Don't Underestimate The Upside Of EU-Mercosur Trade Pact
The EU-Mercosur free trade agreement will likely force economies like those of Brazil and Argentina, to modernize and ditch the last vestiges of protectionism.
BUENOS AIRES — The world economy is supposedly "closing up." Yet global exports of goods and services in 2018 exceeded $25 trillion, a record in nominal terms. The figure represents 29.5% of the gross planetary product. Indeed private studies suggest the figure doesn't even include an additional $8 trillion worth of intangible trading in information (knowledge, date, etc.), which flowed without payment across countries, as part of international value chains.
Half of this commercial flow happens between countries that have signed agreements to open their respective markets, with some 300 treaties currently in force.
In this framework the strategic Association Agreement recently signed between the European Union and South America's Mercosur bloc is on the one hand part of a consistent EU policy (similar to those signed in recent months with Canada and Japan), and a departure for Mercosur in creating institutional links with states beyond the region.
It will mean an overhaul of Mercosur's currently very limited trade with other continents. In 2018, Argentina was 15th on a list of countries with the worst exports to GDP ratio (14.4%), with Brazil in 18th position (14.8%). Mercosur has an exports-to-GDP ratio of less than 15%, which is half the world average and considerably below Latin America's overall ratio of 23%.
This weakness is to a large extent due to internal problems, which in Argentina's case are macroeconomic imbalances, restrictive regulations, mesoeconomic shortcomings and firms' relative lack of international strategies. And while an international pact alone will not resolve such problems, many of our negative results are due to the absence of reciprocal pacts to open markets between this and other regions.
More open economies have lower jobless rates.
As Mercosur is a block with few members (four, compared to the more typical 13 for other groupings), trade inside the region is limited (20% of its total trade in contrast with 65% for the EU), so easing outside trade was required. Countries that generate more international trade benefit from five effects: they improve their production characteristics in goods and services (for increased competition), raise the quality of jobs (foreign firms favor formal contracts and invest in staff), boost investment rates (for having access to markets), reduce currency exchange volatility (because of access to trade or investment dollars) and strengthen gross production (through more net exportation) and subsequent tax revenues.
Furthermore and in spite of contrary opinions, more open economies have lower jobless rates than closed economies, as seen in Latin America. Argentina and Brazil have the highest rates in the region (10% and 12% respectively), compared with more open economies like Chile (7%), Mexico (3.5%) and Peru (6%).
The said pact is no magic wand and will evidently demand corrections in policies and private strategies. But it appears to be a change of matrix for at least the Argentine economy, whose defects are related to a state of general closure entirely at odds with our globalized world.