Sustainability Impact Assessment in Support of the Association Agreement Negotiations between the European Union and Mercosur

Draft Interim Report

Jean-Baptiste Velut, Senior Expert, LSE Consulting; Associate Professor, Sorbonne Nouvelle University, Paris

Daniela Baeza-Breinbauer, Project Officer and Researcher, LSE Consulting

Philipp Lamprecht, Senior Expert, LSE Consulting; Senior Economist, ECIPE

Introduction

• Aims:(i) Robust analysis of the economic, environmental, social, human rights and sectoral impacts, that the association agreement could have, in the EU, in the partner countries and in other relevant countries; and(ii) Wide consultation process involving stakeholders both in the EU and in the partner countries, which provides opportunities for information-gathering and dissemination of results.

• Scope: • A very wide-ranging, multi-faceted and complex SIA.• A range of sustainability issues covered including climate, forests, pollution,

workers’ rights, indigenous peoples and gender.• An original computable general equilibrium (CGE) modelling exercise carried out

by the LSE Consulting team.• A qualitative economic assessment covering ten sectors across agriculture,

manufacturing, and services. • Four negotiating partners, with strong disparities both among them and within the

countries themselves.

From Interim to Final Report

• Integrating stakeholder comments on draft interim report. Comments due 29 October.

• Finalising analysis of impact on sectoral and sustainability issues.

• Finalising chapter on stakeholder consultations.

• Drafting policy recommendations and accompanying measures.

Economic Analysis

Conservative scenario

• Liberalisation on 100% (90%) industrial products in EU (Mercosur).

• 15% reduction in cereals, dairy, rice, sugar, ruminant meat and other meats in the EU.

• Full liberalisation in rest of Ag products in the EU.

• Full liberalisation in 80% of Ag tariff in Mercosur.

• Reduction of 5% in the incidence of NTBs in Mercosur.

Ambitious scenario

• Full liberalisation on industrial products in both EU & Mercosur.

• 30% reduction in rice, sugar, ruminant meat and other meats in the EU.

• Full liberalisation in rest of Ag products in the EU.

• Full liberalisation in all Ag tariff in Mercosur.

• Reduction of 10% in the incidence of NTBs in Mercosur.

Policy Scenarios

FTAs with Canada, Korea, SADC EPA, West Africa EPA, Central America, Colombia, Peru and Ecuador included in baseline.

Macroeconomic Results

Region EU_28 Argentina Brazil Paraguay Uruguay

GDP (%) 0.1 0.5 0.2 0.1 0.2

ΔGDP* 15.1 4.6 5.5 0.0 0.2

Invest 0.4 1.4 0.7 0.3 0.8

Welfare* 8.7 2.1 2 0 -0.1

Real Wages (Skilled)

0.2 0.2 0 0.2 0.2

Real Wages (Unskilled)

0.2 0.3 0 0.3 0.4

Consumer Prices

0.2 -1 -1.5 -0.3 -0.6

Region EU_28 Argentina Brazil Paraguay Uruguay

GDP (%) 0.1 0.7 0.3 0.1 0.4

ΔGDP* 20.9 6.4 9.0 0.1 0.4

Invest 0.5 1.6 0.8 0.4 1.4

Welfare* 12 2.9 2.9 0 0

Real Wages (Skilled)

0.3 0.3 0 0.2 0.3

Real Wages (Unskilled)

0.3 0.4 0 0.3 0.8

Consumer Prices

0.3 -1.4 -2.1 -0.5 -0.6

Conservative scenario Ambitious scenario

*All numbers are in % changes relative to baseline, except welfare and ΔGDP, which are in 2011 US$ in billions.

EU imports from Mercosur in key sectors (% change)

0

10

20

30

40

50

60

70

80

90

Conservative Ambitious

Sector € bn

Cereals 0.8

Rice 0.1

Veg_FN 1.3

Sugar 0.1

Bovine 1.3

Other_mt 0.5

EU exports to Mercosur in key sectors (% change)

0

20

40

60

80

100

120

140

160

Conservative Ambitious

Sector € bn

Dairy 0.1

Che_Rub 12.4

Metal_Pro 2.9

Motor_Trans 8.0

Machinery 11.5

Elect_equip 1.4

Environmental Analysis

Baseline

• In terms of environmental regulation and performance, Mercosur countries fall behind EU standards but are in line with the performance of countries of similar income levels.

• The EU contributes about 9% of global GHG emissions, mostly driven by CO2 emissions, while Mercosur countries contributes 3.5%.

• Mercosur’s per capita emissions are considerably lower than the EU’s, in particular, Brazil’s and Paraguay’s.

• Brazil’s Paris climate commitments include strong reduction of emissions with respect to 2005 levels, namely by 37% by 2025 and by 43% by 2030.

• Mercosur countries have a considerably cleaner energy mix than the EU, with a heavy emphasis on renewables and in particular hydropower, with the exception of Argentina, which is closer to the EU in terms of fossil fuel use.

• Brazil, Argentina and Paraguay are abundant in forest resources. Tree cover loss is a longstanding concern in all three countries.

• In Brazil, long term trends show a significant decline in deforestation between 2003 and 2015, although spikes in deforestation have been recorded in more recent years.

• In agriculture, the use of pesticides has increased across all Mercosur countries, while a slight decline has been recorded in the EU. On the other hand, in Mercosur, agriculture makes substantially less use of fertilisers than EU countries.

Impact

• The AA is expected to have a negligible impact on CO2 emissions.• The increase in emissions caused by an increase in the scale of production is

partially mitigated by a negative composition effect, i.e. a relocation towards less energy and carbon intensive sectors.

• Sectors that are likely to benefit most from the AA include some environmentally sensitive sectors, mainly animal production and agriculture.

• Impact analysis of other GHG emissions that are specifically relevant to the agricultural sector (methane and nitrous oxide) will feature in the final report.

Further analysis

• Impact on land use• Impact of potential expansion of land intensive activities• Deforestation and policy environment

• Impact on energy demand• Energy intensity of different sectors and emission intensity of energy production

• Impact on biodiversity and water resources• Use of water resources, pesticides and fertilizers

• Impact on air pollution• Limited as mostly from industrial and mobile sources (no energy production)

• Impact on trade in environmental goods and services• Scope for complementarities, technology transfer and international cooperation

• Impact on MEA compliance• Commitment to effective implementation of the Paris Agreement under the Sustainable

Development Chapter in the Trade part of the Agreement.

• Formulate policy recommendations

• Incorporate feedback from stakeholders in light of final agreement.

Social Analysis

Baseline

• Wide regional disparities both between and within countries.

• Declining trends in poverty and inequality before recession periods in Brazil (2015-16) and Argentina (2015, 2018).

• High but declining levels of informal employment in the region.

• Gap between de jure and de facto labour standards.

• Labour reforms have helped Mercosur countries reduce forced labour and child labour.

• Uneven progress with regard to union rights and non-discrimination.

• Employment and wage effects per sector are generally marginal and reflect sectoral impact on agriculture and manufacturing; greater wage gains for unskilled labour but greater increases in skilled labour employment.

• Inequality: positive welfare effects on EU, Brazil and Argentina (neutral for Uruguay and Paraguay); non-significant effects on Gini coefficient.

• TSD chapter follows the EU’s established approach to labour enforcement: positive impact of EU-Mercosur agreement will depend on sustained political commitment from governments and cooperation with civil society stakeholders and ILO.

Impact

Further Analysis

Baseline:

• Consolidate with new trends in employment, poverty, inequality.

Impact:

• Develop analysis of TSD provisions and framework for civil society engagement within and outside the trade agreement.

• Formulate policy recommendations to maximize the impact of labour provisions and minimize adverse sectoral effects of the agreement.

• Incorporate feedback from stakeholders in light of final agreement.

Human Rights Analysis

Baseline: scoping and screening

The preliminary findings of the literature review suggest possible effects of the identified trade measureson various human rights obligations of the negotiating countries, and resulted in the selection of thefollowing human rights for further assessment of potential impacts.

Measure Possible Sectoral Effects Possible Impacts affecting HRs Implicated HR

Instruments

National Treatment;

Market Access; Trade in

Goods

- Increased Agricultural Exports from Mercosur- Increased Natural Resource Exports from Mercosur

Increased Land Conflicts ICERDICESCRCRC

Trade in Services Formalisation of Work Environments Improved Work Conditions ICESCR

Establishment -Increased Natural Resource Extraction-Formalisation of Work Environments

-Water Use Conflicts;-Improved Work Conditions;-Infrastructure Development

ICESCR

Selected Human Rights of Concern

Right to an Adequate Standard of Living

Right to the Enjoyment of the Highest Attainable Standard of Physical and Mental Health

Rights of Indigenous Peoples

Gender Equality

Baseline

0

20

40

60

80

100

Overcrowding InadequateWater Sources

InadequateSanitation

Brazil

Rural Indigenous Urban Indigenous

Rural Non- Indigenous Urban Non-Indigenous

0

20

40

60

80

100

Overcrowding InadequateWater Sources

InadequateSanitation

Paraguay

Rural Indigenous Urban Indigenous

Rural Non-Indigenous Urban Non-Indigenous

Access to Adequate Living Conditions

0

50

Brazil Paraguay

% of population in the formal

economy

rural Indigenous population

urban Indigenous population

rural non-indigenous community

urban non-indigenous community

0

5

10

15

20

25

Brazil Paraguay

% of population unemployed

Rural Indigenous Urban Indigenous

Rural - Non indigenous Urban Non-Indigenous

0

5

10

15

20

25

Argentina Brazil Paraguay Uruguay

Male Female

Employment levels for Indigenous persons

% of day spent on unpaid domestic work by Gender

Share of Women in Vulnerable Employment and Wage Employment

0

5

10

15

20

25

30

35

40

45

Argentina Brazil Paraguay Uruguay

Female Male

Scoping Phase Results and Impact

• Regarding the Right to an Adequate Standard of Living, opportunities existfor positive monetary gains from increased exportation and investment

• As long as protection mechanisms mitigate negative impacts from extensive resource needscreating possible risks for land disputes, notably in Brazil.

• Potential impacts on Indigenous Peoples are varied and depend onimplementation and accompanying policies.

• While increases in investment, agricultural output and exports risk disputes for land rights andnatural resource distribution, with proper accountability mechanisms in place, increasedinvestment has the potential to provide important benefits for indigenous populations inemployment, incomes and access to various services

• On Gender Equality, opportunities are presented through an increase ofwomen’s paid employment and wages in the service sector as well asexporting industries.

• While higher wages decrease poverty in the female population, expected export increasestake place primarily in sectors, where men are predominant, and risk increasing incomedisparity.

Sectoral Analysis

Agriculture: Beef

Baseline:

• Mercosur accounts for 69% of the EU imports of Beef. Only 2.5% of EU consumption of beef is currently imported.

• Most of the imports from Mercosur are in fresh or chilled boneless beef. High incidence of the high quality Hilton Quota.

• EU applies high tariffs of up to 60% (ad valorem equivalents).

Impact:

• EU imports from Mercosur will expand 30% (64%) in the conservative (ambitious) scenario.

• Output in the EU will contract by 0.7% (1.2%) in the conservative (ambitious) scenario.

• Output in Mercosur will increase by an average of 1% (2%) in the conservative (ambitious) scenario.

• The agreement provides for dialogue and consultation on animal welfare.

Agriculture: Dairy

Baseline:

• EU exports to Mercosur are €30-40 million mostly accounted for by cheese (around 5000 tonnes per year). This is considerably less in per capita terms than the EU exports to comparable countries.

• Mercosur tariffs on the main products are 16 and 28%. There is therefore considerable scope for expanding EU exports.

• Mercosur exports to the EU are negligible.

Impact:

• EU exports to Mercosur expand by 91% (106%) in conservative (ambitious) scenario.

• No significant change in output in EU.

• No significant increase in CO2 emissions given that output expansion is not predicted and the scale of trade is small in comparison to the scale of domestic production for both regions.

• Other environmental impacts are limited as dairy production is mostly intensive and more reliant on labour and capital than on land.

Agriculture: Sugar and Ethanol

Baseline:

• Mercosur and in particular Brazil is one of the major historic suppliers of sugar and ethanol to the EU. The volume of trade has been fairly variable in both products in recent years.

• Brazil is the world largest producer of sugar cane and ethanol.

• EU tariffs on raw cane sugar are high - €339 per tonne. EU tariffs on ethanol are also high at up to €19 per hectolitre.

• The EU sugar sector underwent a major reform with the removal of sugar quotas resulting in an expansion of production and EU prices aligning more closely with world prices.

Impact:

• EU sugar imports from Mercosur to expand by 15% (27%) in the conservative (ambitious) scenario.

• In the modelling results, output of sugar in the EU could fall by 0.7% (1.0%) and expand by 1.7% (2.5%) in Mercosur (ambitious).

• Small impact on the use of land in Mercosur associated with the increase of output.

• Ethanol production in Brazil more efficient than in EU.

• Impact on LDCs, OMRs expected to be low, in line with the level of impact on the overall market for refined sugar in the EU. Moreover specialty sugars, which are of particular importance to LDCs and OMRs are excluded from tariff liberalization and therefore will not be affected by the Agreement at all.

Agriculture: Beverages

Baseline:

• Bilateral trade dominated by fruit juice and wine exports from Mercosur and, by wine and spirits exports from the EU.

• EU tariffs on fruit juice are at 12% for the products that account for the bulk of trade. EU wine tariffs vary but are mostly around €0.15/litre.

• Tariffs on spirits in Mercosur could be as high as 20% and 35% in Brazil. Most EU wine exports to the region go to Brazil paying 27%. There is therefore considerable scope for trade expansion in these products.

Impact:

• Trade increases by around one third in both directions.

• There are no expected major environmental effects.

• No significant impact on human rights, LDCs and OMRs. EU tariffs on rum are relatively low and much of the cachaça that Brazil exports enters duty free.

Manufacturing: Textile and Garments

Baseline:

• Mercosur accounts for only 1% of the total export of garment and textile in 2016. Exports to Mercosur are far lower in per capita terms than exports to comparable markets, due to the high tariffs paid to enter the Mercosur market.

• Mercosur applies tariffs of 26% to fabrics and 35% to garments. Removing these tariffs has the potential to give rise to a significant expansion of exports.

• The EU mostly imports T&G from China (33% of total T&G imports in 2016), Bangladesh (15%) and Turkey (13%). Mercosur is a small supplier as it only provides 0.4% of the total T&G imports into the EU.

Impact:

• EU T&G exporters will face a greater reduction in tariffs, and are likely to export more.

• EU Exports to Mercosur to expand 310.8% (424.1%) in the conservative (ambitious) scenario.

• EU imports from Mercosur to expand 32.4% (36.5%) in the conservative (ambitious) scenario.

• Social analysis focused on the gender impacts of increased trade liberalization given the high concentration of female workers in both the EU and Mercosur sectors and the relatively high levels of informality encountered in the sector in both blocs.

Manufacturing: Chemicals and pharmaceuticals

Baseline:

• Substantial EU surplus in bilateral trade. Exports are Euros 10 bn and imports Euros 2 bn. Medicaments and antisera main exports. Acylic ether and silicon in imports.

• Tariff in Mercosur is as high as 18%. Maximum tariff in EU is 6.5%.

Impact:

• EU exports to Mercosur to the EU increase by 47% (60%) in the conservative (ambitious) scenario.

• Mercosur exports to increase by 12% (16%) in the conservative (ambitious) scenario.

• More qualitative analysis of impacts in this sector to follow in the final report.

Manufacturing: Machinery

Baseline:

• The main EU export product to Mercosur with exports of €12 billion.

Impact:

• EU exports to Mercosur will expand by 78% (100%).

• EU imports from Mercosur will expand by 17 (24%).

• Analysis up to date shows no significant environmental, human rights, LDCs, and OMRs effects.

Manufacturing: Motor vehicles

Baseline:

• EU exports to Mercosur are around €6 bn in motor vehicles and parts.

• EU imports from Mercosur are around €1 bn.

• EU tariffs are on autoparts are 3-4.5% and 10% on cars.

• Mercosur applies 35% tariffs on cars and 14-18% tariffs on parts with considerable scope for export expansion.

Impact:

• EU exports will expand by 95% (114%) in the conservative (ambitious) scenario.

• Imports from Mercosur will expand by 41% (48%) in the conservative (ambitious) scenario.

• Although neither bloc is as of yet a major producer of electric or hybrid vehicles, as these sectors develop, the agreement could promote the availability of cleaner vehicles.

Services: Business and professional services

Baseline:

• EU exports to Argentina, Brazil and Uruguay in business services have increased at relatively high rates between 2010 and 2015.

• EU imports of business services especially from Brazil and Uruguay have experienced high growth rates.

• Several trade barriers still prevail for business services traded between the EU andMercosur.

• For example, stakeholders stressed the need to be able to send their personnel to Mercosur countries to subsidiaries, branches and clients.

Impact:

• Liberalisation of business services trade between the EU and Mercosur is likely to resultin higher levels of economic activity in both regions.

• This positive effect on overall economic activity can lead to an additional creation ofjobs.

• No human rights, environmental, LDCs or OMS effects.

Services: Financial Services

Baseline:

• Financial services account for 3.5% of EU service exports to Mercosur, while insurance services account for 1.6%. It should be noted that these shares significantly lowerthan for overall EU services exports.

• On the import side, financial services imports account for 2.9% of EU services imports from Mercosur, while imports of insurance services account for 2.0%.

• No restrictions under mode 3 in EU and Argentina. Brazil presents significantly higher barriers.

• Provision under mode 1 is restricted in both Argentina and Brazil.

Impact:

• EU providers of financial services stand to gain from increased market penetration byboth trade and investment. Further liberalisation of financial services between the EU and Mercosur can potentially result in higher economic activity in both regions.

• No major impact on employment.

• No human rights, environmental, LDCs, OMS effects.

Further questions…

•Get in touch with the SIA team through the following:• Website: http://www.eumercosursia.com/

• Email address: Lsee.Sia-Mercosur2018@lse.ac.uk

• We are available to reply to your questions and receive further analysis and data from you.

• Deadline for comments on draft interim report: 29 October 2019.