Science

An environmentally friendly solution to save the agreement between Mercosur and the European Union – 09/12/2020 – market

Economists generally agree that more international trade is better than less. Indeed, there is ample empirical evidence that expanding trade leads to greater growth and social well-being

It is true that commercial openings produce winners and losers, since the distribution of the benefits of the expansion of trade is not homogeneous in the population and in the territory. However, this is not an argument against openness. It is a key point for equalization policies that distribute trade profits more evenly.

Despite the empirical evidence of foreign trade, Brazil remains an extremely closed country commercially: we are among the five most closed 180 countries in the World Bank’s database.

If this situation is uncomfortable, the good news is that an agreement between Mercosur and the European Union was announced in 2019, after almost 20 years of negotiations. This agreement envisaged the abolition of import duties on most of the products sold between the two blocs.

The bad news is that a year and a half has passed since the agreement was announced and in practice nothing has happened. Of course, the world was embroiled in a pandemic in the middle of the street, but that wasn’t all that was holding back its success.

The main reason the deal failed is because of the rise in deforestation rates in the Amazon. The figures published this week leave no doubt: In 2020, more than 11,000 km2 were deforested in the legal Amazon region – this corresponds to a growth of 47% compared to 2018 and is well above the national climate policy target of 3,925 km2 for 2020 .

Potential trading partners of Mercosur are of course aware of the enormous setback in the region. After all, environmental setbacks here are bad not just for Brazil, but for the entire planet.

With that in mind, keeping your hands tied and waiting for the deal to gather dust in European drawers is not an option. Many advantages are at stake for Brazil – the end of its second lost decade in the last 40 years.

The question that doesn’t stop is: How do you untie the knot? In other words, how can the agreement between Mercosur and the European Union be achieved by reconciling existing (environmental) interests and concerns?

In a recent article, Norwegian economist Bard Harstad, a reference in environmental economics, suggests a model where two blocs with similar characteristics to Mercosur and the European Union negotiate a free trade agreement.2 The author shows that the balance is off This agreement results in a natural resource extraction that goes beyond what would happen without the agreement.

This theoretical result is reflected in the reality of the current trade agreements. For example, there is a study of data from 189 countries that shows that the results predicted by Bard Harstad are empirically supported

In this sense, Imazon (Institute for People and Environment of the Amazon) estimates that the agreement between Mercosur and the European Union would currently lead to additional deforestation between 122,000 and 260,000 hectares in Mercosul with Brazil (Amazonia and Cerrado) responsible for 55 % of this deforestation, which is between 67,000 and 143,000 hectares.

Certainly neither Brazil nor Mercosur nor the European Union want to achieve these results. Since environmental issues are bothering everything, there is a solution that Greeks and Trojans can add to it.

Bard Harstad’s article analyzes the characteristics of a trade agreement concluded on several bases – which is possibly key to our problem. It’s a conditional agreement.

A conditional agreement means that after reviewing the original size of the natural resource – in our case the Amazon rainforest – the parties would agree on how to distribute trade profits (estimated by the London School of Economics between 18.3 and 26 billion) Euro).

The novelty of the proposal lies in the fact that the tariff profits in Mercosur depend on the remaining forest. That is, by protecting the forest, Brazil could introduce small tariffs to change trading conditions favorably in its favor. The tariff structure dependent on the preservation of the forest would determine the distribution of trade profits between the parties. In this way there would be an incentive to keep the forest going.

The article contains some technical aspects that should not be examined here for reasons of space. The careful reader will, however, ask about future renegotiations in the event of increased deforestation.

The author investigates this possibility and shows that the conditional agreement is evidence of renegotiation. This means that the advantages of the tariff structure in a conservation situation prevent incentives for deforestation. This is because if Brazil destroys its rainforest, the European Union will have the advantage of imposing tariffs and therefore no incentive to renegotiate.

For this type of trade agreement to come about, the national productive sector must play an intense role in its defense. Unless the government is concerned with a fundamental public good like the Amazon, its maintenance depends on defending the interests of the sectors that should benefit most from the conclusion of the deal. In other words, pushing for a conditional agreement can be a way out for all parties to be satisfied with a satisfactory outcome for the agreement between Mercosur and the European Union.

In short, the opportunity is historic. Given recent economic research, not only can Brazil achieve a commercial opening, but it can make that opening green – to use a term that is rightly in vogue – and for the good of the whole world!

See Douglas Irwin (2019). Will trade reform promote economic growth? A look back at the latest findings. Available at: https://www.piie.com/system/files/documents/wp19-9.pdf.

2 See Bard Harstad (2020). Trade and Trees: How Trade Deals Can

3 See Ryan Abman and Clark Lundberg (2020). Does free trade increase deforestation? The effects of regional trade agreements. Available at: https://www.journals.uchicago.edu/doi/pdf/10.1086/705787.

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