Is this the last chance for the EU–MERCOSUR Agreement?
María Belén Gracia is an international trade law and policy expert from Argentina, based in the Italy.
During the last week of October, EU High Representative/Vice President, Josep Borrell, traveled to South America to co-chair the EU–Community of Latin American and Caribbean States (CELAC) Foreign Ministers Meeting in Argentina and to strengthen bilateral and regional relations between the EU and the countries of the region. The EU–MERCOSUR Association Agreement was one of the main topics on the agenda throughout the bilateral conversations that Borrell had with President Luis Lacalle Pou of Uruguay, as well as with the Argentinian President, Alberto Fernandez. Both sides appear committed to taking all necessary measures to finally sign the Agreement. Negotiations concluded in June 2019, but additional demands from civil society and some EU Member States prompted the EU to demand an additional instrument in the agreement to address sustainability issues – in particular, environmental issues. This will be discussed with the EU Member States and the European Parliament by the end of 2022.
In 2020, I discussed the possible implications for including a Trade and Sustainable Development (TSD) chapter into the trade pillar of the EU – MERCOSUR Association Agreement, but these latest developments warrant another look. Below, I will explore the possible scenarios that could result from the additional instrument on sustainability, with a special focus on deforestation, that the two blocs will need to agree upon to speed up signature of the Agreement. In order to achieve consensus on one or other of these scenarios, a mutual-gains approach may be the last chance for the Agreement in the current political environment.
Why does the EU want an additional instrument on sustainability?
In its description of the goals of the EU – MERCOSUR Association Agreement, the EU lists the promotion of joint values such as sustainable development, through combating climate change and increasing environmental protection. Indeed, the trade part of the Agreement includes a TSD Chapter that comprises commitments regarding the sustainable management of forests and sustainable trade in forest products (Art. 8), illegal logging (Art. 8.2.c), and international cooperation regarding trade and the conservation and sustainable management of forests, applicable not only to forest products, but also to agricultural ones (Art. 8.3.b). The TSD Chapter also reaffirms the parties’ commitments in existing multilateral environmental agreements (MEAs) to effectively implement them (Art. 5.3), and promotes the inclusion of forest-based local communities and indigenous peoples in sustainable supply chains for timber and non-timber forest products (Art. 8.2.b).
However, after the publication of the text of the Agreement, and particularly after the outbreak of the COVID-19 pandemic, demands from civil society and some EU Member States for the inclusion of additional commitments on sustainable development and their enforcement intensified. This led to the adoption of an EU-Mercosur statement on Sustainable Development at the EU27-LAC Informal Ministerial Meeting in December 2020.
Three months later, in March 2021, the EU published the final version of the Sustainability Impact Assessment (SIA) of the Agreement, which highlighted deforestation as one of the two most important environmental issues of the Agreement. The SIA raises some concerns, particularly regarding the situation in Brazil, where there is apprehension about continued pushback on the environmental policies implemented during the first and second decade of the 2000s, which scaled back deforestation. It points to the weaknesses of some environmental protections that allowed agricultural production and deforestation to be decoupled, resulting in a significant increase in the rates of deforestation and forest degradation. Consequently, it recommends the reinforcement of these policies. This could be achieved through compliance with some of the commitments included in the TSD chapter of the Agreement, such as the maintenance and improvement of current levels of protection afforded in domestic environmental law (TSD Chapter, Art. 2).
Under the context of the EU Green Deal, in November 2021, the EU Commission published its proposal for a regulation on deforestation-free products. The proposal aims to tackle the deforestation footprint linked to the consumption of certain agricultural commodities (beef, coffee, cocoa, palm oil, soy, wood, and related products) by establishing due diligence rules and traceability requirements for operators that place those commodities in the EU market to ensure that only deforestation-free – meaning not produced on land deforested or degraded after 31 December 2020 – and legal products – according to the laws of the country of origin – enter the EU market. These obligations vary depending on the assessed risk from the country of origin of producing commodities that are not deforestation-free, based on a benchmarking system operated by the Commission. The Council backed the proposal to a large extent, while simplifying and clarifying the due diligence obligations, particularly those applicable to small operators. Meanwhile, the EU Parliament called for a more stringent approach, demanding a broader definition of deforestation-free products, the inclusion of additional products and the application of the regulation to financial institutions.
The proposal for this regulation added another dimension to the trade policy analysis of the EU – MERCOSUR Agreement: the deforestation footprint linked to the consumption of agricultural commodities in the EU. The TSD Chapter of the Agreement includes a specific provision that provides for collaborative work between the Parties on the trade-related aspects of initiatives contributing to halting deforestation, including those linking production and consumption through supply chains (Art. 13). However, according to analysis by some European experts, the issue of consumption-driven deforestation is inadequately addressed in the EU’s PTAs – including the EU – MERCOSUR Agreement. Further, the Agreement does not provide for a definition of deforestation-free products, and the right to regulate is linked to the obligations of the parties under MEAs (TSD Chapter, Art. 2). This creates a legal conundrum as to whether the EU’s regulatory proposal will be compatible with the commitments agreed with its MERCOSUR counterparts.
In June 2022, the European Commission unveiled a revision of the approach taken on the TSD chapters of EU’s trade agreements (TSD Review) which aims to strengthen their implementation and enforcement. The TSD Review includes policy priorities and action points related to, among other topics, a more proactive cooperation with trade partners, the consolidation of country-specific approaches, increasing monitoring of the implementation of TSD commitments and the role of civil society, and enhancing enforcement by means of trade sanctions as a measure of last resort. Regarding this last point, the TSD Review points to an intention to sanction failure to comply with obligations that materially defeat the object and purpose of human rights treaties and of the Paris Agreement. The Council recently supported the recommendations of the Commission on the TSD Review.
Although the European Commission considers that agreements where negotiations have been concluded – which is the case of the EU – MERCOSUR Agreement – will not be affected by this new policy approach, it’s likely that some of the identified policy priorities and action points end up being part of additional commitments that the Commission will try to push forward.
Possible scenarios for an additional instrument on sustainable development
The EU has proposed an additional instrument that complements the TSD Chapter of the Agreement to its MERCOSUR counterparts. The text of the proposal is not yet public, but developments explained above together with the EU’s proposals in the context of other trade negotiations serve as an indication of three plausible scenarios: (i) a de minimis approach characterized by greater cooperation and implementation roadmaps of MEA commitments; (ii) a medium approach that will also include enhanced monitoring of the TSD commitments and additional commitments related to the development of certification systems for agricultural products linked to deforestation; and (iii) a de maximis approach that will add sanctions in cases of non-compliance and specific cooperation on sustainable food systems.
The first scenario, a de minimis approach, could include more proactive cooperation from the EU side in relation to the implementation of commitments included in the TSD Chapter of the Agreement by MERCOSUR countries, in line with one of the policy priorities listed in the TSD Review. But this alone won’t be enough to convince critics of the Agreement. Hence, the additional instrument might also detail country-specific implementation priorities, based on the red flags identified in the SIA of the Agreement (such as the deforestation concerns in the case of Brazil) accompanied by specific implementation roadmaps of the MEAs ratified by the parties (for example, the Paris Agreement).
The second scenario, a medium approach, might include – in addition to the elements listed in the first scenario: enhanced monitoring of the TSD commitments by civil society; increased participation from international organizations in the implementation stage of the Agreement; and additional commitments related to the development of certification schemes for agricultural products linked to deforestation. Although these certification schemes address the production aspect of these products, they will also have an impact on the ability of producers to successfully comply with future EU measures related to consumption-driven deforestation, which could ultimately impact market access.
The third scenario, a de maximis approach, could add mechanisms related to the enforcement of TSD commitments such as: extending the compliance stage provided for in the dispute settlement part of the Agreement to disputes related to the TSD Chapter; authorization to apply trade sanctions in cases of noncompliance with a dispute settlement panel’s report; and specific cooperation provisions on sustainable food systems. The enforcement element is listed in the TSD Review as a policy priority and provides sanctions as a last resort in case of non-compliance with obligations that materially defeat the object and purpose of the Paris Agreement. This tool was introduced in the free trade agreement (FTA) recently concluded between the EU and New Zealand. The cooperation obligations on sustainable food systems were also included in the EU – New Zealand FTA and are part of the EU’s proposal for a modernized EU-Chile Association Agreement. They entail the acceptance of the parties’ cooperation to reduce adverse environmental and climate effects of some existing food systems, thereby supporting a transition towards more sustainable food production.
These scenarios are not an exhaustive list of courses of action. Other elements could also be considered (i.e., an environment-focused rapid response mechanism modeled after the labor dispute mechanism in the United States-Mexico-Canada Agreement, or the option of making tariff preferences contingent upon sustainable production), but they seem to be the most probable and reasonable scenarios in light of recent developments in EU policies and the underlying willingness of both parties to advance the signature of the Agreement.
But which scenario has the best prospects for success? MERCOSUR countries would probably accept the first scenario since it responds to the demands of the region for more cooperation and technical and financial assistance regarding TSD commitments, to enable the growth of sustainable trade between the two regions. Even agreement over implementation roadmaps is likely to occur – especially after the victory of Lula da Silva in Brazil’s recent Presidential election and his remarks about the protection of the Amazonas. But enhanced cooperation schemes – i.e., the forest partnerships that the EU is currently considering – will be necessary.
From the EU’s perspective, however, this scenario might fall short on issues related to consumption-driven deforestation pushed by European civil society, which could turn the medium approach into a possible trade-off. In fact, the TSD Chapter of the Agreement already foresees a commitment to work together on initiatives to halt deforestation, like those linking production and consumption through supply chains. But, it will require the EU to base its proposal for a deforestation regulation on the international definitions and standards agreed to in MEAs, taking into account the diversity in forest environments, and additional technical and financial cooperation for SMEs to be able to accede to certification schemes. The third scenario is the least likely to prosper. Applying the compliance stage to TSD commitments was not part of the EU’s mandate, nor of its original proposals when negotiating the Agreement, let alone sanctions. Furthermore, MERCOSUR countries would probably advocate for addressing the issue of sustainable food systems at a multilateral level in line with the messages from countries in the Americas in the context of the discussions about this topic during FAO’s Food Systems Summit 2021.
The next phase needs a mutual-gains approach
Although negotiations of the EU–MERCOSUR Agreement were concluded in June 2019, the developments that have occurred in the field of TSD during the subsequent years, together with the demands of civil society to have an agreement that embraces and promotes sustainable trade across the two regions, have made officials realize that additional steps are needed to successfully ink the deal. But they will have to contemplate the technical and financial assistance required by MERCOSUR countries, particularly for SMEs to be able to reap the benefits of the Agreement.
Reaching consensus over an additional instrument that includes elements of the first or even the second scenario seems to be a mutual-gains approach for both regions in the current political environment. The EU needs to regain leverage among its South American allies given its plans for energy autonomy, and MERCOSUR countries also need to re-balance their dependance on the Chinese market and investments. After all, as the Agreement’s SIA highlights, the deal is expected to make a positive contribution to increasing trade in environmental goods and services, and in stimulating cooperation between the Parties for the development of green technology. These advancements will be essential for the transition of both regions to a circular and sustainable economy.
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