Colloque du Réseau Intégration Nord Sud (RINOS)
Montréal, 1-3 juin 2005
Organisé conjointement avec le Centre Études Internationales et Mondialisation
(CEIM)
Université du Québec à Montréal
INTÉGRATIONS RÉGIONALES ET STRATÉGIES DE DÉVELOPPEMENT :
Les relations Nord-Sud dans l’Euromed, les Amériques et l’Asie.
The Mercosur– European Union Free Trade Agreement: an estimate of the impacts
on Brazilian foreign trade
Honorio Kume1
Guida Piani2
Pedro Miranda3
Marta Castilho4
1. INTRODUCTION
The Mercosur and the European Union (EU) have been negotiating a free trade agreement since mid 1990’s.
After some years of discussions on the methods and procedures for the negotiations—which lasted longer
than anticipated—proposals started to be presented in 2001.
In July 2001, the UE made an offer covering trade in goods, with a schedule for the elimination of tariffs, as
well as trade in services and government procurement. At that moment, additional quotas for agricultural
products were not included, as the Europeans argued that they should be used to encourage further
liberalization (Castilho, 2003). A final and more elaborated proposal was presented in May 2004.
The EU offer included 90% of the total tradeable goods, classified into five groups, four of which with linear
liberalization schedules from zero to ten years. Furthermore, bilateral tariffs on a group of products –
basically information technology, pharmaceuticals and chemicals goods - should immediately be brought
down to zero, and reciprocal concessions should be made in textiles, clothing and footwear. As to agricultural
processed goods, additional quotas were offered with reduced in-quota tariffs for most of Mercosur exports:
bovine, poultry and swine meat, ethanol, and corn. For others products, it mentioned only the concession of
future additional quotas, with no volume specification.
From Instituto de Pesquisa Econômica Aplicada – IPEA and Universidade do Estado do Rio de Janeiro – UERJ. e-mail:
kume@ipea.gov.br
2 From Instituto de Pesquisa Econômica e Aplicada – IPEA. e-mail: guidapiani@ipea.gov.br
3 From Instituto de Pesquisa Econômica e Aplicada – IPEA and Universidade Federal Fluminense – UFF.
e-mail: pmiranda@ipea.gov.br
4 From Instituto de Pesquisa Econômica e Aplicada – IPEA and Universidade Federal Fluminense – UFF.
e-mail: castilho@ipea.gov.br
1
On the other hand, the Mercosur countries improved their previous offer on goods, increasing the coverage of
products from 87.8% up to 90% of total tradeable goods, by incorporating textiles and steel products. Major
concessions were also made in services.
Afterwards, the negotiations were intensified, and the parties exchanged new offers in September 2004,
hopping to reach an agreement in late October, before the change of European Commission ministers.
However, the fell far away short of the expectations of both sides and the negotiations were suspended.
Indeed, the proposals presented by the Mercosur and the European Union in September reflected an
atmosphere of deterioration in the negotiations with mutual accusations of important setbacks in the
conditions of liberalization offered before.
The purpose of this paper is to assess the impacts of an hypothetical agreement based on the best offer – the
one presented in May 2004 - specifically on trade flows between Brazil and the EU, using a partial
equilibrium model. The following estimates consider not only the gains associated with the tariff reductions
but also those resulting from additional quotas with preferential treatment and the gains from the
appropriation of quota rents by the Brazilian exporters of processed agricultural products.
This paper is organized as follows: Section 2 details the most relevant aspects of the liberalization programs
presented by the European and South American countries in May 2004 and also points out the importance of
trade between them on a product category basis. Section 3 summarizes the methodological procedures and
sources of data used to calculate estimates for Brazil and the EU, while the results are presented and
commented in Section 4. The conclusions are presented in Section 5.
2. THE EU AND MERCOSUR TRADE LIBERALIZATION PROPOSALS
2.1 A BRIEF HISTORY
In 1994, the EU, under the Spanish presidency, signaled the intention to establish an interregional association
with the Mercosur. The proposed agreement had three axes: a commercial one, which aimed at forming a free
trade area, another one about economic cooperation, and that of a greater political understanding. The
European Commission made it clear form the very beginning that the agricultural products would not be
given a special treatment, as they described the trade agreement as the “progressive establishment of a free
trade zone in the industrial and services areas as well as a reciprocal and progressive liberalization of
agricultural trade, considering the sensitivity of certain products” (European Commission, 1994).
After the signing of the document of in 1994, the project has gone through periods of both major and minor
enthusiasm. The study phase, scheduled to last until 1997, was extended, mostly because of the lack of the
EU interest in advancing the negotiations. Talks were resumed in June 1999, when the Rio de Janeiro summit
took place.
As of then, the process gained a little more consistency and automaticity with the institution of the
Committee of Bi-regional Negotiations. Three technical groups were established to deal with trade issues: a)
customs issues related to trade in goods (tariffs, non-tariff barriers, technical standards, rules of origin, and
antidumping law); b) trade in services, intellectual property, and investment related measures; and c)
government procurement, competition and dispute resolution.
Towards the end of that same year, representatives from both parties met again and decided that information
exchanges would go on through June 2000. The following phase — that of exchanging papers — lasted until
July 2001, when the methodology and the schedule for liberalization of goods and services were defined.
2
In June 2001, the EU unilaterally presented a list of products for negotiation. This initiative proved to be
rather positive, as the Mercosur countries were facing difficulties to define common positions, due to the
macroeconomic problems faced mostly by Argentina, at that moment.
From that point on, various versions of offers from both sides were exchanged: a second one in 2003 and
another two in 2004. In 2003, it was decided that negotiations would be intensified in the following year so
that an agreement could be signed before the end of the mandate of the current European Commission team.
Negotiations were indeed very intense: two formal offers were exchanged, other informal consultations were
made, but no final agreement was reached. Therefore, negotiations remained inconclusive but with some
additional difficulties related to the enlargement of the European Union and new members’ resistance to
commercially opening up to the Mercosur.
2.2 THE MERCOSUR PROPOSAL
The Mercosur May 2004 proposal defines five categories of products with different timeframes for
liberalization (Table 1). Besides those, a group of products with a constant 20% margin of preference and
another one without any definition of a liberalization schedule were included at the last moment. So, for
instance, the products included in category A would have full liberalization immediately while those with
fixed preference would have a mere 20% reduction without ever reaching the free trade status.
TABLE 1
TARIFF REDUCTION SCHEDULE PROPOSED BY THE MERCOSUR, BY PRODUCT CATEGORY (in %)
Category/year
0
A
100
B
1
2
3
4
5
6
7
8
50
50
100
C
11
22
D
0
E
Fixed preference
9
10
33
44
55
66
77
88
100
10
15
25
30
40
50
60
70
85
100
0
0
10
15
25
35
45
55
70
85
100
20
20
20
20
20
20
20
20
20
20
20
Not defined
Source: Department of International Negotiations, Ministry of Foreign Affairs.
Table 2 shows the number of products classified in each category, according to the 8-digit classification of
the Mercosur Common Nomenclature-Harmonized System (MCN-HS8), the common external tariff (simple
average) for each category, and the share of Mercosur total imports from the EU in the 2001-2003 period.
The products for which an extended period of protection was scheduled—classified in categories D and E—
represent about 50% of the total and 27% of the Mercosur imports from the EU in the 2001-2003 period.
Manufactured products are concentrated there. For instance, most textile, clothing and footwear, as well as
automobiles, are in category E. A considerable part of machinery and equipment is also classified in these
two categories, though less concentrated than the previous products.
3
TABLE 2
NUMBER OF PRODUCTS, AVERAGE TARIFF, AND SHARE OF MERCOSUR IMPORTS, BY PRODUCT
CATEGORY – 2001/2003
Category
Number of products HS8
(%)
Average tariff
Imports (%)
A
657
6.7
0.0
14.4
B
1,801
18.5
2.1
5.2
C
1,433
14.7
8.3
46.4
D
1,975
20.3
13.4
6.7
E
2,905
29.8
16.5
20.0
Fixed preference
79
0.8
15.7
0.4
Not defined
880
9.0
15.5
6.8
9,730
100.0
10.8
100.0
Total
Source: Department of International Negotiations, Ministry of Foreign Affairs. Author’s calculations.
At the other extreme, immediate liberalization is scheduled for only 657 products, which comprehend 14.4%
of imports from the EU. However not significant in volume of trade, category B includes a large number of
products. Category C is the one concentrating most imports. In these categories, there are agricultural and
food products, besides some mineral ones. Still, considering the trade volume, category C is much more
important than the previous two.
For 79 products, mostly food products, a 20% margin of preference has been offered. The average external
tariff for these products is almost as high (15.7%) as that for category E products (16.5%) and virtually equal
to that of the group of 880 products (15.5%) for which no concession was made.
2.3 THE EUROPEAN PROPOSAL
The first EU 2001 offer covered trade in goods, services and government procurement. Besides containing a
schedule for the elimination of tariffs, it also included other trade related disciplines, such as antidumping
code, safeguard measures, custom valuation, and sanitary and phytosanitary measures—the latter to be dealt
within the framework of the World Trade Organization agreements—, national treatment and the extinction
of export/import prohibitions and restrictions. Evidently, this last point would not be applied to tariff-rate
quotas for certain agricultural products, which might wait for further incorporation in the proposal to be
presented in 2004.
Three sectors should enjoy special treatment in the agreement. Wines and other alcoholic beverages should
be the object of a special agreement and the concessions for textiles and footwear should be subject to “strict
reciprocity”.5
The initial proposal for the liberalization of trade in goods created five product categories: four with a
schedule up to ten years (A, B, C and D) and another one covering goods for which liberalization was not
5. It is worth pointing out that the EU is negotiating with Brazil a bilateral agreement for the liberalization of trade in
textile products, by which increased quotas for Brazilian products are being anticipated. Argentina already has a bilateral
agreement with the EU.
4
foreseen (E). Notwithstanding, as negotiations evolved, the EU added new categories, composed of products
previously included in category E. In these categories, the products would receive fixed margins of
preference of 25% and 50% and additional tariff-rate quotas with a 50% margin of preference, with amounts
varying according to the good (Table 3).
TABLE 3
TARIFF REDUCTION SCHEDULE PROPOSED BY THE EU, BY PRODUCT CATEGORY (in %)
Category/year
0
1
2
3
4
A
100
B
5
6
7
20
40
60
80
100
C
12.5
25
37.5
50
D
9
18
27
E
0
0
Fixed preference
25
Fixed preference
50
8
9
10
62.5
75
87.5
100
36
45
54
63
72
81
90
100
0
0
0
0
0
0
0
0
0
25
25
25
25
25
25
25
25
25
25
50
50
50
50
50
50
50
50
50
50
Additional tariff-rate quota (variable)
Not defined
Source: European Commission.
Comparing to the 2001 version, the European May 2004 offer incorporated some improvements—the total
coverage of negotiated products increased [from 9,165 in the EU 8-digit Combined Nomenclature (NC8) to
10,427], and some products were added to category A (from 2,998 to 4,323 tariff lines). However, the
products included in E rose from 195 to 410.
Category A is the one with the greatest number of products (NC8)—70% of total imports. However, the tariff
protection imposed to these products is rather weak and 50% of them already enjoy free access to the
European market. Categories B and C comprise a high number of products, representing about 19.1% of EU
imports from the Mercosur in the 1998-2000 period. Category E plus those created afterwards, including
products with respectively 25% to 50% margins of preference, and processed agricultural goods, to which
tariff-rate quotas were offered, consist of 809 products and about 6% of total imports. However, these
products’ reduced weight in trade today already result from the effects of the protection that currently
discriminates against European imports. Specific tariffs—usually an indicator of high levels of protection—
apply to 404 out of the 410 products in category E, to all of those that are subject to tariff-rate quotas, and to
respectively 100% and 90% of those with 25% and 50% margins of preference (Table 4).
5
TABLE 4
NUMBER OF PRODUCTS, AVERAGE TARIFF, AND SHARE OF EU IMPORTS, BY PRODUCT CATEGORY
Category
Number of
products NC8
(%)
Average ad
valorem tariff
Number of products —
specific tariff
Imports (%)
A
4,323
41.5
1.4
8
69.9
B
2,182
20.9
4.5
46
6.7
C
2,664
25.5
8.4
59
12.4
D
429
4.1
17.0
99
5.0
E
410
3.9
15.1
404
0.1
Fixed preference 25%
22
0.2
7.5
22
0.0
Fixed preference 50%
100
1.0
22.1
90
2.1
Additional tariff-rate quota
277
2.7
10.6
277
3.8
Not defined
21
0.2
3.0
20
0.0
10,427
100.0
4.9
1,025
100.0
Total
Source: Department of International Negotiations, Ministry of Foreign Affairs. Author’s calculations.
For some products, the EU made a two-stage offer of additional tariff-rate quotas (with preference margin of
50% of the in-quota tariff): the first one to be delivered immediately and the second one after the completion
of the Doha Round. However, the amount of the second portion will be conditioned by the results of this
Round, and may increase or decrease depending on the agricultural concessions that might be made by the
EU.6 Despite some of the proposed additional tariff-rate quotas’ being inferior to the volumes actually
exported by the Mercosur, European negotiators argue that additional exports may be generated by this offer,
because the tariff reduction would provide resources to reduce prices, thus increasing Mercosur
competitiveness.
2.4 THE BRAZILIAN — EU TRADE BALANCE
Though the negotiations for a free trade agreement do take place between the Mercosur and the EU, the
purpose of this paper is to assess its implications on the Brazilian trade. Therefore, the following analysis will
be restricted to the evolution of trade between Brazil and the EU, in the 1985-2003 period.
The economic relations between Brazil—and also its Mercosur partners—with Western European countries
have always been rather intense, due to historical and cultural reasons. Grilli (1993) points out that the
economic complementary aspects of both groups of countries give ground to anticipate strong potential trade
between them. Nevertheless, a process of gradual loosening of ties has been observed in the past few
decades.7
6. For example, any commitments made by the EU to increase third countries access to its agrofood market in the Doha
Round will imply smaller additional quotas for the Mercosur countries.
7. On the Latin American side, the import substitution policies, as well as the later problems of foreign debt and
macroeconomic stabilization have contributed to reducing bilateral exchange; on the European side, an important option
towards preferential relations with former African colonies and Eastern European countries was registered. On the other
side, the European have been very cautions about approaching Latin America for fear of jeopardizing its relationship with
former colonies. This position was reinforced when Spain and Portugal joined the European Community (current EU) in
6
However, the recent evolution of bilateral trade has shown a trend towards growth. As of the early 1990’s,
Brazilian imports from the EU, always undercut by its exports until then, have increased vigorously.
Brazilian imports moved up from US$ 5 billion in 1991-1992 to about US$ 13 billion in 2003, reaching the
highest values in 1998 (over US$ 17 billion). On the other hand, Brazilian exports have grown at more
moderate rates in the 1985-2003 period, reaching US$ 18 billion in 2003, reaching a surplus in trade balance
again after 2000 (Chart 1).
CHART 1
BRAZIL – EU TRADE, 1985-2003 (US$ billion)
20,000
16,000
12,000
8,000
4,000
Exports
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
0
Imports
As for its composition, the trade between Brazil and the EU shows a typical North-South trade profile: Brazil
exports basically primary products and by-products—56.1% of total sales correspond to sections I to IV of
the Harmonized System—while its imports are mostly manufactured goods—28.5% of the total are chemical
products, plastics and rubbers (sections VI and VII) and 53.5% of the total are capital goods (sections XVI to
XVIII). (Table 5)
1986, when preferential commercial treatment was not extended for the first time to the former colonies of new member
countries. Though the author does not include it, the major factor limiting an increase in trade flows between both parties
was the European agricultural policy, which prevents further exploring of Mercosur’s natural comparative advantages,
which also restricts its imports.
7
TABLE 5
COMPOSITION OF BRAZIL - EU EXPORTS AND IMPORTS — 2002 (in %)
Section
Description
Exports
I
Animals and animal products
II
Vegetable products
III
Animal or vegetable fats, oils and waxes
IV
Imports
6.8
0.4
18.1
1.1
0.1
0.4
Foodstuff, beverages and tobacco
20.7
1.5
V
Mineral products
10.4
2.7
VI
Chemicals or allied industries products
4.2
22.3
VII
Plastics and rubbers
1.6
6.2
VIII
Hides, Skins, Leathers and articles
3.0
0.2
IX
Wood and articles
3.5
0.1
X
Pulp of wood, paper and paperboard
4.4
1.8
XI
Textiles and textiles articles
1.4
1.3
XII
Footwear, headgear and umbrellas
1.3
0.0
XIII
Articles of stone, ceramic and glasses
1.1
1.2
XIV
Pearls, precious metals and stones
1.1
0.4
XV
Base metals and articles
8.6
6.2
XVI
Machinery and electrical equipment
8.5
37.7
XVII
Transport equipment
3.4
11.0
XVIII
Precision Instruments
0.4
4.8
XIX
Arms and ammunitions
0.0
0.0
XX
Miscellaneous
1.3
0.8
100.0
100.0
Total
Source: Secretary of Foreign Trade, Ministry of Development, Industry and Foreign Trade (Secex/MDIC). Author’s calculations.
3. METHODOLOGY AND DATA SOURCES
3.1 METHODOLOGICAL PROCEDURES
The EU offer differs according to the groups of products. A first group, consisting mostly of manufactured
products, would benefit from tariff reductions. For a second one, composed of agricultural products, an
improvement in market assess would result from additional tariff-rate quotas, with the possibility of a
discount in the preferential tariff. The Mercosur offer, instead, was concentrated only in tariff reductions. It
was therefore necessary to use two distinct methodologies with the same hypotheses concerning supply and
demand conditions for the products under analysis.
3.1.1 METHODOLOGICAL PROCEDURES – Tariff reductions
In order to assess the trade gains being generated by the tariff reductions proposed by both parties, it was
chosen a computable partial equilibrium model, as it is often adopted in similar exercises (Cline et alii, 1978;
and Laird and Yeats, 1986). This model usually assumes that the products are differentiated according to the
supplying country and, based on the usual export supply and import demand equations, the algebra
expressions are derived to estimate the trade impacts. These effects may be divided into two parts. The first
one, called “trade creation”, corresponds to the increased imports from the partner country in substitution of
relatively inefficient internal production, and is expressed as follows:
8
CCi = MPi . Emi . (PPi/PRMi) [1 – (Emi/Exi)]
where:
CCi = trade creation of product i;
Mpi = value of imports of product i, from a partner country, in the base-year;
Emi = import price-elasticity of product i;
Exi = export price-elasticity of product i.
PPi = price of imports from a partner country and
PRMi = price of imports from the rest of the world.
Assuming that the export price-elasticity is infinite, the equation of trade creation takes the form:
CCi = MPi . Emi . (PPi/PRMi)
This expression means that the tariff reduction entails a variation in price [(PPi/PRMi) = ti/(1 + ti)], which,
multiplied by the import price-elasticity and the value of imports in the base-year, provides the change in
imports.
The second part, known as “trade diversion”, measures the increase in imports from the partner country,
replacing imports from the rest of the world at higher prices. It can be represented as follows (supposing
infinite export elasticity as well):
DCi = MPi . MRmi . ESi .(PPi/PRMi)/[MPi + MRMi + MPi . ESi .(PPi/PRMi)]
where, besides the variables defined above:
DCi = trade diversion of product i;
MRMi = value of imports of product i from the rest of the world;
Esi = elasticity of substitution;
Despite the greater complexity of the expression, its interpretation is rather simple too: reducing the tariff on
products coming from partner countries changes the relative price concerning imports from the rest of the
world, which, multiplied by the elasticity of substitution and considering the proportion of imports from
partners and suppliers from the rest of the world, triggers a change in favor of imports from partners.
Thus, the total impact of liberalizing imports may be measured as:
Mi = CCi + DCi
3.1.2 METHODOLOGICAL PROCEDURES – Tariff-rate quotas
In the case of products subjected to tariff-rate quotas, the impact of offering an additional volume to be
imported with a margin of preference may be analyzed using the import demand curve, the two-step supply
curve—one level corresponding to the tariff-rate quota, within which the tariff is lower, and the other that
represents the over-quota offer, where the tariff is higher. Furthermore, information on the international price
of the product and the volume of import determined by the tariff-rate quota is required (Skully, 2001).
9
Chart 2 depicts this situation. It shows an initial situation 8, where the supply curve is given by the constant
marginal cost and over-quota imports take place. Exports reach QX, where QT is within the tariff-rate quota
and the remainder sales in the over-quota. Up to the fulfilling of the tariff-rate quota, exports are charged
with the in-quota tariff, so the price reaches P(1 + tin). However, given the prevailing over-quota demand,
domestic (European) market price reaches P(1 + tover), generating a “quota rent”. Its appropriation depends on
the rules of administration of the tariff-rate quota and the market structure. Over-quota exports pay the overquota tariff, providing the import country government with a tariff revenue, besides the one generated by the
in-quota tariff revenue.
CHART 2
TARIFF-RATE QUOTA WITH OVER-QUOTA IMPORTS
Pd
P(1 + tover)
Quota rent
P(1 + tin)
Over-quota tariff
revenue
D
In-quota tariff
revenue
P
CMg
QT
QX
Imports
Chart 3 presents the situation in which the importing country concedes a preferential tariff-rate quota (QA),
with a margin of preference that may be, for instance, 50% of the in-quota tariff. With this offer, part of the
previous over-quota imports will now benefit from the new tariff-rate quota. In the final situation, additional
imports within the preferential tariff-rate quota will generate an additional rent9, equivalent to 50% of the
preferential quota rent.10 The volume of imports remains, however, unchanged. The advantage for the
country (Brazil) that is benefited with the additional tariff-rate quota is only due to the appropriation of part
of the rent generated by the preferential tariff-rate quota, depending on the way it is administrated.
8. In this example, one may assume that this is about EU imports of a product exported by Brazil.
9. It is important to point out that, concerning the foreign currency revenue, the “quota rent” and the export revenue are
equivalent to each other. However, one should also remember that exports lead to a lesser net gain for the country, insofar
the costs of the production factors used in producing the exportable good are positive, whereas the “quota rent” represents
an appropriation of external resources, with no production costs.
10 For lack of information about the rule of appropriation of the quota rent, it was assumed that the exporters’ share is
50%.
10
CHART 3
IMPACT OF AN ADDITIONAL TARIFF-RATE QUOTA
Pd
P(1 + tover)
Quota rent
P(1 + tin)
In-quota tariff
revenue
Preferential
quota
rent
D
P
CMg
QT
QT+QA
M
Imports
The expression used to estimate the additional tariff-rate quota rent (RQ) is given by:
RQ = P. QTA[tover – (tin/2)]/2
where the symbols have been previously defined.
It is worth emphasizing that the exporter will not use the “additional quota rent” to increase sales. If the
demand curve has a negative slope, additional exports will trigger a price drop, in such a way that the net
price (over-quota tariff discounted from the price) received by the exporter will be less than the marginal
cost. Therefore, there will be no incentive to increase exports – an argument used by the European
negociators.
A different procedure was adopted for two specific products. Since Brazilian swine meat exports to the EU
are null due to sanitary restrictions, the future Brazilian exports were estimated to match the quota offer, once
sanitary barriers are removed. For ethanol, the change in European environmental legislation must lead to a
significant rise in the demand so that the quota offer will allow for an increase that may be identical to the
export quantity. Thus, the gain for these products is the result of appropriating part of the quota rent (50%, as
expressed above) and part of the increased exports (called export gain in Table 6).
3.2 PARAMETERS USED AND DATA SOURCES
The import data samples in both directions have taken into account their importance in trade flows, classified
by 8 digits in EU’s CN and the MCN. As a first selection criteria, product import levels above US$ 5 million
and US$ 2 million were fixed, respectively, for Brazilian and the EU sales. Then, products with import tariffs
below 3% have been excluded.
11
These two criteria have led to a sample of 184 products imported by the EU from Brazil, an equivalent to
approximately 90% of all this import flow in 2002. For the Brazilian imports from the EU, the result was a
set of 925 products, representing 61% of Brazilian imports from the European countries.
In order to measure the impact of the liberalization upon the domestic price of an imported product, there
have been used the tariffs effectively paid11 for Brazilian imports from the EU and the (ad valorem and
specific) tariffs applied by the EU, as indicated in its own proposal, deducting the margins of preference
granted in the General System of Preferences.
Finaly, the following parameters were used to reflect import sensitivity in relation to price changes: for
Brazil, 1.9 for the import price-elasticity for capital goods, 2 for intermediary goods, 2.9 for durable
consumer goods, 1.4 for non-durable consumer goods, and 0.6 for oils and fuels (Carvalho and Parente,
1999), and average elasticity of substitution of 1.07, varying from 0.15 to 5.3 (Tourinho, Kume and Pedroso,
2003), and, for the EU, price-elasticity varying from 0.4 to 3.25 (Hoeckman, Ng and Olarreaga, 2002), and
average elasticity of substitution of 1.18, varying from 0.53 to 4.83 (Gallaway, McDaniel and Rivera, 2003).
As to the export-supply elasticity, there is very scarce information in the literature. By and large, infinite
elasticity is used or arbitrary values are chosen, such as 0.5 (Hoeckman, Ng and Olarreaga, 2002). In this
study, infinite elasticity was assumed for all products. This is a reasonable hypothesis when the import
demand increase is small, compared to the total production of the offering country. Thus, concerning
Brazilian imports from the EU, this hypothesis is not likely to introduce a bias into the results. However, it is
possible that, for products with a high Brazilian share in the world market, the result obtained for Brazilian
exports may be overestimated.
For tariff-rate quota products, it was assumed a constant marginal cost, besides the following additional
information: price and quantity of the product exported by Brazil, total quantity imported by the EU, in-quota
tariff, volume of tariff-rate quota, and volume of the additional tariff-rate quota offered and a 50% margin of
preference for the in-quota tariff.
Trade data were obtained from the World Integrated Trade Solutions – WITS (World Bank), from
Secex/MDIC, from the Ministry of Finance’s Federal Revenue Secretariat (SRF/MF), and those on customs
tariff by the European Commission and the SRF/MF.
4. RESULTS
Table 6 contains the gain estimates for Brazil due to the zeroing of tariffs for manufactured goods imported
by the EU (excepting products that enjoy fixed tariff preferences), as well as those generated by the
concession of additional tariff-rate quotas for agroindustry processed products.12
The estimated gains for agricultural and products from the agroindustry represent 78.6% of total gains—US$
709 million out of a total of US$ 903 million. Approximately half of this value is accounted for a single
product: ethanol. The explanation for this result comes from the magnitude of the EU offer: two tariff-rate
quotas of 500 thousand tons each.
11. Imports with tariff reduction, usually to 0%, by special tax regimes—drawback, Duty Free Zone of Manaus,
automotive regime, and industrial outposts—are not subject to any quantitative limitation. So, EU exports that may be
favored by a tariff reduction are those exclusively subject to total payment of import taxes in Brazil.
12 Intervals for the values estimated have not been calculated due to the lack of information on the standard deviation of
the elasticities used.
12
TABLE 6
BRAZILIAN EXPORTS (2002) AND ESTIMATES OF GAINS FOR BRAZIL (US$ 1,000), YEAR 10
Gains with additional tariff-rate quotas
Description
Export
2002
Quota rent
1st stage
1. Primary and
processed agricultural
goods
Export gains
2nd stage
1st portion
2nd stage
177,067
175,938
Gains with
tariff
reduction
Value
%
709,253
78.6
2,507,713
85,901
77,253
1.1 Bovine meat
361,609
36,095
36,095
72,190
8.0
1.2 Poultry meat
468,002
17,980
17,980
35,960
4.0
1.3 Ethanol
15,303
18,640
18,640
377,868
41.9
1.4 Corn
43,700
5,492
4,119
9,611
1.1
1.5 Tobacco
170,294
193,094
Total estimated
gains
170,294
319,648
21,405
21,405
2.4
1.6 Other meats
26,019
2,534
2,534
0.3
1.7 Banana
16,057
7,191
0.8
7,191
1.8 Fruits
173,159
16,016
16,016
1.8
1.9 Processed meat
267,500
45,454
45,454
5.0
1.10 Orange juice and
others
644,281
91,967
91,967
10.2
13,340
1.5
1.11 Swine meat
1.12 Others
0
503
419
6,773
5,644
157,132
15,718
15,718
1.7
1,905,111
193,532
193,532
21.4
265,309
53,981
53,981
6.0
80,856
18,086
18,086
2.0
2.3 Footwear
172,854
36,333
36,333
4.0
2.4 Aluminum
331,111
27,931
27,931
3.1
2.5 Vehicles and parts
245,211
21,653
21,653
2.4
2.6 Others
809,770
35,548
35,548
3.9
100.0
2. Manufatured
2.1 Wood
2.2 Textile and clothing
Total
4,412,824
Total, excluding
ethanol
85,901
77,253
177,067
175,938
386,626
902,785
67,261
58,613
6,773
5,644
386,626
524,917
Total, excluding 2nd
stage
85,901
177,067
386,626
649,594
Total, excluding 2nd
stage and ethanol
67,261
6,773
386,626
460,660
Source: WITS. Author’s calculations.
On the other hand, concessions made to poultry and bovine meat have proven not to be very significant. In
both cases, this can be attributed to the small amount of the tariff-rate quotas to which Brazil was entitled to
in 2002, with reduced tariff rates, and to the small volume offered by the EU in the current negotiations. The
13
two-stage offers of 50,000 tons each for bovine meat 13 virtually correspond to the Brazilian over-quota
exports in 2002, which means an increase in dollar revenues but not in exported quantities. Tariff-rate quotas
proposed for poultry meat are relatively small, when compared to the Brazilian exports to the European
market.
The small growth in the exports of manufactured goods was already expected, since import tariffs in force for
these products are already low, both those consolidated at the WTO by the EU and those undergoing
reductions within the General System of Preferences.
Estimates of the EU gains, presented in Table 7, confirm previous expectations: a very high concentration on
industrialized products, particularly machinery and mechanical appliances, electrical and electronic equipment,
and transport equipment. This group of products accounts for more than 73% of total gains, evaluated at US$
1.3 billion.
TABLE 7
EU EXPORTS (2002) AND ESTIMATES OF GAINS FOR THE EU (US$ 1,000), YEAR 10
Sectors
Export-2002
Export gain
%
1. Capital goods
4,043,424
714,909
53.9
1.1 Machinery and mechanical appliances
2,455,620
477,374
36.0
1.2 Electrical and electronic machinery and equipment
1,233,104
150,947
11.4
354,700
86,588
6.5
1,004,008
262,990
19.8
2.1 Vehicles
198,558
133,698
10.1
2.2 Vehicles parts
762,261
121,922
9.2
43,189
7,371
0.6
1,059,481
95,464
7.2
4. Steel and non-ferrous metals products and tools
520,390
77,304
5.8
5. Plastics and rubbers
504,954
59,338
4.5
6. Others
679,867
115,582
8.7
7,812,123
1,325,588
100.0
1.3 Precision, optical and photographic instruments
2. Transport equipment
2.3 Railway, tramway aircraft, boats, and parts
3. Chemicals
Total
Source: SRF/MF. Author’s calculations.
5. CONCLUSIONS
There is no economic justification for the idea that a free trade agreement should produce an equitable
balance of gains for both parties, but it would rather envisage the exploitation of comparative advantages,
leading the economies to greater specialization and to a more efficient allocation of their resources.
So the results indicating that the gains accruing to the EU are 47% greater than that possibly obtained by the
Mercosur countries should not be considered undesirable or unexpected. However, the previous analysis
clearly indicates an imbalance caused, essentially, by insufficient liberalization of the agribusiness sector on
the part of the EU.
The most negative aspects implied by the EU proposal for Brazilian export interests are:
13. For the tariff-rate quota products, the additional quota offered by the EU to Brazil was calculated according to the
Brazilian share in Mercosur exports to the EU, in 2002.
14
a) approximately half of the gains for agrofood products are concentrated on a single product, ethanol, due to
the high tariff-rate quotas being offered. However, to come true, these concessions would depend on a future
demand for the product in the EU, which will have to be supplied basically by imports;
b) gain estimates for Brazilian exports of bovine and poultry meat are inexpressive. For the former, tariff-rate
quotas offered correspond to actual Brazilian over-quota exports in 2002. Therefore, the potential gains
would come only from the additional quota rents; and
c) important products of the agrobusiness industry were not specifically included, such as sugar.
The limited offers made by the EU to Brazilian primary agrobusiness products remain as an impediment to a
successful match between the Mercosur and EU economic comparative advantages.
Indeed, the results obtained here for Brazil and the EU suggest that the basic principles of a free trade
agreement are at stake. Concerning goods, the negotiations point to distinct directions: one of a rather
comprehensive liberalization for industrialized products, and another of a rather restricted liberalization for
agribusiness products. This imbalance would probably worsen if the services sector had been included in this
analysis.
15
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