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EC impact assessment study suggests beef sector will be the worst affected by an EU–Mercosur FTA

07 January 2012

An EC-financed impact assessment of a potential EU–Mercosur free trade agreement, carried out by the Joint Research Centre-Institute for Prospective Technological Studies (JRC-IPTS), suggests that an agreement ‘may cause a decline in farm income, especially in the beef sector’. According to EU farmers leaders, it is ‘estimated that beef prices could drop almost five per cent, while overall beef production would drop 2.8 per cent.’ The effects would be larger in member states that ‘are more dependent on meat production’.

However, the actual effects depend on the different scenarios simulated, with additional EU beef imports ranging from as little as 5,000 tonnes under some assumptions, through 250,000 tonnes under other assumptions, and 524,000 tonnes under the most liberal assumptions. In the latter case it is estimated that EU production would fall by 280,000 tonnes, ‘with a loss valued at €4.6 billion’. In the poultry sector, the loss of value would be an estimated €800 million.

The JRC-IPTS analysis used ‘two different models of two alternative hypothetical versions of a bilateral free trade agreement’ and describes a total of five different scenarios, three of which factor in various hypothetical outcomes to the Doha Round. Overall, the simulations show that ‘there are significant losses to EU producers and gains to Mercosur producers’, with the most extreme divergence in benefits occurring where the FTA is based on ‘the Mercosur request of 2006’.

However, under some scenarios ‘the gains in the EU manufacturing sector outweigh the losses to the EU agrifood sector, leading to an overall increase in GDP.’ This being stated, if the Mercosur market access request is met in full, then the adverse economic effects on EU agriculture are greater, ‘whereas the additional gains elsewhere (to non-agrifood sectors or to consumers) are relatively smaller’. Significantly, non-agrifood production in Mercosur falls under all scenarios. All projections are based on price changes being passed on throughout the food supply chain.

Beyond the livestock sector, ‘EU imports of vegetables and fruit from Mercosur are also higher with trade concessions’, given that under all scenarios the full abolition of tariffs is assumed.

The trade and production results for the sugar sector are uncertain, and depend heavily on the assumptions made. Some scenarios show increased EU imports, while others show a modest fall in imports. In part these variations are linked to assumptions on the level of imports taking place prior to liberalisation. A similar variation is evident on the EU production side (as some scenarios suggest a 12% decline in EU sugar production, while others show minor increases). In a number of scenarios, extensive use of tariff-rate quotas (TRQs) for trade in sensitive products is assumed, with the overall TRQ limits requested by Mercosur appearing in excess of likely export capacities up to 2020 under the market assumptions made.

There is also uncertainty over the impact of an agreement in the cereals sector, with some scenarios suggesting ‘strong increases in EU exports of wheat to Mercosur’ and others showing little change. In terms of oil crops, more liberalised trade would see EU imports of oilseeds lower, but would see an increase in vegetable oil imports. Changes in the cereals and oilseeds sectors are a consequence of both direct and indirect effects, linked to changes in feed demand following changes in trade in livestock products.

The JRC-IPTS report and the EC information note both provide a detailed breakdown of the impact by region within the EU, in terms of farm income and employment effects. The EC information note assumes ‘the most far-reaching liberalisation scenario (Mercosur request 2006)’ in projecting these effects.

Editorial comment

The impact assessment makes no evaluation of the impact of an EU–Mercosur FTA on traditionally preferred partners such as the ACP. This is despite the potentially significant trade effects of the agreement in the sugar, horticulture, beef and rum sectors, where ACP exporters have a traditional interest in developments on the EU market. Equally no consideration is given to the impact on agricultural commodity exports of interest to the ACP, but where the EU has no production interest (e.g. coffee, and coffee products).

However, extrapolating from the EU-focused analysis, one can expect the price effects of an EU–Mercosur agreement to be felt by ACP sugar and horticultural exports and potentially ACP beef exports, although here the EU trade concessions for ‘Hilton beef’, which are already under way, are likely to have a greater effect (see Agritrade article ‘ Evolving beef trade patterns and the ACP’, 12 November 2011).

Other factors not taken into account by the impact assessment analysis are the growing inter-corporate linkages between EU and Brazilian agri-food enterprises. For example, EU sugar companies (including farmer-owned cooperatives) have for some years been expanding their financial stake in the Brazilian sugar sector. Similarly, EU fruit and vegetable companies are expanding their stake in Mercosur fruit and vegetable production enterprises, with a view to securing long-term sources of supply in the context of anticipated climate change. Meanwhile, a process of cross-investment is under way between EU and Mercosur poultry sector enterprises.

These corporate linkages represent an important dimension of the impacts of an EU–Mercosur FTA on the EU agri-food sector, since it may well have a bearing on the eventual positions adopted by individual EU member state governments on specific aspects of the endgame negotiations.

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