Enhancing Trade Sustainability: EU-Mercosur Association Agreement

1. Trade Sustainability Impact Assessment in Support of the Association Agreement Negotiations between the European Union and Mercosur CSD Meeting, Inception report, 13 October 2017

2. Introduction • Association Agreement negotiations between the EU and Mercosur began in 1999. • The 2009 EU-Mercosur Sustainability Impact Assessment is among the most cited relevant studies, assessing the impact of the agreement on the respective economies along with relevant elements such as the environmental, domestic, and political pillars. • However, the study did not account for the latest development in Mercosur trade flows and changes in Mercosur GSP beneficiary status. • Additionally, the 2009 SIA did not include a specific focus on human rights analysis. • The 2009 SIA is not capturing any of the most recent economic and policy dimensions in the EU and Mercosur.

3. Research Aims Objective of Contract Carry out a Sustainability Impact Assessment in support of the negotiations of the Association Agreement (AA) between the European Union and Mercosur. This study differs from the existing SIA in that it • Uses the most recent data available as well as considers the most recent policy developments; • Assesses trade interactions with value chains, intermediate goods, and services in the production processes; • Prioritises the inclusion of a human rights analysis.

4. Methodology: Overview of Tasks Task 2: Detailed Analysis of Specific Sectors • Sectoral SIA for the trade pillar of the Association Agreement between the European Union and Mercosur • Preliminary Sector Selection • General Approach • Impact on SMEs • Impact on LDCs • Impact on Consumers Task 3: Stakeholder Consultation Process • Active engagement of relevant stakeholders in negotiations of an association agreement between the EU and Mercosur • Electronic Communications • Online Public Consultation • Roundtables • Civil Society Dialogue • Partner Country Workshop Task 4: Policy Recommendations • Recommendations to mitigate negative effects of an association agreement between the EU and Mercosur • Economic elements • Social elements • Environmental Elements • Sectoral Elements • Draw on Stakeholder Recommendations Task 1: Overall Analysis of Sustainability Impacts • Overall SIA arising from the negotiations of an association agreement between the EU and the partner country in Mercosur • Economic Analysis • Social Analysis • Environmental Analysis • Human Rights • Cross cutting issues • LDCs • SMEs • Consumers • Impact on outermost regions

5. Task 1: Overall Analysis of Sustainability Impacts Cross Cutting Issues Mainstreamed Across the Four Areas: Least Developed Countries Small and Medium Enterprises Consumer Impacts Social Analysis • EU’s Approach to Labour Standards • Baseline and Analysis • Quantitative analysis (Poverty, Income distribution) Environmental Analysis • Baseline Indicators • Quantitative CGE Model Analysis Human Rights • Baseline Commitments • Screening Task • In-depth Scoping • Detailed Assessment • Cross-Linkages Economic Analysis • Trade Creation and Diversion • Baseline Scenario • Quantitative Modelling (CGE) • Qualitative analysis • Overall and additional economic analysis

6. Economic Analysis: Baseline • Aims to provide counterfactual by outlining the main economic and social policy expected in EU until 2032 without the implementation of the EU-Mercosur AA. • The GTAP model has been adjusted to include recently concluded negotiations between EU and Singapore and CETA. • Scenarios and sectoral aggregations for CGE modelling simulation has been agreed upon with the Commission. • Descriptive statistics of current total and bilateral trade structures, trends and trade policies (e.g. tariffs) – draft presented in the inception report. • Quantitative analysis based on CGE modelling complemented by qualitative assessment including literature review, consultations with experts and case studies.

7. Economic Analysis: Preliminary Findings Findings from the Descriptive Statistics demonstrate that: Trade in Goods: • The importance of Mercosur and EU in each others goods trade is decreasing; • EU exports to Mercosur is concentrated in chemicals (32.6%), machinery and transport equipment (43.1%); • EU imports from Mercosur are concentrated in Food and live animals (40.3%) and inedible crude materials (29.7%); • On average, relatively high tariff applied by Mercosur on EU exports (e.g. 23% of vehicles); • Average tariffs applied by the EU on Mercosur exports substantially lower, but with high peaks (e.g. 62% on beef, 32% orange juice); • 13% of LDCs exports to the EU are in products also exported by Mercosur. Market size effect may increase the effect. Trade in Services: • Mercosur/EU falling in each others’ trade in services too. Since 2010, there is a reversion in the trend. • With respect to the total EU exports of services, exports to are Mercosur geared towards transport and travel. • In the case of services imports, relatively higher share of transport, travel and other business services. • Protection in services in Mercosur very different. Argentina more liberal, Brazil more restrictive. Investment: Mercosur receives 6.6% of the total Extra-EU outward investment. Substantially more regulatory restrictions to FDI across all sectors in Brazil than in Argentina.

8. Social Analysis Aim Assess the impact of including a trade and sustainable development chapter in the AA along with the consideration of different institutional mechanisms to foster cooperation on labour standards and encourage the diffusion of best practices in workers’ rights. Methodology Quantitative • CGE model results aim to provide insights on wage differentials across five labour categories in different sectors; • Gini Coefficient to be developed based on CGE model results to analyse change in inequality and impact on poverty before and after liberalization in EU, Mercosur and other countries; Qualitative • Desk research and academic literature, specifically relevant studies on EU and Mercosur relations respectively, as well as studies on Mercosur country experience with other trade negotiations will be relied on for the analysis; • Party compliance to core ILO conventions will additionally be investigated to assess potential effects.

9. Social Analysis: Preliminary Screening The literature review demonstrates that the first decade of the twenty-first century was a period of significant economic development in Latin America, as witnessed by: • A notable decline in both absolute and relative poverty; • Reduction of income inequality, as represented by the Gini coefficient between 2000 and 2012 (Alvaredo & Gasparini, 2015); • Growing GDP per capita and an expanding middle class (Vakis, Rigolini & Luchetti, 2016). However, the social analysis must also factor in geographic disparities because findings suggest that: • The incidence of poverty dramatically differs within the regional bloc; • Within each country, levels of poverty differ between rural and urban areas. While urban areas may provide greater opportunities for social mobility than rural regions, they are also more likely to concentrate larger pockets of poverty.

10. Environmental Analysis Aim The analysis will focus on GHG emission and climate change; energy use; land use; resource use and efficiency; waste production; ecosystems and biodiversity; forestry and trade in environmental goods and services Methodology Baseline • Benchmark of current environmental Mercosur performance against EU using indicators of environmental quality (i.e. Environmental Performance Index), and overview of current regulations and obligations. Quantitative Analysis • Based on CGE modelling, the study aims to analyse the scale, structural, technology and product effects in terms of both welfare and GHG emissions using the emission intensity factors in GTAP data base and model. • By employing the GTAP POWER dataset and model, results can be explained in terms of changes in various sectors and a Log Mean Divisia Index (LMDI) based on input-output tables will be used for separating these different effects. Complementary Qualitative Analysis • Results of the stakeholder consultation

11. Environmental Analysis: Preliminary Screening A preliminary investigation of the current environmental performance of Mercosur countries suggests a potential focus on • Biodiversity in Uruguay and Argentina • Fisheries in Argentina • Water resources in Paraguay • Forestry in all four countries • We will assess to what extent a potential expansion of the agricultural/animal sector under the agreement could put pressure on the quality of land and water, as well as biodiversity, which are already a concern in all four Mercosur countries. • We will also assess possible increases in air and water pollution as a possible consequence of increased mining and manufacturing as a result of the agreement.

12. Human Rights Analysis Aim Builds on quantitative and qualitative analysis conducted throughout the study by furthering qualitative analysis of the human rights impacts not covered by the social and environmental analysis Methodology Baseline • Literature review of current human rights records of EU and Mercosur partners, existing human rights commitments, and previous studies on impact of FTAs to establish background and identify country specific issues Analysis • Assessment according to 3 step process outlined in “EC’s Guidelines on conducting analysis of human rights impact in impact assessments for trade-related policy initiatives” • Screening: identification of measures to be assessed in regards to human rights issues • Scoping: collection of data for each measure • Detailed assessment: examination of supply and demand side factors of human rights in assessment of collected data in establishing effects on specific rights, populations affected, and impact on the potential agreement as a whole. Cross-Linkages • The study analysis as a whole, but particularly the human rights and social analysis, focuses on women and vulnerable groups in the EU and Mercosur members. • Where measures are found to have potentially negative impacts on gender equality, the study will identify additional measures for gender equality promotion

13. Human Rights Analysis: Preliminary Screening The preliminary findings of the literature review, suggest possible effects of the identified trade measures on the various human rights obligations of the EU and Mercosur partner countries. The final report will address the potential impacts of the AA on the EU and Mercosur partner countries based on existing literature of FTA impacts under the two different scenarios:

14. Task 2: Detailed Analysis of Specific Sectors, Methodology Preliminary Sector Selection A detailed analysis will be carried out on 8-10 sectors defined jointly with DG trade based on the quantitative and qualitative evidence gathered in Tasks 1.2 and 1.3 • Economic, Social, and Environmental Variables • Share of Employment of Women and Vulnerable Groups • NTBs • Stakeholder Consultation • Expert Opinion General Approach • Policy • Trade • Production & Employment • Market Configuration • Social, Gender & Environmental • Effects on LDCs • Consumer Impacts Impact on SMEs • Consultation • Identification • Impact Measurement • Offensive Costs • Defensive Costs

15. Selected Sectors Sugar/Ethanol Sugar production affected by policies incentivising use of Ethanol and fuel prices Sensitive for EU and conflictive within Mercosur Brazil by far the most efficient sugar/ethanol producer Beverages Mercosur is a major exporter of fruit juices. High protection in EU. Competition of argentine wine potentially limited by love for variety. Issues with Geographic indicators (wine) Car/Car Parts/Machinery Highly protected sector in Mercosur. Very sensitive. High value chain integration High SME involvement Beef Potential negative effects on EU producers Small/Large producers in EU/Mercosur Hilton quota Dairy Potentially important value chain links between countries Sensitive sector in EU Small farmers/Large producers in both regions Textiles Highly protected sector in Mercosur. Evidence of trade diversion. Dominated by SMEs High levels of informal employment and high share of working women Construction/Engineer Growth potential in Mercosur countries Protection levels vary by country Chemicals/Pharma Weak patent protection Large Mercosur laboratories compete with international companies Financial Services Highly regulated in Mercosur (Brazil) Potential positive effects for EU banks Public banks competing with private in Mercosur Business and Professional Services Mercosur growing exporter Protection levels vary by country. Important software industry in Mercosur High proportion of SMEs

16. Task 3: Stakeholder Consultation Process Electronic Communications Raising awareness and facilitating stakeholder engagement through • Dedicated Website: • Email Address • Dedicated Twitter Account • Dedicated Facebook Page Roundtables • Five Roundtables in Brussels • One Roundtable in Buenos Aires (WTO MC11) • Interviews • Face-to-face meetings • Group Seminars with Agricultural Sectors in Sao Paulo and Buenos Aires Civil Society Dialogue Stakeholders invited to contribute during implementation phase through • Month 3 CSD Presentation for Preparation of Inception Report • Month 6 CSD Presentation for Preparation of Interim Report • Month 13 CSD Presentation for Preparation of Final Report Partner Country Workshop • One Day Workshop in Sao Paulo • 50 Participants from Mercosur Countries • Joint Opening Plenary • Parallel Events on Sectorial Specific and Thematic Specific Issues Online Public Consultation Commencing in October, the 12 week consultation aims to • Generate Ideas Through Stakeholder and Target Country Engagement • Identify Groups Impacted by AA • Validate Findings through External Input

17. Next Deliverables Report on Workshop in the Partner Country To be delivered after the workshop. It will contain • Comprehensive summaries of the proceedings • List of attendees • Views expressed • Report on roundtables and bilateral meetings Draft Final Report and Final Report The draft is to be delivered after 10 months, and the final after 13. They will contain • Stakeholder consultation results • Overall analyses • Sector analyses • Activities performed • Executive summaries in French, Spanish, Portuguese, and German Interim Report To be delivered within five months. It will contain • The preliminary findings of the stakeholder consultation • Specific analyses and case studies to be conducted during implementation phase • A summary of progress made • An account of difficulties encountered and outlined solutions

18. Inception Phase (Months 1-3) Operational • Kick off meeting with DG Trade • Proposed methodological approach • Draft literature review • Preliminary list of stakeholders • Meeting with the commission • CSD meeting • Final Inception report Task 1 • Preliminary screening of key sustainability issues Task 2 • Preliminary overview of the overall and sectoral analysis Task 3 • Draft consultation plan

19. Interim Phase (Months 2-6) Operational • Second commission meeting • Second CSD meeting • Draft interim report (4.5 months) • Interim report Task 1 • Quantitative analysis results • Preliminary findings of sustainability issues Task 2 • Preliminary findings of sectoral analysis Task 3 • Stakeholder consultation plan • Workshop and roundtables in partner countries

20. Final Phase (Months 6-12) Operational • Third commission meeting • Third CSD meeting • Draft final report (9.5 months) • Review of draft final by SG • Final report Task 1 • Suggestions and potential ex-post analysis Task 2 • Suggestions and potential ex-post analysis Task 3 • Details of communication activities Task 4 • Policy recommendations and accompanying measures

21. Thank you for your attention! Website: www.eumercosursia.com Twitter: @SIA_EUMercosur Facebook: https://www.facebook.com/sia.eumercosur/ Email: lsee.sia-mercosur2018@lse.ac.uk