EU-Mercosur Free Trade: US, a Third Wheel?

by Matt Singer

On December 2, 1823, President James Monroe issued a statement to the United States Congress “informing the powers of the Old World that the American continents were no longer open to European colonization, and that any effort to extend European political influence into the New World would be considered by the United States ‘as dangerous to our peace and safety.’" Until its multilaterialization in the 1930s, the Monroe Doctrine endured for over a century as a cornerstone of United States regional policy, even as Washington has continued to intervene in and disrupt Latin America’s political evolution in order to further its own self-interests.

In 1995, however, the Europe Union (EU) challenged the historical memory of the venerable doctrine by signing the Framework Cooperation Agreement with Mercosur, the South American Common Market of Brazil, Argentina, Paraguay and Uruguay. The unprecedented pact aims to develop a free trade agreement between the two custom unions, inextricably linking them politically, economically and socially. After negotiations lasting almost ten years, the EU and Mercosur plan to finalize the agreement in October, solidifying what may evolve into one of the most powerful trading blocs in the world. This economic alliance would affect the future of a Western Hemispheric trade union as well as indisputably underlining the fate of the G20 (a coalition to protect the interests of developing countries). The implications of the imminent accord are already rippling across the globe.

History in the Making

On May 28, 2004, EU and Mercosur trade representatives convened in Guadalajara, México to continue an ongoing negotiation process. Mercosur holds a comparative advantage in a wide range of agricultural produce, which composes more than half of its total exports, while Europe is particularly strong in industrial and capital markets, such as automobiles, telecommunications and banking. Their complementary economies seem ideally suited for engaging in free trade, with each component of the bloc specializing in its specific field of strength. However, import quotas and tariffs, intended to protect Mercosur members’ infant industries as well as high cost European farmers, present mountainous obstacles to the realization of any free trade agreement. At the May 28 summit, both sides tentatively agreed to open their markets to foreign competition. The EU and Mercosur have each shown a willingness to make difficult concessions in order to see their negotiations come to fruition.

The Border is Closed

The European Union’s protectionist agriculture regulations insulate locally grown produce from foreign competition. Cultivatable land, a precious and scarce commodity on the continent, is extraordinarily expensive. Hence the European Community instituted subsidies, import quotas and tariffs to keep the region’s relatively inefficient agro-industry afloat by regulating prices on the European market. These policies have effectively kept Mercosur products out of the European market as the EU refused to negotiate on opening its markets up to foreign competition by the raising of its quotas and the lowering of its tariffs. However, European negotiations have recently made important concessions aimed at expediting the process. The EU Common Agricultural Policy of 2003, which significantly reduced Europe’s farm subsidies, coupled with an increase in import quotas and a lowering of tariffs, have strengthened Mercosur’s confidence in the positive outcome of trade talks.

Europe’s reluctant acquiescence to Mercosur’s demands is an attempt to pursue a strategy aimed at obtaining greater access to South American markets where European industries and sectors (such as automobile, telecommunication, banking and computer production) have excelled in the past and appear to have an even more prosperous future. Like its European counterpart, Mercosur has traditionally been averse to granting greater access to these markets, defending its protectionist policies with an infant industry argument. These industries are too small, it maintains, to compete in the world market, and therefore opening its borders at this time could destroy domestic firms. However, the South American Common Market has recognized the significance of Europe’s offer, and in return, has allowed for ever greater access to its telecommunication and banking industries.

Partners in Decay

There is a downside to the growing ties between Europe and Mercosur. Europe’s courting of Mercosur is at best undermining the fabric that binds the fragile G20 together. G20 members fear that the EU-Mercosur agreement could provide unfair access to markets, which would be illegal according to the World Trade Organization (WTO) standards. According to these, Most Favored Nation Status (MFN) cannot be reserved for specific countries, but must be shared among all applicable WTO members. According to some G20 members, including China, India, South Africa and Brazil, the European Union’s decision to engage in trade talks with Mercosur is a stratagem to undermine the G20, an organization that could potentially cause serious problems for both the EU and the United States.

Restructuring the Map

An accord between the two giant trading blocs has the potential to upset and shift the balance of power in the global trade arena, not only affecting the G20 but also challenging U.S. economic hegemony in the Western Hemisphere. A “leading light in the Cairns group of agricultural exporters” and a founding member of the G20, Brazil’s political clout in the international community is growing exponentially. Its ability to command greater respect in political and economic agreements has persuaded the EU to offer greater concessions to Mercosur and is forcing the United States to reformulate its position on the Free Trade Area of the Americas (FTAA).

There is no doubt that Brazil is using the EU-Mercosur trade agreement, and the commercial bonanza it should bring, as a weapon to increase its bargaining power in forthcoming FTAA talks with Washington concerning farm subsidies. The election of two left-leaning presidents in Brazil and Argentina, as well as a shift away from a Western Hemisphere trade pact toward a more amicable courtship with Europe, reflects a fundamental change in Brazilian and Argentine politics as well as in their strategy in dealing with the US. Neither government wants to be considered, as Brazilian President Lula stated during his presidential campaign, an “annexation” of the United States.

In 2004, worries over progress in negotiations deepened as the co-chairmanship of the FTAA rotated to the United States and Brazil. Unfortunately, the inability to compromise by the proposed trading bloc’s two major powers has stalled progress on the realization of such an agreement. It also has persuaded a newly confirmed pessimist Mercosur to look across the Atlantic for an opportunity to further its global thrust and self-interests. The United States’ reluctance to discuss any reductions in farm subsidies during recent FTAA trade rounds has hindered the chances of signing a Free Trade Area of the Americas agreement by 2005, the projected year for it to be announced. Meanwhile, Europe has slipped into the foreground, prepared to equal or even replace the United States as the dominant trading power on the South American continent. The United States’ hegemonic status in the Americas is in peril. To maintain a semblance of the status-quo, Washington will have to concede to demands for a slash in farm subsidies if it wishes to reignite the negotiation process, or at least keep it alive, and to maintain itself as the predominant regional superpower, the U.S. will be forced to compromise.

The EU-Mercosur free trade agreement without a question is a threat to the United States’ dominance in the region. Europe’s belated decision to open its agricultural markets to foreign competition leaves Washington in a precarious position at the negotiating table with its Latin American counterparts. Previously, the EU and the US held the same line regarding agricultural subsidies; both argued that the subject should be addressed at future WTO trade rounds rather than through bilateral trade agreements. If it now wishes to remain competitive with Europe in the South American market, Washington will have to address the issue of the subsidies and import quotas that up to now have plagued many of the Latin American countries. With the EU now retreating from its long held protectionist position, the U.S. can no longer expect to walk away from negotiations with a victory in hand which places Latin America in a dependent position in the FTAA.

Scraping Bottom: U.S.-Latin American Relations

There is no question that U.S.-Latin America relations are at their lowest point in a generation. Clearly, when it has come to leadership and a strong moral stance regarding U.S. policy initiatives towards Cuba, Venezuela and Haiti, Secretary of State Powell has provided no leadership and certainly no vision. By default, such leadership fell into the hands of Otto Reich and a small band of venomous rightwing ideologies headed by Otto Reich, Roger Noriega and Dan Fisk, who held their places because Powell allowed them to be imposed on him.

As a career propagandist and huckster-ideologue, Otto Reich built his professional existence on disseminating public disinformation along with a capacity for extremist politics that have done incalculable damage to the maintenance of a balanced and responsible regional policy. Almost single-handedly, he has bent and distorted U.S.-Latin American relations and has produced a level of odium that cannot be easily recalled in the recent chapters of the bilateral relationship between the two hemispheres. His legacy hardly serves that word, filled as it has been with vulgar rhetoric, meretricious analysis, Rasputin-like conspiracies, and an inability to distinguish responsible behavior from that of a low quality goon. He, together with his fellow alumni from former Senator Helms’ tawdry regional policy-making workshop at the Senate’s foreign relations committee, the State of Department’s Roger Noriega and Dan Fisk, have gone a long way to pollute U.S. hemispheric ties so fundamentally that it will take a generation to undo.

From a Caribbean, Andean or South American standpoint, the EU-Mercosur pact strengthens their respective chances for a fairer and freer FTAA agreement. The United States can no longer treat its hemispheric partners as subsidiaries of a holding company which it controls now that Europe has presented itself as a viable second option for a binding trade relationship. Living in an era of increasingly free global trade, the EU-Mercosur pact could be a refreshing change from a history of largely self-serving and U.S.-dominated agreements. The trade agreement between the European Union and Mercosur could come to rival the Free Trade Area of the Americas as a major hemispheric economic force, even if both are achieved. As the United States’ soft power continues to decline in the region, Europe’s global stock looks increasingly more appealing. If the US wishes to maintain its traditional position astride the Western Hemisphere, it must learn from its European counterparts how to stop talking down and start talking to Latin America.

Matt Singer is a Research Associate of the Council on Hemispheric Affairs, an independent, non-profit, non-partisan, tax-exempt research and information organization. For more information about COHA, go to www.coha.org