Octubre, 2015Redacción: Romina Gayá

The TPP and the Challenges It Poses for the MERCOSUR

By Federico Mazzella Octubre, 2015
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The recent conclusion of negotiations over the Trans-Pacific Partnership (TPP) poses major challenges for the MERCOSUR: a possible negative impact on exports, less relevance as a foreign investment destination, and the influence of TPP standards on the multilateral trading system.

In a context of stagnation in multilateral negotiations, over the past decade many countries have signed new regional trade agreements (RTAs) and deepened existing ones. A more recent noteworthy development is the negotiation of “mega-agreements” between the major global economies, above all the completion of talks for the Trans-Pacific Partnership (TPP) on October 5, 2015, in Atlanta, United States.

Although the TPP does not enter into force for another two years,[1] it is expected to have a significant impact not only on its members[2] but also on the rest of the world, due to its relevance to the global economy: it is the largest RTA that has been concluded to date, in terms of its share in global GDP, trade, and investment (Figure 1).

 

Figure 1. Relevance of the TPP in the global arena

Selected indicators. Share in the total, 2014

Source: Prepared in-house using data from the FMI, WTO, and UNCTAD.

Source: Prepared in-house using data from the FMI, WTO, and UNCTAD.

Furthermore, the MERCOSUR will undoubtedly be affected by changes to the global context as a result of RTAs in general and mega-regionalism in particular. Specifically, the TPP poses major challenges to the MERCOSUR such as a possible negative impact on exports, reduced relevance as a foreign investment destination, and the influence of TPP standards on the multilateral trading system.

 

Greater difficulties in exporting

The TPP will probably have a negative impact on MERCOSUR exports. The new agreement will absorb 27.8% of MERCOSUR exports. Out of these, Venezuelan exports are particularly relevant, as they account for more than half of the total, and are concentrated in hydrocarbons. Exports from Brazil and Argentina are also significant, although to a lesser degree. The United States is the main destination market for MERCOSUR exports to the TPP, followed by Chile and Japan. In turn, MERCOSUR exports to the TPP are mainly made up of natural resources, in addition to some manufactures, which Brazil and Argentina export to the United States and to Latin American countries that are members of the TPP.

 

Figure 2. MERCOSUR* exports to TPP countries

2014

Note: * The data for Venezuela corresponds to imports reported by the partners. Source: Prepared in-house using DATAINTAL and Comtrade data.

Note: * The data for Venezuela corresponds to imports reported by the partners.
Source: Prepared in-house using DATAINTAL and Comtrade data.

On the one hand, the establishment of new regulations—either due to harmonization of existing standards or the raising of standards—will probably generate new non-tariff barriers in the markets of TPP member countries, increasing costs for exporters and excluding all those who cannot comply with these regulations from the market.

On the other hand, the agreement could lead to trade diversion: MERCOSUR exports of some products to certain TPP countries may be displaced by ones from other TPP members, which would enter under preferential conditions. The greatest threats would be in the agricultural sector, where competitive producers in Australia, New Zealand, Canada, and the United States would see significant improvements in their access conditions to highly protected markets such as Japan and Malaysia and, in some sectors, the United States. Meanwhile, MERCOSUR exports, especially of processed foods, will continue to face very high barriers.

Assessing the potential impact of the TPP on the MERCOSUR would require a comprehensive analysis of the entry barriers and conditions of competition for each product, which is beyond the scope of this article. However, by way of example, according to the New Zealand government, the country’s main gains from the TPP would result from increased exports of meat, dairy products, fruits and vegetables, wines, forestry products, and other agrifoods (MFAT, 2015), sectors in which the MERCOSUR countries have comparative advantages. In fact, several of these products have been identified by the INAI [Argentine International Negotiation on Agriculture Institute] Foundation (2014) as being the most vulnerable to trade diversion within the TPP, along with corn, peanut butter, and animal fodder, among others. Likewise, this study predicts a fall in shipments of MERCOSUR agrifoods to certain key destination markets such as the United States and Chile, as a result of the TPP.

With regard to manufacturing, the additional threat to the MERCOSUR does not seem especially significant, because manufacturing only plays an important role in shipments to the United States and Latin American members of the TPP, where MERCOSUR exports already face competition from the United States and other TPP members, as exports from these enter duty-free.[3] Indeed, Sica (2014) shows the drop recorded over the past decade in MERCOSUR exports to Chile, Peru, and Mexico of some manufactures such as automotive industry products, agricultural machinery, footwear, metals and metal manufactures, and fertilizers and herbicides, among others. Nor would it entail significant risks in terms of hydrocarbon exports to TPP countries from MERCOSUR members, such as Venezuela.

Regardless, the TPP restricts the integration of the MERCOSUR into global value chains (GVCs) based in Asia and North America. In this regard, it should be noted that the TPP rules of origin for most industrial products establish a regional content requirement of between 40% and 50% (MFAT, 2015).

 

The shrinking influence of the multilateral trading system

The provisions of the TPP go beyond the scope of the World Trade Organization (WTO), due to the inclusion of new topics and commitments that are deeper than those taken on in the multilateral sphere and even within several pre-existing RTAs. The most noteworthy provisions are those relating to services, investment, public procurement, e-commerce, intellectual property, labor and environmental issues, competition, state-owned enterprises, etc.

This new regulatory framework has significant implications for the MERCOSUR. On the one hand, as part of the regulations that have arisen of the TPP will be beyond the scope of WTO agreements, it will be more difficult to challenge potentially discriminatory measures before the WTO’s dispute settlement body (DSB). Despite its limitations, the dispute settlement system has been a useful tool for MERCOSUR countries.

On the other hand, it is possible that the regulations of the TPP and other mega-agreements currently being negotiated—particularly the Transatlantic Trade and Investment Partnership (TTIP)[4]—lay the groundwork for future multilateral regulations. Considering that the MERCOSUR plays no part in these negotiations, it will have little influence on the definition of the new standards that will govern world trade.

For example, although in 1998 the WTO decided to move forward on an e-commerce work program, a regulatory framework on this issue has yet to be decided upon (all that has been agreed is not to impose customs duties on such transactions). The TPP includes deep commitments on this topic, and it is therefore possible that a future multilateral agreement be based on these standards and on what is decided as part of TTIP negotiations.

 

Investment difficulties

On the one hand, the absence of preferential access to major global markets and the limitations to integration into GVCs reduce the attractiveness of the MERCOSUR as an investment destination, particularly in comparison with the Latin American and Asian countries in the TPP. This has various effects on the MERCOSUR, limiting the growth of total investment, foreign exchange earnings, the narrowing of the technological divide, etc.

On the other hand, the TPP further hampers attempts by some MERCOSUR countries to influence the regulation of international investment. The TPP has adopted the investor-state dispute settlement system (ISDS). Through this scheme, which is similar to that of the agreements on reciprocal promotion and protection of investments (ARPPIs) signed by many countries in the 1990s and early 2000s, private investors can sue states before international courts should they adopt measures contrary to the commitments made in the agreements.

Although MERCOSUR members have signed many ARPPIs, these have never entered into force in Brazil as they were not ratified by parliament. In Argentina and Venezuela, in turn, they were seriously called into question due to the large number of lawsuits filed by foreign investors (Rozemberg and Gayá, 2013). Brazil is currently promoting cooperation and investment facilitation agreements (CIFAs), a new bilateral agreement format which differs from ARPPIs in terms of its state-state dispute settlement system—which is more similar to the system used by the WTO—and by granting more limited rights to foreign investors. The potentially more widespread acceptance of the ISDS system as part of the TPP and other mega-agreements would reduce Brazil’s ability to broaden the reach of the CIFAs it has already signed with several countries and has proposed adding to the MERCOSUR framework.

 

Final considerations

In contrast with several LAC countries, the MERCOSUR has not played an active role in the new wave of regionalism. As a result of opposing commercial interests and institutional issues, the bloc has not concluded agreements with any of the major global economies: the negotiations with the United States within the framework of the Free Trade Area of the Americas (FTAA) were abandoned more than a decade ago, and talks with the European Union (EU) have been going on for more than 15 years (Makuc, Rozemberg, and Duhalde, 2015). Over the last decade, the MERCOSUR has only signed RTAs of limited scope and/or with countries with which it has few commercial ties.

In this sense, the block could be affected by the changes to the international arena in trade-related matters. The lack of progress on the Doha Round and the proliferation of RTAs may reduce the WTO’s influence on world trade. Despite its limitations, the WTO is valuable to the MERCOSUR due to the increased bargaining power the bloc enjoys there: all countries have a vote, and decisions are made by consensus; the fact that transaction costs are lower when negotiating with all partners simultaneously; and the possibility of settling conflicts through the dispute settlement system (Gayá, 2014).

MERCOSUR countries must continue to foster multilateralism, but also to consider the opportunities and threats (which are not mutually exclusive) posed by other international integration options. On the basis of the initiatives currently underway, the MERCOSUR can continue to foster rapprochement with the Pacific Alliance by converging, accelerating, and deepening existing agreements, and can seek to bring the agreement with the EU to a satisfactory conclusion. Likewise, it should consider new negotiation fronts with other partners such as the United States or some Asian Pacific countries. Although these alternatives imply significant risks, the status quo involves high costs in terms of export development, the incorporation of technology, attracting investment, isolation, and loss of relative weight in the international arena.

 

Bibliography

Institute for the Integration of Latin America and the Caribbean (INTAL) 2013. “Mega-agreement Negotiations: How Will They Influence Latin America?” in: INTAL Monthly Newsletter No. 204. Buenos Aires. August.

Fundación INAI. 2014. Nuevo regionalismo. Consecuencias para el comercio agroindustrial [The new regionalism: consequences for agroindustrial trade] (in Spanish). Buenos Aires.

Gayá, Romina. 2014. “Mega acuerdos y multilateralismo en crisis, amenazas para el MERCOSUR [Mega-agreements and multilateralism in crisis, threats to the MERCOSUR]” (in Spanish), in: Informe Económico Mensual. Buenos Aires: USAL. August.

Makuc, Adrián; Duhalde, Gabriela; and Rozemberg, Ricardo. 2015. . IDB-TN 841. Washington, DC: IDB/INTAL.

Ministry of Foreign Affairs and Trade (MFAT). 2015.TPP Fact Sheets. New Zealand.

Rozemberg, Ricardo and Gayá, Romina. 2014. . Buenos Aires: CERA-IEI.

Sica, Dante. 2014. Os impactos dos mega-acordos no MERCOSUL: O TPP [The impacts of mega-agreements on the MERCOSUR: the TPP] (in Portuguese). Paper presented at the international workshop “Os Mega-Acordos de Comércio e o Futuro do MERCOSUL.” Brazil, May 8.

 

[1] The TPP still has to be legally verified before being signed by the governments in question and it will not enter into force until it is ratified by the member countries’ parliaments, which must make the necessary amendments to their own regulatory frameworks enable them to adopt the commitments they have made. They have two years in which to complete this legal process, although the agreement includes certain provisions in the event that a longer period should be required.

[2] Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam.

[3] Chile has signed free trade agreements with all the members of the TPP, Mexico with the United States and Canada, and Peru with these same countries as well as Singapore and Thailand.

[4] The TTIP is being negotiated by the United States and the European Union.

[5] The characteristics of the MERCOSUR’s productive structure have hampered negotiations with partners such as the United States or the EU, as the MERCOSUR’s offensive trade interests are concentrated in exports of temperate climate agricultural products and food, an area in which its partners have the highest levels of protection. In contrast, the MERCOSUR’s defensive trade interests are in the manufacturing industry, where the other countries have comparative advantages.

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