Delegation for relations with the Mercosur countries of the European Parliament Statement by Rui Faria da Cunha, Executive Manager Brazilian Business Affairs Index Brazilian Business Affairs (BBA) The Voice of the Brazilian Industry to the European Union... 2 EU-Mercosur Association Agreement background and new scenario... 3 Private sector s contribution to the negotiations... 3 Macroeconomic scenario... 4 Mercosur-EU trade balance... 4 Brazil-EU trade balance..5 EU-Brazil ForeignDirect investment... 6 Challenges.. 7 Conclusion 8 Brussels, February 1, 2011 1
Mr. Nuno Melo, Vice Chair of the European Parliament Delegation for relations with the Mercosur countries; Your Excellency, D. Mario Sandoval, Ambassador of Paraguay to the European Union; Mr. Christian Leffler, General Director for the Americas of the European External Action Service; Mr. João Aguiar Machado, Deputy Director General for Trade of the European Commission, Mr. Adrian van den Hoven, BUSINESSEUROPE International Relations Director; Members of the Delegation for relations with the Mercosur countries of the European Parliament; Members of the European Parliament; Ladies and Gentlemen. It is a pleasure and an honor to appear before this Delegation of the European Parliament to present the Brazilian Industry s point of view on the progress of the negotiations for the conclusion of the EU Mercosur Association Agreement. Brazilian Business Affairs (BBA) The Voice of the Brazilian Industry to the European Union. BBA opened its office in Brussels in June 2010 to represent and defend the interests of the Brazilian Industry in the European Union. The office is an initiative of two Brazilian organizations: - the Brazilian National Confederation of Industry (CNI) - founded in 1938, is the main organization of the industries federations of the twenty seven states of Brazil, and the federal district, representing more than one thousand syndicates and more than one hundred thousand companies. - the Brazilian Trade and Investment Promotion Agency (Apex-Brasil) - founded in 2003, is a government agency that provides support for the internationalization of the Brazilian companies in all steps, while seeking to attract foreign investment into the country. The mission that was given by the Brazilian industry to BBA includes the monitoring of the negotiations of the EU-Mercosur Association Agreement and of issues like climate 2
change and energy, competition and state aids, general system of preferences and rules of origin, among others. Through the dialogue and the cooperation that we seek to establish with the EU institutions and similar organizations, our aim is to bring the Brazilian industry and the European market closer, promoting and facilitating bilateral trade between Brazil and the European Union. EU-Mercosur Association Agreement background and new scenario After months of expectation on the possible re-launching of the negotiations on the Association Agreement between Mercosur and the European Union, the Brazilian industry received the news with a mixture of satisfaction and concern. The negotiations for the establishment of a free trade area between the two blocs are on the Brazilian trade policy agenda for over ten years and were initiated during the summit of European Union-Latin America and the Caribbean in Rio de Janeiro, in 1999. In 2004, we were very close to conclude the agreement. But it was not possible to overcome some differences in key sectors for both sides. For many sectors of the Brazilian economy, an ambitious agreement would represent a significant improvement in the access to the European market. Besides the natural difficulties to conclude an ambitious agreement, the changes on the economic scenario of the two blocs have affected the views on the biregional integration process. In Mercosur, the crisis has found us more prepared than we were in the past. In Brazil, for example, with external and fiscal accounts stabilized, we adopted countercyclical policies that helped us to restore the growth without risking economic stability. Given the growth of our economy, the price stability and the flexible exchange rate policy, we need to improve the conditions to access international markets in order to ensure that our export growth follow the increment tendency in imports. Otherwise, we will face problems on foreign accounts. Private sector s contribution to the negotiations Meanwhile, Mercosur and European Union businessmen have sought to influence the negotiating process at its various levels: national, regional and bi-regional. On a bi-regional level, the creation of the MERCOSUR-EU Business Forum (MEBF), ten years ago, as a business dialogue channel aiming to promote free trade between the blocs and to endorse the position of the private sector on the negotiations on a free trade agreement. The MEBF prepares joint proposals that are very useful for the negotiators of the bi-regional agreement. Since 1999, the Forum has been developing and disclosing specific recommendations on all relevant areas covered by the negotiations. Meanwhile, business representatives from both sides were able to overcome their differences to produce joint recommendations in several areas, such as tariff liberalization, non tariff barriers, 3
special and differential treatment, rules of origin, services, investment, public procurement, and others. More recently, during the current EU-Mercosur negotiations round held in Brussels, in October 2010, the BBA and BUSINESS EUROPE joined efforts to promote an informal meeting between the chief negotiators and industry representatives of the two blocs, initiative that will be repeated in the round of March 2011. At the end of that meeting, BBA and Business Europe issued a joint press release, in order to publicly state their compromise to support negotiations on a continuous and constructive way. Macroeconomic scenario Mercosur-EU Trade Balance The European market has an undoubted importance for Mercosur. The trade flow between these two blocs recorded uninterrupted growth from 2003 to 2008 and fell in 2008 as a result of the crisis. The result of the trade balance remains negative since 2002, showing that the increase on the volume of imports exceeds the exports value. In 2009 the deficit reached more than 8 billion dollars. Mercosur - E.U. Trade Balance 120.000 100.000 US$ Milion 80.000 60.000 40.000 20.000 0 Exports Trade flow 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: UNCTAD Mercosur - E.U. Trade Balance Year Exports Balance Trade flow 1996 23.311 18.911 4.399 42.222 1997 27.078 20.105 6.973 47.183 1998 28.068 20.834 7.234 48.903 1999 24.356 19.760 4.596 44.115 2000 21.390 20.645 745 42.035 2001 20.943 20.717 226 41.660 2002 16.124 21.481-5.357 37.605 2003 16.332 25.535-9.204 41.867 2004 20.825 31.724-10.899 52.550 2005 24.352 34.681-10.329 59.033 4
2006 26.772 40.031-13.259 66.803 2007 35.083 51.406-16.323 86.489 2008 46.484 61.115-14.630 107.599 2009 37.175 45.377-8.201 82.552 Source: UNCTAD US$ million Brazil-EU trade balance In what concerns Brazil specifically, EU has a significant weight in the Brazilian trade relations. In 2010, the EU accounted for 21.4% of the total traded by Brazilians (adding exports and imports), reaching about 82.2 billion dollars. This represented a 30% increase in traded value compared to 2009. Brazil - E.U. Bilateral Trade US$ Milion 90.000 80.000 70.000 60.000 50.000 40.000 30.000 20.000 10.000 0 Exports Trade flow 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: MDIC The trade balance remained positive, at around US$ 4 billion, but lower than the result recorded in 2009. Brazilian exports to the EU increased by 26.7% compared to the previous year, and imports 33.9%. This difference between the growth rates eventually caused the deterioration of the Brazilian trade surplus. Brazil - E.U. Bilateral Trade Exports Year US$ Milion FOB Part.% US$ Milion FOB Part.% Trade Balance Trade flow 2002 15.609 25,83 13.496 28,57 2.113 29.105 2003 18.816 25,7 13.053 27,01 5.763 31.870 2004 24.676 25,52 15.990 25,45 8.686 40.666 2005 27.039 22,81 18.236 24,78 8.804 45.275 2006 31.045 22,53 20.203 22,12 10.842 51.248 2007 40.428 25,17 26.734 22,16 13.694 67.162 2008 46.395 23,44 36.179 20,91 10.217 82.574 2009 34.037 22,25 29.224 22,88 4.813 63.260 2010 43.135 21,93 39.121 22,24 4.013 82.256 Source: MDIC 5
Despite the growth in the values of bilateral trade, EU s share in trade with Brazil has been decreasing in recent years. The European market share in Brazilian imports has been declining since 2000, but showed some recovery in the last two years. Regarding the EU market share in Brazilian exports, the same tendency is registered, although more pronounced, with a few peaks of recovery. From 1990, the market share decreased more than 10%. E.U. Market Share on Brazilian Exports and 40,0% 35,0% 30,0% 25,0% 20,0% 15,0% Exports 10,0% 5,0% 0,0% 1990 1995 2000 2005 2010 EU-Brazil Foreign Direct Investment The European Union is the largest foreign investor in Brazil. In 2009, EU s investment corresponded to 54.2% of the total amount invested in Brazil. Although the 2009 nominal value is lower than the previous year, EU s participation increased by 6.1 percentage points during this period. 6
On the other hand, the European Union will increasingly be a target for direct investment from Brazil. EUR million Source: DG Trade Challenges According to the Sustainability Impact Assessment (SIA), requested by the European Commission, the economic impact of a free trade agreement is estimated to be positive both for the EU and Mercosur countries. In the EU, the biggest beneficiaries would be the manufacturing and services sectors. We recognize that agriculture would face some adjustment costs, which can be mitigated with adequate transition periods. An agreement that guarantees real improvement in the market access for Mercosur goods and services and predictability for business and investments will contribute to maintain our growth in the coming years. Therefore, we cannot give up on a better European market access for products where we have a recognized comparative advantage such as the agro industrial sector products. On the other hand, Mercosur has yet to implement ambitious trade agreements with large economies. This means that a bi-regional agreement will represent a significant preferential access for European exporters. Other agreements recently concluded by the European Union with other trading partners are commonly presented as a reference for the negotiations with Mercosur. But we surely cannot compare the Mercosur negotiations with the agreements negotiated with other Latin American countries or with South Korea. Trade agreements cannot disregard the structural characteristics of the economies involved because trade flows are driven by different comparative and competitive advantages. It is important to point that the resumption of the negotiations took place during the deepening of the Euro crisis and many sectors of the Brazilian industry are very concerned that the slowdown endured by European economies will last for many years. 7
However, the goal announced by the European authorities to conclude the agreement in a short time is what causes more concern. In a letter sent to Minister Celso Amorim in July 2010, the Brazilian National Confederation of Industry has identified important contextual issues that will influence the effects of such agreement on the growth of trade and competitiveness of Brazilian industry, namely: 1. Exchange rate: the Brazilian currency appreciation, which is a tendency since the middle of last year, and the sharp deterioration of European macroeconomic conditions resulted in a significant loss in the value of the Euro. The result is an accentuated decline in the Brazilian exporters earning on the selling of their products to the European market, while European products acquire more competitiveness in the Brazilian market. 2. Uncertainty about the future of the Euro: although there are expectations that the European Union will overcome the current crisis, there are currently serious doubts about the Euro's future. The outcome of this crisis may have important impacts on business conditions in the European bloc, affecting the strategies of Brazilian companies. 3. Divergent trends in growth markets: while the Brazilian economy presents unprecedented growth rates over the last three decades, the economies of the European bloc face sharp slowdown in its economic activity. Recent moves in several European countries, promoting comprehensive adjustment programs with deep cuts in public spending, foreshadow a long period of weak growth for those economies. These diverging trends will lead to a high growth rate of the Brazilian imports of European goods which has been already observed - without the possibility of growth of Brazilian exports to the European market. 4. Divergent domestic policies to support production: while the European bloc is supporting domestic agricultural production with high subsidies and has adopted several programs to stimulate industrial production since the outbreak of the 2008 economic crisis, the Brazilian government announced a supporting exports program, considered bashful by most of Brazilian businessmen. Most of the measures included in the package released in late April have not yet been implemented. But the crucial problem is that it has not solved the main item of the so-called Brazil Cost to the export sector - the return of tax credits on exports. This is a constitutional right of utmost importance in order to guarantee equality of conditions in international markets competition. The impasse on issues like intellectual property, government procurement, rules of origin and market access of agricultural products can also hinder the chances of success of the agreement. Conclusion Despite the challenges, on the present restructuring of the international scenario, it is of paramount importance that the two regions - Mercosur and European Union - consolidate their partnership in the face of uncertainties such as China s growing 8
influence in trade and investment in South America. An ambitious and balanced Free Trade Agreement is therefore necessary in order to achieve economic growth and the welfare of our societies. The Brazilian industry supports the negotiations for the establishment of a free trade area between Mercosur and the EU. However, it considers that the economic situation in Europe requires caution, and that any relevant agreement for trade liberalization should take into account the need to solve the problems of the domestic agenda, which continues to inflict heavy losses to Brazilian exporters. It is also fundamental that the objective of concluding the agreement in the short term does not jeopardize the results to be achieved in the negotiation. Brazilian Business Affairs - Europe Avenue des Arts, 19 A/D B-1000 Brussels Tel: +32 (0)2 211 05 30 Fax: +32 (0)2 211 05 31 www.apexbrasil.com.br www.cni.org.br 9