The Financial Express

FTA with MERCOSUR: To early to call

-Reuters file photo -Reuters file photo

The recent visit of the commerce minister to a number of Latin American countries concluded with an expectation to sign a free trade deal with the Southern Common Market or MERCOSUR (Spanish acronym). MERCOSUR which is the world's fourth largest trade bloc and also a customs union.

The commerce minister's visit, however, coincided with massive human-caused fire in Amazon rainforest.  Brazil government's failure to contain the fire in the world's largest rainforest put the MERCOSUR's free trade deal with European Union (EU) into uncertainty. France and Ireland have threatened to block the EU-MERCOSUR Free Trade Agreement (FTA), which was agreed in June this year, if the Amazon rainforest is not saved from fire.

Bangladesh has examined the potential of signing a free trade deal with MERCOSUR. Bangladesh Tariff Commission (BTC) conducted a study which favoured signing the FTA with the South American customs union. BTC observed that there would be very negligible revenue loss and exports of Bangladeshi products like garments, textiles, pharmaceuticals, leathers and leather goods, tobacco and tableware would increase.

Bangladesh's bilateral trade with MERCOSUR stood at US$2.37 billion in FY18 with trade balance heavily tilted to the South American regional bloc. Brazil, the largest economy of the region, alone shared around 70 per cent of the total trade of MERCOSUR with Bangladesh.

MERCOSUR AT A GLANCE: The origin of MERCOSUR lies in the process of improving the relations between two giants of the region, Argentina and Brazil. Thus the bloc is both an economic and political one. Founded in 1991 with an aim to establish a common market between Argentina, Brazil, Paraguay and Uruguay, the bloc is now a customs union. Venezuela joined the bloc in 2012 but its membership was suspended in 2016 'due to failure to comply with the group's standards on trade and human rights'.  Bolivia has been in the process of accession since 2012. Chile, Colombia, Ecuador, Guyana, Peru and Surinam are the associate members of the bloc. Mexico is an observer.

Being a customs union, MERCOSUR implements a common tariff of 35 per cent on certain products for all non-member countries and operates a common trade policy. The bloc's Gross Domestic Product (GDP) stood at around US$2.50 trillion in 2018. (If Bolivia and Venezuela are taken into consideration, it will be more than $3.20 billion.) The distribution of the GDP is very uneven as Brazil alone shares 75 per cent of it. The country is the ninth largest economy in the world now. It is the biggest country in South America and also the most populous. An analysis of United Nations Conference on Trade and Development (UNCTAD) showed: "The second largest economy in MERCOSUR is Argentina, whose economic size and population level are about one-fifth of that of Brazil. Despite being the smallest country in the region, Uruguay is the richest country based on GDP per capita but the third largest economy, although its economy is much smaller than that of both Brazil and Argentina (Uruguay's GDP is about 2 per cent of Brazil's and 10 per cent of Argentina's). Paraguay is the smallest country in the region in terms of both GDP and population and is also the country with the lowest GDP per capita."

MERCOSUR countries are rich with natural resources. It has large energy resources, both renewable and non-renewable. Though the share of agriculture is significantly lower than industry and services, the region is the third largest producer of the major crops (soybeans, corn, rice, wheat and sugar) on global market after North America (the United States and Canada)  and China. It made significant advancement on human development indicators (life expectancy, education and health) during the last two decades.  With around 270.0 million inhabitants, MERCOSUR countries are, however, suffering from big gaps between the rich and the poor. All these countries have a Gini coefficient around or above 40 (a Gini coefficient equal to or above 40 is considered as a sign of severe inequality in a country). UNCTAD thus pointed out, "Despite slight improvements since 2008, Latin America is in fact the most unequal region in the world in terms of both income and wealth distribution." 

Nevertheless, MERCOSUR is a growing consumer market as around one-third of its population is middle-class which is predicted to increase at two-fifths within a few years.

CHALLENGES & BARRIERS: Signing a FTA with any country or trade bloc needs to be driven by some clear purposes. Besides expanding merchandise trade, the long-term objectives should be expansion of trade in services and increase in investments.  The initial purpose of FTA with MERCOSUR is to enhance export of potential products and import of raw materials and intermediate goods at competitive prices. 

Though trade with MERCOSUR means trade mainly with Brazil, it will also open window to enter into the Argentine market simultaneously. Negotiating separate trade deals with Brazil and Argentina will be a prolonged task. It is unlikely that any of the countries will reduce 35 per cent common import tariff individually. 

As Brazil is now the ninth largest import source of Bangladesh, a possible FTA is likely to reduce the cost of imports. In FY18, Bangladesh imported $1.45 billion from Brazil which is around 67.0 per cent of total imports from MERCOSUR. The figure was $1.18 billion in FY17. Main import items included sugar, vegetable oil, oil seeds, cotton and cereals.  Import from Argentina also increased to $621.60 million in FY18 from $488.85 million in FY17.

Bangladesh faces trade gap with both the countries as exports to these countries are small. The country's export to Brazil reached at $175.43 million in FY19 which was $115.63 million in FY17 while export to Argentina stood at $20.42 million and $9.61 million respectively.

 Non-tariff measures (NTMs) as well non-tariff barriers (NTBs) are high in MERCOSUR countries. UNCTAD analysis shows that the bloc still applies a significant number of quotas and non-automatic licences. It also unveils that product-specific barriers affect more than 40 per cent of Brazilian imports, 27 per cent of Uruguayan imports and 19 per cent of Paraguayan imports. There is a set of common standards and these are followed by all member countries when importing from non-member countries. Dealing with standards as well as the NTMs will be critical to signing FTA with MERCOSUR.

Moreover, tapping the trade potential requires strong marketing and communication. Bangladesh is culturally unfamiliar with MERCASUR as well as the rest of the South America except the football craze. Portuguese is the most spoken language of the region followed by Spanish. These two languages dominate the region's culture and communication.  Thus, overcoming the cultural barrier is a key to get better market access to South America in the long-run. 

Bangladesh is yet to sign any FTA with any country, so far. Despite many efforts, the FTA with Sri Lanka couldn't be realised.   The country is also yet to complete any full-fledged FTA negotiation with any country.  Thus the move to sign FTA with MERCOSUR appears premature.   India signed a Preferential Trade Agreement (PTA) with MERCOSUR in 2009. The deal is limited to 450 products. Now two parties are trying to increase the number to 3,000 items. Bangladesh may think for a PTA first.

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