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Investment disputes and populist politics undermine EU-Mercosur trade deal

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Portugal and Argentina, who currently hold the European Union and Mercosur presidencies, have made ratification of the EU-Mercosur free trade agreement (FTA) a priority for their terms. As the FTA works its way through European capitals after 20 years of negotiations, the barriers posed by populist economic policies in the largest Mercosur countries (Brazil and Argentina) could complicate ratification just as much as the dispute over the fate of the Amazon.

If those barriers are overcome, the EU-Mercosur free trade area will become the largest free trade zone the EU has ever created, covering 780 million people, removing tariffs for nearly all European agricultural trade, and eliminating customs on 91% of European exports to Mercosur countries. Getting there will require overcoming opposition in France, where foreign trade minister Franck Riester insists “we will not be satisfied with a political declaration on environmental commitments from the four countries concerned,” but also Spain, where food industry representatives declare the FTA “does not bring ‘almost any advantage’ to the Spanish and the European agricultural sector.”

Ratification will also require grappling with economic realities in the Mercosur countries, where European companies face treacherous business environments and governments on both the left and right do little to reassure foreign firms their assets and investments are safe. While Brazil draws the lion’s share of public outcry over President Jair Bolsonaro’s environmental record, it may be Argentina, whose current support for ratification belies President Alberto Fernández’s previous ambivalence, that turns out to be the most intractable threat to the deal.

Brazil allows rhetoric to take precedence over necessary reforms

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Bolsonaro, the ‘Trump of the Tropics’, has hit back against European criticism of his administration’s environmental record. Continuing a long-running feud with Emmanuel Marcon, Bolsonaro demanded in a live stream last month that Macron “stop saying idiotic things” about soy produced on deforested land in the Amazon, mockingly offering Brazilian funds for the French government to pay for reforestation at home. France itself might not import much soy from Brazil, but the EU as a whole is second only to China in Brazilian agricultural imports.

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While Brazil’s president engages in verbal bouts with European counterparts, his finance minister – University of Chicago-trained economist Paulo Guedes – continues to push for an ambitious program of trade liberalization to make the country of 210 million more dynamic. To reshape an economy historically shielded from foreign competition and bogged down by bureaucratic red tape, Guedes came into office with a plan which saw regional and international trade deals (such as the EU-Mercosur agreement) as part of broader reforms that also include long-overdue privatisations.

Guedes’ slate of reforms, however, are coming into conflict with Brazil’s deep web of vested interests and Bolsonaro’s populist economic instincts, as evidenced by an about-face on slashing tariffs applied to imported toys last December and Bolsonaro’s abrupt removal of Petrobras head Roberto Castello Branco. With frustration mounting over the pace of Guedes’ reform programme, Bolsonaro’s penchant for wars of words could end up torpedoing the entire liberalising endeavor.

Argentina’s investment minefield: a deterrent to European investors

Brazil’s southern neighbour and Mercosur counterpart Argentina poses equally vexing issues of populism, with a history of flippancy towards foreign investors that has directly impacted European firms. Bueno Aires’ economic instability is exacerbated by two structural problems outlined by economist Eduardo Levy Yeyati: “insufficient exports and a feeble currency.” Buenos Aires faces a consistent (and often acute) shortfall of foreign currency reserves, and its governments respond to deficits by printing money and borrowing from any outside creditors they can find. Argentinian leaders have tried to get a handle on the peso for decades, but the abortive nature of economic policy in a country prone to swinging between far-left and far-right (together with pervasive political patronage and deep-rooted corruption) undermines stability still further.

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In 1991, Buenos Aires embarked on a ‘convertibility’ programme pegging the Argentine peso to the dollar, with an eye to ending the cycle of lawmakers printing their way through deficits. The convertibility system, which functioned well over the 1990s, collapsed amidst an economic crisis in the early 2000s. As the peso decoupled from the dollar, foreign investors who embraced Argentina in the 1990s (including many European companies) saw their assets devalued and even expropriated. The case of one company – French water utility Saur – illustrates how some firms are still waiting for restitution decades later.

Saur, which secured a concession to provide municipal water services in the province of Mendoza in 1998, experienced the currency crisis first-hand when its operating expenses remained in dollars – but the local government decided to convert water bills into newly-devalued pesos. After years of negotiations over water prices in which the provincial government refused to allow rates to rise, authorities seized control of the company’s operations and cancelled the concession in 2010. In 2014, the International Centre for Settlement of Investment Disputes (ICSID) awarded Saur $39.9 million in damages. In 2016, the court rejected Argentina’s attempt to have that decision annulled.

Despite its loss, Argentina has failed to make good on the judgement, even after a direct intervention by Emmanuel Macron, who convinced then-President Macri to pay out damages owed to other French firms. Of course, the Saur case is just one episode in Argentina’s track record of mistreating and expropriating foreign investors. According to the UNCTAD’s Investment Dispute Settlement Hub, of 1,061 total arbitration cases since 1997, 67 have involved Argentina – 62 with Argentina as a respondent state and 5 as a claimant. 

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Case in point: President Cristina Fernández de Kirchner’s 2012 seizure of energy company YPF from Spain’s Repsol, in which her government ultimately had to offer Repsol $5 billion in compensation for her move towards “recovery of sovereignty and control”. Since then, the home nations of investors, with the exception of the US, that are pursuing cases against Argentina are all European, including Austria, Italy, United Kingdom, Spain, and the Netherlands.

While economic populism and nationalist policies in Brazil and Argentina are nothing new, their latest permutations promise to make the EU-Mercosur agreement an even harder sell among European legislators. Those lawmakers have to take into consideration not just Mercosur government policies and stances on the environment but also low Doing Business and Transparency International rankings in the countries where European companies will be beneficiaries of this deal.

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