Bilateral trade relation

The period from 1998-2004 shows important changes in the Mercosur economies, including currency devaluation, social and macroeconomic crises and recent eco-nomic recovery. These facts have affected their trade relations with the rest of the world, and especially with the European Union.

Since 1997, Mercosur exports to the rest of the world (ROW excluding the EU) have been fluctuating by following the crisis in the region. Agricultural exports have obviously suffered more than the manufacturing sector (agricultural exports fell 21% while manufactured exports rose 5% between 1997 and 1998). In 2001 the situation was similar: agricultural exports fell 13% while manufactured exports rose 1%. The variation in agricultural exports to the EU is not only related to the local macroeconomic situation but also linked to sanitary crises, especially ground exports of beef (foot and mouth disease) and poultry (avian influenza).

Between 2003 and 2004, Mercosur countries have improved their international competitiveness through currency devaluation as a consequence of the financial crisis in the region, but animal diseases limited animal product exports to the EU especially because of extra sanitary controls (while 2003 saw a 34% increase, 2004 saw a -12% decrease in agricultural and food exports).

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European Union (agricultural and industrial) exports to the ROW have grown steadily during this period. However, their exports to the Mercosur countries have been strongly linked to the macroeconomic situation in Latin America. European exports to Mercosur have been falling since 1998, a phenomenon that can be explained by the recession period in South America and the first devaluation of the Brazilian Real. Industrial exports remained steady at the beginning of 1997, but after the Real devaluation they suffered from a strong negative variation (-8%). European exports recovered in the two following years (1999 and 2000) until the next crisis in 2001 (-6% of industrial exports). At the end of 2001, the economic crisis in Mercosur, and thus the devaluations of the Mercosur countries currencies in 2002, resulted in a collapse of European exports to the region. Since

then, and until 2004, a “healthier” Mercosur economy led to a steady increase in European exports (between 30% and 40% per year even for agricultural and food products).

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Even if Mercosur is a minor EU world partner, it is the EU’s most important partner in Latin America, because Mercosur is the destination of close to 50% of the EU exports to the Latin region. At the same time, the EU is an important partner of Mercosur countries especially in the domain of agricultural and food exports (more than 30% of total non-Mercosur exports).

Figure 1.5 gives an idea of the patterns of trade of these two regions as well as the dynamic bilateral trade balance. Mercosur countries are net exporters of agri-cultural and food products (not only to the EU but also to the ROW), while the EU exports to Mercosur are mostly manufactured products and services. Bilat-eral trade was characterized by a deficit for the Mercosur region until 2001. Since 2002, because of the boom in their agricultural exports, the Mercosur countries have reversed the negative trade balance with the EU.

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European imports from Mercosur never stopped rising even during the crises.

Since 2002 European agricultural imports from Mercosur have shown a rapid increase with a peak in 2003. Depreciation of Mercosur currencies had reinforced the competitiveness of Mercosur exports and the appreciation of the Euro with respect to the US dollar then contributed to the widening of the trade surplus between Mercosur and the EU.

Bilateral trade between the European Union and Mercosur seems to be com-plementary according to the previously presented trade patterns. Mercosur ex-ports to the EU are concentrated in a few chapters, of which most are agricultural:

animal products (high-quality beef, poultry, pork and fish), cereals and seeds (wheat, rice and corn), fruits and vegetables, and some foods and beverages.

European Union exports to Mercosur mainly concern manufactured products, such as chemicals, pharmaceuticals, plastic, paper, iron and steel products and

machinery, domestic electrical and electronic devices and vehicles, as we can see in the composition by chapter in Figure 1.7.

However, bilateral trade in some chapters also display the complementarity in their trade patterns. For instance, in the bilateral trade of papers and articles of paper sector (chapter 48), Mercosur exports raw materials belonging to the paper sector, while the EU exports final products of the same sector.

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The complementarity between the trade patterns of both economic blocs, leads us to predict important gains of this regional agreement. Moreover, adjustment costs of this agreement would be negligible compared to the gains, due to the high initial tariff level, especially on the European side (De Melo and Panagariya, 1993; DeRosa, 1998).

Bilateral trade is only a part of bilateral business relations between the two regions. During the 1990’s, the Mercosur region has received more than 50% of the Foreign Direct Investment (FDI) in Latin America and most of the capital came from European transnational groups (telecommunication, energy services and agribusiness). With a EU-Mercosur agreement, the EU is looking to consol-idate its presence in the Mercosur market through FDI. To ensure FDI, Euro-pean companies demand a stable regulatory framework of direct investment and intellectual property rights in order to reduce risks and avoid future problems (Giordano, 2003).

In short, Mercosur and the EU have complementary trade patterns, but we will see in the next subsection that potential trade flows are concentrated in politically sensitive sectors that are now characterized by a high level of protection. The latter and the insecure regulatory framework for FDI, both make this regional trade agreement difficult to conclude.