Failure of strategic trade diplomacy

In June 2019 a free trade agreement (FTA) two decades in the making was struck between the EU and the South American customs union Mercosur (currently comprising Argentina, Brazil, Paraguay and Uruguay). The European Commission calculates that the FTA will save European businesses €4 billion in border duties – four times more than the recent EU-Japan FTA – on annual EU exports to Mercosur valued at almost €50 billion in 2018. From Mercosur members point of view the agreement offers businesses wide-ranging opportunities for economies of scale and specialization through tariff-free access to the world’s largest and most diversified common market.

Nevertheless, while the agreement is finalised in principle, ratification by the signatories is far from guaranteed. One key issue for European ratification to be discussed here are environmental sustainability commitments by Mercosur members, especially Brazil. Given that the EU Council has decided that EU-Mercosur is a “mixed agreement” agreement, rather than falling exclusively within EU competences, ratification of the deal by the parliament of each member state is required.

This means any member state can block the ratification of the FTA. In August 2019, just two months after announcement of the agreement, an environmental issue generated much political heat owing to an outbreak of forest fires in Brazil’s Amazon.

As the fires burned a number of EU states raised red flags on ratification. Ireland’s Prime Minister Leo Varadkar declared that “There is no way that Ireland will vote for the EU-Mercosur Free Trade Agreement if Brazil does not honour its environmental commitments”, while French President Emmanuel Macron similarly stated “In these conditions [increased fires], France will oppose the Mercosur deal as it is.” Macron in particular made hyperbolic statements, for example tweeting “Our house [the Amazon] is burning. Literally”, and pushed for the August G7 leaders’ meeting to place the fires on the agenda.

Given that Brazil is not part of the G7 this infuriated the Bolsonaro government, which accused Macron of a “colonialist mindset” for assuming responsibility over a Brazilian domestic issue without inviting Brazil to participate. 

Suddenly, a trade deal that took two decades to hammer out was facing major ratification hurdles due to an outbreak of forest fires in Brazil during a single month in August 2019.  It is argued here that this political firestorm was a classic case of “more heat than light”, and holds lessons for how not to conduct trade diplomacy.

This is based on the view that non-ratification threats by Varadkar and Macron were reactionary responses based on misleading reports on the extent of the fires. Furthermore, their tactics represent an ill-conceived strategic approach to EU trade diplomacy that will run counter to their environmental goals. This is because blocking the deal will reduce the EU’s soft power to ensure sustainable development beyond its borders.

First, some facts about the recent Brazilian forest fires are called for. Many western media reported sensationalist accounts of the fires that had potential to mislead. For example, Australia’s ABC reported on August 21^st that the fires were the highest number since 2013. The BBC reported on the same day that 2019 fires were an 84% increase on the same period in 2018. These articles are representative of the tone of media coverage, which indicated a crisis of epic proportions. However, a broader historical comparison shows this was not the case. To their credit the BBC issued a more informative article a week later.

This second article provided information from Brazil’s National Institute for Space Research (INPE) showing that the number of fires in Brazil during 2019 was in line with the average for the period 1999-2019. Furthermore, the New York Times reported that analysis of satellite data on the 2019 fires indicated that the majority were burning on already deforested agricultural land. Burning agricultural land to prepare for the new growing season is standard practice in many developing countries.

A further noteworthy point is that Brazil has made laudable progress in significantly reducing deforestation since the 1990s. The moving 10 year average since 2005 has fallen by around 70% to an average of 2,500 sq mi per year. A 2014 paper in Science noted that Brazil’s deforestation efforts had prevented the release of 3.2Gt of C02 into the atmosphere and “made it a global leader in climate change mitigation”.

Consequently, while the most recent data released by INPE shows deforestation in the year through to July 2019 has increased to 3,769 sq mi, this does not constitute a radical reversal of the significant progress made by Brazil against deforestation.

In this light, two points can be made.

First, EU leaders threatening non-ratification for environmental reasons ought to have had a greater appreciation of the historical facts concerning both the extent of the August 2019 fires, and progress by Brazil since the mid-2000s in tackling deforestation, before choosing to publically undermine a trade deal that took the European Commission many years to negotiate.

Second, reactionary threats of non-ratification of the FTA based on ephemeral events – the Austrian parliament was the first government to officially veto the deal in October 2019, in part over environmental concerns, but also workers’ rights – represents a strategic failure of trade diplomacy by the relevant EU leaders, one that ironically will undermine the EU’s ability to promote sustainability. Whereas, deepening reciprocal trade relations between Mercosur members and the EU through the FTA, which includes environmental commitments, would provide the EU with enhanced leverage to ensure sustainable development, as well as providing incentives for Mercosur members to follow through on commitments.

To elaborate, in 2018 the EU ranked as Mercosur’s second biggest trade partner in goods. On the other hand, the EU’s relative trading importance to Mercosur has declined over the period 1997-2017. During that time the share of total Mercosur exports going to the EU has dropped from 20% to 16%, whereas the share of total Mercosur exports going to China grew from 4% to 25% over the same period, making the latter Mercosur’s current top trading partner in goods.

The high tariffs between the EU and Mercosur have undoubtedly impacted this trend. If some EU members block ratification for environmental concerns they will push Mercosur members to seek enhanced trade relations elsewhere. Brazil has recently begun talks with Mexico on a bilateral trade deal, while Mercosur is in trade negotiations with Canada. Further expansion of trade with China is another possibility. Mexico and China will certainly not demand the degree of environmental sustainability the EU currently does in its FTA with Mercosur.

French and Irish threats of non-ratification, followed by Austria’s enactment of the strategy, are a misconceived solution to a misrepresented problem. Non-ratification will work against their environmental goals with the upshot of scuppering a promising trade deal, and therefore represents a failure of strategic trade diplomacy. Rather, mutually beneficial trade relations with commitments on sustainability will provide the EU with increased soft power to push its environmental agenda in Brazil and elsewhere.