EU-Mercosur PTA: the reference scenario (R1)

Venezuela has officially entered Mercosur in July 2006. However, Brazil and Paraguay still need to ratify this decision. Furthermore, this implies a trade liberalization between existing Mercosur countries and Venezuela that is still to be undertaken. Obstacles may emerge at any time so that it was useful to consider the possibility of Venezuela not to complete the entry process. It is also useful as a way of comparing our results to those in the literature that do not consider Venezuela as a Mercosur member.

The Doha agreement should has initially to be concluded in 2006 but the disagreement in agricultural market access (subsidies and trade protection) trun-cates the end of this round. Conversely, other many improvements have been done during these years of negotiations but at the same time in last Ministerial

Meetings some countries set the possibility of the collapse of trade liberalization talks. For our EU-Mercosur PTA simulation is thus necessary to assume both the success and the failure of the DDA.

• Trade Impact:

The EU-Mercosur agreement displays asymmetric consequences for trade in both Mercosur and European regions. For example, Brazil total exports increase by 8.7%, while those of the EU27 only increase by 0.8% (Table 1.21).

Concerning European bilateral trade, we find that the European exports to Mercosur do not compensate its imports from the latter, and thus the real exchange rate depreciates in the EU in order to preserve the current account balance. The same situation is observed in the case of Venezuela which suffers from a real depreciation. For the Mercosur countries, bilateral trade with the EU leads to an appreciation of the real exchange rate (Table 1.23).

[See Table 1.21 for scenario R1]

[See Table 1.22 for scenario R1]

[See Table 1.23 for scenario R1]

Trade creation effects are strong in the EU and Mercosur trade relation, since European exports to Mercosur increase more than 20% (21% to Ar-gentina, 26% to Brazil and 27% to te resto of Mercosur) and her imports from this Latin American region also increases (16% from Argentina, 59%

from Brazil and 55% from the rest of Mercosur) (Tables 1.25 and 1.24). Ar-gentina and EU27 trade gains are equally shared between industrial (4.16%

and 1.52% respectively) and agricultural (3.95% and 1.5% respectively) sec-tors. Most of agricultural trade increase in Argentina are concentrated in a few sectors (MeatCattle 28% and Dairy products 50%), while those in the EU27 are equally distributed among all sectors (Tables 1.26 and 1.28).

In the case of the EU, all sectors benefit from an increase in exports, even critical sectors, such as Sugar (7.4%) and Rice (3.4%). Brazil and the rest of Mercosur only benefit from an incerase in agricultural sectors (5.8% and 4.9% respectvely), particularly for MeatCattle, Dairy products, Sugar, Rice and Cereals sectors (Tables 1.27 and 1.29). All these sectors are initially very protected in the EU and thus even an small tariff cut lead to these crountries to benefit from this PTA with the EU. Moreover, the choice in the sensitive products have an important impact in this agreement, an smaller tariff cuts in agrocultural sensitive products lead to improve market access for Mercosur countries in the EU, while protect (TRQs and lower tariff cuts) some controversial sectors in the EU.

In spite of important trade creation effects, this PTA also generate some important trade diversion consequences are also non-negligible under this scenario. First of all, Venezuela is harmed by the fact that not to be con-sidered as a Mercosur member at the moment of the EU-Mercosur PTA signature, and thus its bilateral trade with the European Union decreases (-1.5% in Table 1.25). The regions which suffer from trade diversion effects are the rest of the Cairns group (developed and developing countries), the rest of South American countries (-0.11% on its total exports), Sub-Saharan African countries (-0.23% of their total exports) and some develped coun-tries such as the NAFTA (-0.08% of total exports). Their bilateral trade with the European Union are especially harmed as a consequence of the improvement in trade relations with Mercosur (Table 1.25).

[See Table 1.25 for scenario R1]

[See Table 1.24 for scenario R1]

• Macroeconomic impact:

Assuming that the Doha agreement is not achieved nor the Venezuela acces-sion to Mercosur, we find that the EU-Mercosur PTA is a welfare-improving scenario for Mercosur (Argentina 0.12%; Brazil 0.47%, and Uruguay and

Paraguay 1.23%) and the EU27 (0.1%). However, Venezuela shows a small negative impact on its welfare (-0.01%). Decomposing welfare impact, we observe that most welfare gains for Mercosur are due to capital ac-cumulation and terms of trade gains (especially for Brazil, Uruguay and Paraguay in Table 1.12).¹⁵ Terms of trade improve especially for Uruguay and Paraguay because they initially suffer from highest protection compared to their Mercosur partners (see Subsection 1.3.3). Very sensitive products represent an important share of initial imports, and since they are not lib-eralized, allocative efficiency gains are very weak in this PTA scenario.

[See Table 1.6 for scenario R1]

GDP increases in all Mercosur countries (Argentina 0.11%; Brazil 0.34%;

Uruguay and Paraguay 1%) and the EU (0.11%) as a consequence of this bilateral agreement, whereas in Venezuela it slightly decreases (-0.08%) be-cause this country does not benefit from the EU-Mercosur PTA under this scenario.

[See Table 1.13 for scenario R1]

Even if sensitive products for the European Union are mainly concentrated in agricultural products, their slight trade liberalization through this PTA harms European agricultural employment (-0.64%in Table 1.14). The same impact is observe in the case of non-agricultural employment in Mercosur countries (Argentina -0.07%; Brazil -0.16%, and the Rest of Mercosur¹⁶-1%) for whom most sensitive products are in manufactured sectors (Table 1.15).

Moreover, capital returns decrease only in Argentina, and land returns only do in Venezuela and the EU27 as it was expected (Tables 1.16, 1.17 and 1.18). However, skilled and unskilled labor wages increase for all partners of the EU-Mercosur PTA (Tables 1.19 and 1.20).

15Note that TRQ gains may be overestimated since TRQ mechanisms are not modeled in this version of MIRAGE. Only exogenous TRQ-rents have been introduced.

16Uruguay and Paraguay