere, the EU has long shown commitment to environmental protection:

first, by deploying a broad range of trade policy tools incorporating sustainability objectives; and

second, by showing consideration for trade-environment linkages at different stages of the policy

process. At the unilateral (i.e. non-reciprocal) level, EU trade policy has designated compliance

with MEAs as eligibility criteria for obtaining GSP status.

At the multilateral level, it has been

actively involved in the work of the WTO Committee on Trade and Environment and a driving

force behind the Environmental Goods Agreement, whose negotiations are currently on hold.

More recently, the EU has also been a leading advocate for banning harmful fisheries subsidies

contributing to unsustainable fishing. In bilateral and plurilateral trade negotiations, the EU has

developed a template to incorporate social and environmental objectives within each trade

agreement under its trade and sustainable development chapter. Developed within the EU-Korea

FTA, this approach has considerably raised the visibility of social and environmental issues in EU

FTAs and has served as a basis for subsequent negotiations (e.g. Colombia-Peru, CETA, and

MEAs subject to eligibility under GSP+ include the Convention on International Trade in Endangered Species of Wild

Fauna and Flora (1973), the Montreal Protocol on Substances that Deplete the Ozone Layer (1987), the Basel Convention

on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal (1989), the Convention on

Biological Diversity (1992), the United Nations Framework Convention on Climate Change (1992), the Cartagena Protocol

on Biosafety (2000), the Stockholm Convention on persistent Organic Pollutants (2001), and the Kyoto Protocol to the

United Nations Framework Convention on Climate Change (1998).The list is available in the Annex VIII of Regulation

(EU) No 978/2012 of 31 October 2012: http://trade.ec.europa.eu/doclib/docs/2013/december/tradoc_152024.pdf

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Vietnam). Typically, under the provisions contained in the EU’s trade and sustainable

development chapter, the trading partners:

 reaffirm their “right to regulate” to protect the environment;

 emphasise their commitment to uphold their environmental laws and effectively

implement the multilateral environmental agreements (MEAs) to which they are party;

 stress their support for climate action within the framework of the UN Framework

Convention on Climate Change;

 commit to promoting long-term conservation and management measures and sustainable

exploitation of marine living resources;

 agree to share information and experience in a wide range of policy spheres (carbon

emissions, deforestation, renewable energy, biodiversity etc.); and

 commit to reviewing, monitoring and assessing the impact of the implementation of the

FTA; establish a Specialised committee on Trade and Sustainable Development

responsible for the implementation of the chapter with the help of Domestic Advisory

Groups.

If sustainability objectives are embedded in many aspects of EU trade policy, some trade policy

tools are also built-in in several environmental measures, whether they be trade restrictions

allowed under MEAs (pertaining to biodiversity, ozone layer depletion etc.), Timber Regulation

or issues related to Illegal Unreported and Unregulated (IUU) fishing.

Finally, the EU’s

environmental concerns are not designed to be confined to the sustainable trade and

development chapter of trade negotiating texts. In its “Trade for All” strategy, the EU expressed

its will to incorporate sustainable development considerations “in all relevant areas of FTAs” such

as energy, raw materials or public procurement provisions (EC, 2015a). The present SIA reflects

this cross-cutting approach.

Mercosur’s approach to the trade-environment linkage

Mercosur’s approach to the trade-environment linkage has significantly changed since its

creation. While the preamble of the 1991 Treaty of Asuncion stated that Mercosur members seek

the achievement of a common market, “believing that this objective must be achieved by making

optimum use of available resources, preserving the environment (…)”,

environmental issues

did not feature in any of the 24 articles of Mercosur’s founding treaty. Soon after the treaty was

adopted, Mercosur members began to develop institutional mechanisms to address the trade-

environment nexus (Powell, 2008).

The Canela Declaration of 1992 gave birth to the Reunión Especializada en Medio Ambiente

(REMA), a working group in charge of analysing environmental policies in Mercosur members

before it was replaced with Working Sub-Group #6 (WSG6) on the environment in 1995. The

next milestone was the signature of the Mercosur Framework Agreement on the Environment in

The current list draws from the EU-Korea FTA: http://eur-lex.europa.eu/legal-

content/EN/TXT/HTML/?uri=OJ:L:2011:127:FULL&from=EN ; and the agreed text of the Vietnam Free Trade

Agreement (2016): http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154229.pdf

DG Environment, “Environment and Trade and External Relations,” available at:

http://ec.europa.eu/environment/integration/trade_en.htm

Treaty Establishing a Common Market between the Argentine Republic,

the Federal Republic of Brazil, the Republic of Paraguay and the Eastern Republic of Uruguay, Preamble:

http://www.sice.oas.org/trade/mrcsr/TreatyAsun_e.asp#Preamble

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2001, which reasserted all Mercosur members’ commitment to environmental protection and

fostered cooperation to improve the enforcement of environmental laws at both national and

international levels. In addition, Mercosur members have adopted a series of regional

environmental agreements since the mid-1990s whose scope ranges from regulation on

dangerous goods, pollutant emission on heavy vehicles to cooperation on environmental

emergencies, sustainable consumption and production, etc. Even if these regional initiatives are

non-binding, they nonetheless show the trade-environment linkage has gained considerable

prominence since the creation of Mercosur (Giupponi, 2017).

These measures on behalf of the trade-environment linkage within Mercosur contrast with the

more limited steps undertaken in external trade negotiations. The different trade agreements

negotiated by Mercosur as a regional bloc have hitherto not included a chapter dedicated to

environmental protection or sustainable development. Nor have individual Mercosur members

negotiated provisions pertaining to the trade-environment nexus in bilateral trade agreements.

This should not be interpreted as a lack of concern for environmental externalities to the extent

that Mercosur members have signed or ratified a wide range of MEAs, as shown in the section.

However, this means that the prospect of an EU-Mercosur AA offers great opportunities to

strengthen the links between trade integration and environmental protection through the

inclusion of a chapter on trade and sustainable development.

Multilateral environmental agreements

Most environmental problems are inherently transnational or global and as such require

international cooperation. To deal with the challenges of building a sustainable world economy,

the EU and Mercosur countries have collaborated through the negotiations, conclusion, and

ratification of MEAs. By providing a transparent and authoritative regulatory framework for

environmental protection, MEAs not only ensure that sustainability issues find global solutions,

but they in turn help create a predictable environment that is essential to the development of

international trade. This explains why references to MEAs have become increasingly common in

free trade agreements as illustrated by the EU’s inclusion of sustainable trade and development

chapters in recent FTAs.

In its 7th Environment Action Programme to 2020, the EU re-emphasised its support for MEAs

and drew a link between its environmental objectives and the principles of the United Nations

Conference on Sustainable Development (‘Rio + 20’). As of November 2017, the EU was a

contracting party or a signatory of nearly 50 MEAs

negotiated either under the aegis of the

United Nations or at the regional level and sub-regional levels (e.g. concerning transboundary

rivers like the 1999 New Rhine Convention). Likewise, Mercosur members have committed to a

large number of international environmental agreements, whether at the regional level (as

shown in the previous section) or under the aegis of the United Nations, where they have ratified

most of the main MEAs.

The texts of Mercosur trade agreements are available on the directory of the Organization of American States:

http://www.sice.oas.org/agreements_e.asp

Decision No 1386/2013/EU of the European Parliament and of the Council of 20 November 2013 on a General Union

Environment Action Programme to 2020 ‘Living well, within the limits of our planet.’ Text with EEA relevance. Available

at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013D1386&from=EN

(thereafter 7

Environment Action Programme).

The full list of MEAs is available at: http://ec.europa.eu/environment/international_issues/pdf/agreements_en.pdf.

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Out of a total of 250 MEAs dealing with various environmental issues in the world, the WTO’s

Committee on Trade and the Environment has recorded nearly 20 agreements that are directly

related to trade, as evidenced by the inclusion of provisions to control trade in order to prevent

damage to the environment

. As Table 18 shows, these MEAs have largely been ratified by EU

and Mercosur members and fall into 4 categories: 1) nature and biodiversity; 2) climate change;

3) waste and 4) chemicals. Each of these categories is discussed either directly or indirectly

throughout this section. Thus, our analysis of the potential synergies, frictions or conflicts

between the EU-Mercosur AA and MEAs will rely on the quantitative and qualitative analysis in

the present section as well as capitalise on the findings from other chapters. Combining this

evidence with the WTO Matrix of trade-related MEAs, this section will analyse the extent to which

the EU-Mercosur AA might improve or undermine a trading partner’s ability to meet its MEA

obligations as well as the incentives or disincentives certain trade effects might produce to ratify

new MEAs.

The potential implications for the implementation of MEAs pertaining to nature and biodiversity

will draw from our discussion of natural resources (including forestry and fishing), agriculture

and the environment (or more specifically pesticide and fertiliser use) as well as the sectoral

analysis of agricultural goods, chemicals and pharmaceuticals. It will be complemented with an

analysis of deforestation. MEAs concerned with climate change, and more specifically the

implementation of the Paris agreement will logically build upon the analysis of environmental

regulation, waste (for methane emissions), CO2 and other GHG emissions and power generation,

as well as deforestation.

World Trade Organization, “The Doha mandate on multilateral environmental agreements (MEAs)”:

https://www.wto.org/english/tratop_e/envir_e/envir_neg_mea_e.htm

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Table 18: Trade-related MEAs signed by the EU and Mercosur

Category Multilateral Environmental Agreements EU ARG BRA PRY URY

Nature and

biodiversity

Convention on International Trade in Endangered

Species of Wild Fauna and Flora (CITES)

x x x x x

Convention on the Conservation of Antarctic Marine

Living Resources (CCAMLR)

x x x x

International Convention for the Conservation of

Atlantic Tunas (ICCAT)

x x x

United Nations Fish Stocks Agreement (UNFSA) x x x

Agreement on Port State Measures to prevent,

deter and eliminate illegal, unreported, and

unregulated fishing (PSMA)

x x

International Tropical Timber Agreement (ITTA) x x

International Plant Protection Convention (IPPC) x x x x x

Convention on Biological Diversity (CBD) x x x x x

CBD: Nagoya Protocol on Access to Genetic

Resources and the Fair and Equitable Sharing of

Benefits Arising from their Utilization

x x x

CBD: Cartagena Protocol on Biosafety x x x x

Climate

change

Vienna Convention for the Protection of the Ozone

layer

x x x x x

Montreal Protocol on Substances that Deplete the

Ozone Layer

x x x x x

UN Framework Convention on Climate Change

(UNFCCC)

x x x x x

UNFCCC: Kyoto Protocol x x x x x

Paris Agreement x x x x x

Waste

Basel Convention on the Control of Transboundary

Movements of Hazardous Wastes and their Disposal

x x x x x

Chemicals

Rotterdam Convention on the Prior Informed

Consent Procedure for Certain Hazardous

Chemicals and Pesticides in International Trade

x x x x x

Stockholm Convention on Persistent Organic

Pollutants

x x x x x

Minamata Convention on Mercury x x x x

Source: https://www.informea.org; WTO MEA Matrix 2017.

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4.2.2. Overall environmental performance

In this section, we benchmark the environmental performance of Mercosur countries against the

EU and globally using the Environmental Performance Index (EPI).

The EPI index assesses a

country’s overall performance through six main aspects: water resources, fisheries, biodiversity,

forest, climate and energy. The overall EPI scores of all Mercosur countries are below the

European average, yet their performance is very much in line with that of countries with similar

income levels (Figure 12). In 2018 Uruguay ranked 47

worldwide followed by Brazil in 69

and

Argentina in 74

position. Paraguay ranked 105

Figure 12: EPI for Mercosur and the EU

Source: EPI 2018. Note that the index does not take account of the latest forest fires in the

Brazilian Amazon.

Figure 13: EPI score over time

The index is provided by Yale Centre for Environmental Law & Policy (YCELP) and the Centre for International Earth

Science Information Network (CIESIN) at Columbia University. See Hsu et al. 2016.

Source: EPI 2018. The baseline refers to data from approximately ten years prior to 2018.

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When we consider the overall performance over time (Figure 13), all Mercosur countries show

some improvements in scores over the last 10 years. The largest improvement in score and

ranking was experienced by Uruguay that went from 72

about 10 years ago to 47

in 2018.

Figure 14 reports the scores in the nine EPI sub-categories for Mercosur countries and the EU.

All Mercosur countries perform better than EU averages in terms of agriculture. This sub-index

score is based on a measure of sustainable nitrogen management that combines a measure of

nitrogen use efficiency with crop yield to measure the environmental performance of agricultural

production. On the other hand, Mercosur countries perform poorly in the biodiversity sub-index,

except for Brazil, whose score is close to that of the EU. Paraguay and Brazil show a

relatively low score in the water and sanitation sub-index, which combines measures of health

risk due to poor access to sanitation and drinking water.

Figure 14: Scores in EPI sub-categories. EU and Mercosur countries in 2018

Source: EPI 2018. Fishery score omitted for Paraguay because it is a landlocked country.

4.2.3. GHG regulation

This section provides an overview of the state of GHG regulation in Mercosur countries from a

comparative perspective with the EU and countries of similar income levels using available

comparable indexes.

The OECD Stringency of environmental policies Index, which is primarily

related to climate and air pollution, covers only Brazil among Mercosur countries. Brazil showed

the lowest index score among OECD countries plus BRICS and Indonesia in 2012. On the other

hand, in 2019 Brazil score 22

out of 60 countries in the Climate Change Performance Index

produced by German Watch. While performing very well in terms of renewable energy, it falls

behind in terms of energy use and climate policy. Argentina ranks 34

overall showing poor

performance in terms of GHG emission trends and developments in terms of renewable energy.

Another comparable measure that provides wider coverage is the Climate Laws, Institutions and

Measures Index (CLIMI) provided by the EBRD in 2011. The index follows the framework earlier

There are various indexes that measure and rank the relative policy performances of governments and they mostly

refer to climate-related policies. However, their coverage is not comprehensive. Moreover, they sometimes provide

differing results, as in the case of Brazil's relative performance in the indices described below.

See https://germanwatch.org/en/download/20503.pdf.

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provided in Dasgupta et al. (1995).

The index refers to 2010 and its correlation with GDP per

capita is shown in Figure 15. Argentina and Uruguay show similar performance, in terms of

environmental regulation, to countries with similar levels of income, while Brazil is among the

top performers within upper-middle-income countries. Unfortunately, Paraguay does not feature

in any of the available indices.

Figure 15: Climate Laws, Institutions and Measures Index and GDP per capita

Source: CLIMI 2011 by EBRD; GDP per capita is obtained from the World Development Indicators of the World Bank.

The plot shows a quadratic fit of the relationship between GDP per capita (PPP) and the climi index together with the

95% confidence interval. EU score is given by the simple average all. GDP per capita is included since it allows to both

compare Mercosur countries with the EU and with other similar countries given that disparity in income levels. There is

no data for Paraguay.

4.2.4. GHG emissions

In this section, we describe the trends in levels of CO

emissions and of the most important

types of GHGs by the EU and Mercosur countries. The EU in 2015 contributed to about 9.5% of

global GHG emissions (about 4500 Mton of CO

equivalent, (Figure 16) while Mercosur countries

reached about 3.5% all together (about 1700 Mton of Co2 equivalent). EU per capita emissions

are similar to those of Argentina (8.9 tonnes of CO

equivalent per person) (Figure 16). Uruguay

shows higher emissions per capita (11.6 tonnes) while Brazil and Paraguay both lie below EU

levels with 6.0 tonnes per person. EU GHG emissions are dominated by CO

emissions (80%),

which are mainly produced through fuel combustion and industrial processing (Figure 17).

Mercosur countries show a larger share of methane (CH4) and nitrous oxide (N2O) that are

mainly related to agricultural activities, waste management and energy use, particularly in

Uruguay and Paraguay.

The index builds on the UN country reports, as well as on the National Communications to the United Nations

Framework Convention on Climate Change (UNFCCC), which includes information of climate adaptation and mitigation

measures adopted by national governments. It comprises four main areas: international cooperation; domestic climate

framework; sectoral, fiscal or regulatory measures or targets; cross-sectoral fiscal or regulatory measures.

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Figure 16: Total GHG Emissions and

emissions per capita in Mercosur

countries and the EU (2015)

Figure 17: Total GHG Emissions by type of

gas in Mercosur countries and the EU

(2015)

Source: Author’s calculations based on data from EDGAR and CAIT Climate Data Explorer. 2015. Washington, DC: World

Resources Institute. Data show GHG emissions excluding Land-Use Change and Forestry

In terms of CO

emissions, the EU accounts for 9.7% of global CO2 emissions (in 2018) while

Mercosur countries contribute to 2.0% of global CO

emissions (Figure 18). While the EU shows

a decreasing trend in CO2 per capita, Mercosur countries have experienced moderate increases

in CO

emissions since the beginning of 2000.

Figure 18: Levels of CO2 per capita in 2015 (left) and trends in CO2 per capita since

1970 (right)

Source: Author’s calculations from the EDGAR (v50_CH4_1970_20153) and World Bank Development Indicators

(population).

The shares of CO

emissions by sectors, excluding emissions from LULUCF,

in 2018 are

reported in Table 19, together with the growth in sectorial emissions since 2010. In both Brazil

and Paraguay, land use, land-use change and forestry (LULUCF), has been a key contributor to

emissions. About 55% of Brazil’s CO

emissions stemmed from LULUCF in 2010, and about

70% in Paraguay. Regarding the other sectors, while the power generation sector dominates

emissions in the EU (36% of total emissions) and Argentina (35%), the large share of renewables

results in relatively lower emissions in the energy sectors of the other Mercosur countries. While

in the EU, emissions from power generation, as for most of the other sectors, have experienced

a decline, Argentina’s CO

emissions from energy production increased on average by 2.3%

annually from 2010 to 2018.

The EDGAR database does not provide data on LULUCF after 2010.

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Table 19: CO2 Emissions by sector in Mercosur countries and the EU (%)

Country Measure

Manufacturing /

Construction

Power

generation

Residential /

Commercial

Transport Waste

Growth -1.1 -2.7 -2.1 0.1 -0.6

Share 18 36 18 27 0

ARG

Growth 0.1 2.3 1.0 0.1 1.6

Share 22 36 19 21 0

BRA

Growth -0.3 4.1 -0.2 2.4 1.2

Share 31 19 8 41 0

PRY

Growth 7.1

1.9 4.8 -20.5

Share 12 0 3 85 0

URY

Growth 4.5 -4.3 -1.2 2.4 0.5

Share 19 12 15 55 0

Source: Author’s calculations from the EDGAR – CO2 Emissions by countries and sector database. The sector share of

CO2 emissions refer to 2018, while the growth in CO2 emissions by sector is computed as the compound annual growth

rate (CAGR) between 2010 and 2018.

The EU contributes 6.8% of global methane emissions, which corresponds to the contribution of

all Mercosur countries altogether (Figure 19, left panel). Figure 19 (right panel) shows that

Brazil’s methane emissions were pretty stable from the 1970s up to 2000 where they

experienced a large increase and remained stable afterwards. On the other hand, methane

emissions have decreased steadily in the EU, Argentina and, only more recently, in Uruguay.

Paraguay after a decline in methane emissions per capita during the 1990s has experienced a

sharp increase since 2006. Methane and nitrous oxide emissions are largely produced by the

agricultural and livestock sectors.

Figure 19: Levels of methane per capita in 2015 (left); trends since 1970 (right)

Source: Author’s calculations from the EDGAR (v50_CH4_1970_20153) and World Bank Development Indicators

(population).

Figure 20 displays similar statistics for Nitrous Oxide (N2O), the third most important GHG gas.

The EU contributes to 11.0% of global nitrous oxide emissions while Mercosur countries

contribute altogether to 9.6%. Uruguay displays a significantly higher level of emissions per

capita, while Paraguay and Argentina and Brazil are closer to EU levels, although still higher.

While the EU has been experiencing a steady decline in emissions per capita for the last three

decades, Mercosur countries have experienced increasing levels of nitrous oxide emissions per

capita in the last decade. Nitrous oxide emissions are mainly derived from fertilised agricultural

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soils and livestock manure. Indeed, more than 90% of Argentina’s nitrous oxide emissions, for

example, are produced by the agricultural sector.

Figure 20: Levels of Nitrous Oxide per capita in 2015 (left) and trends since 1970 (right)

Source: Author’s calculations from the EDGAR (v50_N2O_1970_2015) and World Bank Development Indicators

(population).

With regard to Mercosur countries’ commitment to reduce CO2 emissions,

Brazil was one of

the few developing countries to put forward absolute emission reduction targets in their INDC

and one of the very few to indicate an absolute target of 37% reduction below 2005 levels by

2025 (Table 20).

Argentina is one of few countries to have increased its level of ambition since

the adoption of the Paris Agreement. However, emissions from all sectors are still projected to

grow significantly in Argentina under the current targets. Argentina has committed to not exceed

483Mt CO2e by 2030, which is 25% above 2015 levels. Uruguay has committed to reduce per

capita emissions by 29% by 2025 with specific targets for the beef sector in terms of both

methane and N20 emissions (59% and 52% per unit of GDP from 1990 levels, respectively

without international support). Finally, Paraguay has committed to reduce emissions by 20%

with respect to 2030 projected levels, partially conditional on international support.

Table 20: Climate change targets in NDC content and laws

EU Brazil Argentina Uruguay Paraguay

Overall

target

At least 40%

domestic

reduction in GHG

emissions by

2030 compared

to 1990.

37% reduction in

GHG emissions by

2025 and 43% by

2030 compared to

2005.

Not exceed a net

emission of 483

(unconditional)

million tCO2eq by

the year 2030;

conditional

measures, if jointly

implemented could

bring emissions to

369 million tCO2eq

for 2030.

29 % reduction in

CO2 emissions

intensity per GDP unit

by 2025 from 1990

level.

59% reduction in CH4

emissions intensity

per GDP unit by 2025

from 1990 level.

52% reduction in N2O

emissions intensity

per GDP unit by 2025

from 1990 level.

10%

(unconditional) to

20% (conditional)

reduction in GHG

emissions by 2030

relative to

projected

emissions.

See Climate Action Tracker, 2015.

It is worth noting that 2005 was a year with particularly high emissions in Brazil, which makes Brazil’s pledge slightly

less ambitious (Climate Action Tracker, 2015).

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LULUCF

12 million ha

reforestation by

2030.

Zero illegal

deforestation by

2030.

Enhancing

sustainable native

forest management.

Develop a National

Forest Monitoring

System and a

Safeguards

Information System.

National Forestry

and Climate Change

Action Plan.

To develop

conservation and

use plans for

forested areas to

improve carbon

sequestration in the

Chaco and Selva

Misionera Areas,

and increase

afforestation.

(Non-binding) Avoid

CO2 emissions from

SOC in 45% of the

grasslands area by

2030.

5% increase in the

native forests area of

year 2012 (892.458)

by 2025.

At least maintenance

of 100% of the

amount of forest

plantations effective

area under

management of year

2015 (763.070 ha) by

2025.

Avoid CO2 emissions

from SOC in 30% of

the grasslands area

(3.000.000 ha) by

2025.

Energy Several targets

in laws:

http://climate-

laws.org/cclow/g

eographies/59/cl

imate_targets_E

nergy

45% renewables in

the energy mix by

2030; 23%

renewables in the

power supply by

2030.

18% sustainable

biofuels in the

energy mix by

2030.

10% efficiency

gains in the power

supply.

8% share of

renewable sources

in electric

generation by 2017,

12% by 2019, 16%

by 2021, 18% by

2023 and 20% by

2025. Law 27191 on

Renewable Energy.

25% increase in the

shade and shelter

forest plantations

area of year 2012,

including silvopastoral

systems (97.338 ha)

by 2025. Avoid CO2

emissions from SOC

in 100% of the

peatlands area of

year 2016 (8.366 ha)

by 2025.

Decrease in 20%

the share of fossil

fuels in annual

total energy use

by 2030 against a

2013 baseline.

20% reduction in

fossil fuel

consumption.

Agriculture

15 million ha

restoration of

degraded

pasturelands by

2030; 5 million ha

integrated cropland-

livestock-forestry

systems by 2030

National Agriculture

and Climate Change

Action Plan

(PANByCC)

38% reduction in N2O

emissions intensity

per kg of beef cattle

measured in live

weight by 2025 from

1990 level.

Source: https://climate-laws.org/cclow and OECD (2019) for Argentina.

4.2.5. Power generation

Mercosur countries adopt, on average, a cleaner energy mix than EU countries with the exception

of Argentina. While the EU derived about 29% of electricity from renewable sources, in 2014

Brazil’s share stood at 73%, Uruguay’s at 91% and Paraguay derive almost all its electricity from

hydropower (Table 21). Argentina obtains 32% of its electricity from renewable sources and

relies on fossil fuels more heavily than the EU. The contribution of oil to electricity generation in

Argentina went from 7% in 1995 to 14% in 2014. Indeed, the energy sector has become the

main single contributor to CO2 emissions. In Argentina, energy prices are subsidised and

constitute a disincentive for private and public entities to improve efficiency and invest in cleaner

sources of energy (World Bank, 2016).

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Table 21: Electricity sources in Mercosur countries and the EU

Country/region Source 1995 2005 2014 2014

Hydroelectric

12.2 9.5 11.9

29%

Renewable sources

1.1 4.5 16.6

Nuclear

32.4 30.3 27.7 28%

Natural gas

9.9 20.3 14.5

43%

Oil

8.5 4.3 1.8

Coal

35.7 30.3 26.6

Argentina

Hydroelectric

40.0 32.2 29.0

32%

Renewable sources

0.2 1.3 2.5

Nuclear

10.5 6.5 4.1 4%

Natural gas

39.6 52.4 47.7

64%

Oil

6.8 5.4 13.8

Coal

2.8 2.1 2.9

Brazil

Hydroelectric

92.1 83.7 63.2

73%

Renewable sources

2.0 3.4 9.9

Nuclear

0.9 2.4 2.6 3%

Natural gas

0.2 4.7 13.7

24%

Oil

2.7 2.9 6.0

Coal

2.0 2.7 4.5

Paraguay

Hydroelectric

99.7 100.0 100.0

100%

Renewable sources

0.1 0.0 0.0

Nuclear

0.0 0.0 0.0 0%

Natural gas

0.0 0.0 0.0

Oil

0.3 0.0 0.0

Coal

0.0 0.0 0.0

Uruguay

Hydroelectric

92.8 87.0 74.2

91%

Renewable sources

0.7 0.5 16.8

Nuclear

0.0 0.0 0.0 0%

Natural gas

0.0 0.0 0.0

Oil

6.5 12.5 9.1

Coal

0.0 0.0 0.0

Source: Author’s calculations from the World Development Indicators – World Bank. The last column refers to 2014 and

report the overall percentage of fossil-fuel based energy sources (in grey), renewable sources (in green) and nuclear

power (beige).

Despite the clean energy mix, both Brazil and Uruguay have increased their use of fossil fuels

(natural gas and oil for Brazil, and oil only for Uruguay) in the last two decades. Hydropower is

still a major energy source, but its expansion is constrained by location restrictions: most

currently available potential is located in remote areas of the Amazon. Nevertheless, according

to the 2022 Energy Expansion Plan of Brazil, the hydropower sector is expected to expand as it

received most of the public environment-related lending in 2008-14 (from the Brazilian

Development Bank (BNDES) (OECD, 2015).

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4.2.6. Forests

Among Mercosur countries, Brazil and Paraguay possess abundant forest resources. About 58%

of the territory of Brazil is covered by forest, and 38% of Paraguay (FAO database). Forests in

the EU account for about 40% of land area, with large differences across member states.

Argentina, Brazil and Paraguay feature among the top 10 countries reporting the greatest loss

of forest area during the period 2010–2015, while in the EU the area of land covered by forests

has been growing over time (Table 22).

Table 22: Top 10 countries in terms of annual forest cover loss in the period 2010-15

(plus EU)

Global

Ranking

Country/

Region

Total Forest

in 2015

Annual forest cover loss

(2010-15)

Annualised % loss

(2010-15)

1 Brazil 493,538 984 0.20

2 Indonesia 91,010 684 0.74

3 Myanmar 29,041 546 1.78

4 Nigeria 6,993 410 5.01

5 Tanzania 46,060 372 0.79

6 Paraguay 15,323 325 2.00

7 Zimbabwe 14,062 312 2.08

8 Congo DR 152,578 311 0.20

9 Argentina 27,112 297 1.06

10 Bolivia 54,764 289 0.52

- EU 158,414

-367 -0.23

Source: FAO Global Forest Resources Assessments. Negative sign indicates afforestation. Data are in thousand hectares.

Satellite data from the Brazilian National Institute for Space Research (INPE), which cover both

legal and illegal deforestation, are presented in Figure 21 and cover Brazil’s Legal Amazon

(BLA)

and the Cerrado. For the BLA, data show a sharp decrease in deforestation between

2004 and 2012. Deforestation decreased from 28,000 square kilometres in 2003 to a lowest of

about 5,000 square kilometres in 2012 but has since then increased to about 10,000 square

kilometres in 2019. In particular, Figure 21 (left panel) shows the slow resurgence of

deforestation between 2012 and 2018, followed by a more significant increase in 2019 (+29.5%).

Observed deforestation in 2019 was higher than the annual deforestation rate recorded for any

year during the last decade but remained lower than any year during the 1988-2008 period.

The Brazil's Legal Amazon (BLA) contains the nine Brazilian states in the Amazon basin. It covers also part of the

Cerrado (37%) and Pantanal (40%) ecoregions. BLA was created in 1948 by the Brazilian government based on studies

aimed at promoting the economic and social development of the Amazon region.

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Figure 21: Deforestation in the Legal Amazon states (left) and Cerrado (right)

Legal Amazon

Cerrado

Source: TerraBrasilis part of the National Institute for Space Research (INPE). Brazil’s legal Amazon states include: the

states of Acre, Amapá, Amazonas, Pará, Rondônia, Roraima and Tocantins, as well as part of Mato Grosso and most of

Maranhão. The area covers the Amazon, and part of the Cerrado and Pantanal ecoregions.

According to the Global Fire Emissions Database, which compiles data from the NASA earth

observatory, the 2019 summer recorded higher fire count and intensity than in previous years.

The fire activity is also being largely linked to human activity rather than natural causes. It is,

however, not yet possible to establish whether this more intense fire activity constitutes the

beginning of an upward trajectory in forest fires or just an exceptional event.

The Brazilian Cerrado is one of the most biologically rich areas of the savannah eco-region. It

has been recorded that the Cerrado has lost more than half of its original extent due to cattle

ranching and the production of industrial crops.

Yet, deforestation rates have been decreasing

rapidly since 2004, and have remained relatively low since 2016, compared to the 2001-2015

period (Figure 21, right panel).

In Brazil, the decline in deforestation observed between 2004 and 2012 was largely attributed

to the adoption of appropriate policy initiatives, voluntary arrangements and market-based

initiatives that aimed at decreasing the demand for new deforestation and increasing the risks

to those engaged in deforestation.

An overview of the relevant initiatives that contributed to

the decrease is provided in Nepstad et al. (2014),

and include, for example, the 2004 Detection

of Deforestation in Real Time (DETER) system, and the 2006 Forest Code. From 2014, Brazilian

deforestation rates have begun to increase due to a deteriorating commitment to environmental

regulation, e.g. the amnesty for small properties introduced in 2012 with the New Forest code

(Burgess (2019).

More recently, Brazil’s substantial progress in fighting against deforestation in

the first decade of the twenty-first century has been partly undermined by disinvestment in

Brazil’s ministry of the environment, Ibama, as illustrated by staff reductions and the more

Kennedy, C. M., Hawthorne, P. L., Miteva, D. A., Baumgarten, L., Sochi, K., Matsumoto, M., ... & Develey, P. F. (2016).

Optimizing land use decision-making to sustain Brazilian agricultural profits, biodiversity and ecosystem services.

Biological Conservation, 204, 221-230.

A recent paper by Burgess et al. (2019) documents the impact of changes in the Brazilian regulatory environment by

exploiting high resolution satellite data and a using an empirical research design that aims at establishing causal links

by exploiting discontinuities in deforestation at national borders. The authors find that in 2006, just after Brazil

introduced policies to reduce deforestation, deforestation indeed decreased.

Nepstad, D., McGrath, D., Stickler, C., Alencar, A., Azevedo, A., Swette, B., ... & Armijo, E. (2014). Slowing Amazon

deforestation through public policy and interventions in beef and soy supply chains. science, 344(6188), 1118-1123;

see also L. Tacconi, Rafael J. Rodrigues & A. Maryudi (2019), “Law Enforcement and Deforestation: Lessons for Indonesia

from Brazil,” Forest Policy and Economics 108

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recent loosening of environmental enforcement.

In addition, various stakeholders have raised

concerns about the political commitments on deforestation of the current Brazilian government

and expected future trends in deforestation.

Various domestic policies have been adopted in other Mercosur countries to protect forests.

Argentina, for example, adopted the Native Forest Law in 2007 and a Zero Deforestation Law

was adopted in 2012 in Paraguay (Hsu et al. 2016).

Yet, Mercosur countries exhibit large differences in terms of environmental regulatory stringency

among jurisdictions that have decentralised power to control land use. Evidence from the Gran

Chaco in Argentina and Paraguay and Chiquitano in Brazil shows that lower deforestation

regulations and enforcement in these regions have attracted investments by companies that

tend to clear more forest, mostly for cattle ranching (de Waroux

et al. 2016).

With regard to wood production, the EU produced about 800 million tons of wood in 2018

compared to 200 million tonnes in Brazil (Figure 22, left panel). Brazil is a large producer and

consumer of timber: in 2014, the forestry sector accounted for 1.1% of GDP and 1.3% of total

Brazilian exports, 4.3% including wood pulp. Wood production has only slightly increased over

the last decade mainly due to an increase in the production of wood pulp (Figure 22, left panel).

In 2016, Brazil was the fifteenth largest exporter of wood, accounting for 2% of global wood

exports (COMTRADE). However, international trade in roundwood logs from the natural tropical

forest has been banned progressively since 1980 and most of the Brazilian exports come from

planted forests (FAO, 2018). Unlike other Mercosur countries,

Brazil has ratified the

International Tropical Timber Agreement, an MEA designed to promote sustainable management

of tropical forests

. The EU accounts for about 10% of Brazil’s wood exports.

In Argentina

and Paraguay the production of wood products has been stable over time while it has more than

doubled in Uruguay due to an expansion of wood pulp (Figure 22, right panel).

See analysis for discussion of environmental deregulation. Ibama’s work force of field agents is reported to have

decreased by 44% (from more than 1300 to 730 in 2019) over the past decade. Ernesto Londoño and Letícia Casado

(2019), The New York Times, available from:

https://www.nytimes.com/2019/08/28/world/americas/amazon-fires-

brazil.html. The Folha de Sao Paulo (one of Brazil’s most respected news source) estimated these cuts at 55%. See

Fabiano Maisonnave, “Em document, chefes de fiscalizacão do Ibama alteram para risco de apagão”, Folha de Sao Paulo,

December 27, 2019, available from:

https://www1.folha.uol.com.br/ambiente/2019/12/em-documento-chefes-de-

fiscalizacao-do-ibama-alertam-para-risco-de-apagao.shtml

de Waroux, Y. L. P., Garrett, R. D., Heilmayr, R., & Lambin, E. F. (2016). Land-use policies and corporate investments

in agriculture in the Gran Chaco and Chiquitano. Proceedings of the National Academy of Sciences, 113(15), 4021-4026

Paraguay signed but has not ratified the agreement.

See the ITTO’s latest report (2018) for examples of sustainable forest management projects conducted in Brazil:

https://www.itto.int/annual_report/

Brazil’s tropical roundwood production is mainly concentrated in the northern states of Pará, Amazonas and Mato

Grosso, with the plantation estates located in the non-tropical south and southeast regions of the country. ITTO (2018),

“Biennial review and assessment of the world timber situation 2017-2018”, available from

file:///Users/utilisateur/Downloads/Biennial_review_2017%E2%80%932018.pdf

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Figure 22: Wood production for Brazil (left) & other Mercosur countries (right)

Source: Authors’ elaboration from FAOSTAT. All productions have been converted into million tonnes. Countries are in two separate

graphs because of the large difference in the scale of wood production.

4.2.7. Fisheries

The EU represents the largest single market for fish and fish products. On the other hand, per

capita consumption of fish is low in Mercosur countries and most fish production is exported.

According to FAO, seven fish species

in the Southwest Atlantic area are considered to be over-

exploited or depleted (3 only moderately), seven fish species

are considered overexploited or

depleted in the Northeast Atlantic area and eleven in the Mediterranean area.

In the EU, fishing fleets are managed through the Common Fisheries Policy, which also includes

rules for aquaculture. The policy involves inputs and output controls.

Aquaculture accounts for

about 20% of fish production. Strategic guidelines have been set up to increase production and

the competitiveness of the aquaculture sector and several campaigns have been launched to

promote its sustainability.

Both Brazil and Argentina have implemented policies to encourage the rise in aquaculture. In

Brazil aquaculture increased by almost 400% over 2000-13, accounting for over 60% of total

fish production in 2013 (OECD, 2015).

In Argentina, aquaculture production is growing but it

is not yet economically relevant as the sector is mostly made up of small farmers that incorporate

fish farming as an additional productive option to improve the profitability of the field.

These include: the Argentine Hake Merluccius, the Southern Blue Whiting, the Argentina Croaker, the Whitemouth

Croaker, the Striped Weakfish, the Brazilian Sardinella and Other shrimps.

These include: the Atlantic salmon, the European plaice, the Atlantic cod, the Blue whiting, the Haddock, the Pollock,

and the Whiting.

These include: the Azov Sea Sprat, the Pontic Shad, the European Hake, the Red Mullet, the European Anchovy, the

Sardinellas, the Albacore, the Atlantic Bluefin Tuna, the Swordfish, the European Sprat, the Atlantic Bonito and the

Striped venus. Note that this area is shared with non-EU countries.

Inputs control include rules on access to waters, fishing effort controls and technical measures. Output controls mainly

consist of limiting the amount of fish from a particular fisher. https://ec.europa.eu/fisheries/cfp/fishing_rules_en.

https://ec.europa.eu/fisheries/cfp/aquaculture_en

OECD (2015)

http://www.fao.org/fishery/facp/ARG/es

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Uruguay, aquaculture is in its infancy, yet there is a growing interest in boosting the fishing and

aquaculture sector.

Aquaculture production can contribute to reducing pressure on natural fishery resources but can

also have negative impacts on biodiversity and ecosystems, in particular, if alien species are

introduced. Additionally, aquaculture parks can release contaminants like antibiotics, potentially

contributing to antimicrobial resistance.

In the EU, the Regulation on the use of alien and

locally absent species in aquaculture aims at ensuring the adequate protection of aquatic habitats

from the risks associated with the use of non-native species. In Brazil, while the aquaculture

sector saw initially the introduction of international species such as shrimp and tilapia, it has

shifted to an increasing share of native species, which are also largely intended for the domestic

market (Pincinato and Asche,

2016).

The EU is already cooperating with Brazil and Argentina (as well as other countries in the Atlantic

Ocean) to build an All-Atlantic Ocean Research Community to promote the sustainable

management of the Atlantic Ocean. Key areas of cooperation involve, among others, a

responsible and sustainable fisheries management and aquaculture development, and the

treatment of emerging pollutants.

4.2.8. Agriculture and the environment

According to the OECD (2008), agriculture’s use of inputs is a major driving force leading to

pressure on the environment (OECD, 2010). The choice and quantity of farm inputs can affect

the state of the environment with regard to rates of soil erosion, water quality and ultimately

the aquatic ecosystems (Parris, 2011). In this section we focus on water, fertilisers (nitrogen)

and pesticides use in agriculture and compare the performance of Mercosur countries with that

of the EU and other countries of similar income levels.

In Brazil, the agriculture sector consumes more than 60% of water resources (OECD, 2015a)

and the use of water in agriculture has increased considerably, by 40% from 2006 to 2010. In

Paraguay, agriculture water withdrawal accounts for 78% of total water use and it has grown by

400% between 2000 and 2012. Argentina has increased its water use in agriculture by 30%

between 2000 and 2011 (FAO Aquastat). In the EU, member states are required to price water

in a way that ensures full cost recovery and incentivise the efficient use of water. Water charges

tend to be low in most Mercosur countries. In Brazil, in the four states where some water charges

exist, they are usually too low to stimulate efficient resource use.

At the moment, Rio de

Janeiro is the only state where water use is charged universally. Argentina has implemented a

system of water charges, although several provinces charge a low tariff that does not cover the

full cost of recovery and maintenance of the water system. In Uruguay, water charges exist and

are lower for residential users than for other users (commercial and industrial). Since July 2016,

http://www.fao.org/fishery/facp/URY/es

Lima Junior, D.P., Magalhães, A.L.B., Pelicice, F.M. et al. Aquaculture expansion in Brazilian freshwaters against the

Aichi Biodiversity Targets. Ambio 47, 427–440 (2018).

Pincinato, R. B. M., & Asche, F. (2016). The development of Brazilian aquaculture: Introduced and native species.

Aquaculture Economics & Management, 20(3), 312-323.

OECD (2015b) Water Resources governance in Brazil, OECD Studies of Water, OECD Paris.

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the introduction of agricultural usage charges and contamination fees has been discussed as

part of the preparation for the National Water Plan (UNEP, 2018

In terms of pesticide use, Figure 23 (left panel) shows that Mercosur countries’ average pesticide

intensity (kg per hectare) is above that of countries of similar income levels and above the EU

average. While differences in levels are partly explained by agronomic and climatic conditions,

e.g. countries with warm and wet climate tend to use more pesticides (Ghimire and Woodward,

2013),

trends are more likely driven by changes in agricultural practices and pesticide

restrictions.

Figure 23: Pesticide use by income levels (2017) and over time (1990-2017)

Source: Data on pesticides are from FAOStat. GDP per capita, PPP is from the World Bank World Development indicators

(2017). Figure on the left shows the number of pesticides use per hectare of land (in log). Data refers to 2017. The plot

on the right refers to the amount in kg of pesticides use per hectare of land (in log) over time.

While the use of pesticides has been slightly decreasing in the EU (Figure 23, right panel), it has

been increasing across all Mercosur countries. Brazil recently overtook the EU in terms of

pesticide intensity while other Mercosur countries did so around the turn of the century. While

the import of hazardous pesticides has been decreasing steadily (FAOStat), the use of

unauthorised pesticides remains high across Mercosur countries (OECD, 2015).

In Brazil, MAPA, ANVISA and IBAMA are the main pesticide implementation agencies to supervise

and manage pesticides. Pesticides can only be produced, handled, imported, exported, marketed

and used if previously approved by the three federal government bodies. Pesticide licences,

however, do not require periodic reviews or renewals and are granted indefinitely.

A draft bill

is being currently discussed by congress (PL 6299/02

) and proposes new rules for the approval

of pesticides including integrating all evaluations under the Ministry of Agriculture, while still

involving the three agencies. The bill has been criticised by some environmental organisations.

UNEP (2018) Achieving Sustainable Development Goals on Socially Inclusive and Sustainable Water

through Fiscal and Pricing Reforms in Uruguay, UNEP, prepared by Miguel Carriquiry, Matías Piaggio, Felipe Bertamini,

Gabriela Pérez Quesada, and Guillermo Sena

Ghimire, N., & Woodward, R. T. (2013). Under-and over-use of pesticides: An international analysis. Ecological

Economics, 89, 73-81.

http://portal.anvisa.gov.br/pesticides

https://www.camara.leg.br/proposicoesWeb/fichadetramitacao?idProposicao=46249

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In addition, various stakeholders have raised concerns about the potential use of dangerous

pesticides that are banned in the EU.

In Mercosur countries, implicit subsidies exist for pesticides and fertilisers. In Brazil, for example,

fertilisers and pesticides are exempt from some federal and state taxes (OECD, 2015a). This has

contributed to their growing use. In addition, an increase in the use of pesticides is associated

with the practice of minimum-tillage and no-tillage farming, when this is not employed

appropriately following the principles of conservation agriculture. The practice of minimum-

tillage and no-tillage farming is common across Mercosur countries (Peiretti and Dumanski, 2014)

and that helps preserve carbon in the soil, yet it is also associated with higher pesticide use due

to a higher presence of weeds.

Figure 24: Fertiliser use by income levels (2017) and over time (2002-2017)

Source: Data on fertilisers are from FAOStat. GDP per capita, PPP is from the World Bank World Development indicators

(2010).

The opposite, instead, is observed for the use of fertilisers (nitrogen), in particular for Argentina

and Paraguay that show very low levels of fertilisers intensity. The use of fertilisers is below EU

levels in all four Mercosur countries.

4.2.9. Air pollution

All Mercosur countries have worse scores than the EU in terms of air quality in the Environmental

Performance Index. Figure 25, left panel, displays two different measures of exposure to

particulate matter (PM2.5), mean annual exposure and the percentage of population exposed to

level above WHO guidelines. While displaying higher levels of air pollution than average EU levels,

the trend in Argentina is downwards, as opposed to the EU. Brazil has experienced a notable

improvement, going from 75% of the population exposed to unsafe levels of PM2.5 in 2005 to

56% in 2015. A significant improvement in terms of average exposure has also been experienced

by Paraguay, although the entire population is still considered exposed to unsafe levels of PM2.5.

Uruguay shows the lowest levels of mean exposure in the group and a similar percentage of

people exposed to excessive levels of PM2.5 to the EU. When compared to countries of similar

income levels (Figure 25, right panel), Mercosur countries score pretty well, showing mean

exposure to PM2.5 below those of most countries of similar income levels.

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Figure 25: Exposure to PM2.5

Country

Mean

exposure

% above WHO

guideline

2005 2015 2005 2015

14.3

15.3

84.5

85.5

Argentina 14.9 13.4 98.4 97.3

Brazil

13.8

11.4

75.3

55.8

Paraguay 23.3 14.9 100 100

Uruguay 11.9 11.5 88.9 85.9

Source: World Bank World Development Indicators. Mean exposure is measured in micrograms m3. The second column

of the table indicates the percentage of the population exposed to levels of PM2.5 above WHO guidelines. The plot on

the right shows a quadratic fit of the relationship between GDP per capita (PPP) and the PM2.5 together with the 95%

confidence interval.

4.2.10. Waste

Solid waste can be an important source of methane and, if not appropriately managed can pollute

air and water, with significant health impacts on the local population. Data on the generation,

collection, treatment, and disposal of solid waste for Mercosur countries are limited and hence

need to be interpreted with caution. In general, Mercosur countries show heterogeneous

performance in terms of waste generation and collection. Paraguay and Uruguay show

substantially lower levels of waste generation per capita than countries of similar income levels

(Figure 26, left panel). In contrast, both Brazil and Argentina are in line with the average

performance of other upper-middle-income countries. In terms of waste collection, Brazil and

Uruguay collect about 83-86% of the waste, in line with other upper-middle-income countries,

while Paraguay performs well below with a collection rate of 51% (Figure 26, right panel)

Figure 26: Waste generation and collection

Source: What a waste. A Global review of solid waste managements (Hoornweg and Bhada-Tata, 2012). GDP per capita, PPP is

from the World Bank World Development indicators (2010). Figure on the left shows the amount of solid waste generated per

capita per day (in log). The plot on the right refers to collection rates that are available for fewer countries. For some countries,

collection data refer only to urban areas. No data is available for Argentina. The plots show a quadratic fit of the relationship

between GDP per capita (PPP) and the two variables together with the 95% confidence interval.

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According to OECD (2015), in Brazil, there is a lack of hazardous waste landfills. Moreover, many

municipalities tolerate the illegal practice of disposing of hazardous waste in municipal landfills.

Empirical research on Argentina and Uruguay show that lead from toxic waste continues to pose

a significant public health risk (Caravanos et al. 2016). Recycling is very limited across Mercosur

countries. Recovery is dominated by waste pickers (catadores in Portuguese; cartoneros in

Spanish), who earn their living by collecting recyclables and selling them to private recycling

companies. Waste pickers contribute to waste separation for recycling, for example of aluminium

cans and PET.

4.3. Analysis of impact

4.3.1. Impact on GHG emissions

According to the CGE modelling, the AA is expected to increase CO

emissions in the EU by 0.03%

in the long run under the conservative scenario (Table 23). The largest impact among Mercosur

countries is for Argentina (0.51% increase in CO

emissions). However, it is important to note

that Argentina’s overall contribution to global CO

emissions is low compared to that of the EU.

Both Uruguay and Paraguay are expected to experience a small decline in CO

emissions.

Globally, the AA is expected to have a negligible impact on CO

emissions also considering that

the estimated changes do not reflect possible positive future changes in energy efficiency and

technology. This analysis does not consider LULUCF-related emissions, which are considered

from a qualitative perspective as part of the discussion of the impact on deforestation.

Table 23: Change in CO2 emissions in the two scenarios (long term impact, % change)

EU Brazil Argentina Paraguay Uruguay ROW World

Conservative scenario 0.03 0.16 0.51 -0.04 -0.14 -0.01 0.00

Ambitious scenario 0.05 0.18 0.69 -0.12 -0.23 -0.02 -0.01

Total Emissions (2032 baseline) 3,987 326 185 6 11 53,017 57,532

Source: CGE Modelling Results based on GTAP emission factors. Percentage changes with respect to the 2032 baseline.

Emissions are in millions of tonnes.

Figure 27 reports the results of the LMDI decomposition of the impact on CO

emissions for both

scenarios. Effects are expressed in absolute changes. The figure shows that, under both

scenarios, the increase in emissions due to an increase in the scale of production is partially

mitigated by a negative composition effect. A negative composition effect suggests that the AA

is likely to induce, in the long term, a reallocation towards lower emission-intensive sectors. The

only exception is Argentina where, however, the impact is negligible.

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Figure 27: Decomposition of impact on CO2 emissions: conservative scenario (left)

and ambitious scenario (right)

Source: CGE modelling based on GTAP emission factors. Plots show percentage changes with respect to the 2032

baseline. Decomposition has been obtained using a Log Mean Divisia Index (LMDI). Graph shows absolute changes in

tonnes of Co2.

Based on the CGE modelling results and emission intensities from EDGAR, the AA is expected to

reduce methane emissions in the EU by -0.12% in the long term under the conservative scenario

(Table 24), nitrous oxide emissions are also expected to decrease by -0.21%. In percentage

terms, the effects on methane emissions in Mercosur countries are around 0.6 to 0.9%, with the

exception of Paraguay where the effect is much lower (0.07%). The impacts on nitrous oxide

among Mercosur countries range from 1.5% in Brazil to 0.4% in Uruguay. Effects are again very

small for Paraguay (0.08%). Globally, the AA is expected to have a very small impact on both

types of GHG emissions (Table 24).

Table 24: Percentage Change in other GHG emissions in the two scenarios

Methane (CH4) EU Brazil Argentina Paraguay Uruguay ROW World

Conservative scenario -0.12 0.93 0.84 0.07 0.65 -0.01 0.02

Ambitious scenario -0.17 1.42 1.36 0.17 1.20 -0.02 0.03

Total Emissions (2032 baseline) 948 585 176 41 66 18,764 20,579

Nitrous Oxide (N20) EU Brazil Argentina Paraguay Uruguay ROW World

Conservative scenario -0.21 1.54 1.17 0.08 0.41 -0.05 0.01

Ambitious scenario -0.28 2.11 1.54 0.23 0.13 -0.07 0.02

Total Emissions (2032 baseline) 378 172 69 9 13 4,125 4,767

Source: CGE modelling % emission intensities from EDGAR. % changes with respect to the 2032 baseline. Total

emission are in Mtons of Co2 equivalent.

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Figure 28 reports the results of the Log Mean Divisia (LMDI) decomposition of the impact on the

two other types of GHG emissions for both scenarios. Effects are expressed in percentage

changes. Results differ between gases and scenarios reflecting the impact of sector reallocations.

For methane emissions in Mercosur countries, under both scenarios and across all parties, scale

effects due to the expansionary effect of the AA are amplified by a relocation towards more

methane intensive sectors (composition effect). The latter effect is particularly evident under

the most ambitious scenario and mostly driven by the expansion of animal production. For

nitrous oxide, expansionary effects (scale effects) are also amplified by a positive composition

effect, which suggests a reallocation towards higher nitrous oxide intensive sectors, mostly

agricultural products. For the EU, negative composition effects are instead larger than the

positive scale effects, for both gases, explaining the negative overall expected decline in

emissions.

Figure 28: Decomposition of impact on GHG emissions: methane (left) and nitrous

oxide (right)

Source: CGE modelling based and emissions from EDGAR. Plots show absolute changes with respect to the 2032 baseline

in Mtons of Co2 equivalent. Decomposition has been obtained using a Log Mean Divisia Index (LMDI). In order to match

CGE results to EDGAR data, sectors were aggregated; hence we expect these estimates to carry a wider margin of error.

Table 25 shows the aggregated effect on GHG emissions. The overall moderate increase in GHG

emissions in Mercosur countries is compensated by a decrease in emissions in the EU and the

rest of the world leading to a negligible global effect of the AA on total GHG emissions. Comparing

the projected changes in GDP with those in GHG emissions, results indicate a reduction in

emission intensity of GDP in the EU and Paraguay (in the latter the impact is almost emission-

neutral under the ambitious scenario). In Brazil, Uruguay and to a lesser extent Argentina, the

Agreement increases the overall emission intensity of GDP. Overall, the AA is expected to

marginally reduce the emission intensity of world GDP. The decomposition in Figure 29 shows

once again the positive composition effect in Mercosur countries due to the induced relocation

towards GHG emission-intensive sectors. Scale effects are also positive with the exception of

Paraguay and the rest of the world.

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Table 25: Change in total GHG emissions and GDP in the two scenarios (long term

impact, % change)

GHG Emissions EU Brazil Argentina Paraguay Uruguay ROW World

Conservative scenario -0.02 0.79 0.67 0.06 0.52 -0.01 0.00

Ambitious scenario -0.01 1.15 0.99 0.14 0.87 -0.02 0.00

Total GHG Emissions

(2032 baseline GTAP)

5,313 1,083 430 56 90 75,906 82,878

GDP EU Brazil Argentina Paraguay Uruguay ROW World

Conservative scenario 0.06 0.19 0.51 0.08 0.24 -0.02 0.01

Ambitious scenario 0.08 0.30 0.71 0.15 0.44 -0.02 0.01

Source: CGE modelling and emission intensities from EDGAR. Table 25 shows percentage changes with respect to the

2032 baseline. Total GHG emissions are in Mton of CO2 equivalent. GHG emissions include CO2, CH4 and N20 only.

Minor differences in the aggregated effects are due to the use of a less refined sector classification, which was required

in order to match output data with CH4 and N20 data from EDGAR.

Figure 29: Decomposition of impact on total GHG emissions: conservative scenario and

ambitious scenario

Source: CGE modelling based on GTAP emission factors. Decomposition has been obtained using a Log Mean Divisia

Index (LMDI). Graph shows absolute changes in emissions (Mtons of CO2 equivalent). GHG emissions include CO2, CH4

and N20 only.

From a strictly quantitative perspective based on sectoral analysis, the small increase in overall

GHG emissions in Mercosur countries resulting from the AA is expected to have a limited impact

on trading partners’ ability to meet their commitments to the Paris Agreement, which include

among others a commitment to reduce emissions by 43% by 2030 for Brazil, a commitment to

not exceed 483 Mton CO2eq by 2030 for Argentina, a 29% reduction in emission intensity of

GDP by 2025 for Uruguay and a 10% reduction in GHG emissions by 2030 for Paraguay.

It is

also worth recalling that the effects described above do not reflect the possible future uptake of

green technology (see for example Section 4.3.6 on the impact of the AA on trade in

This issue is further discussed in section 4.3.7.

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environmental goods and services) and the potential expansion of the renewable energy sector.

In this regard, an analysis of the implications of a possible expansion of the biofuel sector is

provided in section 6.1.3.

4.3.2. Impact on land use and deforestation

In this section, we explore the implications, in terms of land use and deforestation of the

expected expansion of relevant agricultural sectors. Based on the overview presented in the

baseline and the analysis presented below, we expect the repercussions of the EU-Mercosur AA

on land use and deforestation to depend marginally on a scale or composition effects in the

agricultural sector, since the expected expansion of the key agricultural sectors such as beef,

soy and sugarcane is expected to be small, and more on countries’ commitment to preserve a

regulatory framework that reduces the rate of deforestation related to farming activities.

We begin by focusing on Brazil, whose case raised particular concerns among stakeholders,

including the European beef industry, as well as environmental and animal welfare NGOs, and

also because its experience is particularly instructive. Agricultural lands account for about 23%

of Brazil’s total surface area, divided between (low productive) meadows and pastures (75%)

and croplands (25%) (FAOSTAT). Historically, the majority of cleared forest land has ended up

in cattle pasture as crop production is mostly located away from forest area (Global Forest

Atlas).

Evidence suggests that most of the deforested area is used for low-efficiency cattle

ranching (Zu Ermgassen et al. 2018),

i.e. less than one cow per hectare. Hence, there is great

scope for expanding production by intensifying beef production in these areas without inducing

deforestation (Cohn et al. 2014).

Indeed, the reduction in deforestation observed since 2004

was achieved despite high beef prices and increasing beef production, which in previous years

had pushed deforestation upward. This suggests that policies and enforcement actions had led

to the decoupling of beef production from deforestation (Boucher et al. 2013).

Indeed, Burgess

et al. (2019) show that during the period of stricter enforcement and monitoring (2002-2012),

the effort to cope with illegal deforestation was effective in reducing forest loss in particular in

areas closer to economic and market pressure.

The beef moratorium in 2009, for example,

was found to produce some positive, although limited effects. A study by Gibbs et al. (2016)

shows that the agreement induced slaughterhouses to avoid purchasing from properties with

deforestation. Another study by Alix-Garcia and Gibbs (2017)

shows that the moratorium led

to some avoided deforestation on properties that registered early in the programme, which was,

however, offset by leakages in the supply chain. Other policies that contributed to the slowdown

in deforestation include the creation of indigenous reserves and the 2006 Forest Code.

https://globalforestatlas.yale.edu/amazon/land-use

Zu Ermgassen, E. K., Alcântara, M. P. D., Balmford, A., Barioni, L., Neto, F. B., Bettarello, M. M. & Gonçalves, E. T.

(2018). Results from on-the-ground efforts to promote sustainable cattle ranching in the Brazilian Amazon. Sustainability,

10(4), 1301.

Cohn, A. S., Mosnier, A., Havlík, P., Valin, H., Herrero, M., Schmid, E., ... & Obersteiner, M. (2014). Cattle ranching

intensification in Brazil can reduce global greenhouse gas emissions by sparing land from deforestation. Proceedings of

the National Academy of Sciences, 111(20), 7236-7241.

Boucher, D., Roquemore, S., & Fitzhugh, E. (2013). Brazil's success in reducing deforestation. Tropical Conservation

Science, 6(3), 426-445.

Burgess, R., Costa, F., & Olken, B. A. (2019). The Brazilian Amazon’s Double Reversal of Fortune.

Gibbs, H. K., Munger, J., L'Roe, J., Barreto, P., Pereira, R., Christie, M., ... & Walker, N. F. (2016). Did ranchers and

slaughterhouses respond to zero

‐

deforestation agreements in the Brazilian Amazon?. Conservation Letters, 9(1), 32-42.

Alix-Garcia, J., & Gibbs, H. K. (2017). Forest conservation effects of Brazil's zero deforestation cattle agreements

undermined by leakage. Global Environmental Change, 47, 201-217.

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negotiations between the European Union and Mercosur

A similar analysis can be applied in relation to any expansion of the oilseeds sector. Brazil has

substantial physical potential for increasing soy production by converting existing degraded

pasturelands into crop fields. Again, historical data indicates that deforestation was on a

declining path until 2012 while soy production, the most profitable Amazon land use, continued

to grow and soy prices were at a record high (Nepstad et al. 2014 and Boucher et al. 2013).

Particularly relevant was the Soy Moratorium, a 2006 voluntary agreement between Brazilian

agribusiness companies to stop purchasing soy from areas in the Amazon that were deforested

after July 2008. The agreement was renewed indefinitely in 2016. The moratorium has been

found to have contributed to reducing deforestation and increasing agricultural productivity

(Kasten, 2017).

In Brazil, sugarcane accounts for less than 9 million hectares, largely located in São Paulo, which

is about only 4.4% of total agricultural land (CONAB). It is also estimated that there are over

40 million hectares of pastureland suitable for the production of sugarcane.

A recent paper by

Jaiswal et al. (2017) shows how Brazilian sugarcane ethanol can be increased substantially

without threatening forests under conservation and, at the same time, accounting for future land

demanded for food and animal feed.

These findings are confirmed by de Oliveira Bordonal et

al. (2018).

In general, evidence for Brazil points towards great scope for expanding agriculture through

intensification and increased productivity without inducing deforestation. As shown in Arias et al.

(2017) although agricultural productivity growth in Brazil has accelerated, there are still large

differences in productivity across farmers and regions, and considerable production gains can be

achieved if agricultural productivity were to grow faster. There is also evidence from the states

of Goias and Mato Grosso that export-oriented farmers were able to increase their agricultural

production by intensifying the existing agricultural lands rather than clearing new land. In a

fraction of the vast Cerrado plain, double-cropping, as opposed to single cropping has started to

take place.

This intensified regime has the potential to expand to other cultivated land areas.

The improvement in productivity in the Cerrado has often been cited as an example of the

success on how to employ state-of-the-art agricultural technology to expand agricultural and

pasture land without deforestation.

This best-case scenario is, however, contingent upon Brazil’s commitment to its Paris Agreement

pledges concerning forest preservation. Brazil, however, has recently opted for rolling back

restrictions on sugar cane production in forest areas. On November 5, 2019, it signed a decree

revoking a 10-year-old zoning regulation that limited the cultivation of sugarcane to areas

outside the Amazon.

100

In November 2019, the farm group Aprosoja started a campaign to end

the Soy Moratorium. The campaign received strong opposition from European companies and

Kastens, J. H., Brown, J. C., Coutinho, A. C., Bishop, C. R., & Esquerdo, J. C. D. (2017). Soy moratorium impacts on

soybean and deforestation dynamics in Mato Grosso, Brazil. PloS one, 12(4), e0176168.

Assunção, J., & Chiavari, J. (2015). Towards efficient land use in Brazil. Climate Policy Initiative, Sept.

Jaiswal, D., De Souza, A.P., Larsen, S., LeBauer, D.S., Miguez, F.E., Sparovek, G., Bollero, G., Buckeridge, M.S. and

Long, S.P., 2017. Brazilian sugarcane ethanol as an expandable green alternative to crude oil use. Nature Climate

Change, 7(11), p.788.

de Oliveira Bordonal, R., Carvalho, J.L.N., Lal, R., de Figueiredo, E.B., de Oliveira, B.G. and La Scala, N., 2018.

Sustainability of sugarcane production in Brazil. A review. Agronomy for Sustainable Development, 38(2), p.13.

Spera, S. (2017). Agricultural intensification can preserve the Brazilian Cerrado: Applying lessons from Mato Grosso

and Goiás to Brazil’s last agricultural frontier. Tropical Conservation Science, 10.

100

The text of the decree is available from : http://www.planalto.gov.br/ccivil_03/_Ato2019-

2022/2019/Decreto/D10084.htm

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investors.

101

Recent efforts to impose budget cuts on Ibama’s anti-deforestation efforts have

exacerbated chronic problems of understaffing, which have made the work of field agents in

certain regions increasingly challenging.

102

In addition, as mentioned previously, various

stakeholders have raised concerns about the policies and their implementation with an impact

on deforestation.

Argentina’s deforestation rates have slowed down in recent years but remain high with respect

to the regional and global trends. Conversion from forest to cropland and grassland contributed

to 35% of total GHG emissions from agriculture activities in 2014 (OECD, 2019).

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Cattle

ranching has been associated in the past to forest degradation due to grazing or overgrazing by

cattle within the forest (FAO, 2019).

104

Recently, Argentina has shown commitment to develop

a participatory national strategy to reduce emissions from deforestation within the UNFCC

REDD+ mechanism.

105

However, if successfully implemented, the National Action Plan on

Forests and Climate Change (PANByCC) will reduce deforestation and forest vulnerability and

degradation. Uruguay has low forest cover (10%) and natural forest cover has increased over

the past years. 75% of Uruguay’s territory is made of grassland for extensive grazing, hence,

there is scope for expanding cattle production without adding pressure on land use. In Paraguay,

the conversion of forest area to pastureland, in particular in the Chaco area, and soybean

production has been one of the major causes of deforestation.

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An expansion of the bovine

sector will not necessarily put pressure on land resources if a strong commitment to the

sustainable management of forests is in place in the country in question. Brazil’s experience in

the early twenty-first century (see section 4.2.6) shows that increased production and trade

expansion is compatible with declining deforestation rates provided that sustainable forest

policies are put in place.

Overall, while there are concerns about the more recent trends in deforestation in Brazil and

Argentina, examples of successful agriculture intensification and the positive trend in

productivity growth show opportunities to limit possible negative effects by converting existing

meadows and pasturelands and by promoting productivity catch-ups across farmers and regions.

Beyond productivity gains, the enforcement (or lack thereof) of regulatory rules protecting forest

areas will largely overshadow the minor effects of the EU-Mercosur AA. Brazil’s experience during

the first decades of 2000 shows that it is possible to decouple beef, soy and maize production

from deforestation by adopting appropriate regulation and monitoring measures. Mercosur

countries, with the exception of Paraguay, have committed to reduce GHG emissions by adopting

forest-related targets and policies, e.g. 12m hectares of reforestation by 2030, end of illegal

logging, compensating any legal logging and strengthening the forest code in Brazil, the

implementation of a National Forest Monitoring system in Argentina and a 5% increase in native

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Brazil urged to renew limits on Amazon soya production, Financial Times, retrieved on 03 March 2020,

https://www.ft.com/content/c554f32a-1521-11ea-9ee4-11f260415385

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Ernesto Londoño and Letícia Casado (2019), The New York Times, available from:

https://www.nytimes.com/2019/08/28/world/americas/amazon-fires-brazil.html

See also Fabiano Maisonnave, “Em

document, chefes de fiscalizacão do Ibama alteram para risco de apagão”, Folha de Sao Paulo, December 27, 2019,

available from:

https://www1.folha.uol.com.br/ambiente/2019/12/em-documento-chefes-de-fiscalizacao-do-ibama-

alertam-para-risco-de-apagao.shtml

103

OECD (2019) Agricultural policies in Argentina, Trade and agriculture directorate, Committee for Agriculture, OECD.

104

http://www.fao.org/redd/news/detail/en/c/1183543/

105

The UNFCCC, through the REDD+ mechanism, calls for signatory parties to develop a national strategy to reduce

emissions from deforestation and forest degradation that includes concrete actions and measures. https://www.un-

redd.org/post/2019/02/18/argentina-s-redd-national-strategy-combining-a-participatory-process-with-sound-technical

106

World Resources Insitute (WRI) http://www.wri.org/blog/2017/11/closing-data-gaps-eliminate-deforestation-and-

land-disputes-beef-supply-chains-paraguay

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forest area in Uruguay. The AA includes a commitment to the effective implementation of the

Paris Agreement and hence has the potential to strengthen such pledges as is further discussed

in Section 4.3.8.

4.3.3. Impact on water resources and the ecosystem

Water is a key agricultural input. The possible expansion of some agricultural sectors, and some

manufacturing sectors, can increase pressure on water resources. According to Ran et al.

(2013)

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the impact of agriculture and livestock production on water-related ecosystem services

can be separated into three categories: 1) withdrawal of water for irrigation of feed and other

crops with effects on downstream aquatic ecosystem, 2) change in land cover that alters the

partitioning and functioning of ecosystems and 3) land-use management practices with

implications for erosion and pollutant runoffs. In this section, we discuss the three main concerns

regarding the potential impact of the AA on water resources: water scarcity, water pollution and

the implications for related ecosystems.

Among the positively affected sectors, sugarcane, rice and nuts are among the most demanding

in terms of water requirements.

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In addition, about 99% of the water consumed by the

livestock sector goes to producing animal feed and fodder (Ran et al. 2013). A move towards a

more intensive meat production could also be accompanied by increased use of cropland for feed

production and to induce an increase in water demanded by the sector. On the other hand, it

has been also shown, for the case of Uruguay (Ran et al. 2013), that it is not the intensification

per se that threatens the provisioning of ecosystem services as a certain degree of intensification

may actually increase water productivity.

Concerns exist also for the water used for livestock drinking and servicing. This water returns to

the environment in the form of liquid manure, slurry and wastewater. The production of animal

wastes in particular in the context of intensive production can put pressure on the surrounding

ecosystem and can result in the pollution of surface waters and groundwater (Mateo-Sagasta et

al. (2017).

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In addition, a move towards intensive animal agriculture could be associated with

the production of ammonia emissions, which can affect surface waters and support harmful algal

growth and also lead to the decline of aquatic species.

Any intensification of agricultural production could lead to an increase in the use of fertilisers

and pesticides with implications for land conservation and water quality. This is of particular

concern in Mercosur countries where implicit subsidies exist for pesticides and fertilisers as

described above.

Overall, the possible expansion of some agricultural sectors poses some moderate concerns

regarding the use of water and pesticides and fertilisers and associated pollution issues if

appropriate management practices are not put in place. This is particularly true given the recent

increase in the use of pesticides and the absence of price incentives to encourage efficient use

of water in agriculture.

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Ran, Y., Deutsch, L., Lannerstad, M., & Heinke, J. (2013). Rapidly intensified beef production in Uruguay: Impacts

on water-related ecosystem services. Aquatic Procedia, 1, 77-87.

108

FAO (1986) Irrigation Water Management: Irrigation Water Needs

http://www.fao.org/docrep/s2022e/s2022e02.htm

109

Mateo-Sagasta, J., Zadeh, S. M., Turral, H., & Burke, J. (2017). Water pollution from agriculture: a global review.

Executive summary. Rome, Italy: FAO Colombo, Sri Lanka: International Water Management Institute (IWMI). CGIAR

Research Program on Water, Land and Ecosystems (WLE).

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negotiations between the European Union and Mercosur

4.3.4. Impact on air pollution

Brazil, Paraguay and Uruguay’s rely heavily on hydroelectric and renewable energy; hence air

pollution is primarily originated from industrial and mobile sources. Adequate air pollution

monitoring is not often in place in Mercosur countries. In Brazil, for example, states are in charge

of air quality regulation and monitoring, but only 12 states had some type of monitoring system

installed in 2012 (OECD, 2015). Hence, the effects of an expansion of the manufacturing and

transport sectors on air quality are explored below.

In Mercosur countries, the positive effects of the AA on manufacturing sectors are confined to a

few industries.

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These are not particularly concerning in terms of air pollution, with the

exception of the pulp and paper sector in Uruguay (which is expected to expand by 1.8% in the

most ambitious scenario this includes also the wood sector), and the non-metal mineral sector

in Brazil and Argentina (expected to increase by 0.7% and 0.8%, respectively). The non-metallic

mineral sector is a major contributor of NOX and to a lesser extent of SO2. These are also the

major pollutants associated with the pulp and paper sector. On the other hand, other heavily

polluting sectors are expected to experience a decline or a very small increase in all Mercosur

countries; these are the chemical sector, an important source of NOX and SO2, and the metal

sector, the latter being a major producer of carbon monoxide (CO). Given these opposing effects,

we do not expect the AA to produce a concerning increase in air pollution from industrial

production, although some negative localised effects might be possible.

In Argentina, energy production is more heavily dependent on fossil fuels, which is associated

with the production of air pollutants such as particulate matter, SO2 and NOX. Yet, the simulated

impact of the AA on electricity use is negative, which largely alleviates this concern.

According to the CGE results, the transport sector is expected to experience a small positive

impact in Mercosur countries (around 0.3% in the conservative scenario for Brazil and Uruguay

(0.4% in the ambitious), and 0.6% (0.8% in the ambitious) in Argentina), except for Paraguay

where the impact is expected to be negative. Expansionary effects in certain agricultural sectors

are likely to be accompanied by an expansion of transportation. The fields of Mato Grosso, for

example, are 2,000km away from the main soybean port at Paranaguá. The Brazilian

transportation network consists mainly of road links, so an increase in transportation can

potentially have negative effects on local air pollution from increased road transport.

Nevertheless, while the number of vehicles in use more than doubled in the last decade,

emissions of particulate matter (PM) decreased significantly thanks to stricter vehicle emission

standards and widespread use of ethanol in cars (OECD, 2015).

111

Moreover, addressing air

pollution has become a priority in Brazil. In 2013, the state of São Paulo established the “New

Standards for Air Quality” that identifies states that do not comply with new standards as well

as the priority sectors. This suggests that the expansion of the transport sector might not

necessarily lead to more air pollution, in particular, if ethanol replaces other fuels and pollution

standards continue to improve as shown in the last decade. In Argentina, instead, the expansion

of the transport sector poses some limited concerns as freight transport is dominated by road

transport and vehicles tend to be old.

110

These are: other food products, electrical equipment, textile, and non-metallic mineral in Brazil and the textile, wood

and paper, electrical equipment, and other food products in Uruguay. In Paraguay the electrical equipment sector is the

only to expect a small significant expansion. In Argentina, it is only the electrical equipment and non-mineral sectors.

111

Ethanol fuelled cars produce less CO, NOX and possibly PM10 than gasoline, but results in greater emission of

aldehydes and higher ground-level ozone.

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4.3.5. Impact on waste

In this section, we explore the possible impact of the AA on waste production and management.

We expect the AA to have only limited impact on waste generation in Mercosur countries. Besides

the potential effects of an increase in animal waste, described above, the effects on industrial

waste are expected to be small since most manufacturing sectors are projected to experience

small or even negative effects. The only exception is Uruguay where the textile and leather, and

the wood and paper sectors are expected to grow by less than 2% in the most ambitious scenario.

These are sectors that tend to be relatively waste intensive. Yet, most hazardous waste is usually

generated by the chemical, metallurgical and automotive sectors, which are expected to mostly

contract in Mercosur countries.

Municipal solid waste production can be expected to increase in line with the expected impact

on GDP. The largest effect being in Argentina where the AA is expected to increase GDP by 0.7%

in the most ambitious scenario, followed by Brazil (0.3%) and Uruguay (0.4%). The expected

impact on Paraguay is, instead, smaller (0.1%). The population in Argentina, Brazil and Uruguay

is highly urbanised and collection coverage is very high (from 90% in Brazil to 99% in Argentina,

source: Terraza et al. 2015).

112

Yet, a high percentage of solid waste is estimated to be disposed

of inadequately (from 86% in Uruguay to 35% in Argentina, source: Terraza et al. 2015). The

waste industry in these countries, however, has seen some positive developments in the last

decade. Argentina and Brazil have proclaimed a national legal framework with specific waste

management laws. In particular, in 2010 the Brazilian National Congress approved the National

Law on Solid Waste that prohibits the use of uncontrolled dump sites and obligates local

governments to develop solid waste treatment plans and recycling goals. In Uruguay, for

example, waste recyclers have been recognised by national law and are given stable salaries

and social protection. Overall, we do not envisage concerns regarding the impact of the AA on

waste both because of the limited impact on waste-intensive industrial sectors and the positive

developments in terms of solid waste management shown by Mercosur countries in recent years.

4.3.6. Impact on trade in environmental goods and services

Environmental goods and services encompass environmental activities aimed at environmental

protection (EP), e.g. protection of ambient air and climate, wastewater management, waste

management, and resource management (RM), e.g. management of energy resources, minerals

and other RM activities. Lower NTBs on environmental goods and services can contribute to

increasing access to such goods with notably important consequences for the environment

(OECD, 2005).

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In particular, increased access can yield positive environmental benefits in

terms of improved resource-use efficiency and pollution prevention. Increased trade in these

goods and services can increase competition and induce greater innovation.

There are some important complementarities between the different parties in terms of

environmental endowments and green technologies. According to the Top Markets Series on

Environmental technology by the US Trade administration, Brazil’s strongest environmental

technology segment in 2016 was in waste and recycling technologies.

114

The EU market output

of the environmental goods and services sector is, instead, dominated by energy-related

112

Grau, J., Terraza, H., Rodríguez Velosa, D. M., Rihm, A., & Sturzenegger, G. (2015). Solid Waste Management in

Latin America and the Caribbean. IDB, IADB

113

OECD (2005) Trade that Benefits the Environment and Development: Opening Markets for Environmental Goods and

Services, OECD, Paris, ISBN Number: 926403577X

114

International Trade Administration (2016) Top Markets Report Environmental Technologies Country Case Study:

Brazil.

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technology for the exploitation of renewable sources (e.g. wind and solar power), followed by

waste management and wastewater management technologies. Mercosur countries constitute a

fertile territory to develop alternative energy technology given the region natural endowment

and the proactive interventions of certain administrations over the past two decades, in

particular in Brazil and Uruguay. Interesting similarities can be observed when considering

climate change-related technologies. Figure 30 shows the share of patents applications by type

of technology filed by each party, with the exception of Paraguay due to lack of data. Brazil is

the largest contributor to climate change-related patents among Mercosur countries with about

24 patents per million people, followed by Uruguay (12) and Argentina (10) during the last 10

years. This is much lower than what is recorded in Europe (more than 1200 patents per million

people). In both Mercosur and EU countries, energy attracts the largest share of patents. These

technologies are indeed the most closely related to profitability and stringent regulation. Yet,

Mercosur countries are still less mature in terms of new technological development in the area

of green technologies and could benefit greatly from the transfer of knowledge and technology

and partnerships with European innovators as there is scope for a substantial catch-up effect in

Mercosur countries.

Figure 30: Patents applications related

to climate change mitigation by

applicant’s country (accumulated 2005-

2015)

Table 26: Percentage of international

partnership by co-

inventor country

(average 2007-2014) – All patents

% Argentina Brazil EU Uruguay

Argentina - 5 34 0.7

Brazil 1.3 - 46 0.03

EU 0.2 0.9 - 0.03

Uruguay 4.6 0.8 38.8 -

Source: OECD Stat, no data available for Paraguay. Source: OECD Stat, no data available for Paraguay.

Indeed, EU and Mercosur countries have already developed some partnerships for the

development of joint patents that are likely to be further expanded. Table 26 shows that about

45% of Brazil’s patents (now referring to technology in general) developed through international

partnerships have been joint projects with EU countries. Similarly, in Argentina and Uruguay,

the cooperation in patents with the EU represents 34% and 38% of total international

partnerships. This suggests that the AA has the potential to further boost international

cooperation in green R&D given the existing strong links in developing joint patents.

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4.3.7. Potential impact on MEA enforcement in Mercosur countries

Table 27: Impact of the EU-Mercosur AA on MEA enforcement

Category of

MEAs

Trade-related

MEAs

Potential impacts of the AA

Recommendations to mitigate risks and

optimise benefits

Nature and

biodiversity

ITTA, IPPC, CBD

ITTA, CITES, IPPC,

CBD

ICCAT, UNFSA,

PSMA

Biodiversity and water: potential increase in fertilisers and

pesticides use in Mercosur countries could contribute to water

scarcity and water pollution affecting the aquatic ecosystems

Forestry: expansion of beef and agricult

ure production in

Mercosur could generate risks for forests and biodiversity if

countries were to loosen their environmental regulation

Increased cooperation through TSD provisions (article 8 on Trade

and Sustainable Management of Forests) could encourage

Argentina and Paraguay to ratify ITTA, and help Mercosur

countries monitor forest preservation

Fisheries: rise of aquaculture could limit over-exploitation of fish

stocks, partly offset by risks for biodiversity

Increased cooperation through TSD provisions (article 9 on Trade

and Sustainable Management of Fisheries and Aquaculture) could

improve tracking of seafood production and encourage Argentina

and Paraguay to ratify ICCAT, UNFSA, PSMA

Adopt efficient and democratic policies to

promote sustainable water use

Better implement National Diversity Strategies

and Action Plans under the CBD

Increase efficiency and productivity in

agricultural production and maintain strict

enforcement of environmental regulation

Ensure participation of civil society stakeholders

in ex-post monitoring programs with adequate

funding to maximis

e the benefits of bilateral

dialogue

Protect land rights esp. among indigenous

communities

to help preserve biodiversity and

combat deforestation

Build upon recent bilateral

cooperation to

promote responsible and sustainable fisheries

management and aquaculture development, and

improve the treatment of emerging pollutants

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Climate change

and ozone

depletion

Vienna Convention

and Montreal

Protocol, UNFCCC,

Paris Agreement

GHG: minor reduction in EU’s methane and nitrous oxide offset

by minor increase in Mercosur countries, leading to minor global

increase in both types of GHG emissions

Forestry

: expansion of beef and agricultural production in

Mercosur could generate risks of forest clearing if countries were

to loosen environmental regulation

Transport: Increase in road transportation could lead to higher

emission levels

Environmental goods and services

: complementarities in

technology are expected to boost trade in environmental goods

as well as technology transfers, building upon current R&D

partnerships. This could lead to better protection of ambient air

and climate, including in the EU.

Renewed commitment to “effectively implement” UNFCC and

Paris Agreement under the TSD chapter (art. 5), as well as the

Montreal Protocol

Maintain strict enforcement of forest

preservation in accordance with Paris

agreement’s pledges

Increase efficiency in agricultural production and

maintain strict enforcement of environmental

regulation

Build upon progress in emission standards and

continue to substitute ethanol for fuel

Ensure participation of civil society stakeholders

in ex-post monitoring programs with adequate

funding to maximis

e the benefits of bilateral

dialogue

Waste

Basel Convention

Small decline in certain manufacturing sectors (chemical, metal

products, motor vehicles) could limit industrial waste while being

slightly offset by minor gains in other industries

Increased trade in environmental goods, as well as technology

transfers,

could lead to better waste management practices

(including hazardous waste) in Mercosur

Establish a clear framework for cooperation on

“the sound management of chemicals and waste”

(art. 13k) in

collaborate with civil society and

business stakeholders

Chemicals

Rotterdam

Convention,

Stockholm

Convention,

Minamata

Anticipated increase of fertilisers and pesticides from Mercosur

could generate new risks for animal and human health

Phase-out hidden subsidies for pesticides and

fertilisers and engage in a comprehensive

reassessment of fertilisers and pesticides

Source: https://www.informea.org; WTO MEA Matrix 2017.

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This analysis builds upon the environmental analysis to assess the impact of the modernised AA

on the enforcement of MEAs, categorised in four environmental realms. Given the diffuse effects

of the AA on EU-Mercosur trade, the two trading partners’ compliance with MEAs is unlikely to

be radically disrupted by purely economic factors. Instead, Mercosur countries’ ability to meet

their obligations under MEAs, or to make commitments in new policy spheres (e.g. fisheries) will

depend first, on the commitment of individual trading partners to maintain and enforce their

regulatory framework, and second, on how the TSD chapter is interpreted and implemented.

The next section discusses its potential for strengthening environmental protection.

4.3.8. TSD approach in the EU-Mercosur AA

As mentioned above, the TSD chapter of the EU-Mercosur AA builds upon the institutional

framework established since the Korea-EU FTA and expanded in subsequent trade negotiations

(CETA, EU-Vietnam, Mexico) making the EU a driving force for institutionalizing trade-

environment linkages at the regional and global levels. These linkages cover a wide range of

environmental issues, including climate change, biodiversity, the sustainable management of

forests, fisheries and aquaculture, and supply chains, making explicit references to MEAs,

protocols and amendments.

While the literature on the links between trade and GHG emissions is well established, assessing

the impact of environmental provisions in trade agreements is a relatively more recent field

(albeit rapidly proliferating), especially for EU trade agreements, given the limited hindsight on

the EU’s TSD model.

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There is, however, a rich literature on the enforceability of labour

provisions in trade agreements, which provides crucial insights into the challenges and stakes of

the trade-environment linkage in EU trade agreements.

These questions fit more broadly into the European Commission’s efforts to effectively implement

the respective TSD chapters of its trade agreements. While they are common traits to all bilateral

trade partnerships, numerous studies have also pointed to the importance of designing

sustainable trade strategies that are tailored to the specificities of each trading partners.

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Drawing from this postulate, the rest of this section discusses the potential impact of the TSD

chapter on the environment, focusing on a question central to both policymakers and

stakeholders: enforcement.

117

A recent review of the literature conducted by the OECD (and funded by the EU) outlined four

ways in which Parties to a trade agreement can monitor progress in the implementation of a

trade agreement: dialogue, dispute settlement, public accountability mechanisms and ex-post

monitoring and review.

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The text of the EU-Mercosur’s TSD chapter and the Commission’s

previous experience in this field provide clues as to its enforceability and potential impact on

trade-environment linkages.

115

Clive George & Shunta Yamaguchi (2018), “Assessing Implementation of Environmental Provisions in Regional Trade

Agreements,” OECD Trade and Environment Working Papers 2018/01, available from:

https://doi.org/10.1787/18166881

116

European Commission (2017), “Trade and Sustainable Development (TSD) chapters in EU Free Trade Agreements

(FTAs)”, available from: https://trade.ec.europa.eu/doclib/docs/2017/july/tradoc_155686.pdf James Harrison et al.

(2019), “Governing Labour Standards through Free Trade Agreements: Limits of the European Union’s Trade and

Sustainable Development Chapters,” Journal of Common Market Studies 57. (2), pp. 260–277.

117

European Commission (2017), ibid. pp. 3-4.

118

Clive George & Shunta Yamaguchi (2018), op. cit.

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Dialogue

Dialogue and cooperation are central to the EU’s approach to trade and the environment. As in

previous trade agreements, the EU-Mercosur AA’s TSD chapter outlines specific institutional

mechanisms for bilateral cooperation, the most important of which is the Sub-committee on

Trade and Sustainable Development, composed of senior officials, or their delegates from each

Party

. The main functions of the TSD sub-committee are: 1) to facilitate and monitor the

implementation of the TSD chapter, including cooperation activities; 2) to participate in the

dispute resolution process, and 3) to help coordinate civil society mechanisms. In addition to

facilitating government-to-government dialogue, the EU cooperative approach can be expected

to provide new opportunities for information sharing and skill transfers among civil society

stakeholders as part of its Domestic Advisory Groups and Joint Forum, provided the parties can

address some of the shortcomings associated with these fora.

119

Although by no means sufficient

to enforcement, these institutional instruments are preconditions for the effective

implementation of environmental provisions. The potentialities of these different forms of

dialogue to improve cooperation in the environmental realm are difficult to quantify but must be

weighed against the absence of such mechanisms under the baseline scenario.

Dispute settlement

In its trade agreements, the EU favours a cooperative approach to dispute resolution in the

environmental realm. In case of disagreement over the implementation of the TSD chapter, a

party may request consultations with its trading partner and may seek advice from relevant

multilateral environmental organisations, domestic advisory groups under civil society

mechanisms or any expert or body it deems appropriate. If consultations fail to bring the two

parties to an agreement, one of the parties may request the establishment of a Panel of Experts

designated by the TSD subcommittee. The Panel of Experts must issue a public report laying out

the facts, the applicability of the relevant provisions and the rationale behind it, as well as

recommendations for the parties to resolve the dispute. The TSD Subcommittee is in charge of

monitoring the follow-up of the report and its recommendations.

One concern about the dispute resolution mechanism that was repeatedly raised during the

consultant’s outreach to civil society stakeholders pertains to the TSD chapter’s separate dispute

settlement mechanism from the rest of the agreement. As in previous EU trade agreements,

disputes related to environmental protection (and labour standards) cannot ultimately be subject

to temporary trade remedies as is the case for other chapters. Additionally, EU trade agreements

do not specify what might occur if one trading partner were to ignore the recommendations of

the panel of experts. While the institutional mechanisms established under the TSD chapter

ensure sustained dialogue and cooperation among parties, they also make the potential impact

of environmental provisions in the EU-Mercosur AA uncertain, insofar as they remain contingent

upon implementation in good faith of all parties. The decentralisation of environmental regulation

in countries like Brazil can increase this uncertainty.

120

119

See discussion below.

120

On this question, see Marcus Walsh-Führing (2018), “The Brazilian Federal Government's Role in the Prioritization of

EU Foreign Direct Investment and its Environmental Agenda,” Brasilian Political Science Review 12 (3), available at:

http://www.scielo.br/scielo.php?script=sci_arttext&pid=S1981-38212018000300203&lng=en&tlng=en

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Whether the EU should subject environmental and labour provisions to sanctions under a model

similar to the United States (withdrawing of trade concessions) or Canada (fines)

121

has been a

central question of the debates on enforcement among trade officials, stakeholders and

scholars.

122

The objective here is not to revisit this discussion but to examine what additional

measures could help parties maximise the impact of the TSD chapter on the enforcement of

environmental standards under the current cooperative approach, building upon the reflection

undertaken by EU institutions (i.e. the Commission, Parliament and EESC). To date, the only

precedent related to the enforcement of TSD provisions in EU trade agreements is the ongoing

dispute over the enforcement of labour provisions under the EU-Korea trade agreement. This

means that there is great scope for “assertively using”

123

the dispute settlement process to limit

negative externalities and maximise the positive externalities of the EU-Mercosur AA on the

environment. While the EU has limited hindsight over the use of its dispute settlement

mechanism regarding TSD provisions, it can already learn from other models like the US and

Canada as applied to both environmental and labour provisions. Three lessons are worth taking

into consideration with regard to dispute resolution. First, one of the main lessons from the US-

Guatemala case on the violation of labour rights is that the burden of evidence brought in a

dispute must not be confined to issues “adversely affecting trade” but rather more broadly

interpreted as trade-related. Second, bearing in mind the complexity of cases and the time they

might require to collect information, parties should aim at minimizing the length of the dispute

resolution process to maintain trust with stakeholders. Here again, the prolonged proceedings

of the Guatemala case (2010-2017) concluding with a dismissal of the case brought by labour

unions has discredited the US sanction-based model.

124

Third, the credibility and success of

dispute resolution mechanisms strongly depend on the participation of civil society

stakeholders,

125

a point to which we turn next.

Public accountability mechanisms

Over the past decade, the European Commission has developed a wide array of measures

designed to engage with civil society stakeholders on trade policy, by providing information on

negotiating rounds, conducting impact assessments (including a civil society dialogue) and

ensuring cooperation over the implementation of agreements (Domestic Advisory Groups).

Whereas the current dispute resolution mechanism allows input from trade policy stakeholders

at the consultation stage, the initiation of a dispute is restricted to governments and does not

allow for direct submissions from civil society organisations.

The EU’s experience with previous FTAs has shown that beyond their benefits for transnational

dialogue, the Domestic Advisory Groups have, in the words of the Commission, “not been able

to work to their full potential,”

126

a diagnosis confirmed by the academic literature.

127

A recent

121

This is the case with the new North American Free Trade Agreement, but was admittedly not the case with CETA,

which saw a convergence of the Canadian and European approaches. For a discussion, see Michéa, Frédérique. (2015).

“Clauses sociales : vers une convergence des modèles ? Le chapitre ‘Commerce et travail’ de l'AECG.” in Christian

Deblock, Joël Lebullenger & Stéphane Paquin, Un nouveau pont sur l’Atlantique : L’accord économique et commercial

global entre l’Union européenne et le Canada. Presses de l’Université du Québec, pp. 347-368.

122

The European Commission recently reviewed the question in its reflection paper on the TSD chapter. For a summary

of academic debates, see Harrison et al. (2019).

123

See European Commission (2017), ibid, p. 6.

124

While violations of labour rights were confirmed, they were not found to be done “in a manner affecting trade.”

125

This point is raised by the Commission as one of the options that could strengthen the current TSD approach:

“enhancing transparency of the complaints mechanism, clarifying the steps to respond better to stakeholder’s inputs.”

European Commission (2017), ibid.

126

European Commission (2017) p. 5.

127

See e.g. Harrison et al. (2019); Lotte Drieghe et al. (forthcoming), “Participation of Civil Society in EU Trade Policy

Making: How Inclusive is Inclusion?”, New Political Economy.

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comparative analysis of the implementation of the TSD chapter in three FTAs (Cariforum EPA,

EU-Korea and EU-Moldova trade agreements) pointed to the limited impact of civil society

mechanisms (including DAGs) on the implementation of the agreement, a problem due, not only

to capacity constraints but also to a lack of clarity on the relations between civil society

mechanisms and trade officials.

128

This means that despite the notable efforts undertaken by

the European Commission over the past decade to include stakeholders from all parties in the

trade policy process, there is still scope to create more meaningful engagement between civil

society actors and government actors. As noted in a recent OECD study, “public accountability

mechanisms such as submissions/complaints and access to remedies are a powerful means of

achieving effective enforcement of environmental legislation such as to protect biodiversity and

ecosystems, to sustainably manage natural resources and the environment, and to conduct

environmental assessments.”

129

One example of such mechanisms is NAFTA’s Commission on

Environmental Cooperation (CEC), which allows citizen submissions on enforcement matters

provided they satisfy a number of criteria and factors.

130

In other words, strengthening public

accountability mechanisms in the current EU-Mercosur AA could maximise its positive impact on

the enforcement of environmental regulation. Policy options include: strengthening the role of

DAGs by allowing them to bring up complaints to the TSD subcommittee; introducing formal

obligations for the Commission to respond to specific grievances raised by DAGs provided certain

conditions are met (e.g. majority vote by DAG members); and clarifying the role of the CSM

during the dispute resolution process, e.g. its relation with the panel of experts.

Ex-post monitoring and review

Last, but not least, the impact of the enforcement of TSD provisions on environmental protection

will depend on ex-post monitoring and review, a crucial question that is often overshadowed by

debates on the use of sanctions. Yet, a recent survey of practitioners and experts of the trade-

environment linkage conducted by the OECD reveals that monitoring programs undertaken with

the collaboration of civil society stakeholders and international organisations are frequently cited

as some of the most effective ways to ensure enforcement of environmental provisions in trade

agreements. The report concludes that “follow-up action between the Parties and public

participation to enhance environmental governance were identified as common elements for

successful enforcement of environmental legislation such as to protect biodiversity and

ecosystems, to sustainably manage natural resources and the environment, and to conduct

environmental assessments. Moreover, clearly specified institutional mechanisms were indicated

as a major factor in ensuring successful implementation of environmental provisions in RTAs.”

131

A 2017 ILO report of the effective impact of labour provisions in trade agreements reached

similar conclusions, underlining the importance of stakeholder involvement.

132

Effective

monitoring processes cannot only build trust in institutional mechanisms but also generate long-

128

Ibid.

129

George & Yamaguchi (2018) p. 23.

130

NAFTA’s Commission for Environmental Cooperation: http://www.cec.org/about-us/public-engagement-and-

transparency/about-submissions-enforcement-matters

131

Clive George & Shunta Yamaguchi (2018), “Assessing Implementation of Environmental Provisions in Regional Trade

Agreements,” OECD Trade and Environment Working Papers 2018/01, available from:

https://doi.org/10.1787/18166881

132

Based on case study analysis, the assessment report finds that there are common factors related to positive outcomes.

These factors include legal reforms, monitoring and capacity-building – all supported by stakeholder involvement, in

such modalities as consultative forums and dialogue. Where stakeholder involvement is concerned, there have been

effective synergies between different approaches. In particular, labour advocates have combined legal, political,

economic, dialogue and monitoring mechanisms in an endeavour to tackle various issues. Additional cross-border

coalitions of stakeholders have been effective in facilitating implementation efforts, and also in enhancing the overall

credibility of dialogue forums.

ILO, 2017 : https://www.ilo.org/wcmsp5/groups/public/---dgreports/---inst/documents/publication/wcms_564702.pdf

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term “network effects” that are central to the EU’s cooperative approach to TSD issues and that

have also proved effective in other contexts.

The main challenge lies in identifying environmental risks that require the greatest attention and

funding action programs tailored to the most urgent needs of the parties. This increased focus

in the enforcement of TSD provisions is not intended to marginalise less visible issues but to

address urgent issues related to the trade-environment nexus and rebuild trust in civil society

mechanisms, thereby encouraging sustained engagement with trade policy stakeholders. The

TSD subcommittee, with the assistance of DAGs, would be a logical venue to identify and monitor

key programs, possibly deployed over a two- or three-year period, whereas its annual or bi-

annual reports could offer interim or final assessments of targeted programs.

Adequate funding is a logical prerequisite for effective monitoring programs. However, the

collaborative approach favoured by the EU to TSD provisions can be conducive to synergies with

civil society, state actors and multilateral institutions. First, insofar as strengthening multilateral

institutions is often presented as a key objective of the EU’s approach to trade and environmental

(and labour) governance, joint programs with international bodies like UNEP or FAO can

capitalise on their experience with local governments and stakeholders on specific environmental

issues.

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Second, given their experience with stakeholder engagement, EU delegations in

Mercosur countries could provide both financial and logistical support in deploying monitoring

programs. The official support of multilateral bodies and the EU delegation could help address

the operational challenges faced both by environmental agencies and NGOs in enforcing

environmental laws (e.g. forest conservation). Finally, research institutions like universities

could also assist in monitoring programs. One of the most important prerequisites to maximise

the impact of the EU-Mercosur TSD chapter is to shift the current TSD approach to a multi-

faceted model of enforcement that complements the benefits of dialogue with a more assertive

use of dispute settlement, more open public accountability mechanisms, as well as targeted and

effective ex-post monitoring processes.

4.4. Conclusion

Overall, the baseline analysis reveals that environmental policies in Mercosur countries are less

stringent than in the EU, yet they are well in line with other countries of similar income levels.

Brazil, in particular, outperforms other Mercosur and upper-middle-income countries in terms of

adoption of climate change policies. Mercosur countries contribute to about 3.5% of global GHG

emissions, compared to 9.5% of the EU, and adopt, on average, a cleaner energy mix than EU

countries, with the sole exception of Argentina. Regarding air pollution, Mercosur countries show

lower levels of pollutants than the EU and countries of similar income levels. Deforestation

remains a concern in Mercosur countries, with the exception of Uruguay. While the situation

improved during the first part of the twenty-first century, recent trends suggest a resurgence of

deforestation. From 2004 in Brazil, the introduction of a series of policies to reduce and monitor

deforestation led to a decrease in deforestation rates. However, from 2014, Brazilian

deforestation rates began to rise due to a combination of worse economic conditions and

deteriorating commitments to environmental regulation and enforcement.

The analysis of the environmental impacts of the AA agreement shows a negligible impact on

global GHG emissions. It also highlights two areas of moderate concern. First, the expected

expansion of the agricultural and animal sectors poses some moderate concerns regarding the

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EU, 2017, ibid.

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increased use and contamination of water resources, if appropriate management practices are

not in place, given the observed rise in the use of pesticides and the absence of adequate price

incentives to encourage efficient use of pesticides, fertilisers and water in agriculture. Second,

we also envisage some moderate concerns in terms of the impact of the AA on deforestation, in

particular in Brazil, if the policy environment that allowed past reductions in deforestation is not

maintained and any expansion of the agriculture and animal sectors are met by an increase in

forest clearing instead of by increases in productivity and the conversion of existing low-

efficiency meadows and pasturelands. On the other hand, we expect some positive effects since

the AA is likely to strengthen the parties’ commitments in the Paris Agreement, to contribute to

increasing trade in environmental goods and services and stimulate international cooperation for

the development of green technology and the protection of natural resources, e.g. fisheries. The

effects of the agreement on MEA compliance depend on the sector and the issue under

consideration, but overall, the AA is expected to have limited direct effects on countries’ abilities

to meet their environmental obligations. Thus, MEA compliance will be contingent upon countries’

commitment to environmental regulation as well as the impact of TSD provisions and the efforts

undertaken by the parties to enforce them.

4.5. Policy recommendations

 Mercosur countries should convert existing degraded pasturelands into land

destined to sustainable agriculture to prevent the clearing and degradation of forest

land to achieve the expected expansion of agricultural production.

 Mercosur countries should aim at closing the gaps in agricultural productivity

that are observed across regions. This can be achieved by increasing efficiency in

sustainable agricultural production, partly by following the successful examples of land

transformation achieved in certain regions, e.g. the Cerrado, while ensuring the

enforcement of environmental and animal welfare regulation.

 Brazil should improve anti-deforestation policies and law enforcement activities

to detect illegal logging and expand monitoring along the supply chain. Brazil should

renew the policy environment that allowed the decrease in deforestation observed up to

2012. Successful measures that have worked in the past include the “Soy Moratorium”

as well as the broader anti-deforestation policies undertaken by the Ministry of the

Environment in the first decade of the twenty-first century. Brazil should encourage

private sector operators to extend the Soy Moratorium to the Cerrado and to improve the

effectiveness of the Beef Moratorium by, for example, expanding monitoring to all

properties in the supply chain. The government should reinvest in Ibama to replenish its

workforce and reassert its authority over inspections. The government should also make

use of the available information on illegal logging, regularly collected using satellite

imagery, to target law enforcement activities.

 Argentina should aim at effective implementation of the proposed National Action Plan on

Forests and Climate Change (PANByCC) objectives to decrease deforestation and prevent

agriculture-related forest degradation.

 Paraguay should maintain the commitment to sustainable forest management,

for example, by increasing the enforcement of the Zero Deforestation Law across all

regions.

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 Mercosur countries should aim at achieving greater harmonisation of deforestation

regulations and monitoring across regions to prevent shifting deforestation towards

weaker regulated and monitored areas.

 Mercosur and the EU should fulfil their Paris Agreement commitments and

achieve their GHG emissions targets as detailed by their Nationally Determined

Contributions.

 Mercosur countries should implement National Diversity Strategies and Action

Plans under the Convention of Biological Diversity and protect land rights especially

among indigenous communities to make local stakeholders an integral part of biodiversity

protection.

 Mercosur countries should engage in a comprehensive reassessment of

fertilisers and pesticides (as well as related subsidies and tax exemptions) to limit

possible harmful effects on human and animal health and the local ecosystem from

agriculture, and establish a monitoring programme for pesticide residues in waterways

and air.

 Mercosur countries should design smart and democratic pricing systems to

encourage more efficient use of water in agriculture and preserve natural resources and

biodiversity.

 Mercosur and the EU should promote cooperation in the development and

transfer of green technology. Some local content requirements for green technology

are adopted in Mercosur countries. In the wind sector in Brazil, for example, local content

requirements are imposed to access subsidised loans from Brazil’s National Development

Bank. Local content requirements in the wind industry are also used in Argentina and

Uruguay (Kuntze and Moerenhout, 2013).

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While these measures can promote green

growth, they can also limit competition and raises costs in the sector. Hence, their

removal is likely to favour the greater transfer of green technology.

 The EU, Brazil and Argentina should continue engaging in the All-Atlantic Ocean

Research Community to promote the sustainable management of the Atlantic Ocean.

Uruguay should also join this international research community.

 Mercosur countries should consider giving the right priority to the circular

economy and waste management and disposal in a way that is safe for human

health and the environment. They should also continue on the path of solid waste

management optimisation.

 Mercosur and the EU should adopt a multi-faceted approach to the enforcement

of TSD provisions by complementing the benefits of dialogue with an assertive use of

dispute settlement, more open public accountability mechanisms, as well as targeted and

effective ex-post monitoring processes that capitalise on the expertise and experience of

local stakeholders, governments and multilateral bodies. Civil society mechanisms should

be reinforced to build trust in TSD enforcement and facilitate each party’s compliance

with MEAs.

134

Kuntze, Jan-Christoph, and Tom Moerenhout. "Local Content Requirements and the Renewable Energy Industry-A

Good Match?." (2013).

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5. Human Rights Analysis

Trade agreements can have positive and negative, prospective and actual, impacts on the

enjoyment of human rights. These are increasingly discussed in literature, as are the nature and

effects of human rights provisions in international cooperation and trade agreements,

particularly those negotiated by the EU, the United States, and Canada. This chapter explores

the human rights impact of the trade part of the EU-Mercosur AA, both in the EU Member States

and Mercosur countries. It does so against the background of the general principle that “the

conclusion of any trade agreement does not impose obligations inconsistent with their pre-

existing international treaty obligations, including those to respect, protect and fulfil human

rights”.

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The chapter is structured as follows:

5.1 Methodology (para 1.1): The assessment has been carried based on the European

Commission’s Guidelines on the analysis human rights impact in impact assessments

for trade-related policy initiatives as well as the Better Regulation Guidelines and

accompanying Toolbox;

5.2 Baseline (para 1.2): For the EU, Argentina, Brazil, Paraguay, and Uruguay

respectively, we first provide a summary of the legislative and institutional framework

regarding existing human rights’ commitments. The framework is then followed by a

concise literature review of current human rights records of each Mercosur partner

country to establish a background and identify any country-specific issues. We identify

relevant indicators and provide a baseline scenario in preparation for the analysis.

5.3 Analysis (para 1.3): Drawing on previous studies on the impact of FTAs on the

selected human rights, we consider the specific context in the Mercosur partner

countries and the EU to identify possible impacts of the trade part of the AA.

5.4 The chapter concludes with a summary (para 1.4) outlining possible positive and

negative impacts on human rights as well as possible risks for those rights that might

be most affected. Para 1.4 also describes which mechanisms impacts may take place

through and para 1.5 contains policy recommendations for measures to amplify

benefits or flanking measures to mitigate risks.

5.1. Methodology

This chapter’s analysis of impacts on human rights builds and expands on the quantitative and

qualitative analysis conducted for the rest of the tasks in the study to identify the possible

impacts on the EU and Mercosur partner countries. Since the commencement of the project, the

task was divided into three phases: 1) Screening 2) Scoping and 3) Analysis. The screening

phase consisted of an extensive literature review and a wide-reaching stakeholder consultation

strategy. Both tasks were implemented to identify which sectors might be most affected and

which populations are most vulnerable to such impacts. As a result of the literature review, and

with preliminary contributions from the consultation activities, the team identified the possible

impacts of the potential trade measures which form part of the agreement. Stakeholders

expressed widespread concern relating to impacts of impoverishment in Mercosur, effects on

health through increasing costs of medicine and trade of unhealthy foods. They also underlined

the importance of highlighting how the Association Agreement might lead to adverse impacts on

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De Schutter, 2011. Guiding Principles on HRIA 2011. At II.2; p.6.

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Indigenous peoples and women in the region. These results, along with the initial screening,

based on human rights commitments, stakeholder consultation results, and recent developments

in the EU and Mercosur countries—as per Universal Periodic Reviews (UN UPRs) and other official

records—resulted in a selection of four human rights to be assessed in detail for potential

impacts.

Table 28: Selected Human Rights

Selected Human Right of Concern

Right to an Adequate Standard of Living

Right to the Enjoyment of the Highest Attainable Standard of Physical and Mental Health

Rights of Indigenous Peoples

Gender Equality

Source: Author’s elaboration.

While human rights issues vary throughout the EU members and Mercosur partner countries,

the identified trends in Table 29 demonstrate that certain human rights issues stand out across

the four Mercosur partner countries.

Table 29: Identification of sectoral effects and possible human rights linkages

Trade Measure Possible Sectoral Effects

Possible Impacts

affecting HRs

Implicated HR

Instruments

National

Treatment;

Market Access;

Trade in Goods

Increased Agricultural

Exports from Mercosur

Increased Natural Resource

Exports from Mercosur

Increased Land

Conflicts; increase

in the cost of

medicines;

Increase in NCDs

International Convention on

the Elimination of all Forms of

Racial Discrimination;

International Covenant on

Economic, Social, and

Cultural Rights; Declaration

on the Rights of Indigenous

Peoples

Establishment

Increased Natural Resource

Extraction

Formalisation of Work

Environments

Water Use Conflicts

Improved work

conditions

Infrastructure

Development

International Covenant on

Economic, Social, and

Cultural Rights; Declaration

on the Rights of Indigenous

Peoples

Trade in Services

Formalisation of Work

Environments

Improved work

conditions;

Increase in scope

and quality of

healthcare

International Covenant on

Economic, Social, and

Cultural Rights; Convention

on the Elimination of all

Forms of Discrimination

Against Women

Source: Author’s elaboration.

While it is important to recognise the significance of all human rights, the focus of the analysis

has been on the four human rights seen as those with most relevance in a trade context.

The screening process identified the measures to be assessed concerning possible human rights

issues in line with Question 4 of the Better Regulation Guidelines. Specifically, the selection of

the four rights was guided by the following criteria:

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1. Linkages with identified trade measures of potential impact

2. Clear impact pathway: direct vs indirect impacts.

3. Context: relevant crosscutting or general human rights issues that may cause concern or

benefits in relation to an FTA.

The findings, and subsequent selection of the four rights above, derive from the extensive

literature review of past FTA effects and current concerns in partner countries—confirmed by

both existing records as well as stakeholder contributions. While a trade agreement may have

the capacity to influence the achievement of some human rights, it is rather limited in its

contribution to the achievement of others. In this light, this study assessed four human rights

that trade agreements may have the ability to, directly and indirectly, impact through trade

measures. The Right to an Adequate Standard of Living, Right to Health, Gender Equality, and

Rights of Indigenous Peoples all have the potential to be impacted by changes in incentive

structures that derive from tariff reductions, market access, and establishment. Furthermore,

the need to narrow the areas of focus follows rigorous methodology set out by past HRIA’s

(Walker, 2018; Dommen, 2020). By narrowing in on selected issues for detailed analyses, impact

assessments can provide policy makers with clear evidence-based recommendations in the face

of complex issues and data limitations (Dommen, 2020).

The chapter follows a common approach in both establishing the initial baseline of the four rights

across all partner Mercosur and EU countries, as well as undertaking the analysis. Human rights

indicators are commonly divided into three categories: 1) Structural Indicators; 2) Process

Indicators; and 3) Outcome indicators (OHCHR, n.d.)

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. Structural indicators refer to the legal

commitments in each of the regions of analysis while process indicators measure the various

efforts implemented by the regional and national governing bodies to meet such commitments.

Outcome indicators then measure the actual enjoyment of the particular rights in question. In

other words, outcome indicators measure the results of the legal commitments given, and

implementation actions undertaken. The three indicator categories are introduced to establish

the status quo and provide the baseline. Thereafter, the analysis assesses outcome indicators

responses to past policies to interpret the possible implications of the EU-Mercosur AA.

Table 30: Human Rights Indicators

Indicator Type Indicator

Right to an Adequate Standard of Living

Structural Indicators

Status on international commitments including CESCR; Regional

commitments; Constitutional declarations

Process Indicators National programmes and policies

Outcome Indicators

Financial resources; Hunger; Access to food; Access to water Shelter; Living

conditions; Basic amenities; Clothing; Clean air; Roads; Utilities networks;

Public space; Access to internet/phone; Access to transport; Schooling

resources; Education expenditure

Right to Enjoyment of the Highest Attainable Standard of Mental & Physical Health

Structural Indicators

Status on

international commitments including CESCR; Regional

commitments; Constitutional declarations

136

https://www.ohchr.org/Documents/Publications/Human_rights_indicators_en.pdf

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Process Indicators National programmes and policies

Outcome Indicators

Prevalence of disease; Risk of impoverishing expenditure; Healthcare

workforce; Hospital resources; Prevalence of mental health disorders;

Rights of Indigenous Peoples

Structural Indicators

Status on international commitments including UNDRIP; Regional

commitments; Constitutional declarations

Process Indicators National programmes and policies

Outcome Indicators

Property/Land Rights; Employment; Infant mortality rate; Adequate housing;

Access to water; Access to sanitation; literacy rates; average years of study;

school attendance; Language/Culture;

Gender Equality

Structural Indicators

Status on international commitments including CEDAW; Regional

commitments; Constitutional declarations

Process Indicators National programmes and policies

Outcome Indicators

Unemployment; wage employment; vulnerable employment; unpaid domestic

work

Source: Author’s elaboration.

5.2. Baseline

5.2.1. Right to an Adequate Standard of Living

The Right to an Adequate Standard of Living is enshrined by the International Covenant on

Economic, Social and Cultural Rights (ICESCR) – to which all EU member states, and all four

Mercosur partner states are party to. The Committee on Economic, Social and Cultural Rights

has issued several General Comments explaining the components of the Right to an Adequate

Standard of Living, which includes the right to adequate housing (General Comments 4 and 7),

the right to food (General Comment 12), the right to water (General Comment 15), the right to

social security (General Comment 19), as well as the right to hospitals and mental health

services. The General Comments elaborate on the criteria, which need to be taken into

consideration for this right to be fulfilled.

In an attempt to measure progress towards achieving the right to an adequate standard of living,

numerous indicators have been developed in the existing literature. The Multidimensional

poverty index (MPI) focuses on households and includes education, health and six living

conditions, the Social Progress Index (SPI) is a collective, national metric broad in scope, and

the Individual Deprivation Measure (IDM) places a greater focus on gender disparities covering

a broad range of social and economic disparities (see section 1.2.4). More recently, Dr Narasimha

Rao and Jihoon Min (2017) developed the Decent Living Standard (DLS), which measures the

necessary elements of both physical and social well-being. While the DLS is not as

comprehensive as the IDM or the SPI in developing non-material dimensions, it goes beyond

poverty indicators included by most indices by focusing on means. As such, indicators defined

by the DLS are of particular relevance in a trade context for their emphasis on material living

conditions.

The Right to an Adequate Standard of Living is quite broad in scope, and thus inherently includes

the right to live a healthy life, and the right to food. However, as this study finds it important to

cover the Right to Health on its own, indicators regarding access to health clinics, physicians,

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and healthcare expenditure, will be discussed in section 1.2.2. on the Right to Health. Further,

this section will discuss hunger and access to food as an element of decent living standards, but

a more detailed discussion on nutrition, health, and food safety will also be developed under

section 1.2.2.

Structural Indicators

The Right to an Adequate Standard of Living is enshrined by several international, regional, and

national instruments that EU member states and Mercosur partner states are party to.

Table 31: Commitments to the Right to an Adequate Standard of Living

International Commitments EU AR BR PY UY

International Covenant on Economic Social and Cultural Rights

(ICESCR)

X x x x x

Declaration on the Right to Development (Article 8)

X x x x x

Universal Declaration on the Eradication of Hunger and Malnutrition

X x x x x

Rome Declaration of the World Food Summit

X x x x x

Agenda 2030

X x x x x

Habitat Agenda

X x x x x

EU Regional Commitments

EU Charter of Fundamental Rights

Mercosur Regional Commitments

Inter-American Court of Human Rights

x x x x

Protocol of San Salvador

x x x x

Source: Author’s elaboration.

Process & Outcome Indicators

In order to establish a baseline regarding the Right to an Adequate Standard of Living, we draw

from existing literature and follow the OHCHR toolkits on key aspects of the Right to Adequate

Housing,

137

the Right to Water and Sanitation,

138

and the Right to Food

139

to provide a brief

overview of baseline conditions across EU member states and the four partner Mercosur

countries. We follow the decent living standards model to provide a brief overview of physical

and social wellbeing conditions in the negotiating parties (Table 32).

Table 32: Right to an Adequate Standard of Living indicators

Physical wellbeing Indicators Social wellbeing Indicators

Financial resources; shelter; living conditions;

basic amenities; hunger; access to food;

Phone; access to internet; Education expenditure

Source: Author’s elaboration.

137

https://www.ohchr.org/EN/Issues/Housing/toolkit/Pages/RighttoAdequateHousingToolkitIssues.aspx

138

https://www.ohchr.org/en/issues/escr/pages/water.aspx

139

https://www.ohchr.org/EN/Issues/ESCR/Pages/Food.aspx

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The EU has a long history of prioritizing social policies at the centre of its activities. The European

Pillar of Social Rights covers 20 principles across 3 areas: 1) equal opportunities and access to

the labour market; 2) fair working conditions; and 3) social protection and inclusion. National

governments, key stakeholders, and the EU institutions jointly commit to uphold the right to an

adequate standard of living by working to implement the Active Inclusion Strategy through the

Social Investment Package. The programmes aim to provide EU citizens with adequate income

support, skill development for employment, and affordable housing.

140

The past decade has

witnessed somewhat stable trends in the poverty headcount ratio. While country specific ratios

may have jumped a percentage point or so in specific years, all member states, with the

exception of Romania, have sustained the population of those in poverty to less than 3%.

Figure 31: Poverty Headcount Ratio at $1.90 a day in Northern EU MS (top left);

Eastern EU MS (top right); Western EU MS (bottom left); and Southern EU MS (bottom

right)

Source: World Bank Data

While most of the trends continue in a downward path, a few EU member states, including Latvia,

Slovakia, Lithuania, and Malta risk increasing rates of poverty post-2016. However, fluctuations

are minimal and not representative of the larger trend which confirms a decrease in the past

decade. The Right to an Adequate Standard of Living guarantees rights holders with durable

homes resilient to climate and infectious disease risks. As an element of SDG 11.1, safe shelter

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https://ec.europa.eu/social/main.jsp?catId=751&langId=en

0.5

1.5

2.5

2007 2009 2011 2013 2015 2017

DK EE FI

LV LT SE

2007 2009 2011 2013 2015 2017

BG CZ HU

RO SK SI

0.2

0.4

0.6

0.8

2007 2009 2011 2013 2015 2017

AT BE FR DE

IE LU NL PT

0.5

1.5

2007 2009 2011 2013 2015 2017

HR CY EL

IT MT ES

European Union

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is a universally accepted standard of decent living conditions, however, the specific definition of

safe shelter remains ambiguous across duty bearers. UN Habitat defines access to sufficiently

spacious and durable housing as a top priority in reducing slums in urban areas. For shelter to

be considered adequate, a basic level of living conditions must be met which include minimum

floor space; electrical lighting; accessible water supply; safe waste disposal; and safe

heating/cooling equipment in necessary conditions.

Article 34 and 31 of the EU Charter of Fundamental Rights and Article 16 and 19 of the European

Social Charter enshrine the right to an adequate standard of living and the right to housing. The

charter provides a reporting mechanism for collective complaints. Furthermore, various

components of the right to an adequate standard of living, are protected through litigation via

the European Court of Human Rights (ECHR) which has ruled on the right to housing in more

than 100 cases.

Figure 32: Percentage of population with access to basic sanitation facilities (left)

electricity (middle) and information/communication technologies (right) in the EU

Source: World Bank Data

Access to basic amenities in EU member states does not seem to be of concern as 96-100% of

the population has access to adequate sanitation facilities, 100% of the population has access

to electricity, and about 80% of the population has access to the internet and personal

telecommunication services. However, the most common barrier in the enjoyment of an

adequate standard of living in the EU regards overcrowding. According to Eurostat, 15.7% of the

EU-28 population lived in an overcrowded household in 2017. The prevalence of overcrowding

ranged from less than 5% to more than 40% in Eastern European countries. In addition, in the

same year, about 13.3 % of Europeans reported their homes to have a leaking roof, damp or

rotting walls, floors, and frames.

141

Amenities for cold storage and adequate cooking technologies are essential for decent living

conditions for their critical role in access to food. Cold storage and clean cooking facilities are

imperative in avoiding risks of spoiled food and discomfort related to the time spent preparing

and purchasing food items.

141

https://ec.europa.eu/eurostat/statistics-explained/index.php/Living_conditions_in_Europe_-

_housing_quality#Housing_conditions

100

European

Union

World

Average

100

European

Union

World

Average

100

120

European

Union

World

Average

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Figure 33: Percentage of population undernourished (left) lacking access to basic

drinking water services (middle) and lacking access to clean cooking technologies

(right) in the EU

Source: World Bank Data

On the surface, food poverty in EU member states does not seem to be of great concern as only

2.5% of the population is undernourished, less than 1% lacks access to basic drinking water,

and less than 2% lack access to adequate cooking technologies. However, the percentage of

undernourished means 12.8 million people do not have access to sufficient food resources in the

European Union. Between 2010 and 2015, the number of people turning to food banks and soup

kitchens has doubled and reached one and a half million in Germany alone (Paritätischen

Gesamtverbandes). The situation is similar in France, where, according to the Institut National

de la Recherche Agronomique (INRA), 6 million people are in a situation of food poverty. Support

systems in the EU are challenged by stigmatisation. A percentage of those suffering from food

poverty are only recently facing financial constraints and live slightly above the poverty line. As

such, they are usually less comfortable with requesting assistance.

Mercosur

The National Social Security Administration of Argentina implements numerous public social

programs aimed at providing constituents with an adequate standard of living. Those who earn

less than 4,800 pesos (US$1,230) monthly receive financial support when starting a family.

Those searching for work are also eligible for unemployment insurance for up to 6 months. In

order to motivate school attendance, the administration implemented a poverty relief program

called the Universal Childhood Entitlement, which provides 180 pesos (US$46) a month per child

in exchange of proof that they are enrolled in school.

In 2002, a Program for Unemployed Heads

of Households was implemented were about 2 million beneficiaries received 150 pesos (US$50)

for part-time work.

2012 2014 2016

European

Union

World

Average

European

Union

World

Average

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While the past decade has witnessed dramatic decreases in Argentina’s poverty rate, trends

have changed course since 2016. Figure 34 below demonstrates the percentage of those living

with $1.90 a day rose by half a percentage point from 2017 to 2018 in all four Mercosur partner

states.

Figure 34: Poverty Headcount Ratio at $1.90 a day (% of population)

Source: World Bank Data.

However, if we consider the poverty line to be at $5.50 per day, the percentage of those living

in poverty grew from 7.7% to 9.6% between 2017 and 2018. Finally, when considering the

national poverty line, the situation worsens. The percentage of those in poverty grew from 25.7%

in 2017 to 32% in 2018 and 35.4% in 2019 – resting at the highest officially recorded level since

2001 and defining 15.8 million Argentinians as among the poor (INDEC, 2019). Some of the

country’s most vulnerable populations, namely children and the elderly, suffer disproportionately

as levels of poverty among those aged under 15 reached 52.6% and among retired seniors -

10.4% (INDEC, 2019).

Since the late 1990s, different Brazilian administrations have increasingly addressed the issue

of poverty. The government implemented three ambitious programs, the Fome Zero (Zero

Hunger) Program, Brasil Sem Miséria (Brazil without Poverty) Program, and the Bolsa Familia

Program, which consisted of multiple conditional cash transfer programs and had tremendous

poverty reduction impacts and allowed Brazil to achieve the MDGs of reducing extreme poverty

between 2003 and 2014 (Figure 34). During this period, more than 29 million people were lifted

out of poverty as the income level of the poorest 40% of the increased by an average of 7.1%

(World Bank, 2019)

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However, suffering from an economic crisis, poverty rate trends in Brazil changed course after

2014, and continue to increase. The economic crisis was a result of falling commodity prices and

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Argentina Brazil Paraguay Uruguay

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the country's limited ability to carry out necessary fiscal reforms at all levels of government,

thus undermining consumer and investor confidence. In the face of depressed economic activity,

extreme poverty rates reached 4.8% in 2017 (Figure 34). However, if we consider Brazil’s official

definition of the poverty line at $5.50 per day, those living in poverty reached almost 55 million

Brazilians in 2017—or 26.5% of the population (World Bank, 2019).

Since the early 2000’s, Paraguay has experienced a substantial poverty reduction. Although

Paraguay does not have a strong standardised welfare system, the country has promoted

poverty reduction programmes in rural areas including the national cash transfer

programme, Tekopora and Tenondera, a second which allows poor families to engage in

productive and economic interventions. The last decade demonstrates that poverty rates in

Paraguay have dramatically fallen.

While Figure 34 confirms that only 1.2% of the population lives under the $1.90 poverty line,

17% of Paraguayans live in poverty under the $5.5 a day line. While Paraguay is the least

urbanised country in South America—with 40% of the population living in rural areas—neither is

markedly defined by higher rates of poverty. Rates are evenly split between rural and urban

areas, and since 2003, improvements have taken place in both. However, while rates of poverty

have decreased, they remain high at 17%, and the country’s weak tax system leads to a

substantial lack of social safety nets (World Bank, 2019).

Uruguay is highlighted in Latin America for its high income per capita, and low levels of poverty.

Uruguay is classified as having “very high human development” by the UNDP Human

Development Index and is ranked 44

on the Social Progress Index. Inclusive social policies

have focused on expanding program coverage. According to the World Bank (2019), almost 90%

of the Uruguayan population aged 65 or more is covered by the pension system.

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Alongside

Argentina and Brazil, this is one of the highest percentages in the region. According to the World

Bank, moderate poverty fell from 32.5% in 2006 to 8.1% in 2018, while extreme poverty

practically disappeared in the same period (Figure 34).

While income levels among the poorest 40% of the Uruguayan population increased faster than

the average income levels, significant disparities remain. Children (17.2%) and those of afro-

descendant backgrounds (17.4) based in the North of the country suffer disproportionally.

However, according to the Human Opportunity Index, Uruguay has managed to provide a high

level of access to basic services such as education, running water, electricity and sanitation. In

fact, Uruguay’s highest scores on the Social Progress Index were linked to essential amenities

for adequate living conditions including water and sanitation, shelter, electricity, and access to

information/communication.

144

143

https://www.worldbank.org/en/country/uruguay/overview

144

https://www.socialprogress.org/?code=URY

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Figure 35: Population living in slums (% of urban) (top left); Access to basic sanitation

facilities (top right) % of the population with access to electricity (bottom left); and

information/communication technologies (bottom right)

Source: World Bank Data

Different Uruguayan governments throughout the last decade have worked to implement

programmes in areas such as infrastructure and sanitation which has translated into 12,300 new

water connections in 12 cities and three water treatment plants in Minas, Treinta y Tres and

Durazno, supplying 60,000 people with clean water.

While poverty in Argentina can be found in both urban and rural areas of the country, the

majority of those living in poverty are concentrated in urban populations outside of the capital.

Among the urban, Figure 35 demonstrates that about 17% of Argentina’s population lives in

slums, despite the efforts of Argentina’s Provincial Housing Institutes in facilitating access

to affordable housing. Such living conditions, often characterised by overcrowding, can lead to

a number of health risks, as well as less visible emotional stresses from lack of privacy and

personal freedom. According to World Bank data, access to adequate sanitation facilities ranges

from 96.2% to 98.3% in Argentina and does not seem to be of concern. In fact, the figures are

particularly interesting as disparities in access to such facilities are often defined by lack of

infrastructure in rural areas. However, Figure 35 demonstrates that Argentina’s rural areas enjoy

greater access and that as such, the barrier may be more so defined by poverty and urban

slums.

In Brazil, over 50 million Brazilians live in inadequate housing (BorgenProject, 2018). The public

Minha Casa, Minha Vida, (My House, My Life) Program provides subsidised housing for families

that earn up to the equivalent of 10 minimum wage salaries. However, almost a quarter of

Brazil’s urban population continues to live in slums (Figure 35). According to Habitat for

AR BR PY

Slums

100

AR BR PY UY

Sanitation

Urban Rural

100

AR BR PY UY

Electricity

Urban Rural

100

150

200

AR BR PY UY

Communication Tech

Internet Mobile phone

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Humanity, slums are often defined by limited or no access to basic resources including sanitation

and electricity (Habitat for Humanity, 2019).

Beyond Brazil’s well-known favelas, the country’s rural areas are also subject to poverty and a

lack of quality housing. While 88% of Brazil’s urban population has access to adequate sanitation

facilities, there are serious concerns regarding Brazil’s rural population as only about half has

access. Ensuring access to adequate sanitation is not only fundamental for human dignity and

privacy but is one of the principal mechanisms for protecting the quality of drinking water

supplies and resources (General Comment 15, para. 29). However, the provision of adequate

housing and basic amenities may require the presence of backbone infrastructure. Existence of

such infrastructure in Brazil’s rural areas depends on location, sector, and prevailing norms.

Brazil’s centralised grid provides electricity access at a national scale, but water and sanitation

are under the jurisdiction of the municipalities. It cannot be confirmed whether the differences

in provision explain the disparities in access, but Figure 35 demonstrates that while access to

sanitation facilities in rural areas is a challenge, access to electricity is not. However, access to

information and communication tools is lower than the country’s regional counterparts.

Brazil’s centralised grid provides electricity access at a national scale, but water and sanitation

are under the jurisdiction of the municipalities. It cannot be confirmed whether the differences

in provision explain the disparities in access, but Figure 35 demonstrates that while access to

sanitation facilities in rural areas is a challenge, access to electricity is not. However, access to

information and communication tools is lower than the country’s regional counterparts.

In Paraguay, lack of such safety nets accompanied by lack of access to soft credit and migration

from rural to urban areas lead to unsafe and overcrowded housing situations in the country.

States must monitor levels of homelessness and invest in programmes to increase access to

adequate housing under their commitments to the ICESCR. Cooperation in achieving the 2030

Sustainable Development Goals also calls on states to prioritise delivering access to housing,

basic services, and upgrading slums.

World Bank Data demonstrates that almost 18% of urban Paraguayans live in slums, and about

22% of those in rural areas lack adequate access to sanitation facilities. However, according to

an Inter-American Development Bank report, these figures underestimate the reality as numbers

of those living in inadequate housing are in fact thought to be closer to 39% in urban areas and

50% in rural areas (ADB, 2019). Difficulties in measurement are exacerbated by the volatility of

adequate housing. While Paraguay’s yearly floods keep thousands seasonally homeless on the

outskirts of Asuncion, the country does not currently implement affordable housing programs.

While the Argentinian constitution does not explicitly guarantee the right to adequate food, the

country is committed to this right via its commitment to the Protocol of San Salvador. Argentina’s

food security strategy since 2006 has focused on limiting the exportation of raw materials

(grains, beef, milk, etc.) to reduce their costs for locals. However, thus far, such strategies have

not proven effective, and in fact, have caused the production of certain raw materials to decrease

and final food product prices to increase as a consequence. After a 10-day fact-finding mission

in 2018, the UN special rapporteur on the Right to Food asserted that Argentina’s economic crisis

has greatly impacted the access to food for millions of people who continue to live in food poverty

(OHCHR, 2018).

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Figure 36: Percentage of population undernourished (left) lacking access to basic

drinking water services (middle) and lacking access to clean cooking technologies

(right) in Argentina

Source: World Bank Data; To be noted that Brazil and Paraguay reflect identical values.

The rapporteur found increasing numbers of Argentinian children being forced to rely entirely

on school feeding programs to relieve hunger and increasing attendance at soup kitchens. A

study by Pontificia Universidad Catolica Argentina found that 12.3% of households had to reduce

their share of food involuntarily in 2015, while the National Statistics Institute highlighted that

the last two years saw a 27% increase in food prices in Buenos Aires.

The Brazilian constitutions explicitly guarantees the right to adequate food, work, housing, and

security, which have benefited from significant achievements in hunger and poverty reduction—

widely considered to be the results of pro-poor policies introduced during the presidency of Luiz

Inácio Lula da Silva. Recognizing that hunger is a multi-sectoral challenge, Fome Zero initiatives

increase access to food for the poorest people while simultaneously supporting small family

farmers. Fome Zero has three main programmes: 1) Bolsa Familia, which is the world’s largest

conditional cash transfer programme; 2) The Alimentação Escolar programme which provides

47 million free school meals every day, and 3) The Fortalecimento da Agricultura Familiar pillar

which is intended to strengthen and stimulate small-scale and family-based agriculture.

As regards the right to water, Figure 36 demonstrates that the situation is concerning for Brazil’s

rural population. While Brazil possesses 12% of the world’s reserve of available freshwater,

access to basic drinking services has yet to peak over 90% accessibility for its rural populations.

According to the US Agency of International Development (USAID), expansion of large soy and

sugar cane plantations has put Brazil’s section of the Pantanal wetland, one of the world’s largest

wetlands and a significant source of clean drinking water, under pressure (USAID, 2011).

Particularly, the industrialised south and southeast, with a population of nearly 60%, face

difficulties regarding water pollution and availability. While the country is increasingly investing

in private sector partnerships to increase water and sanitation infrastructure in poverty-ridden

areas, those most vulnerable continue to struggle with affordability (USAID, 2011).

A disproportionately high percentage of Paraguayans suffer malnourishment as 12% of the

population remains in a state of hunger. Paraguay has a uniquely export-oriented food system

where 94 percent of the country’s agricultural land is employed for export-destined production,

while only six percent is devoted to domestic food production. However, efforts to reallocate

resources are constrained as Paraguay is markedly unequal. It is estimated that 60-80% of the

land in Paraguay is owned by the wealthiest 3%.

2012 2014 2016

AR BR

PY UY

AR BR PY UY

Urban Rural

AR BR PY UY

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Amenities for cold storage and adequate cooking technologies are essential for decent living

conditions for their critical role in access to food. Cold storage and clean cooking facilities are

imperative in avoiding risks of spoiled food and discomfort related to the time spent preparing

and purchasing food items. Women usually bear this burden, in addition to the tasks of collecting

water and cooking fuel. The extent of discomfort is contingent on a number of factors, including

climate and diet,

but also access to markets. About 35% of Paraguayans lack clean cooking

technologies harming members of 668,736 households (CleanCookingAlliance, 2019).

146

Similar to Argentina, the Uruguayan constitution does not explicitly guarantee the right to

adequate food. However, the country is committed to the right to adequate food via its

commitment to the Protocol of San Salvador. Undernourishment and access to clean cooking

technologies do not appear to be of concern with undernourishment levels at 2.5% of the

population and lack of cooking technologies at 2.3%. In fact, Uruguay is one of 17 countries to

score below five on the 2019 Global Hunger Index indicating that it suffers from a low level of

hunger.

However, lack of access to basic drinking water services in Uruguay’s rural areas is alarming at

6.3% of the population. Article 47 of Uruguay’s Constitution recognises that water and sanitation

as a human right. While the country has a National Water Policy there is currently no formal

mechanism to coordinate the work of different organisations with responsibilities in the field of

water, sanitation and hygiene. However, instances of coordination between the Ministries of

Housing and Planning, and the Services Regulatory Unit of Energy and Water exist for the

provision of drinking-water networks. Initiatives with the specific aim of reducing disparities of

access levels include financing plans to channel efficiently and to make water more affordable

for vulnerable groups.

5.2.2. Right to the Enjoyment of the Highest Attainable Standard of Mental and

Physical Health

There are considerable overlaps in key aspects of the Right to an Adequate Standard of Living

and the Right to the Enjoyment of the Highest Attainable Standard of Mental and Physical Health

including access to the determinants of health such as safe drinking water and sanitation; food

and nutrition; and housing. However, the Right to Health also contains certain entitlements

highlighting a country’s obligations to provide access to an adequate system of health protection,

prevention, and treatment and control of disease. Further, while this section will continue the

conversation on food, it will expand upon the discussion in section 1.2.1 by adopting health;

nutrition; and safety approach. In this light, we provide an overview of the current situation in

the negotiating parties below.

Structural Indicators

The ICESCR is the central instrument protecting the right to the highest standard of physical and

mental health. Article 12 defines the right as “an inclusive right extending not only to timely and

appropriate health care but also to the underlying determinants of health, such as access to safe

and potable water and adequate sanitation, an adequate supply of safe food, nutrition and

housing, healthy occupational and environmental conditions, and access to health-related

education and information…”. All EU member states and four Mercosur partner states have

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https://www.cleancookingalliance.org/country-profiles/108-paraguay.html

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ratified the ICESCR. The negotiating parties have also committed to numerous other

international instruments as well as regional and national agreements guaranteeing them as

duty bearers in the enjoyment of the right to health. However, Table 33 shows that Brazil and

the EU have yet to ratify the International Convention on the Protection of the Rights of Migrant

Workers and Members of their Families.

Table 33: Commitments to the Right to Health

International Instruments EU AR BR PY UY

Universal Declaration of Human Rights

x X x x x

International Convention on the Elimination of all Forms of

Racial Discrimination

x X x x x

Convention on the Rights of the Child

x X x x x

Convention on the Elimination of all F

orms of Discrimination

against Women

x X x x x

International Convention on the Protection of the Rights of all

Migrant Workers and Members of their Families

X x x

Convention on the Rights of Persons with Disabilities

x X x x x

European Union Member States

EU Charter of Fundamental Rights

Mercosur Partner States

Argentinian Constitution of 1994

Article 6 and 196 of the Brazilian Constitution

Article 68 of the Paraguayan Constitution

Uruguay’s Constitution

Process & Outcome Indicators

In order to establish a baseline regarding the Right to Health, we draw from existing literature,

and follow the OHCHR toolkit on key aspects of the right to health to provide a brief overview of

baseline conditions across EU member states and the four partner Mercosur countries (Table

34).

147

Table 34: Right to Health indicators

Key toolbox elements Indicators

Accessibility

Financial affordability; access to medicine; nutrition; electronic health

care tech

Availability

Health care expenditure; Health clinics; physicians; brain drain indicators;

Universal health coverage index

Participation Stakeholder consultation mechanisms in health policy

Acceptability / good quality

Gender and culture considerations; trained health professionals; adequate

sanitation; robust phytosanitary measures; safe drinking water

Source: Author’s elaboration.

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European Union

While healthcare in the EU is provided at the national level through a wide range of systems,

most EU Member States have universal health care as well as a system of competing private

health insurance companies. All EU countries provide EU citizens with medical treatment when

visiting other participating European countries.

Figure 37: Domestic general government health expenditure (% of GDP) (left) and

Universal Health Coverage Index score (right)

Source: World Bank Data

The average domestic expenditure on health among EU member states is half a percentage point

higher than the average domestic expenditure globally. The high expenditures are possibly

explanatory of the EU’s average score on the WHO Universal Health Coverage index. On average,

EU member states score 80.7—placing it 15 percentage points above the world average. The

score is presented on a scale of 0 to 100 and is defined by the extent of coverage for essential

health services based on tracer interventions that include reproductive, maternal, new-born and

child health, infectious diseases, non-communicable diseases, service capacity and access. A

score of 81 demonstrates that an adequate level of availability of health services are in place

throughout the EU and that they are, on average, adequately accessible. This is also reflected

by the above-average availability of healthcare workers and hospital beds in the region (Figure

38). In fact, the EU has 200% more beds than the global average, and its health labour force

contracts 260% more nurses and midwives than the global average, 240% more physicians, and

a specialist surgical workforce 318% larger than the global average.

Figure 38: Nurses and midwives, physicians, and specialist surgeons per 100,000

people (left); Hospital beds per 1,000 people (right)

Source: World Bank Data

7.9

7.4

7.1

7.2

7.3

7.4

7.5

7.6

7.7

7.8

7.9

European Union World Average

80.73

65.7

100

European Union World Average

890

360

97.1

340

150

30.5

200

400

600

800

1000

Nurses &

midwives

Physicians Specialist

surgical

workforce

European Union World Average

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EU member states are unique in their ability to meet adequate availability standards as a

consequence of the brain drain phenomena—namely, the emigration of highly trained or qualified

workers from one country or region to another. Growing competition for talent and the limited

remuneration in certain regions make it attractive for their skilled healthcare workers to emigrate

to the EU (Botezat & Ramos, 2020).

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Concerning accessibility, health systems across member

states differ, somewhat vary, but most have strong financial protection systems for users of

health services. While 1-18% of individuals across EU member states uses more than 10% of

their household income on out-of-pocket payments (OOPs), only 3% or less spend more than

25% of their income on OOPs (Figure 39). According to World Bank data, out of pocket payments

in the EU do not risk increase in the poverty gap at the USD $3.20 line.

Figure 39: Proportion of population spending more than 10% and more than 25% of

household consumption on out-of-pocket payments

Source: World Bank Data

However, being pushed into poverty because of healthcare expenditure is dependent on the

measure of poverty. According to the World Health Organisation (WHO), out-of-pocket

payments, particularly for medicines, continue to be unaffordable for many in the EU. Between

1% and 9% of households in the EU are pushed into poverty as a consequence of OOPs, and up

to 17% experience catastrophic health spending—especially among the poorest quintile of the

population. One of the most significant determinants of disparities in access to healthcare is the

price of medicine.

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Figure 40 presents how far the price of medicine in each EU member state deviates from the

mean.

Figure 40: Medicine Price Index across EU MS

Source: MedBelle

The data demonstrates that the prices of branded and generic drugs in Poland, the Netherlands,

and Ireland are the lowest in comparison to the global average. The medicines assessed included

mostly treatments for non-communicable diseases including epilepsy, anxiety, cardiovascular

disease, chronic pulmonary diseases, bacterial infections, diabetes, high blood pressure, and

bowel diseases among others. Considering the disproportionate effect of NCDs in comparison to

communicable diseases in the EU, the price of such medicines is a determining factor of

accessibility to necessary treatment (Figure 41).

Figure 41: Cause of death (left); mortality rate due to inadequate living conditions per

1000,000 people (right); and prevalence of anaemia (right)

Source: World Bank Data

As discussed in section 1.2.1, housing in both urban (99%) and rural (98%) areas of the EU

have adequate access to sanitation facilities and clean drinking water and 98.7% have access to

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ambient air

pollution

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under 5

Women

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Branded drugs Generic drugs Branded and generic drugs

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clean cooking technology. As such, it is unsurprising that the mortality rate as a consequence of

unsafe sanitation, as well as household and ambient air pollution, are 11.5 and 94.9 percentage

points lower than the global average respectively. Additionally, section 1.2.1 demonstrated that

levels of undernourishment across the EU have remained at a constant 2.5% in the last years—

representing 12.8 million. While hunger in the EU is no longer considered to be of concern,

malnutrition continues to be. In fact, the World Health Organization suggests that 30-70% of

adults and 33% of children are either overweight or obese in the EU. Causes range from

increases in urban living, excessive fast-food marketing and lifestyle pressures which limit

opportunities for physical activity. Over 33% of adults in the EU do not engage in sufficient levels

of exercise—especially in high-income countries and for women. A decrease in physical activity

can also act as an underlying factor in the increase of mental health problems, such as depression

and anxiety, in the EU.

Figure 42: Prevalence and Incidence of Mental Disorders (left), and suicide mortality

rate per 100,000 people (right)

Source: IHME, Global Burden of Disease

While the lowest share of the population with mental health challenges resides in Central Europe

(11.87%), at least a tenth of all populations suffer from mental health challenges. In regard to

incidence, or the measured risk of further developing mental health disorders, IHME

demonstrates that risks are low. However, there are significant challenges in measuring

incidence for mental health, as the determinants and severity of mental health disorders are

complex and are attributed to several causal factors.

Mercosur

Argentina's health care system provides for a universal health care system, but those

employed in the formal sector are also required to register with a health insurance scheme.

European Union World Average

Female Male

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Figure 43: Domestic general government health expenditure (% of GDP) (top left) and

Universal Health Coverage Index ranking (top right) Nurses, midwives, physicians,

and specialist surgeons per 100,000 people (bottom left); Hospital beds per 100,000

people (bottom right)

Source: World Bank Data; (WA stands for World Average)

While domestic expenditure on health in Argentina is 1.8 percentage points lower than the

global average, the country’s health system still received a high score of 76 on the WHO

Universal Health Coverage index—about 11 percentage points above the world average. A score

of 76 demonstrates that the country is more or less on par with coverage standards in the EU,

providing an adequate level of availability and accessibility of health services. Argentina’s

workforce of nurses and midwives lags behind the global average, but this is presumably

compensated for by having more than two times the global average of physicians, almost twice

as many specialist surgeons, and almost doubling the average availability of hospital beds

(Figure 43).

Despite Argentina’s adequate health care workforce, the country reflects vast disparities in the

distribution of availability. Rural and low-income areas do not benefit from the same level of

availability as they are not attractive enough to draw sufficient healthcare workers. While

programs to efficiently allocate the workforce used do exist, a growing number of physicians

choose to work privately or in specialty positions to remain in affluent urban areas. A 2015 study

surveyed the willingness of medical students to work in low-resource underprivileged areas after

graduation and found that only 21% showed a strong willingness to work in a deprived area,

with a majority of them being women. Additionally, less than 7% of respondents considered that

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600

800

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national public health authorities adequately facilitate the distribution of physicians in poorer

districts (Borraci et al. 2015).

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In Brazil, the National Healthcare System, known as the Unified Health System (SUS), provides

services for all permanent residents and foreigners in Brazilian territory free of charge. While

domestic expenditure on health in Brazil is substantially lower than the global average, the

country’s health system still received a high score of 79 on the WHO Universal Health Coverage

index—about 13 percentage points above the world average and higher than that of Argentina.

A score of 79 should signify the country to reflect the same availability and accessibility as that

of the EU. Brazil healthcare workforce does in fact reflect almost three times the global average

of nurses and midwives. The system has 140% the global average of physicians at its disposal

and almost twice as many specialist surgeons. However, the number of hospital beds lags behind

the global average at only 2.2 beds per 100,000 people.

The distribution of Brazil’s available workforce varies, with the lowest number of physicians

found in the state of Maranhão (the poorest state) to the highest in the Federal District (the

wealthiest state). Distribution within states is also unequal where some municipalities in the

north and north-east states have no physicians—forcing patients to travel long distances for

care. Like Argentina, rural regions have difficulties in recruiting and retaining health workers

because of lower career prospects, poor working conditions and poor primary care facilities

(Pacheco Santos et al. 2016).

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While Paraguay provides a state-funded health care system, the country also has private health

insurance options available as healthcare—especially outside of Asuncion—is not up to the

standard of many European countries. Domestic expenditure on health in Paraguay is just over

half of the global average, and the country’s health system received a score of 69 on the WHO

Universal Health Coverage index—just above the world average, but lower than any of the other

negotiating parties. In fact, Paraguay’s resources lag behind the world average in all four

availability indicators (Figure 43). The workforce has at its disposal a workforce of nurses and

midwives a third of the size than average, has less than 150 physicians and less than 21 specialist

surgeons per 100,000 people. Finally, the country can only provide 1 bed per 100,000 people,

placing the population at great risk in the case of a large outbreak.

Historically, the development of human resources for health (HRH) in Paraguay was not given

high priority, resulting in inadequate availability of health workers. Much like Argentina and

Brazil, Paraguay’s rural areas are also challenged by an uneven distribution of health workers

favouring the urban capital. While 70% of the country’s population lives outside of the capital,

lack of adequate infrastructure and incentives to work in rural areas has kept 70% of health

workers in Asuncion. Further, Paraguay’s health labour force suffers losses from the brain drain

phenomena as health workers migrate to neighbouring countries. Opportunities in Paraguay’s

health sector are subject to poor working conditions and precarious employment contracts.

Absence of research opportunities, lack of adequate training for career development, and weak

quality control of practices has led professionals to seek opportunities elsewhere (Global Health

Workforce Alliance, 2019).

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Uruguay likewise provides free health care to its residents through two main avenues. The

public health system provides services for those either unemployed or in informal employment

while FONASA, created by the Frente Amplio government in 2007, entitles all employees and

pensioners to health care outside of the public health system. While management and care

changed from a curative social welfare model to a preventive model, funding incentives have

not been sufficient and progress has been slow in assigning users to providers.

While domestic expenditure on health in Uruguay is lower than the global average, the country’s

health system still received a score of 80 on the WHO Universal Health Coverage index—the

highest among its Mercosur counterparts, and almost the same score as the EU. A score of 80

demonstrates that the country is more or less on par with coverage standards in the EU,

providing an adequate level of availability and accessibility of health services. However,

Uruguay’s workforce of nurses and midwives lags behind the global average, but, much like the

situation in Argentina, this is presumably compensated for by having more than three times the

global average of physicians (Figure 43).

With regard to accessibility, Argentina’s financial protection system is of potential concern as

17% spend more than 10% of their household income on OOPs and 5% of the population spends

more than 25%. The proportion of those spending more than 10% of their income is four

percentage points higher than the global average while the proportion of those spending more

than 25% is two percentage points higher. However, the percentage of those at risk of

impoverishing expenditure for surgical care is significantly lower than the global average of

23.6% remaining at 3.9%.

Figure 44: Proportion of population spending more than 10% and more than 25% of

household consumption on out-of-pocket payments (left) and Risk of impoverishing

expenditure for surgical care (right)

Source: World Bank Data; (WA stands for World Average)

Further, Brazil’s financial protection system also exacerbates accessibility challenges as a

quarter of the population spends more than 10% of their household income on OOPs and 3%

spend more than 25% of their income. However, the percentage of those at risk of impoverishing

expenditure for surgical care is about half of the global average.

Alongside availability challenges, issues of accessibility contribute to difficulties in achieving the

Right to Health in Paraguay. Of particular concern is Paraguay’s risk of impoverishing and

catastrophic expenditure for adequate surgical care. More than a quarter of the population is at

risk of catastrophic expenditure while the available surgical workforce is not capable of providing

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more than 21 staff per 100,000 patients. During his 2015 visit, the Special Rapporteur on the

Right to Health identified numerous challenges related to structural factors that obstruct

accessibility to adequate health (OHCHR, 2015).

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These factors are associated with the

country’s institutional weakness and lack of a robust tax structure which keeps it from

earmarking the necessary public investment to increase access to health services.

Uruguay reflects a high level of accessibility to its health system as only 5% of the population

spends more than 10% of their household income on OOPs and no one spends more than 25%.

Additionally, the percentage of those at risk of impoverishing or catastrophic expenditure for

surgical care does not surpass 2% of the population. The National Health Fund (FONASA) is a

central part of Uruguay’s Integrated Health System’s funding model. It involves three mandatory

contributors: 1) those insured, who pay based on income, 2) employers contribute in proportion

to wages paid, and the 3) government supplements these. This allows the country to keep OOPs

low by providing the population with a Comprehensive Health Care Plan (PIAS).

In an attempt to keep medicines accessible, Argentina marginalizes the role of patents in

determining the cost of medicines and reduces the impact of patenting decisions on fair and

efficient access to healthcare.

From 2002 Argentina’s patent office’s examination guidelines have

barred patents on most forms of secondary pharmaceutical patents.

Argentina also allows

parallel imports, compulsory licensing and other TRIPS flexibilities. Since 2017, 70% of the

country’s domestic market is supplied from locally produced medicines.

Figure 45: Medicine Price Index in Argentina and Brazil (top); prevalence and

treatment of HIV (bottom left); and rates of immunisation (bottom right)

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-50

100

150

Epilepsy

Cardiovascular

Asthma

Bacterial Inf

Diabetes

Immunisup.

Contraception

Depressoin

Anxiety / panic

High blood press.

HepB & HIV

Arthiritis; bowel

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Source: World Bank Data; MedBelle (WA stands for World Average)

However, Figure 45 demonstrates that prices for most medicines in Argentina are in fact higher

than the median price around the world, with medicine for cardiovascular disease deviating by

167% and for diabetes by 170%. Medicine to treat anxiety disorders is found to be 47.2% less

expensive than the global median, although the opposite is true for depression.

This is particularly concerning for men in Argentina as the country’s suicide rate is above the

global average (Figure 46). According to the Institute for Health Metrics and Evaluation (IHME),

the prevalence of diagnosed mental health disorders across all negotiating parties is rather high

(above 10% in all) and the highest concentration in Argentina and Uruguay (~15.75%).

However, considering the prevalence of non-communicable diseases in Argentina, the high prices

for diabetes and cardiovascular treatments are concerning (Figure 45).

Brazil is one of the world’s only countries to provide universally free access to AIDS treatment,

leading to a 40% reduction in mortality and a 70% reduction in morbidity by 2004. Furthermore,

resources became available for other treatment as hospitalisations reduced by 80%. However,

access to medicines became a challenge for Brazilians after the country did not make use of the

10-year transition period granted by the WTO after the implementation of TRIPS in 1994. The

ten-year delay was meant to provide developing countries with an opportunity for domestic

pharmaceutical companies to develop their R&D to compete with transnational drug companies.

However, Brazil decided to reject the ten-year grace period, and already adopted legislation in

line with TRIPS only two years into the possible ten. According to civil society, Brazil went further

than the requirements of the TRIPS agreement and failed to adopt the flexibilities it provided

(Chaves et al. 2008).

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Since then, the greatest challenge to the accessibility of the health

system has been the increase in the price of foreign medicines Figure 45.

Figure 45 demonstrates that all medicines in Brazil are more expensive than the median price—

and that these price deviations can range from 12.04% more for bacterial infections to 174%

more to treat anxiety disorders. Similarly, medicines for cardiovascular treatments are 160%

more expensive than the median price, and as medical guidelines are increasingly updated, the

treatment of non-communicable diseases (NCDs) faces price challenges.

Despite Paraguay’s health system’s numerous accessibility challenges, the Special Rapporteur

congratulated the country for working with family health units in rural areas to expand access

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Antiretroviral therapy coverage

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to primary health care, and for the implementation of successful vaccination campaigns

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Paraguay’s rate of immunisation for both Hepatitis B and Measles have seen vast improvements

in the last decade with 88% of the population immune to Hepatitis B and 93% immune to

measles. However, while immunisation of both diseases is above the world average, access to

antiretroviral therapy for those living with HIV is below average in Paraguay.

As an element of Uruguay’s Comprehensive Health Care Plan, the country makes certain

vaccination mandatory—currently providing 13 vaccines for free. It has thus far covered 96% of

the population and led to significant decreases in prevalence in both Measles and Hepatitis B

(Figure 45). Adopting a further detailed recognition of the right to health, Uruguay’s constitution

requires the state to provide the means for prevention and treatment for vulnerable persons,

and national legislation guarantees the right to access quality-medicine. However, while only

half a percentage point of Uruguay’s population lives with HIV (almost 2000 people), only about

half receive antiretroviral therapy coverage. In fact, while Uruguay is the only of the four

Mercosur countries to adopt legislation guaranteeing the right to access quality medicine, it is

also the only of the four countries to fall below the global average for antiretroviral therapy

coverage (62% of those living with HIV) (Figure 45). According to the Pan American Health

Organisation, this is due to the difficulties in monitoring and identifying carriers of the disease—

many are unaware they have it (PAHO, n.d.)..

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However, the leading cause of death across all four Mercosur partner countries are non-

communicable diseases (Figure 46). According to the World Health Organization (WHO), NCDs

are the greatest cause of death in the world, killing more than 36 million people each year, of

which nearly 80% take place in low- and middle-income countries.

As discussed in section 1.2.1, housing in both urban (96.2%) and rural (98.3%) areas of

Argentina have adequate access to sanitation facilities and clean drinking water and 98.6%

have access to clean cooking technology. While the rates of adequacy are lower than those of

the EU, the implicated mortality rates are still 11.4 and 87.7 percentage points lower than the

global average for unsafe sanitation and air pollution, respectively.

Figure 46: Cause of death (left) and mortality rate due to inadequate living conditions

per 100,000 people (middle) and suicide mortality rate per 100,000 people (right)

Source: World Bank Data

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HH & ambient air pollution

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While 88% of Brazilian urban housing has access to adequate sanitation facilities and 99.3%

have access to clean drinking water, conditions for rural Brazil were concerning as 52% lack

sanitation and 13.4 lack access to drinking water. However, while the rates are concerning, the

implicated mortality rates only reflect a tenth of the global average.

Additionally, while unresolved issues remain in Paraguay regarding communicable, maternal,

neonatal and nutritional diseases, the rate of death by non-communicable diseases continues to

grow. Disparities among the country’s rural population are evident as only 78% has access to

adequate sanitation facilities. Additionally, as more than a third of the population does not have

access to clean cooking technology, the implicated mortality rates from household & ambient air

pollution in Paraguay are the highest among the negotiating parties (Figure 46).

Finally, Uruguay’s leading cause of death is breast and lung cancer. While the population enjoys

quite high levels of basic sanitation and clean water services, more than a third of the population

does not have access to clean cooking technology. However, of greater concern is Uruguay’s

suicide rate—particularly for men. Along with Argentina, Uruguay has one of the highest rates

of mental disorders among the negotiating parties.

Perhaps related, section 1.2.1 demonstrated that levels of undernourishment in Argentina

have increased in the last years with poor diets and obesity becoming a concern—especially

among children (Figure 47).

Figure 47: Prevalence of underweight children (left); overweight children (right);

anaemia among children and women (bottom left); and stunting (bottom right)

Source: World Bank Data

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Children under 5 Women

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Column1

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Figure 47 reflects that Argentina is well-below the global average in all indicators of

malnutrition, with the exception of the prevalence of overweight children where the country is

4.3 percentage points above the global average. Changes in food availability throughout the last

decades have shifted diets from foods high in cereals and complex carbohydrates towards

energy-dense, nutrient-poor diets with greater amounts of meat, fats, sweeteners and processed

foods. This so-called “nutrition transition” disproportionately affects low and middle-income

countries—and common among those in South and Central America. Argentina is facing different

transitions among different socioeconomic groups within the country, but a 2019 study linked

most profiles to obesity burden in adults, also evident in Figure 47 (Tumas et al. 2019).

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Argentina is well-below the global average in all indicators of malnutrition, with the exception of

the prevalence of overweight children where the country is 4.3 percentage points above the

global average.

However, the importance of food in the assessment of the Right to Health spans beyond access

to proper nutrition, and critically includes adequate mechanisms to ensure the safety of a

country’s food supply. According to the Global Health Security Index, Argentina has national

regulations and plans that account for the surveillance and control of multiple zoonotic pathogens

of public health concern. In terms of surveillance, Law No. 15,465 of 1960 established

compulsory notification for zoonoses in Argentina. The country has a mandatory national

mechanism for livestock owners to report on disease surveillance and notify the central

government as soon as a disease is suspected or identified. The OIE's 2014 PVS Evaluation

Report for Argentina noted that the national reporting system worked well for suspected animal

diseases, but that information from inspections of slaughterhouses was not consistently sent to

SENASA's National System for Epidemiological Surveillance (SNVE). This was largely the result

of Argentina’s reliance on nongovernment “establishment” personnel for post-mortem

inspections.

In 2016, the European Commission conducted an audit of Argentina’s food safety inspection

system for products of animal origin to determine whether standards remain acceptable for

exportation to the European Union. The report confirms that Argentina’s food safety inspection

system does have the organisational structure to provide ultimate control, supervision, and

enforcement of regulatory requirements (EC, 2016). However, improvements were

recommended for the country’s compliance verification system and to ensure the reliability of

information collected through its cattle database system (EC, 2016).

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While levels of undernourishment in Brazil have dropped to a low of 2.5% in the last years, the

nutrition transition and Brazil’s challenges with the “double-burden” of malnutrition are also a

growing challenge. Many developing countries experience malnourishment among the poor, and

obesity among their middle and higher-income citizens simultaneously. In fact, this is possible

at multiple levels—country, state, household, as well as individual, and it plagues Latin American

countries. Figure 47 reflects that Brazil is well-below the global average in all indicators of

malnutrition, with the exception of the prevalence of overweight children where the country is

1.7 percentage points above the global average.

Regarding food safety, and its position as one of the top producers of beef in the world, Brazil

has a robust health and inspection system for zoonotic diseases and foodborne illness. According

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to the Global Health Security Index, there are currently 277 Zoonotic Disease Surveillance Units

across the country that operate locally under the Health Surveillance Secretary. These units work

collaboratively with the Farming Vigilance Units of the Ministry of Agriculture for issues related

to farming, such as animal health. Under Normative Instruction 50, it is mandatory for livestock

owners or veterinarians to report on possible disease. According to official data, 13,163

foodborne disease (FBD) outbreaks were reported in the country between 2000-2018, involving

247,570 cases and 195 deaths. However, homes were found to be the main site of FBD

occurrence (45.6%) pointing to the need for greater information infrastructure on food safety.

In 2017, the European Commission conducted an audit of Brazil’s health inspection system for

food of animal origin and confirmed it complies with health standards necessary to export to the

EU (EC, 2017). However, a follow-up audit in 2018 found a number of issues with the health

inspection system of Brazil’s poultry which jeopardises its export eligibility status (EC, 2018).

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Of greater concern is Paraguay’s proportion of undernourished at 12% of the population. Figure

47 reflects that Paraguay’s two pressing challenges regarding malnutrition are the rate of

overweight children at 12.4% and the rate of children with anaemia which is almost at a quarter

of the population. In fact, when observing the adult population in Paraguay, rates of those who

are overweight more than double. With 30% of adults obese, Paraguay has the second highest

prevalence of obesity after El Salvador. Obesity has become a major health challenge in Latin

America where 54-70% of the population is overweight and 19% is obese (The Lancet, n.d.).

In regard to food safety, Paraguay’s National Programme for the Control of Zoonoses is guided

by several resolutions emphasising the promotion, prevention, surveillance and control of

zoonotic diseases through the improvement of animal health. Although Paraguay's national

mechanism makes the reporting of most diseases voluntary through the Network of

Epidemiological Surveillance, the National Service for Animal Quality and Health (SENACSA)

makes it mandatory by law to monitor and report on "diseases of obligatory notice". A 2019

audit by the European Commission concluded that Paraguay’s legal framework is comprised of

all necessary elements and that all visited establishments were of acceptable hygiene standard

to carry out its various tasks in relation to animal health and food safety (EC, 2019). While the

country’s export eligibility to the EU was temporarily suspended in 2011 for the identification of

FBD, it regained access to the EU market in 2015.

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In respect of malnutrition, challenges from the double burden of both deficits and excesses

persist in Uruguay. Diets in the country tend to be poor and the prevalence of overweight

children is higher from poorer households. While the country implemented the “Uruguay Grows

with You” program to promote a system for protection in early childhood, the prevalence of

overweight and obese adults continued to rise since 2006. Figure 47 demonstrates that Uruguay

scores below the global average on all four malnutrition indicators except for overweight

children.

Finally, as regards food safety, the incidence of foodborne diseases is low in Uruguay. The

National Directorate of Cattle Services coordinates prevention, control, and eradication measures

for zoonotic disease like aphtose fever, brucellosis, rabies and bird flu through the National Cattle

Information System. This allows users to record any suspicion of disease amongst their animals.

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In 2016, the European Commission conducted an audit of Uruguay’s food safety inspection

system. The report concluded that while a few weaknesses were found regarding the

organisation of controls at feedlots, the overall control system provides an adequate basis for

the country to effectively implement safety inspections. Significant improvements have been

implemented on Uruguay’s cattle database and traceability system along the production chain

(EC, 2016).

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5.2.3. Rights of Indigenous Peoples

Structural Indicators

The United Nations Declaration on the Rights of Indigenous Peoples, which "emphasizes the

rights of all indigenous peoples to maintain and strengthen their institutions, cultures and

traditions, and to pursue their development in keeping with their own needs and aspirations", is

the principle international instrument for the protection of indigenous rights (UNESA, n.d.). While

all EU member states and all four of the Mercosur partner countries voted in favour of its

adoption, they are additionally signatories of numerous other international, regional, and

national commitments. However, Table 35 shows that Uruguay has not ratified ILO Convention

No. 169, and only four members of the EU have.

Table 35: Commitments to the Rights of Indigenous Peoples

International EU AR BR PY UY

United Nations Declaration on the Rights of Indigenous Peoples

x x x x x

International Convention for the Protection of all Persons from Enforced

Disappearance

x x x x

International Covenant on the Elimination of all Forms of Racial Discrimination

x x x x x

International Covenant on Economic, Social, and Cultural Rights

x x x x x

International Covenant on Civil and Political Rights

x x x x x

ILO Indigenous and Tribal Peoples Convention (No. 169)

x x x

European Union Member States

EU Charter of Fundamental Rights

Resolution of 3 July 2018 on violation of the rights of indigenous peoples in

the world, including land grabbing (2017/2206(INI)

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2011 Swedish Constitution

Mercosur Partner States

American Convention on Human Rights

x x x x

OAS Declaration on the Rights of Indigenous Peoples

x x x x

Inter-American Court of Human Rights

x x x x

Argentinian 1985 law on Indigenous Policy and Aboriginal Community Support

Argentinian Constitutional recognition of Customary Law of 1994

Brazil’s 1988 Constitution

Brazil’s Indigenous Statute Law (Law nº 6.001 of 1973)

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Articles 63-66 of Paraguay’s National Constitution

Paraguay’s Indigenous Communities Statute (Act No. 904/81),

Source: Author’s elaboration.

Specific legal principles apply to Indigenous peoples including (1) collective rights and (2) “free

prior informed consent” (FPIC). Both the UNDRIP and the American Declaration on the Rights of

Indigenous Peoples (ADRIP) recognise such rights. Collective rights include Indigenous peoples’

right to self-determination and independent means of subsistence; while the principle of free,

prior and informed consent builds upon and develops the right to participate through stakeholder

consultation and other mechanisms – notably in relation to claims to land, territories and

resources, and more generally in relation to decision-making that affects indigenous peoples

directly, including with respect to their priorities for their own development.

Process & Outcome Indicators

European Union

There are two main indigenous peoples in the continental EU, mostly found in the Arctic: the

Saami, living in Sweden and Finland (and thought to consist of a population between 50,000-

100,000 people) and the approximately 50,000 people identifying themselves as Greenlandic

Inuit living in Greenland. Like most indigenous traditions, the Saami were a nomadic culture that

relied solely on hunting and fishing for subsistence. Reindeer herding was the basis of the

economy until recently, but with economic growth, shifts have occurred towards commercial

fisheries or public and commercial employment. Sami also increasingly participate in the

Scandinavian professional, cultural, and academic world.

Pertaining to the EU’s Outermost Regions (OR), indigenous groups have been driven out in most

departments. Today, a small minority of indigenous groups remains in French Guiana. In French

Guiana, indigenous groups form about 3–4% of the population, (about 10,000 people) and

include the Arawak, Carib, the Kaliña, Palikur, Wayampi and Wayana. Most rely on subsistence

fishing, hunting, and horticulture, mostly growing cassava. However, groups also cultivate sweet

potatoes, sugarcane, cotton, coffee, and citrus trees (PIB, n.d.).

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Where indigenous communities in Mercosur struggle regarding recognition and protection of

indigenous languages, the Greenlandic Inuit and Sami do not. West Greenlandic (Kalaallit), an

Inuit language, is recognised as the official language of the territory, along with Danish, and is

taught in schools, used in broadcasting, administration, church services, literature and

newspapers.

In regard to the Sami, the political struggle for influence began in the 1950s and led to the

establishment of the Sami parliament in the 1990s. Across Sweden and Finland, the parliament

works to coordinate concerns of the Sami. Financed by grants from the Swedish government,

31 members of parliament meet three times a year and remain in office for a term of four years

each. In 2011, the Swedish constitution recognised the Sami people’s right to preserve and

develop a cultural and social life of their own by confirming Sweden’s responsibilities in

promoting such opportunities. As a result, financial resources have been earmarked to further

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Sami interests such as the inclusion of Sami language in nursing homes and schools (Swedish

Institute, 2020).

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However, despite progress in institutional recognition, the Inuit and Sami face a range of

economic, social, health and environmental challenges. The traditional way of life for both groups

is threatened by both economic modernisation as well as international animal rights campaigns

against their traditional forms of subsistence hunting. Land rights face a different challenge in

this region of the world, as the issue of titles is trumped by the impacts of global warming, rising

sea levels, melting ice and the disappearance of animals. In February 2007, a delegation of Inuit

from Greenland, US, Canada and Russia, challenged the U.S. before the Inter-American Court

on Human Rights for its failure to contain greenhouse gases, arguing that it violated its

obligations under the American Convention on Human Rights, however, the court continues in

deliberation (Minority Rights Group, 2008).

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Originally, hunters and gatherers, reindeer herding became an important part of Sami traditions

in the 17

century. Today, only 10% of Swedish Sami earn a living from the reindeer industry

and are forced to supplement their income elsewhere as a result of continuing disputes over land

rights. Like the Arctic Inuits, the Sami too challenged the courts for their rights—specifically

regarding a historical dispute between reindeer grazing rights and landowners’ logging rights.

However, the Swedish Supreme Court ruled in favour of the Sami and provided them with rights

to a significant portion of land (Swedish Institute, 2020).

Mercosur

The Mercosur countries each host considerably sized indigenous populations. According to the

2018 World Indigenous Report, the 2010 census conducted by the Brazilian Institute of

Geography and Statistics reveals that 0.46% of Brazil’s population (over 900.000 people) is

indigenous, while the 2012 Paraguayan National Census of Population and Housing for

Indigenous Peoples demonstrates that 2% of the population, or 136,000 people, self-identifies

as indigenous (IWGIA, 2018). A survey by the World Population Review also demonstrates that

1.1% of Uruguay’s population, almost 40,000 individuals, self-identifies as indigenous (WPR,

2019). Finally, the most recent census by the National Institute of Statistics and Census in 2010

revealed that 2.4% of Argentina’s population, over one million people, self-identified as

descending from or belonging to an indigenous group (IWGIA, 2018). While the Brazilian

percentage of indigenous peoples in Brazil is smallest relative to its population, it has the

greatest geographical representation with presence in 80% of the country’s municipalities.

Together with Paraguay, whose population belongs to 20 nations and five language groups,

Brazil warrants particular attention for the inequalities indigenous people face within each of the

countries.

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Figure 48: Map of Indigenous Communities in Argentina (left); Brazil (middle); and

Paraguay (right)

Source: IWGIA - International Work Group for Indigenous Affairs

While living in vastly different climates, and reflecting very diverse traditions, indigenous

populations across both the EU and Mercosur regions face similar key challenges including those

regarding discrimination poverty, climate change, endangered languages, and land/natural

resources. Despite constitutional recognition in Argentina, Brazil, and Paraguay, Indigenous

peoples across Mercosur commonly struggle with the lack of implementation activities to uphold

such recognition.

Land rights and access to natural resources are perhaps amongst two of the most evident and

contentious challenges indigenous populations face. Mercosur member states have an obligation

via the Inter-American Commission on Human Rights and the Inter-American Court of Human

Rights to protect indigenous communities’ relationship with their land and take action against

the continuing displacement of indigenous peoples. However, theoretical efforts to respect this

right have proved superficial in many instances, with the implementation of constitutional

recognition failing to translate into practical implementation.

The land ownership system established in Argentina after the Spanish conquest did not consider

indigenous systems in its design and failed to incorporate legal protection. In 2006, an

emergency law was adopted to suspend evictions and conduct a survey of lands traditionally

occupied by indigenous communities. Since then, the law has continuously extended the

completion deadline and after the third extension, it is now meant to be completed by 2021. In

regard to language, while Argentina’s National Congress "recognises the ethnic and cultural pre-

existence of the Argentine indigenous peoples", Spanish is the nation's only official language.

However, municipalities have acted to adopt several indigenous languages as co-official in their

local provinces, such as the Province of Corrientes in 2004 and the Province of Chaco in 2011.

In an effort to progress respect for indigenous rights, the country’s National Institute of

Indigenous Affairs was established by the Emergency Act in 2006 to manage the National

Program for Territorial Survey of Indigenous Communities. While the survey aims to register

property for the title of ancestral land, a 2019 investigation found that after 13 years, the survey

had only begun in 57% of indigenous communities and was completed in only 38% of the cases.

Dispossession of lands and exploitation of natural resources has intensified in Argentina as an

effect of increases in mining, natural gas extraction, and oil activities as well as agricultural and

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livestock expansion in indigenous lands (OHCHR, 2017). Argentinian communities are currently

facing numerous instances of such struggles. According to the Ministry of Mining, between 2015

and 2018, investment in lithium exploration and production in Argentina increased by 928%. In

2010, the Kolla people of Salinas Grandes filed a collective injunction against the states of Jujuy,

Salta, and the national government to challenge lithium production as a violation of their rights

to PFIC and a cause of their depleting water sources. These communities are forced to move

away due to the shortage of water suitable for consumption, and the health effects of lithium

extraction. Ten years later, the inter-American Court of Human Rights continued to process the

case (Roth, 2019).

In another instance, spring 2019 saw indigenous communities in Argentina gather to block

access to a mining enterprise in Guayatayoc Lagoon as the communities were not approached

for approval and the local government had approved it independently. Similarly, the Mapuche

community of Campo Maripe continues to resist oil activities and the extraction of natural gas in

Vaca Muerta as inhabitants understand the water to be contaminated – which is having effects

on their livestock and which risks effects on their health. The CESCR expressed concern about

the indigenous situation in Argentina, questioning the authorities on compliance issues and lack

of channels to deliver community land titles to indigenous groups.

However, in April 2020 the Inter-American Court of Human Rights ruled in favour of the

Indigenous people in Salta and declared Argentina to be in violation of various rights owed to

132 different indigenous communities that inhabit the various lands in Salta. The ruling

establishes that the Argentinian government must provide 400,000 hectares of ancestral

property in the north of Salta to the Wichí, Iyjwaja, Komlek, Niwackle and Tapy'y peoples and is

required to comply by a given deadline (Meyer, 2020).

While Brazil’s constitution recognises the rights of indigenous peoples, it guarantees the

exclusive use of their land rather than its ownership. In this sense, if certain criteria specified in

article 231 of the constitution are met, a person or community can engage in a process known

as demarcation where the state then recognises the land as indigenous. The National Indian

Foundation (FUNAI) is responsible for the demarcation process and has undergone many

changes. While the 1988 constitution set a goal of demarcating all indigenous lands within five

years, only 291 indigenous territories were demarcated. The situation has only worsened as in

2017, the President restricted the rights of indigenous peoples to their traditional lands by

requiring that demarcation of any new indigenous land is subject to anthropological proof of

indigenous occupation of that specific land as of October 1988.

Since 2016, the position of FUNAI, responsible for mapping out and protecting lands traditionally

inhabited by indigenous communities, has been weakened (IWGIA, 2019). Governments have

reduced the agency’s budget which is already estimated to only leave 14% for its mandated

activities as 72% of its budget was allocated to personnel expenses (active and retired, including

benefits), 12% to the agency’s structure maintenance and 2% to payment liabilities.

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The

government adopted Provisional Measure No. 870/2019 on the first of January 2019, which

transferred the decision-making power over the demarcation of indigenous and Quilombo

reserves from FUNAI to the Ministry of Agriculture, Livestock and Supply (MAPA). However,

Brazil’s Congress voted to restore FUNAI’s authority after a large mobilisation by indigenous

peoples and legal challenges in the Supreme Federal Court (STF). The weakening of FUNAI’s

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International Work Group for Indigenous Affairs (NGO), The Indigenous World 2019.

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position is evident when observing the rate of demarcation procedures over the past decade.

According to Figure 49, Brazil’s demarcation procedures have particularly slowed over the past

four years (AgenciaBrasil, 2018).

Figure 49: Square kilometres of newly demarcated land in Brazil

Source: AgenciaBrasil

Between 2007 and 2010, Brazil’s federal government demarcated 77,000 square kilometres of

Indigenous territories in the Amazon region. In the next four years, it demarcated 20,000 square

kilometres. During President Rousseff’s truncated second term, from 2014 to May 2016, it

demarcated an additional 12,000 square kilometres. Between 2016 and 2018, it demarcated

only 192 square kilometres, and finally, since January 2019, the federal government has not

demarcated any new indigenous areas. While Brazil’s Bureau of Indian Affairs was legally

required to complete all demarcation cases by 2009, currently, 228 cases await finalisation,

keeping 107,203 indigenous people in states of uncertainty. The 2017 decision to require

anthropological proof for the demarcation of any new indigenous land has effectively put an end

to demarcation efforts (Figure 49). However, in March 2018 the Inter-American Court of Human

Rights ruled against Brazil and held it accountable for the violation of several rights of the Xukuru

people, including the failure to respect PFIC, demarcate traditional territories, and provide

effective legal protection and proceeding. This was the first time that an indigenous people's

group was able to take Brazil to court for its treatment of indigenous peoples (AgenciaBrasil,

2018).

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While Paraguay’s constitutional recognition of indigenous rights has not translated into effective

practical measures to provide indigenous peoples with the means to enjoy their rights in the

past, a few recent advancements are relevant. Paraguay has established an inter-ministerial

committee to implement Court decisions and put legislation in place for the return of traditional

land to indigenous communities. Furthermore, the National Strategy for Indigenous Communities

adopted a decree on consulting indigenous communities ahead of decisions relevant to their

territories and livelihoods, although concerns remain about the levels of bureaucracy involved in

these future consultations.

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violating-indigenous-rights.

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2010 2014 2016 2018 2019

square kilometres of newly demarcated land

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While indigenous communities in Paraguay continue to struggle for land rights and several

territorial restitutions are pending, recent progress has been made regarding land restitution.

The Tarymandymi community from Mbya benefited from the restitution of land in Luque. The

Wonta Santa Rosa community also received lands in Mariscal Estigarribia district and the Río

Apa community obtained the regularisation of their traditional lands. Furthermore, the state has

proceeded with implementation of some outstanding sentences offhanded down by the Inter-

American Court, such as the opening of an access road for the Yakye Axa community in the

Chaco, and the first compensation instalment (of three) as a consequence of development

projects for the Yakye Axa, Sawhoyamaxa, Xamok Kasek and Kelyenmagategma communities.

Across Mercosur, the deterioration and fragility of the ecosystems on which their well-being

depends, motivates indigenous people to migrate to the cities, where they tend to find work in

the manufacturing and services sectors. Figure 50 suggests that this migration from rural to

urban areas and the switch from the agricultural to manufacturing and service sectors are

evident in Argentina, Brazil, and Uruguay—where there is a high prevalence of urban service

sector employment.

Figure 50: Indigenous Occupational Structure by Sector

Source: Sistema de Indicadores Sociodemograficos de Poblaciones y Pueblos Indigenas, CELADE, 2015

100

Agricultural

Sector

Manufacturing

Sector

Services

Sector

Argentina

All Female All Male All Rural All Urban

100

Agricultural

Sector

Manufacturing

Sector

Services

Sector

Brazil

All Female All Male All Rural All Urban

100

Agricultural

Sector

Manufacturing

Sector

Services

Sector

Paraguay

All Female All Male All Rural All Urban

100

Agricultural

Sector

Manufacturing

Sector

Services

Sector

Uruguay

All Female All Male All Rural All Urban

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In rural areas, the presence of indigenous people in the manufacturing sector is, in general,

associated with the making of crafts or industries that also depend on natural resources. It is

important to note that, although indigenous peoples participate in the service economy, they do

so for the most part in vulnerable employment including lower-income jobs, short-term work,

and informal employment, such as domestic service in the case of indigenous women. Figure 51

indicates barriers of indigenous into labour markets in all four Mercosur partner countries as

rates of unemployment are higher in comparison to non-indigenous.

Figure 51: Percentage of population unemployed

Source: Sistema de Indicadores Sociodemograficos de Poblaciones y Pueblos Indigenas, CELADE, 2015

Challenges exist in the level of access to adequate health treatments among indigenous

communities in Brazil, and there are vast disparities among income groups (among which higher

percentages of indigenous communities live in poverty) (Ferraz, 2009). Similarly, the most

recent UPR of Argentina noted that indigenous communities, particularly the Mapuche,

experience major health issues as a direct result of pollution from extractive industries in the

country (OHCHR, 2017). The report also identified the increase in agrochemical use in the Gran

Chaco region to be poisoning the air, soil and water (OHCHR, 2017).

Rural Urban

Argentina

Indigenous Non-indigenous

Rural Urban

Brazil

Indigenous Non-indigenous

Rural Urban

Paraguay

Indigenous Non-indigenous

Rural Urban

Uruguay

Indigenous Non-indigenous

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Figure 52: Infant Mortality Rate

Source: Sistema de Indicadores Sociodemograficos de Poblaciones y Pueblos Indigenas, CELADE; *there is no publicly

available data on Indigenous mortality rates in Argentina

Figure 52 above compares infant mortality rates of indigenous populations with those of non-

indigenous communities in Brazil, Paraguay, and Uruguay*. There are considerable disparities

between indigenous and non-indigenous communities in all three countries, but Paraguay and

Uruguay’s rural indigenous populations reflect disproportionately high rates in comparison. While

data on infant mortality rates for indigenous groups in Argentina is not available, the critical

situation of the indigenous population has recently been highlighted by the death of eight

children belonging to the Wichi people due to malnutrition exacerbated by poor access to clean

drinking water (Bianco, 2020).

As such, achieving the right to adequate housing with proper sanitation facilities and clean water

has direct implications for the health of indigenous groups. States must meet obligations defined

by the right to life where measures must guarantee conditions for a “dignified life” (OHCHR,

2015). Considerable disparities are seen for the three indicators (overcrowding, water access,

and adequate sanitation) of adequate living conditions below in all four Mercosur countries.

Rural Urban

Brazil

Indigenous Non-Indigenous

Rural Urban

Paraguay

Indigenous Non-Indigenous

Rural Urban

Uruguay

Indigenous Non-Indigenous

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Figure 53: Access to Adequate Living Conditions for Indigenous Peoples

Source: Sistema de Indicadores Sociodemograficos de Poblaciones y Pueblos Indigenas, CELADE

The situation regarding water sources and sanitation in Brazil is a serious concern for both

indigenous as well as non-indigenous communities. Agricultural expansion projects, including in

Mercosur member states, have at times undermined indigenous peoples’ rights, including their

rights to lands, natural resources, as well as their rights to food, tradition, health and

development. Such projects sometimes deplete water sources, and at times indigenous families

are displaced, often suffering from extreme poverty and marginalisation.

In 2015, the collapse of a dam owned by a subsidiary of the Brazilian mining company Vale,

and the Anglo-Australian multinational BHP Billiton, killed 19 people and destroyed resources

necessary for the livelihoods of the surviving members of the Krenak indigenous group along the

Rio Doce. Unleashing 40 million litres of water and sediment from iron ore extraction, the

collapse of the dam contaminated the sole water supply for hundreds of thousands of local people

(Phillips and Brasileiro, 2018).

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In another example, indigenous campaigns in Brazil highlight how Xingu river residents struggle

with the damage caused by Belo Monte dam and underline the contamination of rivers and

groundwater around the Norwegian Hydro Alunorte aluminium refinery in the Para state. After

years of complaints that the contaminated water was causing diarrhoea, illness, and poisoning

fish populations, government researchers announced evidence of a contaminating leak.

However, soon after the floods swelled the town with red-coloured mud, a leading member of

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Overcrowding Inadequate

Water Sources

Inadequate

Sanitation

Argentina

Indigenous Non-Indigenous

Overcrowding Inadequate

Water Sources

Inadequate

Sanitation

Brazil

Indigenous Non-Indigenous

Overcrowding Inadequate

Water Sources

Inadequate

Sanitation

Paraguay

Indigenous Non-indigenous

Overcrowding Inadequate

Water Sources

Inadequate

Sanitation

Uruguay

Indigenous Non-indigenous

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the $150 million legal claim launched against the Para state government for damages was

murdered (Phillips, 2018).

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Instances of illegal livestock expansion into indigenous lands have become so widespread in

Brazil that the concept has been coined “cattle laundering”, which is defined by “moving cattle

through intermediary farms to make them appear legal and circumventing existing monitoring

systems” (Amnesty International, 2020). JBS, the largest meat-packing company in the world,

for example, was found to have bought cattle from other farms that had illegally grazed in three

indigenous territories. This is not thought to be a rare occurrence as researchers estimate 95%

of farms buy cattle from other farms—indirect suppliers (Amnesty International, 2020).

A 2019 investigation found that three indigenous territories in Rondonia state, the Uru-Eu-Wau-

Wau, Rio Jacy-Paraná and Rio Ouro Preto Reserves, experienced illegal land seizures for cattle

pastures, leading to a loss of indigenous lands, accompanied by threats, intimidation and

violence. According to numerous estimates, Brazil’s Amazon region experienced 7 killings, 7

attempted murders and 27 death threats against Indigenous people in 2019 (Amnesty

International, 2020). Beyond having their land burned and cleared, communities have reported

facing tens of armed individuals clearing pasture in their territory, hearing gunshots, and facing

eviction. According to a former resident, the last two decades saw over 55 families of the Rio

Jacy-Paraná Reserve evicted to make space for cattle.

Data from IDARON, the Rondonia state animal health agency, shows a 22% increase in illegal

cattle ranching in protected areas between 2018-2020. Such agencies have been found to enable

illegal cattle ranching by disregarding indigenous land rights and providing registration

documents for those illegally using the lands (Amnesty International, 2020).

A study in 2016 engaged in discussion groups with peasants and indigenous communities near

a nature reserve in Eastern Paraguay to elicit attitudes towards recent soy expansion nearby.

Interview results demonstrated that soy cropping expansion had created concerns of

agrochemical pollution and displaced a considerable amount of the population (Cardozo et al.

2016).

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While clearing of land as part of agricultural activities and investment projects can

affect livelihoods across populations, the effects on indigenous subsistence livelihoods are of

particular concern by limiting access to game, fish, and honey (Notess & Veit, 2018; Notess,

2018; Notess et al. 2018).

Existing discrimination against indigenous people is particularly evident in the degree of

socioeconomic marginalisation, lack of preservation of indigenous culture, and challenges in

accessing appropriate educational opportunities (OHCHR, 2017). The UNDRIP prohibits

discrimination against indigenous peoples including in relation to education. In that regard,

Figure 54 observes the right to education by comparing illiteracy rates and average years of

study between indigenous and non-indigenous populations in the four Mercosur countries.

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Figure 54: Rates of Illiteracy among Indigenous Populations

Source: Sistema de Indicadores Sociodemograficos de Poblaciones y Pueblos Indigenas, CELADE

The discrepancies in access to education in Brazil are linked only to a limited extent to indigenous

identification as the rural-urban divide plays a more significant determining role. While about

34% of the indigenous community living in rural areas is considered illiterate, 23% of the non-

indigenous are illiterate. Similarly, Figure 54 demonstrates that Indigenous peoples in Brazil’s

urban areas are almost 5% more likely to be illiterate. In contrast, Paraguay also sees rural vs

urban differences, but accessibility is more strongly predicted by indigenous identification. About

54% of Indigenous peoples in rural areas are considered illiterate, in comparison to only 9% of

non-indigenous individuals. Similarly, Indigenous peoples in Paraguay’s urban areas are seven

times more likely to be illiterate. The disparities in literacy rates among Indigenous peoples in

Paraguay can be explained, in part, by examining the average years of study.

Figure 55: Average years of study among Indigenous Populations

Rural Urban

Argentina

Indigenous Non-indigenous

Rural Urban

Brazil

Indigenous Non-indigenous

Rural Urban

Paraguay

Indigenous Non-indigenous

Rural Urban

Uruguay

Indigenous Non-indigenous

Rural Urban

Argentina

Indigenous Non-indigenous

Rural Urban

Brazil

Indigenous Non-indigenous

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Source: Sistema de Indicadores Sociodemograficos de Poblaciones y Pueblos Indigenas, CELADE

While Argentina and Uruguay—those with the smallest disparities in literacy rates—reflect small

discrepancies in average years of study, the situation in both Brazil and Paraguay is of concern.

Anything below a 100% rate of primary education enrolment in Figure 56 below would indicate

an implementation gap in the right to education. Moreover, a lower percentage of school

attendance of indigenous children compared to non-indigenous children is a measure of

inequality.

Figure 56: School Attendance

Source: Sistema de Indicadores Sociodemograficos de Poblaciones y Pueblos Indigenas, CELADE & World Bank Data

Figure 56 demonstrates that while Argentina and Uruguay reflect minor inequalities in school

attendance by indigenous communities, both Brazil and Paraguay indicate sizeable inequalities—

Rural Urban

Paraguay

Indigenous Non-indigenous

Rural Urban

Uruguay

Indigenous Non-indigenous

100

6 - 11 years 12 - 17 years 18 - 22 years

Argentina

Indigenous Non-indigenous

100

6 - 11 years 12 - 17 years 18 - 22 years

Brazil

Indigenous Non-indigenous

100

6 - 11 years 12 - 17 years 18 - 22 years

Paraguay

Indigenous Non-indigenous

100

6 - 11 years 12 - 17 years 18 - 22 years

Uruguay

Indigenous Non-indigenous

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with the largest concern in Paraguay. According to the Latin American and Caribbean

Demographic Centre (CELADE), the lower attendance of indigenous youth to secondary

education is associated with earlier incorporation into the labour market (CELADE, 2018).

According to the last visit of the Special Rapporteur on the right to education, Paraguay reflects

persistent inequalities in the realisation of this right for indigenous children.

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While non-

indigenous adolescents receive over eight years of schooling on average, Indigenous peoples

receive three. As noted in Figure 54-55, about 40% of Paraguay’s indigenous population remains

illiterate and indigenous adolescents are 25 times less likely to attend school than their non-

indigenous classmates.

Poor attendance may be explained by limited incentives for families to invest in schooling when

evidence indicates that only 30% of teachers working in indigenous schools have completed

basic education. The report also finds that there are significant inequalities in the infrastructure

of indigenous schools as only 25% have electricity and only 5% have main water supplied from

a public or private grid, only 7% have toilets with septic tanks, and only 23% have separate

toilets for boys and girls.

At the time of the Special Rapporteur’s visit, government support for the educational needs of

indigenous peoples focused on the provision of centrally mandated services but did not plan on

providing support for educational needs designed by their own conceptions of development and

indigenous education in their own language. In fact, according to the CELADE, security of the

indigenous language, and bilingualism in Spanish are indicators of the respect of the right to

culture and identity (CELADE, 2018). As the most common of Paraguay’s indigenous language,

Guarani, is recognised as a national language in the constitution, Figure 57 compares the

percentage of indigenous populations in Paraguay that only speak their indigenous language

versus those that only speak the national language versus those that speak both.

Figure 57: Percentage of Indigenous Population Fluent in traditional Language in

Paraguay

Source: Sistema de Indicadores Sociodemograficos de Poblaciones y Pueblos Indigenas, CELADE

While the right to culture and identity is integral to the Declaration of Rights of Indigenous

peoples, certain local authorities view the prioritisation of indigenous languages alongside the

national language as a cultural barrier or sign of underdevelopment. According to the report of

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Only

Indigenous

Language

Only Spanish Both

Indigenous

Language and

Spanish

Rural Urban

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the Special Rapporteur, the language is often shunned by teachers, and students hesitate to

speak it in public. Even though it is protected under the Constitution, the plan for Guaraní to be

taught in formal education is viewed as a subsidiary issue as Spanish is considered necessary

for economic opportunities. Studies show systematically that those indigenous people who only

speak their own indigenous language present indicators of unfavourable living conditions in

comparison to those that speak Spanish. While a direct causal link between the ability to speak

Spanish, and improved living standards is difficult to prove, the inability of some to speak

Spanish marginalises them socially and prevents indigenous populations from securing work in

the formal sector (CELADE, 2018).

Language is one of numerous elements in respecting the right to culture and identity - links to

land and water are likewise vital to indigenous culture and identity. However, as briefly presented

above, indigenous land ownership is confronted by numerous challenges. Displacement

commonly undermines the right to culture and identity—especially in Brazil. Furthermore,

various instances of indigenous communities attempting to defend their cultural rights,

inherently connected to environmental and land rights, have concluded in killings. According to

Global Witness, Brazil had the third highest number of killings of environmental defenders,

witnessing 24 deaths in 2019—of which 90% took place in the Amazon (Global Witness, 2020).

5.2.4. Gender Equality

Structural Indicators

The principle instrument guiding the commitment to Gender equality is the Convention on the

Elimination of all Forms of Discrimination against Women (CEDAW). However, via further

adoption of other international, regional, and national instruments, the EU and all four of the

Mercosur partner States commit themselves to end discrimination against women throughout

their institutional, legislative, and normative frameworks (UNWomen, 2009).

Table 36: Commitments to Gender Equality

International EU AR BR PY UY

Convention on the Elimination of all Forms of Discrimination against Women

x x x x x

Fundamental ILO Convention No. 111 on Discrimination

x x x x x

International Covenant on Economic, Social, and Cultural Rights

x x x x x

International Covenant on Civil and Political Rights

x x x x x

International Covenant on the Elimination of all Forms of Racial

Discrimination

x x x x x

Fundamental ILO Convention No. 100 on Equal Remuneration

x x x x x

European Union Member States

EU Charter of Fundamental Rights

Resolution of 3 July 2018 on violation of the rights of indigenous peoples in

the world, including land grabbing (2017/2206(INI)

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Mercosur Partner States

American Convention on Human Rights

x x x x

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Inter-American Court of Human Rights x x x x

Argentinian Constitution x

Argentine Quota Law 1991 x

Argentine Civil Code x

Inter-

American Convention on the Prevention and Eradication of Violence

against Women

x x x x

Argentine anti-femicide law x

Brazil’s 1988 Constitution x

Articles 63-66 of Paraguay’s National Constitution x

Articles 46-48 and 89 of the 1992 Paraguayan Constitution x

Uruguay’s 2006 Domestic Work Law x

Uruguay’s 2008 Consensual Union Law x

Uruguay’s 2008 Reproductive and Sexual Health Law x

Uruguay’s 2009 Law on quotas x

Uruguay’s 2009 Sexual Harassment Law x

Uruguay’s Gender Identity Law x

Uruguay’s Pregnancy Termination Law x

Source: Author’s elaboration.

Process & Outcome Indicators

A plethora of existing literature assesses the state of gender equality across time and countries.

Measuring gender equality, however, can be a difficult and demanding task. While various

indices, including the UNDP’s Gender Development Index, efficiently allocate rankings that

symbolise progress towards achieving women’s rights across countries, they fail to provide a

granular picture of where disparities lie within countries. As such, this report observes indicators

that define capabilities gaps (health, education and nutrition) and disparities in access to

resources and opportunities (Seguino, 2006) (Table 37).

Table 37: Gender Equality Indicators

Key toolbox elements

Indicators

Capabilities Mortality ratio; fertility rate; secondary school enrolment ratio; illiteracy ratio;

educational attainment ratio; rates of malnourishment

Access to

resources/opportunities

Female share of total employment; female share of vulnerable employment;

demographic profile of sectors; unpaid and care work

Source: Author’s elaboration.

European Union

Although inequalities still exist, the EU has made progress in gender equality over the last

decades by embarking on numerous initiatives with a focus on equal treatment legislation across

disciplines, gender mainstreaming, integration of the gender perspective into all policies, and

specific measures for the advancement of women. As such, EU member states reflect some of

the lowest values among UNDP’s Gender Inequality Index (GII). The GII measures losses in

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potential human development due to disparity between female and male achievements in

reproductive health, empowerment and the labour market.

Figure 58: Gender Inequality Index scores among EU Member States

Source: European Commission. Gender equality strategy

Values range between 0 and 1 where higher values indicate higher inequalities between women

and men. With the exception of Bulgaria, Hungary, and Romania, EU member states remain

below scores of 0.20. Low values across the EU are further evident as rather gender-equal

observations of mortality rate, life expectancy, and progression to secondary school (Figure 59).

Figure 59: Mortality rate (left); Life expectancy (middle); progression to secondary

school (right)

Source: European Commission. Gender equality strategy

In order to continue positive trends in the labour market, the region follows the EU Gender

Equality Strategy of which the key objectives include challenging gender stereotypes, closing

gender gaps in the labour market, achieving equal participation across different sectors of the

economy and achieving gender balance in decision-making. The Strategy pursues a dual

0.05

0.1

0.15

0.2

0.25

0.3

0.35

European

Union

World

Average

Male Female

European

Union

World

Average

Male Female

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European

Union

World

Average

Male Female

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approach of gender mainstreaming combined with targeted actions. While the Strategy focuses

on actions within the EU, it is coherent with the EU’s external policy on gender equality and

women’s empowerment (European Commission, 2020).

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While the EU has made significant

progress in the areas of gender equality in the past decade, a small gender disparity continues

to exist in unemployment rates.

Figure 60: Unemployment (top left); % of women in wage employment (top right); %

of population in vulnerable employment (bottom left); time spent on unpaid work

(bottom right)

Source: World Bank Data

Figure 60 presents the share of female workers in wage employment in the non-agricultural

sector (industry and services), expressed as a percentage of total employment in the non-

agricultural sector. In comparison to the agricultural sector, the industry and service sectors

reflect greater rates of formal wage employment—allowing for greater bargaining power through

contractual means. Data on women in wage employment in the non-agricultural sector show the

extent to which women have access to paid employment – which affects their integration into

the monetary economy. This acts as an indicator of the degree to which labour markets are open

to women - which affects not only equal employment opportunities but also economic efficiency

through flexibility of the labour market and the economy's capacity to adapt to changes over

time. Vulnerable employment is defined as informal working arrangements, with a lower

likeliness of decent working conditions, adequate social security and ‘voice’. Such arrangements

can be characterised by shorter hours, unpaid work, inadequate earnings, and lack of social

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World Average European Union

Male Female

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World Average European Union

EU World Average

Male Female

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protection. While vulnerable employment is widespread for both women and men, women are

more likely to help out in a household or family business while men are more likely to be self-

employed (ILO, 2018).

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Figure 60 demonstrates that vulnerable employment is not of great

concern for women in the EU.

The concentration of women in certain sectors may result from cultural attitudes that prevent

them from entering industrial employment. This is particularly harmful to women, who have a

much narrower range of labour market choices and lower levels of pay than men.

Figure 61: Employment by Gender and Sector

Source: World Bank Data

There are several explanations for the importance of service jobs for women. Figure 61

demonstrates that while the EU is a service economy with both a majority percentage of men

and women working in the service industry, the agricultural and industrial goods sectors are

predominantly male.

Mercosur

In recent years, Argentina has focused on eradicating gendered violence by launching the

National Action Plan to Prevent and End Violence against Women 2017–2019. Argentina has also

taken numerous steps towards bridging the labour market-related gender disparities. The

country recently joined the GQUAL Campaign which supports balance in international

organisations. Additionally, the past decades have benefited from further implementation of the

Argentine Republic’s National Plan of Action to implement UN Security Council resolution 1325

(2000). As an indicator of its commitment, Argentina is also in the process of establishing a “UN

Women” office in Buenos Aires to further support its recent commitments.

Throughout the last decade, Brazil’s strategy to improve the situation of women (through

initiatives such as the Bolsa Familia, Brazil Without Extreme Poverty, the National Documentation

Program, My House, My Life, Brasil Cariñoso, Light for All, Social Assistance Network, and Pro-

Gender and Racial Equality in Businesses program, continue) continues to have a significant

impact on the socio-economic opportunities for women.

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Male Female

Industrial Service Agriculture

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While focusing on ending violence against women by forming a task force for the implementation

of its 2016 Law for Comprehensive Protection for Women Against Violence, Paraguay has also

adopted strategies to bridge the rural-urban gaps with the implementation of the Public Policy

Law for Rural Women, thus far training more than 1,000 rural women on agriculture techniques.

Finally, with the support of UN Women, Paraguay has also proposed legislation aimed at

increasing women’s participation in politics.

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Finally, Uruguay has implemented advances in legal, programmatic, institutional and budgetary

frameworks to further gender equality initiatives in the country. The National Institute for

Women’s Affairs (INMUJERES) was established in 2005 and has since launched numerous gender

equality programs, including those under the National Plan for Equal Opportunities and Rights

which has mainstreamed a gender-based approach.

While significant progress has been made in the areas of gender equality in the past decade, the

four Mercosur countries continue to score poorly on gender equality.

Figure 62: Gender Inequality Index scores among Mercosur partner countries

Source: UNWomen. Americas and the Caribbean

Argentina, Brazil, and Paraguay all reflect GII scores significantly higher than those across EU

member states. While Uruguay is lower than Romania, at 0.28, it also raises higher concerns

than those in the EU. However, observing mortality rates, life expectancy, and enrolment in

secondary schooling across Mercosur, women seem to fare better than men (Figure 63).

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0.1

0.2

0.3

0.4

0.5

0.6

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Figure 63: Mortality rate (left); Life expectancy (middle); progression to secondary

school (right)

Source: UNWomen. Americas and the Caribbean

Across Mercosur, women remain more vulnerable to poverty and malnourishment and spend

twice the amount of time on unpaid domestic work (OECD, 2019). Women’s labour market

participation is lower than men’s, they are more likely to be working in vulnerable employment,

and their positions render them less likely to reap the financial benefits of any sectoral trade

increases. Figure 64 compares female unemployment against male unemployment in all

negotiating states. World Bank data demonstrate that a small gender disparity exists in

unemployment rates in the EU and a far larger disparity in Mercosur member states.

Figure 64: Unemployment (top left), % of women in wage employment (top right); %

in vulnerable employment (bottom left); % of time spent on unpaid work (bottom

right)

100

150

200

AR BR PY UY

Male Female

AR BR PY UY

Male Female

100

AR BR PY UY

Male Female

Argentina Brazil Paraguay Uruguay

Male Female

AR BR PY UY

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Source: World Bank Data

Figure 64 presents the share of female workers in wage employment in the non-agricultural

sector (industry and services), expressed as a percentage of total employment in the non-

agricultural sector. Wage employment in industry and services takes place in the formal economy

where women have greater bargaining power through contractual means. Data on women in

wage employment in the non-agricultural sector show the extent to which women have access

to paid employment – which affects their integration into the monetary economy. This acts as

an indicator of the degree to which labour markets are open to women - which affects not only

equal employment opportunities but also economic efficiency through flexibility of the labour

market and the economy's capacity to adapt to changes over time.

The current share of women in wage employment within the negotiating parties is of concern

mainly in Paraguay, where only about half of the female workforce is employed under formal

arrangements.

While reducing unemployment is a priority, it is equally important that employment does not

place women in positions of vulnerability. According to a 2018 ILO report, women are often

sought for different kinds of employment that make them vulnerable through unjust wages, and

informal employment. The lack of formal complaint mechanisms such as human resource

departments, labour unions, or open and objective channels for communication poses serious

concerns about the ability to hold employers accountable and to provide fair working conditions

(ILO, 2018). Vulnerable employment is defined as informal working arrangements, with a lower

likeliness of decent working conditions, adequate social security and ‘voice’. Such arrangements

can be characterised by shorter hours, unpaid work, inadequate earnings, and lack of social

protection. While vulnerable employment is widespread for both women and men, women are

more likely to help out in a household or family business while men are more likely to be self-

employed (ILO, 2018).

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Figure 65 demonstrates that while vulnerable employment is typically not of great concern for

women across Argentina, Brazil, and Uruguay, rates across all Mercosur countries are greater in

comparison to the EU. Concerns are particularly present in Paraguay where 42% of women are

engaged in vulnerable employment. According to UN Women, the integration of women in the

Paraguayan workplace occurs unequally, with noticeably different rates of involvement in the

labour market between men (87.1%) and women (62%). These disparities in the labour market

may be explained by the fact that a majority of women in Paraguay work in the informal sector,

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AR BR PY UY

Female Male

Argentina Brazil Paraguay Uruguay

Male Female

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where vulnerable working conditions provide monthly wages equal to only 71% of those of men’s

(UN Women, 2009).

Casual or temporary jobs — to which women have more access — usually include few, if any,

social benefits (ILO, 2018). Additionally, the gender gap in earnings is particularly high in

informal employment, where unpaid work has been registered in cases of piece-rate employment

arrangements (Hinojosa, 2009). Women may be drawn into lower-paying service activities that

allow for more flexible work schedules, thus making it easier to balance family responsibilities

with work life. On a daily basis, in all four Mercosur member states, women spend more than

double the amount of time on unpaid domestic and care work than men.

Across both the EU and Mercosur countries, the concentration of women in certain sectors may

result from cultural, structural, and traditional elements that prevent them from entering

industrial employment. In fact, the last two decades have seen men’s employment in industry

increase by 5.3%, while the global share of women in the industry has declined by 5.6% (ILO,

2016).

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This is particularly harmful to women, who have a much narrower range of labour

market choices and lower levels of pay than men. Men continue to make up the majority of

people employed in all three sectors, but the gender gap is biggest in the industrial sector.

Figure 65: Percentage of Female Employment (left) and Male Employment (right) by

Sector, 2017

Source: World Bank Data

There are several explanations for the importance of service jobs for women. Figure 65

demonstrates that while all negotiating parties are service economies with both a majority

percentage of men and women working in the service industry, the agricultural and industrial

goods sectors are predominantly male. Women's wage employment is important for economic

growth and the well-being of families. However, women often face obstacles such as restricted

access to credit markets, capital, land, and training and education; time constraints due to

traditional family responsibilities; and labour market bias and discrimination. These obstacles

force women to limit their full participation in paid economic activities, to be less productive, and

to receive lower wages.

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Argentina Brazil Paraguay Uruguay European

Union

Industrial Service Agriculture

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Argentina Brazil Paraguay Uruguay European

Union

Industrial Service Agriculture

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The realities provided above outlining the gendered realities of unemployment, contractual

arrangements, vulnerable employment, and sectoral make up define the basis for the study’s

analysis. The baseline highlights that women have restricted access to land as collateral, provide

disproportional amounts of unpaid labour, are at risk of informal arrangements and are most

commonly employed in the service sector.

5.3. Analysis

Based on the results of the economic analysis from the CGE modelling along with the analysis in

the previous chapters, we look at the aggregate welfare effects, GDP, results on skilled and

unskilled labour, loss of tariff revenue and sectoral effects to assess the implications for the

selected human rights on the EU, Argentina, Brazil, Paraguay, and Uruguay.

5.3.1. Right to an Adequate Standard of Living

Section 5.2.1 provided a baseline scenario of current progress towards achieving the right to an

adequate standard of living across four Mercosur states and EU member states. Poverty has

decreased in the last decade in all Mercosur partner countries, with the exception of Brazil.

However, while all headcounts of poverty below the line of $1.90 per day were decreasing over

the medium term, Mercosur member states continued to reflect greater populations in poverty

than those of the EU from 2004 -2017. Data on food and water insecurity demonstrates that

conditions for the achievement of the right to food have improved since 2005 in all negotiating

parties except for Paraguay, where 12% of the population remains undernourished. As regards

the right to water, World Bank data illustrates that the situation of Brazil and Uruguay’s rural

population are of greatest concern. The Association Agreement has the potential to directly

impact the right to an adequate standard of living in the negotiating parties through two central

mechanisms:

1. Effects of investment on housing, living conditions, and access to land

Increasing the ability of EU investors to purchase agricultural land in Mercosur can increase

global production and generate income for all four member states. However, with a pattern of

prioritizing economic development over land rights, there is often controversy over the

displacement of local people and the sharing of benefits provided by surrounding natural

resources.

While interpretation of some CGE results on human rights impacts is straightforward, others can

prove to be rather ambiguous and dependent on external factors. The CGE results demonstrate

that exports will increase in all negotiating parties, particularly for Brazil and Argentina.

According to USAID, Brazil has implemented legal provisions to address inequities and land

disputes that may arise from increased exports, providing small farmers with forest lands for

cultivation. However, section 5.2.3 demonstrates that in practice, such commitments are weak,

and development activities add continuing pressure (USAID, 2019).

According to stakeholder contributions for the 2017 UPR, Brazil is struggling to protect rural

residents from violations regarding the right to an adequate standard of living, adequate

housing, food, and water. Poor working conditions are common in infrastructure projects, such

as poor housing conditions and long hours at the Santo Antônio factory in northern Brazil.

Additionally, expansion of soybean cultivation risks increasing unemployment in rural areas as

it is recorded to displace eleven agricultural workers for everyone finding employment in the

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sector (Clay, 2013). Further, stakeholders reported that coffee plantations in the southern region

of Minas Gerais have exhibited concerning numbers of slave-like working conditions—notably

even among those certified as sustainable. Cases have also been recorded of exploitation of rural

workers in Brazil’s informal sector as they are unable to retire. In order to retire, workers are

required to submit a declaration of rural activity. Cases have been noted of workers unable to

convince their landowners to issue the necessary documents to claim their retirement rights with

the National Social Security Institute (OHCHR, 2017).

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Paraguay is particularly vulnerable to the effects of investment on exacerbating existing

inequalities in the agricultural sector. The sector contributes to about 25% of GDP, and the last

decade has witnessed its success in transforming itself from a net importer into a large–scale

exporter. However, with private ownership of 60-80% of the country’s land by only 2-3% of the

population, an export-oriented development strategy risks leaving small holder farmers behind.

Almost half a million small-holder families are estimated to lack access to land in the country.

The nature of FTAs leads them to inherently benefit farmers producing export crops, often having

negative impacts on farmers producing foods for the domestic market as they face pro-

competitive effects. Only 6% of agricultural land in Paraguay is available for domestic food

production, whilst 94 % is used for export crops. Further lowering trade barriers risks

encouraging conversion to higher-value crops for export, and further exacerbating inequality in

the country.

Impacts on Uruguay may be positive. Throughout the last decade, Uruguayan governments

have managed to provide a high level of access to basic services such as education, electricity

and sanitation. However, the North of the country suffers from disproportionally higher levels of

poverty. As such, if increases in investment prioritise the north of the country, increases in

employment, income, and training, may prove beneficial for the region.

Some stakeholders pointed to the efforts by foreign investors who engage in corporate

responsibility, and often finance local health, education, cultural, and capacity building programs

across the Mercosur region. Investment could provide greater opportunities for formal

employment and mitigate the lack of accountability in informal arrangements. Transnational

corporations have played a significant role in the regional economies—particularly in Brazil, with

the world’s 25 largest transnational agricultural suppliers having a presence. However, as

increasing investment may pose risks, including increases in inadequate living conditions as a

result of investment-induced labour demands or increased land inequality, any benefits such as

local infrastructure development and formal employment will partly depend on the strength of

accountability mechanisms. Such mechanisms can be identified either in the private sector via

properly monitored due diligence, or in through public policy measures via institutional

strengthening and regulatory enforcement.

2. Effects of trade in goods, investment, and public procurement on water security

Section 5.2.1 demonstrated that lack of access to basic drinking water services is most

concerning in Brazil’s rural areas (13.4% of the population) and Uruguay’s rural areas (6.3% of

the population). As such, impacts in terms of the right to water are expected to be bigger in

these two countries than into Argentina and Paraguay were lack of access to basic drinking water

services range from 0%-1.6% of the populations.

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Lack of clean drinking water in Brazil’s rural areas is of serious concern. The country’s water

companies suffer significant water losses (more than a third of the supply, on average) and have

high operating costs. In light of the concerns about the right to water as an effect of foreign

investment described in section 5.2.1 and 5.2.3, increased investment — particularly involving

agricultural expansion and the construction of dams — poses a number of risks as it may lead

to the contamination of critical water supplies for Brazil’s rural populations (USAID, 2011).

While Uruguay has a National Water Policy, there is currently no formal mechanism to

coordinate the work of different organisations with responsibilities in the field of water, sanitation

and hygiene. A 2012 report by the Special Rapporteur on the human right to safe drinking water

and sanitation raised concerns relating to the possible impacts of large-scale investment projects

on the quantity and quality of water in the country. Particular concerns surround access to

drinking water for those living in rural areas (OHCHR, 2012)

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. According to the CGE results,

investment in Uruguay may increase up to 1.4% above the baseline. Sector specific results

demonstrate that the largest increase in Uruguay’s outputs will consist of Vegetables and Bovine

Meats – water-intensive industries. However, initiatives with the specific aim of reducing

disparities of access levels include financing plans to distribute water more efficiently and make

it more affordable for vulnerable groups. Should investment help build infrastructure to improve

water distribution services in rural areas impacts could be positive.

5.3.2. Right to the Enjoyment of the Highest Attainable Standard of Mental and

Physical Health

In addition to the impacts of individual income gains on household health expenditure as well as

state level GDP increases on earmarking gains for the provision of health care, the Association

Agreement can impact the achievement of the Right to Health through six key mechanisms: 1)

Phytosanitary issues and food safety; 2) Trade in goods and non-communicable diseases; 3)

Impact of trade in services and health-related goods on scope and quality; 4) Intellectual

property rights, pharmaceuticals, and associated technologies; and 5) Procurement; and 6)

Trade in services health workforce retention.

1. Sanitary and phytosanitary regulation and enforcement issues

About three fourths of new human diseases emerge from animals. Although most new diseases

emerge from wildlife, intensive industrial livestock systems appear to present greater risk than

traditional systems without robust safety inspection standards, production methods and controls.

Trade in services and trade in goods can increase risks of communicable disease through

increases in cross-border activity. However, increased trade with countries that uphold higher

standards, can indirectly improve safety inspection procedures by the need to align standards.

The possible implications of trade liberalisation on food safety are both negative and positive.

Free trade agreements provide the conditions to facilitate and increase trade, while always

protecting the life and health of consumers, animals and plants.

Results from the consultation activities indicate that European stakeholders share widespread

concerns over food safety issues from Mercosur exports to the EU and lack trust in the ability of

partner countries to enforce EU standards because food safety non-compliances have been found

in products imported from the Mercosur partner countries in the past. The Association Agreement

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aims to reduce non-tariff barriers, including control and customs requirements. Where approved,

economic operators in the EU and the Mercosur countries may benefit from "low documentary

and data requirements” and “low rate of physical inspections and examinations”. Although some

stakeholders suggest that trade facilitation might lead to relaxed standards, it should be pointed

out that SPS requirements of the EU remain unchanged and the EU will therefore continue to

ensure a high level of protection of products imported from the Mercosur countries.

The AA is expected to induce improvements in SPS controls and standards across Mercosur

countries, while not having any negative impact across EU member states. While reduced levels

of inspection activity may raise alarms on the surface, the reductions are based on the

compliance of the SPS rules of the importing country, which include the approval of countries

and economic operators. Both must first comply with criteria predefined by the importing country

before becoming approved to benefit from reduced requirements. The EU already conducts

extensive audits of compliance with EU level sanitary standards across all Mercosur partner

countries before becoming an approved trade partner of animal products.

Increased food trade and cooperation with Mercosur countries, where safety inspection systems

and enforcement mechanisms have historically been weaker, is expected to produce further

alignment to EU standards. Further, the TSD chapter of the agreement reaffirms explicitly the

‘precautionary principle’ and the right of both sides to adopt measures to mitigate any perceived

risk of serious environmental as well as human health and safety. The principle is also included

in the SPS chapter.

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However, improvements in SPS controls and standards in the Mercosur countries will require

cooperation with the EU and the guarantee of robust monitoring/enforcement mechanisms by

the Mercosur countries. Food safety enforcement is somewhat dependent on institutional

strengths of the Mercosur countries and their ability to control corruption. Brazil’s 2017 meat

scandal, involving rotten and contaminated meat, is said to have been caused, in part, by the

bribery of health inspectors and politicians.

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Unlike the EU-Mexico Global Agreement, which

was the first to include provisions to fight corruption and measures to act against bribery and

money laundering, the EU-Mercosur AA does not include any chapter dedicated to this issue.

Further, the replacement of parastatals with private sector actors at specific nodes in the supply

chain can lead to challenges in managing food safety by national authorities, as has been shown

in the case of the dairy sector. Dairy production in low and middle-income countries has

increasingly shifted from a formal sector heavily supported and supervised by the public sector

to a largely autonomous informal sector, with associated increasing difficulties of inspection and

regulation. However, with an increase in inspection standards, trade may lead Mercosur

countries to identify food safety concerns already present in the domestic market, but that had

gone under the radar until arrival in the EU. For example, chemical contamination was not

identified in traditionally smoked fish imported from the Ivory Coast until it arrived in France.

In low- and middle-income countries, there is little evidence that a lead reason for the spread of

foodborne diseases is trade liberalisation. As imported food from the EUis typically of higher

sanitary quality than food in Mercosur’s domestic markets, there is little scope for concern

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regarding imports of foodborne illnesses. In fact, EU investment in Mercosur countries can also

lead to positive health impacts in the latter. Increasing demand for meat and other livestock

products increases private investment in the intensification of animal production in all four

partner countries. Positive implications can arise if large food multinationals, with

complexsupply chains adopt private systems of higher quality than existing standards. By

training employees with local networks, this has the possibility of higher standards spilling over

to surrounding firms. One study found that Kenyan farmers who received food safety training

used safer chemicals and had fewer reported health problems. However, the results are varied

as no benefits were found for exporters of seafood in Brazil. Indeed, while increased enforcement

of food safety inspection might increase standards for export-oriented foods, there is little

evidence that the benefits extend to domestic incidence of foodborne illnesses in Brazil and

Paraguay. Most food sold in Brazil and Paraguay’s domestic markets is still not subject to

effective food safety management.

Additionally, higher standards may also give private companies considerable negotiating power

with governments when developing food safety regulations, which may further barriers for small-

scale producers. Indeed, the other way around, food safety can also affect the ability to enjoy

the benefits of liberalisation. International trade studies have found evidence that the fixed costs

of meeting standards can lead to increases in inequality by favouring established exporters.

Considering the country’s unequal land distribution, this is particularly concerning for Paraguay.

2. Increase in non-communicable diseases (NCDs) as a result of changes in the patterns of

food consumption brought about by changes in income, lifestyle and the food industry

(nutrition transition)

During this study’s consultation activities, stakeholders expressed widespread concerns on the

impacts of increases in EU exports making unhealthy commodities (including foods high in fat,

salt and sugar, processed meat and alcohol and tobacco) more accessible across Mercosur

states.

Considering existing trends in all four of the Mercosur trading partners as well as patterns

across the EU (section 5.2.2.), the most evident risk of the Association Agreement regards the

nutrition transition and obesity. A number of studies suggest that trade is associated with

increased intake of soft drinks and fast foods while evidence points to a correlation between

imports and expenditure on unhealthy foods (Hawkes, 2006; WHO, 2015; Milijkovic et al. 2017).

Rapid increases in sales and marketing of packaged foods took place in lower-middle-income

countries in the 1990s as a direct effect of liberalisation.

A recent study on the determinants of obesity in Brazil found that an increase in trade openness

has directly led to an increase in overweight and obesity ratios in Brazil (Milijkovic et al. 2017).

The implementation of free trade agreements in Latin America has been found to be associated

with changes in the availability of meat, dairy products, and processed foods. Imports of

processed cheese slices—a novel product in the region—grew by over three thousand percent.

Island countries perhaps reflect examples of the most severe cases as imports of high-fat meats

led directly to the decline of traditional root crops.

In practice, the effect of trade liberalisation has been variable, but there is some evidence of a

price lowering effect on energy-dense foods and diets. Possibilities of EU FDI in the form of large

European multi-national supermarket chains, such as Aldi and Lidl, poses both benefits and

challenges in Mercosur partner countries. While supermarkets have a larger selection of health

foods in comparison to traditional retailers, they have been found to charge lower prices for

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processed foods and higher prices for fresh nutritious foods in comparison to traditional retailers.

In fact, the price difference between healthy and unhealthy foods in supermarkets naturally

drives consumers to unhealthy choices as healthy foods typically cost 10% to 60% more than

processed foods. While informal markets and traditional retailers benefit from pricing advantages

for local foods, pro-competitive effects may cause them to exit the market, as has been evident

in Mexico (Atkin et al. 2017).

The situation in Paraguay is of particular concern because the country is at the highest risk of

facing the double burden of malnutrition. The country reflects the greatest levels of inequality

and provides the least measures of social protection. Although there is evidence on the impact

of trade liberalisation on food availability and prices, there is little written evidence of the direct

impact of trade liberalisation on the prevalence of undernutrition. Evidence suggests that trade

liberalisation leads to increased national food availability in net-importing countries which in turn

leads to declines in stunting. Imports move countries with insufficient domestic food production

towards food adequacy. However, Paraguay does not suffer from insufficient domestic food

production but is financially incentivised to export 94% of it. Lowering tariffs via the AA may

further influence household malnutrition among farming families via pro-competitive effects of

imports and increasing financial incentives to export. Policies limiting domestic support for the

agricultural sector, alongside pressures of increased agricultural production of high-yield cereals

with lower nutritional content, can lead to reductions in micronutrient nourishment (DeFries et

al. 2015).

3. Impact of trade in goods and services on rural health services

Apart from the obvious gains from trade in high quality medical equipment, trade in health

services under Mode 1 and Mode 3 present possible opportunities for rural healthcare in

Argentina, Brazil, and Paraguay.

The opportunity to remotely supply health services (mode 1) stems from advancements in

technological progress and information technology that allow for medical services—as simple as

diagnostics or complex as remote surgeries—to electronically deliver. As a global hub for medical

and technological advancements, a trade relationship with the EU offers Mercosur partner

countries the ability to engage with professionals with vast experience using such technologies.

Increases in mode 1 trade can increase the scope of health services reaching geographically

remote populations that may not be adequately served by existing systems. In addition to

increasing scope, the remote supply of health services can decrease costs for users. Considering

rural populations in Argentina, Brazil, and Paraguay may be subject to longer distance travelled

to reach healthcare, cost reductions of remote supply expand beyond possible direct costs, to

include opportunity costs through time savings. In addition, the possibility of engaging with a

physician online in the privacy of an individual’s home may encourage an increase in dialogue of

culturally sensitive health issues—such as reproductive health.

However, increase in trade of remote healthcare services is not without risk. First, depending on

costs, remote services may exacerbate existing health disparities among the poor. Considering

that all three countries’ exhibit rural-urban income disparities, benefits of mode 1 trade will only

be possible if affordable. Second, the increase in culturally sensitive dialogue is largely

dependent on two factors: the user must have internet and access to either a smartphone or

computer in the household and the user has to actually have a spacious enough household to

find privacy. Considering that 17-22% of the population in the three countries live in slums

characterised by overcrowding, the latter is questionable. In addition, while more than 80% of

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Argentinians have internet in the household, less than 70% do in Brazil and Paraguay. Finally,

increasing such services risks the possible reallocation of resources away from rural health care

and towards export-oriented specialised health services targeting higher income populations.

In addition, foreign direct investment (mode 3), can also contribute to reaching the Right to

Health in Argentina, Brazil, and Paraguay. Investment in rural areas can contribute to upgrading

health care infrastructure, it can create jobs, and encourage the transfer of know-how and

medical expertise to local providers and practitioners. However, risks include establishing a

duality of healthcare and increasing disparities between the wealthy and poor. A foreign private

clinic or hospital may incentivise “internal brain drain” where the already small number of health

workers in the three countries, but especially in Paraguay, may be drawn to work at foreign

firms with higher salaries. Considering that all three countries currently benefit from less than

1% of external health expenditure, there is sparse evidence for effects in practice.

4. Impact of strengthened intellectual property rights and access to medicines

Perhaps one of the most debated areas of trade regards access to medicine. The duty to assure

that all health care services are accessible implies an obligation on all four Mercosur states and

EU member states to ensure access to affordable and safe drugs. There are two key areas to

assess the impact: the effect on the price of medicines, and the effect on innovation.

While the AA is not expected to impact the right to access to medicines across the EU,

stakeholders have expressed concern that increased patent protection may put the right at risk

across Mercosur countries. Some empirical studies suggest that increasing patent protection

for medicines has a direct impact the price of medicines (Shadlen, 2019). A number of ex-post

studies find higher prices following increased IP protection in Malaysia, Brazil, and Jordan

(Dommen, 2020), and a 2018 study of prices in OECD countries finds that stronger IP standards

correlate with higher national pharmaceutical expenditure (Jung & Kwon, 2018). However, as

most medicines on the WHO essential medicines list are available in generic form, the impact of

the AA would be quite limited. Further, the agreement is not expected to contain TRIP+

provisions on regulatory data protection or supplementary protection certificates—suggesting

that the impact on access to novel medicines would not be significant. The exclusion of such

provisions is welcomed by numerous stakeholders who expressed concern on how the previous

EU proposal on IP could have had a negative impact on access to medicines across Mercosur

(Ghiotto & Echaide, 2019).

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As noted in the baseline, in Argentina prices for most medicines are currently higher than the

median price around the world (with medicine for cardiovascular disease deviating by 167% and

for diabetes by 170%). Similarly, all medicines in Brazil are more expensive than the median

price (and these price deviations can range from 12.04% more for bacterial infections, 160%

more for cardiovascular treatment and 174% more to treat anxiety disorders). These price

deviations could be attributed to the relatively high tariff barriers for EU exports to Mercosur –

nine out of the top-20 EU exports face ad-valorem tariffs of over 10%, while tariffs for medical

instruments and equipment can be as high as 18%. Reduction or elimination of tariffs and non-

tariff barriers could in fact reveal a positive impact of the AA in terms of cheaper medicines and

medical instruments in Mercosur.

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Even in the absence of stricter IP provisions for patent protection, the AA may incentivise R&D

and innovation to some extent. The AA's incentive provisions, which have as their objective

supporting innovation and new medicines, could potentially lead to lower costs for the health

care system, as well as incentives for FDI in Mercosur countries’ health sectors. Significant

challenges regarding AMR, new diseases, and neglected tropical diseases among other threats

require innovation, research, and development for new drugs and vaccines. The AA’s provisions

on procurement present a viable opportunity for Mercosur countries to take advantage of health-

related innovation as a result of increased FDI.

Finally, Paraguay is in a unique position to benefit from strengthened IP enforcement as

improved border enforcement could indirectly contribute to a reduction in the country’s

counterfeit pharmaceutical trade which poses serious risks to public health. In fact, alongside

China and India, Paraguay is one of the largest producers of false pharmaceuticals, where 30%

of medicine is counterfeit.

5. Impact of procurement on quality of health services, goods, and management

Procurement could also have direct benefits for the four Mercosur countries. Novel access to

government contracts could allow the partner countries to procure both higher quality healthcare

goods at discount prices, as well as services for management efficiencies (Bloom et al. 2013).

While trade agreements covering investment in services typically exempt public services,

including health services, the EU-Mercosur AA text opens procurement options at the national

level. In fact, Mercosur governments have engaged in public procurement processes and

strategies to reduce the price of medicines since 2015. They have successfully joined forces to

negotiate lower prices for several medicines including drugs for treating HIV, hepatitis C

antivirals and oncology medicines. However, liberalizing the procurement market risks

weakening participatory approaches in the design of strategies for the provision of public goods

and services.

6. Health workforce –capacity building and tech transfer opportunities matched with risks

of brain drain exacerbation

Lastly, mode 4 of trade in services—namely the movement of natural persons—could have both

negative and positive impacts for both the EU as well as Mercosur. The movement of health care

professionals can facilitate the promotion of knowledge spill overs and increase capacity in

Mercosur countries in two ways. First, exchange programs for Mercosur physicians to spend time

in the EU, and vice versa, can facilitate capacity building and increase the preparedness of both

sides in the case of an outbreak. In fact, the Global Health Security Index uses the presence of

an exchange program as an indicator of health security in the country, but it highlights that none

of the four Mercosur countries have evidence of supporting any exchange program for medical

training. Second, much like the opportunities presented by trade in services mode 1 and 3,

Mercosur countries—especially Brazil and Paraguay—can take advantage of such exchange

programs and establish them in rural areas lacking healthcare.

However, mode 4 may present a serious risk concerning brain drain phenomena. Temporary

exchanges may encourage permanent movement, risking a loss of critical health care

professionals. This risk is costly for the constrained human capital in medical resources across

Brazil and Paraguay, but also for the investment costs lost in training professionals in the home

country.

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5.3.3. Rights of Indigenous Peoples

Building on CGE outcomes, existing literature, and stakeholder contributions across this study

as well as those identified in past consultations, this section identifies three possible impacts of

the Association Agreement on the rights of indigenous peoples in Argentina, Brazil and Paraguay.

1. Effects of investment, natural gas extraction, and agribusiness on Indigenous Land Rights

A key characteristic among indigenous communities is the inherent relationship with nature.

Acting as stewards of natural resources, indigenous communities often live in biologically diverse

and resource-rich areas. However, the lack of formal registration of this traditional relationship

with the land across Argentina, Brazil, and Paraguay, have led indigenous communities to

be particularly vulnerable to dispossession of their lands.

The CGE model predicts increased output in some agricultural sectors in Mercosur countries,

which may lead to pressure on land use and potential impacts on indigenous populations’ access

to land. To take the important case of beef, in the conservative scenario where EU tariffs are

reduced by 15%, output increases in Argentina by 1.3%, in Brazil by 1.2%, and in Paraguay by

0.2%. In the ambitious scenario, where EU tariffs are reduced by 30%, output expands most in

Argentina with a 2.5% increase, in Brazil, by 2.0% and in Paraguay by 0.6%.

On a sub-sector level, the AA’s impacts on beef output in particular in Brazil and Argentina are

relatively modest and reflect the impact of a limited market access opening that is small in

relation to existing production levels. The AA impacts on beef output in Paraguay are very small

in the CGE modelling and reflect Paraguay’s small share of historic Mercosur beef exports to the

EU.

As in Mercosur, only 40% of the land is used by agricultural activities, risks exist for expansion

of the agricultural frontier. According to stakeholder responses, the majority of land clearing in

Argentina is caused by soya and cattle production, leading to the displacement of many

indigenous communities (Yousefi et al. 2018).

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Likewise, the majority of land clearing in Brazil

is caused by the demand for cattle and soy. Over a period of a decade, the rapid spread of soy

cultivation has led to the displacement of about 300,000 people in Rio Grande do Sul, Brazil,

and 2.5 million people in Paraná, Brazil (Clay, 2014). Stakeholders reflect widespread concerns

that increased agricultural exports risk furthering the agricultural frontier into the Brazilian

Amazon which, in turn, threaten the natural resources indigenous communities rely on.

For the reasons set out in Chapter 4, increases in agricultural production do not necessarily take

place at the expense of forests. Past evidence for Brazil has pointed towards agricultural

expansion through intensification without inducing deforestation. Forest and indigenous

protection policies play a key role in determining whether agricultural expansion takes place at

the expense of land dispossession and deforestation. This is demonstrated by data from the

period 2004-12 when production of beef and various crops increased while deforestation

decreased in the country (Chapter 4). Further, according to this study’s agricultural sector

analysis, there may be an increase in the density of animals per hectare in Brazil rather than an

increase in the use of land. Already deforested lands tend to be used for low efficiency

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pastures

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and the north of Brazil reflects high variability in productivity,

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both suggesting

room for intensification.

However, while policy frameworks for the protection of indigenous rights are theoretically in

place across all Mercosur countries to ensure agricultural expansion would advance without

jeopardizing rights of indigenous communities, section 5.2.3 highlights numerous shortcomings

in both Argentina and Brazil’s protection mechanisms. FUNAI’s activities, including the

demarcation, protection, and maintenance of indigenous reserves are of particular importance

to avoid risks of land dispossession in Brazil. However, the undermining of FUNAI’s authority

since 2016 and the drastic decrease in demarcation progress, together with agricultural

expansion, raise concerns for indigenous land dispossession. Additionally, while Argentina’s

national land survey is meant to register and protect indigenous lands, registration activities

have been slow and failed to comply with given deadlines for completion. The growing number

of legal challenges brought against investments on indigenous lands, particularly across

Argentina and Brazil, already reflect the disconnect between a theoretical respect for the rights

of Indigenous peoples and practical implementation of measures to ensure that the right is

respected and fulfilled.

Further, a lack of adequate dispute settlement mechanisms for indigenous communities may

cause communities to place themselves at risk of not being able to speak out against land

intrusion. As already mentioned in section 5.2.3, threats, violence, intimidation, and killings of

indigenous activists are frequent across all three countries, and particularly in Brazil (Phillips and

Brasileiro, 2018). 

In Brazil, mechanisms to implement the right to prior, free and informed consent (PFIC), along

with environmental impact assessments, risk becoming tick box exercises (OHCHR, 2017) that

therefore fail to prevent the adverse effects of investment. Projects such as Belo Monte, Teles

Pires and São Manoel Hydroelectric Dams, the Tapajós Dam project have passed through

congress in Brazil, despite violating indigenous rights to consultation (OHCHR, 2017). Impact

assessments fail to be conducted locally, and the process is to be devised in a way to enable

rights holders to demand inclusion in the decision-making process in its entirety. According to

the 2016 Brazilian mission report of the Special Rapporteur on Indigenous rights, such concerns

are aggravated by the growing use by the judiciary of the “security suspension” mechanism —

which suspends certain rights in favour of other interests, and thus allows projects to proceed

even if they risk leading to serious violations (OHCHR, 2016).

In Paraguay, any increase in demand for land without legal land rights risks an exacerbation of

conflict between indigenous communities, private sector, and government officials as records

indicate agro-business commonly threaten those engaging in territorial claims. Economic growth

in the country has historically excluded indigenous peoples as they have not benefitted from

significant reductions in poverty levels.

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In addition, the situation in Argentina is different from that of Brazil and Paraguay in that

indigenous communities face a continued struggle against natural gas extraction—particularly in

the country’s Vaca Muerta region (see section 5.2.3.), where shale and tight gas production is

expected to continue to grow irrespective of the AA (USEIA, 2019). However, there are no tariffs

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IPAM Amazonia (2017)

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MDPI (2018)

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on imports of natural gas into the EU, so Mercosur gas exports will not be directly affected by

tariff liberalisation under the Agreement.

2. Impacts of investment and agribusiness on indigenous health

Beyond direct loss of land, agricultural expansion also threatens indigenous health with the

increase of pesticide use in the intensification of agriculture. The CGE model predicts increased

output in some agricultural sectors in Mercosur countries, with potential impacts on the proper

distribution of surrounding natural resources.

Additional production of some agricultural products may lead to pressure on land use with

adverse impacts on environmental conditions. As a result of agricultural expansion, Mapuche

communities in Argentina were subject to major health issues including impacts from increased

use of agrochemicals in the Gran Chaco region as well as soybean monoculture production which

led to polluting the local air, soil and water (OHCHR, 2017). Further, intensification of cattle

breeding in Argentina and Brazil may risk ill management of manure associated with adverse

effects on water and local environments (see Chapter 4).

3. Effects of investment on tradition and livelihood transitions

The CGE model predicts increased output in some agricultural sectors in Mercosur countries,

with potential impacts on traditional livelihoods and shifting labour structures. The CGE results

demonstrate an increase in investment in Argentina, Brazil, and Paraguay. If this investment is

to take place in rural areas, the indigenous livelihoods in the agricultural sector may be adversely

affected. Hinojosa (2009) finds that incentives to accentuate asset concentration, particularly

land, in order to produce economies of scale and to participate in the process of market

expansion, could affect the most vulnerable groups if no mitigating measures are implemented

to avoid asset dispossession and unfair labour-market practices. In Brazil, the natural resources

on which indigenous communities depend for their livelihoods risk reduction as an effect of

further agricultural expansion into the Brazilian Amazon or the Gran Chaco region (OHCHR, 2017;

Dommen, 2019).

However, while land conflicts persist as a result of foreign investment in rural territories,

indigenous people have, in some cases, managed to negotiate with companies involved to obtain

benefits such improved sanitation, jobs, and the building of schools and roads (Cali, Ellis and

Willem te Velde, 2008). In some instances, trade and investments have provided indigenous

peoples with new employment opportunities and income gains with further intangible positive

impacts such as on indigenous women’s confidence and bargaining power. According to a 2011

FAO report, the social impacts of transnational corporations (TNCs) investing in rural territories

can actually be positive through higher wages and job creation (Nascimento, 2011).

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However,

this evidence points to transitive benefits deriving from foreign investment in economic activities

other than agribusiness. Evidence on transitive benefits of agribusiness specifically is sparse

across Argentina, Brazil, and Paraguay. Furthermore, where employment benefits may be

possible, they may not provide sufficient compensation for risks of adverse effects on their

territories, inherently linked to their livelihoods, know-how and culture (OHCHR, 2013; OHCHR,

2016).

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While the protection of traditional knowledge and genetic resources is mentioned in the

agreement’s proposed IP chapter, the text is brief. Recognizing ‘the importance and value of

biological diversity and its components and the associated traditional knowledge, innovations

and practices of indigenous and local communities’, the text reaffirms sovereign rights over

natural resources. However, considering domestic shortcomings in protecting the cultural rights

of indigenous peoples and local communities—especially in Brazil—it is unlikely that the inclusion

of article 6 is able to mitigate risks to traditional know-how and culture.

In summary, concerns exist for indigenous land rights across Mercosur’s rural areas. While such

concerns exist independently, the AA’s impact on agricultural output and investment risks

contributing to the situation. Effective PFIC and complaint mechanisms are essential to ensuring

that development does not come at the expense of indigenous rights. Upholding the protection

of indigenous reserves and maintaining robust enforcement are other important mechanisms.

The analysis above sets out important concerns regarding the current effectiveness of these

measures. While increased output in some agricultural sectors can impact the distribution of

natural resources and, in turn, health, existing evidence is insufficient to assess the direction of

the impact. Furthermore, whilst new income-generating employment or new infrastructure

opportunities may be a way of realizing the human rights of rural inhabitants in general, those

who wish to maintain their lands and traditions may find the former insufficient if they come at

the cost of the latter.

5.3.4. Gender Equality

While gender inequality seems to be of lesser concern among most EU member states, concerns

remain across Mercosur. Women suffer disproportionately from poverty and malnourishment

while undertaking unpaid domestic and care work. They are more likely to be unemployed, and

when they are employed, it is likely in vulnerable employment and at a lower wage than their

male counterparts.

There is an expansive pool of research focusing on the link between female

employment and equilibrium effects of trade liberalisation. However, results are variable as

export increases may increase employment and minimise the pay gap in some countries while

decreasing the labour pool in other countries. Considering the economic, social, and cultural

complexities in the role of gender, impacts on gender equality will be context specific and depend

on the sector, the country and a range of other factors. Studies assessing the effects of

liberalisation in Latin American countries demonstrate that trade appears to have divergent

gender effects, in some cases, these give rise to considerable concerns (Seguino, 2006; Dias,

2010).

Trade liberalisation may impact women and men differently presenting different potential

benefits as well as challenges. We draw on the CGE results to observe sectoral effects – in the

broad sense in which the economy is divided into agriculture, manufacturing and services sectors

– in order to assess the implications for gender equality in the EU, Argentina, Brazil, Paraguay,

and Uruguay. Bearing in mind the results of the stakeholder consultations undertaken for this

study as well as similar results from consultations undertaken in a 2019 study by Alliance Sud,

we identify three main mechanisms through which the Association Agreement can impact gender

equality (Dommens, 2019).

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1. Impacts of trade in goods on employment

Following results from the quantitative analysis, the bulk of output and export increases from

Mercosur will be in agricultural and industrial goods, which are sectors where ownership is

dominated by men. While female wages may increase, special attention should be paid to

potential consequences for income disparities as they risk increasing at a lesser rate than that

of men. While the literature concludes that liberalisation certainly affects wages, it differs

between sectors, as well as countries (Satveren, 2003). An UNCTAD study estimating the impact

of trade integration on women’s employment in Mercosur concluded that liberalisation had a

slightly positive impact on women’s employment in the service sector, but no impact in the

agricultural or industry sectors (UNCTAD, 2018).

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This CGE analysis conducted for the present

study also found a slightly positive impact on the services sector, in which 87% of Uruguay’s

female labour force and 92% of Argentina’s finds itself.

Trade liberalisation in Brazil did not improve gender equality in the 1990s (Dias, 2010). While

the employment gap between women and men did narrow, it did so as an outcome of job loss

for both rather than as a result of increases for women. Pro-competitive effects forced those

working in sectors with increased imports to exit. As in Brazil, the trade sector is dominated by

men, they disproportionately feel the effects of gains or losses. According to results from the

CGE model, agricultural exports from Mercosur are estimated to intensify, however benefits to

the female workforce are limited because land ownership is traditionally skewed towards men.

One survey estimated that in Brazil only 11% of the land was owned by women (although this

was likely to be an underestimate given that the questionnaire did not give the option of

indicating that land was owned jointly with a spouse) (Deere and Leon, 2003). Lack of land

ownership does not only limit wage benefits for women in Brazil, it also restricts women’s access

to credit due to the impossibility of using land as collateral (Deere and Leon, 2003). Liberalisation

in a sector where men receive higher earnings may increase income disparity as increased cash

crop returns flow primarily to men. While this does not necessarily increase poverty in the female

population, it is important to note the risks to women’s economic independence.

On the other hand, trade liberalisation improved both employment and wages for women in

Uruguay, but the direction of gender gap impacts were dependent on the specific trade flows

(Terra et al. 2008). Another study found the reduction of import tariffs to have a variable effect

on female-to-male employment ratios in Paraguay dependent on the sector. The impact on

female employment was positive in terms of production tasks but negative for non-production

tasks (UNCTAD, 2018).

Where women do work in the industrial and agricultural sectors, increased trade may lead to

possible employment losses as technological and skill upgrading link to exports may affect

women across all four Mercosur partner countries. Typically hired for unskilled ‘feminine’

jobs, women risk being replaced by men when technological upgrading is introduced in both

manufacturing and agricultural sectors in the case of Mercosur (Dias, 2010). Post trade

liberalisation across Latin America in the 1990s, labour markets reflected a mismatch between

available skills among the female work force and those newly demanded by the market and

decreased female employment. In fact, as pro-competitive effects of trade liberalisation across

all four Mercosur partner countries caused local firms to exit and job losses, a higher percentage

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of women lost their jobs and were less likely to find new employment in trade sectors (Azar,

2004).

At the same time, losses in formal manufacturing employment are often compensated by

increases in informal employment across both the manufacturing and agricultural sectors.

Women are intentionally sought for work because they are more likely to accept poor working

conditions (Dias, 2010). It has been argued that over the past three decades trade liberalisation

along with inadequate finance policies have contributed to the growth of vulnerable employment

across Mercosur (Seguino, 2006). According to ILO data, eight out of ten new jobs in Latin

America were created in the informal sector in the 1990s (Dias, 2010). Evidence indicates that

trade liberalisation risks contributing to inequality by increasing the probability of women

working in the informal sector (Goldberg & Pavcnik, 2007).

According to the CGE results, production and exports of textiles and garments (T&G) in the EU,

Brazil, Argentina and especially Uruguay will increase. In Europe, women make up more

than 70% of workers in these sectors (Euratex, 2016), and while it is unclear how widespread

informality is in Europe’s T&G sector, a 2014 report estimates that a third of the workers in

Eastern European countries operate on informal contracts (Clean Clothes Campaign, 2014).

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In Argentina, it is estimated that the garment sector consists of 80% of female workers where

three-fourths are estimated to be informally employed, receiving no social benefits or protection

(SOMO, 2011). Similarly, 94% of the T&G workforce in Brazil are women where almost a fourth

work in home-based workshops (BSR, 2017). On the other hand, while the informal sector is

widespread in Uruguay, it is equally represented by both women and men (see Chapter 7).

Finally, beyond vulnerable employment, women undertake twice the amount of unpaid and care

work than men. Literature suggests that women bear the burden of household adjustments as

increases in exports lead to reductions in women’s leisure time, especially for women with less

bargaining power in the household (Floro, 1995; Satveren, 2003; Darity, 1995). While an

increase in women’s paid employment in exporting industries is beneficial, the number of unpaid

labour women are expected to take care of does not decrease, but rather is done at the cost of

women’s leisure time, more so than for men (Fontana and Wood 2000; Erturk, Catagay and

Darity, 1995).

2. Effects of economic growth on Mortality

A quantitative analysis of liberalisation across Latin American countries, including the four

Mercosur partner countries, demonstrates that while economic growth leads to inevitable

decreases in mortality across both genders, the effect is stronger for men. The CGE results

demonstrate that all four of the Mercosur partner countries will benefit from GDP increases (Table

38).

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The countries included in the study are Bulgaria, Croatia, Romania and Slovakia (in the EU) and Bosnia & Herzegovina,

Georgia, Macedonia (FYROM), Moldova, Turkey and Ukraine.

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Table 38: Macroeconomic impacts of the AA in the ambitious scenario

Region GDP % GDP EUR bn Invest

Real Wages

(Skilled)

Real Wages

(Unskilled)

EU28 0.1 20.9 0.5 0.3 0.3

Brazil 0.3 9.0 0.8 0 0

Argentina 0.7 6.4 1.6 0.3 0.4

Uruguay 0.4 0.4 1.4 0.3 0.8

Paraguay 0.1 0.1 0.4 0.2 0.3

Source: CGE Modelling Results.

However, untangling the mechanisms through which economic growth impacts mortality is

complex. Some argue that if growth results in job “flexibility,” women may differentially bear

the costs of economic insecurity (Seguino, 2006; Dias 2010; UNCTAD, 2018).

Another common argument, particularly relevant to the situation in Argentina, regards a

“backlash” against women as a result of economic deterioration across male employment. A

decrease in economic opportunities for men is said to contribute to increasing rates of domestic

violence, and the so-called “crisis of masculinity” (Chant 2000). Violence against women is of

particular concern in Argentina where poverty has been on the rise the past two years. Female

victims of violence have limited access to legal aid and face continued sexist stereotypes

amongst authorities (OHCHR, 2017). The worsening of gender-based violence has been noted

by numerous local civil society groups including the Mesa Intersectorial and the Centro de

Protección Familiar foundation. Further, shortcomings of national and provincial authorities’ data

collection methods on femicides have been highlighted, and unpunished killings of women

continue to raise alarms (OHCHR, 2017).

3. Effects of investment and trade in goods on education

Finally, effects on gender equality and educational attainment are ambiguous across all

negotiating parties. According to a quantitative assessment of the effects of liberalisation on

education, increase in trade as a % of GDP was found to have negative implications for gender

parity in education across Mercosur states (Seguino, 2006). However, increases in investment

were found to have positive effects on female educational attainment. It is unclear why the two

liberalisation effects take opposite directions, but net effects are in any case found to be small

(Seguino, 2006). In regard to impacts of the AA, Seguino’s methods would suggest that the

agreement’s impacts on investment in Argentina would lead the country to experience most

benefits for gender equality in education (Table 38).

An important finding from the Alliance Sud study undertaken in 2019 is that Mercosur countries

have largely relied on tariff revenues for a significant portion of the public budget (Dommens,

2019). Tariff reductions from the Association Agreement risk decreasing available funds for

public provision of key services including healthcare, social security, and education, which might

disproportionately affect women. Argentina may face a reduction of up to 0.6% in tariff revenue,

and with an applied custom averaging duty of 13.5%, Brazil also risks large public revenue

losses. A reduction in public services affects women not only as direct beneficiaries of those

services but also as a source of employment given that across Mercosur states, the public sector

employs a significant proportion of women.

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5.4. Conclusion

Building on the results of the initial screening, based on human rights commitments, stakeholder

consultation results, and recent developments in the EU and Mercosur countries, this chapter

focused on impacts in four human rights areas: 1) the right to an adequate standard of living;

2) the right to health; 3) the rights of Indigenous peoples; and 4) gender equality. In order to

best assess possible risks and provide appropriate flanking measures, the four selected rights

needed to be assessed against identified trade measures and have cross-cutting relevance to

the Association Agreement specifically.

The study undertook an assessment of structural, process, and outcome indicators relevant to

each right. Findings suggest that the AA is expected to impact on the Right to an Adequate

Standard of Living in two main ways. Impacts could be either positive or negative and are largely

dependent on the strength of accountability mechanisms across Mercosur. First, increases in

investment could provide greater opportunities for formal employment and mitigate the lack of

accountability in informal arrangements. However, increasing investment may also pose risks,

including by increasing inadequate living conditions as a result of investment-induced labour

demands or exacerbating land inequality—especially in rural areas. Second, in rural areas in

both Brazil and Uruguay increases in investment could create additional challenges with respect

to access to basic drinking water services.

Concerning the Right to Health, our analysis suggests that the Association Agreement presents

significant opportunities from trade in services and the potential to increase health care services

in rural Brazil and Paraguay. Opportunities also exist via procurement, and transfer of know-how

through the movement of persons. However, risks exist in terms of possible brain drain impacts

and consumer trust as regards phytosanitary measures. While stakeholders have expressed

concerns that new IP rights might have an adverse impact on access to medicines across

Mercosur, the absence of TRIP+ provisions suggest such risks will not materialise. Further, the

removal of tariffs as well as NTBs may expand access to cheaper medicine and medical

equipment. Moreover, EU-Mercosur cooperation on IP enforcement presents opportunities to

curtail the prevalence of counterfeit pharmaceuticals in the region.

While the situation of indigenous people has seen improvements in Argentina and Paraguay in

the last decade, Brazil has regressed since 2014. While Brazil made several steps forward in the

previous decade, including through the expansion of indigenous reserves, the recent situation in

Brazil gives rise to considerable concerns, inter alia in the light of the shrinking resources for

FUNAI, a considerable slowdown of the demarcation process (including the reopening of already

demarcated land), and the recognition that the slowdown in demarcation has been accompanied

with growth in large scale agribusiness and extractive projects (OHCHR, 2017).

Agricultural expansion and increased investments as a result of the AA may pose risks to

indigenous peoples’ land rights in Argentina, Brazil and Paraguay. However, the potential impacts

are small as the AA only slightly increases output of agricultural products such as beef across

the three countries in the CGE modelling.

While protection mechanisms are in place to ensure that any expansion of agriculture is not at

the expense of indigenous rights, shortcomings in current policy frameworks exist. There is a

key disconnect between theory and practice in the protection of indigenous rights and access to

justice. Strengthening such institutional mechanisms can help ensure indigenous peoples are

consulted in the expansion of agricultural or investment projects, and in turn, adverse impacts

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are minimised. Additionally, investment can bring about positive effects including in terms of

employment and infrastructure development. Nonetheless, while investments in rural

employment and infrastructure increase the standard of living for inhabitants, they should not

be considered to replace or justify the lack of consideration for indigenous rights to traditional

lands, resources, and culture.

Concerning gender issues, women are estimated to benefit from the AA. However, as women

are underrepresented in tradeable sectors, and increases in agricultural and industrial exports

may result in technical upgrading, women are expected to benefit from employment and income

gains less so than men. Women’s labour market participation is lower than that of men, they

are more likely to participate in vulnerable employment, and are less likely to reap the financial

benefits of any sectoral trade increases. However, opportunities exist—particularly in education.

While both genders will benefit, risks for widening rather than narrowing indicators of inequality

exist across Mercosur as men are expected to benefit disproportionately.

5.5. Policy Recommendations

 Mercosur and EU governments should continuously monitor the enjoyment of

all the four rights and use the instruments available under the Agreement to flag

changes in the human rights situation. With the development of proper accountability

mechanisms, as well as adequate flanking measures, the AA has the potential to provide

important benefits to the participating countries.

 Mercosur and EU governments should ensure adequate access to relevant and

recent data for the continuous monitoring of outcome indicators. Mercosur should focus

on increasing data collection and availability efforts to monitor indigenous rights as well

as women’s rights and health indicators. The EU should continue data collection efforts,

and where possible, assist Mercosur partner countries.

Right to an Adequate Standard of Living

 Mercosur and EU governments should require businesses to present a plan on

the provision of adequate living and working conditions for employees prior to the

approval of investment projects that are expected to require a large labour force in an

underdeveloped area.

 Paraguay should implement land reforms so as to enhance resource access for

small-holder farms and distribute trade benefits.

Right to Health

 All parties should take steps in reducing risks of increasing obesity, possibly with

measures such as information campaigns, educational programmes, front of package

(FOP) nutrition labelling.

 All parties should make sure that physician exchange programs under mode 4

ensure balanced female participation and distribute participants proportionally across

rural and urban areas.

 All parties should cooperate on matters related to incentivising research and

development of new medicines while providing access to affordable medicinal

products.

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 All Mercosur countries, particularly Argentina and Brazil, should establish

physician exchange programs to place EU professionals in rural areas and increase

healthcare services.

 Mercosur countries, with the support of the EU, should implement programs to

retain their domestic health workforce and mitigate “brain drain” concerns.

Rights of Indigenous peoples

 The governments of Argentina, Brazil, and Paraguay should strengthen their

institutional frameworks for the protection of indigenous peoples.

o Argentina should provide necessary resources for the National Institute of

Indigenous Affairs to expedite activities for the completion of the Territorial Survey

of Indigenous Communities to avoid post-investment land disputes.

o Brazil should retract its proposed bill to open indigenous lands for natural

resources and re-prioritise the demarcation of indigenous lands as well as providing

FUNAI with adequate resources to protect lands.

o All three countries should prioritise mechanisms to implement the right to

prior, free, and informed consent, particularly among municipal

governments in states with large indigenous populations. The EU’s

consultation strategies provide examples of good practices. Mercosur governments

should establish regular roundtables, and a civil society dialogue so that proposed

investment projects are presented prior to their approval.

 The EU should encourage European businesses to engage in consultations with

indigenous communities before investing. Given the issues surrounding local

enforcement of PFIC and impact assessments, such efforts will help recognise the rights

of indigenous peoples while avoiding land disputes months into planned investments as

has been evident in past cases in Argentina and Brazil.

 The EU should encourage EU businesses to consider human rights impacts

alongside cost-benefit analyses prior to approval of large-scale investments.

Such assessments could employ stated/revealed preference methods to capture the

impacts on non-market values inherent to indigenous traditions (OECD, 2018) and could

give consideration to protective or compensating measures including infrastructure

development, capacity building and skill training, etc.

Gender Equality

 Mercosur countries should invest in rural development programs in support of

female-headed farms to tackle the traditional skewness towards male-owned land. A

similar approach as Brazil’s My House My Life program

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could be considered, but for

female-headed households to purchase land rather than property.

 Mercosur countries should invest in capacity building and training programmes

specifically targeting women across agricultural and manufacturing sectors to tackle

potential job loss due to skill upgrading, and historical difficulties in accessing training.

 Argentina and Brazil should provide further resources for campaigns fighting

domestic violence.

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http://worldpolicy.org/2016/07/07/brazil-my-house-my-life/

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6. Sectoral Analysis

6.1. Qualitative Analysis

Some of the dimensions of the analysis are hard to quantify and require other methodologies.

Moreover, even when it may be possible to assess impact through quantitative methods, it is

necessary to qualify the results in order to assess likelihood. For example, data from CGE models

may not reflect the very recent policy or economic developments. For these reasons, we carry

out in-depth qualitative analysis focusing on ten key sectors.

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The sectoral analysis is based

on data on production, trade, tariffs and revealed comparative advantages. It is also grounded

in the reports, assessments and evaluations of relevant international organisations,

complemented by academic literature.

Consultation with experts and stakeholders

We exploit the networks of contacts of the researchers and the institutions involved, particularly

those located in Mercosur, to undertake interviews about specific issues that may be hard to

quantify or that may require qualification. For example, countries may present non-reported

restrictions to trade that need to be identified and be described by the local experts. In particular,

experts are useful in addressing the following issues:

 NTBs such as non-automatic licenses, SPS measures, and technical barriers to trade.

 Barriers to services provision. For example, market reservation and restricted modes of

provision.

 Restrictions on the provision of services under mode 3 (commercial presences) and other

restrictions on FDI.

 Restrictions on foreign companies bidding in government procurement procedures.

 Regulations on intellectual property rights such as patent protection and the enforcement

of these rights.

 Geographical Indications and origin denominations

We also use expert input to evaluate some potentially non-quantifiable aspects that can

substantially affect the results of the agreement. In particular, we evaluate:

 The operation of the Mercosur customs union. Although applying a common external tariff

(CET), Mercosur is not yet a fully operational customs union. Members have the capacity

of changing unilaterally tariffs. Moreover, there are sectors where the FTA component

(i.e. trade within Mercosur) is not liberalised.

 The existing Common Automobile Policy in the Mercosur and its reform. This may have

important implications for how the FTA with the EU may affect the automobile sector.

 The non-automatic licenses regime in Argentina. Although this regime has been simplified,

several products are affected by this measure.

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The sectors have been selected in consultations with the EC.

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Chapter 7 provides more information about the stakeholder consultation process, concerning

sustainability aspects in addition to the economic issues.

6.2. Cross-Cutting Issues

For each sector addressed, this chapter observes several cross-cutting themes, namely, SMEs,

consumers, government procurement, LDCs and OMRs.

6.2.1. Small and Medium Enterprises (SMEs)

SMEs are major employers in both partners. Even in sectors such as car manufacturing, both

the EU and Mercosur are populated by many SMEs as the main manufacturers. Moreover, given

the integration of the sector into value chains, they export as well. On the other hand, although

Mercosur agricultural production and exports tend to be dominated by large farms, there are

many small and medium farmers that may be affected by the agreement. The presence of SMEs

on the EU side is even more substantial. Some of them are important exporters that face serious

barriers to export to Mercosur given their high tariffs and NTBs. In addition, small farmers are

important to the EU agricultural sector.

The data presents some challenges. Surveys of firms and farms, in the case of Mercosur, are

not easily available and present issues with their consistency among members. However, there

is information about the number of firms by sector, size and country that can be used in the

analysis. From the results of the CGE, it is possible to identify sectors where trade and production

will expand or contract and assess whether those sectors are characterised by a large number

of SMEs. If more detailed information about trade flows of SMEs to the participant countries is

found, this number is refined to obtain a more precise number of potential firms or farms affected.

The impact on SMEs is also assessed through the development of a questionnaire, specifically

targeted to SMEs, further to the example set by SME Tests developed in the context of other

negotiations.

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6.2.2. Consumer Impacts

FTAs can have important effects on consumers in terms of price, quality and quantity. The

removal of barriers to trade reduces the price of imported goods, especially when tariffs are high.

It also increases prices of exported goods in the short run as domestic supply is used to supply

the expanded opportunities in the destination market. At the same time, the EU-Mercosur FTA

could increase the availability and variety of goods in both partners. In addition to the increase

in the existing imports, there may be additional products imported that increase the supply of

varieties in both partners. Overall, this maximises the utility that consumers derive from the

consumption of goods by virtue of the preference for variety that consumers present.

In addition, consumers derive utility based on the quality of the products. This includes direct

elements such as the safety as well as indirect elements such as the ethical considerations in

production including animal welfare or the labour conditions in the production. Products that

address these issues, present among European consumers and increasingly in consumers in

Mercosur, are considered as higher quality and of higher value. Moreover, geographical

indications and denominations of origin define particular characteristics of the product. The

quantitative elements (price, quantity) can be assessed using consumer welfare analysis. Other

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See EC, 2015c.

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non-measurable effects can be assessed by looking into concepts such as consumer detriment

and the analysis of the consumer conditions. In the first case, the effect of an agreement can be

assessed by looking at the loss of consumer welfare generated by the market and regulatory

failure or trade barriers. Their removal indicates the benefit for the consumer.

The European Consumer Agenda suggests a sequence of questions to answer with respect to

consumer effects. Although inspired by an analysis of the EU Single Market, the framework can

be adapted to accommodate the EU-Mercosur Agreement. For example, although cross-border

trade is limited (e.g. France and Brazil share a land border), there are possibilities of business-

to-consumer transactions between Mercosur and EU’s firms and citizens that need to be

evaluated. Other questions such as the effects on prices, quantity, availability as well as the

safety of consumer products and services can be considered using this framework. Additional

input to the cross-cutting consumer analysis is provided through the stakeholder consultation

process. We structure the assessment on consumers based on the set of test questions, which

feature in the Better Regulation Guidelines and Toolbox.

6.2.3. Government procurement

None of the Mercosur members has signed the WTO Government Procurement Agreement (GPA).

Consequently, the access of foreign firms to the government tendering process is discretionary

in Mercosur countries. This has limited the capability of EU firms, especially SMEs, to provide

goods and services to Mercosur governments. Access to tenders is, generally, only possible when

there is a significant lack of local capacity.

The agreement could open the possibility for European firms to participate in the procurement

and tendering process in Mercosur countries. They will be able to compete with local and other

Mercosur countries’ suppliers. Overall, through bilateral and plurilateral agreements (such as the

Mercosur or GPA agreement respectively), the EU pursues the mutual opening of procurement

markets. In case such reciprocity is not provided, as explained in the 2019 Guidance on third

country bidders,

the economic operators that do not have secure access to the EU procurement

market through an FTA or the GPA may be excluded from procurements in the EU. Therefore,

the Mercosur agreement will provide Mercosur firms with secured access to the EU procurement

market.

At the same time, it will benefit Mercosur governments by increasing the competition in the

process, allowing to procure under lower prices. The effects of the agreement on procurement

are likely to be larger in sectors such as chemicals and pharmaceuticals and on machinery.

6.2.4. Least Developed Countries

None of the Mercosur members are LDCs. Trade between the EU and Mercosur suggests the

possibility that some LDCs, currently receiving preferences under the Everything But Arms (EBA)

initiative may be affected. In particular, the increased market access that the Mercosur countries

will receive as a result of the FTA may reduce the value of the preferences received. Our

assessment of the impact examines the degree of similarity of exports to the EU between each

Mercosur member and each LDC. This can be performed by the calculation of the Finger-Kreinin

index at much disaggregated levels (i.e. Common Nomenclature at 8 digits or Harmonised

System at 6 digits). This indicates the potential negative effect for LDC exporters, also compared

against the existing EU MFN tariffs in order to assess more properly the magnitude of the impact.

On the other hand, as both partners will get increased access to each other’s markets, there will

be more opportunities for LDCs through their current integration into value chains. We perform

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this analysis by looking into the results of CGE models that can assess the effects on LDCs of

the agreement between both partners.

6.2.5. Impact on EU outermost regions (OMRs)

The assessment of the possible impact of this agreement on the economies of the EU's outermost

regions is an important element of the Mercosur SIA. The OMRs are not singled out in the GTAP

database and therefore cannot be analysed by CGE. This, therefore, entails a qualitative

approach, setting out the structure of production and assessing this in view of the overall impact

on certain products (notably sugar and fruits). The team has collected different views during the

stakeholder consultation and taken them into consideration throughout the different sections of

the report.

6.3. Sectoral analysis: Agriculture

6.3.1. Beef

Sector overview

Mercosur countries have been among the main historical suppliers of beef to the EU and Mercosur

presents important production capacities. The importance of Mercosur as a supplier of beef is

explained by the traditional links, consumer preferences as well as certain policies affecting the

bilateral trade. The Mercosur beef export supply is diverse. On one side, Mercosur is a major

exporter of processed beef (e.g. corned beef). This export supply, whose development started

thanks to European investments in the late XIXth and early XXth, is demanded by many low-

income consumers in the EU. On the other extreme, beef from some of the Mercosur countries

(i.e. Argentina) is recognised in the European consumers as synonymous of the highest quality

and it is consumed by the high-income end of the income distribution in the EU. This puts

Mercosur as a diversified exporter of beef that can supply a wide range of consumers in the EU.

Production, trade and consumption

Table 39 and 40 present the beef balance in the EU and Mercosur. This indicates how much

production, consumption and trade have evolved, measured in quantities, in the last 10 years.

Unfortunately, it is impossible to obtain more updated information for Mercosur with this level

of detail. In the EU, consumption fell between 2007 and 2013 and then picked up considerably

between 2014 and 2018 (see data table), although it remains however, lower than it was in the

early 2000s. EU production has also grown considerably and in 2018 reached its highest level

since 2007. This is in part due to the pick-up in domestic consumption and part in response to

the growing demand for EU exports of both bovine meat and live animals.

Measured in volumes, Mercosur is the largest supplier of beef to the EU, accounting for 73% of

total EU beef imports. This share, however, has been coming down during the analysed period.

This may be the result of a joint effect associated with the increase in market access and exports

into the EU from third suppliers and a generalised fall in the total Mercosur volume of exports.

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Nevertheless, the importance which China as a destination of beef exports has acquired in the

last years cannot be downplayed.

193

The introduction of export duties and other restrictions to exports of beef in the mid 2000’s (although substantially

removed recently) has played a significant role.

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In terms of consumption, Mercosur countries have been experiencing an increase in per capita

consumption and the EU, on the other hand, experienced a fall. In Argentina, the fall in per-

capita consumption experienced since the 1970s has now stabilised while Brazil’s consumption

has increased.

These long-term trends may experience some short-run cycle associated with the economic and

the livestock cycle. In the first case, the economic crisis that affected Mercosur countries in the

last three years may have affected beef consumption and it may have increased export surplus.

This is not reflected in the analysis as more recent data are not available. On the other hand,

change of producers’ expectations resulting from the change in government in Argentina and

Brazil during 2015-16 may have led to a reduction of short-run production of beef to increase

the number of cows. This process seems to have stopped, and production has increased during

2017 (Infocampo, 2019).

Table 39: Beef balance in the EU (in thousands of tonnes carcass weight equivalent)

2010 2011 2012 2013 2014 2015 2016 2017 2018

Gross indigenous production

8,203 8,183 7,855 7,488 7,655 7,835 8,070 8,107 8,236

Net production

8,100 8,036 7,697 7,379 7,541 7,657 7,852 7,869 7,994

Consumption

8,167 7,995 7,761 7,523 7,641 7,743 7,907 7,884 8,044

Imports meat

321 287 275 304 308 300 304 285 303

Imports (live animals)

0 0 0 0 0 0 0 0 0

Imports (total)

321 287 275 304 308 300 304 285 303

Exports (meat)

253 327 210 160 208 211 249 271 250

Exports (live animals)

104 147 159 109 114 178 219 238 242

Exports (total)

357 474 369 269 322 389 468 509 492

Source: Eurostat

Table 40: Beef balance in Mercosur (in thousands of tonnes carcass weight equivalent)

2010 2011 2012 2013 2014 2015 2016 2017

Production

12612 12356 12690 13373 13382 13132 12963 13470

Apparent consumption

10109 10240 10382 10681 10588 10521 10267 10543

Export

2539 2157 2369 2750 2874 2673 2764 2992

Imports

36 41 61 59 80 61 69 64

Exports to EU

298 258 251 255 245 236 245 244

Source: FAOSTAT. Comtrade

The share and volumes fell substantially around a decade ago and have since been fairly stable.

The fall was associated in part to the increase in consumption experienced in Mercosur as well

as with changes in structure of the destination suggest that other non-EU markets have gained

relevance. The Russian Federation, China and Egypt, for example, absorb, in volumes, more or

similar volumes of Mercosur’s beef exports than the EU.

Table 41 presents bilateral trade in beef between Mercosur and the EU in values. Beef represents

around 3% of the total EU imports from Mercosur. This share has gone up as the value of total

EU imports from Mercosur has decreased (around 20% with respect to the 2012 values).

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Nevertheless, the value of the EU imports of beef from Mercosur have remained relatively

constant since 2012 around Euros 1.3 billion. This is explained primarily by the fact that most of

the imports from Mercosur (by value) are limited by quotas. The share of Mercosur in total EU

imports in value remains close to the share observed in volumes. Moreover, it also presents a

decreasing trend and indicates a reduction of near six percentage points in the last 5 years. This

fall seems to be explained by a combined effect of a fall in the volumes imported, discussed

before and an increase in the import prices.

On the other hand, the importance of the EU as a destination of exports measured in values is

substantially higher than when measured in volumes. In fact, the EU doubles its share when the

influence of prices is considered. The EU represents almost 17% of the value of the beef exported

by Mercosur.

Table 41: EU-Mercosur bilateral trade (in billions of Euros)

Year

EU beef

imports

from

Mercosur

Beef

products

in total

imports

from

Mercosur

(%)

Total

EU beef

imports

Share of

Mercosur

in total EU

imports of

beef (%)

Mercosur

beef

exports to

Total

Mercosur

beef

exports

Share of EU

in total

Mercosur

beef exports

(%)

2012

1.3 2.6 1.8 73.9 1.3 7.1 18.4

2013

1.3 2.9 1.8 72.6 1.2 7.7 16.2

2014

1.3 3.3 1.9 71.6 1.3 8.5 15.6

2015

1.4 3.3 2.1 66.2 1.4 8.6 15.8

2016

1.4 3.4 2.0 68.0 1.4 8.4 16.7

2017

1.3 3.2 1.9 69.0 1.4 8.5 16.5

Source: Eurostat and UN Comtrade. Note: Differences between the value of exports and the value of imports due to

different data sources and transformation into Euros of data originally in US dollars.

Trade composition

Mercosur beef exports can be classified as fresh, frozen and processed beef. These categories

are also distinguished by whether beef include bones. However, due to SPS rules, almost all EU

beef imports are boneless. Table 42 presents the detail of the beef imports from Mercosur

classified using the EU Common Nomenclature at 8 digits between 2015 and 2017. Fresh beef

constitutes the most important beef product imported from Mercosur, accounting for more than

half of the total value imported. In turn, Mercosur represents nearly 64% of the total EU imports

on this product. In general, this product represents the higher quality side of the distribution of

products. This product is for what Mercosur beef imports are known for in the EU.

Frozen beef is another important beef product imported from Mercosur. Mercosur represents

around 80% of the EU’s total frozen beef imports from the world. This is trade is limited to the

hindquarters of the animal, based on the higher value assigned by the EU consumer. However,

they are of less value than fresh or chilled beef. Forequarters and other cuts are frequently

exported by Mercosur to Israel and other low-value markets. Finally, processed beef (e.g.

thermo-processed) is another key product in the trade between Mercosur and the EU. Mercosur

accounts for almost all the EU imports on this product, where Brazil is by far the largest supplier.

However, the volumes imported by the EU have observed a decline in the last five years. This is

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in large part because China and other emerging markets are increasingly demanding this product

from Mercosur, reducing the supply to the EU.

Table 43 presents the Mercosur exports to the EU as Mercosur reports them. The differences in

value with respect to the value of the EU imports from Mercosur are related to the different

source of data and the transformation to Euros of the exports originally expressed in US dollars.

The table presents the average value of total Mercosur exports in each product. It also presents

the share of the EU as a destination for each product.

The most important exported beef product for Mercosur is boneless frozen beef (020230),

accounting for almost 62% of the total Mercosur beef exports. However, the share of the EU in

the exports of this product is small at 7%. This product, in general of lower quality and price, is

frequently exported to low and middle-income countries. In the case of high quality chilled

boneless beef (020130), the EU represents on average 44% of the Mercosur beef exports by

value for the period 2012-16. Exports of this product have grown substantially over the last five

years but remain well below peak levels seen in 2005-07.

Policy dimensions

Tariffs constitute a major element of the trade policy applied to the beef trade. In general, tariffs

applied by the EU on beef constitute tariff peaks and they tend to be several times higher than

the average tariff applied by the EU on all products. In addition to that, as it happens with many

agricultural products, the tariffs applied by the EU tend to be non-ad valorem. This complicates

the analysis, but it also affects trade differently than ad-valorem duties. This is because the ad-

valorem equivalent tends to increase as the import price falls. Consequently, tariffs tend to be a

larger share of the import price in the cheapest products.

In the rest of the products, ad-valorem equivalents range between 26.6% and 79.3%. Two

products are of importance in virtue of the existing trade. In the case of chilled boneless beef

(02013000), the ad-valorem equivalent tariff is 43%. In the case of boneless frozen beef

(02023090), the ad-valorem equivalent is around 64%.

The Hilton quota provides access at a reduced tariff (20%) in high quality fresh and chilled

cuts.

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This TRQ negotiated in 1979 and expanded after successive EU enlargements due to

withdrawal of WTO concessions, benefits several world exporters. However, the largest

beneficiaries are the Mercosur countries, which account for more than 70% of the total quota

allocation. Argentina is the largest beneficiary of this quota, accounting for more than half of the

total quota allocation and 75% of the allocation to Mercosur countries. Nevertheless, Argentina

has not managed in the last years to export substantial volumes outside the allocated volumes

under the TRQ. This was primarily associated with the restrictions that applied to the exports of

beef from Argentina until 2015. On one side, exports of beef have been subject to a 15% export

duty. On the other side, there have been intermittent quantitative restrictions on the volumes

exported since 2006. These restrictions have been lifted in early 2016 (Reuters, 2016).

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See Commission Regulation (EU) No 593/2013.

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Table 42: Imports of beef products from Mercosur (in millions of Euros)

CN Description 2015 2016 2017

Average share in imports from Mercosur

Average

share in EU

imports

Argentina Brazil Paraguay Uruguay

02013000 Fresh or chilled bovine meat, boneless

810 860.5 860.2 45 26 3 27 64

02023090 Frozen bovine boneless meat (excl. Forequarters,

whole or cut into a maximum

351.1 328.6 311.1 3 67 2 29 82

16025031 Corned beef, in airtight containers

120.4 107.8 83.2 0 100 0 0 100

16025095 Meat or offal of bovine animals, prepared or

preserved, cooked

84.3 79.8 59.7 1 98 - 0 94

OTHER BEEF PRODUCTS IN CHAPTERS 2 AND 16

1.7 1.6 0.7 21 55 0 24 11

TOTAL

1,367 1,378 1,315

Source: Eurostat.

Table 43: Mercosur beef exports to the EU (in millions of Euros)

HS6 Description 2012 2013 2014 2015 2016

Average Total

Mercosur exports

Share of product in

total beef exports

Share of EU

in total

product

exports

020130

Meat of bovine

animals, fresh/chill

691.6 686.0 762.3 781.8 884.6 1,744.8 21.6 43.6

020230 Meat of bovine

animals, frozen, bon

348.4 330.6 342.5 348.3 319.3 4,983.3 61.8 6.8

160250 Prepared/preserved

preparations of

254.6 208.2 200.1 208.0 179.9 601.5 7.5 34.9

OTHER PRODUCTS IN

CHAPTERS 02 AND 16

1.3 1.3 1.4 1.1 0.8 714.6 8.8 7.3

TOTAL

1,316.4 1,244.3 1,324.0 1,361.1 1,406.2 8,066.5

16.5

Source: UN Comtrade.

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Table 44: MFN tariff applied by the EU on beef products (2016)

CN Description Duty

Import

price per

100 kg

Ad-

valorem

equivalent

02011000 Carcases or half-

carcases of bovine animals, fresh or

chilled: High quality beef and veal

12.8% + 176.8

EUR/100 kg

N/A

02012020

"""Compensated"" quarters of bovine animals with bone

in, fresh or chilled: High quality beef and veal"

12.8% + 176.8

EUR/100 kg

831.0 34.1

02012030

Unseparated or separated forequarters of bovine

animals, with bone in, fresh or chilled: High quality beef

12.8% + 141.4

EUR/100 kg

N/A

02012050

Unseparated or separated hindquarters of bovine

animals, with bone in, fresh or chilled: High quality beef

12.8% + 212.2

EUR/100 kg

N/A

02012090

"Fresh or chilled bovine cuts, with bone in (excl.

carcases and half-carcases, ""compensated quarters"",

12.8% + 265.2

EUR/100 kg

1,275.4 33.6

02013000 Fresh or chilled bovine meat, boneless: High quality

12.8% + 303.4

EUR/100 kg

999.3 43.1

02021000 Frozen bovine carcases and half-carcases: High quality

beef and veal

12.8% + 176.8

EUR/100 kg

398.6 57.1

02022010 "Frozen ""compensated"" bovine quarters, with bone in:

High quality beef and veal"

12.8% + 176.8

EUR/100 kg

265.8 79.3

02022030 Frozen unseparated or separated bovine forequarters,

with bone in: High quality beef and veal

12.8% + 141.4

EUR/100 kg

N/A

02022050

Frozen unseparated or separated bovine hindquarters,

with bone in: High quality beef and veal

12.8% + 221.1

EUR/100 kg

N/A

02022090

"Frozen bovine cuts, with bone in (excl. carcases and

half-carcases, ""compensated"" quarters, forequarters

12.8% + 265.3

EUR/100 kg

774.2 47.0

02023010 "Frozen bovine boneless forequarters, whole or cut in

max. 5 pieces, each quarter in 1 block;

12.8% + 221.1

EUR/100 kg

349.2 76.1

02023050

Frozen bovine boneless crop, chuck and blade and

brisket cuts: High quality beef and veal

12.8% + 221.1

EUR/100 kg

388.1 69.8

02023090

"Frozen bovine boneless meat (excl. forequarters,

whole or cut into a maximum of five pieces,

12.8% + 304.1

EUR/100 kg

589.6 64.4

16025010

Prepared or preserved meat or offal of bovine animals,

uncooked, incl. mixtures of cooked meat or

303.4

EUR/100 kg

1,140.8 26.6

16025031 Corned beef, in airtight containers

16.6% 364.1 16.6

16025095 Meat or offal of bovine animals, prepared or preserved,

cooked (excl. corned beef in airtight con

16.6% 572.0 16.6

16029061 Prepared or preserved meat or meat offal, uncooked,

containing meat or offal of bovines, incl. mixture

303.4

EUR/100 kg

N/A

16029069

Prepared or preserved meat or meat

offal, cooked,

containing meat or offal of bovine animals

16.6% N/A 16.6

Source: Eurostat. Note: Only products in headings 0201, 0202 and 1602 are shown

In contrast, Uruguay and Brazil have managed to export larger volumes outside the quota,

paying the standard MFN duty (12.80 % + 303.40 EUR/100 kg). Transformed into ad-valorem

equivalent, this duty is of 43%. In virtue of the high quality associated with the product,

Mercosur exporters manage to export significant volumes even when tariffs may be prohibitive

for the rest of the exporters. This provides an idea of the competitiveness of Mercosur exporters

in this product.

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Sanitary Status

The Foot and Mouth Disease (FMD) constitutes a major concern for Mercosur exporters and

different outbreaks in the past generated serious disruption and economic loses. Sanitary

measures with respect to FMD applies primarily to fresh and frozen beef and not on cooked

processed beef where the trade is not subject to these regulations. There is not a single FMD

status across Mercosur and it presents not only variations between countries but also within the

different regions in each country. Uruguay has been free of FMD for many years and it has

managed to stop its vaccination. Consequently, this has allowed Uruguay to access high price

markets such as the US and Japan. However, Uruguay reintroduced vaccination recently. The

same status is currently observed in Paraguay.

The sanitary status of Argentina varies within the country. Patagonia is free of FMD without

vaccination. In the rest of the country, vaccination is regularly performed and enforced by the

Servicio Nacional de Sanidad (SENASA). The last serious outbreak occurred in 2001. As

Argentina, Brazil presents different areas with respect to FMD status and vaccination. However,

it presents some areas without FMD status. Only one state (Santa Catarina) is free of FMD and

vaccination is not practiced.

Despite the variations, Mercosur countries have made enormous efforts to improve their sanitary

status and they continue to work to improve it. The status is not an impediment to export to the

EU. However, it limits the products that can be exported. For example, no trade in beef with

bone is recorded in virtue of the FMD status.

Animal Welfare

Given the importance of meat production in Mercosur countries, animal protection has long been

subject to political debates in the region. Over time, each member has sought to regulate

agricultural practices to prevent animal abuse at various stages of the production process or for

various species, with recent reforms undertaken by Brazil (2012), Paraguay (2013) and Uruguay

(2014) (Table 45). Over the past two decades, the Brazilian Ministry of Agriculture, Livestock

and Food Supply (MAPA) has worked to develop a set of “Good Agricultural Practices” with the

agricultural industry and collaborated with World Animal Protection to fund a program known as

STEPS. The latter was designed to educate Brazilian producers across the country on humane

slaughter of cattle, poultry and pigs (Cassuto & Saville, 2012

195

; Souza, Leite and Molento,

2019).

195

David N. Cassuto & Sarah Saville, Hot, Crowded, and Legal: A Look at Industrial Agriculture in the United States and

Brazil, 18 Animal L. 185 (2012), http://digitalcommons.pace.edu/lawfaculty/869/.

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Table 45: Animal protection regulation in Mercosur countries

Country Regulation

Year

Argentina Law 13346, abuse act and acts of cruelty to animals

Law 2786, prohibiting animal abuse

1891

1954

Brazil Decree 16590, public entertainment houses, prohibiting animal abuse

Decree 24645, for animal protection

Law 9605, on environmental crimes

Humane Slaughter Regulation

Regulation 275

1924

1934

1998

2000

2012

Paraguay Protection and Animal Welfare Act 4840

2013

Uruguay Law 18471, for the responsible possession of animals

Decree 62, regulation of Law 18471

2009

2014

Source: Souza, Leite and Molento, 2019.

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Today, Mercosur countries are global players in the production and exports of meat products,

with Brazil ranking as the world’s top beef and chicken exporter, while Uruguay, Paraguay and

Argentina also rank within the top-ten list (Argentina being also the 10

exporter of chicken

meat), according to U.S. Department of Agriculture (USDA) data. The intensification of meat

production and the dramatic rise of beef exports from Mercosur (notably Brazil) have renewed

concerns over animal welfare. This is partly due to the uneven enforcement of animal welfare

across regions or Mercosur countries, sectors (e.g. fish being generally excluded from animal

protection regulation) and farmers of the same industry. However, rankings in terms of animal

protection suggest a very uneven evolution.

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Paradoxically, large-scale factory farms tend to have higher levels of compliance given their

greater exposure to federal inspection agencies and their dependence on foreign markets like

the EU, which requires stricter standards (Cassuto & Saville, 2012; Souza, Leite and Molento,

2019).

Assessing the impact of the agreement

Economic impact

Given the limitations of the CGE analysis, it does not model tariff rate quotas (TRQs) but rather

applies partial tariff cuts of 15% and 30% in the conservative and ambitious scenarios

respectively. Table 46 presents a summary of the results obtained in the CGE analysis for bovine

meat.

196

Souza A.P.O., Leite L.O. & Molento C.F.M., “Animal welfare in Central and South America: What is going on?” In: Hild

S. & Schweitzer L. (Eds), Animal Welfare: From Science to Law, 2019, pp.88-102.

197

The Welfare Animal Protection (WAP) index ranks countries based on the status of their legislation and enforcement

of animal protection and welfare. Argentina has been downgraded (from A to E) as well as Brazil (from B to D) and

Uruguay (from C to D)These low scores were partly due to a change in methodology “in line with current societal

expectations in terms of animal welfare,” since all Mercosur countries faired much better in the previous version of the

index (2014), with Argentina rated A, Brazil B and Uruguay C. Paraguay is not included in the 50-country database. For

more details on the WAP index and its methodology, see https://api.worldanimalprotection.org/

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In the most conservative scenario, where the tariff currently being applied in the model is

reduced by 15%, EU beef imports from Mercosur will expand between 26% and 37% depending

on the country. In this scenario, output in Mercosur would expand between 0.2% and 2.1% and

total EU output will contract by 0.7%. In general, the effects of the agreement tend to be smaller

for Paraguay, whereas Uruguay is the country that experiences the largest effects in terms of

output.

In the ambitious scenario, where tariffs applied in the CGE model are reduced by 30%, the

effects are, as expected, larger. EU imports from Mercosur would expand between 54% and

78%. Output in the EU would fall by 1.2% whilst output in Mercosur would expand between 0.6%

and 4% and by around 2% in the two large countries.

Table 46: Bovine meat results in the CGE Model

Conservative Scenario Ambitious Scenario

EU imports Output EU Imports Output

Argentina 30.9 1.3 66.3 2.5

Brazil 37 1.2 78.0 2.0

Paraguay 28.7 0.2 63.7 0.6

Uruguay 25.6 2.1 54.1 4.0

EU28 -0.7 -1.2

Source: CGE Modelling Results.

These results need to be qualified based on the limitations of the CGE analysis and the reality of

the beef trade. However, it is important to highlight a few features. The conservative scenario

would imply an increase of around 30% in imports of beef cuts. Based on recent trend imports

of around 200 thousand tonnes per year, this would be equivalent to an increase in imports of

around 60 000 tonnes. The ambitious scenario would imply an increase of around 64% in imports

of beef cuts, which would imply an increase in imports of around 128 000 tonnes.

It is important to highlight the segmentation of the beef market. Whilst the general analysis and

the CGE results in particular treat beef as a single product, there is a significant heterogeneity

within the product. First, beef production is a completely different activity from dairy production,

with dedicated breeds and practices. Most beef production in the EU is in fact from the dairy

herd with the remainder coming from the beef herd. The latter commands a higher price. Second,

although it is a typical case of joint production, there are marked consumer preferences that

determine different price elasticities and prices. Third, even within specific cuts, there are

significant quality differentials that explain differences in prices.

Although domestic consumption of beef is high in Mercosur, it is a major exporter in all the

segments of the beef market. It exports cooked, frozen and chilled beef. However, particularly

in the case of frozen and chilled beef, it tends to export to the EU the higher end of the quality

spectrum, with a consequent higher price. This is reflected in a significant difference between

the price of cuts imported from Mercosur and the average cut produced in the EU. For example,

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in 2018, the average price of Mercosur beef imported in the EU was €5.64/kg cwe

198

and in the

EU, the price was €3.80/kg cwe.

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These differentials suggest the existence of segmented

markets for beef, indicating that the effect of the FTA is likely to fall primarily on the premium

segment of the market and, consequently, larger than it would be if all segments were equally

represented. This focus of Mercosur in the higher segments responds is, in part, a reaction to

European consumer preferences, but also the result of limited market access.

In addition, the EU beef market and the EU-Mercosur trade is also affected by another

characteristic that tends to reduce the impact than it would be under more standard market

configurations. Currently, Mercosur exports enter the EU through the Hilton quota; the erga

omnes tariff rate beef quota (which is open to those countries authorities which have been

authorised by the Commission to issue certificates of authenticity on a competitive basis and

amounts to 45,000 tonnes product weight);

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the erga omnes quota for frozen beef

201

with a

volume of 54 875 tonnes product weight; and the out-of-quota channel that involves facing the

EU MFN tariff which varies significantly depending on the type of beef. This last channel has, on

average, attracted imports from Mercosur of around 45,000 tonnes of fresh beef and around

10,000 for frozen beef.

The increase in imports from Mercosur as compared with current trade will likely be significantly

less than the volume of the new quota given the high level of existing out-of-quota trade, much

of which will likely be channelled through the new quota. The negotiated quota will imply a

transfer, in the form of quota rent, of EU tariff duties collected to the Mercosur exporters or to

EU importers (e.g. supermarkets), depending on how the quota is going to be administered.

Environmental impact

Beef production may have important effects on the environment. On one side, extensive models

of cattle breeding have important implications with respect to how land is used and allocated to

different agricultural activities. On the other hand, cattle breeding has been associated with the

production of certain GHGs such as carbon dioxide and methane. This point is addressed in more

depth in Chapter 5 with reference to the modelling results. Moreover, the management of

manure associated with more intensive forms of cattle breeding (e.g. feed-lots) may have also

important implications with respect to the effects on water and the environment of the areas

where these farms are located. Therefore, the assessment of the effect that the agreement may

have on the environment needs to be related to the differential effect with respect to the current

situation. This suggests understanding the existing use of environmental resources and how the

situation may change as a result of the agreement.

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Average price of imports from Mercosur in headings 0201 and 0202 (EU Comext)

199

DG Agri’s medium term outlook

200

Argentina and Uruguay are the only Mercosur members, which have access to this quota. They currently have access

to the full volume shared with the USA, Australia and New Zealand. The volume available to countries other than the US

will gradually be reduced to 10 000 tonnes product weight over the coming years. See Commission Implementing

Regulation 2179/2019 amending Commission Implementing Regulation 481/2012.

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See Commission Implementing Regulation 431/2008 as amended by Commission Implementing Regulation

2276/2016.

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Use of land

Additional land to be used in cattle production (especially under extensive models of

production) will come from basically two sources. On one side, cattle farming may advance

on current idle lands in terms of agricultural production. This may include former agriculture

lands as well as forests and other natural ecosystems. On the other side, cattle production

may expand on existing agricultural lands dedicated to other products such as crops or other

animal products. In terms of the effect of the agreement on land, the effect of the agreement

should be primarily concerned with the first dimension.

Table 47 presents how the total land available in each country is used as agricultural land and

on permanent and temporary meadows and pastures. This last category is relevant for cattle

production. In general, more than 72% of the agricultural land in Mercosur are permanent and

temporary meadows and pastures. The room for substitution between cattle production and non-

animal production is limited as the share of pastures in agricultural land is above 70%

in Mercosur as compared with 35% in the EU. However, it is still possible that some

reallocation between cattle and other animal production could occur. Moreover, this general

picture does not consider the case of reallocation within regions.

In addition, there is room for increases in productivity that may allow producing larger volumes

of beef without increasing the land use for cattle. On one side, already deforested lands tend

to be used for low efficiency pastures, suggesting room for increases

202

. On the other side,

there is high variability in productivity in the north of Brazil, suggesting that there is

space for homogenous and higher productivity.

203

It is possible, except in Uruguay where it has already occupied 83% of the total land that the

agricultural land may expand further in Mercosur. In Mercosur, only 40% of the land is used by

agricultural activities. This suggests that there is a large room for expansion of the agricultural

frontier. However, as highlighted by some stakeholders, a very large expansion of

the agricultural land may not be feasible given the existence of unsuitable and/or protected

areas. It may be possible that domestic consumption may fall, maintaining the stock

unchanged. Moreover, even in the case that cattle stock increases, there may be an increase

in the density of animals per hectare rather than an increase in the use of land.

This anticipated shift to more productive farming practices has raised concerns among some

stakeholders about environmental risks associated with such intensification, especially

with regard to water use and potential deforestation resulting from greater reliance on animal

feed. The environmental analysis assesses these risks and offers policy options to mitigate

them. Acknowledging these risks, our point here is rather to show that there is currently

ample scope to increase efficiency in agricultural production without shifting to unsustainable

forms of mass production.

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IPAM Amazonia (2017)

203

MDPI (2018)

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Table 47: Land use in Mercosur and the EU (2015) in millions of hectares

Country

Total Land

(1)

Agricultural

Land (2)

Permanent

and

temporary

meadows

and

pastures

(3)

Share of

agricultural

in total land

(2)/(1)

Share of

pastures in

agriculture

land

(3)/(2)

Cattle stock

(millions of

heads)

Density in

pastures

and

meadows

(heads/ha)

Argentina 273.7 148.7 112.9 54% 76% 51.4 0.35

Brazil 835.8 282.6 196.0 34% 69% 215.2 0.76

Paraguay 39.7 21.9 17.0 55% 78% 14.2 0.65

Uruguay 17.5 14.5 12.5 83% 87% 11.9 0.82

Total

Mercosur

1,166.7 467.6 338.4 40% 72% 292.8 0.63

EU 423.8 184.5 65.3 44% 35% 89.6 0.49

Source: FAOSTAT.

Consequently, although there may be room for a limited expansion of the agricultural frontier in

Mercosur associated with an increase in the cattle stocks, it is also possible that exports to the

EU may be generated without increasing stocks, by increasing the animal density and/or by

substituting land with other animal uses.

Animal welfare

This subsection primarily focuses on the anticipated effects of the EU-Mercosur AA on animal

welfare in relation to the beef sector. This is logically the area that received the greatest attention

during the stakeholder consultation sessions organised within the framework of this study. It

also discusses the potential impact of bilateral institutional mechanisms on the protection of

animal welfare in the two trading partners, and more specifically in the Mercosur region.

To the extent that the agreement will stimulate meat exports, it will favour the development of

factory farms, where, as mentioned previously, compliance with animal protection regulation

tends to be stricter than small producers (Cassuto & Saville, 2012; Souza, Leite and Molento,

2019). Additionally, the agreement opens the channels to assist Mercosur governments,

institutions and producers in production techniques and practices that minimise not only the

suffering of animals but also environmental side-effects. The agreement includes several

instances to establish dialogue between the sanitary services of the party members, and

cooperation on animal welfare and the fight against antimicrobial resistance.

It is worth mentioning that the EU and some of the Mercosur countries have been already

engaged in cooperation activities in the matter. With Argentina, the EU has signed the

Administrative Arrangement on Technical Cooperation on Animal Welfare. This recent agreement

has focused in its early stages in developing capacity building activities such as the Regional

Better Training for Safer Food (BTSF) Workshop on Animal Welfare in March, 2018.

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These

activities are expected to reinforce the positive effects of the visits of EU inspectors to abattoirs

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https://ec.europa.eu/food/animals/welfare/international-activities_en

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in Argentina (and other exporters) which include animal welfare assessments. These visits not

only focus on assessing the compliance with EU normatives, but they have also didactic value.

With Brazil, cooperation extends since 2013 and there have been more activities which have

been evaluated in terms of their impact.

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Within the framework of the 2013 Administrative

Memorandum of Understanding on Animal Welfare, the EU and Brazil have worked together in

areas such as a BTSF event (that included participants from the rest of the Mercosur members),

research activities, technical meetings and specific projects on road transport of live animals, a

project on gestation group sow housing, maritime transport of live animals and humane

slaughtering in small scale establishments. The evaluation suggests that, although the

agreement did not consider any legal mechanisms to modify practices, the activities have

contributed to a significant change in the attitude of the stakeholders in the production,

commercialisation and logistics involved. Moreover, this success seems to reinforce some

underlying trends in Brazil. On the one side, there is an increase in animal welfare as a specific

topic of research by scholars in universities, research and extension institutions. Moreover,

although slow, there is increasing concern by Brazilian consumers on animal welfare.

In this sense, the FTA is more likely to spur further these actions and trends. It creates additional

instances of cooperation, communication and dialogue between EU and Mercosur institutions.

Moreover, it is possible that positive effects can spill over and improve animal welfare in activities

not related to the trade with the EU. The FTA can generate a large enough mass of good

practitioners on animal welfare in Mercosur that can facilitate the application of good animal

welfare techniques in the trade with other destinations and the domestic market.

This is where the enforcement of the EU-Mercosur AA’s language on cooperation on behalf of

animal welfare could not only mitigate minor externalities arising from increasing production and

trade, but also offer opportunities to develop a stricter regulatory framework for animal

protection both in Mercosur and the EU. However, to the extent that animal welfare provisions

are not subject to dispute settlement, the efficacy of this chapter will depend primarily on trading

partners’ commitment to harmonise or raise regulatory standards in this realm.

Social impact

There are significant differences in the related social composition of the beef sector in both the

EU and Mercosur. The EU’s animal production is characterised by its intensive production based

on small and frequently family-owned farms. This puts the effects of the agreement on the beef

sector at the core of its social dimensions in the EU. In addition to the effects on the rural

population, workers operating in the meat processing plants may also be affected by the

agreement.

In the case of Mercosur, animal production tends to be more extensive and based on large scale

farms. However, in virtue of their larger size, these farms tend to make more intensive use of

paid labour than their European counterparts. In many of these cases, employees live with their

families on the farm. Consequently, their housing is attached to the performance of the

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European Commission (2017) “Study on the impact of animal welfare activities international activities”,

file:///C:/Users/m.mendez-parra/Downloads/EW0617175ENN.en.pdf

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employment. This means that farm downsizing tends to have far more serious consequences

that the typical job loss. As in the case of the EU, urban workers tend to be employed in meat

processing plants.

Social impact in the EU

In 2013, there were 1,825,000 cattle-keeping farms in the EU (Rico et al. 2017). 640,000 were

subsistence farms. The commercial farms generated nearly 2.5 million jobs (measured as Annual

working units). This means that many of these jobs include the labour input provided by the

farmer and his/her family. Around 888,000 were employed by the sector which includes the

production of other types of meats in addition to beef.

The conservative scenario anticipates that unskilled and skilled employment will fall by 0.7% in

both cases. In the ambitious scenario, on the other hand, unskilled and skilled employment

would fall by 1.3% in both cases.

Of course, the effect on employment and income in these population groups will depend primarily

on the magnitude of the effect of the agreement. Although beef imports from Mercosur could

increase substantially, considering that they will remain a small share of the volumes consumed

by the EU, the effect in total production and consequently on employment tend to be limited. All

this suggests that in virtue of the small share of Mercosur in EU consumption before and after

the agreement and the possibility of re-conversion of farms, the effect in terms of employment

in the EU production of beef are expected to be limited.

Social impact in Mercosur

There are no statistics about employment in cattle farming for Mercosur. This information does

not allow us to quantify precisely the employment relevance of the beef sector in Mercosur.

However, based on the share of cattle production in the total value of production in each of the

countries and making abstraction of any consideration with respect to labour productivity,

employment in the cattle production in Mercosur countries could be around 3% of the total

employment. This could potentially be more than 3 million jobs that would depend on cattle

production.

In Mercosur countries, the demand for unskilled labour in the conservative scenario may increase

between 0.2% and 2.5%; and the demand for skilled labour would rise between 0.3% and 2.7%.

In the ambitious scenario, the unskilled labour would increase between 0.6% and 4.7%; and the

demand for skilled labour between 0.7% and 5%.

This represents a very high upper bound of what could be the number of employees affected in

the sector. The employment that may be affected by the agreement will be potentially lower. On

one side, there is a significant share of beef that is marketed domestically without significant

effect expected. Although it is not possible to distinguish farms that supply beef for export

(animals are breeding to supply jointly the domestic and export market), based on Table 43, 1%

of the beef produced in Mercosur would be exported to the EU. With a potential increase of this

share to 2% as explained before, the share of employees affected in Mercosur by the agreement

would be around 0.06% of the total employment or around 10,000 jobs across Mercosur.

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Although many of these jobs may be created among the most vulnerable people in the region,

the effect is very small to generate a significant change in either poverty or income distribution.

In addition to the effects on the cattle breeding, there is an additional effect to consider in the

sector that slaughters and process animals. There are no official statistics about employment in

the beef producer sector. We do not have information about the value of production of beef in

the sector, but even if 100% of it is produced by the beef sector and considering the potential

share of the EU in total Mercosur beef production, the affected employees will be around of 0.1%

of the total employment. This could be as high as 35,000 jobs for Brazil. However, this would

constitute still an unrealistic upper effect on employment in this sector.

Chapter 4 makes a deeper assessment of the labour rights effects of the agreement. Although

certain labour rights issues affect the agricultural sector (e.g. housing associated with

employment), they are not specific to the beef sector. There are no major specific labour rights

issues affecting workers in beef production and cattle breeding.

Human rights

Beef production involves activities that spread into both rural and urban areas. Populations in

each of these areas are subject to different types of legal and institutional challenges that affect

different degrees of their human rights. Therefore, it is important to distinguish the labour rights

and the land access dimensions in the analysis. However, there are no significant issues specific

to beef production. Chapter 6, on the other hand, discusses general human rights issues,

including access to land. These are very relevant to the agricultural sector in general but no

specific to beef production and/or cattle breeding.

Impact on SMEs

The assessment does not preview a specific impact on SMEs, resulting from these provisions.

Impact on Consumers

A related dimension of the social impact is associated with the effect on EU domestic prices

associated with the agreement. In principle, the agreement may generate some important

reduction in key products of importance for consumers.

Beef (and other meats) accounts for 3.5% of the average household expenditure.

206

Based on

animal protein consumption, beef would represent nearly 20% of the meat consumption in the

EU.

207

Therefore, although we may be mixing value and quantity-based measures, we could

say that beef would represent around 0.7% of the average household consumption.

Although the effect in terms of employment in Mercosur may be limited, there is a potential

dimension to consider associated with the weight that beef has in the household consumption.

Table 48 suggests that the share of beef in total household consumption could be as high as

206

Based on data from Eurostat.

207

Food Supply - Livestock and Fish Primary Equivalent provided by Food and Agriculture Organization of the United

Nations.

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5.45%. This suggests that any change in the price of beef associated with the effect may have

potentially large effects on the value of household consumption.

However, as we mentioned, even a relatively large increase in the exports of beef to the EU will

still represent a relatively small change with respect to the total production and consumption in

Mercosur. Consequently, it is unlikely that small changes in volumes may generate a large effect

on prices. Moreover, it is expected that the supply to the EU will be mostly concentrated in higher

quality cuts and their consumption is more limited in Mercosur. This suggests that the effect on

prices may be more limited. However, it is expected that the effect on prices may be higher than

the one that EU consumers may experience.

Table 48: Share of beef in average household consumption in Mercosur

Country Share of beef (%) Source

Argentina 5.45 Indice de Precios al consumidor base (2015)

Uruguay 3.93 Indice de Precios al consumidor base (2010)

Brazil 3.02 Sistema Nacional de Indice de Precos a Consumidor (2014)

Source: Author’s elaboration.

Impact on LDCs

The effect on preference erosion on LDCs associated with the improvement in market access

from Mercosur is expected to be negligible as there is no expected any displacements of exports

from LDCs to the EU. The impact can be assessed by looking at the LDCs exports and the exports

to the EU. Table 49 presents the average value of beef exports from each LDC to the EU and in

total. Exports of beef products to the EU are less than Euros 2 million and represent around 25%

of the total LDC beef exports. However, considering that the EU imported, in 2016, from LDCs

by almost Euros 39 billion, the effect general preference erosion effect is marginal. For Myanmar,

the country with the largest value exported to the EU, beef exports represent around 0.2% of

its total exports. Therefore, the effect of increased market access to Mercosur in beef products

on LDCs exports is in general negligible.

Table 49: Least Developed Countries exports of beef (in millions of Euros)

Country

Total Exports

Exports to the EU

Myanmar 5.3 1.4

Nepal 0.7 -

Ethiopia 0.3 0.1

Bangladesh 0.3 0.0

Lao PDR 0.3 -

Madagascar 0.3 0.1

Sudan 0.2 -

Rest of LDCs 0.7 0.0

Total 8.1 1.9

Source: UN Comtrade

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Impact on OMRs

In virtue of the reduced size, there are no commercial exporting beef activities of relevance in

the outermost regions of the EU with the notable exception of the Azores. Therefore, the increase

in the exports of beef from Mercosur to the mainland EU is not expected to have a significant

effect on the exports of these regions as well as on the intra-EU regional trade.

Moreover, the small economic size of these regions suggests that the effect of the imports from

the Mercosur may be limited to the beef production that exists to supply the local market. For

example, it is unlikely that the agreement will imply a sizable increase in the exports of Mercosur

to Reunion, for example. It is possible, nevertheless, some increase in the cross-border trade

between Brazil and French Guyana. However, this is likely to be limited to a circumscribed

expansion of the already low cross-border trade between Brazil and France.

Policy Recommendations

 Mercosur countries should aim to increase productivity to limit the effects that

additional production may have on land use. For example, measures to increase the

weight of slaughtered animals can contribute to increase beef without increasing

substantially the number of animals.

 Both parties should pursue effective implementation of their commitments

under the Paris Agreement and in particular their commitments on forests and GHG

emissions.

 Both parties should make use of the frameworks for dialogue and cooperation

created by the agreement and the other cooperation frameworks that exist in the area

of animal welfare.

 The EU should cooperate and support the design of adequate animal welfare

legislation in countries with weak legal frameworks in this matter. The

improvement in the enforcement of legislation in this topic and will benefit from support

and collaboration between the EU and Mercosur countries.

6.3.2. Dairy

Sector overview

European immigrants in Mercosur countries in the late XIXth and early XXth centuries brought

their taste and preferences for dairy products. Mercosur countries tend to present a higher per-

capita level consumption of dairy product than similar developing countries and certainly higher

than most of their Latin-American partners. This and the perceived good quality associated with

the European dairy products put Mercosur as a potential key export partner for the EU. The same

European immigrants also brought their know-how to the production of dairy products in the

region. In addition, the availability of resources (e.g. land) and the increased domestic demand

and contributed to the development of an important and competitive local dairy sector in

Mercosur countries. Therefore, Mercosur producers may also see the agreement as an

opportunity to expand their exports to the EU.

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However, these structural similar characteristics hide the enormous scale and trade asymmetries

between both partners. The EU is the largest producer and consumer of dairy products in the

world; whilst Mercosur manages to supply a growing domestic demand but is a much smaller

producer and exporter. In this sense, there are different opportunities and challenges for both

partners. In the case of Mercosur, there is an opportunity to expand their industry beyond the

regional context. For the EU, Mercosur constitutes an opportunity for further expansion of an

already dynamic sector.

Production, consumption and trade

Table 50 presents the composition of the balance of milk and some dairy products in the Mercosur

and the EU. This allows to identify the production and consumption evolution of some key

products and for the whole sector. In the case of milk, the quantity value for all milk trade,

production and consumption, includes the milk already used to produce cheese and butter.

Therefore, it presents a general view of the sector and not specifically of fresh milk.

Production of milk in Mercosur has grown by 31% between the periods analysed (2004-05 and

2012-13), following closely the evolution of consumption. Consumption of cheese has

experienced a significant increase during the period. This is associated with the increase of

incomes experienced during the period across the region (e.g. cheese presents generally a very

high-income elasticity). Exports of dairy products have increased also by 30%; however, most

of this trade is intra-Mercosur trade as we will see.

Table 50: Balance sheet of dairy products (in thousands of tonnes)

Product Period Export

Quantity

Import

Quantity

Production Stock

Variation

Consumption

Mercosur

Butter 2004-05 20 1 157 -1 138

2012-13 48 7 180 3 137

Cheese 2004-05 80 7 455 0 381

2012-13 103 35 687 -5 624

Milk 2004-05 3,177 444 35,864 -13 33,144

2012-13 4,286 1,297 47,040 -2 44,053

Butter 2004-05 923 765 2,084 53 1,872

2012-13 914 866 1,927 -2 1,881

Cheese 2004-05 3,117 2,491 8,525 -21 7,920

2012-13 4,354 3,605 9,448 6 8,693

Milk 2004-05 53,712 43,346 153,680 -526 143,840

2012-13 70,439 54,016 156,538 -2 140,117

Source: FAOStats.

It is worth mentioning that the period presented here does not capture the economic crisis that

Mercosur countries experienced in the last 3 years and it is expected that consumption of dairy

products (although not fresh milk), rather than falling, may have slowed down its growth during

the period. However, this short-run phenomenon constitutes a short-term deviation of the long-

run trend showing the increase in the consumption of dairy products in Mercosur. The increase

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in the consumption of dairy products responds to a long-run trend rather than to short term

variations. In the case of the EU, production and consumption have been more stable. Trade, on

the other hand, has experienced a more dynamic behaviour with both exports and imports

expanding.

Trade composition

In the case of the EU, Mercosur is a small partner in its dairy exports. It represents no more

than 0.4% of the total extra-EU dairy exports (Table 51). Moreover, exports have fallen in the

recent years associated with the fall in incomes in Mercosur as well as some price behaviour

explained by, among other factors, fluctuations in the exchange rate. In addition, dairy products

constitute a very marginal product in the total exports of the EU to Mercosur.

Table 51: EU-Mercosur bilateral trade of dairy products (in millions of Euros)

Year

Imports

from

Mercosur

Total EU

dairy

imports

from the

world

(extra-EU)

EU dairy

exports to

Mercosur

Total EU

dairy exports

to the world

(extra-EU)

Share of

Mercosur in

total EU

dairy

exports (%)

Share of dairy

products in

total EU

exports to

Mercosur (%)

2012 0.0 637.3 33.8 8,717.3 0.39 0.07

2013

0.1 653.1 36.1 9,331.4 0.39 0.07

2014 0.0 703.9 33.9 10,210.2 0.33 0.07

2015

0.0 576.1 26.9 9,318.7 0.29 0.06

2016 0.0 581.9 24.3 9,092.5 0.27 0.06

Source: Eurostat Comext

Most of the EU exports of dairy products to Mercosur are concentrated in cheese, accounting for

more than 45% of the total dairy export (Table 52). This is followed by preparations for infant

use (baby formula) which accounts for almost 25% of the exports. Whey, accounting for slightly

more than 15%, almost completes the range of products exported. However, when looking at

the information at 8 digits, whey in powder is the most important dairy product. Among cheese,

brie, Parmigiano Reggiano and other cheese account the for the largest shares. Although this

analysis provides an initial assessment overview of the capabilities of both partners to supply

each other’s market, it is insufficient to give a comprehensive assessment of the capacities to

supply and to absorb more trade. Therefore, we need to focus on different elements to assess

potential effects.

In the case of the EU exports, it matters the structure and the size of total Mercosur imports of

dairy products. This will indicate the opportunities that the EU may have to gain market share

in the Mercosur market. At the same time, the assessment of the existing total export capacities

of Mercosur will suggest the potential short-run expansion of the exports to the EU.

In terms of Mercosur export, Table 53 presents total exports disaggregated by product. It also

indicates the share of the intra-Mercosur trade. This trade represents a sizable share (53%) of

total exports of dairy products. In virtue of the relatively high tariffs applied on dairy products

imported by Mercosur (to be discussed later in more depth), it suggests an important trade

diversion within Mercosur. Mercosur producers manage to export primarily to the rest of the bloc

under the high protection of the CET whereas outside Mercosur, in general, Mercosur dairy

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products might not be very competitive. However, this lack of competitiveness may be

associated with generally high levels of protection worldwide rather than a typical trade diversion

scenario.

However, a product view suggests that in some products, Mercosur exporters manage to export

important volumes outside the bloc. In the case of full fat milk powder (040221), that represents

47% of the total Mercosur exports of dairy products, almost 40% are exported outside the bloc.

In addition to this, skimmed milk powder (040210) and cheese (040690) are products with a

sizable out-of-Mercosur exports. This suggests that Mercosur may have some supply capacities

of milk powder outside the bloc that could maybe employed to supply the EU market. Despite

these products, in general, Mercosur does not have, at least in the short run, capacity to export

dairy products in sizable volumes and value to the EU. Moreover, even assuming an unlikely re-

allocation of exports from Mercosur to the EU, the effect of these exports on the EU market are

expected to be minimal as we have already seen.

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Table 52: EU dairy exports to Mercosur (in thousands of Euros)

HS6 Description 2012 2013 2014 2015 2016 Share (%)

040210 Milk and cream in solid forms, of a fat content by weight of <= 1,5% 212 810 930 786 198 1

040410 Whey and modified whey 8,633 6,369 4,885 1,496 2,557 11

040510 Butter (excl. Dehydrated butter and ghee) 1,569 2,737 1,398 1,899 2,314 5

040610 Fresh cheese "unripened or uncured cheese" 615 1,022 717 333 353 1

040630 Processed cheese, not grated or powdered 1,287 1,727 1,171 736 658 3

040640 Blue-veined cheese and other cheese containing 1,015 1,393 1,407 1,476 1,353 3

040690 Cheese (excl. Fresh cheese, incl. whey cheese). 19,968 20,936 22,698 19,557 16,528 46

190101 Preparations for infant use 6,328 12,43 19,575 9,818 5,909 25

OTHER 556 1,121 667 656 327 2

TOTAL

42,193 50,560 55,461 38,772 32,213

Source: Eurostat.

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Table 53: Total Mercosur exports of dairy products (including intra-Mercosur, in millions of Euros)

HS6 Description 2012 2013 2014 2015 2016

Average share of

Mercosur in total

exports (%)

Share of product

in total dairy

exports (%)

040120 Milk and cream of a fat content by

weight of > 1% but <= 6%, …

20 19 21 13 10 30 1

040140

Milk and cream of a fat content by

weight of > 6% but <= 10%, not …

15 13 14 14 12 12 1

040210 Milk and cream in solid forms, of a

fat content by weight of <= 1,5%

118 176 142 113 94 64 10

040221 Milk and cream in solid forms, of a

fat content by weight of > 1,5%,

unsweetened

748 914 912 841 625 63 48

040299 Milk and cream, concentrated and

sweetened (excl. In solid forms)

41 40 48 34 42 20 2

040390 Buttermilk, curdled milk and cream

14 13 7 10 10 39 1

040410 Whey and modified whey

110 127 122 85 67 23 6

040510

Butter (excl. Dehydrated butter and

ghee)

123 121 121 74 48 12 5

040610 Fresh cheese "unripened or uncured

cheese"

83 91 78 57 108 49 6

040630 Processed cheese, not grated or

powdered

17 21 24 22 26 82 2

040690 Cheese (excl. Fresh cheese, incl.

whey cheese)

287 275 292 178 146 55 14

Other dairy products

44 52 46 29 32 80 4

TOTAL

1,618 1,860 1,827 1,470 1,218 53 100

Source: UN Comtrade.

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Trade Policy

The dairy sector tends to be protected worldwide. Not only are there different tariffs and trade

measured applied; the sector tends to be subject to different incentives such as price support

mechanisms and other subsidies. This certainly applies to the EU and to an extent to Mercosur

too. In the EU, whilst the CAP reform has reduced notably the volume of price distorting

mechanisms towards less distorting de-coupled payments, a substantial share of the dairy farm

income is provided through different producer support mechanisms.

Table 54 presents an aggregation into 6 digits of the ad-valorem equivalent MFN tariffs. This

sheds some light, although partial, on the weak performance of the Mercosur exports of dairy in

the EU. Tariffs applied to dairy products are several times higher than the average MFN tariff

applied by the EU. Moreover, all the dairy products are subject to the non-ad valorem tariffs

which not only make analysis difficult, they affect efficient suppliers by applying a higher duty

to low price exporters.

Table 54: EU and Mercosur MFN tariffs applied to dairy products in 2016 (%)

HS6 Description

European Union Mercosur

Min Avg Max Min Avg Max

040110

Milk of a fat content, by weight, not exceeding

34.6 35.8 37 12 13 14

040120

Milk and cream of a fat content by weight of >

1% but <= 6%, …

44.2 50.1 56.1 12 13 14

040140

Milk and cream of a fat content by weight of >

6% but <= 10%, not …

61.7 62.2 62.7 12 12.7 14

040150 Milk of a fat content, by weight, exceeding 10% 30.6 63 99.2 12 12.7 14

040210

Milk and cream in solid forms, of a fat content

by weight of <= 1,5%

52.8 58.9 65.1 28 28 28

040221

Not containing added sugar or other sweetening

matter

44.7 51 57.3 16 24 28

040229 Other 60.3 66.7 75.1 16 24 28

040291

Not containing added sugar or other sweetening

matter

32.6 104 172.7 14 14 14

040299

Milk and cream, concentrated and sweetened

(excl. In solid forms)

34.7 86.3 121.6 28 28 28

040310 Yoghurt 15.4 48.6 135.3 16 16 16

040390 Buttermilk, curdled milk and cream 16.5 72.8 148.1 16 16 16

040410 Whey and modified whey 9.2 167.2 241.6 28 28 28

040490 Whey - other 58.5 84 107.1 14 14 14

040510 Butter (excl. Dehydrated butter and ghee) 57.4 59 70.1 16 16 16

040520 Dairy spreads 64 64 64 16 16 16

040590 Dairy spreads - other 64.3 64.3 64.3 16 16 16

040610 Fresh cheese "unripened or uncured cheese" 62 65.4 74.1 16 22 28

040620 Grated or powdered cheese, of all kinds 41.2 41.2 41.2 16 16 16

040630 Processed cheese, not grated or powdered 35.6 39.8 55 16 16 16

040640 Blue-veined cheese and other cheese containing 21.6 21.6 21.6 16 16 16

040690 Cheese (excl. Fresh cheese, incl. whey cheese). 34.5 36.7 50.6 16 22 28

Source: World Bank Trains.

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Although the CET tariffs applied by Mercosur on dairy products are high in term of international

average standard, they are not tariff peaks. They are slightly above the average Mercosur CET.

They are, nevertheless, substantially lower than those applied by the EU. Moreover, they show

a high level of homogeneity within dairy products, presenting a very low variation. EU importers

can import dairy products under a system of TRQs. Some of them are assigned to specific

suppliers (none of them a Mercosur country) whilst others are open to products from any WTO

member. In virtue of the high out-of-quota tariffs presented before, most of the dairy imports

are done through the TRQs.

The administration of the TRQ, in this case, is on the importer. Importers need to request a

licence to import under the TRQ. The Commission allocates the license based on different criteria

up to the maximum volume established by the TRQ. This system provides importers with a rent

generated by the difference between the out-of-quota and the in-quota tariff. Under the TRQ,

the importer pays the in-quota tariffs whilst, if the quota is effectively filled, sells domestically

considering the higher out-of-quota tariff.

Sanitary conditions

The low levels of Mercosur exports to the EU makes it difficult to analyse compliance with sanitary

standards. In the RASFF, for example, there are no recent alerts risen on milk and milk products

originated from Mercosur, but this may be the result of the very low level of imports from

Mercosur.

Although there are certain minimum sanitary standards that apply to the production of dairy in

Mercosur and the main producers tend to adopt private standards above the required local

regulations; it is unclear how many Mercosur dairy exporters are in the position of meeting in

the short-run the EU standards. Still, there is a significant informal milk circuit in many of the

Mercosur countries where fresh milk is commercialised without minimum processing (e.g.

pasteurisation). Although this volume of milk is not used in any exported or domestically

commercialised dairy product, it reveals the weaknesses in the enforcement of some basic

sanitary regulations and heterogeneity among dairy farms. This complicates the assessment of

the compliance capacities of the Mercosur dairy producers.

On the other extreme of the sector, there are large dairy firms that operate with high levels of

compliance. Some of these firms are in partnerships with or are directly owned by internationally

recognised dairy firms, many of them from the EU (e.g. Danone). This suggests that it may be

easier, in case of being required, for these firms to adequate their production processes to meet

EU standards. The capacity of other formal dairy firms to meet EU standards is more unclear.

Mercosur presents good enough certification capabilities. The EU has granted to the respective

sanitary authorities the recognition to perform these tasks. Therefore, if Mercosur exporters can

meet the standards, it will be easy for them to certify their compliance.

Assessing the impact of the agreement

The EU dairy sector is three times larger than the Mercosur’s. It indicates, on the other hand,

that the Mercosur capacity to supply an expanded demand from the EU is, in the short run,

limited. This puts a major limit on the effects of the agreement on the exports of dairy products

from Mercosur. Although there might be some sharper effects in some specific products; in

general, the effect will be small in the whole EU dairy market.

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Geographical indications and denomination of origin

Dairy products (especially cheese) present a wide range of variety with different quality

characteristics. The enforcement of these features is of extreme importance in the EU and it is

increasingly important in Mercosur countries. Geographical indications and the denomination of

origin introduce another issue to consider in the assessment of the effects of the agreement in

the dairy sector. EU consumers have developed very strong preferences and taste for varieties

of cheese. In this sense, most of the cheese consumed in the EU is differentiated using

geographical indications and denominations of origin. Product differentiation introduces a limit

on competition. Although not an institutional or legal discrimination, it tends to create market

niches where competition is limited.

This puts a constraint on the capacity of Mercosur exporters to supply cheese to the EU. The

products will not be able to bear the name of an EU GI, which would be an infringement of an

intellectual property right even if their products may be very similar or even superior to those

supplied by EU producers. These denominations will be, initially, unknown for the European

consumer and it will be hard for them to identify the qualities that the product may have.

Consequently, it will be only through a very competitive price that these varieties may compete

with the established and know EU varieties.

This” branding” issue is of less importance for cheese or other dairy products used in food

manufacturing where the quality requirements tend to be lower than those assigned by the

consumer. If the manufactured products are not marketed as containing or being produced using

some dairy product protected by GI or denomination of origin, Mercosur exporters will be in the

position of supplying them with the product. This suggests that the potential expansion on the

exports of cheese from Mercosur would be likely to occur in the cheapest and lowest quality

spectrum destined to the manufacturing sector. Nothing would prevent exporting high quality

cheese using a Mercosur denomination of origin or geographical indication. However, it will take

time until the EU consumer recognises the quality of the product and consider it as a substitute

and, consequently, competitor of an EU cheese.

This issue is raised as there are significant differences in the geographical indications system in

both partners. In the case of Mercosur, this system is little developed. This is the result of a

country-oriented marketing structure with limited trade scope with limited need to differentiate

the product in third markets. In the case of the EU, the system is widely developed and

implemented.

Economic impact

Table 55 presents an extraction of the most relevant results for the dairy sector of the CGE

analysis separated in two scenarios. In the conservative scenario, partial tariff cuts are assumed

for dairy products, and full liberalisation is assumed in the ambitious scenario. Bilateral trade

will expand substantially relative to the baseline in both scenarios. However, it is important to

remark that trade in the baseline, as we have seen, is limited. Consequently, EU imports of dairy

products will not change significantly in absolute terms. The same happens with output in both

scenarios. As we have seen, Mercosur is a negligible supplier to the EU market and, despite the

large relative increases in the exports to the EU, this does not change substantially its position

in the EU market.

The EU will experience smaller, but still large, relative increases in its exports to Mercosur. In

the most ambitious scenario, exports to Mercosur more than double. However, the starting base,

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while still low is higher than in the other direction, resulting in a far larger absolute increase for

EU exports to Mercosur than for EU imports from Mercosur. The increase in exports to Mercosur

is offset by a reduction in the exports to other destinations due to interactions with other sectors

and the dynamic effects of the model. Total EU exports of dairy products therefore do not

experience an overall increase. Thus, although exports to Mercosur increase, this does not lead

in the modelling results to an increase in output in the EU.

As to the effect on Mercosur, Uruguay is the most affected by the agreement, with fall in output

between 1.5% and 2.4% (the latter in the ambitious scenario, in which dairy is fully liberalised).

This is noteworthy considering that Uruguay would be the country that will see its exports to the

EU growing the most. While the assumption of full liberalisation leads to some displacement of

Uruguay exports to Mercosur by EU exports, this is not the full explanation of the fall in dairy

output, which is also in part due to reallocation between Uruguayan sectors due to the dynamic

effects of the model.

Table 55: Summary of results in the dairy sector in CGE analysis (million EUR)

Conservative Scenario Ambitious Scenario

EU Imp EU Exp Output Eu Imp EU Exp Output

Argentina 8.5 74.2 0.4 22.7 97.3 0.6

Brazil 22.0 93.1 -0.2 104.7 123.9 -0.2

Paraguay 3.1 76.3 -0.1 4.4 101.0 -0.05

Uruguay 28.7 105.7 -1.5 363.8 144.1 -2.4

EU28

-0.09

-0.10

Source: CGE Modelling Results.

The analysis needs to be considered considering the products traded. Although there are high

levels of protection across all products, a different effect of the trade agreement is expected

depending on the product considered.

Except for Uruguay, the effects of the agreement on the output of the dairy sector in Mercosur

tend to be minimal. It is important to highlight that the effects on increasing EU supply to

Mercosur will depend on the capacity and convenience of the EU in supplying products with prices

according to the level of income of Mercosur. Although incomes are rising, Mercosur consumers

may find, in general, the products supplied by the EU to be unaffordable. For example, certain

types of cheese or variety may find only demand among consumers with the highest income and

they are likely to be already consuming these products. Therefore, the increase in the supply of

dairy products to Mercosur may be more limited than expected. For Mercosur producers,

nevertheless, the full elimination of the tariffs on the imports from the EU seems to have little

effect.

The recognition of certain denomination of origin from the EU in Mercosur may, eventually,

expand further the exports from the EU. This will depend, as explained, on whether Mercosur

consumers are willing to afford the European-dominated varieties and the associated higher

quality. In any case, over time, it may be possible that Mercosur consumers develop stronger

preferences for European varieties that will reinforce the impacts.

For Mercosur, the actual impact of the agreement is, in the short run, minimum. The lower rate

of growth applied to a low export base to the EU indicates a minimum impact in the volume of

exports. The expansion of the Mercosur exports to the EU will depend on the combination of the

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lower tariffs, the improvement in the sanitary conditions, and other quality aspects of production.

The agreement generates these opportunities which may generate, in the long run, an expansion

of the exports to the EU. However, although perfectly possible, this possibility remains

hypothetical.

Environmental impact

Dairy farming is generally performed in small farms that occupy a limited area. Production tends

to be based on intensive rather than extensive techniques, more demanding of capital and labour

than land. Consequently, an expansion of the sector is expected to put limited pressure on the

availability of land. It is expected that, although the number of farms in the EU may expand,

this will have a limited effect in the non-agricultural area. Moreover, it is expected that the

expansion in the production of milk may be matched with productivity increases.

Table 56 presents the volume of GHG (in CO2 equivalents) of the milk production in the EU and

Mercosur. Based on the CGE results, it is unlikely that current GHG emissions will change

substantially as a result of the agreement. The impacts of the model are marginal except for

Argentina and Uruguay, which account for a very small share of dairy emissions as can be seen

from the table. These impacts are examined in full in Chapter 5.

Table 56: Greenhouse gases emissions in Mercosur and the EU in the production of

milk (2012-13) (in megatonnes)

Country Emissions

Argentina 4.6

Brazil 48.2

Uruguay 1.6

Paraguay 0.5

Total Mercosur 54.9

European Union 87.9

Source: FAOSTAT.

Social impact

Social impact in the EU

In the EU, the manufacture of dairy products sector employs 102 thousand workers, representing

0.34% of the total employment in the manufacturing sector.

208

In 2010, there were 1.2 million

commercial farms in the EU dairy sector (Rico et al. 2017). 54% of them were specialised dairy

farms or were dedicated exclusively to the production of milk. This suggests that more than 600

thousand farms have the production of milk as the main and exclusive source of income. In

virtue that most of these farms tend to be family owned and run units, it is possible to suggest

that at least that number of households will depend on the income of the dairy sector.

In this sense, the agreement is also expected to benefit many of these households. An increase

in demand for milk associated with an increase in the production of dairy products for export to

Mercosur will lead to an increase in price that will be translated into an increase in household

income. It is hard to assess how many households will directly benefit from the increase in the

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Source: Eurostat (2015) Number of employed people by EU firms classified by size class in the food and beverage

sector

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price of milk. However, a generalised increase in the price of milk will generate higher income

for all farmers.

Therefore, based on the number of farms involved directly in the production of milk and on the

workers involved in its manufacture, it is possible that at around 700,000 workers/farmers may

benefit directly because of the agreement. The magnitude of that improvement is unclear.

However, they will receive either an increase in income associated with the rise in the price of

milk and/or higher job security related to the increase in the market access in the small dairy

products producers.

Social impact in Mercosur

The modelling figures and the composition of the sector in Mercosur suggest that a negative

impact, although small, in the sector will likely affect primarily the most vulnerable producers,

most of the family-run businesses. The increase in the exports to Mercosur of dairy products

from the EU will affect directly those producers that are at the border of profitability and

competitiveness.

Moreover, dairy farms tend to be family-owned businesses, with a minimal component of paid

labour. This implies that the issues associated with labour representation in the dairy farming

sector tend to be minimum. Only in the dairy processing, where there are more labour-type

relationships, there is scope for conflicts in terms of representation. However, they tend to have

good representation by relatively powerful labour unions. This suggests that there are minimum

potential conflicts associated with this regard.

Human rights impact

In general, the sector has not been associated with issues related to human rights in Mercosur.

On one side, in terms of land use and the effects on indigenous populations, there are little

overlapping and potential conflict between dairy farms and indigenous populations. Dairy farms

in Mercosur tend to be in areas with almost no indigenous populations. Moreover, in virtue of

their limited size, the potential displacement of indigenous populations associated with an

expansion of these farms is minimal.

Impact on SMEs

Most of the employment (75%) in the EU dairy sector is generated in small establishments (with

less than 9 persons employed). In virtue that large firms are generally in a better position of

overcoming existing trade barriers, the agreement with Mercosur may benefit the smallest firms

as it will bring down barriers hard to overcome to them. Despite this, and even when Mercosur

may be a potential large destination of products, it is unlikely that the agreement will have a

sizable impact in the employment in the sector.

The structure of the sector in Mercosur is similar to the EU, with typical small farmers supplying

milk to milk processors. There is no uniform information about the number of milk farms and

employment in the dairy sector. Estimates go from 4291 milk farms in Uruguay to 931299 dairy

farms in Brazil.

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Milk processors in Argentina employ nearly 30,000 people (Ministerio de

Ciencia y Tecnica, 2016). These figures come from a wide range of sources and estimation

methodologies that complicate the assessment.

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For Uruguay data see Uruguay XXI (2015) “Informe Sector Lacteo”; for Brazil, see BNDES “Producao leiteira no

Brasil”, BNDES Sectorial 37.

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However, as in the case of the EU, the majority of the milk and dairy producers tend to be micro

and small firms. In Brazil, 95% of dairy farms have less than 21 cows. Even in Argentina and

Uruguay, tending to have a more concentrated sector, 33% of the dairy farms have less than

60 cows. This approaches the average cows per farm in the EU (I.e. 54 cows) (EC, 2014).

Impact on Consumers

Dairy products represent at least 2% of the household expenditure in Mercosur and it could be

as high as 3.6%.

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This implies that a reduction in consumer prices associated with the

agreement may bring some moderate benefits to Mercosur consumers. These benefits may be

higher in those households where the consumption of dairy products tend to be higher. However,

on average, households will be better off by 0.02% as a result of a decrease in dairy consumer

prices of 1%. Although a fall in the producer prices may be partly absorbed along the

commercialisation chain and the fall may therefore be reduced for consumers, the impact of the

small increase in EU imports is likely to reach the consumer at least in part.

Dairy products account for up to 2.1% of EU household expenditure. As in the short run, the

volumes of production of milk and dairy are constant, an increase in the exports of milk and

dairy products to Mercosur may lead to an increase in prices in the EU.

Impact on LDCs

EU imports of dairy products from LDCs are marginal (less than Euros 100,000). The effect on

these countries is likely to be negligible. On one side, as it was seen before, the capacity of

Mercosur to supply the EU market and the likelihood of the removal of barriers are limited. On

the other hand, given the magnitude of imports from LDCs is minimal, the potential damage is

also minimal. Therefore, the EU-Mercosur agreement presents a negligible challenge for the

LDCs.

Impact on OMRs

In virtue of the low Mercosur exports of dairy products to the EU, it is possible to affirm that it

is unlikely that the agreement will have important effects on both producers and consumers

located in the outermost regions of the EU. On the other hand, being the dairy production

capacity in most of the outermost regions of the EU very limited, with the notable exception of

the Azores, it is unlikely that the agreement will bring additional benefits in terms market access

to Mercosur. Therefore, it is expected that the agreement will have on both exports and imports

a neutral effect for these regions.

Policy Recommendations

 Uruguay should secure support to affected farmers to accommodate to the new

market conditions.

 Mercosur countries should work in improving quality and strengthening its

system of denomination of origin and geographical indications. The expertise of

the EU in this area is extremely valuable and it could contribute that in the long run, more

Mercosur exporters could benefit from the agreement.

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Based on the analysis of the structures of the Consumer prices indexes of Argentina (2015), Brazil (2014) and

Uruguay (2010)

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6.3.3. Sugar and Ethanol

Sector overview

The EU is the third largest sugar producer and the second largest consumer in the world. It

accounts for roughly 50% of the total sugar beet production in the world and is also a major

importer of raw cane sugar for refining. With the consumption of sugar, including sugar used for

non-food purposes, reaching 19 million tonnes w.s.e

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in the period 2012-2015, the sugar

sector continues to be of great economic importance to the EU (EP, 2016). According to CEFS

(2016), the sugar industry is also an important job creator, providing direct or indirect

employment to roughly 180 thousand people.

Sugar beet in which the EU is a major producer accounts for 20% of the world’s sugar production.

The remaining 80% is produced using sugar cane, of which Brazil is the world’s largest producer

and exporter. Brazil accounted for approximately 52% of world net sugar exports in 2015 and is

also the second largest producer and exporter of ethanol in the world (EFFAT, 2017). For

Mercosur, the sugar and ethanol sectors are important employment generators, particularly for

the rural areas. In Brazil alone, the sugar/ethanol chain provides direct and indirect employment

to around 3.5 million people. Salaries for the sugarcane industry in Brazil are among the highest

in its agricultural sector.

EU’s sugar policy

Before the gradual abolition of sugar production quotas, a process which was completed in

September 2017, EU sugar policy had three important pillars; a) minimum support price for beet

sugar, b) production and import quotas and c) import tariffs. Under the quota system, the total

EU production quota of 13.5 million tonnes of sugar was divided between 20 Member States (EC,

2017a). Production in excess of this quota was governed by strict rules. It could either be a)

exported up to the EU's annual World Trade Organisation (WTO) limit of 1.374 million tonnes)

sold for biofuel or other industrial non-food uses, c) counted as the following year's sugar quota

and d) released on the EU domestic market with a levy.

In 1992, the support price for sugar beet was reduced, followed by the introduction and

‘decoupling’ of direct payments to farmers i.e. payments were no longer related to the quantity

of sugar produced. Significant reforms were further introduced in the period 2006-2010, which

has resulted in the reduction in the production of sugar by roughly 6 million tonnes, closure of

around 80 sugar beet processing factories and ended production in many EU states (EC, 2017a).

Gradual reduction of support prices for Beet sugar, end to export refunds and phasing out of

public intervention finally led to EU abolishing the quota system on 30 September 2017. In this

post-production quota regime, there is no limit to production or exports, enabling EU’s

production to better adjust to domestic and global market demand.

Sugar imports into the EU are subject to an MFN tariff of €339 per tonne with the exception of

those imported under multilateral or bilateral Tariff-Rate Quotas (TRQs), and sugar from LDCs,

which can be imported duty-free quota-free under EBA. At present, 412,054 tonnes of Brazilian

sugar can be imported at the preferential rate of €98 per tonne (Sugarcaneorg, 2017), with

additional sugar imports subjected to the MFN tariff.

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White Sugar Equivalent.

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EU’s Ethanol Policy

The EU’s ethanol market also remains highly protected; the EU imposes a tariff of €19.20 per

hectolitre of undenatured ethanol, and the import duty for denatured ethanol is around €10.20

per hectolitre (Aghajanzadeh-Darz et al. 2015). Broadly, the EU’s regulatory framework for

biofuels is based on the Renewable Energy Directive (RED) and the Fuel Quality Directive (FED).

In 2015, the EU approved ILUC Directive 2015/1513, which amended the RED and the FQD to

address indirect land use change (ILUC). This directive capped the contribution of crop-based

biofuels, including ethanol, in Europe’s climate and renewable objectives. The Renewable Energy

Directive was recently revised for the period 2020-2030, with the EU targets for Renewable

Energy Sources consumption being raised to 32% by 2030 (EU Science Hub, 2019). It further

states that the share of biofuels and bioliquids shall be no more than one percentage point higher

than their share in 2020, with a maximum of 7 % of final consumption of energy in the road and

rail transport sectors (ibid).

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Brazilian ethanol policy

Brazilian ethanol producers have historically received dedicated support by the government. The

industry started to develop in the 1970s as a result of government subsidies. Tax incentives

continue to play a key role in supporting ethanol consumption, particularly since the introduction

of flex-fuel cars (ABSugar, 2016). Moreover, specific credit lines are provided to sugar and

ethanol producers to fund investment in sugarcane production, and expansion of industrial

capacities and logistics for sugar and ethanol. Other forms of subsidies and government support

include; guaranteed purchases of ethanol by Petrobas (a state-owned oil company); access to

low-interest loans for agroindustry firms; lower excise taxes on ethanol compared to petrol;

price-fixing for hydrous ethanol; incentivised sales to domestic car fleet; substantial mandatory

blending of ethanol in gasoline; support to development of flex fuel-vehicles; and banning

purchases of diesel-powered cars (Alpha Invesco, 2018).

Production of Sugar and Ethanol in the EU and Mercosur

Table 57 shows EU’s sugar production and use in the period 2010-2018. Sugar beet production

in the EU increased from 105.2 MT to 109 MT in 2010-2013. In 2014, there was a 20% increase,

leading to almost 3 MT of out-of-quota sugar being carried forward and treated as quota for

2015. Since a significant percentage of the quota for this year was already produced before the

season started, there were strong incentives for farmers to reduce sugar output- there was a

substantial fall in sugar production in 2015.

The EU production quota on sugar ended on 1st October 2017, represented by a clear hike in

sugar production, which reached 21.1 MT in 2017/2018. EU also emerged as a net exporter of

sugar in this year, with a substantial decline in imports. However, the record global sugar

production in this year resulted in a sugar surplus of close to 9 MT, suppressing world prices,

and slowing down exports, which are forecasted at 2.1 MT for the EU in 2018/2019 (EC, 2018).

In the case of ethanol (Table 58), domestic production in the EU steadily increased in the period

2010-2019. EU has consistently remained a net importer of ethanol in the period considered,

with ethanol being primarily used for fuel purposes. About 23% of the EU ethanol is sugar beet

based.

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https://ec.europa.eu/jrc/en/jec/renewable-energy-recast-2030-red-ii

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Table 57: EU Sugar Market Balance (Million Tonnes)

2010 2011 2012 2013 2014 2015 2016 2017 2018

Sugar beet production

105.2 125.0 114.1 109.0 131.0 101.9 112.4 142.8 126.2

Sugar production*

16.1 18.9 17.5 16.7 19.5 14.9 16.8 21.1 18.6

Consumption

18.9 19.0 19.0 19.1 19.4 18.5 17.7 18.6 18.5

Imports

3.4 3.3 3.6 3.1 2.7 2.9 2.4 1.3 1.3

Exports

1.0 2.1 1.3 1.4 1.4 1.4 1.3 3.3 2.1

Beginning stocks**

1.6 1.2 2.4 3.2 2.6 4.0 1.9 2.2 2.7

Ending stocks**

1.2 2.4 3.2 2.6 4.0 1.9 2.2 2.7 1.9

Source: EU Agricultural 2018 Outlook. Notes: * Sugar production is adjusted for carry forward quantities and does not

include ethanol feedstock quantities. ** Stocks include carry forward quantities. The sugar marketing year is

October/September.

Table 58: EU Ethanol balance (Million Tonnes)

2010 2011 2012 2013 2014 2015 2016 2017 2018

Production 4.4 4.8 4.8 4.8 5.5 5.1 4.9 5.2 5.2

of which based on

cereals

66% 66% 65% 67% 66% 61% 72% 71% 73%

of which based on

sugar beet and molasses

27% 28% 30% 29% 29% 33% 23% 23% 21%

of which based on

other agricultural crops

6% 4% 4% 3% 4% 4% 3% 3% 2%

of which advanced 1% 1% 2% 1% 2% 2% 3% 4% 4%

Consumption 4.5 4.8 5.0 5.1 5.7 5.2 5.2 5.3 5.8

of which for fuel use 3.1 3.4 3.6 3.6 3.8 3.6 3.5 3.9 4.1

of which for other uses 1.4 1.4 1.4 1.5 1.9 1.6 1.7 1.5 1.7

Ethanol imports 0.3 0.3 0.4 0.6 0.4 0.4 0.3 0.3 0.2

Ethanol exports 0.0 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.1

Ethanol blending in

gasoline %

3.1 3.6 4.0 4.3 4.4 4.2 4.2 4.5 4.8

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In the case of Mercosur, Brazil is the world’s largest producer of sugar cane. Table 59 shows that

the production of sugar declined in Brazil from 38 MT in 2010 to 33 MT in 2015, recovered in the

period 2015-2017, but thereafter declined to 29 MT in the year 2018. In the case of ethanol,

production increased from roughly 21 MT of ethanol in 2010 to 26 MT in 2018.

Table 59: Sugar and ethanol production in Brazil (million tonnes)

Year

Sugarcane Sugar Ethanol

2010 620 38 21

2011 559

2012 588 38 18

2013 651 37 21

2014 633 35 22

2015 666 33 23

2016 651 38 21

2017 641 38 22

2018 620 29 26

Source: UNCIA DATA

Trade in sugar and ethanol between EU and Mercosur

Comparative advantages of EU and Mercosur

To examine which trading bloc can produce sugar and ethanol products with lower opportunity

cost, we calculate the global revealed comparative advantage index or Balassa’s RCA index.

Table 60 shows the RCA index for EU and Mercosur in the sugar and ethanol sectors, and at a

further disaggregated product-level.

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To ensure that results are robust to the choice of year,

results for RCA indices are presented as an average in the period 2012-2016 and separately for

the latest year 2016.

RCA index greater than 1 for a product implies that the trading bloc has a global comparative

advantage in producing it. Table 60 shows that Mercosur has a higher comparative advantage

in both the sugar and ethanol sectors. At the disaggregated product level, it is observed that

Mercosur has a global comparative advantage in raw cane sugar, which accounts for 80% of

global sugar production. It also has a comparative advantage in Cane or Beet sugar in solid form,

Molasses and Chewing gum. On the other hand, the EU has a comparative advantage in Raw

Beet sugar, Refined Cane or Beet sugar, Lactose and Glucose products, Sugars in solid form,

Beet molasses and Sugar confectionary, other than chewing gum.

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Here product refers to six-digit HS product. A list of all the six-digit products in the sugar and ethanol sectors is

given in appendix A.

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Table 60: Revealed Comparative Advantage of EU and Mercosur in sugar and ethanol

Product Name HS code EU (2016) Mercosur (2016) EU Avg. Mercosur Avg.

Sugar Sector

17 0.8 14.3 0.9 12.5

Ethanol Sector

2207 1.2 7.2 1.1 8.9

Raw Beet Sugar

170112 1.8 0 2.3 0

Refined Cane or

Beet Sugar

170191 1.2 0.2 1 0.1

Lactose,

Weight >= 99%

170211 1.7 0.1 1.7 0.1

Glucose, < 20%

By Weight

170230 0.9 0.7 1.1 0.8

Glucose >= 20%

And < 50%

170240 1.8 0.4 1.8 0.3

Sugars in Solid

Form

170290 1.3 0.4 1.4 0.6

Beet Molasses

170390 1.4 0 1.5 0

Sugar

Confectionery

170490 1.4 0.9 1.4 1

Raw Cane Sugar

170114 0 40.1 0 36.8

Cane or Beet

Sugar in solid form

170199 0.7 9.6 0.9 9.3

Chewing Gum

170410 0.6 2.1 0.7 1.9

Source: Export data is collected from UNCOMTRADE in WITS. Note: RCA(ij) = (xij/Xit) / (xwj/Xwt), Where xij and xwj are

the values of trading bloc i’s exports of product j and world exports of product j and where Xit and Xwt refer to the

trading bloc’s total exports and world total exports.

Trends in EU’s imports from Mercosur

Importance of sugar and ethanol in the EU’s total imports from Mercosur

Although agricultural imports occupy a large portion of total imports from Mercosur, the share

of sugar imports in total imports from Mercosur remained low in the period 2012-2016 and

declined from 1.2% in 2012 to 0.2% in 2015. In the year 2016, this rose to 0.5%. The share of

ethanol in total imports from Mercosur is even lower and averaged at 0.05 in the period 2012-

2016 (see Figure 66).

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Figure 66: Share of sugar & ethanol imports in total imports from Mercosur (%)

Source: Data collected from Comext-Eurostat.

Importance of Mercosur as a trade partner to EU in sugar and ethanol

Mercosur is more important as an import partner for the EU in the sugar and ethanol sectors

than as an export partner. Table 61 shows that the share of Mercosur in the EU’s total sugar

imports in the year 2016 was 12%, while its share in the EU’s ethanol imports was 4.68%. As

an export partner, Mercosur accounts for less than 1% of the EU’s total sugar exports and ethanol

exports. Brazilian exports of ethanol to the EU have also faced tough competition from other

ethanol-exporting countries. Recently, Brazil has lost sizeable market share to the new market

entrance by Guatemala (through trade agreement) and Pakistan (through preferential imports

in Generalized System of Preferences status), who have gained duty-free access to the EU in the

ethanol sector.

Table 61: Share of Mercosur in EU trade

Share of Mercosur (%)

EU imports of Sugar

12.08

EU imports of Ethanol

4.68

EU exports of Sugar

0.92

EU exports of Ethanol

0.51

Source: Comext-Eurostat. Note: Data is for 2016.

To identify the top 5 products imported by the EU from Mercosur in the sugar sector, we calculate

the import share of each six-digit product in the overall imports of the sugar sector. Table 62

shows the average import share of each product in the period 2014-2016. It is observed that

the top most imported product from Mercosur is Raw Cane Sugar which, on an average,

comprised of 59.5% of sugar imports from Mercosur per year in the period 2014-2016, followed

by Cane or Beet Sugar in solid form, Sugar Confectionery, Raw Cane Sugar obtained without

centrifugation and chewing gum.

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2012 2013 2014 2015 2016

Share of Sugar and sugar products in EU imports from Mercosur

Share of Ethanol in EU imports from Mercosur

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Table 62: Top five products imported by EU from Mercosur in the sugar sector

HS code Description

Average import share in

the period 2014-2016 (%)

170114

Raw Cane Sugar 59.53

170199

Cane or Beet Sugar in solid form 37.47

170490

Sugar Confectionery 1.072

170113

Raw Cane Sugar, In Solid Form, Obtained Without

Centrifugation

0.76

170410

Chewing Gum, Whether or Not Sugar-Coated 0.57

Source: Comext-Eurostat.

To identify the top 5 products exported by the EU to Mercosur in the sugar and ethanol sector,

the export share of each six-digit product in EU’s total exports in the sugar sector is calculated.

Table 63 shows the average export share of each product in the period 2014-2016, and it is

observed that the top most exported products to Mercosur include Sugar Confectionery

(excluding chewing gum) followed by Lactose in solid form, Sugar in solid form, Chewing Gum

and Glucose in solid form.

Table 63: Top exported products by the EU to Mercosur

HS code Description

Average export share in

the period 2014-2016 (%)

170490 Sugar Confectionery 58.40

170211 Lactose in Solid Form and Lactose Syrup 23.07

170290 Sugars in Solid Form 12.68

170410 Chewing Gum 1.96

170230 Glucose in Solid Form and Glucose Syrup 1.81

Source: Comext-Eurostat. Calculations of share do not take account of trademarked confidential

Barriers to trade between EU-Mercosur in sugar and ethanol sectors

Barriers faced by Mercosur exporters

Examining MFN tariffs

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imposed by the EU on sugar and ethanol products in the year 2016

(see Figure 67) shows that EU imposed high tariffs on imports of Raw Cane sugar and Glucose

(more than 100% tariffs), Cane or Beet sugar in solid form, Raw Beet sugar and Fructose.

Comparatively lower tariffs were placed on Sugar Confectionary, Lactose products and Molasses.

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Applied MFN simple-average rates are used.

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Figure 67: Applied MFN tariffs imposed by the EU in 2016 (AVE)

Source: Tariff data collected from TRAINS, WITS at HS six-digit level. MFN (AVE) applied tariffs have been use.

Figures 68 and 69 plot EU MFN ad valorem equivalent (AVE) tariffs for sugar and ethanol products

(at four-digit level) in the period 2012-2016. It is observed that the AVE rate of MFN applied

tariff on Cane or Beet sugar has remained high, while that on molasses has remained low in the

period. In the Cane or Beet sugar (HS 1701) products, tariffs on Raw Cane sugar have remained

the highest compared to other products in the period 2012-2015, while tariffs on Refined Cane

or Beet sugar have been consistently the lowest. In terms of the ethanol sector, tariffs on un-

denatured ethanol remained consistently higher than tariffs on denatured ethanol (Figure 69).

These tariffs on ethanol do not distinguish between the different uses of ethanol (beverage, fuel,

industrial).

Figure 68: Tariffs on sugar products Figure 69: Tariffs on Ethanol products

Source: Tariff data collected from TRAINS, WITS at HS four-digit level. MFN (AVE) applied tariffs have been used.

104

103

100

120

2012 2013 2014 2015 2016

Cane or beet sugar Other sugars

Molasses Sugar confectionary

2012 2013 2014 2015 2016

UNDENATURED ETHYL ALCOHOL

DENATURED ETHYL ACOHOL

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Barriers faced by EU exporters

At the four-digit level, products on which highest tariffs are imposed (see Table 64) include Cane

or Beet sugar in solid form (21%), followed by Sugar Confectionery (20%), ethanol (18%), and

Molasses (16%). On the remaining sugar products, an MFN tariff of around 15.8% is placed.

Along with high tariffs on sugar and ethanol products imposed by Mercosur, other problems

faced by EU exporters include un-harmonised tariffs, which in some cases need to be paid twice

(EC, 2012), and absence of a single market for sugar in Mercosur and the uncertainty related to

differences in national trade regimes and intraregional customs within Mercosur.

Table 64: Applied MFN tariffs imposed by Mercosur on sugar and ethanol products

Product MFN tariffs, 2016

Cane or Beet Sugar 21.3

Other Sugars 15.81

Molasses 16

Sugar Confectionary 20

Ethanol 17.92

Source: Tariff data collected from TRAINS, WITS at HS four-digit level.

Assessing the impact of the agreement

Economic Impact

Given the limitations of the CGE analysis, it does not model tariff rate quotas (TRQs) but rather

applies partial tariff cuts of 15% and 30% in the conservative and ambitious scenarios

respectively. In both scenarios, there is a small decline in output in EU’s sugar sector, slightly

larger in the ambitious scenario, with a diversion of output into some Mercosur countries; there

is a predicted increase in output in the sugar sector of Brazil and Argentina. Driven by increasing

exports, the domestic use of sugar declines in Brazil and Argentina.

In the sugar and ethanol sector as a whole, Mercosur enjoys a comparative advantage over the

EU. EU imports Raw Cane sugar, Cane or Beet sugar in solid form and Ethanol from Mercosur.

Currently, in the sugar sector, more than 100% ad valorem equivalent (AVE) tariff rate is

imposed by the EU on import of Raw Cane sugar and Glucose, along with very high tariffs on

Raw Beet sugar and Cane or Beet sugar in solid form. Tariffs on Ethanol are also high; around

31% (AVE) on undenatured and 19% (AVE) on denatured ethanol. As part of FTA, if EU opens

up TRQ on sugar, then Mercosur countries can benefit from an increase in exports of sugar to

the EU. These are products where Mercosur enjoys a global comparative advantage and is an

important exporter to the EU.

For EU producers, reduction in tariffs imposed by Mercosur countries in the sugar sector can lead

to some increase in exports of Sugar Confectionery, Lactose products and Sugars in solid forms-

products where EU has a comparative advantage. On the import side, increased access to

Mercosur’s cheaper sugar imports, particularly raw cane sugar and cane or beet sugar, can

increase the competitiveness of EU’s sugar users, including sugar refiners, confectioners, bakery

producers and chocolatiers. As seen from Table 62, EU is a net importer in the case of ethanol,

and its bioethanol production is also closely linked to the sugar sector.

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Since ethanol is not specifically captured by the GTAP database, market impacts cannot be

obtained from the model. With the opening of a TRQ for ethanol, domestic EU ethanol producers

will face increased competition from Brazilian ethanol imports. Higher access to Brazilian ethanol

as part of the TRQ can, however, boost the competitiveness of EU industries that use ethanol as

a feedstock, such as chemicals, pharmaceuticals, cosmetics and the food and drink industry.

Environmental Impact

In the case of the EU, rising ethanol from Mercosur can reduce pollution in the EU by beneficially

impacting its greenhouse gas emissions. European and Brazilian biofuels have different energy

balances and emit different green-house gasses. Altieri (2012) argues that the success of the

Brazilian ethanol program is rooted in the proven economic and environmental advantages

of sugarcane ethanol, which offers an unrivalled fossil energy balance compared with other

alternative fuels, and in turn contributes to a significant reduction in GHG emissions.

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However,

in recent years, significant improvements have been made by the EU in its GHG savings. EU

ethanol production and use resulted in more than 71% average savings over fossil fuels in 2018

as compared with 50% in 2011 (ePure, 2020)

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Higher ethanol production is associated with the increasing use of irrigation, water consumption,

overflow of fertilisers and pesticides, degradation of soil and pollution. These environmental

implications could be reduced should Mercosur countries increase investment in more modern

facilities that use cleaner technologies.

Given the scale of existing Brazilian sugarcane production-less than 9 million hectares, largely

concentrated in Sao Paulo, which is roughly 4.4% of the total agricultural land- any significant

spill over on deforestation is unlikely, particularly as a response to the extra volume represented

by a TRQ. Recent studies, including de Oliveira Bordonal et al. (2018 and Jaiswal et al. (2017),

show how Brazilian sugarcane ethanol can be increased substantially without leading to de-

forestation.

According to the FAO, the land for sugarcane cultivation in Brazil has almost doubled (rising from

56 to 97 tons per square km) in the period 2004-12, when deforestation was decreasing

dramatically (see Chapter 5). It has stagnated for the last five years. Moreover, sugar cultivation

remains concentrated around the North-Eastern region or Sao Paulo, away from the Amazon,

implying that any significant spill over on deforestation is unlikely, particularly as a response to

the extra volume represented by a TRQ.

Furthermore, increased sugar production in Mercosur may come from productivity gains realised

through economies of scale associated with higher export production from the FTA. Mercosur

could be in the position of supplying the EU with the additional sugar and ethanol generated by

the agreement with a minimum impact in the current land use, given productivity trends.

Between 2015 and 2018, the annual average growth rate for sugarcane yields in Brazil was 1.85%

(USDA, 2019).

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Social impacts

Signing of the FTA, and the consequent economic impacts, also have an important social

dimension. In the EU, the sugar sector provides jobs to roughly 145,000 sugar beet growers,

28,000 sugar processers, and many more upstream and downstream works (EC, 2017a). As

discussed in the economic impact section, the CGE modelling results predict a decline in output

(albeit small) and exports in the EU’s sugar sector. The reduction in EU’s output and exports can

negatively impact employment opportunities; the CGE modelling results, under both the

conservative and ambitious scenario, predict a small decrease in employment in EU’s sugar

sector for skilled and unskilled labour. The amount of downward pressure on production will

however depend on the volume of the TRQ; modelling results predict 0.7% and 1.0% contraction

in the two scenarios. Moreover, as the EU primarily imports cane sugar for refining, it will also

create some activity and employment in refineries.

Specific modelling results for ethanol cannot be considered as it is not captured by the GTAP

database. However, as with sugar, market access for Brazilian ethanol will expose EU producers

to additional competition with consequent effects for workers in the sector and other related

industries. Additional market access for Brazilian ethanol will also allow ethanol users in the EU,

such as the biochemical and bioplastics industry, to become more competitive, in turn generating

some employment.

In the case of Mercosur, rising output and exports in the sugar and ethanol sector will generate

new employment opportunities, for both skilled and unskilled labour. For Brazil and Argentina,

the CGE modelling results predict a rise in both skilled and unskilled employment. Further, under

both scenarios, there is expected to be a higher increase in skilled employment in Brazil and

Argentina compared to unskilled employment, along with a rise in real wages in the sugar sector

of Mercosur countries.

In the short run, the FTA is expected to decrease rural unemployment, especially in Argentina

where rural unemployment is significantly higher than urban unemployment, and contribute

towards a reduction in rural poverty, which is particularly high in Brazil. However, an overall

increase in rural- informal employment may be limited as the sector becomes increasingly

formalised and mechanised (de Oliveira Bordonal et al. 2018). Increasing exports can lead to an

increase in employment in urban areas for processing of sugar and ethanol products and their

transport. To attract workers, wages and working conditions may be improved, which in the long

run will create incentives for mechanisation and skill development, leading to a move from

agricultural employment towards more skilled employment (EC, 2010). Moreover, if incentives

from mechanisation lead to more skilled employment, it can translate into lower inequalities for

those in employment.

Human Rights Impact

The sugar cane sector in Mercosur countries is traditionally dependent on informal seasonal and

unskilled labour. In Brazil, the sugar and bio-fuel industry has historically relied on poor labourers

and migrants. However, in recent years, the sugar sector has become increasingly mechanised

(de Oliveira Bordonal et al. 2018).

As per the CGE modelling results, both production and exports in Mercosur’s sugar sector are

likely to increase with signing of the FTA, and there are also likely to be employment gains for

both skilled and unskilled workers, as well as the rise in wages. Overall, this can offer better

working and living conditions for the workers in the sugar sector. However, if the expansion of

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sugar production and commercial farming to meet the increasing demand for sugar exports

occurs at the expense of small-scale farmers, it can lead to loss of livelihood for smaller farmers

in Mercosur and have adverse gender impacts. The impact on human rights in the EU can be

expected to be minimal; partial liberalisation mechanisms such as tariff rate quotas (TRQs) allow

the EU to provide limited market access on these products for Mercosur countries, while also

safeguarding the interests of EU farmers.

Impact on SMEs

Less competitive small-scale EU farmers and SMEs that produce and process raw sugar may be

more affected than larger producers. In contrast, for sugar-using SMEs such as confectioners

and bakeries, opening up TRQ on sugar products will provide access to cheaper sugar products,

allowing them to become more competitive and generate higher profits.

For sugar producers in Mercosur, the FTA can lead to an increase in the demand for Mercosur’s

exports, providing important opportunities for SMEs in expansion and becoming more productive.

Impact on Consumers

According to the European Food Safety Agency (EFSA), there is evidence that high intakes of

sugar products contribute to weight gain, dental problems and other serious diseases. However,

as a primary good, table sugar is characterised by low-price elasticity, indicating that changes

in the price of table sugar will not affect consumers’ consumption decisions substantially. The

impact on consumers is likely to be limited since sugar is also not a very large part of consumer

budgets.

Impact on LDCs

Since 2009, the EU has been granting duty-free and quota-free access for sugar imports from

LDCs and African, Caribbean and Pacific countries (ACP) that have signed preferential

agreements such as the Economic Partnership Agreement or the Everything-But-Arms

agreement (EC, 2017a). Sugar is also imported based on zero-duty TRQs through free-trade

agreements with some countries including Balkans and India, and at reduced duty from Mercosur

countries. In addition to these import concessions, the EU has supported restructuring or

diversification of the sugar sector in developing countries which have been traditional suppliers

to the EU. This has contributed to developing countries moving up the chain in the sugar sector

or diversifying into new sectors. Under the EU-Mercosur FTA, sugar will be subject to TRQ and

therefore the impact on LDCs will be limited, particularly since imports from Brazil are currently

at a historic low.

Impact on Outermost regions of the EU

In these outermost areas, cane cultivation and processing accounts for a substantial portion of

local economic activity. They are known mainly for the production of specialty sugars and rum.

The French outermost regions produce cane sugar mainly for exporting to continental Europe

and secondarily for their local markets: 60% of their sugar production is exported for refining in

Europe and the remaining 40% are specialty sugars for direct consumption mainly in the EU

market (source: French Ministry of Agriculture). The main sugar-producing region is Réunion,

where sugar cane production plays an important role in the island’s agriculture and its socio-

economic development. Réunion accounts for 75% of the EU’s sugar cane production (93% of

its cane sugar is exported to continental Europe, half of it being specialty sugars – source:

SSR) with the rest produced in the Antilles (Guadeloupe, Martinique and French Guyana). Insofar

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as the market access opening for sugar will be limited and will not cover specialty sugars, the

impact of the agreement is likely to be limited for the outermost regions.

Policy Recommendations

 Mercosur countries with support from the EU should implement policies to

manage social impacts and to increase environmental efficiency in order to

mitigate the potential adverse effect of the expansion of sugar production and maximise

the economics gains from the FTA. Mercosur countries will also need to address

challenges related to the proper enforcement of adjustment policies.

 Brazil should ensure that its biofuels policy effectively addresses liberalisation

issues to have positive social impacts. For instance, organisational support can

facilitate the involvement of small farmers through contract farming or cooperatives (EC,

2010).

 Mercosur countries should manage the environmental consequences of trade

liberalisation through the FTA. They should increase investment in more modern

plants that use cleaner technology or invest in the development of certification systems

addressing biodiversity and climate change to counter potential soil and water

degradation.

 The EU should provide technical assistance in the form of supporting the

development of newer and cleaner technologies in Mercosur, as well as research

programmes and policies aimed at improving productivity in the agricultural areas, and

sharing of best-practices such as management techniques for better resource use and

better agro-chemical usage.

6.3.4. Beverages

Sector overview

EU-Mercosur trade in alcoholic and non-alcoholic beverages is significant for both trading blocs.

EU exports of waters (HS 2201-2202), as well as a range of different alcoholic beverages,

account for a significant share of the beverages imported by the four Mercosur countries.

Similarly, beverages are among Mercosur’s largest exports to the EU. Even so, tariffs applied on

certain beverages imported into Mercosur from the EU and vice versa remain high, and NTMs

have been shown to raise the cost of trade in beverage products between the two trading blocs.

The status quo in EU-Mercosur trade in beverages

Figure 70 compares the combined value of EU beverage exports to all four Mercosur countries

(measured in € billions) between 2012 and 2016 with the equivalent value of Mercosur exports

of beverage products to the EU, distinguishing between alcoholic and non-alcoholic beverages.

Mercosur’s non-alcoholic beverage exports to the EU are dominant, significantly exceeding the

values of non-alcoholic and alcoholic beverages imported by Mercosur from the EU. In 2016, the

EU imported nearly €1.3 billion worth of non-alcoholic beverages from the four Mercosur

countries (down from €1.45 billion in 2015).

In contrast, the EU dominates trade in alcoholic beverages with Mercosur. The gap between EU

exports of alcoholic beverages to Mercosur and the corresponding imports of these beverages

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from Mercosur countries has narrowed since 2012. This has occurred on the back of both a

decline in the value of EU exports of alcoholic beverages to Mercosur since 2014 as well as the

steady growth of Mercosur exports of these beverages to the EU over the past five years. In

2016, the EU exported more than €322 million in alcoholic beverages to Mercosur (down from

€381.4 million in 2012) and imported €227.8 million worth of alcoholic beverages (up from just

less than €161 million in 2012) from the Mercosur member states. There is significant variation

across the four Mercosur countries in the types of beverage products that dominate EU-Mercosur

trade.

Figure 70: EU-Mercosur trade in alcoholic & non-alcoholic beverages, 2012-2016

Source: Author’s elaboration using EU Comext data

Table 65: Share of beverages in total EU-Mercosur trade in 2016

Share of total

EU exports to

Mercosur

countries (%)

Share of

Argentina’s

total exports

to the EU (%)

Share of

Brazil’s total

exports to the

EU (%)

Share of

Paraguay’s

total exports

to the EU (%)

Share of

Uruguay’s total

exports to the

EU (%)

Alcoholic

beverages

0.9 2.7 0.03 0.01 0.2

Non-alcoholic

beverages

0.1 1.3 4.1 0.3 0.2

All beverages

1.0 4.0 4.1 0.3 0.4

Source: Author’s calculations using EU Comext data

Much of the two-way trade in beverages between the EU and Mercosur is concentrated in specific

products. Table 66 and Table 67 outline the top 10 beverage products exported from the EU to

Mercosur and from Mercosur to the EU, respectively, in both cases based on the total value of

exports over the five-year period between 2012 and 2016. In line with the overall pattern of EU

beverage exports to Mercosur discussed above, alcoholic beverage products generally dominate

the top 10 EU exports to the Mercosur countries. Whisky is the top EU export in value terms to

each of the four Mercosur member states. While there is significant variation in the relative

position of other types of beverages across the four Mercosur members, wine and sparkling wine

feature prominently among the top five EU beverage exports to all Mercosur countries. In

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2012 2013 2014 2015 2016

€ billions

EU28 alcoholic beverage exports to Mercosur

EU28 non-alcoholic beverage exports to Mercosur

EU28 alcoholic beverage imports from Mercosur

EU28 non-alcoholic beverage imports from Mercosur

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addition, beer is among the top 10 exported products from the EU to each of the Mercosur

members. Among the non-alcoholic beverages, water products are generally more significant

exports from the EU to Argentina and Brazil, with much smaller values of exports going to

Paraguay and Uruguay. Water aside, however, non-alcoholic beverages generally do not feature

much among the top 10 EU beverage exports to Mercosur countries.

Table 66: Top 10 beverage products exported from the EU to Mercosur countries, by

total value of exports between 2012 and 2016

Argentina Brazil Paraguay Uruguay

Product

Value

(€ mn) &

% Share of

EU exports

Product

Value

(€ mn) &

% Share of

EU exports

Product

Value

(€ mn) &

% Share of

EU exports

Product

Value

(€ mn) &

% Share of

EU exports

1 Whiskies

(HS 220830)

74.3

(0.19%)

Whiskies

(HS 220830)

466.8

(0.28%)

Whiskies

(HS 220830)

88.6

(3.50%)

Whiskies

(HS 220830)

197.7

(2.46%)

2 Non-alcoholic

beverages

n.e.s.

(HS 220290)

23.8

(0.06%)

Wine

(HS 220421)

414.8

(0.25%)

Beer

(HS 220300)

27.4

(1.08%)

Sparkling wine

(HS 220410)

22.7

(0.28%)

3 Waters

(HS 220210)

23.0

(0.06%)

Waters

(HS 220210)

183.5

(0.11%)

Sparkling wine

(HS 220410)

14.4

(0.57%)

Vodka

(HS 220860)

14.4

(0.18%)

4 Sparkling wine

(HS 220410)

17.8

(0.04%)

Sparkling wine

(HS 220410)

129.7

(0.08%)

Wine

(HS 220421)

11.6

(0.46%)

Liqueurs and

cordials

(HS 220870)

10.2

(0.13%)

5 Liqueurs and

cordials

(HS 220870)

14.9

(0.04%)

Non-alcoholic

beverages

n.e.s.

(HS 220290)

111.3

(0.07%)

Waters

(HS 220210)

10.2

(0.40%)

Wine

(HS 220421)

9.4

(0.12%)

6 Vodka

(HS 220860)

13.6

(0.03%)

Beer

(HS 220300)

108.1

(0.07%)

Vodka

(HS 220860)

8.3

(0.33%)

Beer

(HS 220300)

8.8

(0.11%)

7 Beer

(HS 220300)

7.5

(0.02%)

Vodka

(HS 220860)

80.6

(0.05%)

Liqueurs and

cordials

(HS 220870)

4.3

(0.17%)

Waters

(HS 220210)

4.2

(0.05%)

8 Gin and Geneva

(HS 220850)

4.6

(0.01%)

Liqueurs and

cordials

(HS 220870)

19.0

(0.01%)

Ethyl alcohol

<80% vol.

(HS 220890)

1.6

(0.06%)

Spirts

(HS 220820)

3.7

(0.05%)

9 Wine

(HS 220421)

2.3

(0.01%)

Ethyl alcohol

<80% vol.

(HS 220890)

6.4

(0.00%)

Non-alcoholic

beverages

n.e.s.

(HS 220290)

0.8

(0.03%)

Non-alcoholic

beverages

n.e.s.

(HS 220290)

3.4

(0.04%)

Mineral water

and aerated

water

(HS 220110)

1.2

(0.00%)

Mineral water

and aerated

water

(HS 220110)

5.7

(0.00%)

Gin and

Geneva

(HS 220850)

0.4

(0.02%)

Ethyl alcohol

<80% vol.

(HS 220890)

2.9

(0.04%)

Source: Own calculations using EU Comext data.

The profile of top exported products from the four Mercosur countries to the EU is, at least in

general terms, markedly different. Specifically, non-alcoholic beverages, and fruit juices in

particular, feature much more prominently among the top 10 Mercosur exports to the EU. Orange

juice is the top beverage export from Brazil to the EU market, accounting for almost 4% of total

Brazilian exports to the EU. Frozen orange juice and other citrus fruit juices also rank among

Brazil’s top four exports to the EU in terms of total value exported between 2012 and 2016.

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Orange juice and/or citrus fruit juices also feature prominently among the top exports to the EU

from Argentina, Paraguay and Uruguay. In addition, grapefruit juice (Paraguay’s top beverage

export to the EU), pineapple juice (Brazil and Uruguay) and apple juice (Brazil) also rank among

the top exported beverages to the EU for specific Mercosur members.

Alcoholic beverages are generally less prominent among the top exports to the EU, with some

important exceptions. Wine (in containers of 2 litres or less) is both Argentina’s and Uruguay’s

top beverage export to the EU. Rum (and other spirits obtained from distilling fermented sugar

cane products) are key exports to the EU for both Brazil and Paraguay and, to a lesser extent,

Uruguay as well. In turn, whisky is Uruguay’s fourth largest beverage export to the EU in value

terms and Paraguay’s 10th largest export to the European bloc. Sparkling wine is also an

important export to the EU for Argentina, Paraguay and Uruguay. In addition, beer ranks among

Argentina’s top 10 beverage exports to the European market, although it does not feature among

the top exports in any of the three other Mercosur member states.

Table 67: Top 10 beverage products imported by the EU from Mercosur countries, by

total value of imports between 2012 and 2016

Argentina Brazil Paraguay Uruguay

Product

Value

(€ mn) &

% Share of

EU imports

Product

Value

(€ mn) &

% Share of

EU imports

Product

Value

(€ mn) &

% Share of

EU imports

Product

Value

(€ mn) &

% Share of

EU imports

Wine <= 2 litres

(HS 220421)

745.7

(1.83%)

Orange juice

(HS 200919

and 200912)

5,881.8

(3.77%)

Grapefruit

juice (HS

200929 and

200921)

12.1

(0.23%)

Wine <= 2

litres

(HS 220421)

5.1

(0.07%)

2 Citrus fruit juice

(HS 200939)

329.4

(0.81%)

Juice of fruit or

vegetables

(HS 200989)

98.3

(0.06%)

Orange juice

(HS 200919)

7.2

(0.14%)

Citrus fruit

juice

(HS 200939)

4.4

(0.06%)

3 Wine > 2litres

(HS 220421)

126.3

(0.31%)

Frozen orange

juice

(HS 200911)

51.5

(0.03%)

Frozen orange

juice

(HS 200911)

1.1

(0.02%)

Orange juice

(HS 200919)

4.2

(0.06%)

4 Orange juice

(HS 200919)

25.5

(0.06%)

Citrus fruit

juice

(HS 200939)

36.7

(0.02%)

Rum and other

spirits

(HS 220840)

0.5

(0.01%)

Whiskies

(HS 220830

2.5

(0.03%)

5 Spirits

(HS 220820)

18.5

(0.05%)

Rum and other

spirits

(HS 220840)

35.7

(0.02%)

Juice of fruit or

vegetables

(HS 200989)

0.2

(0.00%)

Frozen orange

juice

(HS 200911)

1.4

(0.02%)

6 Grape juice

(HS 200969)

13.6

(0.03%)

Pineapple juice

(HS 200949)

23.6

(0.02%)

Ethyl alcohol

<80% vol.

(HS 220890)

0.2

(0.00%)

Mineral water

and aerated

water

(HS 220110)

0.4

(0.00%)

Ethyl alcohol

<80% vol.

(HS 220890)

10.6

(0.03%)

Non-alcoholic

beverages

n.e.s.

(HS 220290)

8.2

(0.01%)

Citrus fruit

juice

(HS 200939)

0.1

(0.00%)

Liqueurs and

cordials

(HS 220870)

0.2

(0.00%)

8 Sparkling wine

(HS 220410)

7.2

(0.02%)

Wine <= 2

litres

(HS 220421)

7.2

(0.00%)

Sparkling wine

(HS 220410)

0.04

(0.00%)

Sparkling wine

(HS 220410)

0.2

(0.00%)

Juice of fruit or

vegetables

(HS 200989)

3.6

(0.01%)

Apple juice

(HS 200979)

6.0

(0.00%)

Spirits

(HS 220820)

0.02

(0.00%)

Rum and other

spirits

(HS 220840)

0.2

(0.00%)

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Beer

(HS 220300)

3.6

(0.01%)

Mixtures of

fruit juices

(HS 200990)

4.6

(0.00%)

Whiskies

(HS 220830)

0.02

(0.00%)

Pineapple juice

(HS 200949)

0.1

(0.00%)

Source: Author’s calculations using EU Comext data.

A more aggregated picture of the importance of the EU in total beverage imports into Mercosur

and vice versa is presented in Table 68 and Table 69 respectively. The EU accounts for a large

share of imports of certain beverages into the Mercosur countries, but there is variation across

products and the individual Mercosur member states. Among the non-alcoholic beverages, the

EU accounts for the majority of Argentina’s and Brazil’s water (HS2201) imports and is a key

source of Brazilian imports of sweetened or flavoured water into Brazil as well (HS2202).

However, the presence of EU fruit juice exports in Mercosur markets is generally much more

limited. In contrast, the EU’s share in certain alcoholic beverage markets in the Mercosur

countries is markedly more substantial. The EU accounts for half of the beer imported into Brazil;

one quarter and more than one-third of the wine imported into Argentina and Brazil, respectively;

all of the vermouth imported by Argentina and more than 90% of Brazilian imports; and between

65-80% of the spirits and liqueurs imported by the four Mercosur members.

Table 68: EU shares of total beverage imports of Mercosur countries in 2016

Product

% of total Mercosur imports of the product

Argentina Brazil Paraguay Uruguay

Fruit juices (HS2009) 0.3 6.0 1.7 2.1

Waters, not containing added sugar,

sweeteners or flavourants (HS2201)

93.6 75.1 25.4 84.2

Waters, containing added sugar, sweeteners

or flavourants (HS2202)

32.3 82.8 10.6 6.9

Beer (HS2203) 14.0 50.5 9.4 5.4

Wine (HS2204) 25.9 35.4 8.3 12.0

Vermouth (HS2205) 100.0 92.6 1.0 37.5

Cider, perry, mead and other fermented

beverages (HS2206)

18.4 11.4 2.4 4.5

Undenatured ethyl alcohol, spirits and

liqueurs (HS2208)

65.9 80.5 71.9 73.2

Source: Author’s calculations using UN Comtrade data

In comparison, however, exports from the individual Mercosur countries generally hold fewer

substantial shares of the EU beverage market. The Mercosur countries’ shares of total EU imports

of most beverage products are substantially below 1%. Notable exceptions are fruit juice exports

from Argentina and Brazil (1.6% and 23.4% of total EU fruit juice imports, respectively) and

Argentina’s wine exports (1.8% of total EU wine imports).

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Table 69: Mercosur countries’ shares in total EU beverage imports in 2016

Product

% of total EU imports of the product

Argentina Brazil Paraguay Uruguay

Fruit juices (HS2009) 1.6 23.4 0.05 0.05

Waters, not containing added sugar,

sweeteners or flavourants (HS2201)

0.0 0.03 0.0 0.01

Waters, containing added sugar, sweeteners

or flavourants (HS2202)

0.0 0.04 0.0 0.0

Beer (HS2203) 0.02 0.02 0.0 0.0

Wine (HS2204) 1.8 0.01 0.0 0.01

Vermouth (HS2205) 0.01 0.0 0.0 0.0

Cider, perry, mead and other fermented

beverages (HS2206)

0.0 0.0 0.0 0.0

Undenatured ethyl alcohol, spirits and liqueurs

(HS2208)

0.05 0.1 0.0 0.0

Source: Author’s calculations using UN Comtrade data.

Beverage production in the EU and Mercosur countries

An accurate analysis and comparison of beverage production levels in the EU and Mercosur is

constrained by the limited availability of comparable data across countries, particularly in the

case of the Mercosur member states. Nevertheless, beyond what can be learnt about production

levels from the trade data presented above, comparable production data is available for the EU

across a number of different alcoholic and non-alcoholic beverage products.

The total value of EU beverage production reached €144.4 billion in 2014 (up from €140.9 billion

in 2012). Figure 71 provides an indication of the scale of production of particular types of

beverages across the EU by depicting recent trends in the production value of various beverages.

Beverage production in the EU is dominated by the manufacture of soft drinks and

mineral/bottled waters, beer and wine, followed in order of magnitude of the value of production

by distilling, rectifying and blending of spirits and the manufacture of fruit and vegetable juice.

Figure 71: EU beverage production in € billions, by beverage type, 2012-2014

Source: Author’s elaboration using Eurostat data.

0 10 20 30 40 50

Manufacture of soft drinks; production of…

Manufacture of beer

Manufacture of wine from grape

Distilling, rectifying and blending of spirits

Manufacture of fruit and vegetable juice

Manufacture of malt

Manufacture of cider and other fruit wines

Manufacture of other non-distilled fermented…

€ billions

2014 2013 2012

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Comparable data on production levels (measured in terms of the value of production) for

different types of beverages across the Mercosur countries is not readily available. However,

limited cross-country data on production volumes is available for wine and beer production in

Mercosur. Figure 72 shows that Brazil was the dominant beer producer in Mercosur between

2012 and 2014 by some margin, followed by Argentina. In comparison, Paraguay and Uruguay

produced very limited volumes of beer over this period. In contrast, Argentina was the Mercosur

bloc’s major wine producer between 2012 and 2014, with only limited volumes produced in the

other three member states. This is also reflected in the trade data outlined in the previous section,

which shows that wine is Argentina’s top beverage export to the EU and also that Argentina

accounts for the Mercosur countries’ largest share of wine imported into the European bloc.

Figure 72: Beer & wine production (million tonnes) in Mercosur, 2012-2014

Source: Author’s elaboration using FAOstat data.

Tariffs and other protective measures on EU-Mercosur trade in beverage products

Mercosur has relatively high applied most-favoured nation (MFN) tariffs on beverages,

particularly in the case of waters and alcoholic beverages. No beverage products from the EU

currently enter Mercosur duty-free. Applied MFN tariffs on beverage exports in 2016 ranged from

14% in the case of fruit juices to 20% for beer (marginally lower tariffs applied by Paraguay)

and most waters, wines (although Brazil’s tariff on still wine is 27%), vermouth, ciders and other

fermented beverages, and spirits and liqueurs, and 35% for other non-alcoholic beverages

(excluding water, fruit and vegetable juices and milk) in the case of Argentina.

The EU is a major source of the Mercosur countries’ imports of water (especially Argentina, Brazil

and Uruguay), beer (particularly in the case of Brazil), wine (again, particularly for Brazil),

vermouth (especially Argentina and Brazil) and spirits and liqueurs, exports of which all still

attract high tariffs in Mercosur. There is thus potential to increase EU beverage exports to

Mercosur if the EU-Mercosur agreement includes the elimination of Mercosur tariffs on beverage

products facing relatively high applied tariffs. This is especially true in the case of alcoholic

beverages, and particularly in the case of sparkling wine in Argentina and wine in containers of

less than 2 litres in Brazil, where the applied tariffs are high even in comparison to the general

Mercosur tariff.

Argentina Brazil Paraguay Uruguay Argentina Brazil Paraguay Uruguay

Beer of barley Wine

Million tonnes

2012 2013 2014

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Table 70: Mercosur countries’ applied MFN tariffs on beverage imports from the EU, by

HS 6-digit product, 2016

Product description HS code Mercosur simple average

applied MFN tariff(s)

Frozen orange juice 200911 14.0

Orange juice 200912 or 200919 14.0

Grapefruit juice 200921 or 200929 14.0

Single citrus fruit juice 200931 or 200939 14.0

Pineapple juice 200941 or 200949 14.0

Tomato juice 200950 14.0

Grape juice 200961 or 200969 14.0

Apple juice 200971 or 200979 14.0

Cranberry juice 200981 14.0

Other fruit juices 200989 14.0

Mixtures of fruit juice 200990 14.0

Mineral waters and aerated waters 220110 20.0

Ordinary natural water 220190 20.0

Waters with added sugar or flavour 220210 20.0

Non-alcoholic beverages (excl. water, milk) 220290 20.0 (Brazil, Paraguay, Uruguay)

35.0 (Argentina)

Beer 220300 20.0

Sparkling wine 220410 19.0 (Paraguay)

20.0 (Brazil, Uruguay)

27.5 (Argentina)i

Wine in containers <=2 litres 220421 19.0 (Paraguay)

20.0 (Argentina, Uruguay)

27.0 (Brazil)

Wine in containers >2 litres 220429 20.0

Grape must 220430 20.0

Vermouth and other wine in containers<=2 l. 220510 20.0

Vermouth and other wine in containers >2 l. 220590 20.0

Cider, perry, mead and other fermented

beverages

220600 20.0

Spirits obtained by distilling grape wine or

grape marc

220820 20.0

Whiskies 220830 13.33 (Uruguay)

16.67 (Paraguay)

17.33 (Brazil)

20.33 (Argentina)ii

Rum and other distilled sugar cane spirits 220840 20.0

Gin and Geneva 220850 20.0

Vodka 220860 18.0 (Paraguay)

20.0 (Argentina, Brazil, Uruguay)

Liqueurs and cordials 220870 18.0 (Paraguay)

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20.0 (Argentina, Brazil, Uruguay)

Ethyl alcohol of strength <80% volume (excl.

those above)

220890 20.0

Sources: UNCTAD TRAINS database; WTO Tariff Analysis Online database. Notes: Tariffs are simple averages. The

UNCTAD TRAINS database is used predominantly, with the WTO database use to fill gaps in terms of missing data in the

TRAINS database. (i) In Argentina, champagne is subject to 35% tariff, and other sparkling wine to 20%. (ii) Whisky in

bottles is subject to 35% in Argentina.

There is significant variation in the applied EU MFN tariffs across beverage products imported

from the Mercosur countries. Mercosur exports of mineral waters and aerated waters, ordinary

natural water, beer and a range of spirits (including whiskies, rum, gin and Jenever, vodka, and

liqueurs and cordials) enter the EU duty-free, while Paraguay also enjoys duty-free access for

waters with added sugar, sweetener or flavour, other non-alcoholic beverages (excluding water,

fruit or vegetable juices and milk), vermouth, and cider and other fermented beverages. The

EU’s applied tariffs on alcoholic beverage imports from Mercosur are generally lower. Sparkling

wine, wine, cider and other fermented beverages, and rum face non-ad valorem tariffs, but these

are fairly low. However, aside from wine exports from Argentina, the EU is generally a relatively

limited market for alcoholic beverage exports from the Mercosur countries.

Table 71: EU applied MFN tariffs on beverage imports from Mercosur countries, by HS

6-digit product, 2016

Product description HS code EU applied MFN

tariff(s)

Non-ad valorem

tariffs

Frozen orange juice 200911 24.40

Orange juice 200912 12.20

Orange juice 200919 22.90

Grapefruit juice 200921 12.00

Grapefruit juice 200929 22.80

Single citrus fruit juice 200931 14.80

Single citrus fruit juice 200939 17.49

Pineapple juice 200941 15.60

Pineapple juice 200949 20.00

Tomato juice 200950 16.40

Apple juice 200971 18.00

Apple juice 200979 22.00

Cranberry juice 200981 19.76

Other fruit juices 200989 18.87

Mixtures of fruit juice 200990 18.45

Mineral and aerated waters 220110 0.00

Ordinary natural water 220190 0.00

Waters with added sugar,

sweetener or flavour

220210 9.60*

Non-alcoholic beverages (excl.

water, and milk)

220290 9.60*

Beer 220300 0.00

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Sparkling wine 220410 EUR 32/hl

Wine in containers <=2 litres 220421 EUR 15.4 - 32/hl

Wine in containers >2 litres 220429 EUR 12.2 - 32/hl

Grape must 220430 32.00

Vermouth and other wine in

containers <=2 litres

220510 0.00* Paraguay only EUR 10.9/hl *

or EUR 0.9/% vol/hl

+ EUR 6.4/hl *

Vermouth and other wine in

containers >2 litres

220590 0.00* Paraguay only EUR 9/hl *

or EUR 0.9/% vol/hl

Cider, perry, mead and other

fermented beverages

220600 0.00* Paraguay only EUR 5.76 – 19.2/hl *

or EUR 1.3/% vol

min EUR 7.2/hl *

Spirits obtained by distilling

grape wine or grape marc

220820 0.00

Whiskies 220830 0.00

Rum and other distilled sugar

cane spirits

220840 EUR 0.6/% vol/hl

Or EUR 0.6/% vol/hl

+ EUR 3.2/hl or

0%**

Gin and Geneva 220850 0.00

Vodka 220860 0.00

Liqueurs and cordials 220870 0.00

Ethyl alcohol of strength <80%

volume (excl. those above)

220890

EUR 1/% vol/hl +

EUR 6.4/hl Or EUR

1/% vol/hl

Source: WTO Tariff Analysis Online database. Notes: Tariffs are simple averages except in the case of non-ad valorem

tariffs. (*) Paraguay enjoys preferential duties for these beverage products under the GSP+ scheme. (**) Part of Brazil’s

exports of rum and cachaça are under HS22084031 and HS 22084091, which are duty-free.

Non-tariff measures

Since negotiations between the EU and Mercosur began in June 2000, the promotion of mutual

trade in agricultural products, and products relying on agricultural inputs, has been an important

area of cooperation (EC, 2001). At the same time, consumer protection and food safety have

been a key objective for the EU member states in particular. Nevertheless, there have been no

instances of alerts since 2005 in the EU’s Rapid Alert System, Rapex, involving any beverages

posing risks to the health and safety of consumers in EU member states from any countries,

including the Mercosur member states. On the other hand, previous studies have found NTMs

pose particularly onerous constraints on EU beverage exports to Mercosur (Philippidis and

Sanjuan, 2007; van Bekum, 2015). Philippidis and Sanjuan (2007) estimated in 2007 that, when

measured in trade cost equivalents, NTMs affecting EU exports of beverages and tobacco to

Mercosur were equivalent to an additional cost of 160% of the value of the product. Similarly,

trade costs faced by Mercosur exporters of beverages to the EU also appear to be high (van

Bekum, 2015).

Problematic issues facing EU exporters into Mercosur include variation in labelling and/or

packaging standards for wine and potentially also other beverage products. For instance, there

are currently lengthy market processes involved in accepting labelling and packaging in Brazil

and labelling requirements differ from international standards in Argentina (CELCAA, 2016). Tax

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discrimination also affects EU beverage exports into Mercosur, especially in Brazil where local

spirits have been taxed at a lower rate since the reform of the industrialised product tax in 2015

(Spirits Europe, 2017). These and other issues, together with the potential benefits from

addressing them, are interrogated further below (including specific economic issues related to

sanitary and phytosanitary standards (SPS), geographical indications (GIs) and quality

requirements and standards). Nevertheless, the insights presented so far suggest an EU-

Mercosur agreement that successfully reduces NTMs could have a substantial impact in boosting

EU beverage exports to Mercosur.

Assessment of the impact

Economic impact

The modelling exercise undertaken for this study offers some insights on the impact of the

agreement on the beverages sector. In terms of output, this is estimated to increase in the EU,

Brazil and Argentina, and a decrease in Uruguay and Paraguay. It also shows that imports of

beverages are going to increase in both the EU and Mercosur bloc, with a stronger impact on

Mercosur countries. Exports of beverages, on the other hand, are forecasted to increase

(especially for Brazil and Argentina), except for Uruguay.

A key objective of EU negotiators involved in negotiations with Mercosur around a future trade

agreement is to free up trade in wines and spirits. This has generally focused on seeking to:

 facilitate mutual recognition of standards, practices and regulations as well as certification

and documentation requirements, notably through the inclusion of a wine annex;

 cooperate to address divergences in product definitions, certification and labelling (e.g.

in the use of grape varieties for winemaking and the labelling thereof) as well as those

related to the International Organisation of Vine and Wine’s standards (e.g. on quality

requirements and content analysis/additives); and

 improve intellectual property protection and facilitate protection and recognition of

geographical indications.

The EU has made a number of recent proposals to govern trade in wines (HS2204) and spirits

(HS2208) between the EU and Mercosur. These proposals cover the mutual recognition and

authorisation of imported wine products produced in accordance with relevant winemaking

practices and regulations in the EU and Mercosur; specific agreements regarding labelling

requirements; and limits on certification and documentation requirements for wine products and

spirits imported from either the EU or Mercosur.

Another objective is to address issues related to GIs relevant to trade in wines and spirits. The

EU is seeking legal protection in the shape of a protected destination of origin (PDO) and

protected geographical indication for certain wines in Mercosur markets. Similarly, some

Mercosur producers have also sought protection for GI products in European markets such as

cachaça, a spirit produced in Brazil from sugarcane and used in cocktails such as caipirinha.

Producers of the latter want protection to ensure only they are allowed to use this denomination

for their products in the European market. These producers also argue the recognition process

should respect that cachaça and rum are different products and hence should not be subject to

EU tariffs on rum but rather be treated equally with other spirits.

Environmental impact

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The liberalisation of EU-Mercosur trade in beverages would likely result in an increase in

agricultural production (to provide inputs for beverage producers) and downstream beverage

manufacturing, potentially placing greater pressure on both land and water resources. While the

potentially adverse effects of the anticipated production changes arising from an EU-Mercosur

agreement should not be ignored, the overall environmental impacts in Mercosur and the EU are

unlikely to be significant. This owes, in part, to the strong emphasis in EU regulatory policies on

reducing environmental impacts. There is an emphasis, for example, on waste prevention and

recycling (including through the revised Waste Framework Directive adopted in 2008) and on

reducing the environmental impact of packaging and packaging waste (e.g. through the

Packaging and Packaging Waste Directorate, established in 1994).

On the Mercosur side, exposure to increased competition from European exporters may

necessitate positive changes among beverage producers that improve environmental compliance

and sustainability. Likewise, beverage exporters based in Mercosur will face greater incentives

to comply with European regulations and legislation in order to capitalise on better opportunities

in European markets. This may, however, require support for regulatory capacity building for

both regulators and beverage firms (in relation to compliance) in Mercosur.

Social impact

Our modelling exercise shows that in the beverage sector, both skilled and unskilled employment

will decrease marginally in both the EU and Mercosur because of the agreement.

An EU-Mercosur agreement has potential to improve labour conditions and address land tenure

constraints related to agricultural production in Mercosur. The shifting dynamics in the beverage

sector resulting from trade liberalisation may also induce greater concentration in the agricultural

segments of particular beverage value chains in either the EU or Mercosur. Beverage production

is already relatively highly concentrated in Mercosur countries (Traistaru and Martincus, 2003).

Further liberalisation of trade through an EU-Mercosur agreement may result in greater

concentration and alter the distributional and locational patterns of beverage production,

resulting in changes in both overall welfare and the distribution of welfare over space. This has

the potential to compound inequality within Mercosur countries.

Health considerations are also important when analysing the impact of EU-Mercosur trade in

beverages. The EU policy agenda increasingly emphasises combatting obesity, which has

resulted in heightened attention on the health impacts of the food and beverage industry. This

has motivated greater focus, and growing interest, in the reformulation of beverages to ensure

they contribute to healthier diets. This is likely to have important implications for product

standards and nutritional requirements guiding Mercosur beverage exports to the EU market.

Human rights impact

Liberalisation of EU-Mercosur trade in beverages is unlikely to create any major human rights

concerns.

Impact on SMEs

SMEs account for a large share of activity in the beverages sector. Indeed, more than 80% of

the firms operating in the beverage sector in the EU employ fewer than 10 people (EC, 2016b).

More than 285,000 SMEs operate across the broader food and beverage sectors in the EU,

accounting for nearly two-thirds (62.8%) of total employment in these sectors, just less than

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half (48.1%) of the value-added generated by these sectors, and almost all firms (99.1% of the

total number of firms) producing either food or beverages (Food Drink Europe, 2016). Similarly,

a relatively high concentration of manufacturing SMEs in Argentina are involved in the production

of food and beverages (Oxford Business Group, 2018).

It is unclear how much small farmers in Mercosur producing inputs for beverage value chains

would benefit from enhanced trade in beverages resulting from an EU-Mercosur agreement. This

suggests increased agricultural activity associated with beverage production may contribute to

the dispossession of the land of smallholders or indigenous groups. Participation of local

producers, especially smallholders, may depend on how successfully these producers can engage

in collective production to participate directly in new investments and larger markets (Hinojosa,

2009).

Even with lower tariffs and a reduction of other barriers to EU-Mercosur trade in beverages,

another potential concern for SMEs, particularly those in Mercosur, is the cost of compliance with

regulatory requirements in each other’s markets. SMEs generally have fewer resources at their

disposal compared to large beverage firms or multinational beverage manufacturers to overcome

import regulations and comply with SPS measures required for access to foreign markets. The

European Commission has cited concerns about the administrative burden and legislative

demands faced by SMEs to comply with regulations in the food and drink industry (EC, 2016).

This may include compliance with labelling and/or packaging standards, health and nutritional

requirements and product quality standards. As such, measures that simplify some of these

requirements will be beneficial for SMEs.

Impact on Consumers

Consumers in both the EU and the four Mercosur countries are likely to benefit from enhanced

EU-Mercosur trade in beverages. Prices of beverages are likely to fall in both the EU and Mercosur

through the liberalisation of EU-Mercosur trade as domestic producers face greater competition

from foreign varieties. The pressure from heightened competition can improve aggregate

productivity in the domestic beverage sectors in the Mercosur countries and the EU member

states, and also stimulate product innovations, meaning consumers may enjoy better quality,

more innovative beverage products at lower prices. In turn, consumers will also benefit from

access to a wider array of both alcoholic and non-alcoholic beverages. The modelling exercise

undertaken for this study shows that private consumption in the beverages sector will increase

for all countries, with especially strong effects in the EU bloc and Paraguay.

Impact on LDCs

In theory, a reduction of tariffs on Mercosur beverage exports to the EU under an EU-Mercosur

trade agreement could erode the tariff preferences enjoyed by LDC beverage manufacturers into

the EU market. LDCs enjoy duty-free access to the EU market, whereas the EU’s applied duties

on beverage imports from Mercosur are relatively high for some beverage products, particularly

fruit juices and many different types of alcoholic beverages, which face non-ad valorem tariffs

(see Table 72). However, in other beverage products (mineral waters and natural waters, beer,

spirits, whiskies, rum, gin, vodka, liqueurs and cordials) this is not a relevant consideration since

the EU’s applied MFN duties on beverage imports from Mercosur are set at zero.

In reality, LDC exports of beverages to the EU are very limited at present, both in value terms

and as a share of the EU’s total imports of particular beverage products from the world. Table

72 shows that even when the exports from all 47 LDCs are combined, the total values of

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beverages exported from these countries to the EU are minimal. Only fruit juice exports from

LDCs to the EU exceeded €1 million, on average, each year between 2012 and 2016. The values

of LDC exports of vermouth and cider and other fermented beverages were especially small.

Moreover, at the individual country level, many LDCs did not export certain types of beverages

to the EU at all over this period. This suggests the immediate impact of an EU-Mercosur

agreement on the beverage sectors in LDCs would be limited.

Table 72: LDC total and selected LDCs with significant beverage exports to the EU

(based on the average export value from 2012-2016), by product

Fruit juices

(HS2009)

Waters

(unflavoured)

(HS2201)

Waters

(flavoured)

(HS2202)

Beer

(HS2203)

Spirits and

liqueurs

(HS2208)

LDC Total

(average

export value

2012-2016)

1,200,439 53,264 691,842 759,948 405,726

LDCs with

annual

average

exports to the

EU exceeding

EUR 100,000

(2012-2016)

Bangladesh (€265,555)

Ethiopia (€483,494)

Madagascar (€145,266)

Mali (€105,048)

Uganda (€112,248)

Bangladesh

(€313,249)

Lao PDR

(€115,423)

Madagascar

(€204,231)

Haiti

(€170,409)

Madagascar

(€187,810)

Source: Author’s calculations using Eurostat data.

Impact on OMRs

Production of specific beverage products, mostly alcoholic varieties, is significant in the context

of the economies of a handful of the EU’s outermost regions. Rum, for example, is a key product

in the French Caribbean islands (Martinique and Guadeloupe) and is also produced in French

Guiana, Réunion and the Canary Islands (particularly Gran Canaria, home to the Arehucas rum

factory, the oldest rum distillery in Europe, and several other distilleries, which import raw

materials from abroad to produce rum). Rum production is especially important for the economy

of Martinique, where it is responsible for approximately one-fifth (21%) of total agricultural GDP

(IEDOM, 2011). Martinique is often referred to as the “Rum Capital of the Caribbean”, and

producers in the geographic area enjoy PDO status, labelled AOC Martinique Rhum Agricole, for

varieties that meet specific local standards (Clarke, 2013). Much of the rum produced in

Martinique is exported, with exports primarily going to the French mainland (nearly 80% of total

production in 2010) or North America.

218

A reduction in the tariffs (of EUR 0.6/% vol/hl in the

case of bottled rum)

219

on rum exported by Mercosur countries to the EU is unlikely to have

major effects on the rum producers (and especially exporters) in Martinique, Guadeloupe, French

Guiana, Réunion and the Canary Islands.

In the case of certain other beverages, an EU-Mercosur trade agreement may be beneficial for

consumers in the EU’s outermost regions. Martinique, for example, is largely reliant on imports

from Europe and Latin America to meet local demand, especially for processed products such as

fruit juice. A reduction in tariffs on fruit juices imported from Mercosur countries could boost the

218

See Rhum Agricole, 2018. Available at: http://www.rhum-agricole.net/site/en/mq_rum.

219

In a one-litre bottle with 40% of alcohol, the duty will be as much as Euros 0.24

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variety of juice available to consumers in Martinique (and other outermost regions of the EU)

and lower prices.

Policy Recommendations

 Both parties should address the NTMs in the beverages sector. Affecting both EU

and Mercosur beverages exporters, these barriers could prevent the realisation of some

of the positive gains from the agreement. In particular, labelling and packaging standards,

certification requirements, tax discrimination, SPS issues should be addressed.

 Both parties should ensure legal protection for both EU and Mercosur products

requiring PDO and GI and ensure that different varieties are treated like different products.

 Mercosur members should put in place appropriate welfare measures to counter

the potential negative social effects. This includes social protection measures (social

safety nets) to counterbalance the potential changes in the production of beverages,

which could increase economic concentration and inequality. This could also mean

introduce programmes to accelerate job creation in other sectors for those who may be

losing their jobs due to increased concentration of production.

 Both parties should consider introducing measures to promote responsible

consumption of certain beverages, especially alcoholic and sugary drinks. This also

includes introducing educational campaigns of the health risks of certain drinks and

strengthening the national health systems to deal with this issue.

6.4. Sectoral analysis: Manufacturing

6.4.1. Textile and Garments

Sector overview

The European textile and garment sector

The T&G sector is important to both the European and Mercosur economies. Data for 2013 shows

that in Europe, the T&G sector produces items for a total value of EUR 166 billion. European

countries work on large sections of the value chain, from the production of natural and synthetic

yarn to fabrics and garment but also home, technical and industrial textiles. The retail and

distribution part of the value chain is also present in Europe (EC, 2017c). Three quarters of the

production are concentrated in Italy, France, the UK, Germany and Spain. Southern European

countries tend to focus on clothing, while northern European countries produce a larger share of

technical textiles (EC, 2017c). 30% of the global market T&G exports come from the EU.

The Mercosur textile and garment sector

T&G also play a big part in the Mercosur economies, notably in Paraguay where textile export

represents 11.34% of all manufacture exports (WTO, 2017). With 799.6 million US$ Brazil is the

largest textile exporter of the Mercosur economies, yet constituting only 1.04% of all

manufacturing exports the textile sector’s overall significance is more limited. In the regional

context, other important players in the textile sector are El Salvador, Guatemala and Peru (WTO,

2017).

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https://www.wto.org/english/res_e/statis_e/wts2017_e/wts2017_e.pdf

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Historically a cotton producer, Brazil now ranks fifth in the global cotton production ranking

(Nascimento, 2016). According to the Brazilian Textile and Apparel Industry Association (Abit),

33,000 companies of all sizes operate in the T&G sector in 2015, employing 1.5 million people

and making T&G the second largest manufacturing employer in Brazil.

221

The Brazilian T&G

sector relies on the country’s large domestic market rather than focussing on exports (Fibre2

Fashion).

Similarly, in Argentina, the textile industry generated 6.42% of the total national manufacturing

output in 2016 (INCED). The industry is mostly focussed on the domestic market and is

dominated by small and medium-sized companies (65% of the companies have less than 50

employees; SOMO, 2011).

Current status of trade in textile and garment

222

The EU exports considerable amounts of garments and textiles. For the EU countries, Mercosur

is a small market, accounting for only 1% of the total export of garment and textile in 2016 (the

largest market, the US, accounted for 13% in the same year). Mercosur only ranks 20th among

the markets for European garment and textile exports, as shown in Figure 73 below. In 2019,

the EU exported a total of EUR 448 million worth of T&G to the Mercosur, up from the 426 million

exported in 2015 (Eurostat, International trade in goods). Brazil is the largest importer, with

around 72.46% of the total Mercosur imports from Europe in 2019 (comparable to 71.94% in

2015).

Figure 73: EU exports of garment and textile to Mercosur by country, 2012-2016

Source: Eurostat

221

Abit - Associação Brasileira da Indústria Têxtil e de Confecção. Available at:

http://texbrasil.com.br/en/press/brazilian-textile-and-apparel-sector-in-2015/

222

Throughout this section, we define textile using HS codes 50-60, and garment using HS codes 61, 62, and 63.

2012 2013 2014 2015 2016

Uruguay

23,362,626 26,290,749 25,422,364 28,397,017 31,852,431

Paraguay

9,187,133 7,171,628 6,602,267 7,267,721 11,809,779

Brazil

392,869,683 358,572,074 333,131,581 315,056,981 304,809,201

Argentina

75,356,280 77,882,682 74,312,404 92,505,902 81,985,905

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

EUR

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Mercosur countries used to import more textile than garments, for example with a 64.27% share

of textiles in Mercosur T&G imports from the EU in 2015. Textile and garment imports have since

balanced out and in 2019 textile constituted 53.58% of Mercosur T&G imports from the EU.

Figure 74: EU exports of garment and textile to Mercosur by type, 2012-2016

Source: Eurostat

Jan.-Dec.

2012

Jan.-Dec.

2013

Jan.-Dec.

2014

Jan.-Dec.

2015

Jan.-Dec.

2016

Clothing

136,881,332 155,785,255 156,569,030 155,974,515 169,588,768

Textile

363,894,390 314,131,878 282,899,586 287,253,106 260,868,548

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

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Table 73 shows the top exported products from the EU to Mercosur. These are raw materials,

yarn and textile, while no garments are included – reflecting the content of Figure 74. These top

20 products only cover 33% of the total EU T&G exports to Mercosur. These indicate that EU

exports to Mercosur are quite diversified.

Table 73: EU exports to Mercosur, top 20 most exported T&G products, 2016

Product

code (HS)

Product name

Export

(EUR)

% of

total

620462 Women's or girls' trousers, bib and brace overalls, breeches and shorts of cotton

(excl. Knitted or crocheted)

12,631,620 2.93%

560313

Nonwovens, n.e.s., of man-made filaments, weighing > 70 g/m² but <= 150

g/m²

11,849,046 2.75%

620342 Men's or boys' trousers, bib and brace overalls, breeches and shorts, of cotton

(excl. Knitted or crocheted)

11,129,623 2.59%

620640 Women's or girls' blouses, shirts and shirt-blouses of man-made fibres (excl.

Knitted or crocheted and vests)

8,218,099 1.91%

591190 Textile products and articles, for technical purposes, n.e.s. 7,745,087 1.80%

590699

Rubberised textile fabrics (excl. Knitted or crocheted textile fabrics, adhesive

tape of a width of <= 20 cm)

7,656,778 1.78%

591132

Textile fabrics and felts, endless or fitted with linking devices, of a kind used in

papermaking or similar machines, weighing >= 650 g/m²

7,352,527 1.71%

610910 T-shirts, singlets and other vests of cotton, knitted or crocheted 7,291,281 1.69%

610990 T-shirts, singlets and other vests of textile materials, knitted or crocheted (excl.

Cotton)

6,990,650 1.62%

591000 Transmission or conveyor belts or belting, of textile material, (excl. Those of a

thickness of < 3 mm and of indeterminate length or cut to length only)

6,439,119 1.50%

620520

Men's or boys' shirts of cotton (excl. Knitted or crocheted, singlets and other

vests)

5,964,310 1.39%

551011 Single yarn, containing >= 85% artificial staple fibres by weight 5,921,868 1.38%

550130 Filament tow, acrylic or modacrylic 5,817,720 1.35%

551614 Woven fabrics containing >= 85% artificial staple fibres by weight, printed 5,679,404 1.32%

611030 Jerseys, pullovers, cardigans, waistcoats and similar articles, of man-made

fibres, knitted or crocheted

5,609,254 1.30%

590390

Textile fabrics impregnated, coated, covered or laminated with plastics other

than polyvinyl chloride or polyurethane

5,233,258 1.22%

590220 Tyre cord fabric of high-tenacity polyester yarn 5,006,405 1.16%

630790 Made-up articles of textile materials, incl. Dress patterns, n.e.s. 4,880,406 1.13%

560312 Nonwovens, , n.e.s., of man-made filaments, weighing > 25 g/m² but <= 70

g/m²

4,839,576 1.12%

560900 Articles of yarn, strip or the like of heading 5404 or 5405, or of twine, cordage,

ropes or cables of heading 5607, n.e.s.

4,747,189 1.10%

TOTAL

32.76%

Source: Eurostat

The EU mostly imports T&G from China (33% of total T&G imports in 2016), Bangladesh (15%)

and Turkey (13%). Compared to these, Mercosur is a small market as it only provides 0.4% of

the total T&G imports into the EU. Import of T&G from Mercosur have increased, from EUR 209

million in 2012 to EUR 236 million in 2016. Argentina has overtaken Brazil as the largest exporter,

with 41% of the exports in 2016, but Brazil and Uruguay follow closely.

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Figure 75: EU imports of garment and textile from Mercosur, 2012-2016

Source: Eurostat

Figure 76 below shows how most imports from Mercosur are in textiles rather than garments.

For the period 2012-2016, Textile products constitute more than 90% of the imports.

Figure 76: EU import of garment and textile from Mercosur by type, 2012-2016

Source: Eurostat

2012 2013 2014 2015 2016

Uruguay

55,420,318 50,672,260 51,352,935 49,258,190 62,346,883

Paraguay

3,485,719 4,724,338 1,464,510 1,815,794 1,623,368

Brazil

86,811,952 77,734,325 70,774,269 73,617,832 74,831,422

Argentina

62,825,310 64,062,594 57,750,195 60,242,725 97,098,471

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

EUR

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

Jan.-Dec. 2012 Jan.-Dec. 2013 Jan.-Dec. 2014 Jan.-Dec. 2015 Jan.-Dec. 2016

EUR

Textile Clothing

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Table 74 looks at the top 20 most imported products from Mercosur into the EU. Combed wool

dominates imports, accounting for almost half of the total imports. Due to this, the imports are

very concentrated, with the top 20 imported products accounting for almost 90% of total imports.

However, among these imports, we also find garment products.

Table 74: EU imports from Mercosur, top 20 most imported T&G products, 2016

Product

code

Product name

Imports

(EUR)

% of

import

510529 Wool, combed (excl. That in fragments 'open tops') 112,467,572

47.7%

510111 Greasy shorn wool, incl. Fleece-washed wool, neither carded nor combed 29,846,290

12.7%

520100 Cotton, neither carded nor combed 14,553,213

6.2%

500200 Raw silk 'non-thrown' 8,421,850

3.6%

510121 Shorn wool, degreased, non-carbonised, neither carded nor combed 7,446,826

3.2%

580632 Narrow woven fabrics of man-made fibres, with a width of <= 30 cm, n.e.s. 6,565,757

2.8%

530500 Coconut, abaca "manila hemp or musa textilis nee", ramie, agave and other

vegetable textile fibres, n.e.s., raw or processed, but not spun; tow, noils and

waste of such fibres, incl. Yarn waste and garnetted stock

6,004,237

2.5%

510310 Noils of wool or of fine animal hair (excl. Garnetted stock) 4,161,133

1.8%

611241 Women's or girls' swimwear of synthetic fibres, knitted or crocheted 2,949,385

1.3%

560721 Binder or baler twine, of sisal or other textile fibres of the genus agave 2,574,907

1.1%

630260

Toilet linen and kitchen linen, of terry towelling or similar terry fabrics of cotton

(excl. Floor-cloths, polishing-cloths, dishcloths and dusters)

2,143,169

0.9%

530890 Yarn of vegetable textile fibres (excl. Flax yarn, yarn of jute or of other textile

bast fibres of heading 5303, coconut "coir" yarn, hemp yarn and cotton yarn)

1,623,798

0.7%

591132 Textile fabrics and felts, endless or fitted with linking devices, of a kind used in

papermaking or similar machines, e.g. for paper pulp or asbestos-cement,

weighing >= 650 g/m²

1,520,024

0.6%

540233 Textured filament yarn of polyester (excl. That put up for retail sale) 1,345,057

0.6%

510219 Fine animal hair, neither carded nor combed (excl. Wool and hair of kashmir

"cashmere" goats)

1,243,949

0.5%

510220

Coarse animal hair, neither carded nor combed (excl. Wool, hair and bristles used

in the manufacture of brooms and brushes, and horsehair from the mane or tail)

1,135,096

0.5%

500400 Silk yarn (excl. That spun from silk waste and that put up for retail sale) 1,060,911

0.4%

610463

Women's or girls' trousers, bib and brace overalls, breeches and shorts of

synthetic fibres, knitted or crocheted (excl. Panties and swimwear)

1,035,216

0.4%

510539 Fine animal hair, carded or combed (excl. Wool and hair of kashmir "cashmere"

goats)

942,527

0.4%

540773

Woven fabrics of yarn containing >= 85% synthetic filament by weight, incl.

Monofilament of >= 67 decitex and a maximum diameter of <= 1 mm, made of

yarn of differe

nt colours (excl. Those of polyester, nylon or other polyamide

filaments or monofilaments, and of mixtures of textured and non-textured

polyester filaments)

878,085

0.4%

TOTAL 88.1%

Source: Eurostat

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Overall, the EU is a net exporter of clothes to the Mercosur, although decreasingly so, as shown

in Figure 77 below. In 2016, the net exports of T&G were EUR 195 million.

Figure 77: EU net export of T&G to Mercosur, 2012-2016

Source: Eurostat

Tariffs

This section uses data from the UNCTAD Trade Analysis Information System (TRAINS) to look

at tariffs levied on T&G in the EU-Mercosur trade. We extracted data on effectively applied tariffs

(simple average) applied by the EU and by Mercosur for the products under HS codes 50-62.

For EU exports, we collected data on the tariffs applied by Mercosur countries. Mercosur member

countries apply many exemptions on the Mercosur CET, and therefore each country applies

different tariffs to goods imported from the EU. For the T&G, these range from 0% to 35%. The

average tariff applied by Mercosur countries on T&G products increased from 17.6% in 2005 to

22.6% in 2016 (TRAINS data). Figure 78 shows the differences in the tariffs applied by each

country. Argentina and Brazil have applied higher tariffs than Paraguay and Uruguay especially

since 2009.

Figure 78: Mercosur average applied tariff by country, HS 50-62, 2005-2016

Source: TRAINS

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

2012 2013 2014 2015 2016

EUR

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Argentina Brazil Paraguay Uruguay

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Mercosur countries apply the highest MFN tariffs on clothing (HS 61-62) rather than on textile.

These tariffs, applied to all trade partners, are relatively high and reveal the interest of Mercosur

countries to protect the domestic garment industry.

Figure 79: Mercosur average applied tariff by HS code, HS 50-62, 2016

Source: TRAINS

When trading with the EU, all Mercosur countries now face MFN tariffs.

223

The average tariffs

applied by the EU to T&G (HS 50-62) imports from Mercosur countries have ranged between

6.5% and 8.4% in the period 2007-2015 (TRAINS data). While these averages have increased

over the years, they are lower than the tariffs applied by Mercosur to EU exports. Similarly to

Mercosur, the EU applies the highest tariffs to garments.

Figure 80: EU average applied tariff by HS code, HS 50-62, 2015

Source: TRAINS

223

Paraguay graduated from GSP+ in January 2019.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

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In 2015, the average tariff applied by the EU on imports from Mercosur was around 8%, and the

average tariff applied by Mercosur on imports from the EU was around 25%. The Mercosur

market is, therefore, more protected from EU imports compared to the EU market.

Figure 81: EU and Mercosur average applied tariff, HS 50-62, 2007-2015

Source: TRAINS

Quality, safety and standards

The EU has set up several systems to protect its consumers by ensuring that goods imported

into the Union comply with health and safety regulations. The degree to which these regulations

affect imports from Mercosur countries is the ability of Mercosur exporters to comply with EU

standards.

The EU has set up a Rapid Exchange of Information System (RAPEX) through which national

trade and customs authorities report notifications about unsafe consumer products other than

food and pharmaceuticals.

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Searching the database for notification raised on imports of T&G

and footwear products from Mercosur countries from 2005 till 2017 only returns 8 notifications.

In the Mercosur, these notifications concern all countries: there were 2 from Brazil, 3 from

Paraguay, 2 from Argentina and one from Uruguay. Paraguay is the country with the least

exports to the EU, but with the highest number of notifications. However, the number of

notifications is relatively low, especially considering the long-time span taken into account. This

suggests that quality and safety standards are not an obstacle to Mercosur exporters to Europe.

Assessing the impact of the agreement

Economic impact

This section assesses the impact of the AA on the textile and garment sector for both the EU and

Mercosur. With an AA, trade between the EU and Mercosur would be liberalised, and the tariffs

on T&G in trade between the two blocs would be eliminated.

224

See:

https://ec.europa.eu/consumers/consumers_safety/safety_products/rapex/alerts/repository/content/pages/rapex/inde

x_en.htm

2007 2008 2009 2010 2011 2012 2013 2014 2015

Tariffs applied by the EU on imports from Mercosur

Tariffs applied by Mercosur on EU imports

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The Mercosur T&G sector is more protected compared to the EU market. Through the AA, the

EU T&G exporters will face a greater reduction in tariffs and are likely to export more to the

Mercosur market. Given that the tariffs on garments are higher on both sides, the AA could

encourage increased exports in garments, compared to textile.

The CGE modelling offers some insights on the potential impact of the AA for the EU and Mercosur

economies. The modelling looks at an ambitious and a conservative scenario (for more details,

see section on CGE results). For each scenario, results are provided by sector.

EU production will fall very marginally by up to 0.1%. This is not due to direct trade impacts on

the T&G sector but to reallocation of resources between sectors in the model. Output in Paraguay

will also fall slightly, whereas Brazil, Argentina and especially Uruguay will see their output

increase. The EU and Mercosur (except Paraguay) will see their exports increased considerably.

Environmental impact

The T&G sector value chain has considerable environmental impacts. In 2015, the global textiles

and clothing industry was responsible for the consumption of 79 billion cubic metres of water, 1

715 million tons of CO2 emissions and 92 million tons of waste, and these figures are set to

double by 2030 (Sajn, 2019). The environmental impact is present in all segments of the value

chain. Growing cotton requires huge quantities of land, water, fertilisers and pesticides. Natural

fibres also have a high environmental impact, with silk production linked to the depletion of

natural resources and global warming, cotton contributing to water scarcity and wool to GHG

emissions.

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Data derived from the Higg Materials Sustainability Index (MSI), which provides

a cradle-to-gate material scoring tool by the Sustainable Apparel Coalition (SAC), illustrates that

the materials with the overall highest environmental impact are leather and natural fibers (silk,

cotton, wool). Silk shows high negative impacts across all five dimensions used in the scoring:

Abiotic Resource Depletion, Fossil Fuels; Eutrophication; Global Warming; Water Scarcity (Global

Fashion Agenda, 2017). Polyester, which is made of fossil fuels, has a lower water footprint

compared to cotton but it discharges microplastic fibres in the water when washed, which can

end up in the human food chain.

T&G production is an energy-intensive process which uses large amounts of water and chemicals.

More than 1 900 chemicals are used worldwide in the production of clothing, of which 165 the

EU classifies as hazardous to health or the environment. Transport and distribution of material

and finished products account for only 2% of the climate-change impacts of the industry. This

phase is also characterised by waste generated through packaging, tags, hangers and bags, as

well as unsold leftovers that are thrown away (Sajn, 2019). The phase with the highest

environmental footprint is consumer use, due to the chemicals and energy involved in washing

and ironing, as well as disposal of clothes at the end of their life (Sajn, 2019).

The assessment of the EU-Mercosur T&G trade reveals a potential increase in trade of textile

and garment between the two blocs. This can potentially have negative environmental

consequences, especially considering the increased transport of goods across the ocean between

the two regions. The main negative environmental impacts could therefore arise from trade.

225

See EPRS, 2019. Environmental impact of the textile and clothing industry. What consumers need to know.

https://www.europarl.europa.eu/RegData/etudes/BRIE/2019/633143/EPRS_BRI(2019)633143_EN.pdf

. Also Global

Fashion Agenda & The Boston Consulting Group, 2017. Pulse of the Fashion Industry.

https://globalfashionagenda.com/wp-content/uploads/2017/05/Pulse-of-the-Fashion-Industry_2017.pdf

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There could be additional negative impact deriving from the increase in production arising from

import/export opportunities between the two blocs. However, if consumption of textile and

garment does not increase or increases only marginally as is predicted by the modelling, the

impact on these externalities can be expected likewise to be marginal.

Social and human rights impact: gender, informality and wages in the T&G sector

Worldwide, most workers in the T&G sector are women (BSR, 2017); in Europe, women are

more than 70% of workers in these sectors (Euratex, 2016). It is unclear how widespread

informality is in the T&G sector in Europe. A 2014 report by the Clean Clothes Campaign analyses

the garment sector in selected post-socialist Eastern European countries (of which some are part

of the EU), and estimated that a third of the workers in the garment sector operates on informal

bases (Clean Clothes Campaign, 2014).

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The Home-Based Workers Association estimates that

in Bulgaria, in addition to 100,000 registered workers in the garment sector, another 500,000

operate as home-based workers (ibid.). The same study also reports that wages paid to the

workers (even when compliant with minimum wages) do not provide a liveable income (ibid.).

In Mercosur countries, the T&G sector has large pockets of informality in which gender and

migration issues also take an important role. The Argentinian garment sector presents a high

degree of informality - around 75% of the workers are estimated to be operating in the informal

space (SOMO, 2011). These include workers in small enterprises and home workshop. These

workers often do not have contracts, and receive no social benefits or compensation, and are

unlikely to be protected in case some issues arise (ibid.).

Women are often overrepresented among the casual and less-skilled workforce, including in the

garment sector in Argentina. One study estimates that 80% of the workers in this sector are

women (SOMO, 2011). In addition, many of them are migrant workers from the Quechua and

Aymara ethnic groups coming from neighbouring Bolivia and Peru (SOMO, 2011). Especially

those working in home workshops often lack documentation and any form of protection and tend

to work long hours for low wages (ibid.).

Similarly, the Brazil T&G sector predominantly employs women. Almost 25 percent of the total

employment in this sector is in home-based workshops, in which women account for 94% of the

workforce (BSR, 2017).

In Uruguay, informality is prevalent in various sectors, including light manufacturing (which

includes garment and textile manufacturing) (UNCTAD, 2015). However, informality does not

seem to have a strong gender dimension in Uruguay, as studies have found similar levels of men

and women in the informal sector (ibid.)

The CGE modelling offers some insights on the potential impact of the AA for labour. The

modelling looks at an ambitious and a conservative scenario (for more details, see section on

CGE results). For each scenario, results are provided by sector and by type of labour (skilled or

unskilled).

In the case of an AA, there will be changes in sectoral employment. The CGE model conducted

for this study distinguishes between skilled and unskilled labour. In the T&G sector, the

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The countries included in the study are Bulgaria, Croatia, Romania and Slovakia (in the EU) and Bosnia &

Herzegovina, Georgia, Macedonia (FYROM), Moldova, Turkey and Ukraine.

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conservative scenario of the model estimates that the EU bloc, Argentina and Paraguay will see

a small decrease in unskilled employment in the sector. Brazil and Uruguay, on the other hand,

will see an increase in unskilled employment. The employment effect is particularly strong for

Uruguay. In terms of skilled employment, the results are quite similar: the EU countries and

Paraguay will see a small decrease, but Argentina, Brazil and Uruguay will see an increase in

their skilled employment (again, this effect is stronger for Uruguay). The ambitious scenario

reveals a similar pattern, with a decrease in both skilled and unskilled labour in the EU, Argentina

and Paraguay, and an increase in Brazil and Uruguay.

Impact on consumers

The creation of an AA between the EU and Mercosur will promote additional trade between the

two blocs, and this could promote increased consumers’ welfare, as consumers will have more

options to choose from and will benefit from increased competition.

The CGE forecasts that private consumption of T&G will increase in EU and Argentina, but will

decrease in Brazil, Uruguay and Paraguay. These changes, however, are limited and unlikely to

have a large impact on consumers.

Impact on SMEs

SMEs are important players in the T&G sectors in Europe. In 2013, the sector had 185,000

companies employing 1.7 million people, accounting for 3% of manufacturing value-added and

6% of manufacturing employment in Europe (EC, 2017c). Many of these companies are small

businesses – companies with less than 50 employees account for more than 90% of the

workforce and produce almost 60% of the value-added (ibid.).

The simulation of the AA and other available data do not allow us to distinguish between SMEs

and larger firms, and therefore it is difficult to establish what will be the impact of the AA on

SMEs in both the EU and Mercosur. The extent to which these smaller and medium firms will

thrive under the AA will depend on their ability to increase their production and export.

Impact on LDCs

As part of its Generalised Scheme of Preferences (GSP), the EU offers duty-free and quota-free

access to its market to a number of developing countries. LDCs benefit from the EBA programme,

while low and lower-middle-income countries benefit from GSP or GSP+. Among the countries

which are beneficiaries of these schemes, a number are strong T&G producers. Looking at the

EU top sources of T&G imports, nine countries benefit from preferential market access to the EU

through GSP, GSP+ or EBA. In 2016, this represented 35% of the EU total imports of T&G. This

is around the same size of the total EU imports of T&G from China (33.4% of total T&G imports

in 2016). Therefore, the EU imports of T&G from China and its most competitive trade partners

with preferential access make up almost 70% of the total EU imports of T&G.

Eliminating tariffs between the EU and Mercosur, an AA could allow Mercosur countries to export

more to the EU, depending on their production capacity. This could in principle displace some of

the imports from LDCs.

However, this impact will only be significant if Mercosur countries manage to export T&G to the

EU in significantly greater volumes. Mercosur is a much smaller supplier of T&G to the EU and

the world as compared to LDCs (with duty-free access) and other MFN countries such as China.

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Therefore, duty elimination for Mercosur is unlikely to lead to significant preference erosion for

LDCs.

Impact on the Outermost Regions of the EU

The EU Outermost Regions (ORs) are the most remote regions of the EU. The ORs are not large

producers of garment and textile. For this reason, the likely impact of an AA between the EU and

Mercosur on the EU ORs from the viewpoint of the T&G industry is unlikely to be large. The ORs

are unlikely to be affected by larger trade flows.

Policy Recommendations

In order to fully benefit from the EU-Mercosur AA and to minimise the negative effects, this

study recommends:

 Mercosur and EU countries should work to minimise the negative environmental

implication of increased trade in T&G products. While increases in production of T&G

products will be limited, trade among the EU and Mercosur will increase. Therefore, the

environmental implications linked to increased transport and trade need to be taken into

account, and minimised were possible. This could include introducing and enforcing

stricter regulations on transport sector emissions both in the EU and in Mercosur and

encouraging cooperation on environmental standards related to transport.

 Both parties should implement measures to protect informal workers in the

textile and garment sector. We lack precise information on the informal workers in the

textile and garment sector in both the EU and Mercosur. However, simulations show

potential job losses in these sectors in the EU and Paraguay and a smaller measure in

Argentina – and we can assume that these trends will affect both the formal and the

informal sector. The EU, Paraguay and Argentina should therefore strive to support

extend social safety nets to protect informal sector workers.

 Both parties should improve their understanding of the role of SMEs and

establish monitoring strategies to ensure timely support measures. SMEs play an

important role in the textile and garment sector, especially in some of the EU and

Mercosur countries. However, there is limited understanding of how trade impacts SMEs.

Therefore, it is recommended to closely monitor the effects in the years following the

entry into force of the agreement to potentially intervene with mitigation measures for

the negative impact.

6.4.2. Chemicals and Pharmaceuticals

Sector overview

The chemicals sector includes both inorganic industrial products, including rubber, plastics, and

industrial agents, and organic products, including pharmaceuticals for human and animal use as

well as pharma-chemicals (e.g. synthesised active ingredients, incipient inputs for formulation,

raw materials) that are used in the production of human and veterinary drugs. For the most part,

trade flows of inorganic chemicals reflect relative prices and traditional barriers to trade (e.g.

tariffs). Trade flows of pharmaceuticals, however, reflect intellectual property coverage as well

as health regulations that condition market access. In this section, unless a distinction is made,

“chemicals” is used with reference to the entire array of outputs, including pharmaceutical

products (HS30).

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Chemicals are one of the EU’s major exports, accounting for about 17% of total extra-EU28

exports in 2019, with this share having remained broadly stable over the past ten years. Figure

82 shows the share of trade in chemical and pharmaceutical products in EU-Mercosur trade.

227

The share of EU exports of chemicals and pharmaceuticals to Mercosur countries increased from

16% in 2000 to 24% in 2019. The share of EU imports of chemicals and pharmaceuticals from

Mercosur countries increased from 3% in 2000 to 6% in 2019.

Figure 82: EU28 Chemical and Pharmaceutical Exports and Imports

Source: COMEXT. Notes: Table shows chemical and pharmaceutical exports and imports as a share of total EU-Mercosur

exports/imports. Chemical and pharmaceutical trade is defined as Section VI (Chapters 28-38) of HS 2012.

227

Here and in the following, chemical and pharmaceutical trade is defined as Section VI (Chapters 28-38) of HS 2012.

10%

15%

20%

25%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

EU exports EU imports

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The EU is currently running a substantial trade surplus in chemicals with Mercosur, amounting

to €8.4 billion (with exports of around €10.8 billion in 2019 and imports of €2.4 billion in 2019

(Figure 83). This surplus has widened since 2012, with the increase mainly driven by strong EU

export growth. In terms of overall importance to EU chemicals exporters, however, Mercosur

accounted for approximately 3.1% of total extra-EU28 exports of chemicals in 2019. Mercosur

exporters accounted for only about 1.2% of total EU28 chemical imports in 2019 (Figure 84).

Figure 83: EU28 Trade in Chemical and Pharmaceutical Products with Mercosur (Total),

in € million

Source: COMEXT. Notes: Figure shows chemical and pharmaceutical exports and imports by the EU28 to and from

Mercosur. Chemical and pharmaceutical trade is defined as Section VI (Chapters 28-38) of HS 2012.

Figure 84: EU28 Trade in Chemical and Pharmaceutical Products with Mercosur (% of

total extra-EU28 chemical and pharmaceutical trade)

Source: COMEXT. Notes: Figure shows chemical and pharmaceutical exports and imports by the EU28 to and from

Mercosur, expressed as a share of total extra-EU28 chemical and pharmaceutical exports or imports. Chemical and

pharmaceutical trade is defined as Section VI (Chapters 28-38) of HS 2012.

2,000

4,000

6,000

8,000

10,000

12,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

EU exports EU imports

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Table 75 and Table 76 take a closer look at the main chemical and pharmaceutical HS 6-digit

products traded between the EU and Mercosur.

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Broadly speaking, trade is evenly

concentrated across the top products on both the export and import side, with the top 20 HS

codes accounting for 62% to 76%. Medicaments, antisera and blood and immunological products,

fungicides, vaccines and heterocyclic compounds are the most important EU exports, with a total

share of approximately 42%. Biodiesel was the most important imported product in 2019, Silicon

and inorganic or organic compounds of precious metals. Note that a number of derivatives of

agricultural products are also present among the top exports of Mercosur to the EU (e.g. essential

oils; oils of lemon). This is consistent with the broader comparative advantage of Mercosur in

many agricultural products.

Table 75 and Table 76 also provide information about tariffs. Relatively high tariff barriers remain

for the top products, in particular for EU exports to Mercosur – nine out of the top-20 EU exports

face ad-valorem tariffs of over 10%. Tariffs for Mercosur exports to the EU are generally lower,

but around 65% of the top-20 products still encounter EU import tariffs of around 5%.

Table 75: Top 20 Pharmaceutical and Chemical Exports from the EU to Mercosur

HS6 Description

2019 EU export

volume in €

million

Export

Avg. MFN Tariff

Mercosur (%)

1 300490

Medicaments; consisting of mixed or unmixed

products n.e.c. in heading no. 3004, for

therapeutic or prophylactic uses, packaged for

retail sale

1,651 15.3% 14

2 300215

Blood, human or animal, antisera, other blood

fractions and immunological products;

immunological products, put up in measured

doses or in forms or packings for retail sale

735 6.8% 6

3 300220

Vaccines; for human medicine

595 5.5% 4

4 380892

Fungicides; other than containing goods

specified in Subheading Note 1 to this Chapter;

put up in forms or packings for retail sale or as

preparations or articles

518 4.8% 2

5 293319

Heterocyclic compounds; with nitrogen hetero-

atom(s) only, containing an unfused pyrazole

ring (whether or not hydrogenated) in the

structure, other than henazone (antipyrin) and

its derivatives

445 4.1% 14

6 300212

Blood, human or animal, antisera, other blood

fractions and immunological products; antisera

and other blood fractions

379 3.5% 14

7 31SSS9

Confidential trade chapter 31

267 2.5% 2

8 300439

Medicaments; containing hormones (but not

insulin), adrenal cortex hormones or

265 2.5% 10.5

228

Note that due to confidentiality requirements, trade for certain HS products cannot be reported. This is the case

when reporting would reveal information about individual statistical units (exporters in this case). Such trade is

subsumed in more aggregate categories. For example, the artificial HS code “Confidential trade of chapter 29 and SITC

Group 5” sums trade from all confidential HS codes from chapter 29 (i.e., HS code starting with 29).

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antibiotics, for therapeutic or prophylactic uses,

packaged for retail sale

9 330300

Perfumes and toilet waters

245 2.3% 11

10 293339

Heterocyclic compounds; containing an unfused

pyridine ring (whether or not hydrogenated) in

the structure, n.e.c. in 2933.3

232 2.1% 12

11 293399

Heterocyclic compounds; n.e.c. in headings no.

2933

187 1.7% 2

12 382200

Reagents; diagnostic or laboratory reagents on

a backing and prepared diagnostic or

laboratory reagents whether or not on a

backing, other than those of heading no. 3002

or 3006; certified reference material

156 1.4% 12

13 382499

Chemical products, mixtures and preparations;

n.e.c. heading 3824

145 1.3% 12

14 380869

Insecticides; containing goods named in

Subheading Note 2 to this Chapter, put up in

forms or packings for retail sale or as

preparations or articles, in packings of a net

weight content exceeding 7.5kg

140 1.3% -

15 300290

Toxins, cultures of micro-organisms (excluding

yeasts) and similar products

134 1.2% 6

16 380893

Herbicides, anti-sprouting products and plant-

growth regulators; other than containing goods

of Subheading Note 1 to this Chapter; put up in

forms or packings for retail sale or as

preparations or articles

133 1.2% 2

17 330499

Cosmetic and toilet preparations; n.e.c. in

heading no. 3304, for the care of the skin

(excluding medicaments, including sunscreen

or sun tan preparations)

128 1.2% 4

18 293499

Nucleic acids and their salts, other heterocyclic

compounds, n.e.c. in heading number 2934

124 1.2% 7

19 310240

Fertilisers, mineral or chemical; ammonium

nitrate with calcium carbonate or other

inorganic non-fertilizing substances, mixtures

thereof

123 1.1% 4.5

20 300420

Medicaments; containing antibiotics (other than

penicillin, streptomycin or their derivatives), for

therapeutic or prophylactic uses, packaged for

retail sale

106 1.0% 10

Total 6,707 62.2%

Notes: Table shows the 20 HS 6-digit products with the highest share in EU chemical and pharmaceutical exports to

Mercosur. ‘Export share’ denotes the share of the HS product in total chemical/pharmaceutical exports to Mercosur. ‘Avg.

MFN Tariff Mercosur’ is the average Mercosur MFN import tariff, calculated as the simple average ad-valorem equivalent

of the tariff lines underlying each 6-digit code. Chemical and pharmaceutical trade is defined as Section VI (Chapters

28-38) of HS 2012. Sources: COMEXT, UN Comtrade, UNCTAD Trains.

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Table 76: Top 20 Pharmaceutical and Chemical Imports from Mercosur to the EU

HS6 Description

2019 EU import

volume in €

million

Import

Avg. MFN Tariff

EU (%)

1 382600

Biodiesel and mixtures thereof; not containing

or containing less than 70% by weight of

petroleum oils or oils obtained from bituminous

minerals

628 26.5% 6.5

2 280469

Silicon; containing by weight less than 99.99%

of silicon

197 8.3% 5.5

3 284390

Inorganic or organic compounds of precious

metals, n.e.c.; amalgams

116 4.9% 4.15

4 293719

Polypeptide hormones, protein hormones and

glycoprotein hormones, their derivatives and

structural analogues; other than somatotropin,

(its derivatives and structural analogues) and

insulin and its salts

107 4.5% 0

5 330113

Oils, essential; of lemon (terpeneless or not),

including concretes and absolutes

95 4.0% 5.7

6 330112

Oils, essential; of orange (terpeneless or not),

including concretes and absolutes

72 3.0% 5.7

7 290121

Acyclic hydrocarbons; unsaturated, ethylene

66 2.8% 0

8 300490

Medicaments; consisting of mixed or unmixed

products n.e.c. in heading no. 3004, for

therapeutic or prophylactic uses, packaged for

retail sale

63 2.7% 0

9 350300

Gelatin (including gelatin in rectangular sheets,

whether or not surface-worked or coloured)

and gelatin derivatives; isinglass; other glues

of animal origin, excluding casein glues of

heading no. 3501

61 2.6% 7.7

10 293339

Heterocyclic compounds; containing an unfused

pyridine ring (whether or not hydrogenated) in

the structure, n.e.c. in 2933.3

57 2.4% 5.6

11 282530

Vanadium oxides and hydroxides

52 2.2% 5.5

12 380610

Rosin and resin acids

43 1.8% 5

13 292320

Lecithins and other phosphoaminolipids,

whether or not chemically defined

41 1.7% 5.7

14 28SSS5

Confidential trade chapter 28

36 1.5% -

15 300610

Pharmaceutical goods; sterile surgical catgut,

suture materials, tissue adhesives, laminaria,

laminaria tents, absorbable surgical or dental

haemostatics, and surgical or dental adhesion

barriers

31 1.3% 0

16 382319

Industrial monocarboxylic fatty acids; acid oils

from refining; (other than stearic acid, oleic

acid or tall oil fatty acids)

30 1.2% 2.9

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17 300190

Glands and other organs; heparin and its salts;

other human or animal substances prepared for

therapeutic or prophylactic uses, n.e.c. in

heading 3001

27 1.2% 0

18 290919

Ethers; acyclic, and their halogenated,

sulphonated, nitrated or nitrosated derivatives,

other than diethyl ether

25 1.0% 5.5

19 291819

Acids; carboxylic acids, (with alcohol function

but without other oxygen function), other than

lactic, tartaric, citric, and gluconic acids and

their salts and esters

23 1.0% 5.3

20 320110

Tanning extracts of vegetable origin;

quebracho extract

22 0.9% 0

Total

1,791 75.6%

Sources: COMEXT, UN Comtrade, UNCTAD Trains. Notes: Table shows the 20 HS 6-digit products with the highest share

in EU chemical and pharmaceutical imports from Mercosur. ‘Import share’ denotes the share of the HS product in total

chemical/pharmaceutical imports from Mercosur. ‘Avg. EU MFN Tariff’ is the average EU MFN import tariff, calculated as

the simple average ad-valorem equivalent of the tariff lines underlying each 6-digit code. Chemical and pharmaceutical

trade is defined as Section VI (Chapters 28-38) of HS 2012.

Assessing the impact of the agreement

Chemicals and pharmaceutical products are aggregated into a single sector in the GTAP database.

Consequently, some caution is necessary when assigning the impact to lower levels of

disaggregation.

In the conservative scenario, EU imports from Mercosur will increase by 12.8% and in the

ambitious scenario, they will increase by 16.2%. Exports to Mercosur will increase by 47.6% in

the conservative scenario and by 60.2% in the ambitious scenario. This will increase total exports

by 0.7% in the EU in the conservative scenario and by 0.9% in the ambitious scenario. In

Mercosur, total exports will expand by 7.7% in Brazil and by 1.9% in Argentina in the

conservative scenario. In the same scenario, exports from Uruguay and Paraguay will contract

by 1.3% and 3%, respectively. In the ambitious scenario, total exports will expand by 10.5%

and 2.8% (in Brazil and Argentina, respectively); and they will contract by 2.2% and 3.5% (in

Uruguay and Paraguay, respectively).

These changes in trade will generate some minor output changes in the EU. Output would

increase by 0.2% in both scenarios. Changes in output in Brazil are similar to those experienced

by the EU in both scenarios. However, output will fall in Argentina by 0.2% (both scenarios), in

Uruguay by 1.2% (1.9%); and in Paraguay by 2.5% (2.4%) in the conservative (ambitious)

scenario.

Social impact

Unskilled and skilled labour will increase in the EU by 0.1% in the conservative and the ambitious

scenario. In Mercosur, the impact is negative. In the conservative scenario, unskilled and skilled

labour will fall between 0.5% (Brazil) and 0.9% (Uruguay). In the ambitious scenario, unskilled

labour would fall between 0.5% and 2.5%. Skilled labour would fall by 0.5% and 2.3%,

The negative social impact in Mercosur is compensated by improved and cheaper access to

chemical and pharmaceutical products by consumers and firms. The fall in tariffs, especially in

Mercosur, is likely to reduce prices consumer and wholesale pay for key products such as

medicines.

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Environmental and human rights impact

There are not foreseen relevant impact in the environment and human rights. However, access

to cheaper medicines will benefit Mercosur citizens in relation to the right to access to healthcare.

Government procurement

None of the Mercosur countries are signatories of the WTO Government Procurement Agreement.

Therefore, chemical and pharmaceutical companies are, in general, excluded from participating

in tendering processes. The EU-Mercosur agreement will allow, in principle, EU companies to

participate, bid and compete in procurement processes as local companies. This could allow, for

example, EU pharmaceutical companies to participate in tendering processes to supply public

health systems in Mercosur with vaccines and medicines.

Impact on SMEs

SMEs account for high shares in the total number of EU companies trading both chemicals and

pharmaceutical products to partners outside the EU (extra-EU trade). In 2017 (most recent data),

EU SMEs’ share in the number of enterprises exporting chemicals and pharmaceuticals products

was 91% and 75% respectively (Table 77). Likewise, EU SMEs’ share in the number of

enterprises importing chemicals and pharmaceuticals products was 90% and 75% respectively

(Table 78). Accordingly, a reduction or full elimination of tariffs in Mercosur countries would

improve market access conditions for SMEs for both partners. A reduction or full elimination of

import tariffs on the side of Mercosur countries would improve EU SMEs competitiveness in

Mercosur markets. The full elimination of import tariffs would reduce the deterrent effect of

Mercosur countries’ import regulations, e.g. customs and import facilitation procedures, on EU

SMEs regarding the decision to enter Mercosur markets. Even though EU tariffs a generally lower

than tariffs applied by Mercosur counties, similar considerations apply for SMEs from Mercosur

countries.

Table 77: Extra-EU Exports of SMEs and Large Companies, Pharmaceutical and

Chemical

Number of exporting enterprises Chemicals products Pharmaceutical products

Total 10,594 1,832

Fewer than 10 employees 3,325 388

From 10 to 49 employees 3,851 390

From 50 to 249 employees 2,463 587

250 employees or more 777 409

Unknown 142 21

Shares of exporting enterprises Chemicals products Pharmaceutical products

Total 100% 100%

Fewer than 10 employees 31% 21%

From 10 to 49 employees 36% 21%

From 50 to 249 employees 23% 32%

250 employees or more 7% 22%

Unknown 1% 1%

SMEs 91% 75%

Large companies 7% 22%

Source: Eurostat TEC database.

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Table 78: Extra-EU Imports of SMEs and Large Companies, Pharmaceutical and

Chemical

Number of importing enterprises Chemicals products Pharmaceutical products

Total 9,580 1,943

Fewer than 10 employees 2,894 429

From 10 to 49 employees 3,267 434

From 50 to 249 employees 2,422 603

250 employees or more 789 423

Unknown 156 24

Shares of importing enterprises Chemicals products Pharmaceutical products

Total 100% 100%

Fewer than 10 employees 30% 22%

From 10 to 49 employees 34% 22%

From 50 to 249 employees 25% 31%

250 employees or more 8% 22%

Unknown 2% 1%

SMEs 90% 75%

Large companies 8% 22%

Source: Eurostat TEC database

Impact on Consumers

Chemicals

The reduction or full elimination of tariffs on chemical products would result in lower prices for

intermediary and final products. The precise impact is difficult to assess because of the high

number of chemical compounds and the high number of products in value chains that use

chemicals compounds as input for production.

Pharmaceuticals

In markets for medicines, wholesalers and retailers frequently apply lump sum percentage

margins. As a result, lower import tariffs result in market price reductions that are much higher

than the initial savings from lower import tariffs. In markets for pharmaceutical products, even

low import tariff rates have a significant compounding effect on the final retail price of medicines,

which in turn impacts on affordability. The nominal tariff charged by customs authorities only

tells part of the story of the real burden imposed on an intermediate (e.g. hospitals, insurance

companies) and final consumers. At the counter, the final price of a medicine paid for by a

consumer is a combination of the manufacturer’s price, various mark-ups by importers,

wholesalers and distributors, and retail pharmacies, doctors and hospitals respectively (see, e.g.,

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IFC 2017; IMS 2014).

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Survey data presented by the International Finance Corporation (IFC

2017; referring to Health Action International (HAI) survey data) show that numerous mark-ups

along the medicine distribution chain can account for up to 90 per cent of the final price to the

consumer, and often are in the 30% to 50% range in countries with unregulated mark-ups.

Specifically, according to the IFC (2017), mark-ups range from 25% to 30% per cent for

importers, 25% to 50% for wholesalers, 25% to 75% for sub-wholesalers, and 50% to 80% for

retailers (for generics products).

While import tariffs on pharmaceuticals and medicinal products can cause substantial net losses

for governments, taxpayers and patients, they effectively work as a subsidy for companies along

national distribution chains. This may lead to a political economy, in which customs authorities

and pharmaceutical distributors may have a common interest in maintaining (high) import tariffs.

The reduction or full eliminations of import tariffs on medicines would thus reduce rent-seeking

and market distortions, and help to substantially cut the costs of medicines in Mercosur countries

that apply tariffs on medicines and create better conditions for access to medicines for patients

in these countries. The precise relative impact depends on the level of the import tariff, the

number of wholesalers along national markets’ distribution chains and the mark-ups applied by

importers and distributors.

Impact on LDCs and OMRs

The assessment does not preview a specific impact on LDCs and OMRs resulting from these

provisions.

Recommendations

 Mercosur countries should aim to gradually introduce changes in the tariff

schedule. This will allow companies to adjust the new competition by increasing their

productivity and competitiveness, as well as tackling the negative effects on output and

employment that the agreement is expected to generate in the chemicals and

pharmaceutical sector.

 Mercosur countries should support the re-training of workers with the aim of

facilitating a transition to other sectors. In addition, the provision of income support

should be considered for the affected workers.

6.4.3. Machinery

Sector overview

The structure of the machinery sector

The machinery and equipment products are mostly included in Chapter 84 (Nuclear reactors,

boilers, machinery and mechanical appliances and parts thereof) and Chapter 85 (Electrical

229

IFC (2017), Private Sector Pharmaceutical Distribution and Retailing in Emerging Markets - Making the Case for

Investment, International Finance Corporation of the World Bank Group. IMS (2014), Understanding the pharmaceutical

value chain, IMS Institute for Healthcare Informatics. HAI (2010), Life-saving insulin largely unaffordable – A one day

snapshot of the price of insulin across 60 countries, available at:

http://www.haiweb.org/medicineprices/07072010/Global_ briefing_note_FINAL.pdf, accessed on 20 August 2017.

Bauer (2017). The Compounding Effect of Tariffs on Medicines: Estimating the Real Cost of Emerging Markets’

Protectionism. ECIPE Policy Brief 1/2017.

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machinery and equipment and parts thereof; sound recorders and reproducers; television image

and sound recorders and reproducers, parts and accessories of such articles) of the Harmonized

System (HS). However, as the analysis in this section is based on the GTAP classification used

in the CGE model, it also includes some inputs and parts used in production processes that

belong to other Chapters. On the one side, machinery accounts for 889 HS 6 digits products. On

the other side, electronic equipment and other manufactures accounts for 328.

According to Grasso, F. & Kossacoff S. (2015),

230

the most important Latin-American countries

in the capital goods sector

231

are Argentina, Brazil and México. The machinery and equipment

sector (Sectors 29 and 31 in the ISIC Rev. 3) weighs moderately in gross value added both in

MERCOSUR (in 2015: 2% Argentina, 1% Brazil and 0.4% in Uruguay) and in the EU (in 2014:

2.5%). In terms of manufacturing employment, the sector share in the EU (14.4% in 2015)

doubles the share in MERCOSUR (7.3% Argentina and 7.6% Brazil in 2015). The sector

performance in terms of productivity and technological content is quite heterogeneous. SMEs

represent a large share of employment in Sectors 29 & 31 (more than 50% in Argentina in 2011

and, for Sector 29 only, 42% in Brazil), while their share is lower in EU (around 21% in 2011).

Top Products

Based on the bilateral trade between the EU and Mercosur, the GTAP Machinery sector accounts

for most it. It accounts for 94% of the EU exports to Mercosur and 88% of the imports from

Mercosur. Within Mercosur, Brazil represents the largest share of both exports and imports,

followed by Argentina. Table 79 presents the bilateral trade between the EU and Mercosur.

Table 79: EU-Mercosur bilateral trade on electronic equipment and machinery (2015-

18) (in thousands of Euros)

Argentina Brazil Uruguay Paraguay Mercosur

Electronic equipment and other manufactures nec

EU exports

2015

162,066 561,269 24,633 17,785 765,753

2016

171,420 523,453 23,562 14,457 732,891

2017

182,608 570,950 21,673 21,148 796,378

2018

178,881 608,564 22,883 19,510 829,838

EU imports

2015

8,192 178,596 9,906 1,005 197,699

2016

9,042 155,554 7,590 1,546 173,734

2017

8,399 161,410 8,594 1,074 179,477

2018

10,382 141,957 8,858 1,498 162,695

Machinery

EU exports

2015

2,740,858 9,133,768 682,284 145,300 12,702,210

230

Grasso, F & Kossacoff S. (2015). Lineamientos de Política Tecnológica para la Industria de Bienes de Capital, CIECTI

Working Paper n°5. Available at:

http://www.ciecti.org.ar/publicaciones/dt5-lineamientos-politica-tecnologica-industria-

bienes-capital/

231

Their definition of the capital goods sector is broader than ours: they include, in addition to Sectors 29 and 31 from

the ISIC Rev 3 (excluding domestic appliances), some subdivisions from Sectors 28, 32, 33 and 34.

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2016

2,738,165 7,419,884 534,092 136,431 10,828,572

2017

3,334,103 7,809,460 334,141 167,512 11,645,217

2018

2,958,575 8,539,852 322,523 167,408 11,988,359

EU imports

2015

75,669 1,133,550 13,507 620 1,223,345

2016

65,643 1,122,477 10,391 1,888 1,200,400

2017

77,632 1,307,320 13,314 730 1,398,996

2018

76,210 1,468,528 10,147 371 1,555,256

Source: Own elaboration based on EU-Comext

Table 80 captures the magnitude of the EU-Mercosur trade in the context of all Mercosur trade

in electronic equipment and machinery. Electronic equipment represents a small share of total

Mercosur exports. However, machinery accounts for nearly 5% of total Mercosur exports. In the

case of imports, electronic equipment accounts for 5% (on average) of the Mercosur imports

and machinery represents a 17% (average) of the total Mercosur imports.

In terms of Mercosur exports, the EU shows a growing share in both electronic equipment and

machinery (25% and 17% in 2018 respectively). In terms of imports, the EU is a major supplier

of machinery for Mercosur but a minor one in the case of electronic equipment. This anticipates

that a significant impact of the agreement in terms of EU exports is expected in the machinery

sector.

Table 80: Mercosur trade on Machinery and electronic equipment (2015-18) (in

millions of Euros)

Total European Union Share EU (%)

Share of sector

in total

Mercosur trade

(%)

Electronic equipment and other manufacture

Mercosur exports

2015 1,170.7 229.7 19.6 0.5

2016 1,168.8 226.7 19.4 0.5

2017 1,151.5 189.1 16.4 0.4

2018 1,222.6 313.5 25.6 0.5

Mercosur imports

2015 10,822.9 695.9 6.4 4.8

2016 8,653.5 681.8 7.9 4.5

2017 10,883.3 686.4 6.3 5.2

2018 10,270.2 691.2 6.7 4.6

Machinery

Mercosur exports

2015 11,759.4 1,648.6 14.0 4.9

2016 11,470.6 1,761.6 15.4 4.9

2017 12,971.7 1,934.0 14.9 5.0

2018 12,286.7 2,135.3 17.4 4.6

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Mercosur imports

2015 40,863.6 13,225.1 32.4 18.1

2016 35,423.6 11,811.5 33.3 18.6

2017 35,016.2 11,275.9 32.2 16.6

2018 35,680.5 11,239.4 31.5 16.0

Source: Own elaboration based on UN-Comtrade. NB. Some trade flows may differ from those in the previous table

based on Comext data.

Based on the top electronic products and manufactures nec exported by the EU to Mercosur

presented in Table 81, there seems to be a combination of electronic products (mostly inputs

and intermediate products) and some manufactures used in motor vehicles. This suggests the

existence of a value chain involving both sectors. The top 10 products account for almost 48%

of the total EU exports of electronic products and manufactures nec to Mercosur.

In contrast to electronic equipment and manufacture nec, EU exports of machinery appear more

diversified. The top 10 products accounts 17% of the EU exports of machinery to Mercosur These

products involve a wide range of products. Brazil is the most important destination, with the only

exception of generating sets, wind-powered (850231), where Argentina and Uruguay are the

largest importers.

Tariff applied by Mercosur on electronic products and manufactures nec and machinery are high.

The top exported products by the EU attract tariffs as high as 20%. This reveals a significant

protection on Mercosur on these products and that the agreement could generate significant

changes in the relative prices between products imported from the EU, domestically source and

imported from other origins.

Table 82 captures the top 10 electronic products and manufactures nec and machinery products

imported by the EU from Mercosur. In the case of electronic products and manufactures nec,

these products represent almost 61% of the total EU imports. This set of products represent a

wide range of products, mostly inputs and intermediates products. Top 10 EU imports of

machinery from Mercosur represent 37% of total EU imports of this set. These products are

basically engines (especially electric) as well as self-propelled machinery.

In contrast to Mercosur, tariffs applied by the EU on the Mercosur exports of both electronic

products and manufactures nec and machinery are low. They do not exceed 3% and, in many

instances, they are zero. This indicates that, at least with respect to the tariff reduction, the

effect of EU imports from Mercosur is likely to be minimal.

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Table 81: Top EU exports to Mercosur average 2015-18 (in thousands of Euros)

Argentina Brazil Uruguay Paraguay Total

Mercosur Tariff

Electronic products and other manufactures nec

940190 Parts of seats, n.e.s.

19,607.8 72,620.8 678.1 25.7 92,932.5 18

847330 Parts and accessories of automatic data-

processing machines

14,436.5 36,207.9 1,093.5 753.7 52,491.7 5.1

847150 Processing units for automatic data-processing

machines

6,697.5 29,660.2 734.8 1,476.4 38,568.9 11.2

852990 Parts suitable for use solely or principally with

transmission

3,916.7 31,989.7 359.0 153.4 36,418.9 8

852910 Aerials and aerial reflectors of all kinds; parts

suitable

4,937.4 28,098.6 182.4 972.6 34,191.0 16

852721 Radio-broadcast receivers not capable of

operating without an external …

7,660.2 24,330.6 16.2 8.8 32,015.7 20

847170 Storage units for automatic data-processing

machines

15,433.1 15,645.5 741.1 120.4 31,940.1 4.4

847290 Office machines, n.e.s.

16,518.8 4,927.6 1,032.5 383.4 22,862.3 11.8

711319 Articles of jewellery and parts thereof

963.7 14,265.0 652.9 5,937.1 21,818.8 18

940120 Seats for motor vehicles

5,784.5 11,612.6 35.2 9.1 17,441.4 18

Total Selection

95,956.2 269,358.5 5,525.7 9,840.7 380,681.1

Total Electronic products and other manufactures

173,780.92 566,204.11 23,202.84 18,234.30 781,422.17

Share Selection (%)

55.2 47.6 23.8 54.0 48.7

Machinery

853710 Boards, cabinets and similar combinations of

apparatus for electric

74,788.1 257,754.9 3,694.8 2,414.3 338,652 12

847989 Machines and mechanical appliances, n.e.s.

58,735.1 232,489.0 4,710.9 3,018.1 298,953 12

848180 Appliances for pipes, boiler shells, tanks, vats

or the like

45,608.4 195,341.2 5,178.7 1,615.1 247,743 15.1

848340 Gears and gearing for machinery

31,747.4 156,028.9 4,792.9 317.6 192,887 14

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901890 Instruments and appliances used in medical,

surgical or veterinary …

39,048.3 130,488.7 3,730.9 3,004.1 176,272 9.1

842240 Packing or wrapping machinery, incl. heat-

shrink wrapping machinery

53,849.8 107,334.0 4,472.6 2,864.7 168,521 3.5

850231 Generating sets, wind-powered

68,903.5 2,509.1 88,414.9 23.5 159,851 14

850300 Parts suitable for use solely or principally with

electric motors

45,175.2 104,808.3 7,732.1 66.8 157,782 14

842230 Machinery for filling, closing, sealing or

labelling bottles, cans, …

51,515.0 92,160.7 5,863.4 2,767.9 152,307 9.3

843149 Parts of machinery of heading 8426, 8429 and

8430, n.e.s.

15,700.8 114,580.8 4,108.8 1,778.6 136,169 10.4

Total Selection

485,071.6 1,393,495.7 132,699.9 17,870.8 2,029,137.9

Total Machinery

2,950,097.3 8,249,370.4 471,774.1 156,067.0 11,827,308.7

Share Selection (%)

16.4 16.9 28.1 11.5 17.2

Source: Own elaboration based on EU-Comext

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Table 82: Top EU imports from Mercosur average 2015-18 (in thousands of Euros)

Argentina Brazil Uruguay Paraguay Total EU MFN

Electronic products and other manufactures nec

853222 Fixed electrical capacitors, aluminium

electrolytic

0.0 27,170.8 0.2 0.0 27,171.0 0

940190 Parts of seats, n.e.s.

257.9 5,283.1 6,945.1 378.6 12,864.8 2.5

852990 Parts suitable for use solely or principally with

transmission

81.4 11,856.6 15.9 17.0 11,970.9 2.6

710399 Precious and semi-precious stones, worked,

whether or not graded

5.8 10,791.3 154.2 - 10,951.3 0

847759 Machinery for moulding or otherwise forming

products from rubber …

0.1 9,901.2 0.2 - 9,901.5 1.7

901832 Tubular metal needles and needles for sutures

0.5 9,010.6 3.5 - 9,014.6 0

846799 Parts of pneumatic tools for working in the

hand, hydraulic or with

1,418.7 5,968.8 237.1 166.0 7,790.7 1.7

851680 Electric heating resistors

- 6,751.3 - - 6,751.3 2

853225 Fixed electrical capacitors, dielectric of paper

or plastics

567.6 5,747.9 27.2 13.7 6,356.4 0

844712 Circular knitting machines, with cylinder

diameter > 165 mm

1,119.1 4,246.4 531.4 96.8 5,993.7 1.7

Total Selection

3,451.1 96,728.0 7,914.8 672.2 108,766.1

Total Electronic products and other

manufactures

9,010.7 159,597.9 8,738.0 1,285.6 178,632.2

Share Selection (%)

38.3 60.6 90.6 52.3 60.9

Machinery

850152 AC motors, multi-phase, of an output > 750 W

but <= 75 kW

18.4 97,076.6 5.9 - 97,100.9 1.5

842951 Self-propelled front-end shovel loaders

- 92,287.8 - - 92,287.8 0

841290 Parts of non-electrical engines and motors,

n.e.s.

34.9 72,337.4 8.3 0.7 72,381.3 1

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841330 Fuel, lubricating or cooling medium pumps for

internal combustion …

1,767.4 53,494.0 14.1 0.2 55,275.6 1

848310 Transmission shafts, incl. cam shafts and

crank shafts, and cranks

617.1 43,088.1 15.6 - 43,720.8 2

850153 AC motors, multi-phase, of an output > 75 kW

3.5 40,128.8 4.5 - 40,136.8 2.4

841430 Compressors for refrigerating equipment

123.4 32,264.2 1.1 1.4 32,390.2 1.5

842911 Self-propelled bulldozers and angledozers,

track laying

- 30,555.3 - - 30,555.3 0

850300 Parts suitable for use solely or principally with

electric motors

17.2 23,646.3 169.1 - 23,832.7 2.7

842920 Self-propelled graders and levellers

- 23,814.0 - - 23,814.0 0

Total Selection

2,581.8 508,692.5 218.7 2.3 511,495.3

Total Machinery

75,336.2 1,276,931.9 12,148.8 922.8 1,365,339.7

Share Selection (%)

3.4 39.8 1.8 0.2 37.5

Source: Own elaboration based on EU-Comext

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Assessing the impact of the agreement

Economic impact

Economic analysis

This section presents the main results of the CGE analysis in relation to machinery and electronic

equipment and manufactures nec. The analysis is based on outlining two scenarios. In the

conservative and ambitious scenario, the EU eliminates tariffs duties in both sectors. Mercosur

liberalises 90% of both machinery and electronic products in the conservative scenario whilst

eliminates duties in all products in the ambitious scenario. Moreover, in the case of Mercosur,

there is a reduction of NTBs of 5% and 10% in the conservative and ambitious scenarios,

respectively.

Table 83 presents the main direct impact of the simulations. Even in the conservative scenario,

the impact of the agreement in EU exports is important. Machinery exports will increase by 78%

and exports of electronic equipment and manufactures nec by 109%. The complete elimination

of duties and further reduction of NTBs on the Mercosur side in the ambitious scenario will make

EU exports of machinery to increase by 100% and of electronic equipment and manufactures

nec by almost 149%. The fact that these products (especially machinery) represent significant

shares of the EU exports to the Mercosur suggest that they account for most of the impact in

the total effect of the EU exports to Mercosur.

In terms of EU imports, the low tariffs applied in the products under analysis anticipates lower

impacts. In the conservative scenario, EU imports from Mercosur of machinery will grow by 17%

and imports of electronic equipment and manufactures nec by 15%. In the conservative scenario,

on the other hand, imports of machinery from Mercosur will increase by 24% and imports of

electronic equipment and manufacture nec by almost 22%. Despite the low impacts, these

products (especially machinery) represent a relatively large share of the EU imports from

Mercosur, which indicates that the total impact is not negligible.

Table 83: EU-Mercosur bilateral trade changes in the machinery and electronic

equipment and manufactures nec (percentage change with respect to baseline)

EU imports from Mercosur EU exports to Mercosur

Conservative scenario

Machinery 17.3 78.4

Electronic equipment and manufactures nec 15.7 109.3

Ambitious scenario

Machinery 24 100.5

Electronic equipment and manufactures nec 21.6 148.7

The changes in bilateral trade trigger output and total trade effects in all countries. Table 84

shows the main results. In the EU, in the conservative scenario, output of machinery will grow

by 0.4% and of electronic equipment will contract by 0.3%. In the ambitious scenario, output

will increase by 0.5% in machinery and it will contract by 0.4% in electronic equipment and

manufactures nec.

In Mercosur, output of machinery in the conservative scenario will contract by 3.8% and 1.9%

in Brazil and Argentina (the most important producers). However, output of electronic equipment

and manufactures nec will expand by 1.6% and 2.1% in Brazil and Argentina respectively. The

effects are amplified in the ambitious scenario. Output of machinery will fall by 5.1% and 2.9%

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in Brazil and Argentina and it will increase by 2.2% and 2.7% in the case of electronic equipment

and manufactures nec.

Total exports of machinery and electronic equipment in the EU are expected to increase by 1.3%

and decrease by 0.1%, respectively in the conservative scenario. In the ambitious scenario,

exports of machinery will expand by 1.7% and exports of electronic equipment will remain

constant.

In Mercosur, total exports of machinery are expected to expand by 12% in Brazil and by 1.5%

in Argentina in the conservative scenario. Exports of electronic equipment will expand by 14%

and 9% in Brazil and Argentina, respectively. In the ambitious scenario, total exports of

machinery will expand by 16.4% in Brazil and 2.6% in Argentina. Exports of electronic equipment

will expand by 20% and 13% in Brazil and Argentina, respectively.

All these results suggest a very mixed picture of the effects of the agreement beyond the

increases of bilateral trade. They also suggest a quite complex structure of production and trade

relations in the Mercosur and the EU. In the case of Mercosur, even if EU tariffs reductions are

not significantly, Mercosur tariffs reduction is likely to have significant competitiveness effects

that will facilitate the expansion of exports. Cheaper inputs, intermediates and machinery are

likely to boost exports. Within each sector, it is expected a heterogeneous effect with some firms

contracting their output whilst others expand it. However, the effect on output is, on machinery,

negative on the aggregate.

Table 84: Output and total trade changes in the machinery and electronic equipment

and manufactures nec (percentage change with respect to baseline)

EU28 Brazil Argentina Uruguay Paraguay

Conservative scenario

Machinery

Output

0.4 -3.8 -1.9 -1 -3.2

Total

exports

1.3 12 1.5 -3.8 -11.8

Total

imports

1.6 4.1 1.6 0.7 -0.2

Electronic equipment and

manufactures nec

Output -0.3 1.6 2.1 1.6 0.4

Total

exports

-0.1 14.4 9.4 6.2 -0.5

Total

imports 0.8 -3.6 -1.2 -0.3 -0.1

Ambitious scenario

Machinery

Output 0.5 -5.1 -2.9 -1.4 -4.5

Total

exports

1.7 16.5 2.6 -6.6 -14.9

Total

imports

1.6 4.1 1.6 0.7 -0.2

Electronic equipment and

manufactures nec

Output -0.4 2.2 2.7 1.8 0.8

Total

exports

0 20.4 13.1 7 0

Total

imports 1 -5 -1.9 0 -0.2

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Technical norms

In the EU, safety of machinery is legislated at the product level, while in Brazil (and to the extent

they have legislation, in the other Mercosur countries), it is regulated as part of workplace safety

legislation. So there is no regulation at the product level, only at the point when it is installed

and put into service. Much EU machinery legislation is subject to Self-Declaration of Conformity

by the manufacturer (SDoC). If the MCS producer uses EU harmonised standards to build the

product, there is a presumption of conformity with the technical regulations. However,

sometimes certain tests need to be done in accredited labs. These can be sub-contracted to local

labs if they have a contractual relationship with an EU notified body. However, this option is not

available in all cases. Thus, there is an additional cost associated with access to the EU market

that does not necessarily apply to the Mercosur market in the same way.

Government procurement

The agreement will facilitate the participation of European firms in Mercosur countries’ tendering

process. As none of the Mercosur countries are a member of the WTO Government Procurement

Agreement, currently non-Mercosur companies enjoy no legal rights to participate in government

procurement processes. The agreement could allow EU producers and traders of machinery to

compete for contracts in Mercosur countries under non-discriminatory terms with Nationals in

Mercosur countries. Similarly, Mercosur companies will acquire the legal right to bid for EU

contracts under non-discriminatory terms.

Social impact

The economic effect may lead to social impacts. Changes in household income and prices are

likely to affect poverty levels. In the case of prices, given that machinery and electronic

equipment are not consumed by households, we should not expect significant changes in

consumer prices that can affect poverty. However, the changes in output may trigger changes

in employment that could affect the income of the people directly employed in these sectors.

In Mercosur, there is a more mixed picture. In the machinery sector, employment is expected

to fall in all countries. For unskilled labour, employment will fall by 4.1% and 2.1% in Brazil and

Argentina respectively, in the conservative scenario and it will fall by 5.5% and 3.2% in the

ambitious scenario. For skilled labour, employment will fall by 4.1% in Brazil and 2% in Argentina.

Employment is expected to expand in the case of electronic equipment in Mercosur. In the case

of unskilled labour, employment will increase by 1.2% and 1.4% in the conservative scenario in

Brazil and Argentina, respectively. In the ambitious scenario, unskilled employment will increase

by 1.7% and 1.8% in the two countries. Skilled labour will register a similar increase in Mercosur.

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Table 85 presents the impact on employment in the EU and Mercosur countries. In the case of

the EU, employment of unskilled labour is expected to rise in the machinery sector by 0.3%/0.4%

in the conservative/ambitious scenario. On the other hand, in the case of the electronic

equipment sector, employment of unskilled labour will contract by 0.4%/0.5% in the

conservative/ambitious scenario. Skilled labour is expected to behave similarly.