trade.ec.europa.eutrade.ec.europa.eu/doclib/docs/2006/december/tradoc_131428.pdf · TRADE SIA OF THE ASSOCIATION AGREEMENT UNDER NEGOTIATION BETWEEN THE EUROPEAN COMMUNITY AND MERCOSUR

TRADE SIA OF THE ASSOCIATION AGREEMENT UNDER NEGOTIATION BETWEEN THE EUROPEAN COMMUNITY AND

MERCOSUR

UPDATE ON THE OVERALL PRELIMINARY TRADE SIA EU-MERCOSUR

MID TERM REPORT

5th APRIL 2007

Personal data in this document have been redacted according to the General Data Protection Regulation 2016/679 and the European Commission Internal Data

Protection Regulation 2018/1725

SIA of Mercosur Negotiations – Mid Term Report page 2

This Report was commissioned and financed by the Commission of the European Communities. The views expressed herein are those of the Consultant, and do not represent

any official view of the Commission.

This Report has been prepared for the European Commission under Contract No: Trade 05-G3-01 - Specific Contract No 1

Principal authors:

Benoît Faucheux, Jennifer Franz, Clive George, Bénédicte Hermelin, Tomek Iwanow, Colin Kirkpatrick, Hanna Norberg, Jacob Lind Ramskov, Martin Hvidt Thelle

Trade SIA EU-Mercosur Partners

IARC, Institute for Development Policy and Management (IDPM), University of Manchester Chaire Mercosur

Copenhagen Economics ECOSTRAT Consultants, Brazil

GRET (Groupe de Recherche et d’Echanges Technologiques) Land Use Consultants

Natural Resources Institute, University of Greenwich WISE Development (Women in Sustainable Enterprise Development)

Project website: http://www.sia-trade.org/mercosur

Project email address: [email protected]


CONTENTS

ABBREVIATIONS.................................................................................................................... 4

EXECUTIVE SUMMARY........................................................................................................ 7

1. INTRODUCTION............................................................................................................... 11

2. METHODOLOGY............................................................................................................... 15

3. BASELINE CONDITIONS AND TRENDS....................................................................... 24

4. TRADE LIBERALISATION AND SUSTAINABLE DEVELOPMENT: THEORY ANDEVIDENCE.............................................................................................................................. 39

5. REVIEW OF PREVIOUS IMPACT ASSESSMENT STUDIES........................................ 58

6. MODELLING THE EU-MERCOSUR ASSOCIATION AGREEMENT .......................... 64

7. IMPACT ASSESSMENT: TRADE IN NON-AGRICULTURAL GOODS....................... 89

8. IMPACT ASSESSMENT: TRADE IN AGRICULTURE ................................................ 120

9. IMPACT ASSESSMENT: SERVICES ............................................................................. 141

10. IMPACT ASSESSMENT: RULE-BASED MEASURES............................................... 154

11. MITIGATION AND ENHANCEMENT MEASURES .................................................. 168

12. CONSULTATION AND DISSEMINATION ACTIVITIES.......................................... 170

13. WAY FORWARD AND CONTENTS OF FINAL REPORT......................................... 174

REFERENCES....................................................................................................................... 175

ANNEX 1: TERMS OF REFERENCE ................................................................................. 190

ANNEX 2. KEY STATISTICS FOR THE MERCOSUR COUNTRIES ............................. 197

ANNEX 3. DETAILED MODEL RESULTS........................................................................ 200

ANNEX 4. THE IMPACT OF FURTHER TRADE LIBERALISATION BETWEEN EU AND MERCOSUR ON ROMANIA AND BULGARIA...................................................... 232


ABBREVIATIONS

AMS Aggregate Measure of Support

CAP Common Agricultural Policy

CGE Computable General Equilibrium

CCA Causal chain analysis

CIFOR Center for International Forestry Research

CGE Computable General Equilibrium

CoC Chain of Custody

CSR Corporate Social Responsibility

CTA Technical Centre for Agricultural and Rural Cooperation ACP-EU

DDA Doha Development Agenda

DFID UK Department for International Development

DG Directorate General

EBA Everything But Arms

EC European Commission

EFTA European Free Trade Area

EU European Union

ERRT European Retail Round Table

FAO Food and Agricultural Organization of the United Nations

FDA Food and Drugs Administration

FDI Foreign Direct Investment

FERN Forests and the European Union Resource Network

FLEGT Forest law Enforcement, Governance and Trade

FOB Free On Board

FTAA Free Trade Area of the Americas

GATS General Agreement on Trade in Services

GATT General Agreement on Tariffs and Trade

GDP Gross Domestic Product

GNP Gross National Product

GFT Government Financial Transfers

GFW Global Forest Watch

GTAP Global Trade and Protection

HPDC Highly Protected Developing Country

HACCP Hazard Analysis Critical Control Point

IDPM Institute for Development Policy and Management

IARC Impact Assessment Research Centre

IEEP Institute for European Environmental Policy

IISD International Institute for Sustainable Development


ICTSD International Centre for Trade and Sustainable Development

IFF Intergovernmental Forum on Forests

IFPRI International Food Policy Research Institute

IPF Intergovernmental Panel on Forests

ITC International Trade Commission

ITTA International Tropical Timber Agreement

ITTO International Tropical Timber Organisation

IMF International Monetary Fund

LDC Least Developed Country

LIDC Low Income Developing Country

M and E Mitigation and Enhancement

MFN Most-favoured-nation

MOU Memorandum of Understanding

MEAs Multilateral Environmental Agreements

MEDC Major Exporting Developing Country

MENA Middle East and North Africa

MFA Multifibre Arrangement

MFN Most-favoured-nation

MOU Memorandum of Understanding

NAFTA North American Free Trade Agreement

NAMA Non-agricultural Market Access

NGOs Non-governmental Organizations

NSDS National Sustainable Development Strategies

NTB Non-Tariff Barriers

NTM Non-Tariff Measure

ODC Other Developed Country

ODI Overseas Development Institute

OECD Organization for Economic Co-operation and Development

PPP Public Private Partnerships

RA Representative Agent

ROO Rules of Origin

SADC Southern African Development Community

SCM Subsidies and Countervailing Measures

S & D Special and Differential

SD Sustainable Development

SIA Sustainability Impact Analysis

SME Small and Medium-sized Enterprises

SPS Sanitary and Phytosanitary Measures

SSA Sub-Saharan Africa


TBT Technical Barriers to Trade

TD/BU Top Down/Bottom Up

TOR Terms of Reference

TRIPS Trade-Related Aspects of Intellectual Property Rights

TRQ Tariff Rate Quota

UN United Nations

UNCED United Nations Conference on Environment and Development

UNCTAD United Nations Conference on Trade and Development

UNDESA UN Department of Economic and Social Affairs

UNDP United Nations Development Programme

UNEP United Nations Environment Programme

US United States of America

USAID United States Agency for International Development

USDA United States Department of Agriculture

WHO World Health Organization

WTO World Trade Organization

WWF World Wide Fund for Nature


EXECUTIVE SUMMARY

This report presents the interim mid-term results of a project being undertaken for the European Commission, to provide an overall sustainability impact assessment (SIA) of the Association Agreement under negotiation between the European Union and the Mercosur countries. This overall SIA is being carried out in parallel with three detailed SIAs, for agriculture, automobiles and the forest sector. The interim results of these sectoral SIAs are incorporated into the overall assessment, along with a wider analysis of the other components of the proposed trade agreement.

The methodology used is as described in the inception report for the project. The current report provides interim findings of the assessment, for consultation and discussion with stakeholders. The final report of the project will update these findings, and evaluate alternative measures for prevention or mitigation of potentially adverse impacts and enhancement of beneficial ones.

The overall SIA analyses the impacts of a postulated trade liberalisation scenario for four components of an EU-Mercosur trade agreement, in comparison with a baseline situation without such an agreement. These four components cover:

• agriculture;• non-agricultural market access;• services• investment, trade facilitation and government procurement

Many options are available to negotiators for different degrees of liberalisation for different products, services and other measures. Alternative options are also available for parallel policy measures in both the EU and Mercosur countries, and for EU-funded support measures. The further liberalisation scenario analysed in the assessment allows for varying degrees of liberalisation for each component of the proposed agreement. Initial indications are given of potential policy measures to enhance beneficial impacts or to prevent or mitigate adverse ones. In the CGE-modelling used in this report we have evaluated the static comparative effects from removing tariffs and non-tariff barriers in agriculture and giving full non-agricultural market access, as well as removing existing barriers on cross-border trade in services. Furthermore, an indication of the potential gains from trade facilitation is included in the modelling scenario. The model does not include effects from liberalising investment, and any such dynamic effects are additional to the quantitative estimates provided in this report. The final stage of the project will include a fuller assessment of alternative mitigation and enhancement measures.

Principal findings

Impacts in the EU

The economic impacts for the EU are expected to be beneficial overall. A static CGE modelling study undertaken as part of the SIA estimates that full liberalisation would give an economic welfare gain of the order of 0.1% of GDP. Additional gains can be expected from dynamic effects whereby productivity is enhanced through greater competition and economies of scale. However, such gains depend on a wide range of complementary measures, and their magnitude cannot readily be estimated.


The gains in static economic welfare are associated with increases in output in some economic sectors and decreases in others, which can be significant as a percentage of each sector’s size. Production of services and manufacturing goods would increase, while the agricultural sector in general and processed foods in particular would contract. For full liberalisation, the production of motor vehicles and machinery is projected to increase by between 1 and 2 percent in the EU15, while animal products, grains and processed foods would decline by between 3 and 5 percent. Output in most service sectors rises through an increase in exports. Output of financial services is estimated to increase by about 2 percent for full liberalisation, and in the utilities sector by about 3 percent. Anticipated effects in the EU10 are similar to those in the EU15 but somewhat smaller.

The decrease in production in agriculture and food processing will reduce employment in these sectors. If not mitigated by appropriate support programmes or other policy measures, this adjustment process may lead to adverse social impacts in particular localities. Both positive and negative environmental impacts will arise, associated with the production changes. These will be localised and are expected to be small, and not significant in the context of an effective regulatory regime.

Impacts in Mercosur

The economic impacts are relatively larger in Mercosur countries than in the EU, primarily because EU-Mercosur trade is a larger proportion of their total trade. Full liberalisation would be expected to lead to static economic welfare gains of the order of 0.5% GDP in Argentina, 1.5% in Brazil and 2.1% in Uruguay. The comparative static economic model used in the SIA indicates a potentially high welfare gain in Paraguay, perhaps up to 10% of GDP. This is partly because of the high initial barriers, and partly because the export sectors which benefit from lower EU tariffs comprise a much larger proportion of the economy than the sectors which decline through higher EU imports. Most of the static welfare gains in all the Mercosur countries come from goods liberalisation, with a smaller contribution from liberalising cross-border trade in services. There are also significant potential gains from trade facilitation measures, but they cannot be modelled with any certainty.

The sectoral changes indicated by the model are generally in the opposite direction to those in the EU, and again are larger. The agriculture and processed foods sectors are expected to expand, while textiles and clothing, wood, pulp and paper, chemicals, metals, motor vehicles, transport equipment (except for Argentina) and machinery are all expected to decline. With full liberalisation some of the changes are predicted by the model to be as much 50% of sector output. Output is also predicted to decline for financial services, utilities (except Uruguay) and business services.

Significant increases in economic welfare may occur in the long term in all the countries. The exposure to competition is expected to induce efficiency and productivity gains, and the opportunities for new investment and prospects of higher rates of return can be expected to attract foreign and domestic investment, depending on the other factors which affect the investment climate. However, the pace of liberalisation and complementary policy measures will affect the impact associated with investment and productivity growth. If liberalisation outpaces the rate at which domestic economies can adjust, there could be a negative impact as imports replace domestic production and uncompetitive firms retrench or close.


The study identifies social impacts in Mercosur that are beneficial in the short term as well as the long term, and others that may be significantly adverse unless effective mitigating action is taken. The potential negative impacts of greatest concern are: (i) significant negative short to medium term impact on employment in manufacturing, with associated pressures on wage rates during the period of adjustment (ii) a significant adverse impact on government revenues, except in Paraguay; unless compensated by raising taxes from appropriate other sources, this could have negative impacts on social, educational and health expenditure (iii) a decline in manufacturing would raise concerns over reduced technology levels and skill levels, and may reduce the ability of Mercosur countries to promote higher incomes through industrial development.

Gender impacts are expected to be mixed and relatively small.

Both positive and negative environmental impacts are expected. The main potential impacts that have been identified are (i) potential for improved environmental services, subject to continued state support and effective regulation (ii) potential for increased water pollution from agriculture and food processing, requiring stronger regulation (iii) a potentially significant adverse impact on biodiversity, exacerbated by increased demand in Europe for biofuels, particularly from Brazil.

The potentially adverse impacts on biodiversity in Mercosur would be significant globally if not countered by effective mitigation measures. The impacts of the proposed trade agreement on climate change are mixed. The economic modelling studies indicate a small reduction in greenhouse gas emissions from the re-allocation of production between Mercosur and the EU, countered by a larger increase due to increased international transport. Efforts to reduce EU emissions through the use of biofuels to replace fossil fuels are expected to benefit significantly from a reduction of barriers to imports of Mercosur ethanol.

Recommendations for negotiators and policy-makers

The final stage of the project will assess potential policy measures to mitigate adverse impacts or enhance beneficial ones. Recommendations will be developed for actions that may be taken within the proposed trade agreement, by other policy-makers in the EU and Mercosur, and in EU-funded support to Mercosur countries.

Further consultation

The results of the overall SIA will contribute to refining the EU’s position in ongoing negotiations, the design of its support programmes and other parallel policy measures. In order to assist with this, and with the completion of the SIA study and preparation of the final report, comments and suggestions are invited on the questions identified below. The list is not intended to be comprehensive, and observations relating to other aspects of the study are also welcomed.

• Is there any important evidence of which you are aware that has not been taken intoaccount, such that the assessment of impacts is misleading or incorrect?

• Are there faults in the analysis which may have led to incorrect conclusions?


• Do you have any suggestions for the analysis of prevention, mitigation and enhancingmeasures? Do you have any suggestions for further development of communicationwith experts and other stakeholders?

Do you have any additional suggestions or issues for consideration in the Final Report?

Comments and suggestions may be sent to the project email address:

[email protected]


1. INTRODUCTION

1.1 EU - Mercosur Trade Association Negotiations

The negotiations for an Association Agreement between the EU and Mercosur (comprising Brazil, Argentina, Paraguay and Uruguay) began in June 2000 with the ultimate objective of achieving a greater level of political and economic cooperation and integration within the Mercosur group itself, and with the EU. In 2004 the EU and Mercosur held intensive negotiations aimed at concluding trade talks by the end of October 2004. However, at a ministerial meeting held in Lisbon on 31st October 2004, both parties agreed that the negotiations required more time. Although the parties met several times in 2005, they have been unable to re-launch successfully the bi-regional discussions. It is in this context that the Commission has decided to undertake a new Trade SIA of the Mercosur – EU Association Agreement.1

1.2 The European Commission’s Trade SIA Programme

The European Commission has been engaged in conducting Trade SIAs as part of its trade policy-making process since 1999. The European Union’s approach to the impact assessment of trade policy goes beyond strategic environmental assessment of the effects in Europe, to assess the impacts of proposed trade agreements on all aspects of sustainable development for all trading partners. The approach aims to make a significant contribution to regional and global governance, although to achieve this many challenges have to be overcome. As well as the general methodological difficulties of undertaking ex ante impact assessment at the policy level, the assessment has to evaluate the significance of economic, social and environmental impacts, and find appropriate entry points into complex decision-making processes.2

The approach was first developed in 1999 in the preparations for the World Trade Organisation (WTO) conference in Seattle. At that stage the level of detail possible in the assessment could go no further than confirm that some of the issues were genuine cause for concern, and would need fuller investigation. When the WTO trade negotiations were resumed at the Doha conference of 2001 the European Commission embarked on a more comprehensive series of SIAs of the Doha Development Agenda, and launched similar SIA studies for regional trade agreements.

The initial methodology for SIA of trade agreements was developed in early 1999 (Kirkpatrick, Lee and Morrissey, 1999), building on earlier North American experience of assessing the environmental impacts of trade policy. An overview assessment of the Seattle agenda was undertaken prior to the WTO Ministerial Meeting in November 1999 (Kirkpatrick and Lee, 1999). The methodology was subsequently refined and developed further for more detailed assessments (Kirkpatrick and Lee, 2002), and the European Commission has recently issued a handbook describing its current status (European Commission 2006). With further refinements for each of the studies undertaken, the extended methodology has been applied to the WTO negotiations mandated by the WTO Ministerial Meeting in Doha, and to regional trade negotiations and agreements to which the EU is a party. Some 16 SIA studies have been undertaken to date by a range of organisations, as listed in Box 1.

1 The work completed in 2003 on a preliminary Trade SIA of the EU Mercosur negotiations (Planistat, ‘Global Preliminary SIA EU-Mercosur. Final Report’, September, 2003) provides the starting point for the current EU-Mercosur Trade SIA. 2 See Kirkpatrick and George (2006a) for a detailed discussion the methodological issues relating to the Trade SIA approach.


Box 1: European Union SIAs

Pre-Seattle SIAs

Initial development of SIA methodology

• Overview SIA

WTO Doha Development Agenda

Further development of SIA methodology

• Preliminary Overview SIA• Sector studies

o Agriculture – major food cropso Non-Agricultural Market Access - textiles and clothing, non-ferrous metals, pharmaceuticalso Competition policyo Environmental serviceso Distribution serviceso Forestso Agriculture – generalo Fisheries

• Final Overview SIA

Regional SIAs

• EU-GCC EU-ACPoverview SIA sector/sub-region SIAs

• EU-Chile EU-Mercosuro overview SIA sector/sub-region SIAs

• Euro-Mediterranean Free Trade Area overview SIAo sector/sub-region SIAs

The European Commission has defined the objective of its SIA studies (European Commission, 2002) as a means of integrating sustainability into European trade policy:

• by analysing the issues of a trade negotiation with respect to sustainable development;• by informing negotiators of the possible social, environmental, and economic

consequences of a trade agreement;• by providing guidelines to help in the design of possible flanking measures, the sphere

of activity of which can exceed the commercial field (internal policy, capacitybuilding, international regulation), and which makes it possible to maximise thepositive impact and to reduce the negative impact of the trade negotiations in question.

1.3 The Updated EU – Mercosur Preliminary Trade SIA

An initial preliminary overview SIA of the proposed EU-Mercosur trade agreement was undertaken for DG Trade in 2003 (Planistat, 2003). The current study draws together the results of this earlier study and updates the analysis to account for developments in the negotiations and in the pattern of EU-Mercosur trade that have occurred since 2003.

The aim of the study is to provide an overall assessment of the potential impact on sustainable development of the trade aspects of an Association Agreement between the European Union and Mercosur. The overall assessment will allow for the cross sectoral and cumulative impacts likely to result from the implementation of the trade aspects of an Association Agreement between the European Communities and Mercosur as a whole. It will also


integrate the findings of the sectoral Trade SIA studies that are being undertaken for Automobiles, Forests and Agriculture.3

The updated preliminary overview SIA covers four main areas:

• agriculture;• non-agricultural market access;• services;• investment, trade facilitation and other rules-based measures in the proposed trade

agreement.

The updated Preliminary Trade SIA and the sector studies will be carried out using a standard methodological framework. This framework has two complementary elements:

- Trade sustainability impact assessment, comprising a balanced and integrated assessment ofpotential economic, social and environmental impacts. The sustainability impact assessmentwill:

- build on the findings of trade and economic analysis relating to EU- Mercosurtrade;

- provide a clear analysis of the underlying sustainability context;- specify the scenarios for analysis;- provide a quantitative and qualitative assessment of the potential impacts,

using appropriate techniques of economic, environmental and social analysis.The quantitative analysis will be informed by the results of modelling of thetrade liberalisation scenario.

- utilise case study evidence, including case studies undertaken by local experts.- give a transparent analysis of the causal chain mechanisms through which the

scenarios are expected to impact on the social, economic and environmentaldimensions of sustainability.

- Consultation process, whereby consultation with, and dissemination of results to, partnersand key stakeholders in the EU and its Mercosur trading partners is an integral part of theassessment process. Consultation and transparency are essential processes for ensuring thecredibility and legitimacy of the Trade SIA.

This Mid-Term Report builds on the results of the EU Mercosur Trade SIA Inception Report (IARC, 2006), which provided an initial update and screening of potentially significant sustainability impacts. In accordance with the requirements of the Terms of Reference, the midterm report describes:

• Implementation of the methodology: a summary of the process by which themethodology has been implemented in the case of EU-Mercosur negotiations

• Information on communication activities:• State of play of study underway, outcomes regarding the screening phase, design of

sector studies• The way ahead to complete the study

There are thirteen sections in the Report:

3 Separate Mid Term Reports have been prepared for the automobile, forests and agriculture sectors.


1. Introduction2. Methodology3. Baseline Conditions and Trends4. Trade liberalisation and Sustainable Development: Theory and Evidence5. Review of Previous Impact Assessment Studies6. Modelling the EU – Mersosur Association Agreement7. Impact Assessment: Trade in Non-Agricultural Goods8. Impact Assessment: Trade in Agriculture9. Impact Assessment: Services10. Impact Assessment: Rules – Based Measures11. Mitigation and Enhancement Measures12. Consultation and Dissemination Activities13. Way Forward and Content of Final Report


2. METHODOLOGY

2.1 Trade SIA Framework

The purpose of the (ex ante) SIA is to support better policy making, by providing decision makers with an evidence-based assessment of the potential positive and negative consequences of their policy choices. To achieve this, the analysis strives to be credible, evidence-based, and transparent. The results of the assessment also need to be provided to decision-makers at an early stage in the policy cycle, if they are to inform the decision-making process.

The main components of the SIA methodology are: • Screening and scoping• Scenarios• Assessment of impacts• Evaluation of alternative preventative, mitigation and enhancement measures• Consultation and stakeholder engagement

The methodological framework for undertaking sustainability impact assessments (SIA) of trade negotiations was originally developed in 1999, and has subsequently has been refined on the basis of experience in its application (George and Kirkpatrick, 2004; EC, 2006). This ongoing process of refinement and development has been maintained in the current study, by incorporating economic modelling as one of the analytical tools that is used to assess the significance of potential sustainability impacts.

The methodology for the EU-Mercosur SIA includes an integrated CGE modelling component which provides a quantitative framework for identifying static equilibrium economic impacts and linking these to the analysis of social and environmental impacts (Figure 2.1). This analytical framework provides a common quantitative foundation for the assessment of sustainability impacts.


Figure 2.1: The Integrated Framework

The Copenhagen Economics Trade Model (CETM) is a global computable general equilibrium (CGE) model incorporating some of the relevant environmental and social parameters. The CETM captures linkages between the different sectors and regions of the world economy, and allows for an economy-wide assessment at both the national and global level.

Figure 1 shows the impacts that can be modelled directly in the CETM, in relation to the corresponding core indicators of the SIA methodology. Generally, the main use of the general equilibrium model is to provide estimates of the static equilibrium economic effects of the trade agreement, but there are social and environmental indicators included as well in the output of the model. Other economic impacts and associated social and environmental effects are assessed separately.

An important part of the output from the model is the information on which sectors are expected to contract or expand (for each country/region), and the relative magnitude of these sectoral shifts. Combined with information on sector characteristics from a social and environmental perspective, this information provides the starting point for the SIA analysis.

The model can calculate impacts on a wide range of variables for each individual country, such as:

• Economic welfare (measured as equivalent variation)• Real income• Total employment• Employment by sector and skill-level• Real wages

Trade reforms

Baseline economic, social and environmental

conditions

Scenario definitions

Integrated quantitative framework: Copenhagen Economics Trade

Model Macroeconomic

and sectoral results

Quantitative economic results

Quantitative social results

Quantitative environmental results

Screening of sustainability issues

Focused economic analysis

Focused social analysis

Focused environmental analysis

Baseline economic, social and environmental conditions

Scenario definitions

Integrated quantitative framework :

Quantitative economic

results

Quantitative social results

Screening of sustainability issues

Focused economic analysis

Focused social

analysis

Focused environmental

analysis

Macroeconomic and sectoral

Quantitative environmental

results

Copenhagen Economics Trade Model

Trade reforms


• Return on capital• Economy-wide value added (GDP)• Value added by sector• Real prices for both domestic and imported goods and services• Output and market sizes for goods and services• Imports and exports by sector• Tariff revenues• Energy usage• CO2 emissions

Regarding social impacts, the CETM can analyse certain distributional effects of macroeconomic and sectoral effects following trade reforms. The output includes quantitative changes in real wages and sectoral employment for skilled and unskilled labour. Due to the detailed regional and sectoral disaggregation of the CETM that is used for this study, this output from the CETM shows in which sectors jobs will be lost, in which sectors employment will increase, and the aggregate effect on wage levels for skilled and unskilled workers in each country.

The focus of the environmental modules in the CETM is energy usage (electricity, oil, coal, gas) and greenhouse gas emissions (CO2). The GTAP energy data set (EDS) is used, which covers among other variables the quantity of energy usage by energy commodity and energy use class. The energy and CO2 impacts of international transport are included in the model as well, and will also be assessed separately by considering the estimated changes in trade flows.

The GTAP6 database provides the majority of the data for the empirical implementation of the model. The database is the most recently updated source for internally consistent data on production, consumption and international trade by country and sector on a global level. It is based on detailed national accounts and balance of payments data from both national sources and international organisations. Compared to previous versions of the GTAP database, version 6 includes several important improvements with respect the EU-Mercosur context, all of which are incorporated in the CETM:

• improved domestic databases for Argentina and Brazil• improved treatment of data on services trade• improved tariff coverage using MAcMaps data on preferential rates

2.2 Causal Chain Analysis

Causal chain analysis (CCA) is the fundamental building block for the SIA methodology, and is used to identify the significant cause-effect links between the proposed trade measure (scenario) and its final economic, social and environmental impacts. CCA aims first at (i) linking changes in a trade measure to changes in the incentives (prices) and opportunities (expanded market access), which can influence the production system and trade flows; and then at (ii) linking changes in the production system to sustainability impacts. The CCA draws on a range of sources for the evidence that informs the analysis, including:

• economic theory, evidence from earlier studies and data analysis;• economic (trade) models, based on available computable general equilibrium (CGE)

models and spatial trade model applications;


• qualitative analysis based on the analysis of anticipated changes in the production systemand trade flows;

• case studies;• consultations and expert opinions.

The CETM model is the principal source used for the causal chain analysis of the static equilibrium economic effects. Successful application of the causal chain method over the full range of the assessment requires separating the trade-related causes from other causes, which implies adopting a “systems model” of all the main factors affecting sustainability.

2.3 Static and dynamic effects

A change in a trade measure, such as the removal of a tariff, has two main effects. The first is to create static gains from trade, including efficiency gains from exploiting comparative advantage, the reduced costs from scale economies, reduction in distortions from imperfect competition and increased product variety. The second effect is to create dynamic gains from trade. These are the benefits from trade that accrue over time. The sources of these are not well understood or documented, although there exist a variety of possible theoretical reasons and some empirical evidence that countries have benefited more than the static gains alone would suggest.4

A static trade model has no explicit time dimension and abstracts from the process by which an equilibrium might be reached over time, as well as from the dependence of the variables in the model itself on a changing past or future. A dynamic trade model has an explicit time dimension, but to be meaningful it should include variables and behaviour that at one time depend on variables or behaviour at another time.

A conceptual framework for the SIA, which includes the economic static and dynamic effects of trade liberalisation along with the environmental and social effects, is presented in Figure 2.2.

4Deardorff's Glossary of International Economics available at:http://www-personal.umich.edu/~alandear/glossary/


Figure 2.2. Basic Principles of the Causal Chain Analysis

2.4 Scenarios

Two scenarios are used in assessing the potential impact of the EU-Mercosur negotiations on sustainable development:

• Base scenario: no change in the current negotiated trade measures affecting EU andMercosur trade, including no agreement on the trade liberalisation measures beingdiscussed within the WTO Doha Development Agenda negotiations. The baseline scenarioassumes, therefore, a continuation of existing trends in trade flows and current levels oftariff and non-tariff measures.

• Further liberalisation scenario: : this represents the strongest probable implementation ofthe EU –Mercosur trade negotiations. Negotiating options for the actual trade agreementcover a range of intermediate scenarios, involving different degrees of liberalisation foreach type product or service, differing for each form of trade measure.

2.5 Sustainability Indicators and Impact Significance

The SIA uses the same set of nine core indicators as used in the previous SIA studies, covering the economic, environmental and social dimensions of sustainable development (Table 2.1). For each of the core indicators, second tier indicators are used to describe specific impacts that are identified in the assessment.

Trade Measure

Incentives and Opportunities

CCA

Production System

CCA CCA CCA

Economic Impacts

Social Impacts

Environmental Impacts

CCA

Process Impacts

Dynamic effects

Economic Models


Table 2.1. Core Sustainability Indicators

Sustainability dimension

Core indicator

Economic Real income Fixed capital formation Employment

Environmental Biodiversity Environmental quality Natural resource stocks

Social Poverty Equity Health and education

In addition to the nine core indicators for sustainability outcomes, the methodology allows for two process indicators which influence the long term economic, social and environmental impacts of trade liberalisation:

• Consistency with sustainable development principles• Institutional capacity for effective sustainable development strategies

The key principles of sustainable development are taken to be the principles defined in the Rio Declaration on Environment and Development5. The influence on capacity to implement effective sustainable development strategies is assessed according to compatibility with principles developed by the UN Department of Economic and Social Affairs (UNDESA) and OECD6.

The sections of the report which follow apply this framework to the proposed EU – Mercosur Association Agreement They describe the analysis of economic, social and environmental impacts, followed by an analysis of process impacts under the headings of the impact indicators defined in the SIA methodology. The impacts are summarised at the end of each section, in tables of the form shown in Table 2.2.

The following symbols are used in the tables to show impact significance

� positive greater significant impact � negative greater significant impact� positive lesser significant impact � negative lesser significant impact�� positive and negative impacts likely to be experienced according to context (may be

lesser or greater as above) - impact has been evaluated as non-significant compared with the base situation

Column 2 This shows the types of likely significant impact by country or sector that have been identified in the analysis, grouped under the nine core indicators and two process indicators defined in the methodology.

Column 3 Entries in this column summarise the main factors in the causal chain.

5 United Nations (1992) 6 IDPM (2001), George and Kirkpatrick (2006b)


Column 4 An entry in this column indicates potential for either a mitigating or an enhancing measure, or a combination of the two

Column 5 Significance of short and long term impacts.

Table 2.2: Format of impact summary tables

Potential significance

Impact Countries / sectors affected

Causal factors Factors affecting significance

shor

t te

rm

long

te

rm

Economic Real income

Fixed capital formation

Employment

Social

Poverty

Health and education

Equity

Environmental Biodiversity

Environmental quality

Natural resources

Process

SD principles

SD strategies

Greater and lesser significance are defined by the SIA methodology as:

• lesser significant impact – marginally significant to the negotiation decision, and ifnegative, a potential candidate for mitigation

• greater significant impact – significant to the negotiation decision, and if negative,merits serious consideration for mitigation.

Distinctions between greater and lesser significance are based on the importance of an impact for the particular economic, social or environmental factor concerned. They give no indication of relative importance of different impacts. The following factors are taken into account in evaluating significance:

• the extent of existing economic, social and environmental stress in affected areas;• the direction of changes to base-line conditions;• the nature, order of magnitude, geographic extent, duration and reversibility of

changes;• the regulatory and institutional capacity to implement mitigation and enhancement

measures.


2.6. Short and long term impacts

As shown in Table 2.2, the impact summary tables distinguish between short term and long term impacts.

Short term impacts are those which occur during the period of adjustment, as production rises in some sectors and declines in others to accommodate the changed trade measure.

Long term impacts are the combined outcome of the static changes which result once the period of adjustment is complete, and of the dynamic effects of the trade measure.

2.7. Country Groupings and Case Studies

Any global or regional level aggregation aggregates variations in sustainability impacts between countries and sectors. The main focus of the SIA is on the potential impacts in the EU and Mercosur as a whole. However, the SIA will also provide information on potential impact at the individual country level, where it appears that a particular country may be disproportionately affected (positively or negatively), in economic, social or environmental terms. Importer and exporters countries are likely to respond in different ways, e.g. depending on their competitive position. Equally, social and environmental impacts may vary significantly depending at the country or intra-country level. The modelling results cover the four Mercosur countries separately and as a single group. For the European Union the results are disaggregated for the 15 member states and the 10 accession members groups. To strengthen the analysis by allowing for potential differences in impact between countries, a number of sector level case studies were undertaken in individual Mercosur countries.7 In selecting the case studies, the following criteria were used:

• importance of the country as producer, importer or exporter of the product;• the trade structure of the country (taking into account the export or import dependence);• importance of social and/or environmental issues• availability of data and overall feasibility with regard to time and funding resources

available.

2.8. Preventative, Mitigation and Enhancement Measures

The SIA methodology allows for evaluation of possible preventative, mitigation or enhancement measures, subsequent to the assessment of potential impacts. These measures can be categorised as follows:

• trade-related measures, which can be integrated into the trade agreement• international and regional measures to improve the policy environment and strengthen

national regulatory capacity• national sectoral policy measures to remedy or regulate market imperfections• national policy measures to mitigate adjustment costs.

The MTR identifies the significant potential impacts of trade liberalisation in Mercosur and the EU and provides a preliminary discussion of potential flanking measures (section 8). The

7 The country level sector studies are included in the Automobile, Forest and Agriculture MTRs.


detailed analysis of the potential preventative, mitigation and enhancement measures that might be introduced will be undertaken in the Final Report.


3. BASELINE CONDITIONS AND TRENDS

The trade SIA methodology incorporates a baseline scenario, which represents the economic, social and environmental conditions and trends that would occur in the absence of a EU – Mercosur Association Agreement. trade agreement. In this section, the existing trade and economic conditions and policy environment relating to EU – Mercosur trade are described.

3.1 The Mercosur Treaty

Mercosur was created in 1991 with the signature of the Treaty of Asunción by four Latin-American countries (Argentina, Brazil, Paraguay and Uruguay). It was the result of a convergence process between the two biggest economies, Brazil and Argentina, in the region during the 1980s, just after democracy was re-established (Devlin, 2000). Different stages in the evolution of Mercosur can be identified according to the main results of the integration process (Narbona, 2005). Sometimes the bilateral relationship between Argentina and Brazil have been decisive to Mercosur’s evolution (Machado and Ribeiro, 1999). After an initial transition period where intra-regional trade strongly increased, the regional bloc suddenly deadlocked and Mercosur fell into a structural crisis. The Conference “Mercosur: In search of a new agenda” held in the Getulio Vargas Foundation in Rio de Janeiro (June 2003) was devoted to examining future directions for Mercosur regarding several aspects, including alternatives for the trade agenda (Rios, 2003), and Mercosur’s insertion into a globalised world (García Pelufo, 2003). Economic and political solutions have been proposed to be able to cope with the great constraints and problems in each particular field. Subsequent studies has explored various options for the future of this regional initiative (Secretaría del MERCOSUR, 2004).

Two new issues have recently emerged and both constitute perhaps the most important challenges for the internal enlargement process of Mercosur. The first challenge is the impact of different fiscal policies on the integration process. Tax issues directly affect Mercosur in the area of competitiveness, investment promotion, tax collection and its distribution among the sectors. This topic is closely related to the limited efforts for macroeconomic coordination made by Mercosur countries. The second challenge relates to the asymmetries within the framework of the regional integration project. There are asymmetries between the regional integration process and local development that have to be faced to achieve structural convergence inside Mercosur. Moreover, there are specific asymmetries in the smallest member state, Paraguay, demanding specific measure such as the Structural Convergence Fund (Zerbino, 2004).

Mercosur has signed various trade agreements, mainly with Latin American partners (Table 3.1). Recently, Mercosur has also concluded preferential trade agreements with developing countries from other regions, such as India and South Africa. However, these agreements are only partial scope agreements and they do not cover all the trade flows between the members. Mercosur has never concluded any trade agreement with a developed country, although two are currently in the process of negotiation. Mercosur countries are also members of the Latin American Integration Association.


Table 3.1: List of trade agreements negotiated by Mercosur

Agreements Established Members of agreement

Signature Date

Description

MERCOSUR/Chile July, 1996 Objectives: to form a free trade area between Mercosur and Chile in 10 years, starting in 1997; to crease a wide economical space to facilitate circulation of goods/services, establish juridical and institutional base for economic/physical cooperation; to promote economic, energetic, scientific and technological cooperation and complementation

MERCOSUR/Bolivia Dec., 1996 Objectives: form a free trade area in 10 years (max.) leading to total trade liberalization and all forms of non-tariff restrictions should be eliminated by this time

MERCOSUR/Mexico July, 2002 Objectives: Crease free trade/eliminate all tariffs, restrictions and other obstacles; diversification of trade and the establishment of a juridical basis granting transparency for economical agents; establishment of juridical background to promote and stimulate reciprocal investments; promotion of economic complementation and cooperation

MERCOSUR/Mexico (automobiles)

July, 2002 Objectives: Establish reciprocal reduction on import tariffs for automobiles

MERCOSUR/Peru Nov., 2005 Objectives: Establish tariff preferences, with a view of a free trade area MERCOSUR/Andean Community (Columbia, Ecuador, Venezuela)

Dec., 2003 Objectives: Establish tariff preferences, with a view of a free trade area

MERCOSUR/India (preferential trade agreement)

Jan., 2004 Objectives: Framework agreement; signed to establish first stage of tariff concessions and preferences for eventual creation of free trade area

MERCOSUR/SACU (South African Customs Union)

Dec., 2004 Objectives: Establish fixed tariff preferences between Mercosur and SACU; main sectors concerned: agro-industrial, chemical, automobiles and plastic

Free Trade Area of the Americas

Objectives: Wide-scope agreement; create a free trade area in the Americas; areas in discussion include: education, investment, sanitary and phytosanitary measures

MERCOSUR/European Union

Objectives: bilateral trade liberalization of goods/services following WTO rules; better access to government procurement; promotion of open and nondiscriminatory environment for investments; establish effective dispute settlement mechanisms

3.2 EU – Mercosur Relations

The EU has supported the integration process of Mercosur since shortly after its inception. In May 1992, one year after the conclusion of the Asunción Treaty, Mercosur and the EU signed an inter-institutional agreement which served as a vehicle for technical assistance, personnel training, and institutional support for the then recently founded Mercosur. The two blocs signed an inter-regional Framework Agreement in December 1995. It was the first agreement of its kind that the EU was negotiating outside Europe. This agreement was designed to facilitate further negotiations on commercial and economic cooperation while putting in place immediately a political dialogue between the two regions.

The negotiations of the EU-Mercosur Association Agreement, which has three components (political, cooperation and trade), were launched in the first EU-Latin America meeting of Heads of States and Governments held in Rio de Janeiro in June 1999. The EU-Mercosur Bi-regional Negotiations Committee (BNC) is the main forum for negotiations. The first round of negotiation was celebrated in April 2000. Since then, sixteen negotiating rounds have taken place.


During the spring 2004, substantial progress in the trade chapter allowed both parties to realistically envisage a conclusion of negotiations by the end of October 2004. But the year concluded on the failure to meet the deadline of October 31 for the completion of the negotiations. Following a number of technical contacts in 2005 to discuss the ways to re-engage the process, Ministers met again in September of 2005 and Trade Commissioner Peter Mandelson visited the region in March of 2006. Since then, discussions have continued at the technical level, but no new negotiating offers have been exchanged and the discussions are currently at a standstill.

The main difficulties met by the negotiators are:

• The central role played by agricultural issues on both sides: agriculture is the mainobjective for Mercosur, whilst it remains the most sensitive issue for the EU.

• The position of Mercosur regarding services and public procurement, where main EUinterests are concentrated.

• The impasse in the Doha Round and the Free Trade Area of the Americas (FTAA).• The need to negotiate “bloc to bloc” with the EU requires the consolidation of an

internal consensus prior to an external one. This requirement creates an additional stepin the process of defining common positions. Furthermore, the regional bloc has madelittle progress on the implementation of a customs union and free circulation of goods.

• EU enlargement, which has introduced new interests and priorities in the negotiations.

During recent negotiations different proposals for tariff elimination have been advanced. Mercosur proposes a less than full reciprocity approach with a phased reduction in tariffs for different categories of goods and services:

• For Mercosur imports from the EU the categories for tariff reduction are: A: 0 years;B: 8 years; C,D,E: 10 years, with different levels of reduction per category

• For EU imports from Mercosur, reductions are: A: 0 years; B: 4 years; C: 7 years andD: 10 years.

The EU has proposed the same tariff reduction periods for both EU and Mercosur imports but considers five categories (A to E) instead of the four proposed by Mercosur.

• For Mercosur imports from EU and for EU imports from Mercosur, the categories fortariff reductions are: A: 0 years; B: 4 years; C: 7 years; D: 10 years and E: not defined.

Regarding tariff rate quotas (TRQs) the EU proposes a two-step approach. In the first step, the EU would grant Mercosur the right to export an additional but limited quantity of product X within the framework of the EU-Mercosur agreement. In the second step, the volume granted to Mercosur is linked to the WTO negotiations in the Doha Round. The second quantity that Mercosur will effectively obtain will be inversely linked to the increase in the current volume of the EU WTO TRQs that will be negotiated at the WTO. For every percentage point of increase in the EU bound WTO TRQs, the second quantity devoted to Mercosur shall be reduced by a corresponding five percentage points (Kutas, 2006).

Although the parties met several times in 2005 and 2006, they have been unable to successfully re-launch the bi-regional discussions.


3.3 Economic Characteristics

Population, per capita income, economic growth rates and total trade activity vary significantly between the four countries. As of 2004, per capita GDP was highest in Argentina (12,723 US$ PPP) and lowest in Paraguay ($4,868 US$ PPP).8 Of the Mercosur countries, Brazil has the largest economy (GNI 584,859 million US$). Paraguay falls at the other end of the spectrum as the smallest trading partner (1%), with the smallest GNI (7,133 million US$ in 2004) and slowest rate of per capita annual GDP growth (0.4%). The principal economic data for the partner countries are presented in Table 3.2.

Table 3.2: Mercosur: Economic Characteristics

Argentina Brazil Paraguay Uruguay

Population1 Population (m) 38.37 183.91 6.02 3.44 Population (% rural) 10 17 43 7

Real Income

GDP (current $USb) PPP2 486 1483 28 32 GDP growth (annual %)9 9 5.2 2.9 12.3 GDP/Capita (current US$) PPP2 12723 8297 4868 9465 GDP/Capita growth (%) 8 3.9 0.4 11.6 GINI Coefficient (Total av. 1984-2002) 52 59 57 45 GINI Coefficient (urban) 53 58 58 45

Fixed capital formation Gross capital formation (% of GDP) 19 21 22 13 Gross capital formation (annual % growth) 35 11 3 32 FDI net inflows (% of GDP) 3 3 1 2

Employment

Unemployment rate (total) % of labour force3 20 9 7 19 Unemployment rate (urban) % of labour force 14 12 10 13 Real Average Wage (2000= 100) 92.2 85.5 90.5 77.9

Trade Exports (% of GDP) 25 18 36 30 Imports (% of GDP) 18 13 37 28

External Debt Total debt service (% of GNI) 2003 12 12 5 8 Total debt service (% of exports) 2003 38 64 10 26 Total External Debt (% of GDP) 2003 128.25 46.55 53.24 105.20 Notes: 1: All Table 1 data for 2004 unless otherwise indicated 2: Paraguay income data for 2002 3: Data Argentina (2002); Brazil (2001); Paraguay (1999); Uruguay (2002) Sources: World Bank World Development Indicators (WDI) 2004; WTO; LAC Databook 2005 (World Bank);

8 LAC Databook (World Bank), 2005 9 Annual growth is for the period 1976 to 2003


3.4 Trade Flows

Mercosur is the main trading partner of the European Union (EU) in Latin America. Between 1995 and 2004, 42% of EU sales to Latin America went to Mercosur and 48% of its imports from this region originated in the bloc of the Southern Cone10. However, the share of Mercosur as a recipient of EU exports has been declining over the period, with corresponding increases in the share of trade with countries such as Chile and Mexico (Table 3.3).

Table 3.3: Mercosur main trading partners Value ($USm) Growth (%) Share (%) by region

1995 2000 2004 95/00 00/04 1995 2000 2004 Asia 9171 7971 17537 -13 120 13 9 13 European Union 18012 20025 30078 11 50 26 24 22 Intra Mercosur 14451 17741 17114 23 -4 21 21 13 USA 10773 16930 24678 57 46 15 20 18 Rest of the world 18087 22196 44453 23 100 26 26 33

Export

World 70493 84863 133861 20 58

Asia 7920 10085 15029 27 49 10 11 16 European Union 21949 21069 20007 -4 -5 27 24 21 Intra Mercosur 14439 17713 17879 23 1 18 20 19 USA 17635 18693 15696 6 -16 22 21 17 Rest of the world 17915 20882 26210 17 26 22 24 28

Import

World 79858 88441 94821 11 7 Asia 17091 18055 32566 6 80 11 10 14 European Union 39961 41094 50086 3 22 27 24 22 Intra Mercosur 28890 35453 34994 23 -1 19 20 15 USA 28407 35623 40374 25 13 19 21 18 Rest of the world 36001 43078 70663 20 64 24 25 31

Total Trade

World 150351 173304 228682 15 32

Note: ASIA includes ASEAN members, Bangladesh, Hong Kong, Macao, Japan, Pakistan. Source: COMTRADE

The EU-Mercosur trade relation is characterized by sharp asymmetries. The first imbalance relates to the weight of the bilateral trade relation in each partner’s total trade. In 2005, Mercosur accounted for only 2.4 % of EU imports down from 2.95% a decade earlier; and for 1.7% of EU exports, down from 2.75% in 1995 (Chart 1). But for Mercosur countries, the EU is a strategic trading partner. In 2005 the EU was the main client of the bloc of the Southern Cone, absorbing 20.5% of its exports, and also its main provider (21% of Mercosur imports). The importance of EU in Mercosur’s total trade, has however declined in the past decade. (Figure 3.1) .

10 Data provided IADB (2006)


Figure 3.1: Share of EU and Mercosur bilateral trade

0

5

10

15

20

25

30

35

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Period

% s

har

e EU exp to M'sur (% oftotal EU exp)EU imp to M'sur (% oftotal EU imp)M'sur exp to EU (%total M'sur exp)M'sur imp to EU (%total M'sur imp)

Source: COMTRADE database

The second asymmetry that can be observed in the EU-Mercosur trade relation as regards the trade balance. For a long time, the Mercosur trade balance with the EU was systematically negative. However, in 2002, the trend was reversed and since then Mercosur has recorded continuous trade surpluses which, in 2005, reached $10.07 billion (Figure 3.2). This surplus is primarily the result of trade in the agricultural sector. In 2004 Mercosur’s agricultural exports to EU were worth $16.2 billion and imports amounted to only $762 million. In contrast, Mercosur exports of manufactured goods were $10.5 billion but imports reached nearly $20 billion. Although Mercosur trade with the EU has increased in absolute terms, as illustrated in Table 6, the relative share of the EU as a trading partner has been declining.

Figure 3.2: EU – Mercosur Total Trade 1995-2005

0

10,000

20,000

30,000

40,000

50,000

60,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Period

$U

S m

illio

n

Import

Export

Total

Source: COMTRADE


The Netherlands, Germany, Italy and Spain are the main recipients of Mercosur exports to the EU while approximately 70% of Mercosur imports from Europe originate in Germany, France, Italy and Spain. Despite their strong historical links, trade flows between Portugal and Brazil are very low (3% of the EU total trade with Brazil). Considering the size of the Brazilian economy, it is not surprising that Brazil is responsible for 75.7% of Mercosur trade with the EU, while Argentina accounts for 21%, Uruguay for 2.3% and Paraguay for 1%11.

Intra-Mercosur trade increased significantly during the period that followed the creation of the common market. From 1990 to 1999 intra-Mercosur trade rose from less than 10% to 25% of total trade, but after the multiple crises that shook Latin America, at the turn of the centuries, this share dropped significantly to 11%. Since than intra-Mercosur trade has only slightly increased its share to 13% of total trade (Figure 3.3).

Figure 3.3: Intra-Mercosur Trade (% share of the total trade)

0

5

10

15

20

25

30

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Period

% s

hare

Intra Mercosur Trade (% of total trade)

Source: IADB, 2006

The composition of Mercosur exports to the EU is very different from the composition of exports to the US (Table 3.4). More than 50% of Mercosur sales to the EU are composed of food and raw agricultural materials and this export profile has varied little over time. On the contrary, the composition of Mercosur exports to the US is characterized by a much lower share of agro-food products (9.9% in 2002). Between 45% and 50% of Mercosur exports to the world are manufactured goods. On the other hand, it is interesting to note that a high percentage of Asian imports from Mercosur are ores and metals, and agro-food products. This shows that Mercosur countries have benefited from the expansion of the Asian economies, through a significant demand for raw materials12.

Table 3.4: Composition of Mercosur exports, 1995-2002 (%)

Food Agricultural Raw Materials

Ores & Metals Fuels Manufactured Goods

Goods not elsewhere

95 00 02 95 00 02 95 00 02 95 00 02 95 00 02 95 00 02 World 35.5 30.5 33.9 5.2 3.9 3.3 7.3 7.6 7.1 3.7 6.6 8.3 45.7 49.1 45.4 1.4 2.3 2.1 LAC 24.3 19.5 19.2 2.9 1.7 1.6 2.4 2.5 2.7 8.3 13.2 15.3 61.8 63.0 61.2 0.3 0.1 0.1

11 Data for 2004. Source: Eurostat. 12 IADB (2004)


USA 16.3 11.6 9,9 5.6 4.4 3.7 4.8 4.4 3.7 3.9 9.3 10.9 67.5 68.1 70.4 1.9 2.2 1.6 EU-15 51.4 46.5 51.7 8.0 6.4 4.9 8.7 11.3 10.4 0.8 0.5 2.2 30.5 34.6 29.6 0.6 0.6 1.1 ASIA 34.3 36.5 40.1 7.6 7.5 6.1 25.6 26.4 23.3 0.8 0.8 3.5 31.5 28.8 26.9 0.2 0.1 0.1 Source: IADB (2004)

Mercosur’s export portfolio is fairly diversified, but with wide variation across countries. More than 50% of Brazil’s exports are composed of industrial goods, but this percentage decreases to 14.6% for Paraguay. Non agricultural raw materials and fuels account for 34% of Paraguay’s exports, while this sector only represents 11.6% of Uruguay sales to the world. Agricultural raw materials and food account for 48.4% of Uruguay’s exports, 42.9% for Argentina, 34% for Paraguay and 22.7% for Brazil13.

Mercosur countries are major producers and net-exporters of agro-food products. In 2003, Brazil ranked third in the top-10 list of agro-exporters and Argentina ranked seventh. Both countries are also the second and third EU providers of agricultural products, behind the US. The agricultural sector is a key component of Mercosur economies. In all the member states, agriculture accounts for more than 10% of GDP. In addition, it is a very dynamic sector with an impressive rate of growth (except in Paraguay). The data presented in Table 3.5 illustrate that the sector is also an important source of employment. However, Table 3.5 does not include employment data for the agro-business sector. In Brazil, if agricultural jobs are added to employment in food processing industries, the percentage of the labour force employed in the sector reaches 35%.

Table 3.5: Importance of the agricultural sector in Mercosur economies

Argentina Brazil Paraguay Uruguay Agricultural share (%) of GDP (2004) 11.2 10.4 27.2 12.4 Growth (%) agricultural GDP (2004) 7 5.3 2.1 9 Agricultural population (% of total) 2003 9.4 14.8 38.9 10.8 Sources: World Bank, FAO.

Mercosur exports of agricultural products are diversified. Table 3.6 shows that the most important products exported by Mercosur are: soybeans and soy products, bovine and poultry meats and preparations, sugar, fruits juices, coffee, corn, wheat, tobacco, fruits and vegetables (fresh and prepared).

Mercosur imports mainly mineral fuels and oils (15.5%), nuclear reactors, boilers and machinery (14.4%), electrical machinery and equipment (13.8%), organic chemicals and chemical products (8.1%), vehicles (7.1%), plastics and their products (4.2%) and fertilisers (3.8%)14.

Table 3.6: Value and destination of Mercosur agricultural exports (2004) World ($USm)

Share of Mercosur

total agricultural exports (%)

Asia (%)

EU 15 (%)

Mercosur (%)

North America

(%)

Other (%)

Beverages/Spirits 824 1.8 27 23 8 20 22 Bovine Meat/Preparations 4343 9.3 14 35 2 17 32 Coffee 1759 3.8 12 56 2 20 10 Corn 1825 3.9 42 19 3 0 36 Dairy products/Bird’s eggs/natural honey 1014 2.2 12 16 10 9 53

13 Data for 2003. Source : INTAL 14 Data for 2004. Source : COMTRADE


Poultry meat/preparation 2875 6.2 58 7 8 6 21 Soybeans/soya products 18665 40 49 24 0 1 25 Sugar 2707 5.8 1 1 80 1 17 Swine meat/preparation 745 1.6 44 37 3 1 15 Tobacco 1666 3.6 33 2 1 7 58 Vegetables/fruits (fresh and preparation) 1456 3.1 15 4 7 0 74 Fruit juices 1657 3.5 23 33 4 16 24 Wheat 1613 3.5 2 44 21 16 17 Other agricultural products 5565 11.9 11 63 0 20 5 TOTAL AGRICULTURE 46714 100 Source: COMTRADE

3.5 Tariff rates

In 1995, Mercosur countries adopted a common external tariff (CET). As a result, the four countries share the same level of tariffs with a few exceptions (2% of the tariff lines). With an average MFN15 tariff that is approximately 11% and a maximum rate of 35%, Mercosur tariff structure presents a low level of dispersion. The MFN average tariff for agricultural products is 10% while the MFN average tariff for non-agricultural goods, capital goods and information technology and telecommunication goods is 10.75%. Mercosur has a simple tariff structure: all the tariffs are expressed in ad-valorem terms and there is only one tariff rate quota (TRQ). Table 3.7 illustrates the average tariffs schedule and effectively applied protection, by sector, in EU and Mercosur. The effectively applied level of protection on manufactured goods is significantly lower in the EU (5.14%) than in Mercosur (13.8%). In contrast, the agriculture sector is more protected in the EU, with an effectively applied tariff of 17.9%, than in Mercosur (11%). In particular, the EU tariffs structure in the agricultural sector contains 640 tariff peaks, defined as three times the average tariff rate, which suggest significant variation in level of protection across commodities.

Table 3.7: EU and Mercosur Tariff Structure by sector: 2003 (all figures in percentage)

Country Sector Simple Average Tariff

Effectively Applied Tariff*

Number of Tariff Peaks

Maximum Tariff Rate

Total 6.17 10.2 665 230 Agriculture 8.99 17.9 640 230

Raw Materials 0.98 0.98 0 5 Textiles 10.59 17.2 17 29

EU tariffs applied on Mercosur Exports

Manufacture 4.72 5.14 6 27 Total 11.16 12.25 195 55

Agriculture 12.41 11.0 3 55 Raw Materials 1.11 1.11 0 6 Manufacture 11.35 13.8 192 35

Mercosur tariffs applied on EU exports

Textiles 16.24 18.92 0 25 Source: Trains, MAcMap * - data for 2001 from MAcMap The Effectively Applied Tariff is an ad valorum equivalent of applied border protection thatincludes information on tariffs, special and mixed tariffs, quotas, tariff rate quotas and preferential rates

Although some main agricultural products exported by Mercosur to the EU enter the European market duty free (soya products and coffee), the access for many Mercosur key export products – such as bovine and poultry meats, sugar, wheat, corn and ethanol, is restricted by TRQs and/or high tariff barriers (Table 3.8). It is necessary to differentiate

15 MFN: Most favored nation


between sensitive products under the GSP where there are low or zero tariffs and those sectors where individual Mercosur countries have graduated.

Table 3.8: MFN rates on main exports by Mercosur

Share of Mercosur

agricultural exports to the

EU (2004)

Tariff Rate

Quota

EU MFN minimum tariff EU MFN maximum tariff

Equivalent ad valorem

Equivalent ad valorem

Oilcake from soya bean

32.23% No 0.0% 0.0%

Soya beans 19.25% No 0.0% 0.0% Coffee 5.94% No 0.0% 11.5% Bovine meat, fresh or chilled

4.50% Yes 20.0% 12.8%+ 3,034 €/t

85.2%

Orange juice, not frozen

4.26% No 12.2% 15.2%+206 €/t

85.2%

Maize 3.18% Yes 0.0% 90 €/t 73.2% Bovine meat, frozen 2.43% Yes 20.0% 12.8%+

3,041 €/t 141.8%

Raw Tobacco 2.96% No 18.4 MIN 22€ MAX 24€/100 kg

2.9% 11.2 MIN 22€ MAX 56€/100 kg

11.2%

Poultry preparation 1.94% No 8.5% 867 €/t 33.2% Poultry meat 1.92% Yes 6.4% 1,024 €/t 87.9% Preparation of bovine meat

1.65% No 16.6% 16.6%

Sugar 0.6% Yes 138.3% 198.8% Notes: The tariffs refer to the tariff lines where trade flows between the EU and Mercosur do exist. Ad valorem equivalents have been calculated by the author according to the WTO methodology currently used in the negotiation of the Doha round. Sources: COMEXT database, TARIC, author’s calculations for ad valorem equivalents.

Table 3.9 shows that there are protectionist tariffs in both EU and Mercosur markets and gives an indication of levels. Both market also protect their market access with non-tariff barriers. Table 3.10 describes some non-tariff barriers, such as the use of technical standards and labels, that Mercosur economies apply on EU exports.

Table 3.9: Trade restrictions on selected manufactured products

EU tariffs Export tax by Mercosur Mercosur tariff Non-tariff barriers

Motor vehicles 10.0%

Untanned leather 9% (Brazil)

5% (Argentina) Yes Processed bovine leather

6.5% Yes

Other processed leather

3.5% Yes

Footwear 3.5% 17.7% Yes


Other leather good, e.g. handbags

3.0% 17.7% Yes

Metal products 1.2% 18.4% Yes Electrical machinery 17.3% Yes Other machinery 16.3% Yes Sources: COTANCE, European Commission TARIC database, Estevadeordal and Krivonos (2000).

Table 3.10: Summary of main Mercosur Non-Tariff Barriers

Country/Sector Type of Barrier Description

Argentina

Agriculture Sanitary/ phytosanitary Measures

Ban on the import of pork meat and pork meat products due to a lack of recognition of free disease status (Classical Swine Fever) for Spain


Requirement of presentation of certificates concerning traceability and genetically modified products


Import ban on bovine meat because of BSE; EU countries banned: DK, ES, FIN, F, UK, IRL, IT, PR, BEL

Agriculture Countervailing Measure Applied customs duties on imports of olive oil and wheat gluten from 10% to 31,5%, by derogation to the Mercosur Common External Tariff.

Automotive Standards & Technical Requirements

Certificate of Homologation (CHAS) to ensure compliance of parts with Argentine safety norms (tyres; seat belts).

Horizontal Export Subsidies and Incentives

Variety of tax and tariff exemptions for imported capital goods and excise and sales tax exemptions for exported products.

Horizontal Tariff Level Changes Arbitrary increases of tariffs and non transparent application, e.g. imposition of temporary additional duties.

Horizontal Quantitative Restrictions “Canal Morado” to deal with under-invoicing. Requires reference pricing, which is a long and costly procedure with possible penalties attached.

Textiles and Leather

Export Taxes Cumulated export duties on raw hides and “wet-blue” (pre-tanned hides). The combined taxes have been 15 %.

Brazil

Agriculture Subsidies Alcohol production is subsidised indirectly discriminating against foreign suppliers. No clear separation between fuel alcohol and traditional alcohol markets.


Ban on imports of bovine animals, meat and products from countries with countries with indigenous BSE cases


New measures on imports of seed potatoes introduced but no delay for their implementation, no technical justification


The import of apples, pears, plums, nectarines, peaches, marmelos, cherries and nuts is restricted by phytosanitary rules.

Automotive Import Ban on Used Goods

Used cars, motorcycles and tyres are all banned. WTO dispute settlement panel requested by EU to investigate ban on tyres.

Horizontal Tariff Level Changes Arbitrary increases and decreases of tariffs.

Horizontal Non-automatic import licensing

Request left pending without formal reply; goods stopped at border causing losses to exporters.

Pharmaceuticals Enforcement problems on IPR

Regulatory agency for marketing approval relies on the data submitted by originators to license generics

Pharmaceuticals Enforcement problems on IPR

Delays in granting patents

Textiles and Leather

Export tax Export taxes on exports of bovine raw hides and skins.

Paraguay


Agriculture Quantitative Restrictions and Related Measures

Prohibition of imports of bovine products from countries that were affected by BSE.

Horizontal Representative Law Foreign importers cancel, revoke, or do not renew their contract with a local representative in Paraguay, without justifiable reason, compensation has to be paid to the representative.

Horizontal Consular stamping Requirement

Time-consuming, expensive and difficult to fulfil procedures cause delays and raise logistics costs. High fines for errors.

Horizontal Enforcement problems with IPR

Problems related to music, movie and software piracy, counterfeiting of trademarks and infringements of patents in the pharmaceutical industry

Horizontal Representation Law No national treatment for foreign firms; the law imposes high costs if foreign importer changes local representative or distributor. Unclear application of penalties.

Uruguay

Agriculture Standards and Other Technical Requirements

Energy drinks cannot be registered as regular foodstuffs as long as they exceed the caffeine maximum amount of 20 mg/100 ml provided for non-alcoholic beverages

Agriculture Standards and Other Technical Requirements

Legislation restricts the EU exports of products using non fortified wheat flour as an input.

Agriculture Internal Taxation Uruguay levies an excise tax on luxurious goods including alcoholic beverages, soft drinks, cosmetics and perfumes, tobacco, cigarettes and cigars, motor vehicles and motorcycles

Automotive Import Ban on Used Goods

Used cars, motorcycles, chassis and bodywork are generally banned (a few exceptions e.g. classic cars and racing cars).

Horizontal Enforcement problems with IPR

Problems related to music, movie and software piracy, counterfeiting of trademarks and infringements of patents in the pharmaceutical industry.

Source: EU Market Access Database, available at http://mkaccdb.eu.int

3.6 Foreign Direct Investment

The liberalisation process of the Mercosur economies during the 1990s fostered the adoption of measures to promote the attraction of foreign direct investment (FDI). During this period, many public enterprises have been privatised and foreign firms have invested heavily in the region. Between 1996 and the year 2000, Mercosur attracted 52% of the net FDI flows received by Latin America and the Caribbean (Table 3.11). But since 2001, the flows directed to Mercosur have fallen for two main reasons: firstly, privatisation plans were largely completed, and secondly, the economic crisis in Argentina provoked uncertainty among investors. Mercosur only attracted 34% of the FDI in Latin America over the period 2001-2005. However, after a three year period of continuous decrease, FDI flows resumed with growth in 2004.

Table 3.11: FDI flows to Mercosur

1991-1995** 1996-2000** 2001-2005** $USm (% total) $USm (% total) $USm (% total)

Argentina 3,781.5 59 11,561.1 31 2,980.6 15 Brazil 2,477.4 38 24,823.6 68 16,480.7 83 Paraguay 103.8 2 185.1 1 53.9 0 Uruguay 82.5 1 187.2 1 367.9 2 MERCOSUR 6,445.2 36,757.1 19,883.1

* This does not include financial centres. FDI figures are equal to inflows of FDI minus capital outflowsgenerated by foreign investors. The figures differ from those presented in the Preliminary Overview of the


Economies of Latin America and the Caribbean, as the latter shows the net balance of foreign investment, i.e., direct investment in the reporting economy minus direct investment abroad. ** Annual average Source: ECLAC (2005)

The EU is the biggest investor in the region. The majority of European FDI is directed to Brazil. In 2001, the FDI stock of the EU in Brazil amounted to US$ 74,508 millions and to US$ 50,397 in Argentina (Table 3.12). Spain is the EU member with the largest stock of FDI in Mercosur, followed by France, the Netherlands, the United Kingdom, Italy, Germany and Portugal. EU investment is located in areas as diverse as telecoms, energy, financial services, the automotive industry, the agro-industry and the retailing sector. It should be noted that Mercosur does not have a common policy in terms of FDI, and corporate and social taxes vary widely across countries.

Table 3.12: EU FDI Stock in Latin America, 2001

(Outward stock, Millions Euros)

Latin Americaa Argentina Brazil Chile Columbia Mexico Venezuela

European Union (%) 194738 50397 74508 15064 5902 25945 7493 100 26 38 8 3 13 4

France 19504 5553 8389 698 262 1556 1647 Germany 17829 2336 7481 537 505 5102 966 Netherlands 12296 1646 5223 899 -533 2630 1075 United Kingdom 16963 3622 4508 2947 2085 2283 666 Italy 9117 3147 4648 91 60 387 229 Portugal 8515 96 8185 16 0 88 5 Otherb 110514 33997 36074 9876 3522 13900 2905

aEurostat Balance-of-Payments (BOP) Economic Zone of Latin America includes: Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Mexico Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela b“Other” has been computed as the difference between the estimated EU aggregate and the sum of the selected declaring countries. Note: Data on Spanish assets in Latin America are not separately available: it can be assumed they account for a significant part of “Other”. Source: Amann and Vodusek, 2004

The concentration of FDI in services is particularly strong in the Mercosur region. In Brazil, between 1997 and 2000, over 81 percent of all FDI inflows were to the services sector. A large part of these investments were made by European firms, and in particular, Spanish investors. However, with the deterioration in the global economic situation and the corporate credit retrenchment, this pattern changed: in the early years of the new decade, less than 60 percent of FDI inflows were undertaken in services, while the share of FDI in manufacturing rose to 35 percent in the same period (Amann and Vodusek, 2004). This shift in the composition of European investment in Mercosur in part reflected the influence of devaluations on foreign investment decisions. For the services sector, devaluation had adverse repercussions for foreign firms serving the domestic market. On the other hand, devaluation increased the international competitiveness of manufacturing, and foreign firms in Brazil and Argentina responded by increasing their exports—particularly to the rest of Latin America. This led to new investment in the automobile sector, involving such firms as Volkswagen in Brazil and Pergeuot Citroen in Argentina.

3.7. Social Development Indicators


Argentina and Uruguay are classified as upper middle income countries in the World Bank classification, and Brazil and Paraguay as lower middle income. Brazil has invested heavily in technological development, spending 1.0% of GDP on Research and Development (UNDP 2005). Argentina has also invested significantly (0.4%), while Uruguay and Paraguay spent 0.2% and 0.1% of GDP, respectively. As the country with the lowest per capita income, Paraguay is the only Mercosur member with a significant inflow of development aid.

Unemployment in Argentina and Uruguay, is around 20% of the labour force. In both countries, rural unemployment is significantly higher than in urban areas. In Brazil and Paraguay overall unemployment levels are lower (recorded as less than 10%), and are higher in urban than rural areas.

Although Uruguay has a lower GDP per capita than Argentina, it has lower levels of absolute poverty. The proportion of the population living at less than US$ 1 per day is 16.4% in Paraguay, 8.2% in Brazil, 3.3% in Argentina and less than 2% in Uruguay. The numbers of people with incomes below $US 2 per day are 33.2% in Paraguay, 22.4% in Brazil, 14.3% in Argentina and 3.9% in Uruguay.

The countries’ rankings in the broader measure of the Human Development Index follow the same order as GDP per capita, with Argentina at 0.863, Uruguay at 0.840, Brazil at 0.792 and Paraguay at 0.755.

Poverty levels vary significantly between regions, particularly between the more prosperous cities and remote rural areas. In Paraguay a very skewed distribution of land ownership, with the overwhelming majority of peasants without formal land titles, contributes to a high level of rural poverty.

Life expectancy at birth is the highest in Uruguay, at 75.4 years, followed by Argentina at 74.5 years. Brazil (70.5%) has the lowest life expectancy, with Paraguay slightly higher at 71.0%. Life expectancy in Brazil has however improved significantly in recent years, from 68.3 years in 2001.

Brazil has a lower adult literacy rate, at 88.4% compared with 91.6%. The two richer countries have significantly higher literacy rates, at 97.2% in Argentina and 97.7% in Uruguay. Brazil has however made strong progress, with a combined enrolment ratio the second highest in the region at 91%, after Argentina at 95%. Uruguay has a combined enrolment ratio of 88%, with Paraguay lagging far behind at 73%. Secondary education in Paraguay is particularly weak, at 51% of children.

Income inequality is the lowest for the four countries in Uruguay, with a Gini index at 44.8.. The figure has shown only slight variation between the pre and post-crisis periods. In Brazil income inequality is among the highest in the world, improving somewhat between 1994 and 2003 to a figure of 56.9, then falling sharply back in 2004 to the 1994 level of 61.5. Inequality in Paraguay is similar, at 57.9, with Argentina rather lower at 52.7. The figure in Argentina has been rising steadily since 1996, when its Gini index was 48.5.

Although per capita income in Argentina rose in the early 1990s, the distribution of income worsened and the income of the poorest 20% declined. Since 1995, average income for nearly all groups fell, except for the highest 20%. Similarly in Paraguay, income inequality rose significantly between 1990 and 1995 and has stayed relatively high. With rising


unemployment in both countries, many of the poor have resorted to work in the informal sector, with limited social protection. Poverty in Brazil is similarly linked with large disparities in income, both between regions and in the social exclusion of some groups.

As well as income inequalities, the rural poor often have limited access to social services, and lack the power to exercise rights to land or employment. Indigenous peoples and other ethnic minorities are particularly affected, with a close connection to environmental issues, for example in the Amazonian forest.

As measured by the Gender-related Development Index, Argentina has the highest levels of gender equity at 0.854, followed by Uruguay at 0.836. Paraguay has the lowest level of gender equity, at 0.742, with Brazil at 0.786.

3.8 Environmental indicators

Mercosur has the largest reserves of arable lands and forests in the world. The expansion of agricultural activities combined with logging has led to a rapid deforestation in many areas, especially in Brazil and Paraguay. Other activities such as mining and road construction have also contributed to deforestation.

Biological diversity is also high coastal zones, where it is threatened by population pressures and commercial activities such as shrimp farming and oil extraction. Fisheries, especially in Argentina, have suffered from over-exploitation of some species. Catches are difficult to monitor, with limited implementation of fishing licenses. Concerns have also been expressed about the impact on biodiversity of transgenic crops, particularly in Argentina and in Brazil, used both legally and illegally.

The main threat to air quality comes from emissions of pollutants in urban areas, particularly from road transport. Industrial emissions are also significant in some areas. In Brazil and Argentina oil extraction and the chemical industry are significant pollution sources.

Water quality management is a major issue in some areas. The agriculture sector has grown rapidly since the 1990s, with potential for pollution from fertilisers and pesticides. Other concerns arise from pollution from mining and the chemical industry. Water is abundant in most parts of the region, and water quantity is not a major issue in most areas.

Increased oil exploration (notably through foreign direct investment in Brazil), may accelerate the decline of the resource. Brazil has however invested heavily in the development and use of biofuels, and much of the electricity production in the region comes from hydropower.

Some environmental qualities are improving while others are deteriorating, through effects such as depletion of water resources, land conversion, coastal development, climate change, urbanisation and increasing consumption, pollution and waste generation. Many of the environmental trends are associated with social and economic ones, including industrialisation and economic growth. Other social and economic changes include education, improvement and extension of health services, technological development and the broad influences of globalisation.


4. TRADE LIBERALISATION AND SUSTAINABLE DEVELOPMENT:THEORY AND EVIDENCE

4.1 Introduction

The objective of the current EU-Mercosur Trade SIA is to update the findings of the preliminary overview SIA that was undertaken in 2003 (Planistat, 2003). As described in Section 2, causal chain analysis is used to develop the evidence on which the SIA is based. The evidence is quantitative and qualitative, and is drawn from theory, empirical analysis, case studies and expert opinion. This section of the report reviews the literature on the relationship between trade liberalisation and economic performance, poverty alleviation, and environmental protection, which will be used to inform the updating of the preliminary overview SIA of the EU – Mercosur trade negotiations.

4.2 Trade Liberalisation and Economic Performance

Productivity and Growth

Theory

The literature generated by the debate on the effects of trade liberalisation and related policies has focused largely on the impact on economic performance. International trade shows a strong positive correlation with economic growth (Levine and Renelt, 1992; Florax et al 2002) and there is firm empirical evidence to show that growth accelerations tend to be correlated with increases in trade and investment (Hausmann et al 2005). As explained below, trade liberalisation allows for increased specialisation and stimulates investment through the exploitation of economies of scale and through technology transfer. At the same time, there is a broad consensus that trade liberalisation alone is not sufficient for economic growth. Rather, maximising the economic gains from trade liberalisation depends on identifying the binding constraints on economic growth and selecting an appropriate set of policy reforms, including, the underlying macroeconomic environment, policies for export development, the design and sequencing of trade policies, external constraints and opportunities, and complementary policies that contribute to the overall investment climate (Hausmann et al 2004; World Bank, 2006).

Trade theory highlights the way in which trade liberalisation assists countries to utilise their resources more efficiently. First, trade allows a country to specialise in the productive activities in which it has a comparative advantage. Second, trade extends the market allowing producers to exploit economies of scale. These effects are characterised as static gains from trade (WTO, 2003). However,as Rodriguez and Rodrik (2002) show, with different assumptions underlying trade theory models, opposing arguments are not hard to build. If market or institutional imperfections exist, openness can lead to sub-utilization of human and capital resources, concentration in extractive economic activities, or specialization away from technologically advanced, increasing returns sectors (Rodrigues and Rodrik,2002;Chang et. al., 2005). If the structure of economic activity is rigid, than trade may have a modest impact on the allocation of resources across and within industries and thus will not necessarily increase the efficiency of allocation of these resources (Freund and Bolasky, 2004). Other factors that may prevent the static gains from trade being fully realised include:


o Inappropriate macroeconomic policies, such as incomplete stabilisation, resulting incontactionary fiscal and monetary policies that lead to appreciation of the realexchange rate and thereby reduce competitiveness

o Institutional and regulatory weaknesses which limit capacity to implementappropriate ‘behind the border’ policies to support export growth

o Infrastructural constaints which limit supply side response to specialisationopportunities arising fom trade liberalisation.

Trade liberalisation will also have a positive impact on long term economic growth if it increases the rate of investment or improves productivity growth. Rising productivity is the key to enhancing economic growth. The new trade theory predicts that openness to trade and investment strengthens the drivers of productivity through the following mutually reinforcing channels:

• knowledge and technology transfers.Grossman and Helpman (1991) argue that openness to trade provides access toimported inputs, which embody new technology and increases the size of themarkets facing producers which in turn raises returns to innovation and affects acountry’s specialization in research intensive production. Thus a country’sopenness leads to improvements in domestic technology; helps the productionprocess become more efficient and culminates in productivity improvements.Finally, knowledge travels with goods, services and investment as a benignunintended side-effect of trade and investment flows. But the extent to which suchpotential technology spillovers materialize depends on the recipient’s stock ofhuman capital, which is the most important determinant of absorption capacity(Nordas et. al 2006).

• Trade induces better resource allocation.Trade liberalization tends to induce the most productive firms to expand, while the least productive firms exit the market, leaving the average productivity level in the liberalized sector higher (Melitz, 2003; Melitz and Ottaviano, 2005). This suggests that trade can promote industry productivity growth without necessarily affecting intra-firm efficiency (Melitz, 2003). Increased competition further reinforces incentives to innovate, helping to create more competitive firms which can then compete more effectively in world markets.

• Trade increases incentives for investment.Better access to imports and to export markets increases the scope for productive investment by creating new business opportunities. By changing the return on investment, trade liberalisation can lead to a higher investment rate and hence a higher growth rate following trade liberalization (DTI, 2004).

• Trade increases incentives for firms to innovate.because the rewards from successful innovation will be proportionately greater if firms are selling in larger (i.e. export as well as domestic) markets. Where highly productive firms expand as a result of exports, this boosts the productivity of the economy as a whole (DTI, 2004).

Evidence

The evidence on the static gains from trade liberalisation shows that the full efficiency gains from the reallocation of resources from less to more efficient uses occur over the long term, and that there are often costs incurred before the related stream of benefits can be realised. In particular, as workers are displaced from inefficient enterprises, some amont of transitional


unemployment and output loss is likely (World Bank, 2006: 89).16 In addition, the costs of the adjustments do not necessarily fall on those who reap the benefits. Winters (2000) points out that the more protected the sector being liberalised the greater the transitional costs are likely to be, although this sector may offer the largest long term returns to reform.

The econometric evidence on the links between trade liberalisation and economic growth is mixed. At the macro level, the standard empirical methodology has been to regress total factor productivity growth or economic growth rates on trade, controlling for other relevant factors such as measures of human capital accumulation, the initial level of GDP per capita (which is a proxy for the initial stock of technology) and a host of other variables. However, it has proved difficult to use the cross section approach to establish causality and to identify the role of other intervening factors. While most studies have found a positive relation between a measure of trade openness and economic growth (Frenkel and Romer, 1997; Edwards, 1992; Sachs and Warner, 1995; Sala-i-Martin, 1997) it is also the case that these studies have been criticised for failing to deal with problems in defining and measuring openness, in identifying causation and, in isolating the effects of trade liberalisation (Rodriguez and Rodrik, 2001); Kenny and Williams, 2001). In particular, a closer scrutiny of the results reveals that the relation between trade and growth in most studies refers to actual trade volumes rather than to trade policy measures (Nordas, 2006). Thus, these studies fail to establish whether trade liberalisation leads to, or results from, economic growth. More recent studies have used more sophisticated methodology for dealing with the direction of causality or measuring trade barriers but fall short of giving a definitive ‘proof’ of the effects of trade (Alcala and Ciccone, 2005; Waciarg and Welch, 2003; Frenekel and Rose, 2003). Thus, there seems to be strong evidence of a link between growth and trade, but a causal and robust link between trade liberalization, as measured by changes in tariff restrictions or non-tariff barriers, and productivity growth is yet to be established. (Nordas et. al, 2006).

Research at industry level is an alternative approach to assessing the impact of trade liberalisation on productivity and growth. Here, researchers have focused on the evidence on sectoral output and employment and the level of openness. The assumption is that since gains from trade come from specialization one would expect significant labour and capital reallocation following trade liberalization (Freund and Bolakly, 2004). Firm heterogeneity and a wide dispersion of productivity levels are well documented within industries; as a result, exit is necessary to rid the sector of low productivity firms and entry is important to enable the arrival of new industry leaders. Roberts and Tybout (1996) find that productivity dispersion tends to be relatively greater in industries not exposed to foreign competition, and that productivity growth is higher in tradable products. This implies that foreign competition serves as a disciplining device within industries. Bernard and Jensen (1999) use plant level data from the United States and show that the effect of reallocation on productivity is quite large, making up over 40% of total factor productivity growth in the manufacturing sector. They also find that reallocation to exporting firms is important in generating growth effects. Studying the productivity of Chilean manufacturing plants during the trade liberalisation period of the 1970s and early 1980s, Pavcnik (2002) shows that exiting plants are on average about 8% less productive than surviving firms. This reallocation of resources increases the aggregate industry-level productivity in the export and import competing sectors. In Pavcnik’s empirical study, the aggregate productivity is found to increase by 25.4% in the export-

16 The European Commission has recently created a Globalisation Adjustment Fund to assist workers when more than 1000 people in a firm or industry lose their jobs because of ‘structural changes in world trade patterns’. (The Economist, January 20-26, 2007


oriented sector and by 31.9% in the import competing sectors over a period of seven years. By comparison, the gain was 6% in the nontraded goods sectors.

Another important strand of the literature aims to explore the link between exporting and productivity at the micro or firm level by comparing the performance characteristics of exporting and non-exporting firms from a range of industries and over a number of years. (Greenaway and Kellner, 2005). Based on this new micro evidence, researchers have investigated if the higher productivity of exporters could be explained by the existence of learning - by- exporting or simply by the fact that only the more productive firms can export, i.e. firms self-select into the export markets. Again, there is a fundamental problem ofcausality; efficiency and exporting are highly correlated because efficient firms export. Thelearning-by-exporting hypothesis says that firms that participate in foreign markets mayacquire information from foreign customers and foreign contacts, who may suggest ways toimprove the manufacturing process, new product designs, and increase the quality of thegoods (Lopez, 2005). Furthermore, firms participating in international markets are exposed tomore intense competition and must improve faster than firms who sell their productsdomestically only. Exporting makes firms more productive (Wagner, 2007).

Recent surveys of empirical studies conclude that there is strong evidence of firm self-selection into export market i.e. exporting firms are more productive than firms that focus on the domestic market. This result is robust, and it does not depend on characteristics of the specific country under study (Lopez, 2005; Wagner, 2007). Empirical support for learning by- exporting is not as strong. Some studies, for example, Bernard and Jensen (1995), and Castellani (2002), report no evidence of firm productivity increasing after entry. Others, like Greenaway and Kneller (2004), Baldwin and Gu (2004) do find some supportive evidence. But the evidence is difficult to interpret in that some of the firms that fail to find direct post-entry productivity effects do report some evidence of further productivity improvement among the most export oriented firms (Lopez, 2005; Wagner, 2007).

The potential economic gains from trade liberalisation are not confined to the goods (agriculture and manufacturing) sectors. Liberalisation in the services sector can also contribute to productivity and economic growth, raising the productivity of inputs into the production process and improving the quality of services provided to consumers. These gains are often linked to foreign direct investment which can provide significant gains through advanced technology, management skills and access to international distribution networks. These potential gains can occur in key service sectors such as telecommunications, utilities and telecommunications, provided there is a stable regulatory framework in the host economy (Parker and Kirkpatrick, 2005)

The financial sector sector provides inputs to all other sectors in the economy and in addition it provide essential inputs in the conduct of international trade. The literature suggests that there is a positive relation between trade openness and performance of the sector. A study of a large number of banks in 80 countries over the period 1988-1995 found that foreign presence in domestic banking markets had significant impacts on the domestic market (Claessens et al., 2001). First, it was found that foreign banks had lower interest margins, lower profits and lower overhead expenses than domestic banks in developed countries, suggesting that they have more effective operations. Second, it was found that the presence of foreign banks reduced the profitability, non-interest income and overall expenses for domestic banks, suggesting that they become more efficient too. Third, it was found that the impact on domestic banks occurred very soon after the entry of the foreign bank. Provided that the


foreign bank entry does not squeeze margins in local banks to the extent that the financial system becomes less stable, financial sector liberalization was found to improve the performance of the financial sector in developed countries. In developing countries, in contrast, foreign banks had higher margins and profits than local banks, a feature that is attributed to weaker regulation and less competition facing foreign banks in developing countries. Nevertheless foreign banks provide access to international financial markets and new products in developing countries (Clarke et al., 2005).

Other studies have found that financial development has a positive impact on economic growth (Levine et. al., 2000). Thus, if trade liberalization improves the performance of the financial sector and improvements in the financial sector have a positive impact on economic growth, there are indirect dynamic gains from trade liberalization in the financial services sector (Nordas et al 2006).

Foreign investment in infrastructure for the utilities sector (water, electricity and transport) accounted for major share of FDI inflows to Latin America in the 1990s (World Bank, 2003). There is a body of evidence that shows that foreign investment in electricity sector has contributed to an improvement in efficiency performance of privatised firms, provided that the sequencing of privatisation and regulatory framework are effectively designed and implemented (Kirkpatrick, Parker and Zhang, 2007). In the water sector, the evidence is more mixed, and suggests that ownership is less important than regulation in determining the performance of private and public owned utilities (Kirkpatrick, Parker and Zhang, 2006). For telecommunications, the evidence confirms that foreign participation has contributed significantly to an improvement in service delivery (Ross, 1999).

Arnold et. al. (2006) is one of the first empirical analysis of the impact of liberalization in services sectors for the productivity of downstream manufacturing industries. The analysis focuses on the Czech Republic which introduced far reaching reforms of services industries during the 1990s, including opening services sectors to foreign investors. Several aspects of services liberalization are considered and measured, namely, the increased presence of foreign providers, privatization and enhanced competition. The results, based on firm-level data for the period 1998–2003, suggest a positive association between liberalization in services industries and the productivity of manufacturing firms using services inputs. The authors draw two conclusions. First, services policy matters for the productivity of manufacturing firms relying on services inputs. Second, there seem to be evidence that opening services sectors to foreign providers is a key channel through which services liberalization contributes to improved performance of downstream manufacturing sectors.

Rutherford, Tarr and Shepotylo (2006) analyze the effects of Russia’s accession to the WTO with special attention to the liberalization of barriers against foreign direct investment in services. Taking price changes from the Global Trade Analysis Project (GTAP) model of world trade, the authors use a small open economy computable general equilibrium comparative static model of the Russian economy to compare the results of Russian accession to the World Trade Organization (WTO) with the gains from Doha Agenda multilateral trade liberalisation. Given the importance of foreign direct investment (FDI) liberalization as part of Russian WTO accession, the authors also include FDI and Dixit-Stiglitz endogenous productivity effects from liberalization of import barriers against goods and FDI in services. The authors estimate that Russian WTO accession in the medium run will result in gains averaged over all Russian households equal to 7.3 percent of Russian consumption (with a standard deviation of 2.2 percent of consumption), with virtually all


households gaining. They find that global free trade would result in a weighted average gain to households in Russia of 0.2 percent of consumption, with a standard deviation of 0.2 percent of consumption, The results strongly support the view that Russia's own liberalization is more important than improvements in market access as a result of reforms in tariffs or subsidies in the rest of the world. Foremost among the own reforms is liberalization of barriers against FDI in business services.

The authors also highlight that their analysis does not account for the transition costs associated with such trade reforms. The authors’ earlier paper shows that Russia’s WTO accession is associated with a decline in employment in light industry, the food industry, mechanical engineering and metal-working and construction materials (Jensen, Rutherford and Tarr, forthcoming). Thus, as concluded by Jensen et. al (2004) despite a likely substantial improvement in the standard of living for almost all Russians after adjustment to a new equilibrium after accession to the WTO, government safety nets are very important to help with the transition and especially for the poorest members of society.

A recent survey of the literature on the relationship between trade liberalisation and productivity concluded that ‘for a variety of reasons the level of proof, that trade increases productivity and economic growth, remains a little less than one might wish, but the preponderance of evidence certainly favours that conclusion’ (Winters, 2004). However, the study also highlights the importance of complementary policies: ‘liberal trade policies are likely to boost income in most circumstances, because they enlarge the set of opportunities for economic agents, but a longer term effect on productivity and growth requires a combination of other policies as well.’

Foreign Direct Investment, Productivity and Growth

Theory

Foreign direct investment is considered by most countries to be an important component of their development strategy and policies are accordingly designed to simulate the invard flow of foreign investment. An important motivation for this interest is the possible existence of FDI spillovers, a concept that embodies the fact that MNEs (multinational enterprises) own the technology which can be transmitted to domestic firms and thereby raise their productivity level (Crespo and Fountoura, 2005). Foreign direct investment is generally considered as the main channel of international technology diffusion. The reason is that FDI creates many interactions between foreign and domestic firms that can be opportunities for technology to be diffused (Nordas, 2006).

Gorg and Greenaway (2004) identify several channels, associated with technology diffusion, through which FDI impacts on productivity growth and per capita income growth rates in a host country:

• Imitation – The theory of the multinational firm proposes that multinationalcorporations have a technological advantage over local firms that outweighs the costof doing business in external markets. The inflow of new knowledge may benefitdomestic firms through imitation and learning of technology or managerial andorganizational practice (Blomström 1986). One mechanism commonly alluded to inthe literature is reverse engineering.


• Skill acquisition – Adoption of new technology can occur through the acquisition ofhuman capital. MNEs invest in training and it is impossible to lock in such resourcescompletely. The movement of labour from multinationals firms to other existing ornew firms can generate productivity improvements through two mechanisms: througha direct spillover to complementary workers and through knowledge carried byworkers who move to another firm. Empirical studies show that training of localemployees in MNC affiliates might contribute to a positive spillover effect if the levelof turnover is high (Djankov and Hoeckman, 2000). Nevertheless, it is important tostress a possible negative impact arising through this channel, as MNEs may attractthe best workers from domestic firms by offering higher wages (Sinani and Meyer,2000).

• Competition – Entry of multinational firms puts pressure on local companies to useexisting technology more efficiently. This facilitates a reduction in X- inefficencyyielding productivity gains. In addition, competition may increase the speed ofadoption of new technology.

• Exports – An indirect source of productivity gain might be through exports.Exporting generally involves fixed cost to establish distribution networks, createtransport infrastructure, and learn about consumers’ tastes in overseas markets.Multinationals firms generally come already armed with such information and exploitit to export form the new host country. Trough collaboration or imitation domesticfirms can learn how to penetrate export markets.

Various interactions that facilitate technology diffusion can occur at several levels within an economy. The literature usually distinguishes between backward linkages (with domestic suppliers), forward linkages (with customer firms and firms down the production chain) and horizontal linkages (with competing firms). As noted by Nordas et. al (2006) with imperfect competition and scale economies, the impact on domestic firms of the entry of foreign companies can be twofold. On the one hand, domestic firms can expect productivity gains through technological spillovers. On the other hand, the increased competition from foreign firms diminishes the production of domestic firms and increase their average costs (market-stealing effect). As a consequence, the net impact of FDI on productivity can be either positive or negative. Thus, whether spillovers from multinationals raise host-country welfare is, ultimately, an empirical question.

The way in which FDI affects productivity and growth is likely to depend on the economic and technological conditions in the host country (Busse and Groizard, 2006). The level, the existence, sign and magnitude of FDI spillovers to domestic firms depend on a multiplicity of factors related to the characteristics of the MNEs and of foreign investment, as well as on the characteristics of the host countries, sectors and firms (Crespo and Fountoura, 2005). In particular, it appears that developing countries may need to reach a threshold level of development, in education and infrastructure, before they are able to capture fully the benefits associated with FDI (Hansen and Rand 2006). Borensztein et al. (1998) find that host economies have needed an educational capacity to absorb the positive technological spillover effects. Balasubramanyam et al. (1996) find that openness to trade is essential for the growth effects of foreign investment. Hermes and Lensink (2003) and Alfaro et al. (2004) find that countries with better financial systems and financial market regulations can exploit FDI more efficiently and achieve a higher growth rate.


Evidence

FDI may have a positive impact on economic growth leading to an enlarged market size, which in turn attracts further FDI. However, given the possible interdependency between FDI and economic growth there is a need for a proper test of endogeneity. Empirical investigations have therefore focused on the causal relationships between FDI and growth using Granger causality tests. Out of six studies that were review by Hansen and Rand (2006), five have found that FDI, on average, has an impact on growth which led the authors to conclude that, at macro level, there is indeed a strong causal relationship between FDI and growth.

Medvedev (2006) tests for a relationship between preferential liberalization and net FDI inflows by country in a large panel of high income and developing nations over the last two decades. He finds that PTA membership is associated with a positive change in net FDI inflows. The results show that the FDI benefits of preferential liberalization increase with the size of PTA partners and their proximity to the host country. There is a threshold (membership) and a market size component to the PTA-FDI relationship, although the latter seems more important.The study also finds that the relationship is mainly driven by the developing countries in the sample, which implies that the effect is due mostly to North-South PTAs. Finally, the link between preferential liberalization and FDI is strongest in the late 1990s and early 2000s—a period when most “deep integration” agreements have been signed.

The recent paper by Aizenman and Noy (2005) examines the interaction between financial flows and trade, arguing for an existence of two-way feedbacks between FDI and trade for developing countries. After controlling for other macroeconomic and institutional effects, the authors find the strongest feedback between the sub-accounts is between FDI and manufacturing trade.

Empirical evidence at firm level that analyses the spillover effect of MNC in domestic firms productivity gives a more mixed picture. Gorg and Greeenaway (2004) review over 40 studies of horizontal productivity spillovers in manufacturing industries in developing, developed and transition economies. Of those, 22 report unambiguously positive and statistically significant horizontal spillovers effects, but the majority of these studies use cross-sectional data, which may lead to biased results. Selection bias may arise as sectors where FDI is important are generally those where productivity is the highest and productivity growth strong. Multinationals will tend to invest in sectors with the most promising growth rate and will pick the best companies in the host country which are likely to be the most productive. Cross-sectional data would show a positive and statistically significant relationship between the level of foreign investment and productivity consistent with spillovers, even though foreign investment did not cause a high level of productivity but rather was attracted by it. Gorg and Greenaway find that only eight studies use panel data and solve for the selectivity bias, but in all cases, find positive evidence of spillover. Almost all the studies are for developed economies. Conversely, several studies using firm-level panel data find evidence of negative effects of the presence of multinationals on domestic firms. For example, Aitken and Harrison (1999), using data on Venezuelan manufacturing plants for the period 1976–1989, find that productivity growth in domestic plants is negatively correlated with foreign presence in the sector. A similar result was obtained by Djankov and Hoekman (2000) in their analysis of Czech firms in transition. Furthermore, the few studies that have looked at the potential for vertical (interindustry) spillover find evidence that vertical spillover may be a more important channel for knowledge externalities than horizontal spillover (Javorcik, 2004) .


The micro level evidence also confirms that absorptive capacity of domestic firms is an important determinant of whether domestic firms benefit from FDI in the same sector. Girma et. al. (2001) using firm-level panel data, find no evidence of production spillover in UK manufacturing on average – under the assumption that spillovers are homogenous across different types of firms. They do find, however, evidence for spillover to firms with a small gap between their productivity level and the industry frontier productivity level (called the technology gap) Other studies (e.g.Girma, 2002) support the hypothesis that only firms with some minimum level of absorptive capacity benefit from productivity spillover. Finally, there is also evidence that geographical proximity matters i.e. domestic firms located near multinationals may be more likely to benefit from multinationals than other firms. Girma and Walkien (2002) find evidence for positive spillover from FDI in the same region and sector as domestic firms in UK, but the results are significant only for firms that have a low technology gap vis-à-vis multinational (cited in Georg and Greenaway, 2004)

A recent review of literature conclude that ‘as far as the empirical evidence is concerned, it is insufficient to allow us to draw definitive conclusions for unambiguous positive impact of FDI on productivity and growth rates’. The most robust empirical result relates to the importance of the absorptive capacity and geographical proximity of domestic firms, which appears to be a fundamental precondition for enabling them to capture these indirect benefits from FDI (Crespo and Fountoura, 2005).

4.3 Trade Liberalisation and Environmental Protection

Theory

Trade liberalisation may theoretically affect the environment through a variety of channels. First, any overall increase in the level of economic activity is likely to be accompanied by an increase in the use of natural resources and higher levels of pollution (scale effect). However, a number of other factors make it difficult to isolate “pure” scale effects and identify a strong pattern in the commonly-assumed detrimental relationship between increased economic activity and environmental performance. Environmentally beneficial income effects might arise when augmented financial capacity supplies more resources for environmental protection (supply-side effects) and fosters greater demand for environmental quality (demand-side effects). Nevertheless, though it may be difficult to isolate the “pure” scale effect, it is increasingly acknowledged that anthropogenic activities (in terms of scale and methods of production, as well as consumption effects) are having a net negative impact on the environment, particularly with reference to climate change and global warming (IPCC, 2001, Stern, 2007).

Second, trade liberalisation changes the type of economic activity (composition effect). If the changes favour industries that pollute less, or extract less of the country’s natural resources, positive environmental impacts can be expected. If the products for which the country has a comparative advantage have high pollution intensities or a greater dependence on local natural resources, the effects will be typically in the opposite direction.

Third, trade liberalisation can lead to a change in the environmental intensity of production or a change in the environmental effects of the methods of production employed (technology effect). Openness may spur more environmentally friendly technological innovation which has a positive effect on both the economy and the environment. Similarly, trade liberalisation


can enhance a country’s access to environmental know how and technology, either through imports of environmental goods and services or through cleaner production techniques embodied in foreign direct investment. Alternatively, greater openness may encourage a race-to-the-bottom where countries compete for foreign direct investment and try to increase their international competitiveness by relaxing environmental regulatory standards.

Finally, trade liberalisation can have an indirect impact on the environment, through the effect of trade on economic growth. Standard trade theory allows for a discrete increase in economic activity following trade liberalisation, but a long term growth effect is excluded by assuming fixed technology and resources. Recent contributions to trade theory allow for trade openness to lead to higher growth rates by allowing the rate of productivity growth to increase as trade is liberalised.

Each of these channels is affected by the interaction between market forces and regulatory institutional frameworks at the national and international levels.17 If regulatory controls on the environmental side are increased (and effectively enforced), an increase in economic activity or a structural shift in production need not result in a change in the net overall environmental impact. Similarly, the effectiveness of the domestic regulatory institutions will affect the extent to which positive environmental impacts of foreign investment are realised (Kirkpatrick, George and Scrieciu, 2006).

To summarise, the effect of trade and investment liberalisation on the environment is theoretically ambiguous. This is hardly surprising, given the complex interdependencies that exist between trade, investment, regulation and environmental quality. The different assumptions and possibilities in the theoretical literature suggest that the impact of trade liberalisation on environmental quality may not necessarily follow a single or unique pattern, and may depend on country specifics, the nature of the environmental problem under investigation, as well as policy and institutional measures accompanying the trade reform process.18

Evidence

The growing availability of large cross country time series data bases, combined with increasingly powerful computing capacity, has fostered the rapid growth in quantitative studies of the relationship between trade, investment and the environment. Two main techniques have been extensively employed. The first approach has involved the use of econometric techniques. Most commonly, these have been applied to aggregate cross-country data (sometimes combined with time-series data), in an attempt to establish a common ‘pattern’ in the relationship between trade and the environment, although there is a growing literature which uses micro-level household data. Nevertheless, the limitations of the econometric approach need to be acknowledged. Firstly, there is a standard problem of demonstrating causality. It is relatively simple to show a statistically robust correlation between a change in trade policy and a change in measures of environmental quality. It is more difficult however to ‘prove’ that the change in trade policy is the cause of the change in

17 Copeland and Gulati (2006) argue that the differences in regulation regimes and institutions help explain the heterogeneity across countries in response to trade and investment liberalisation.

18 The role of institutional factors has been integrated in the recent economic growth literature (North, 1990; Rodrik et al 2004). Interestingly, the new institutional economics has had less impact on trade theory.


environmental quality.19 Secondly, there are major concerns about the quality of the data and the econometric specifications in this literature (including weak theoretical underpinnings), with considerable differences in the results and in the policy conclusions drawn from the findings.

The second technique used to quantitatively investigate and assess the impact of trade liberalisation on the environment is economic modelling and simulation, of which Computable General Equilibrium (CGE) models increasingly play a significant role. The CGE approach is based on the simulation of outcomes for a specified policy ‘shock’, and it has been widely used to estimate the likely impact of trade liberalisation.20 CGE models typically share some common features with the conventional trade theory, namely, the assumption that resources are in fixed supply and the impacts of the policy shock are measured in the net economic gains resulting from the reallocation of resources. Most CGE models are static and estimate the change in economic welfare in moving (instantaneously) to a new equilibrium position.21 An advantage of CGE models is that they can isolate the impact of trade on the environment from other factors; the disadvantage is that the results are simulated counterfactuals and do not measure actual outcomes.

The impact of increased openness to trade and investment has been extensively studied in recent years, using cross country data. Antweiler, Copeland and Taylor (2001) and Copeland and Taylor (2004) conclude that where trade liberalisation increases the level of economic activity, the net impact on the environment is beneficial. This finding is based on SO2 concentrates only, where the negative scale effect is outweighed by a positive technological effect. Dean (2002) also finds that that trade liberalisation has a beneficial environmental impact, although in this case, the positive income effect outweighs a negative terms of trade effect. Frankel and Rose (2005) allow for the endogeneity of trade and income in testing for the effect of trade on environmental quality. Using instrumental variables for openness and for income, the study focuses on seven separate environmental quality indicators (three measures of air pollution, industrial carbon dioxide emissions, deforestation, energy depletion and rural clean water access). For the three kinds of air pollution, the results show a negative relationship with openness. For the other four indicators of environmental quality, only carbon dioxide is found to worsen with trade liberalisation.

The econometric literature that relies on cross country data ‘averages out’ the considerable heterogeneity that exists across countries in the net effect of trade on the environment. Copeland and Gulati (2006) suggest that it is useful to distinguish between different types of countries, classified in terms of the environmental characteristics of their exports.22 The pollution-intensive characteristics of different types of exports can be particularly important in assessing the environmental consequences of increased foreign investment flows. This is referred to as the pollution haven hypothesis and has been widely discussed in the literature.23

19 Frankel and Rose (2005) take account of the interdependence between trade openness and environmental quality.

20 See, for example, Hertel (1997); Anderson and Martin (2006); Hertel and Winters (2006). 21 Scrieciu (2007) provides a detailed critique of the limitations and appropriateness of CGE models, particularly

in assessing the sustainability impact of trade liberalisation. 22 Copeland and Gulati (2006) propose four groups of countries: (i) natural capital-intensive exporters with weak

property rights (ii) natural-capital-intensive exporters with strong property rights (iii) low income pollution-intensive manufacturing exporters (iv) low income exporters of relatively clean goods.

23 Copeland and Taylor (2004) distinguish between the pollution haven effect and the pollution haven hypothesis. In the former case, a tightening of environmental regulations will, at the margin, have an effect on trade and investment flows. In the latter case, the effect of environment regulation dominates the influence


In part, this debate has reflected the concern that the global trend towards trade and investment liberalisation will worsen environmental quality as countries compete for an increased share of foreign investment by engaging in a ‘race to the bottom’ on environmental regulations. Similarly, it is argued that the adoption of more stringent national environmental standards could reduce a country’s competitive advantage and encourage pollution intensive industries to relocate to countries with lower standards.

If the costs of compliance with environmental regulations differ across national boundaries, then, other things being equal, we might expect to see the relocation of pollution intensive industries to locations where the costs of compliance are lower. These shifts may in turn have a ‘chilling’ effect on the introduction of new environmental regulation as countries become more reluctant to increase environmental control measures or deliberately try to attract FDI by offering lower environmental standards, leading to a competitive ‘race to the bottom’.

Although this ‘pollution haven’ effect has been the subject of extensive empirical investigation, the results have been inconclusive. A comprehensive review of the earlier literature on FDI and the environment concluded that ‘fears of a “race to the bottom” in environmental standards, based on the idea of “pollution havens” may be generally unfounded’ (OECD, 1997). Jaffe et al (1995) found little evidence of stringent environmental regulations having a significant effect on investment or trade flows. More recent studies (for example, Smarzynska and Wei, 2001; Busse, 2004; Kirkpatrick and Shimamoto, 2007) have confirmed these results, leading Copeland and Gulati (2006) to conclude that ‘there is currently very little explicit evidence that environmental policy affects trade and investment flows between rich and poor countries’.

The existing empirical literature has a number of limitations, which may go some way in explaining these somewhat surprising results. These limitations include differences in econometric methodologies, data sources and proxies, as well as alternative conceptual frameworks (Letchumanan and Kodama, 2000; Copeland and Gulati, 2006). A major limitation of empirical studies that have examined the linkage between trade and investment flows and environmental regulation has been the almost complete lack of comparable data on environmental regulation across countries. In attempting to overcome this lacuna in the data, most studies have tested the pollution haven hypothesis indirectly, by examining the international changes in the emissions output of ‘dirty’ industries on the assumption that stricter environmental regulations results in better environmental conditions, and vice versa (Hoffmann et al, 2005). In addition, most studies fail to allow for the endogeneity of environmental policy. Where allowance is made for these limitations, there appears to be some evidence in support of the pollution haven argument. Using US regulation data, there is an emerging body of evidence to suggest that plant investment decisions within the US are affected by environmental policy (Keller and Levinson, 2002; Gray and Shadbegian, 2002). Also, Levinson and Taylor (2003) and Ederington and Minier (2003) treat environmental regulations as an endogenous variable, and find that US environmental regulations do influence US trade patterns. Cole and Elliott (2003) allow for possible endogeneity and in addition test for the pollution haven effect using the ‘new’ trade model which includes both inter- and intra-industry trade flows. Using cross country data, they find that environmental regulation differentials influence trade patterns. It can be concluded, therefore, that the

of all other factors that affect trade and investment flows, and leads to a shift in pollution intensive industry from countries with more stringent regulations to countries with weaker environmental regulation.


evidence on the pollution haven effect is inconclusive, and will further research is required, particularly on a case by case basis.

Trade liberalisation can have an indirect impact on the environment through the effect of greater trade on economic growth and the effect of increasing national income on environmental quality. As discussed above, the empirical literature fails to find strong evidence of a causal link from trade liberalisation to economic growth (Rodriguez and Rodrik, 1999; Kenny and Williams, 2001). Winters (2004) reviews the evidence and concludes that trade liberalisation by itself is unlikely to boost economic growth, unless openness improves the quality of governance and is accompanied by improved macroeconomic policymaking. The link from economic growth to environmental quality has also been extensively studied, and has given rise to the Environmental Kuznets Curve (EKC) hypothesis.24 The EKC is derived from the early empirical testing of the cross country relationship between income per capita and environmental degradation which showed an inverted U relationship, suggesting that environmental quality will improve with rising levels of income once a threshold income level has been passed.25

Very few studies support the hypothesis of continuing improvement in environmental quality after income per capita has reached a certain level. Based on their review of the earlier literature, Nordström and Vaughan (1999) conclude: “… nothing in the relevant literature suggests that the pollution trajectory will turn downward with increasing income by compelling necessity… income growth, while perhaps a necessary condition for changing the focus from more immediate economic and social concerns to longer-term sustainability issues, is not sufficient to reverse degradation’.

More recent research has shown that the relation between environmental quality and income is sensitive to the sample of countries and the time period chosen (Harbaugh et al 2002; Stern and Common, 2001). Copeland and Taylor (2004) argue that the failure to find robust empirical confirmation of the EKC is due to a misspecification of the macro relationship. They show how different sources of growth will lead to different environmental outcomes and argue for an approach that allows for differences in sources of environmental damage across different countries.26 Antweiler et al (2001) is an example of this approach, where the effect of increases in income per capita on sulphur dioxide emissions is estimated in a sample of cities in different countries, while holding other factors constant. The results provide strong evidence of a positive income effect, i.e. higher income per capita income is associated with lower SO2 concentrations.

The modelling literature on trade and the environment has also grown rapidly over the last decade with the advance in modelling tools and increasing worldwide concerns for the sustainability of greater trade liberalisation and higher economic growth (Box 4.1).

24 In a recent survey of the literature on the EKC hypothesis, Copeland and Taylor (2004) note that theory has only played a limited role in the development of the hypothesis.

25 See Shafik (1994) and Grossman and Krueger (1995) for early contributions to the EKC literature. 26 For example, inconclusive results are more generally obtained when the hypothesis is applied to deforestation

as compared to other environmental problems such as pollution for which the EKC hypothesis has been more successfully tested (Angelsen, 1996; Panayotou, 1994, 1997).


Box 4.1: Simulating the Environmental Effects of Trade Liberalisation


Source: WTO 2004

The majority of modelling studies tackle the trade-environment relationship at an aggregated global, regional or country level (Cole and Rayner, 2000, Dean, 2000, Townsend and Ratnayake, 2000, Nijkamp et al, 2005, Zhu and van Ierland, 2006). A smaller but significant body of literature investigates the implications of trade reforms on environmental quality at a more disaggregated level of the economy by undertaking a sector-specific approach, particularly related to agro-food activities.

The assessment of the impact of trade liberalisation on core environmental indicators is poorly represented in the CGE modelling literature. They only partly address impacts on environmental quality indicators (typically addressing changes in air pollution),27 as CGE economic models by design are not able to deal with complex environmental impacts related to the effects on biodiversity and natural resource stocks. This is partly because CGE models are typically constructed to target aggregates, whereas many of the environmental problems are of local nature and of local relevance (e.g. the pollution of specific water bodies, biodiversity loss in specific regions). Böhringer and Löschel (2006) present a generic (“core”) CGE model with energy flows (fossil fuels used as a primary factor of production releasing carbon dioxide) as used for a comparative-static assessment of trade and environmental or energy related policies. The authors further develop the core model and discuss several extensions for a better evaluation of potential interactions and trade-offs between economic/trade and environmental indicators. These refer to the inclusion of non-CO2 greenhouse gases, accounting for market distortions such as taxes or subsidies, involuntary

27 Trade liberalisation-induced changes in air pollution (climate change) are usually addressed in CGE models (typically labelled E3, Energy-Economy-Environment, CGE models) in terms of energy-linked emissions (i.e. CO2 greenhouse gas emissions) coupled to economic activities (Böhringer and Löschel, 2006). For example, Nijkamp et al (2005) add an explicit capital-energy composite input into the production structure to model the impacts of international climate change policies in a CGE context.


unemployment and imperfect competition, adding dynamic specifications and endogenous technological change.28 However, the authors do not provide greater detail on their practical implementation and the appropriateness of their incorporation into a CGE modelling framework.

When economic and environmental linkages are assessed within a CGE modelling framework, their complexity tends to be narrowed down for example to the attachment of an environmental module to production or consumption functions often under the form of technical coefficients of emissions. Moreover, several crucial limitations related to the appropriateness of CGE models to simulate policy reform and environmental sustainable issues, particularly pertaining to climate change, and the interactions between energy and output have been highlighted in Barker, Köhler and Villena (2002). These include the limited disaggregation of productive sectors and factors of production, high uncertainty regarding the assumed values of substitution elasticities between factors of production, and the very limited representation of technical progress. In addition, the key neo-classical assumptions, restrictions, and behavioural laws underpinning CGE models, for which there is no general consensus and no empirical foundation,29 are made to render these models well behaved, resulting in strong climate policy recommendations with a high degree of certainty, even though environmental (climate change) analysis is plagued by uncertainties, multiple equilibria, unstable dynamics, intergenerational equity concerns and alternative distributional outcomes (DeCanio, 2003).

To summarise, the review of the literature provides empirical evidence of the potential negative environmental impacts of trade and investment liberalisation. However, the empirical evidence also cautions against generalisation, and highlights the importance of contextualised analysis.30 though some environmental problems are global in nature, such as climate change, and would require a global approach. The environmental outcome of trade and investment liberalisation is determined by a complex process of interdependent relationships which are difficult to capture in an econometric or modelling framework. Environmental policy and the quality of regulatory institutions and governance, in particular, play an important part in determining the effect of trade and investment liberalisation on the environment. The robustness of environmental policies and institutions, including the adequacy of supporting regulatory instruments, are important determinants of the environmental impacts of trade and investment liberalisation. So far, however, institutional factors have been largely neglected in the empirical literature on trade and the environment. Further research in this area is needed if the potential negative impacts of trade liberalisation are to be effectively controlled or mitigated by national and international environmental policy.

Even if trade and investment liberalisation are shown to promote economic growth, this will not be sufficient to ensure environmental sustainability. For trade liberalisation to contribute to environmental sustainability, sound environmental policies are needed, both at the national and international level to influence the nature of trade flows and the nature of economic

28 The disaggregation of the representative agent into heterogeneous households represents a further proposed extension to the core CGE model that would allow for the analysis of equity issues, as well as linking models to ensure a more comprehensive coverage of SIA requirements.

29 CGE models, which are typically based on one year’s data, are inherently not falsifiable and tend to fit the data perfectly (Barker, 2004).

30 Some environmental problems are global in nature, such as climate change, and will require a global approach.


growth. This requires the development of appropriate regulatory frameworks, and in the case of developing countries financial and technical assistance will be needed to enable them to strengthen policy coordination in the areas of trade, environment and development.

4.4 Trade Liberalisation and Poverty Alleviation

The impact of trade liberalisation on poverty alleviation and other dimensions of social development depends largely on the relationship between trade and growth. However, growth is not a sufficient condition for poverty reduction. Even if trade liberalisation leads to more rapid growth, this does not imply that it will improve the condition of the poor (WTO, 2003:109). If income inequality increases at the same time, the poor may actually become worse off. Trade theory predicts that wage inequality decreases in developing countries as a consequence of trade liberalisation, since developing countries are relatively well endowed with low skilled labour relative to developed countries. When trade liberalisation occurs, developing countries are predicted to become more competitive in low skill intensive sectors and as a result, these sectors will expand. The increased demand for low skilled workers will lead to an increase of their wages relative to the wages of skilled workers.

The empirical literature on the link between trade and wage inequality is mixed (Wood, 1997). Experience in East Asian economies appears to confirm the theoretical predictions, whereas in Latin America it appears that trade liberalisation was associated with an increase in wage inequality. One explanation for trade liberalisation being associated with increased wage inequality in some developing countries is that liberalisation introduces new skill intensive activities For example, there is evidence for Mexico that liberalisation induced larger FDI inflows from the United States, and increased the demand for skilled labour in manufacturing industrieswhich led to an increase in wage inequality (Feenstra and Hanson, 1997).

The relationship between wage inequality and poverty is more difficult to predict and quantify. If an increase in wage inequality is associated with rising or constant employment, absolute poverty levels may fall, whereas if rising wages for skilled workers is linked to job losses for the unskilled there is more likely to be a negative impact on poverty. It is also important to recognise that the majority of the poor in developing countries derive their income from non-wage sources, often in the agriculture and rural sector. Trade liberalisation in agriculture could increase the incomes of the poor. Dollar and Kraay (2001) analyse how growth affects average real income of the poorest quintile on household incomes, and find that their income increases proportionally with the country’s average income, which implies that economic growth benefits the poor. But they find no evidence of a significant negative relationship between openness and average incomes of the poor. Any link from trade liberalisation to poverty reduction relies, therefore on the indirect effect through economic growth. As already discussed, this link is contested in the literature, and the empirical evidence suggests that the growth induced impact of trade liberalisation on poverty is weak (Rodrik, 2000; Winters et al 2002).

Economic modelling techniques, and particularly Computable General Equilibrium models have gained in popularity as a method of assessing the poverty impact of trade liberalisation. Computable general equilibrium models have been widely used to assess the impact of trade


liberalisation on aggregate economic welfare and poverty levels, particularly in the context of the WTO trade negotiations.31

Global CGE models by design are not particularly well suited for poverty analysis due to their lack of disaggregated information at the household level and their inability to distinguish between poor and non-poor individual households. Instead they tend to distinguish between various types of “representative agents” or, in other words, categories of households or workers (e.g. unskilled and skilled labour; rural and urban labour). They provide estimates mostly related to aggregate impacts on poverty and on changes in real income at the poverty line. Several global CGE models assess the impact of further trade liberalisation on poverty by differentiating between skilled and unskilled labour, and calculating the number of people that may be lifted above the $1 or $2 a day poverty line (Anderson, Martin and van der Mensbrugghe, 2006b, Cline, 2004). The number of people lifted out of poverty appears to be, as in the case of economic welfare impacts, dependent on the depth of trade liberalisation: the greater the trade reforms, the greater the increase in the number of people lifted out of poverty. This results from the fact that poverty impacts are mainly explained in CGE models by changes in real rewards to factors. Since the returns to unskilled labour are estimated overall to increase with trade liberalisation more than the returns to skilled labour, and most of the poor are unskilled workers, greater trade reform is expected to contribute to more poverty alleviation. Overall, global CGE models estimate modest poverty impacts stemming from full trade liberalisation, and much smaller poverty alleviation effects for developing countries under partial trade reforms.

Polaski (2006) undertakes a discussion on the likely poverty impacts of trade liberalization by combining the income gains or losses estimated by the CGE (Carnegie) model with the data on the current distribution of poverty in the developing world. The author argues that because some developing countries are expected to experience negative effects from agricultural liberalisation, and because most of the poor depend on agricultural income, poverty is likely to deepen and spread in rural areas, though displaced farmers may be absorbed, in some cases, by expanding manufacturing exports. Nevertheless, the net effect would depend on the details of the liberalization scenario and various country characteristics, such as the relative size of the agricultural and manufacturing sectors, the rates of growth or contraction likely to be experienced by each sector, and their relative productivity levels.

CGE modelling techniques have also been recently refined to provide more reliable numerical estimates of trade liberalisation induced poverty effects across countries and regions. This class of augmented CGE models focus on a specific country (single-country CGE models) and are linked to micro-simulation models drawing on more detailed household level data. These models are richer in household level detail and are thus relatively better suited to investigate poverty and equity impacts, and bridge the macro-micro gap of analysis.32 The

31 For example, recent CGE studies assessing the economic implications of trade liberalisation include Francois,

van Meijl and van Tongeren (2005), Hertel and Keeney (2006), Anderson, Martin and van der Mensbrugghe

(2006a), and Polaski (2006). 32 The DDA trade liberalisation is found to result, for example, in positive but very small poverty impacts in Brazil (Ferreira-Filho and Horridge, 2006). This is largely attributed to the growth in the Brazilian agro-food output and exports predicted to be triggered by greater trade liberalisation, which creates a greater demand for unskilled labour, and, assuming operational factor markets results in a reduction of the number of people below the poverty line


single country CGE models show that national poverty impacts of further trade liberalisation vary across countries and are dependent on factor mobility, the effectiveness of price transmission channels, and the incidence of tax replacement, as well as the extent to which complementary reforms, and mitigating and enhancing measures are implemented (Hertel and Winters, 2006). On balance, trade liberalisation may contribute to poverty alleviation, but there is no guarantee that the poor will always stand to benefit.


5. REVIEW OF PREVIOUS IMPACT ASSESSMENT STUDIES

5.1 Introduction

This section of the mid term report reviews the previous impact assessment studies that have been undertaken for EU –Mercosur trade liberalisation. The studies reviewed provide quantitative analyses of the economic impacts of trade liberalisation, and deploy computable general equilibrium (CGE) modelling and econometric estimation techniques.The results of these studies will be used to inform the causal chain analysis in Sections 7 to 10 of the report.

5.2 The 2003 Preliminary SIA for EU- Mercosur

This section reviews the 2003 Preliminary SIA for EU- Mercsur (Planistat, 2003). . The scenarios assessed in the previous study are described, together with its methods of analysis, its principal findings and its recommendations for more detailed assessment of specific sectors and issues.

The analysis in the Planistat preliminary overview SIA of the EU-Mercosur trade agreement was based on a purpose-developed Computable General Equilibrium (GGE) economic model. For services and FDI it was considered that the economic model would not be able to fully capture the impacts of trade policy changes, and so these were assessed separately in a parallel cross sector analysis.

The model used in the Planistat study included a dynamic link, through which the direct income effects of trade liberalisation induce shifts in the regional pattern of savings and investment. Such effects can magnify income gains or losses. The results estimated changes in the capital stock, and the welfare and other implications of such changes. In practice, the results of the study showed little difference with and without the dynamic link.

The model allowed wages to vary, and kept total employment effectively constant. Its results included changes in wage rates for skilled and unskilled labour, and changes in employment by sector, under the equilibrium conditions that would occur once the economy has adjusted to the change in trading conditions. Other results for the new equilibrium included changes in GDP, national welfare and income, total export quantity and export value, terms of trade, consumer prices, and production output by sector. The equilibrium changes in production levels predicted by the model were used to estimate environmental impacts, outside the model. The data came primarily from the GTAP5 database, which has since been superseded by GTAP6.

The baseline scenario of the first preliminary overview SIA included the assumption of a successful conclusion to the WTO Doha Round, and implementation of the Free Trade Area of the Americas (FTAA). These were implemented in the SIA along with the scenario for a postulated EU-Mercosur agreement, as shown in Table 5.1.

Table 5.1: Scenarios assessed in the Planistat SIA of an EU-Mercosur Agreement

Trade Measure & Field of Application

Measure Applied Implementation in model

Baseline Scenario




WTO Doha Round Tariff reduction and reduction of barriers to trade in services. Agricultural subsidy reduction

30% reduction in agricultural subsidies. 50% reduction in all tariffs.

FTAA incorporating Mercosur

Free Trade All Western-hemisphere border tariffs removed with the exception of ‘Other Agriculture’, where tariffs reduced by 50%.

Government Procurement: 40% of purchases open to regional competition.

Reduction in tariff equivalent on inputs to public administration and water

EU-Mercosur Scenario Agricultural and non-agricultural goods A) Elimination ofCustoms duties

Agricultural & processed agricultural products HS01-02, 04-24

EU proposal: Tariff elimination covering €2.2bn of Mercosur exports currently covered by tariffs (80% of agricultural sector trade subject to tariffs) + €5.8bn products which already have 0% duty => 90% coverage of MERCOSUR’s agricultural exports. More limited tariff reductions on remaining 10% of trade: cereals, olive oil, dairy products, beef, tobacco, sugar, certain processed fruit, vegetables.

Reduction of tariffs by 65% from Doha baseline

EU export subsidies and other factor payments are not addressed by Mercosur negotiations. But they are addressed by Doha round negotiations.

Incorporated into baseline: subsidies reduced 30%

Mercosur Export taxes Elimination of those remaining

Fish - HS03 Complete elimination of duties over 10 year period

Elimination of tariffs

Industrial Products HS25-97

100% elimination of duties over a timetable, possibly faster in EU than Mercosur

Elimination of tariffs

B) Non-tariff measuresi Internal taxes Re-statement of multilateral agreements.

Progressive elimination of tax discrimination

Reduction in non-tariff taxes on international trade by 80%

ii rules of origin Agreed application of rules of origin Reductions in implicit taxes

iii standards Elimination of use of standards as a means of protection

Reduction in tariff equivalents.

Sanitary / Phytosanitary measures

Recognition of equivalence of technical methods in food and related sectors

Reduction in tariff equivalents on agriculture-based sectors.

Services & Establishment

Sector-based agreements. Reduction in frictional trading costs, including between Mercosur countries

Reduction in tariff equivalents both within Mercosur and between regions, specified as changes in elasticities for all services




sectors and construction. Other sectors / other types of measure Foreign Direct Investment (FDI)

FDI considered under Services & Establishment

Foreign Direct Investment is endogenous in the model. Nevertheless, reduction in tariff equivalents in all manufacturing sectors, water, electricity and gas, construction, communications, financial services, wholesale & retail trade.

A) GovernmentProcurement

Partial (40%) opening of public procurement, especially at federal level where applicable.

Reduction in tariff equivalent on inputs to public administration and water

B) IntellectualProperty Rights

Specific agreement on wines and spirits. Increased general protection for intellectual property. Note difficulty in modelling pharmaceutical impact.

Reduction in tariff equivalent for food products, beverages & tobacco products, textiles & wearing apparel, electronics, machinery and other manufactures, business services, recreational and other services, wholesale & retail distribution.

C) Competition Harmonisation and greater enforcement of competition policy

Suggested reduction in Mercosur tariff equivalents in water, electricity and gas, transport, communications, financial services.

D) Transparency Incorporated into other measures

The Planistat model and the CETM model used in the present study share a common theoretical framework used in CGE modelling. The model outputs are therefore similar. The main differences are in the data inputs where the 2006 model uses the updated GTAP6 database, and in the specification of the scenarios, where the CETM assumes 100 per cent liberalisation of all trade in goods and services, and includes an allowance for a 1 per cent reduction in the costs of trade facilitation. The Planistat SIA was based on economic modelling of an assumed scenario for the actual trade agreement.

In the present study, the baseline has been updated for the current standstill in the WTO Doha negotiations. A similar ‘no change’ assumption is made for the FTAA in the baseline.The SIA estimates the impacts for the ‘further liberalisation’ scenario where a range of negotiating options are defined for the agriculture, agriculture and services sectors.

The main findings of the 2003 SIA on sustainable development in Mercosur and the EU were as follows:

Mercosur

• Relatively small overall economic impacts.

• Larger positive or negative economic impacts on particular sectors.

• A danger that short-term problems of employment restructuring might dominate andoutweigh the longer term benefits.

• Only a limited contribution towards reducing unemployment

• Potentially extensive agricultural restructuring


• For agriculture, possible environmental effects on water resources and water quality,soil quality and biodiversity; possible social effects on employment (formal orinformal) and rural poverty. In particular as these may be gender or ethnicallydifferentiated.

• For food products and meat and dairy products, environmental effects on air emissionsor water or ground pollution.

• For petroleum and related chemicals and plastics, potential environmental effects inBrazil.

• For transport: environmental effects in Argentina, Brazil and Uruguay on airemissions from transport, and land quality or water supplies from car disposal.

• For the retail and wholesale sector, social impacts associated with the economic andemployment impacts.

European Union

� In the European Union, the main issues identified in the Planistat SIA are social, associated with potentially adverse economic effects for particular economic sectors in specific regions of some Member States. The potential economic and environmental impacts are assessed to be non-significant.

The screening and scoping exercise conducted in the 2003 SIA identified the following priority sectors for more detailed study:

• Agriculture, Food products and Meat & Dairy products: Mercosur• Agriculture, Food products and Meat & Dairy products: EU-25• Food products and Meat & Dairy products - Environmental analysis, Mercosur• Petroleum refining, Chemicals, Rubber, Plastics – Brazil• Electronics & Machinery – Capital Goods: Mercosur• Wholesale & Retail – Mercosur and EU• Transport – Argentina, Brazil and Uruguay

The study also identified impacts in other sectors that were potentially significant:

• Forestry and Wood products. Potentially significant impacts were identifiedassociated with agriculture. It was envisaged that a detailed SIA on agriculture wouldexamine these in more detail.

• Fishing – Argentina. Several studies of this area had already been conducted.Insufficient information was available to indicate that further study would beworthwhile.

• Leather Products. It was considered unlikely that the potential impacts would besufficiently significant to warrant further analysis.

• Motor Vehicles – Mercosur and EU. Several potentially significant impacts wereidentified, arising from increased trade between the EU and Mercosur in bothdirections. It was envisaged that the most significant of these would be examined in adetailed SIA on the transport sector.


5.3 Other Economic Impact Assessments of EU – Mercosur Trade Liberalisation

Quantitative analysis using both general equilibrium and partial equilibrium techniques can provide useful information on the likely economic effects of trade liberalisation in different sectors and economies. These results can then be incorporated in the causal chain analysis which is used to carry out the sustainability impact assessment.

Girodano and Watanuki (2000) construct a comparative static CGE model for Mercosur which is represented by Argentina and Brazil. The model included 11 sectors and 5 regions. Trade liberalization is modelled as the complete removal of tariff barriers between trade partners. The results show that under the Mercosur-EC FTA European exports to Argentina grow by 13% and those to Brazil by 14%. Argentina expands exports to the EC by 11%, while in Brazil increases exports by 9%. The most dynamic European exporting sector is light manufacturing . Exports in animal products experience the fastest growth in Argentina , while other agricultural products are the most dynamic in Brazil. Simulation results show that services exports to Mercosur fall slightly. The sectoral composition is very similar across countries within Mercosur, with export gains concentrated in the agribusiness sectors, and a dominance of the food crops sector followed by the food processing industry.

Efficiency gains from full trade liberalisationcause GDP to raise by 0.7% in Argentina and by 1.3% in Brazil. In the EC, the overall effect on GDP (0.22%) is smaller since trade with Mercosur accounts for a smaller portion of European GDP. Under partial liberalization, all countries still have positive welfare gains.

Bchir, Decreux and Guérin (2001) used the MIRAGE model with GTAP 5 database. The model assumes perfect competition and monopolistic competition depending on the sector, full employment, and capital immobility as well as attempting to capture dynamic effects related to technological externalities and non-monotonic increased competition. The authors explicitly model these effects by adjusting factor reallocation to take effect over a specified period. The scenarios examined included full trade liberalization between EU and Mercosur and between Mercosur and other Latin American countries, as well as a combination of the two. These simulations were done in a seven geographical zones and in a nineteen sectors framework.

The results from the Mirage model suggest that Mercosur’s total export and imports should rise by 12.3% and 12.7% respectively. EU imports and exports rise by 1.6% each. The authors find significant trade diversion effects and Latin American exports to Mercosur are predicted todecline by 17%. In the same way, Latin America (excluding Mercosur) exports to the EU should fall by 7%. . The most striking illustration is a reduction of meat exports from the rest of South America to the EU. Sectors in Mercosur that are predicted to decline include, adversely affected are automobiles (-1.0%), other agriculture products (-1.5%), other Manufacturing (-1.7%), and metals (-1.3%). Sectors whose production will “gain” from such a liberalisation episode include: cereals (+2%), milk and sugar (+2%), and, meats (+8%).

Flores (2004) examined the changing dynamics of EU–Mercosur integration in the context of 2004 EU enlargement. As in the case of the previous models it uses the GTAP 5 (1997) database but has extended it with the most recent Input-Output tables for Argentina and Brazil. Also, this model assumes an interaction between perfect and imperfect competition.


As in the previous studies, the simulations are full (‘optimistic’) and partial (‘realistic’) liberalization scenarios, where the latter excludes a large part of trade in the agriculture sector. The results show that GDP rises as a result of an agreement by about 1.5% under the full liberalization scenario and by a 1.3% under the ‘realistic’ one.

Calfat and Flores (2006) estimate the potential gains to trade in goods from liberalisation of EU-Mercosur trade. The partial equilibrium analysis is conducted at the detailed six digit product level. The analysis identifies the products where there appear to be opportunities for gains from trade, based on revealed comparative advantage and existing levels of tariff equivalents facing the product in the importing country. Two liberalisation scenarios are used: first a reduction of 50 percent in the ad valorem tariff equivalent, and second, a reduction of 100 percent in the ad valorem tariff equivalent. The aim is to identify potential ‘winners’ at the product level from trade liberalisation.

The main products for EU gains are nuclear reactors, boilers, machinery etc; electrical and electronic equipment; pharmaceutical products; optical, photo, technical and medical apparatus; and paper and paperboard and related articles. Automobiles and motor vehicle parts are not identified as products where significant gains could occur.

The studies reviewed in this section show modest overall welfare and real income gains for Mercosur. from an EU-Mercosur FTA. However, these overall gains are an aggregation of the gains and loses that are predicted to occur at the sectoral level. Computing and data limitations have meant that much of the economic analysis of the potential impact of trade liberalisation is based on simplified representation of behavioural relationships and ‘stylised facts’ which do not capture the complex set of interacting factors that can determine the behaviour of producers and consumers at the micro level. Thus, while the results of CGE models and other partial equilibrium analyses can inform the causal chain analysis, the evidence which they provide needs to be complemented by an understanding of the institutional and policy factors which also influence the final economic (and social and environmental) outcomes of trade liberalisation.


6. MODELLING THE EU-MERCOSUR ASSOCIATION AGREEMENT

6.1 Modelling Trade Liberalisation

Quantitative modelling of the effects of trade liberalisation provides a valuable source of information on the likely magnitude of the economic, social and environmental impacts of trade liberalisation in the main sectors and different groups of countries.

Most trade models use a Computable General Equilibrium (CGE) modelling framework. The CGE approach is based on the simulation of outcomes for a specified policy ‘shock’, and it has been widely used to estimate the impact of trade liberalisation, taking both partial and, more often, full implementation of liberalisation scenarios as policy shocks (Kirkpatrick and Scrieciu, 2006). CGE economic modelling studies rely on an extensive economic theoretical framework largely based upon the logic of general equilibrium and neoclassical economic theory, where economic agents display rational optimisation behaviour. All model results are specific to the details of the scenario (policy change) and structure imposed, especially assumptions regarding response elasticities. As a general rule, the greater the degree of trade liberalisation represented in the scenario (policy shock) and the more responsive the economy is assumed to be (as represented by structural parameters), the greater the effect of liberalisation predicted by the model.

Trade liberalisation models rarely discuss, however, the adjustment costs incurred as economies adjust to trade reform and move towards a new equilibrium. In the short term this will reduce the overall income gains and have a negative impact on the affected sectors and factors of production, including labour. Since the gains from trade liberalisation accrue to the most competitive (more responsive) producers and losses are often incurred by the least competitive producers, models have a bias towards overestimating potential gains. This is particularly the case of estimates of effects on developing countries, as non-price constraints on supply response are not always adequately captured in the models.

6.2 The EU Mercosur CGE Model

This section presents the results from a model-based static comparative assessment of the economic, social and environmental impacts of a potential FTA between EU and Mercosur. A free trade agreement will lead to economic gains for both the EU and the Mercosur, and understanding the size and the source of these gains is essential for the overall assessment of such an agreement.

Our analysis assesses the size and source of the static comparative economic gains from removing existing barriers to trade between the EU and Mercosur (but not internally within the Mercosur), and we focus on those effects that can be modelled using reliable data of world trade. We use a consistent and empirically well-founded analytical framework (so-called general equilibrium model) in which different scenarios of a free trade agreement can be evaluated and compared with the current situation (the baseline). The baseline for our analysis is therefore a global model of the current production and trade structure for the entire world economy including the best available information about cost structures (including inputs, labour and capital) and price levels for both exported goods and those consumed domestically. We also include the best and most updated information about trade barriers, both in the form of tariffs, but also non-tariff barriers such as quotas etc. Using this


information, we are able to model and reproduce the current trade flows and production structures as of today.

The applied trade liberalisation scenario

Within this consistent and well-established modelling framework we analyse the effects of a scenario of a potential free trade agreement. No one knows what such an agreement will look like in details, and no one knows when it will be implemented. We have been asked by the Commission to look at the impacts of a scenario of full liberalisation of trade between the EU and Mercosur. While such a scenario might be desirable for both the EU and Mercosur, it is unlikely that full liberalization scenario can be agreed in the short term. The scenario for this analysis as defined by the European Commission covers the following elements:

� A removal of all tariffs and non-tariff barriers in agriculture, while keeping the domestic agriculture policies in both the EU and Mercosur unchanged

� A removal of all tariffs and non-tariff barriers in manufacturing, and thus providing full market access for non-agricultural products

� A removal of all barriers on cross-border trade in services (mode 1), while leaving aside the potential gains from opening the two economies for investment in services via lower barriers to consumption abroad, foreign establishment or movement of natural persons (thus modes 2, 3 and 4 are not included)

� A representation of trade facilitation measures (i.e. reducing barriers related to customs procedures and other administrative burdens directly related to trade), which for the purpose of the analysis has been modelled as reduction in trade costs of 1 percent.

In summary, the applied scenario is a conservative estimate of an ambitious free trade agreement. The scenario is conservative in the sense that where ever needed we deliberately chose the most conservative assumptions, and we avoid overestimating the economic gains by only including the effects which are widely accepted to be well captured in this kind of model (e.g. we use a constant returns to scale model which provides more conservative evaluations of free trade agreements than models with increasing returns to scale).

We also restrain from formal modelling of effects where little is known about the actual flows and the factual barriers – as is the case for foreign direct investment in services. This does not mean that investment in services is irrelevant or unimportant. On the contrary, relaxing barriers to foreign establishment in services could bring further benefits to both economies, but the required data for formal modelling are unavailable.

Furthermore, we chose to model only the static comparative effects from trade liberalisation, and thereby leaving the dynamic effects from trade induced productivity gains aside. Again, we have deliberately chosen the most conservative assumption, and modelled the static comparative efficiency gains from better allocation of production factors between sectors based on today’s production and cost structure. However, recent literature on the dynamics of trade liberalization suggest that trade liberalization can lead to greater international competition and thereby put increased pressure on domestic firms to improve productivity and


to innovate, but such effects are not formally modelled and any such benefits should thus be added to the static comparative gains quantified in this analysis.

At the same time, the scenario is ambitious. It is ambitious in the sense that all barriers that can formally be included in the model are removed in the scenario. That being said, we also underline that the scenario is not chosen because we consider it as the most likely, nor necessarily as the most desirable scenario. It could turn out that both negotiating parties find it useful to negotiate further liberalisations in services, especially in reducing the barriers to foreign establishment of service firms, while keeping some of the existing protection in sensitive sectors such as agriculture, food and automobiles, or at least consider very long transition periods for such ambitious trade reforms.

The above mentioned scenario is deliberately chosen as the one giving the best possibilities for revealing potential social and environmental side-effects that needs to be dealt with in order to achieve the economic gains from free trade. When negotiating a final agreement, the current analysis can then serve as part of the evidence-base and make negotiators well-prepared to tackle potential concerns.

Summary of results

In this study we have analyzed the possible effects on the Mercosur and the EU from a full free trade agreement, where all of the above mentioned barriers are removed. We use a well-known and state-of-the-art general equilibrium model (CGE-model) of world trade for the most recent year.

If the scenario described above were fully implemented in this setting (corresponding to today’s situation) we estimate conservatively that the Mercosur countries all in all will obtain a welfare gain amounting to around 9 billion USD. The welfare gain captures the effect from a more efficient allocation of production factors between sectors, lower prices on imported goods and services and higher wages as the economies have adjusted to the new equilibrium without barriers. The welfare gain also takes into account that tariff revenues are lost. But as shown, it is all in all an economic welfare improvement for the Mercosur area.

The corresponding gain in the European union (EU25) is around 4 billion USD (or 0.1 percent of GDP), measured at current price levels and with the current production structure and productivity levels. These efficiency gains primarily arise because Mercosur has a comparative advantage in agricultural products and processed food, and because the EU has a comparative advantage in manufacturing and services. This is the general picture, but as our studies show, there are also specialized comparative advantages at the sectoral level.

Overall, the results of our analysis show that a full free trade scenario between the two regions will lead to positive net income effects across all countries. Looking closer at the effects of each trade liberalization measure in the scenario, we find that for the Mercosur countries, tariff reductions are the single most important measure, while our analysis shows that trade facilitation is of relatively large importance to the EU. Trade liberalization of cross-border services in itself does not give as large a contribution to the overall result. However, liberalizing other modes of trade in services, especially foreign establishment (FDI), certainly constitute an important part of the trade negotiations, and economic effects should be expected in the service sector as well as economy-wide from liberalising other modes of service trade.


At the aggregate, production and output will increase in both economies. On a sector specific level, we find that in general, there will be an overall contraction of Mercosur manufactured goods and expansion in agricultural goods, most notably so for processed foods. For the EU the effect is the reverse, i.e output of manufacturing goods will increase, while the agricultural sectors, and again processed foods are expected to shrink in relative importance. Whether some sectors will shrink in absolute terms depends on a number of assumptions to be made outside the model, i.e. will the identified upward pressure on unskilled wages in Mercosur attract labour from the informal sector to the formal sector? In this case the absolute change even in those sectors contracting in relative terms could be positive.

We also include the effects of removing the impediments to cross-border trade in services. However, large gains from trade in services are expected to arise from removing barriers to foreign establishment. These effects are not included in the model, and therefore substantial additional gains are expected from liberalising in this area as well.

Besides the static efficiency gains that have been modelled in a state-of-the-art CGE-model there are also other potential effects:

� Economic gains from removing barriers to foreign direct investment

� Dynamic gains from trade-induced productivity gains

� Economic gains from expanding the labour force in Mercosur (from informal to formal sector).

� The loss of tariff revenues is included in the welfare economic evaluation.However, potential negative welfare effects from replacing the lost tariff revenues with revenues from raising other taxes and the distortion effects hereof are not considered.

These aspects of free trade are also important, but have not been included in the model.

Background and model description

The EU and Mercosur are significant trading partners. Almost one quarter of Mercosur total imports originates from the EU. On the European side, Mercosur is EU’s 9th biggest trading partner, with trade amounting to more than two percent of total European trade.

A free trade agreement with the Mercosur union is – from a purely economic point of view - almost the same as a free trade agreement with Brazil (and Argentina). Even though the European Union is applying very high tariffs on agricultural goods and processed food from these countries, these are exactly the products that make up the largest part of European imports from Mercosur. A shopping trip to the local European supermarket confirms that even with high tariffs, Brazilian and Argentinean beef still remains competitive. The newcomer to Mercosur, oil-exporting Venezuela joining in 2006, stands out as a special case in terms of trade with the EU, where oil comprises the most traded product.

In general, Mercosur has better market access to EU than what EU is given in Mercosur. However, in those sensitive sectors where tariffs are the highest the picture is reversed. EU has higher protection in the sensitive sectors than the Mercosur. EU firms are exporting


chemicals, machinery and transport services and many other goods and services. EU based multinationals also have shifted a large amount of foreign direct investment into the Mercosur countries. Partly to jump over import barriers and serve the growing South American market from within. And partly with the purpose of re-exporting the goods produced in South America to other parts of the world and even back to Europe. The substantial investments by European automobile manufacturers in Mercosur are important to the sector, and since the effect on FDI has not fomally modelled, the effect on the traded flows of automobiles should consider how FDI could shift in a more liberal trading context.

Eventhough Mercosur is intended to be a customs union, EU firms still face very different trade barriers in the five countries in Mercosur. Furthermore, a number of internal non-tariff trade barriers between the Mercosur members reduces the attractiveness of the combined market.

Trading Landscape

EU is Mercosur’s most important trading partner33, 23 percent of all Mercosur trade is with the EU. Meanwhile, 2.3 percent of EU’s trade is with Mercosur, which makes Mercosur EU’s 9th biggest trading partner. In 2003, the total bilateral trade volume between the regions amounted to 155 billion Euros. Furthermore, this trade is growing in importance, e.g. the volume of trade in goods has doubled since the 1990s.

A very large share, 63 percent34 of EUs trade with Mercosur(5) is attributable to trade with Brazil, 21 percent with Argentina, 12 percent with Venezuela and the remaining 4% is divided between Uruguay and Paraguay. Meanwhile more than 90 percent of Mercosur’s trade with EU is accounted for by EU15.

On the product side, the main part of exports from the EU to Mercosur is attributable to machinery, transport equipment and chemicals and related products. For Argentina, Brazil, Paraguay, and Uruguay, the most important exports are agricultural products in general and grains, crops and processed foods in particular. Venezuela’s export differs from the other Mercosur countries. Here the majority of exported goods consist of mining, metals and minerals.

Existing Trade Barriers

Theoretically, a customs union implies free trade within the union (i.e. no tariffs or non-tariff trade barriers) and common external barriers for imports originating from outside the union. Although, Argentina, Brazil, Paraguay and Uruguay, formed the Customs Union Mercosur in 1995, many discrepancies are still in place both internally between its members and externally towards other trading partners such as the EU. Internally, non-tariff barriers are hindering free trade between the Mercosur members35. Externally, each Mercosur country has its own external tariff, so European exporters are not just facing one unified external trade system in Mercosur. In fact, European exporters have to deal with each country separately. Therefore, in practice there are a number of issues, which need to be sorted out before the customs union is

33 (2004) according to Eurostat, Comext, Statistical Regime 4. 34 (2001) Source: GTAP. 35 This is most notably true for the automobile sector, which was initially left out of the agreement, then scheduled for inclusion in 2000, and later postponed until 2006. For an interesting case study on trade for the automobile sector for Argentina and Brazil, see Brambilla (2005).


fully achieved. Thus, existing barriers to trade between Mercosur and the European Union are quite disparate, on a country as well as sector specific level. However, import protection vis-à-vis EU is more homogenous for the four founding Mercosur countries, Argentina, Brazil, Paraguay and Uruguay, (hereafter Mercosur4) than for Venezuela, who joined the Mercosur in 2006.

Table 6.1 and Table 6.2, below summarize sector specific trade barriers for goods traded between the EU and Mercosur. The figures reported stem from the GTAP database and MAcMap-HS6 database, which in addition to tariffs also include non-tariff trade barriers which have been converted into ad-valorem equivalents. For more information on the MAcMaps data base, please refer to Boet et al (2004).

European import protection on goods from the Mercosur, which is summarized in Table 6.1 below, is mainly present in eight sectors for Mercosur4, with the highest levels of protection in place for grains, other crops, and for processed foods in particular, where import protection is as high as 35% for Brazil and Uruguay, and 92% for Paraguay.

Table 6.1: Sector Specific Import Protection Levels (%) on Mercosur Goods in the EU


Grains 28 28 28 28

Other crops 10 2 0 8

Animal Products 3 1 0 2

Forestry 0 0 0 0

Fisheries 10 5 0 8

Mining 0 0 0 0

Processed Foods 11 35 92 35

Textiles and Clothing 3 4 1 1

Lumber, Wood, Pulp, Paper 0 1 0 0

Chemicals 0 1 0 0

Metals and Nonmetallic Minerals 5 3 2 0

Motor Vehicles 1 2 6 2

Transport Equipment 0 1 0 0

Machinery 0 0 0 0 Source: Tariffs and ad Valorem Equivalents for merchandise: GTAP database version 6 and MAcMAPs-HS6 database.

Turning to import protection on goods coming into the Mercosur countries from the EU, the levels of import protection are overall higher and present in all sectors, but Fisheries. Here, Processed Foods is also a sector with significant import protection, albeit not as high as their European counterpart. The levels of protection are highest for manufacturing goods, most notably so for Textiles and Clothing and Motor Vehicles. It is interesting to note that the general level of import protection is lower in Argentina than in the other Mercosur(4).


Table 6.2: Sector Specific Import Protection Levels (%) for European Goods in Mercosur


Grains 5 9 8 8

Other crops 5 8 13 13

Animal Products 4 7 4 4

Forestry 3 4 4 4

Fisheries 1 1 0 0

Mining 6 4 1 1

Processed Foods 15 16 16 16

Textiles and Clothing 19 18 14 14

Lumber, Wood, Pulp, Paper 11 13 10 10

Chemicals 11 9 9 9

Metals and Nonmetallic Minerals 14 13 13 13

Motor Vehicles 16 18 14 14

Transport Equipment 6 1 11 11

Machinery 14 13 12 12 Source: Tariffs and ad Valorem Equivalents for merchandise: GTAP database version 6 and MacMaps,-HS6 Database.

The CGE Model

This section provides a brief overview of the global computable general equilibrium (CGE) model used in this study. The methodology is comparable with recent policy analyses of the World Bank, the IMF and the OECD, incorporating similar quantitative modelling frameworks.

The GTAP database, version 6.236, provides the data for the empirical implementation of the model. The database is the best and most updated source for internally consistent data on production, consumption and international trade by country and sector. For more information, please refer to Dimaran and McDougall (2006). The GTAP data on protection incorporates the Macmaps data set37, which includes a set of ad valorem equivalents (AVEs) of border protection across the world. The source information concerns various instruments, such as specific tariffs, mixed tariffs and quotas, which cannot be directly compared or summed. In order to be of use in a CGE model, these have been converted into an AVE per sector, per country and per trading partner.

Impediments to trade in services are not as clearly visible as is the case with tariffs for trade in merchandise. Rather, trade barriers in the service sector often entail prohibitions, quantitative restrictions and government regulations, which limit the market access to foreign suppliers. These are not easy to quantify. In order to remedy this lack of data, we follow Francois (2003) in estimating tariff equivalents for the service sector through the use of a gravity-type equation. These estimates are then incorporated into the analysis.

36 Available in June 2006. 37 The MacMaps database is the result of a joint effort by the International Trade Center (governed by UNCTAD and WTO) and Cepii.


Box 6.1: Overview of the model

The model employed in this study is a global, multi-regional, multi-sectoral general equilibrium model. In each region, there is a single representative household, which allocates its expenditures over personal consumption today and savings (future consumption). The representative household owns all production factors and receives income by selling them to firms. It also receives income from tariff revenues. Part of the income is distributed as subsidy payments to some sectors.

On the production side, firms use domestic production factors (capital, labour and land) and intermediate inputs from domestic and foreign sources to produce outputs in the most cost-efficient way that technology allows. Factor markets are competitive, and labour and capital are mobile between sectors but not between regions.

Prices on goods and factors adjust until all markets are simultaneously in (general) equilibrium. This means that we solve for equilibrium in which all markets clear. While we model changes in gross trade flows, we do not model changes in net international capital flows. Rather our capital market closure involves fixed net capital inflows and outflows.

Model Data

The GTAP version 6.2 dataset is benchmarked to 2001, and includes detailed information on input-output, trade and final demand structures for the whole world this year. However, there are some important changes to the trade policy environment that have happened since then, that we wish to include in the basic dataset. Therefore, before conducting any policy experiments, we first run a pre-experiment, where we include the ATC phase-out, Chinas accession to the WTO, EU 10 joining the European Union in 2004, as well as Venezuela joining the Mercosur in 2006.

In short, the data set we employ for the analysis is a representation of a notional world economy in 2001, where we have realized many of the trade policy reforms that have taken place since then.

For the purpose of this study, the GTAP data base has been aggregated into 22 sectors and 10 regions. Table 6.3 below shows the sector structure.

Table 6.3: Sectors in the Model Primary sectors Manufacturing Sectors Service sectors Grains Textiles and Clothing Utilities Crops Wood, Pulp and Paper Construction Animal Products Chemicals Wholesale, retail Forestry Metals Communications Fisheries Motor vehicles Transport Services Mining Transport Equipment Finance Processed Foods Machinery Business Services

Other Services

Note: The detailed mapping between the aggregated sectors and the original GTAP sectors, together with a list of regions used in the model can be found in the Annex.

Economic effects in the scenario compared to current situation

We now turn to the results of the analysis and we focus on describing and discussing the main results.


Real Income Effects

When we construct our key economic indicator, real income, we combine the effect of changes in incomes and changes in consumer price levels and calculate the net economic effect for a representative consumer in each economy38, and look at the results in the free trade scenario compared to the constructed baseline.

We show that the trade liberalisation scenario defined in section 6.1 have positive real income effects for all countries in Mercosur, and a positive real income effect for the European Union as a whole (EU25). The effect on real income is also positive for EU15 as well as EU10 taken separately. In total both EU and Mercosur gain economically from free trade. Seeing that the Mercosur countries have higher initial barriers to trade, these countries are expected to experience larger gains from free trade, mainly because of the increase in purchasing power for domestic consumers when the high tariffs on European goods are dropped. This is confirmed by the model simulations. In absolute terms, a potential full FTA is expected to lead to a real income gain of a little over 9 billion US$ for the Mercosur countries. For the EU25, the corresponding figure is close to 4 billion US$.

Let’s take the combined Mercosur economy as example. Real income basically increases through two channels. One is through the generation of higher incomes when export-oriented sectors expand their activity, as does for example the Brazilian processed food sector. The other effect is through the reduction of consumer prices for imported goods when tariffs on European imports are removed. We need to keep both these effects in mind when evaluating the economic impact of a free trade agreement on final consumers.

The national real income effects are summarized in Table 6.4 below. As can be seen from the table, large countries have large absolute gains. Thus, approximately three quarters of the net income gain in Mercosur is attributable to Brazil and the lions part of the European gains are not surprisingly found in EU15.

Table 6.4 Real Income Effects, Overview Gain in

Millions of US$ Change from baseline

Argentina 1 255 + 0.5%Brazil 6 883 + 1.5%Paraguay 643 + 10.0%Uruguay 369 + 2.1%Venezuela 91 + 0.1%

EU15 3700 + 0.1%EU10 201 + 0.1%

Source: Model simulations

Seeing that the Mercosur region is economically much smaller than the European Union39, this naturally implies that the relative effects on real income for Mercosur are larger. For

38 Technically we measure the change in so-called ‘equivalent variation’ (EV). The idea is that we find the income required to ensure that we are at the new level of utility but with the old set of prices. Assume that trade liberalisation makes prices fall. At the original price level, what is then the minimum amount of money which we would have to give to our representative consumer to make her as well off as she will be after the price fall? The answer is EV. EV is almost always used as the best lower bound approximation of the true welfare effect in terms of consumer’s surplus. 39 i.e. in GDP terms, the Mercosur market is less than 10 % of the European Union, according to the World Bank World Development Indicators (WDI) 2005.


Argentina and Venezuela, the effects are 0.5 and 0.1 percent of GDP respectively, while for Brazil the corresponding figure is 1.5 percent. The biggest relative effects are shown to arise in Uruguay and Paraguay, where a full FTA between Mercosur and EU25 is expected to lead to increases in net income amounting to 2.1 and 10.0 percent of GDP. For the European Union the relative net income effect is shown to be approximately 0.1 percent.

In order to find out more about the effects of different trade liberalization measures, we now decompose the real income effects with respect to tariff reductions, service liberalizations and trade facilitation.

Tariff reductions are the most important factor for the gains from trade liberalization in the Mercosur countries. This measure accounts for a little over 60 percent of the real income effect. The second most important factor for the Mercosur countries is trade facilitation, which would account for approximately 30 percent of the gains under the assumptions made in the model. It is interesting to note, that although our liberalization scenario assumes a full liberalization of trade in services for Mode 1, this measure is shown to have a limited effect on outcome. In short, tariff reductions and trade facilitation are very important for the Mercosur to realize the potential gains of a free trade agreement with the EU. The main reason for this result is that Mercosur is facing high tariffs in EU on those trade flows that are already the most important ones. Therefore, if substantial tariffs are removed on those goods which are already traded the most, then this is inevitably having a large impact.

On EU’s part, trade facilitation is shown to be the single most important trade liberalization measure. Here, trade facilitation accounts for approximately half the increase in real income for EU25. Tariff reductions are attributable for 35 percent, while the corresponding figure for service liberalization is 15 percent. Thus, for both regions tariff reductions and trade facilitation are the shown to be central, while the gains are not very sensitive to the level of Mode 1 liberalization taking place in the service sector, cf. Error! Reference source not found..

Table 6.5: Decomposition of Real Income Effects, (Millions of US$) Total gain of which from

Goods liberalisation

of which from Cross-border Service Trade Liberalization

of which from Trade

Facilitation

Argentina 1 255 411 138 705 Brazil 6 883 4 510 465 1 908 Paraguay 643 502 12 129 Uruguay 369 272 21 76 Venezuela 91 -267 61 297 Total Mercosur 1103 507 697 502

EU15 3 700 1 306 558 1 836 EU10 201 39 18 144 Total European Union 201 39 576 144


Output effects

In this section, we describe the changes in output in each country. Here we measure the changes in value added holding producers prices constant. This economic indicator is thus used to analyze how much more value is created from expanding production in each economy as a result of our trade liberalization scenario. Since we hold producer prices constant this is an aggregated indicator for the goods producing sectors to reflect the changes in physical output due to free trade.


First we summarize the overall national effects on production, and later we go on to discuss the changes in sectoral output for each country. Looking at the increase in economy-wide output, the largest relative effects are in Mercosur, again most notably so in Paraguay, where output is expected to increase by 2.5 percent as a result of a potential FTA. Also, the expected effects are quite large for Uruguay and Brazil, with expected increases of close to one percent. For Argentina, Venezuela and the European Union, the effects on total output are smaller. The national changes in output are summarized in Table 6.6 below.

Table 6.6: Economy-wide output changes Argentin

a Brazil Uruguay Paraguay Venezuel

a EU15 EU10

Change from baseline

+ 0.3% + 0.8% + 2.5% + 0.9% + 0.3% + 0.1% + 0.1%

Source: Model Simulations Note: Output is measured by value added (GDP) at given produce prices.

Effects on Sectoral Outputs

Disaggregating the economy-wide output changes, we find that the specific barriers removed in our scenario leads to some changes in the production structure across sectors. These changes are summarized in


Table 6.7 and Table 6.1 below. Overall, a pattern emerges where, for Mercosur, there is an increase in the production of agricultural goods, while the manufacturing sectors in general contract. The opposite is true for Europe, here, production of agricultural goods is expected to lose importance, while the manufacturing sector in general will expand. The changes in sectoral output mirror the underlying initial levels of trade protection, i.e. domestic output is expected to decrease as a result of increased competition, in the industries that initially enjoyed high levels of import protection.

Production of grains, other crops, animal products and processed foods are expected to increase across all Mercosur countries. Meanwhile, in the manufacturing sectors metals, motor vehicles, transport equipment and machinery are all shown to contract. As pointed out in the previous section, these are among the sectors where the ex-ante Mercosur trade barriers were higher than their European counterparts. For a complete picture of ex-ante barriers to trade, please refer to Table 6.1 and Table 6.2 above.


Table 6.7. Changes in Sectoral Output in Mercosur

Value Added Shares, 2001 (baseline model data)


grains 1,5% 0,5% 2,3% 1,9%other crops 2,5% 2,6% 13,2% 1,6%animal products 1,8% 1,8% 4,7% 7,1%forestry 0,2% 0,2% 2,1% 0,5%fisheries 0,1% 0,0% 0,1% 0,3%mining 2,2% 1,3% 0,1% 0,3%processed foods 3,9% 3,4% 4,8% 7,4%textiles and clothing 1,5% 1,5% 1,9% 2,2%lumber, wood, pulp, paper 1,8% 1,8% 1,4% 1,4%chemicals 2,6% 3,4% 0,6% 3,1%metals and nonmetallic minerals 2,3% 2,7% 2,6% 2,5%motor vehicles 0,9% 0,8% 0,03% 0,5%transport equipment 0,2% 1,0% 0,0% 0,1%machinery 1,7% 4,3% 1,0% 1,1%utilities 2,2% 3,2% 18,8% 4,4%construction 4,2% 9,3% 4,6% 3,3%trade 14,4% 9,0% 18,6% 8,6%communications 2,3% 1,6% 1,3% 2,2%transport services 5,3% 2,4% 3,3% 10,4%financial services 3,9% 8,5% 2,6% 3,8%business services 6,4% 13,2% 3,0% 5,3%other services 38,2% 27,4% 12,9% 31,8%Total 100% 100% 100% 100%

Value Added Shares, scenario 2001 (full free trade)


grains 1,7% 0,6% 2,6% 2,1%other crops 2,5% 2,6% 12,2% 1,6%animal products 1,8% 2,3% 6,4% 7,4%forestry 0,2% 0,2% 1,9% 0,5%fisheries 0,1% 0,0% 0,1% 0,4%mining 2,2% 1,3% 0,1% 0,3%processed foods 4,1% 5,0% 8,3% 8,7%textiles and clothing 1,5% 1,4% 1,4% 1,8%lumber, wood, pulp, paper 1,7% 1,7% 1,1% 1,3%chemicals 2,6% 3,2% 0,5% 2,9%metals and nonmetallic minerals 2,2% 2,3% 2,1% 2,2%motor vehicles 0,8% 0,6% 0,0% 0,3%transport equipment 0,2% 0,8% 0,0% 0,1%machinery 1,4% 3,3% 0,4% 0,7%utilities 2,2% 3,2% 17,4% 4,5%construction 4,2% 9,4% 5,0% 3,4%trade 14,3% 9,1% 18,1% 8,7%communications 2,3% 1,6% 1,3% 2,2%transport services 5,3% 2,4% 3,3% 10,1%financial services 3,8% 8,4% 2,0% 3,8%business services 6,4% 13,0% 2,6% 5,2%other services 38,3% 27,5% 13,1% 32,0%Total 100% 100% 100% 100%Source: Model simulations

For Argentina, a potential FTA with the EU is expected to lead to an increase in overall production amounting to 0.3 percent. In general, the sector specific effects are not so big in Argentina as for the other Mercosur countries. Comparing the changes in output to their relative share of total production gives a better picture of each sector’s effect on the overall economy. Each industry’s share of production is available in the annex. For Argentina, output in the sector ‘other service’, is attributable to 38 percent of total value added, thus the 0.2


percent increase in this is expected to have a significant effect on the overall economy. Meanwhile, the 15 percent decrease in machinery sector, although dramatic on a sector specific level, does not translate to a big effect on the general Argentinean economy, since this sector only accounts for 1.7 percent of total production.

The Brazilian economy is shown to expand overall output by 0.8 percent as a result of a potential FTA. Here, the biggest relative increase is shown to occur in the processed food sector, which is expected to expand by close to 50 percent. Seeing that 3.5 percent of total production is attributable to this sector, this large increase will have a significant effect40 on the overall output increase in the economy. The same is true for animal products, which is accountable for 1.8 percent of total value added, and is expected to increase by 32 percent, which implies an overall effect of 0.6 percent. Motor vehicles are shown to be the sector expected have the biggest contraction, here production will decrease its share of total value added from 0.9% to 0.6%. However, the overall effects of this decrease will not be very big, since less than one percent of total value added is attributable to this sector. The production of machinery is also expected to contract in relative terms.

The effects in the applied free trade scenario are expected to have large effects on the Paraguayan economy (detailed results are shown in appendix). As previously pointed out, this is true at the aggregated level i.e. the overall effect on output is expected to be 2.5 percent, but also on disaggregate level. As can be seen from the table above, the largest absolute increase is shown to occur in the processed foods sector, where output is expected to increase by almost 75 percent. Seeing that this sector is accountable for close to 5 percent of overall production, this leads to a big increase (i.e.3.5%) of total value added. Animal products is the sector with the second biggest expected expansion, i.e. 37 percent. Close to five percent of all Paraguayan production stems from this sector, so a large share of the overall gain comes from this increase as well. On the contracting side, the motor vehicles, transport equipment and machinery sectors are all expected to lessen their importance in terms of share of total value added. Although these are large sector specific changes, the effect on total output is very limited since these sectors account for less than 0.1 percent of overall production. The utilities sector, which is expected to decrease by 7.8 percent, is the single most important contracting sector, since it is accountable for close to 20 percent of total production. (i.e. the decrease in this sector is accountable for a total decrease of 1.5 percent of overall production).

In Uruguay, the processed foods sector has the relatively largest share of overall production in all of Mercosur. 7.4 percent of total value added in Uruguay is attributable to this sector, the expected 17 percent increase in production in this sector, is accountable for a 1.3 percent increase in overall production. This is counteracted by the expected decrease in production in the textiles and clothing sector, which accounts for a decline of 0.3 percent of total value added. Please refer to appendix for details.

The total effect on EU15 output sums up to 0.1 percent of GDP. The lowering of Mercosur import protection leads to an expansion of the European metals, machinery and automotive sectors. In general, production of manufacturing goods is expected to increase, while the agricultural sectors in general and processed foods in particular are expected to contract. Meanwhile, the service sectors, which are attributable to about 75 percent of EU output value, are also positively affected from the removal of the barriers to cross-border trade in services.

40 i.e. 0.466*3.5=1.6% to be exact.


However, the service sectors will further benefit from reducing the barriers to foreign establishment.

Table 6.1: Changes in Sectoral Output, EU

Value Added Shares in baseline model data (2001) and in the scenario of free trade

Baseline data Scenario (free trade) Change in scenario from baseline

EU15 EU10 EU15 EU10 ∆EU15 ∆EU10

Grains 0,16% 0,77% 0,15% 0,76% -0,01% -0,01%

Crops 0,92% 2,05% 0,92% 2,05% -0,01%

Animal Products 0,58% 1,29% 0,56% 1,28% -0,02% -0,01%

Forestry 0,19% 0,50% 0,19% 0,50%

Fisheries 0,28% 0,08% 0,28% 0,08%

Mining 0,44% 1,51% 0,44% 1,51%

Processed Foods 3,17% 6,17% 3,01% 6,00% -0,16% -0,17%

Textiles and Clothing 1,22% 2,73% 1,23% 2,73% +0,01% +0,01%

Wood, Pulp, Paper 2,34% 3,50% 2,34% 3,50% +0,00%

Chemicals 3,33% 3,74% 3,34% 3,75% +0,01% +0,01%

Metals 3,68% 5,54% 3,71% 5,58% +0,03% +0,03%

Motor Vehicles 1,94% 1,76% 1,97% 1,78% +0,03% +0,01%

Transport Equipment 0,53% 0,56% 0,53% 0,57% +0,01%

Machinery 6,58% 6,55% 6,67% 6,60% +0,09% +0,05%

Utilities 2,10% 3,86% 2,10% 3,87% +0,01%

Construction 6,04% 6,29% 6,04% 6,29%

Wholesale, Retail 12,99% 13,13% 12,99% 13,15% +0,01%

Communications 2,46% 2,33% 2,46% 2,33%

Transport Services 4,36% 6,10% 4,36% 6,11% +0,01% +0,02%

Finance 4,17% 2,28% 4,17% 2,28%

Business Services 11,91% 11,62% 11,92% 11,62% +0,01%

Other Services 30,62% 17,60% 30,62% 17,62% +0,02%

Total 100,0% 100,0% 100,0% 100,0% Source: Model simulations

For EU10, the effects are very similar to EU15 with an expected contraction in the agricultural sectors, most notably so for processed food, which for EU10 is a substantial sector in terms of overall production (i.e. 6.2%). Here, the manufacturing sectors are also expected to increase their importance, with significant overall effects in the sectors metals and machinery which are accountable for about six percent of total output each.

Trade Effects

Having analyzed the expected changes in production, we now turn our attention to the effects on trade. As previously pointed out, production in the agricultural sectors in Mercosur are expected to expand, while the manufacturing sectors in these sectors will decrease output as a result of trade liberalization.


Table 6.2 below show the changes in export for each sector in Mercosur.


Table 6.2: Change in Exports, Mercosur (value of exports, mio. USD)

Argentina Brazil Paraguay Uruguay MERCOSURin pct. of baseline

Grains 478 -191 -15 16 288 7%

Crops 22 -2.024 -218 -3 -2.137 -22%

Animal Products -21 -118 -9 -22 -161 -36%

Forestry 1 -11 -2 -4 -16 -12%

Fisheries 2 -6 -2 -5 -7%

Mining 8 243 -1 361 2%

Processed Foods 2.829 31.203 1.829 1.114 37.242 210%

Textiles and Clothing 125 -244 -51 -88 -229 -4%

Wood, Pulp, Paper 42 -456 -32 -17 -449 -8%

Chemicals 143 -378 -14 -36 124 1%

Metals 215 -448 -8 -18 256 2%

Motor Vehicles 8 -866 -35 -816 -11%

Transport Equipment 31 -411 -4 -380 -10%

Machinery -33 -1.436 -15 -33 -1.412 -13%

Utilities -31 5 -138 38 -123 -6%

Construction 1 3 4 9%

Wholesale, Retail 43 121 -11 5 181 16%

Communications 92 49 -1 5 150 24%

Transport Services 20 -72 -8 -55 -62 -1%

Finance 28 80 -5 8 117 13%

Business Services 160 672 -7 2 857 16%

Other Services 237 18 -9 5 332 14%

Total 4.399 25.735 1.284 874 34.124 26%

Change in country exports 14% 38% 42% 27% 26%

Share of Mercosur change 13% 75% 4% 3% 100% Source: Model simulations Note: Intra Mercosur trade included

As can be seen from the table, the expected changes in exports are largely in line with the prediction with regards to changes in production, although the overall increase in agricultural production is mainly spilling over in an increase in processed foods. Above, the primary agricultural sectors, i.e. grains, crops, and animal products are all shown to increase in Brazil in


Table 6.7 above, however here they’re shown to decrease in exports. The underlying reason for this is that these products are used as intermediate inputs in the processed foods sector, which could increase as much as triple. This is also true for Paraguay.

It is always difficult to predict the impact of large changes, but given that the EU in the base year apply a very high protection against Paraguayan food products (92%) we can certainly predict a large increase on this trade link if these barriers are completely removed.

Mercosur imports are also expected to increase in the free trade scenario, and when the intra-Mercosur trade is counted and measured in values imports increase more than exports and the trade balance is worsened, cf.


Table 6.3.


Table 6.3: Change in Imports, Mercosur (value of imports, mio. USD)

Argentina Brazil Paraguay Uruguay MERCOSURPct of

baseline

Grains 4 776 18 3 801 68%

Crops 63 614 101 13 790 57%

Animal Products 21 284 29 16 349 189%

Forestry 0 7 0 0 7 38%

Fisheries 1 15 2 19 36%

Mining -1 -253 -10 -265 -6%

Processed Foods 532 4.199 645 521 5.897 205%

Textiles and Clothing 203 919 115 78 1.316 42%

Wood, Pulp, Paper 190 580 54 36 860 32%

Chemicals 264 1.487 88 41 1.880 10%

Metals 286 1.768 105 60 2.220 38%

Motor Vehicles 527 4.906 28 5.461 90%

Transport Equipment -1 -255 0 -256 -7%

Machinery 1.440 8.249 352 117 10.158 35%

Utilities -79 108 1 9 38 2%

Construction 13 16 29 49%

Wholesale, Retail 198 623 26 25 872 41%

Communications 36 -9 3 16 47 8%

Transport Services -30 219 36 38 263 4%

Finance 193 537 53 15 799 39%

Business Services 267 2.334 21 29 2.651 44%

Other Services 433 800 44 77 1.354 32%

Total 4.560 27.925 1.755 1.115 35.290 34%

Change in country imports 18% 39% 64% 26% 34%

Share of Mercosur change 13% 79% 5% 3% 100% Source: Model simulations

Note: Intra Mercosur trade included

The corresponding results for the EU, which are available in


Table 6.4 below, are very similar to the expected changes in output. Effects on EU imports are available in Table 6.5.


Table 6.4: Changes in Exports, EU (value of trade, mio. USD)

EU15 EU10 EU25 pct of baseline

Grains -302 -7 -309 -4,2%

Crops 55 -5 50 0,2%

Animal Products -263 -7 -270 -3,3%

Forestry 0 -1 -1 0,0%

Fisheries -9 0 -9 -0,3%

Mining -19 0 -19 -0,1%

Processed Foods -6.694 -178 -6.872 -5,0%

Textiles and Clothing 1.051 24 1.075 0,8%

Wood, Pulp, Paper 113 0 113 0,1%

Chemicals 1.466 32 1.498 0,4%

Metals 1.469 113 1.583 0,7%

Motor Vehicles 4.545 133 4.679 1,7%

Transport Equipment 79 34 113 0,1%

Machinery 9.327 318 9.645 1,4%

Utilities -11 6 -4 0,0%

Construction 0 0 0 0,0%

Wholesale, Retail 0 4 4 0,0%

Communications 0 0 0 0,0%

Transport Services 244 25 269 0,2%

Finance 0 0 0 0,0%

Business Services 170 0 170 0,1%

Other Services 0 5 5 0,0%

Total 11.222 497 11.719 0,4%

Change in country exports 0,4% 0,3% 0,4%

Share of EU25 change 96% 4% 100%

Source: Model simulations, including intra-EU trade

Table 6.5: Changes in Imports, EU (value of trade, mio. USD)

EU15 EU10 EU25 pct of baseline

Grains -116 -6 -123 -1,8%

Crops -1.655 -12 -1.667 -3,4%

Animal Products -535 -6 -541 -5,5%

Forestry -22 0 -22 -0,6%

Fisheries -86 0 -86 -2,3%

Mining 384 0 384 0,3%

Processed Foods 29.918 -175 29.743 23,0%

Textiles and Clothing 378 23 401 0,2%

Wood, Pulp, Paper 6 0 6 0,0%

Chemicals 615 52 668 0,2%

Metals 1.623 114 1.737 0,8%

Motor Vehicles 1.069 100 1.170 0,5%

Transport Equipment 88 40 128 0,2%

Machinery 3.187 411 3.598 0,5%

Utilities 250 4 253 1,6%

Construction 10 0 10 0,1%

Wholesale, Retail 261 3 263 0,4%

Communications 113 0 113 0,6%

Transport Services 46 14 60 0,0%

Finance 141 0 141 0,3%

Business Services 993 0 993 0,6%

Other Services 419 3 422 0,5%

Total 37.088 565 37.653 1,4%

Change in country imports 1,5% 0,3% 1,4%

Share of EU25 change 98% 2% 100%

Source: Model simulations, including intra-EU trade


As could be expected, trade liberalization implies an overall increase in export for all countries in Mercosur and the EU. The aggregated changes in national imports and exports are summarized in Table 6.6 below.

Table 6.6: National Trade Balance Effects (percentage change) Argentina Brazil Uruguay Paraguay EU15 EU10

% change in exports +14% +38% +42% +27% +0,4% +0,3%

% change in imports +18% +39% +64% +26% +1.5% +0.3%

Source: Model estimations

The largest increases in export are evident in the Mercosur countries. The increases in exports are expected to be big in Brazil, Uruguay and Paraguay. Seeing that the majority of EU-Mercosur trade is accounted for by Brazil, the 37 percent increase in Brazilian exports implies a large increase in trade between the two trading blocs.

Social effects in the scenario compared to current situation

We now turn to the social effects in terms of wages and return on investment. We decompose the real income effects with respect to the three production factors unskilled labour, skilled labour and capital. Table 6.7 contains summarizing data on changes in wages for skilled and unskilled labour and changes in real return to investment.

Table 6.7:Summary, Decomposed Income Effects (percentage change) Argentina Brazil Uruguay Paraguay EU15 EU10

Unskilled Real Wage Effects %

0.3% 0.9% 5.5% 1.4% 0.2% 0.1%

Skilled Real Wage Effect %

0.0% 0.7% 3.2% 0.7% 0.3% 0.2%

Real return to Investment %

0.1% 1.8% 8.0% 1.4% 0.1% 0.2%

Wage Effects

Trade liberalization is shown to have positive effects on wages for both skilled and unskilled labor in both the EU and Mercosur. The wage increase for unskilled labor will be relatively higher in the Mercosur countries, while skilled European workers are expected to enjoy the larger wage increase41.

Real Return to Investment

The real return to investments is also expected to increase across both Mercosur and Europe as a result of a potential FTA. Overall, the increase in return to capital will be higher for the Mercosur countries, most notably so for Uruguay (8.0%) but also for Brazil and Paraguay. The increase in return to investments is expected to be smaller for Argentina, Venezuela and the European countries.

41 Employment is – by definition – kept constant in the scenario. Therefore, the shown wage shift is the resulting change in wages that exactly clears the labour markets. If we made different assumptions about the functioning of the labour markets some of this wage increase will be transformed into higher employment, and smaller increases in wages.


Energy and environmental effects in the scenario compared to current situation

The total consumption of coal and oil declines in the scenario while the consumption of gas increases. All in all the demand for the energy goods falls. Brazil is the country that reduces the energy demand most. The total decrease in Brazil is 5.2 Mtoe where the main part comes from reduction in oil demand. EU15 is the region with the largest increase in energy demand measured in absolute terms. In relative terms Venzuela increases the demand most. For both regions it is the demand for gas that increases most.

Table 6.8: Energy consumption for firms and households (Mtoe) Coal Oil Gas Total Energy

Benchmark Scenario Benchmark Scenario Benchmark Scenario Benchmark Scenario

Argentina 0.7 0.7 25.9 25.9 17.4 17.3 44,0 43.9

Brazil 12.3 11.6 81.8 77.6 7.1 6.8 101.2 96,0

Paraguay 0,0 0,0 0.1 0.1 0,0 0,0 0.1 0.1

Venezuela 0,0 0.1 54.6 55.8 27.6 28.1 82.2 84,0

EU15 215,0 215.1 569.4 571.8 230.9 230.9 1015.3 1017.8

EU10 92.3 92.4 43.2 43.3 34.6 34.6 170.1 170.3

Sum 320.3 319.8 776.8 774.5 317.6 317.7 1414.6 1412.2


The decrease in demand for energy and the shift towards gas and away from oil results in a decrease of CO2 emissions from EU-Mercosur production. The largest reduction comes from oil while emission from gas increases.

Overview of key indicators

Our free trade scenario is welfare improving for both trading blocs in terms of increasing real income. All countries in Mercosur as well as the two parts of Europe we analyze (EU15 and EU10). Aggregate output in all parts of the two trading blocs is also expected to increase as a result of free trade.

A free trade scenario as analyzed here will entail large scale and long term adjustments to the two economies. Brazil, Paraguay and Uruguay can foresee an economic gain from a major restructuring of their economies, with a decrease in output shares for some sectors and a increase in output from the processed food sector.

From a social point of view these sectoral changes will imply adjustment costs which have not been quantified in our economic study. From a labour market point of view the overall change is positive in all economies since both skilled and unskilled wages are expected to increase, or may – depending on the functioning of the labour market – attract labour to shift from the informal to the formal sector and thereby increase the labour supply. Furthermore there is generally a positive social profile of the wage shift in the direction of more convergence between skilled and unskilled wages. Unskilled wages increase generally more than for skilled labour in Mercosur. In the EU the reverse is true and skilled wages increase more than unskilled.

In terms of energy consumption we assess that a free trade agreement could lead to less energy consumption in production because the energy intensive parts of the manufacturing sector are shifted towards Europe, where firms generally are more energy efficient than the Mercosur counterparts. The lower energy consumption and substitution towards more gas


leads to a small downturn in total carbon emissions from production in Mercosur and EU together. A drop in emissions in Mercosur is counteracted by an increase in emissions in the EU, but the net-result is expected to be a small reduction in carbon emissions. Carbon emissions elsewhere in the world are assumed unaffected.

Effects on the rest of the world

The rest of the world is also affected by a potential free trade agreement between the EU and Mercosur. While most participating parties will loose tariff revenues, except Paraguay, while other parts of the world will see increasing tariff revenues. The other South American countries are expected to see higher tariff revenues, cf. Table 6.9.

Table 6.9 Tariff Revenue Effects, millions of dollars Base revenue New revenue Change

Argentina 1.984 1.044 -940

Brazil 5.609 3.185 -2.424

Paraguay 151 164 13

Uruguay 246 129 -117

MERCOSUR associates 3.625 3.558 -67

Other South America 6.725 6.995 270

EU15 20.861 18.306 -2.556

EU10 6.207 2.152 -4.055

ROW 183.166 184.642 1.476

Source: Model results

Total world welfare in terms of real income is increased by a bilateral free trade agreement between the EU and Mercosur. The gains to the two parties (EU and Mercosur) outweigh the loss to the rest of the world. The other South American countries (both the Mercosur associates and the rest of South America) are facing a relative decline of real income of -0.1 percent. While the negative real income impact on the rest of the world is large in absolute values, the change is insignificant in relative terms (less than 0.1 percent).

Table 6.10 Welfare Effects, millions of dollars Goods

liberalization (tariff cuts and

other AVTs)

Services liberalisation

Total effect (including 1

pct. trade facilitation)

Argentina 411 138 1.255

Brazil 4.510 465 6.883

Paraguay 502 12 643

Uruguay 272 21 369

MERCOSUR associates -165 -12 -173

Other South America -65 -7 -67

EU15 1.306 558 3.700

EU10 39 18 201

ROW -2.594 -199 -2.982



7. IMPACT ASSESSMENT: TRADE IN NON-AGRICULTURAL GOODS

7.1 The Non-Agricultural Goods Sector in Mercosur

The industrialisation process in Mercosur countries was for many years been promoted by protectionist import substitution industrialisation (ISI) strategies. However, with the adoption of liberalisation policies in the late 1980s and 1990s, the tools for pursuing industrial development strategic objectives shifted from control and ownership to market regulation and development. Trade policy is seen as one of the key policy instruments for industrial development.

The manufacturing sector now accounts for a significant share of GDP in each of the Mercosur countries (Table 7.1).

Table 7.1: Manufacturing Value Added (% of GDP)

Source: World Bank: World Development Indicators

7.2. Trade Flows

Manufactures also account for a significant proportion of Mercosur exports and imports.Brazil has the highest share of manufactures in total exports at almost 70 percent; Argentina (51 percent), Uruguay (44 percent) and Paraguay (24 percent) have lower share of manufactures in exports (table 7.2). In contrast, imports of manufactures dominate total imports in all four countries (Table 7.3).

Table 7.2: Share of Non Agricultural Exports in Total Exports (%)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Argentina 50 48 51 49 50 56 55 54 51 51 53 Brazil 68 67 66 68 68 73 70 70 68 69 71 Paraguay 55 42 28 26 29 34 30 24 22 24

Uruguay 54 52 50 48 48 52 54 49 46 44 Source: UN COMTRADE

Table 7.3: Share of Non Agricultural Imports in Total Imports (%)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Argentina 93 94 94 94 94 94 93 94 95 97 96

Brazil 88 88 90 89 91 92 93 92 92 94 94 Paraguay 81 79 80 78 82 82 85 87 91

Uruguay 88 88 88 88 88 87 87 84 85 89 Source: UN COMTRADE

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Argentina 19 19 20 19 18 18 17 22 24 24 Brazil 24 23 20 17 17 17 14 13 12 11 Paraguay 15 15 15 15 14 13 14 14 14 14

Uruguay 19 19 18 18 16 16 15 16 18 21


7.3 Tariff and Non Tariff Measures

Existing levels of protection on manufactures are on average around 13-14% (Table 7.4), although there are sizeable variations in the AVE level of protection on specific products and sub-sectors (see Section 3). These sub-sectoral variations in protection levels are found in the external tariff and non-tariff barriers applied to trade with the EU, and in the barriers to trade which are imposed on intra-Mercosur trade flows.

Table 7.4: Average MFN Tariffs on Manufactured Products (%)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Mercosur 12.6 13.0 13.1 15.0 15.3 15.3 14.1 14.2 14.5 13.4 12.0 Argentina 13.1 13.9 14.1 16.4 16.2 16.1 13.3 15.0 15.8 13.1 12.0 Brazil 14.4 14.8 14.4 17.3 17.0 16.8 15.1 14.9 14.5 14.4 13.5 Paraguay 11.4 11.5 11.7 11.8 13.6 13.7 13.5 13.2 13.2 12.4 11.2

Uruguay 11.6 12.0 12.2 14.4 14.5 14.7 14.6 13.7 13.7 11.5 Source: UNCTAD TRAINS

7.4 Model Results

The Copenhagen Economics Trade Model (CETM) aggregates industrial production into five product groups as shown in Table 7.5.

Table 7.5. Non-agricultural product aggregation used in the economic model

Sector GTAP sector Corresponding ISIC/CPC codes Textiles and wearing apparel

Wool, silk-worm; textiles; wearing apparel; leather goods

CPC 0296, ISIC 17-19; 243

Wood and paper Wood products; paper products; publishing

ISIC 20-22

Petroleum, coal products

Petroleum; coal products ISIC 23

Motor vehicles and parts

Motor vehicles and parts ISIC 34

Transport equipment

Transport equipment nec ISIC35

Electronic equipment

Electronic equipment ISIC32

Machinery Machinery and equipment ISIC 29-31;33

The results of the modelling indicate that liberalisation would globally reduce the output of manufacturing output in Mercosur (Table 7.6). The estimates are for full liberalisation. Lesser degrees of liberalisation, including the introduction or revision of tariff rate quotas, would have smaller effects in the same direction.

The modelling results in the Planistat (2003) also show a decline in output for all manufacturing subsectors. (Table 7.6) Textiles and clothing, wood, pulp and paper, chemicals, metals, motor vehicles, transport equipment (except for Argentina), and machinery are all predicted to decline as a result of full trade liberalisation.The largest decline is predicted to occur in motor vehicles and transport equipment. Comparison of the two sets of figures in (Table 7.6) gives a broad indication of the level of uncertainty as well as the


possible magnitude of the effects. The differences arise partly through the use of more recent data in the CETM model of the current study, and partly through differences in the modelling assumptions.

The estimates in Table 7.6 show the change in output relative to the sector’s output level in the base scenario equilibrium, and are important for sectoral investors, employers and employees. For national policy makers, the sectoral level changes can also be viewed in terms of their significance in terms of the total economy.

Table 7.6: Static Equilibrium Changes in Industrial Sector Output, (percentage change in sector output)

Argentina Brazil Paraguay Uruguay CETM model Textiles and Clothing -1.4 -6.5 -27.8 -15.7Wood, Pulp, Paper -1.8 -5.0 -21.3 -7.8Chemicals -0.1 -5.1 -20.1 -5.4Metals -3.7 -14.0 -19.1 -13.8Motor Vehicles -9.7 -29.1 -66.4 -41.6Transport Equipment 4.0 -17.6 -63.0 -35.7Machinery -15.3 -24.3 -57.8 -38.0

Planistat model Textiles & Clothing -1.5 0.2 -10.3 -26.0Leather Prdcts -3.1 1.6 -7.1 -25.3Paper & Publishing -1.7 -0.7 0.9 -3.8Petroleum & Coal Prdcts 0.5 -1.3 -3.3 -1.5Chemicals & Min Prdcts -1.7 -0.8 -2.3 -6.0Metals & Metal Prdcts -4.0 -4.2 -0.5 -15.7Motor Vehicles -4.0 -3.4 -13.5 -67.5Other Transport Equip 0.0 -2.2 -19.6 -32.6Other Manufactures -6.6 -6.0 -3.7 -21.3

Table 7.1. Changes in Sectoral Output in Mercosur

Value Added Shares baseline model data (2001) and scenario of free trade

Baseline model data Scenario (free trade) Change in scenario from baseline

Argentina Brazil Argentina Brazil ∆ Argentina ∆ Brazil

Grains 1,5% 0,5% 1,7% 0,6% 0,2% 0,1%

Crops 2,5% 2,6% 2,5% 2,6% 0,0% 0,0%

Animal Products 1,8% 1,8% 1,8% 2,3% 0,1% 0,6%

Forestry 0,2% 0,2% 0,2% 0,2% 0,0% 0,0%

Fisheries 0,1% 0,0% 0,1% 0,0% 0,0% 0,0%

Mining 2,2% 1,3% 2,2% 1,3% 0,0% 0,0%

Processed Foods 3,9% 3,4% 4,1% 5,0% 0,2% 1,6%

Textiles and Clothing 1,5% 1,5% 1,5% 1,4% 0,0% -0,1%

Wood, Pulp, Paper 1,8% 1,8% 1,7% 1,7% 0,0% -0,1%

Chemicals 2,6% 3,4% 2,6% 3,2% 0,0% -0,2%

Metals 2,3% 2,7% 2,2% 2,3% -0,1% -0,4%

Motor Vehicles 0,9% 0,8% 0,8% 0,6% -0,1% -0,2%

Transport Equipment 0,2% 1,0% 0,2% 0,8% 0,0% -0,2%

Machinery 1,7% 4,3% 1,4% 3,3% -0,3% -1,0%

Utilities 2,2% 3,2% 2,2% 3,2% 0,0% -0,1%

Construction 4,2% 9,3% 4,2% 9,4% 0,0% 0,1%


Wholesale, Retail 14,4% 9,0% 14,3% 9,1% -0,1% 0,1%

Communications 2,3% 1,6% 2,3% 1,6% 0,0% 0,0%

Transport Services 5,3% 2,4% 5,3% 2,4% 0,0% 0,0%

Finance 3,9% 8,5% 3,8% 8,4% -0,1% -0,1%

Business Services 6,4% 13,2% 6,4% 13,0% -0,1% -0,2%

Other Services 38,2% 27,4% 38,3% 27,5% 0,1% 0,1%

Total 100,0% 100,0% 100,0% 100,0% Source: Model simulations

The results of the modelling also indicate that Mercosur countries would reduce their exports of manufactured products to the EU (Table 7.8). In absolute value terms, the largest declines are in machinery and motor vehicles. . Table 7.8: Change in Exports, Mercosur (value of exports)

Argentina Brazil Paraguay Uruguay Venezuela MERCOSUR

Textiles and Clothing 125 -244 -51 -88 30 -229

Wood, Pulp, Paper 42 -456 -32 -17 15 -449

Chemicals 143 -378 -14 -36 410 124

Metals 215 -448 -8 -18 515 256

Motor Vehicles 8 -866 -35 77 -816

Transport Equipment 31 -411 -4 5 -380

Machinery -33 -1.436 -15 -33 106 -1.412

The CETM results are broadly similar to the results of other modelling studies of EU –Mercosur trade liberalisation (summarised in Section 5), in showing a decline in manufacturing sector output.. The main difference between the CETM results and other models is in the size of the impact, which is typically larger in the CETM due to the assumption of full liberalisation.

The model results for employment follow those for output, with employment predicted to decline in manufacturing (Table 7.9). Under the full liberalisation scenario, the implications of production shifting in response to changes in comparative advantage induced by trade liberalisation would be a s shift of labour out of manufacturing and into agriculture and food processing activities.42

42 (The figures in Table 37 show the percentage change in employment in the sector: the industry changes in employment have a smaller percentage impact on the total level of employment).


Table 7.9: Changes in Employment (%) (Full Liberalisation scenario)

Argentina Brazil Paraguay Uruguay Venezuela

textiles and clothing -1.6 -6.1 -27.3 -15.7 -0.1

wood, pulp, paper -1.9 -4.8 -20.9 -7.9 0.0

chemicals -0.3 -4.5 -19.8 -5.5 2.1

metals -3.8 -13.6 -18.0 -13.8 3.4

motor vehicles -9.9 -28.6 -66.4 -41.6 0.2

transport equipment 3.9 -17.2 -63.0 -35.7 2.0

machinery -15.4 -23.9 -57.3 -38.0 3.1

7.5. Automobiles Sector Study

The development of domestic automobile sector in Mercosur, particularly in Brazil and Argentina, has been a key part of industrial development strategy. The sector is now a major part of the global industry, and in 2004 was the ninth largest exporter of vehicles in the world. Production is predominantly for the domestic market, and Mercosur’s combined vehicle production ranks third among developing country producers, after China and South Korea.

The automobile sector accounts almost 1 percent of total GDP in Argentina and Brazil, between about 6% and 8% of manufacturing, and about 0.5 percent of total employment (Table 7.10).

Table 7.10: Automobile Sector Output and Employment (2001)

Argentina Brazil Share of automobile sector in GDP 0.9 0.9 Share of automobile sector as % total manufacturing sector 8.7 5.8 Share in total employment 0.4 0.5

Source: GTAP database and UNIDO industrial statistics for output; ILO Key Indicators for employment

Trade flows in automotive industry products, including road vehicles and other transport equipment between the EU and Mercosur are shown in Table 7.11. In 2004, EU imports of road vehicles from Mercosur totalled $585 million, which represented 1.7 percent of all EU imports from Mercosur. In the same year, the EU’s exports of motor vehicles to Mercosur amounted to $2483 million, which represented 11.3 percent of total EU exports to Mercosur.

Table 7.11: EU-Mercosur Automotive Industry Trade (US$ Millions)

1999 2004

Road vehicles EU imports from Mercosur 862 585

EU exports to Mercosur 2,558 2,483

Other transport equipment


EU imports from Mercosur 515 508

EU exports to Mercosur 1,126 868

Total trade in goods EU imports from Mercosur 20,464 34,201

EU exports to Mercosur 22,027 21,895

Source: OECD

European investors have had a long involvement with the automobile sector in Mercosur, and all the major European multinationals have invested manufacturing and parts production plants in Brazil and Argentina. Investments were made to produce for the domestic market and were encouraged by tariff protection and government incentives. In more recent years, the globalisation of the automobile value chain, has increased the influence of competitiveness considerations on the locational choice of multinationals and on their allocation of Mercosur production between the domestic and export markets.

7.5.1. Sustainability Impact Assessment for Automobile Sector in Mercosur

Real Income

The CGE modelling results discussed above indicate that a removal of protection barriers would shift labour and capital to other production activities which were internationally competitive and as a consequence, output in the automobile sector would decline. This result is dependent, however, on the assumptions that no other changes in economic parameters occur, that resources shift instantaneously between sectors, and that economic decisions are made entirely on the basis of market prices.

In reality, changes in the output of the automobile sector will be determined by a complex set of factors relating to institutional and policy variables, corporate strategy and long term trends in productivity and market demand.

Viewed in a dynamic perspective, trade liberalisation can expose domestic producers to greater competition, through import competition. These competitive pressures can in turn stimulate growth in productivity. However, where there is market concentration and where the main producers are foreign owned, the response of producers to trade liberalisation is more likely to be determined by the longer term global strategic goals of the automobile multinationals who increasingly privilege the search for efficiency over the search for markets in order to establish, using FDI, international or regional production systems.

Until the early 1990s the industry was strongly regulated by government policies that provided incentives for local production as part of a protectionist import substitution industrialisation strategy. Production was intended for the domestic market. In the 1990s, the introduction of new public policies focused on bringing about greater integration as the international economy began to change the structure and performance of the automobile sector. The automobile sector in Brazil was targeted as a key sector for attracting FDI and also for promoting ‘popular’ (economy) cars for the local market. The Mercosur level trade equilibrium regulations were used to facilitate the integration of companies established in Argentina and Brazil. FDI flows increased and were aimed at the regional market and automobile production grew at an average rate of approximately 5%, allowing output to double in this period. However, the industry remained inward orientated, with domestic sales


accounting for more than three quarters of domestic output. In 2002, domestic production accounted for 93% of the industry’s total sales.

The growth in exports in recent years is explained in terms of domestic market conditions, rather than the lowering of trade tariffs and barriers. The main effect of the inflow of FDI was to increase productive capacity. In Brazil, capacity utilisation fell from above 80% in 1995 to 55% at the beginning of the decade; the economic crises in the domestic and Mercosur market further increased the level of capacity underutilisation. The propensity to export by Brazilian automobile multinationals has shown a cyclical pattern, exporting according to prevailing conditions in the domestic and Mercosur markets. Successive devaluations have also encouraged Brazilian multinational companies to expand exports beyond Mercosur to prevent their profitability being squeezed by the imbalance between dollar denominated debt and local currency sales revenue. The Brazilian auto industry specialises in small, low cost vehicles with high fuel economy, which have been exported to lower and middle income markets in Latin America, rather than to Europe or North America. In 2002, Mexico replaced Argentina as the leading destination for Brazilian automobile exports.

In Argentina, the automobile sector was adversely affected by the devaluation of the Brazilian real in 1999 and the overvaluation of the peso and subsequent economic crisis in Argentina. By 2002, the automotive industry production had declined down to 159 thousand units compared to 457 in 1998.). Similar declines were experienced in domestic sales and exports. The sector experienced a US$ 118 million disinvestment in 2003. However, signs of a recovery were evident by 2004 as production, domestic sales, exports and investment experienced upward trends in the past three years.

Although production in 2005 was still only 75% of record production in 1998, the 320 thousand cars produced were more than double the production of four years earlier. By mid 2006, Argentina had experienced fourteen straight quarters of growth with overall economic activity nearly 10% above the peak in the second quarter of 1998. In July 2006, Argentine industry grew almost 9% year-on-year, while automotive industry production was up a third..

The auto parts industry had also suffered under the Brazilian devaluation in 1999 and the later collapse of the Argentine economy in 2001. In July 2004, the government approved an agreement between local carmakers and auto parts firms limiting the value of imported auto parts to 40% of the total value of the vehicle. The agreement served to boost local auto parts sales in the domestic market, but many took advantage of their new-found competitiveness to also export.

Import sales are a relatively high proportion of total domestic sales. Brazil remains the main country of origin. Brazil is also the main source for imports of auto parts, accounting for approximately a third of parts imports and Europe accounting for about 17%. The devaluation of the peso had a positive impact on export competitiveness, and vehicle exports grew 35% in 2004 and another 50% in 2005. Total value of automotive industry exports exceeded US$ 1.9 billion in 2004. Although the dependence on the Brazilian market declined from the 90% in 1998 to 30% of exports in 2004, export sales were still very concentrated with three markets received almost 90% of vehicle exports – Mexico (43.5%), Brazil (30%) and Chile (15%). The auto parts sector also benefited from the devaluation, and in 2004, it contributed some US$ 767 million to the trade balance


What effect might a reduction in tariff levels and NTBs phased in over a period of ten years have on output levels in the automobile sector in Mercosur? Mercosur automobile imports are mainly more expensive models and specialist vehicles, which will have a relatively low price elasticity and limited substitutability with locally produced models. The reduction in the local price of imports following trade liberalisation is unlikely therefore to have a significant effect in terms of imports displacing local production. Similarly, the reduction in tariffs in the European market is unlikely to have a significant effect on the level of Mercosur automobile exports to the European market.

This suggests that in the short term, liberalisation of trade with the EU is unlikely to have a significant impact on the output of the automobile assembly sector in Mercosur. In the longer term, however, the sector faces a challenge in maintaining momentum in export growth, given its current specialisation in the production of low cost vehicles designed for the local (Brazilian) market. Achieving sustained growth in exports will involve adapting production and designing models for the global markets and greater integration into global production chains. In turn, this has implications for national policy towards FDI in the automobile sector, with a shift away from policies intended to encourage production for the local market and to promote local regional employment and economic development. Also, in the long run, as the industry moves towards greater international integration of production, and as income levels rise in Mercosur, a failure to adapt to the pressures of international competition is likely to make the local industry increasingly vulnerable to competition and imports from Europe.

The automobile sector in Brazil has developed strong production linkages with local parts supplier networks, and parts production now accounts for a significant share of the sector’s output. The automobile supply chain in Brazil has seen significant changes in recent years. The number of direct suppliers has fallen significantly from around 500 to 150. Likewise, the proportion of parts production for models produced outside Brazil has increased as part of the globalization of production chains. At the same time, growth in arms-length exports of parts by Brazilian companies is constrained by specialization in parts designed for the models in which Brazil specializes. Furthermore, the proportion of imported components used in models produced in Brazil has increased substantially. The Brazilian auto parts industry has experienced a sharp contraction in domestic demand and in local technological development capacity as a result of changes in automobile makers’ requirements, as the auto sector has increased its international competitiveness by using imported inputs and reducing domestic content. As a result, domestic supply chains and domestic technological capacity have been reduced.

In so far as trade liberalisation reinforces these underlying processes of globalization and international competitiveness in the automobile sector, the short term impact on the parts sub-sector may be less benign than for the automobile assembly sub-sector. A reduction in tariff and non-tariff barriers on the import of parts will reinforce the trend towards the use of imported rather than domestically produced parts by the multinational automobile assembly companies. Mercosur parts producers are unlikely to benefit from the opening of the European market for exports. In the longer term, the parts sector will face increasing pressure as the automobile multinationals strive to maintain international competitiveness by global sourcing of parts, thereby reducing the existing dependence on local production linkages.

To conclude, the impact of EU-Mercosur trade liberalisation on the output of the automobile sector in Mercosur can be expected to reinforce the existing trends towards global production chains and increased international competitiveness (Box 4). In the short term, the assembly


sub-sector is unlikely to change significantly in terms of its exports and imports with the EU. In the longer term, the removal of import barriers can be expected to increase competition in the Mercosur market and imports from Europe may increase, as disposable income rises and consumer tastes change. The increased competition may also increase the pressure on local producers to diversify away from the dependence on compact cars designed for the local market, toward vehicles which can compete in international markets.

For the parts sub-sector, trade liberalisation is expected to intensify the pressure on local producers, as assembly companies increase the proportion of imported parts used in vehicle production. The weakening of the linkages of assembly firms with local parts companies increases the need to increase exports from the parts sub-sector, however, export growth is constrained by the earlier dependence of the sector on producing parts designed for the local market.

Investment

The development of the automobile sector in Brazil and Argentina to supply domestic and regional demand has for a long time been a centrepiece in their industrial strategies. To this end, both countries established protection systems to attract inward investment and protect their domestic markets. The result has been a large and sustained inflow of FDI into the automobile sector in both countries. By 2000, FDI in automobiles accounted for 4.7 percent of total stock of FDI, and in Brazil the share of automobile FDI in total FDI stock was 6.5 percent.

What effect might EU – Mercosur liberalisation have on FDI flows to the automobile sector in Mercosur? The primary motive for the inflow of auto sector FDI in the 1990s was to supply the domestic market from local production. Here, the objectives of government policy and the multinationals were complementary, with foreign investors benefiting from various incentives provided by national and state governments. The key determinants of FDI for ‘behind the border’ production are the size, stability and growth of the domestic market, the quality of the business environment that determines the costs of doing business in the country; and the soundness of macroeconomic conditions, including exchange rate policy and the regulatory controls on international remittances and other foreign capital transactions.

The major exchange rate realignments in Brazil and Argentina in the in 1999 and 2002 improved the export competitiveness of the automobile sector and encouraged TNCs to switch production towards export markets outside Mercosur. Car manufacturers announced major new investment projects in 2004, mainly in Brazil but also in Argentina, notably export oriented projects in compact cars. FDI in the automobile industry that targeted the Mercosur market in the 1990s is shifting towards export-oriented production for markets outside Mercosur

In the short term, the removal of tariff and non-tariff barriers is not expected to have a significant impact on the ‘fundamentals’ of FDI flows. In the long term, the removal of non-tariff barriers to trade and investment flows will contribute to an improvement in investors’ judgements of the business environment for inward foreign investment in the automobile sector. The removal of non-tariff constraints on trade and investment in the automobile sector will facilitate the global production networking and associated export and import of parts and services, which is now a dominant feature of the industry. It would also act as a ‘signal’ to European investors of a realignment of government policy towards raising the industry’s


productivity and international competitiveness as necessary conditions to establishing a sustained growth in automobile exports from Mercosur. At the same time, the liberalisation of trade and investment flows in Mercosur is likely to further expose the weaknesses in the supplier sub-sector, and could result in new investment in supplier R&D capacity and export capacity in the parts supply sector.

Employment

|The trend in employment follows that of output, with a decline in the late 1990s during the period of macroeconomic and exchange rate instability followed by a recovery in recent years. Total employment in 2005 was similar to the level in 1996.

The automobile sector employs a relatively high proportion of skilled labour. The educational and skill level of the labour employed in automobiles is significantly above the all-industry average reflecting the industry’s relatively more sophisticated technology and needs for skilled labour. The automobile industry is characterised by a relatively high proportion of male employment, at 83% compared to an all industry figure of 65%.

How might employment in automobiles be affected by EU – Mersosur trade liberalisation? The CGE modelling of the full liberalisation scenario predicts a significant decline in employment in automobiles sector. These estimates show the long run changes that would occur if capital and labour shifted from automobiles production to sectors ( mainly agriculture based) where comparative advantage is higher. In reality, however, the impact on employment will be determined by the investment and production decisions of automobile firms (predominantly foreign owned) and government, to the changes in the level of trade protection in Mercosur and the EU. As discussed above, there is unlikely to be a significant change in imports or exports in the short term, and it is expected therefore, that the short term impact on employment will also be insignificant. In the longer term, however, the main influence on employment growth in automobiles will continue to be the growth of the domestic and export markets. The removal of protection can be expected to reinforce the underlying pressures on employment in the automobile sector as the firms continue to seek labour savings productivity gains and a reduction in the share of labour costs. The trend towards global sourcing of parts in particular, could have an adverse impact on employment, although the magnitude of the loss in jobs will depend partly on the capacity of the parts sector to improve its competitiveness through product redesign and production which can compete in international markets, allowing exports to replace the decline in demand from Mercosur auto producers.

Poverty

Although aggregate levels of absolute poverty in Mercosur are relatively low, poverty remains a serious problem for significant segments of the population. In Brazil, 10 per cent of the population exist on less than $1 per day and about one third of the of the poor live below the poverty line. There is significant unemployment and informal sector activity. There are also significant regional differences in income and poverty levels. A key objective of government has been to stimulate employment growth as a means of increasing the income of the poor.

The labour force in automobiles is predominantly skilled and male. Wages are above the national average for manufacturing. The impact of trade liberalisation in the automobile sector is not expected therefore, to have a significant poverty impact. . If labour is displaced


by labour-saving technological change within the sector it can be expected to find alternative employment in other sectors where demand for skilled labour is growing.

Equity

Persistent poverty in Mercosur, as in most Latin American countries, is largely a distributive problem. Inequality in the distribution of income is high, and this inequality undermines the potentially positive impacts of growth on the poor, as well as hindering growth itself. Where growth has been achieved, its potential positive ‘trickle down’ impact on the poor, for example through low wage unskilled employment generation, has been reduced by the inequalities which are reflected in patterns of domestic market production and demand.

Wage and income inequality in the automobile sector is already skewed in favour of higher income groups. Gender inequality is also high in the automobile sector. Regional governments have used incentives to attract automobile investment (Box 6) but the impact on new jobs has been limited. The liberalisation of trade in automobiles between Mercosur and Europe is unlikely to induce any significant changes in existing inequality levels at the national or sectoral levels.

Health and Education

The decline in tax revenue following trade liberalisation could result in some reduction in expenditure in education and health. However, the impact that can be attributed to any change in trade tax revenues from automobile imports will be insignificant.

The long term process of productivity improvement and integration into global production export markets can be expected to stimulate improvement in labour and managerial skills in the automobile sector.

There are potential negative health impact associated with changes in the automobile sector as a result of trade liberalisation. Any increase in vehicle usage that is attributable to trade liberalisation will increase vehicle emissions, all other things being equal. This may have an adverse impact on heath conditions which are related to air quality. These impacts are discussed in detail below as part of the assessment of the environmental quality core indicator.

Environmental Quality

Air pollution is a primary negative externality of automobile usage and production around the world. Green House Gases (GHGs) from automobiles are a significant contributor to global warming. Respiratory illnesses from automobile emissions, including particulate matter and other harmful substances, is a leading cause of morbidity and mortality. With the predicted growth in automobile production in the largest manufacturing countries of Brazil and Argentina, emissions from automobile production locally are likely to increase. On the other hand, any change in technology towards cleaner methods of production will have an offsetting effect. Continued growth in domestic market demand will also contribute to increased air pollution.

Brazil has been at the forefront in developing fuel technology of growing interest to the automotive industry and policy-makers worldwide. Ethanol technology is already mature in Brazil, and the country accounts for 38% of world ethanol production. Infrastructure is also


already in place to deal with the distribution and supply of bio-fuels. By 2003, Brazil had launched its first flex-fuel cars, which ran on any blend of ethanol and gasoline. By 2006, seven car makers produced flex-fuel cars for the domestic market (many with tri-fuel engines). In early 2006, about 77% of new cars sold had flex-fuel engines.

Among Mercosur governments, Brazil is probably most advanced in its policies towards controlling emissions, dealing with solid wastes and chemicals, and other environmental concerns arising from vehicle use. Perhaps the best example of this is the 20 year old National Programme for the Control of Automotive Emissions (PROCONVE), which reduced polluting emissions at source (the vehicle) significantly since its inception in 1985. Another key concern with respect to the environmental impact of the automobile sector is the shift towards bio-fuels. In Brazil, the government has developed a programme to support bio-diesel production with the so-called ‘social fuel’ label. This was only available to mills that bought a minimum percentage of their source crops from small family holdings and poor farmers. 500 million litres of this type of bio-diesel was produced in 2005, and the volume of the special label fuel was growing.

An additional environmental issue related to the automobile sector relates to the import of used tyres, which was prohibited in Brazil from 1991 (there was a special procedure available for tyre re-treaders). Tyres are difficult to discard since they do not bio-degrade making disposing of used tyres an important public concern. Brazil, like the EU, only allows tyres to be re-treaded once.

All of these environmental consequences of increased automobile production and consumption are trends that will continue independently of EU – Mercosur trade liberalisation and any environmental quality impacts attributable to trade liberalisation will be incremental to these underlying trends. The impact of trade liberalisation on environmental quality is expected therefore to be insignificant in terms of air quality. As a consequence, the incremental impact on human health from increased vehicle use and production that occurs as a result of trade and investment liberalisation is also likely to be insignificant.

Natural Resources

Increased domestic and international demand for alternative fuels, will increase incentives for land conversion and consequent depletion of forests. Among the most widely used of alternative fuels is biodiesel. Among the many variations of biodiesel being tested around the world, the most widely used product is made through a reaction of soybean oil and methanol In Brazil, soya-based biodiesel production represents a significant share of their activities to substitute away from traditional, petroleum based fuels towards alternative energy sources. Despite their renewable nature and reduced emissions of known GHGs, there are other externalities associated with biodiesel use, including process water, wastewater treatment, natural gas and electricity. These pressures will add to impacts linked to sugarcane produced for use in ethanol production.

Farming land is being converted to meet the demand of sugarcane and soybeans in the region, with a potential negative impact on food security for low income households. Small farms are being purchased by much larger ones and land is converted to mechanised crop production, eliminating rural jobs. Agrochemical use in soya cultivation is also believed to have an impact on the local environment as well as farmer health.


The impact of trade liberalisation in the automobile sector on natural resources in Brazil will be mainly indirect, as increased vehicle use impacts on increased demand for bio-fuels based on sugar and soya production. These adverse environmental impacts, for example in water use and land conversion, will have additional negative social impacts. However, the additional pressure on natural resources in terms of the linked environmental and social impacts that can be attributed to trade liberalisation are unlikely to be significant, relative to the underlying pressures associated with the international growth in bio-fuels.

Biodiversity

An increase in demand for flexi and alternative fuels to accommodate the desire for cleaner air and a reduced dependence on petroleum products, will have implications for biodiversity.

Sugar and soya production is a significant potential threat to biodiversity.. Lost environmental services from conversion of forest and protected lands is very high and the Brazilian cerrado has suffered in particular from the advancement of soybean production. Agrochemical use in production can likewise impact on biodiversity of local animal populations.

Changes to biodiversity have long-term social, economic as well as ecological impacts. As biodiversity in Mercosur is lost (particularly the impact on the cerrado and rain forest, in the face of increased demand for agricultural lands), the provision of goods in the form of food and fuel will decrease, but also medicinal and genetic resources will be lost. There are significant economic benefits from tourism (ecotourism) in ecologically-rich countries, including indirect benefits such as local employment and knowledge of resources.

The impacts on biodiversity that can be attributed to EU – Mercosur liberalisation in automobiles are unlikely to be significant, compared to the underlying pressures related to the long run process of economic growth and development.

Process Indicators

The liberalisation of trade in automobiles is not expected to have any significant impacts on the process indicators for sustainable development.

The assessment of the potential impacts in Mercosur of EU – Mercosur trade liberalisation in the automobile sector has found that in most cases the effects will be insignificant. However, considered as part of an economy-level liberalisation to trade, the impacts attributable to the automobile sector will contribute to the cumulative impact of trade liberalisation. Considered as part of the overall impact of economy-level trade liberalisation, the potential long term negative impacts of trade liberalisation in automobiles will become more significant.and prevention of any likely negative impacts will require the adoption of appropriate preventative and mitigation measures.

The results of the SIA for the automobile sector in Mercosur are summarised in Table 7.12.


Table 7.12: SIA Impacts for Automotive Sector in Mercosur




shor

t te

rm

long

te

rm

Economic

Real income Argentina and Brazil (i) assemblyGoverrmentpolicy; ;corporatestrategy; globalproductiontrends

(ii)partsinternationalcompetition;corporatestrategy

(i) assemblyDomestic marketconditions;capacity utilisation;response tointernationalcompetitivenesspressures

(ii)partsResponse tointernationalcompetitivepressures

_

�

�

��

Fixed capital formation Argentina and Brazil Investment

climate

Corporate strategy

Complementary policy changes

Investors’ perceptions

Global trends

_ �

Employment Argentina and Brazil Changes in output and investment

Labour saving productivity gains

Competitiveness of domestic production

_ ��

Social Poverty Argentina and Brazil Changes in

investment, output and employment

Existing levels of inequality _ _

Equity Argentina and Brazil Changes in investment, output and employment

Existing levels of wages, gender and regional inequalities

_ _

Health and Argentina and Brazil (i) education (i) education


Education Changes in government social expenditure as result of reduction in trade tax receipts Global restructuring and international competiiveness pressures

(ii) healthImpact of airpollution causedby increasedvehicle use

Share of trade tax revenue in total government revenues

Firm level decisions of labour upgrading

(ii)healthTechnologicalchangesRegulatorymeasures

_

_

�?

_

Environmental Environmental quality All Mercosur

countries Scale, technology and composition effects of trade liberalisation

Existing trends in production and consumption

Quality of environmental regulation

_ _

Natural resources All Mercosur countries

water use and land conservation

Demand for bio-fuels

_ _

Biodiversity All countries, particularly Brazil

Growth in demand for soya and sugar based bio-fuels

Growth in demand for bio fuels

_ _

Process _ _ SD principles All countries See Table 31 See Table 31 _ _

SD strategies All countries

See Table 32 See Table 32 _ _



7.5.2 Sustainability Impact Assessment for Automobile Sector in EU


Economic Impacts

The further opening of the Mercosur automobile market to European automobile companies is likely to increase investor confidence, and reinforce the recent increase of European FDI into the Brazilian and Argentinean automobile sectors. The recent upsurge in investment in the automobile sector has been directed towards production for exports, as part of the global production strategies being followed by the major automobile TNCs. The phased liberalisation of trade is expected, therefore, to facilitate the shift towards increased international competitiveness of the domestic assembly and parts sectors in Brazil and Argentina, and to result in a continued growth of exports from Mercosur to third markets. Automobile exports from Mercosur to Europe are a small proportion of total exports, and the phased removal of EU barriers to Mercosur automobiles is not expected to lead to a significant increase in EU imports from Mercosur. EU exports of automobiles may increase as a result of liberalisation, but the growth will be limited to the more luxury brands and specialists vehicles for which the price elasticity of demand in Mercosur is lower than for ‘popular’ brands supplied by Mercosur production.

With the opening of Central European countries to global markets since 1989, the auto industry in Central Europe is now increasingly integrated into the European industry Integration between the motor industries of Western and Central Europe has taken two forms. First, there has been an increasing two-way trade in vehicles, in which Central Europe offered both growing domestic markets and low-cost production sites to Western European assemblers (including firms from Japan and North America with operations in Western Europe). Second, a number of export-oriented engine and component plants were built in Central Europe in the 1990s. Car production in the new EU members now accounts for about 10% of total EU25 production. The liberalisation of automobile sector trade between the EU and Mersosur is not expected to significantly affect these industry shifts between the EU 15 and EU 10 members.

The existing trends in European investment to the automobile sector are expected to be determined mainly by macroeconomic stability and business environment in Mercosur. Trade liberalisation will ‘signal’ the governments’ commitment to a more outward looking export orientated development strategy and therefore reinforce investor confidence. This may result in increased competition between Mercosur and other low cost production locations, including EU10, for TNC FDI into the automobile sector.

The short run effect of trade liberalisation on output and employment in the EU automobile sector are unlikely to be significant. In the long run, the effects of the more open market and a reduction in trade facilitation costs, combined with rising consumer income levels in Mercosur, may lead to an acceleration in the growth of EU vehicle exports to Mercosur.

Social Impacts

The liberalisation of trade in automobiles between EU and Mercosur is not expected to have significant social impact in the EU member states.



Legislation to control noxious emissions from industrial production and from automobile engines has been increasingly stringent in the EU in recent years. Given the effective enforcement of environmental standards and controls within the EU, any additional environmental pressures within the EU caused by the liberalisation of automobile trade between EU and Mercosur are unlikely to be significant.

Process Indicators

The automobile sector can have significant impacts on long run sustainability trends, particularly in relation to emissions and global warming. These potential impacts are now integrated into public policy analysis, and are increasingly been implemented in flanking policy measures at the EU level. The additional impact on the sustainable development process indictors that can be attributed to the liberalisation of EU Mercsosur trade in automobiles is unlikely to be significant in itself, but is a key part of a systemic approach to sustainability policy.

The significance of the potential economic, social and environmental impacts of EU -|Mercosur trade liberalisation in automobiles are shown in Table 7.13.

Table 7.13: SIA Impacts for Automotive Sector in EU



Causal factors

Factors affecting significance

shor

t te

rm

long

te

rm

Economic Real income EU members where

automobile production is concentrated

Removal of tariff and non-tariff measures on exports to Mercosur

Growth in income levels and shift in market preferences in Mercosur

Globalisation strategies of EU firms

- �?


All EU states Liberalisation of investment and trade flows; improvement in investment climate; reduction in trade facilitation

Global locational shifts in FDI in automobile sector

- _


costs

Employment Particularly in new member states

Removal of tariff and non tariff measures

_ �?

Social Poverty No significant impacts - - Health and education No significant impacts Equity No significant impacts - - Environmental Biodiversity No significant impacts - - Environmental quality No significant impacts - - Natural resources No significant impacts - - Process SD principles High consistency - -

SD strategies Part of existing systemic approach

- -

7.6. Sustainability Impact Assessment for other Non-Agricultural Goods

7.6.1 Mercosur

The modelling results are consistent in showing a general decline in manufacturing in Mercosur following trade liberalisation. The results of CGE modelling give an indication of the changes in economic incentives that result from trade liberalisation. If it is allowed that resources move smoothly and instantaneously in response to these new comparative advantage ‘signals’, then the predicted changes in output occur. In the real world, however, an industry’s response to trade liberalisation will be influenced by the effect with trade liberalisation has on longer term productivity growth and investment, and by corporate strategic planning decisions. The complex set of factors that can influence an industry’s response was first discussed in detail for the automobile sector in Mercosur. This analysis is now applied more generally to the rest of the manufacturing sector in Mercosur.

Economic indicators

Real Income

Real income will be affected primarily by the overall welfare changes. The modelling results reported in Section 5 indicate that the total static welfare gain from full liberalisation would be of the order of 0.5% GDP in Argentina, 1.5% in Brazil and 2.1% in Uruguay (Table ??). The welfare gain estimated for Paraguay is significantly higher, at 10% GDP, but with a higher degree of uncertainty in the calculations. These results for a full liberalisation scenario are broadly consistent with those indicated by the modelling calculations in the 2003 SIA. For full liberalisation of industrial products and partial liberalisation of agriculture and services, these gave welfare increases of 0.3% GDP in Argentina, 0.1% in Brazil, 3.3% in Uruguay and 3.1% in Paraguay. The static welfare gains predicted by CGE modelling are for the economy as a whole, and imply that the gains in real income in the agriculture and food


processing sector are sufficient to offset the losses in manufacturing. The distribution of the real income losses in manufacturing will be determined by the magnitude of the changes that occur at the individual industry level

As discussed in Section 4, trade liberalisation may generate dynamic gains in terms of productivity and economic growth. Trade opening can induce greater competitiveness and export performance on the part of domestic manufacturing firms, allowing them to adjust positively to the new market incentives and opportunities. However, a necessary condition for this positive adjustment process to occur is a phased process of liberalisation which gives the affected industries time to adapt. The costs of adjustment associated with trade liberalisation are likely to be lower if adjustment is spread over time (Winters, 2000). As noted by Collier, Greenaway and Gunning (1997), ‘in the presence of multiple policy instruments and conflicting interest groups competing for attention, policy reforms are more likely to be incremental than comprehensive’. The optimal sequencing of trade liberalisation is to begin with the elimination of quantitative restrictions by conversion into tariffs, followed by a phased reduction of tariffs.

European FDI accounts for a significant share of total FDI in the manufacturing sector in Mercosur. The main determinants of FDI inflows are the investment climate within the Mercosur countries and the potential for growth in the domestic and export markets. In the early 2000’ European FDI diversified into the services sector in response to domestic market opportunities, but more recently, has switched back to investing in those parts of manufacturing where there is potential of export growth, such as automobiles.

The inflow of FDI can also contribute to productivity growth and economic growth, with the potential for economy level spill over externalities from the industry in which the investment is made. To the extent that investors continue to have confidence in Mersosur as a stable investment environment with potential for market expansion, the potential negative impact of trade liberalisation on manufacturing sectors will be moderated. But for other sectors which are unable to compete internationally as import substitutes in the domestic market or as exports, trade liberalisation will accelerate the underlying process of sectoral decline.

Fixed Capital Formation

The results for the CGE model reported in Section 5 are based on a fixed capital stock, which is redeployed across sectors in accordance with the static output changes that occur as a result of trade liberalisation. However,in a dynamic context, trade liberalisation may have a positive impact on investment behaviour, and particularly on the investment decisions of foreign investors. The literature review in section 4 showed that multinationals will tend to invest in sectors with the most promising growth potential and will pick the companies in the host country which are likely to be the most productive. Trade liberalisation is unlikely, therefore, to have any significant adverse impact on the inflow of FDI in the manufacturing sector in the short term. Over time, however, it may have an impact on the sub-sector allocation of new investment. The removal of protective barriers will make investment in import substitution production less attractive, while at the same time increasing the attractiveness of those activities which have the potential to compete internationally and expand production for export markets. The long term gains that investment may have on


economic growth would be dependent on technological development and the dynamics of both foreign and domestic firms.43.

Employment

The CETM predicts precentage changes in sectoral employment similar to those for output. The Mercosur – EU model follows the standard computable general equilibrium modelling approach and assumes that total employment is fixed at the national or regional level. Workers from a declining sector are able to immediately find work in an expanding sector, hence, the model allows only for the evaluation of inter-industry shifts in employment.44 Transitional and persistent unemployment effects due to labour market constraints and the associated adjustment costs are not generally evaluated within a CGE modelling framework. In other words, CGE models tend to remain silent on employment effects such as moves into or out of disguised unemployment in very low productivity, informal sectors, from or into formal employment in higher productivity, modern sectors within a country/region, or the migration of jobs from one country to another as a consequence of trade liberalisation (Ackerman, 2005)45.

For each of the Mercosur countries the model predicts a negative overall impact on employment in the manufacturing sector, reflecting the predicted structural shift from industrial to agricultural based production which occurs following trade liberalisation. Although this will be compensated by a rise in employment in other sectors, a time lag can be expected between declining employment in one area and a rise in another. Given the rigidities in the labour market and the high level of official unemployment in the urban sector in Mercosur countries46, the overall employment effects of trade liberalisation during the period of adjustment are expected to be negative, and may be significant if the pace of liberalisation is faster than can be accommodated by the markets.

The long term impact on industrial employment will be similar to that for output. However, the pressure to maintain cost competitiveness in international markets may accelerate the adoption of less labour intensive technology, with negative consequences for employment, particularly for unskilled labour.In contract, trade liberalisation which extends to labour may increase the employment opportunities for skilled labour, for example engineers, who are displaced as a result of sector level adjustments to trade liberalisation.

Social indicators

Poverty

As discussed in Section 4, global CGE models by design are not particularly well suited for poverty analysis due to their lack of disaggregated information at the household level and their inability to distinguish between poor and non-poor individual households. The CETM model gives estimates of the static equilibrium effects on skilled and unskilled real wages in

43 Ozler, Yilmaz and Taymaz (2004) 44 Changes in relative wages are used to maintain overall level of employment (and unemployment) constant. 45 The short term adjustment costs in employment may be significant, particularly if they are concentrated in particular subsectors and/or regions. Recent work by the OECD has considered ways in which governments can assist workers displaced by trade to re-integrate into the labour market (OECD, 2005). 46 14% in Argentina, 12% in Brazil, 10% in Paraguay, 13% in Uruguay. Official figures on employment in developing countries typically understate the level of labour un- and under- employment.


each of the Mercosur countries. A significant rise in unskilled wages is projected for Paraguay. The effect in the other countries is small, including a small decrease in skilled wages in Argentina (potentially offset by trade facilitation measures). These changes are derived on the assumption that overall employment remains constant. If we allow for the decline in manufacturing employment during the adjustment period and the likelihood that, during this period of adjustment, many of the displaced workers will join the pool of urban unemployed, then any gain in wages by those remaining in employment is likely to be offset by the fall in income for the now-unemployed. Many urban households in Mercosur countries are on or below nationally recognized poverty levels. The impact of industrial trade liberalization on poverty within the manufacturing sector during the adjustment period is expected, therefore, to be adverse, although the negative impact on household incomes of manufacturing sector labour could be partly offset by any reduction in prices of comsumption goods resulting from trade liberalization.47 Longer term impacts may be more beneficial, if trade liberalization raises the long run economic growth path and subsequent increases in incomes of poor households.48 From the perspective of national poverty levels, the impact of trade liberalization is more difficult to predict.


The direct fiscal impact of the removal of tariff barriers to imports of industrial goods would be to reduce government revenue, if this is not mitigated by levying the same amount of income by other means49. Table 7.14 indicates the potential magnitude of the effect for industrial and agricultural tariffs combined. About three quarters of the total can be expected to come from industrial liberalisation50. A reduction in social expenditure could then be expected. Depending on the types of alternative taxes that are chosen, further social impacts would occur, if the incidence of their effects differed from those of the import tax which they replace. The short term impact of industrial trade liberalisation on expenditure in health and education might also be negative. Longer term impacts will depend on the ability of the industrial sector to respond positively to increased competition.

Table 7.14 Tariff Revenue Effects, millions of dollars Base revenue New revenue Change

Argentina 1.984 1.044 -940

Brazil 5.609 3.185 -2.424

Paraguay 151 164 13

Uruguay 246 129 -117


A study by the IMF51 indicates that trade liberalisation has typically been associated with a

marked decline in trade tax revenue. In middle income countries revenues as a share of GDP fell by about a third, while in low income countries the decline was over 40 percent. Many middle income countries have responded by raising revenue from other sources to leave total

47 Barraud and Calfat (2006) estimate that trade liberalisation in Argentina will lower poverty levels, by reducing the prices of consumption goods and increasing the demand for labour in non traded sectors such as construction. 48 As discussed in Section 4, economic growth is not a sufficient condition for poverty reduction. 49 If trade liberalisation proceeds by substituting tariffs for non-tariff barriers there may be a positive revenue impact in the initial phases of trade liberalisation. 50 Kowalski P (2005) 51 IMF (2005)


tax revenues broadly unchanged, but in low income countries total revenues declined in parallel with the falling trade tax revenues. The report also notes that the revenue concerns may be exacerbated by short term expenditure pressures that can arise from liberalisation, such as increased social outlays for displaced workers.

The IMF study advocates the use of domestic consumption taxes, notably VAT, to offset the anticipated loss. If the system is appropriately designed, consumer prices can be left almost unchanged, so that distributional impacts are minimised, and potentially avoided altogether through appropriate adjustment of income tax, enabled by an anticipated rise in incomes. The study reports Tunisia, Malawi, Uganda, Senegal and Jordan as examples of where tax reforms have been used successfully to replace lost tariff revenues, in contrast with many other cases where reforms have not been undertaken, revenues have fallen, and government expenditure has had to be cut. In Jordan and Senegal IMF funding programmes had explicitly linked trade reform with domestic tax changes.

Equity

In addition to the potential impacts on employment and poverty discussed above, industrial liberalisation may have impacts on gender equity. These are considered unlikely to be significant for the industrial sector as a whole, although there may be significant differential impacts at the sub-sector level, where female employment may be concentrated.

Trade liberalisation has in general tended to lead to increasing feminisation of the workforce, with effects on gender equality that have not been clear cut52. Reforms which draw more women into the labour force can coincide with persistent gender segmentation in labour markets, and specific policies are often needed in order to achieve greater gender equality. The short to medium term effects for EU-Mercosur liberalisation may differ from the more general case, with an overall movement out of industrial employment and into agriculture. Although some significant effects may occur for particular industries, the overall gender impact is expected to be relatively neutral.

Environmental indicators

Biodiversity

Production levels are expected to rise for processed food, particularly in Paraguay and Brazil, and decline in most other manufacturing sectors. The principal biodiversity effects will occur through any consequent changes in pollution (primarily of water) and water consumption, which may have knock-on effects through pollution of aquifers or a fall in groundwater levels.

Water resources are relatively abundant in the Mercosur countries, and impacts from consumption changes are unlikely to be significant. The effect on water pollution may be significant in local species-rich areas if existing pollution levels are high, and regulation is weak. The overall effect of the production changes is expected to be beneficial but small, with a possibility of localised effects that are adverse, but also small. The overall impact on biodiversity of industrial liberalisation in Mercosur countries is therefore expected to be non-significant.

52 UNRISD (2005)


Environmental Quality

Impacts will occur for both air pollution and water pollution as a result of the production changes. In Mercosur countries these are expected to be beneficial overall as a result of the overall fall in manufacturing production, but with the possibility of localised adverse effects from the increase in production of processed foods. These could be significant if regulatory regimes are weak or are unable to respond (Box 7.1). The potential for adverse effects is particularly high in Paraguay and to a lesser extent Brazil. Any reduction in intra-Mersosur shipments of industrial goods will contribute to the overall improvement in environmental quality.

Little effect on greenhouse gas emissions and climate change is expected from the production changes, as these consist primarily of movements of production between the EU and Mercosur and also other countries. A quantitative estimate of the effect is given in Section 5. A signficant adverse effect may however arise from the increase in international transport. For full liberalisation of agriculture as well as manufactured goods, this could amount to an increase in global CO2 emissions of about 0.15%.

Box 7.1. Industrial Pollution and Regulation

In terms of the impact of industry on the environment, there is evidence that pollution has increased with the increased privatisation, reduced participation of the government in the productive sector, and the liberalisation of capital and trade flows (Young, 2003). A detailed analysis of the contribution of different sectors in Brazil to overall air pollution points to the complexity of the pollution haven debate and the country-specific terms of production and trade, as well as the importance of the regulatory structure and reach of the government in monitoring and controlling sector-specific pollution levels. While large industry, such as the automotive and paper sectors, are subject to greater regulation and are more highly visible in Brazil, small-scale industries are among the most polluting in the country-by sector. Based on the number of employees, small-scale industries in the wood production, leather products and metal production far exceed large-scale contributors (Jayaraman, Lanjouw, 2004). Small-scale industries may not only be more difficult to monitor and thus their full contribution to overall scales of pollution unknown, they also have fewer opportunities to incorporate new technology into production due to cost; monitoring their compliance is more difficult; disposing of waste properly may be more expensive, and there is often reduced awareness to potentially harmful effects of pollution among small-scale producers (Jayaraman and Lanjouw, 2004).

Natural Resource Stocks

The overall effect of industrial liberalisation on water resources in Mercosur countries will be beneficial, because of the overall decline in industrial production. Water resource pressures tend to be low in the region, and so any localised adverse effects are not expected to be significant.

Similar effects are expected for industrial energy consumption. As assessed in the economic model, energy consumption may fall slightly overall through a change in energy mix. A larger decline in the industrial sector will be countered by an increase for other sectors.

In the longer term, improvements in production technology can be expected to include reduced intensity of energy consumption and water use. Reduced energy consumption in production will partially counter increased consumption in international transport. However,


except perhaps in particular areas where industrial use is a major factor and environmental stress is high, these effects are unlikely to be significant in relation to the general pressures on resources.

The beneficial environmental effects will be greatest where the production changes are largest and the current environmental performance is weakest, and will be maximised by strong policy responses to the opportunities for better regulation. It should however be noted that if the goal of greater economic growth is achieved, with a large industrial component in the long term, the beneficial technology effects will be accompanied by adverse scale effects. This will add further to the need for stronger environmental regulation.

Process indicators

Consistency with sustainable development principles

The proposed EU-Mercosur trade agreement is judged to be highly consistent with principle 12 of the Rio Declaration, in promoting a supportive and open international economic system. There are however potential conflicts with the Rio principles of reducing and eliminating unsustainable patterns of consumption (principle 8) and enhancing technology transfer (principle 9). Except in these areas, the scenario is judged to be relatively neutral in respect of sustainable development principles.

In relation to consumption and production patterns, the scenario aims to accelerate economic growth in both the EU and Mercosur. To the extent to which it achieves this goal, it will add to the underlying processes which drive increasing consumption and associated wastes. Stronger environmental regulation will therefore be needed, to achieve a sustainable balance between economic growth and environmental degradation. The EU-Mercosur trade liberalisation scenario adds incrementally to this general need.

In relation to technology transfer, the scenario has mixed effects. The anticipated decline in industrial production will initially tend to inhibit technology transfer rather than enhance it. However, by exposing domestic industry in Mercosur to greater competition, liberalisation will enhance incentives for investment in internationally competitive technologies. The relative importance of these effects will be influenced by other aspects of domestic industrial policy.

Institutional capacity for effective sustainable development strategies

The influence of EU-Mercosur trade liberalisation on institutional capacity for strategic sustainable development planning is judged to be neutral.

Impact Summary

The significance of the impacts of full trade liberalisation on the industrial sector are shown in Table 7.15 in terms of the core and process indicators.

Table 7.15: Summary of Sustainability Impacts for Non-Agricultural Goods Sector: Mercosur





shor

t te

rm

long

te

rm

Economic Real income All Short term decline

in industrial output

Domestic industrial development policy �� ?

Fixed capital formation All Output changes at firm level New investment

Investment climate Firm dynamics _ �?

Employment All Reduction in output

Labour market flexibility, transferability of skills

� �?

Social

Poverty Loss of employment and household income

Informal sector income generation opportunities, development policy, long term growth

� �?

Health and education Decline in government revenue from trade tariffs

Tax reforms �? -

Equity Gender impacts Mixed effects for individual sub-sectors

Employment structure

- -

Environmental

Biodiversity Minor effects in both directions, small beneficial overall effect

Water consumption and pollution

Effective regulation - -

Environmental quality Beneficial overall impact on air and water pollution, possible local adverse effects

Reduction in industrial sector activity

Improvements in pollution control technology Changes in output mix

� �

Climate change International transport

Carbon trading etc. � �

Natural resources Overall beneficial effect on water and energy

Reduction in industrial sector activity

� �

Process

SD principles Positive for international cooperation, otherwise neutral except for consumption and production and technology transfer

Acceleration of underlying processes

Environmental regulation and technology cooperation

- �

SD strategies Neutral - -


� positive greater significant impact � negative greater significant impact


� positive lesser significant impact � negative lesser significant impact�� positive and negative impacts likely to be experienced according to context (may be


7.6.2 European Union

The level of EU tariffs on non- agricultural imports from Mercosur are lower than on agricultural imports and have relatively few tariff peaks (Table 7.16). There are also non-tariff measures applied to some manufactured goods imported from Mercosur, but again these are fewer than in agriculture (Table 7.17).

Table 7.16: EU and Mercosur Tariff Structure by sector: 2003 (all figures in percentage)

Country Sector Simple Average Tariff

Effectively Applied Tariff*

Number of Tariff Peaks

Maximum Tariff Rate

Total 6.17 10.2 665 230 Agriculture 8.99 17.9 640 230

Raw Materials 0.98 0.98 0 5 Textiles 10.59 17.2 17 29

EU tariffs applied on Mercosur Exports

Manufacture 4.72 5.14 6 27 Total 11.16 12.25 195 55

Agriculture 12.41 11.0 3 55 Raw Materials 1.11 1.11 0 6 Manufacture 11.35 13.8 192 35

Mercosur tariffs applied on EU exports

Textiles 16.24 18.92 0 25 Source: Trains, MAcMap * - data for 2001 from MAcMap The Effectively Applied Tariff is an ad valorum equivalent of applied border protection thatincludes information on tariffs, special and mixed tariffs, quotas, tariff rate quotas and preferential rates

Table 7.17: Trade restrictions on selected manufactured products

EU tariffs Export tax by Mercosur

Mercosur tariff Non-tariff barriers

Motor vehicles 10.0%

Untanned leather 9% (Brazil)

5% (Argentina) Yes Processed bovine leather

6.5% Yes

Other processed leather

3.5% Yes

Footwear 3.5% 17.7% Yes Other leather good, e.g. handbags

3.0% 17.7% Yes

Metal products 1.2% 18.4% Yes Electrical machinery 17.3% Yes Other machinery 16.3% Yes Sources: COTANCE, European Commission TARIC database, Estevadeordal and Krivonos (2000).

The modelling results for the EU show that trade facilitation accounts for approximately half the increase in real income for EU25. Tariff reductions are attributable for 35 percent, while the corresponding figure for service liberalization is 15 percent. (Table 7.18)


Table 7.18: Decomposition of Real Income Effects, (Millions of US$)

Total gain of which from Goods

liberalisation


of which from Trade

Facilitation

Argentina 1 255 411 138 705 Brazil 6 883 4 510 465 1 908 Paraguay 643 502 12 129 Uruguay 369 272 21 76 Venezuela 91 -267 61 297 Total Mercosur 1103 507 697 502

EU15 3 700 1 306 558 1 836 EU10 201 39 18 144 Total European Union 201 39 576 144


The main gains to the EU manufacturing sector from trade liberalisation with Mercosur are likely therefore, to result from increased exports of goods and investment to Mercosur, rather than from a reduction in the price of Mercosur manufactured goods sold in the European market.

The predicted changes for the non-agriculture sector output (assuming full liberalization) are shown in Table 7.19. The lowering of Mercosur import protection leads to an expansion of the European metals, machinery and automotive sectors. In general, production of manufacturing goods is expected to increase,

Table 7.19: Changes in Sectoral Output, EU

Value Added Shares in baseline model data (2001) and in the scenario of free trade

Baseline data Scenario (free trade) Change in scenario from baseline

EU15 EU10 EU15 EU10 ∆EU15 ∆EU10

Textiles and Clothing 1,22% 2,73% 1,23% 2,73% +0,01% +0,01%

Wood, Pulp, Paper 2,34% 3,50% 2,34% 3,50% +0,00%

Chemicals 3,33% 3,74% 3,34% 3,75% +0,01% +0,01%

Metals 3,68% 5,54% 3,71% 5,58% +0,03% +0,03%

Motor Vehicles 1,94% 1,76% 1,97% 1,78% +0,03% +0,01%

Transport Equipment 0,53% 0,56% 0,53% 0,57% +0,01%

Machinery 6,58% 6,55% 6,67% 6,60% +0,09% +0,05%


For EU10, the effects are very similar to EU15 however, the manufacturing sectors are also expected to increase their importance, with significant overall effects in the sectors metals and machinery which are accountable for about six percent of total output each.

Employment is predicted to increase in the manufacturing sectors Table 7.20.


Table 7.20: Employment Effects (% change)

EU15 EU10 textiles and clothing 0.9 0.3 wood, pulp, paper 0.1 0.1 chemicals 0.4 0.2 metals 0.7 0.6 motor vehicles 1.8 0.7 transport equipment 0.1 1.0 machinery 1.4 0.8

The changes in exports from the EU to Mercosur are shown in Table 7.21 and are very similar to the expected changes in output.

Table 7.21: Changes in Export Quantity, EU (percentage change)

EU15 EU10 Mining 0.0 -0.4Textiles and Clothing 1.7 0.5Wood, Pulp, Paper 0.9 0.2Chemicals 0.8 0.3Metals 1.5 1.0Motor Vehicles 3.2 0.8Transport Equipment 0.1 2.6Machinery 2.5 1.2Source: Model simulations

The changes in imports of manufactures are smaller, confirming the EU’s comparative advantage in manufactured goods (Table 7.22)

Table 7.22: Change in Imports %, EU EU15 EU10

mining 0,4 0,2 textiles and clothing 0,3 0,1 wood, pulp, paper 0,0 -0,1chemicals 0,2 0,1metals 0,8 0,3motor vehicles 0,5 0,5transport equipment 0,1 0,5machinery 0,5 0,3Source: Model simulations, including intra-EU trade

The aggregated changes in national imports and exports are summarized in Table 7.23 below.

Table 7.23: National Trade Balance Effects (percentage change) EU15 EU10

% change in exports +0,4% +0,3%

% change in imports +1.5% +0.3%

Source: Model estimations

The model predictions for EU manufacturing show modest gains in ouput and exports. The more significant gains to the EU from trade liberalisation in manufacturing are likely to be


linked to the investment flows to Mercsosur. There has been significant levels of EU investment in the manufacturing sector in Mercosur and the EU is now the largest investor in the Mercosur region. The majority of European FDI is directed to Brazil. In 2001, the FDI stock of the EU in Brazil amounted to US$ 74,508 millions and to US$ 50,397 in Argentina (Table 7.24). Spain is the EU member with the largest stock of FDI in Mercosur, followed by France, the Netherlands, the United Kingdom, Italy, Germany and Portugal. EU investment is located in areas as diverse as telecoms, energy, financial services, the automotive industry, the agro-industry and the retailing sector.

Table 7.24: EU FDI Stock in Latin America, 2001

(Outward stock, Millions Euros)

Latin Americaa

Argentina Brazil Chile Columbia Mexico Venezuela

European Union (%)

194738 50397 74508 15064 5902 25945 7493

100 26 38 8 3 13 4 France 19504 5553 8389 698 262 1556 1647 Germany 17829 2336 7481 537 505 5102 966 Netherlands 12296 1646 5223 899 -533 2630 1075 United Kingdom 16963 3622 4508 2947 2085 2283 666 Italy 9117 3147 4648 91 60 387 229 Portugal 8515 96 8185 16 0 88 5 Otherb 110514 33997 36074 9876 3522 13900 2905

aEurostat Balance-of-Payments (BOP) Economic Zone of Latin America includes: Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Mexico Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela b“Other” has been computed as the difference between the estimated EU aggregate and the sum of the selected declaring countries. Note: Data on Spanish assets in Latin America are not separately available: it can be assumed they account for a significant part of “Other”. Source: Amann and Vodusek, 2004

The concentration of FDI in services is particularly strong in the Mercosur region. In Brazil, between 1997 and 2000, over 81 percent of all FDI inflows were to the services sector. A large part of these investments were made by European firms, and in particular, Spanish investors. However, with the deterioration in the global economic situation and the corporate credit retrenchment, this pattern changed: in the early years of the new decade, less than 60 percent of FDI inflows were undertaken in services, while the share of FDI in manufacturing rose to 35 percent in the same period.. This shift in the composition of European investment in Mercosur in part reflected the influence of devaluations on foreign investment decisions. For the services sector, devaluation had adverse repercussions for foreign firms serving the domestic market. On the other hand, devaluation increased the international competitiveness of manufacturing, and foreign firms in Brazil and Argentina responded by increasing their exports—particularly to the rest of Latin America.

Trade liberalisation is likely to give added assurance to European investment on the investment climate in Mercosur. The inclusion of an investment agreement in the agreed liberalisation programme, which improved the transparency of investment conditions and brought about a greater degree of harmonisation in national policies towards FDI in the Mercosur countries, would contribute further to the attraction of inward investment from Europe to the manufacturing sector.


Economic Impacts

The economic impact of trade liberalisation in the EU25 is expected to be positive. Real income can be expected to increase, as a result of increased production for export to Mercosur, and from the returns on investments made in Mercosur. Employment is also expected to increase. There is unlikely to be a significant impact on investment in Europe.

Social Impacts

There are unlikely to be any significant social impacts resulting from trade liberalisation of manufactures trade with Mercosur. There are adjustment costs in the EU industrial sector resulting from underlying shifts in global competitiveness and comparative advantage, the additional impact of EU – Mercosur liberalisation in non – agricultural goods trade is unlikely to be significant.


The change in production resulting from increased exports on non-agricultural goods to Mercsosur will give rise to increased environmental scale effect pressures. However, given the effective implementation and strengthening on environmental regulation on industrial sector activities, these additional environmental effects are not expected to be significant.

The expected sustainability impacts for non-agriculture goods sector in the EU are shown in Table 7.25.

Table 7.25: Summary of Sustainability Impacts for Non-Agricultural Goods Sector: EU




shor

t te

rm

long

te

rm

Economic Real income All increase in

production of exports

Increased investment in Mercosur

Investment climate

� �

Fixed capital formation All _ -

Employment All increase in output � �

Social

Poverty - -

Health and education - -

Equity - -





shor

t te

rm

long

te

rm

Environmental

Biodiversity - -

Environmental quality - -

Natural resources - -

Process - -

SD principles - -

SD strategies - -





8. IMPACT ASSESSMENT: TRADE IN AGRICULTURE

A sectoral SIA for agriculture is being carried out in parallel with this overall SIA of the proposed EU-Mercosur trade agreement. This section of the report summarises the mid-term results of the agriculture SIA53. The study identifies both beneficial and potentially adverse impacts on a range of economic, social and environmental factors which contribute to sustainable development. For many of these impacts the study also identifies key factors which may contribute to enhancing beneficial effects and avoiding or mitigating adverse ones.

8.1. The agriculture sector in the EU and in Mercosur

Mercosur agriculture is more competitive than in the EU and could develop very quickly. Meanwhile, agriculture in the EU is still the main economic sector in rural areas. Farm employment is concentrated in countries such as Poland, Italy, Spain, France and Hungary, which account for nearly the two-thirds of the total EU agricultural labour force.

Gross Value Added of agriculture is also concentrated. France, Italy, Spain, Germany and the UK account for over two thirds of EU-25 agricultural value added. Agricultural production in the EU-25 is relatively well-balanced between crop products and animal products. The EU-25 is one of the main world producers of cereals (except for rice and maize), sugar, some fruits and vegetables, meats and dairy products. The EU food and drink industry is its largest manufacturing sector, ahead of the automobile and chemical industries. Small and medium enterprises are common in the sector.

The agricultural sector is a key component of Mercosur economies. In all the member states, agriculture accounts for more than 10% of GDP, with rapid growth in all the countries except Paraguay. Agriculture is also a major source of employment in Mercosur countries, directly and indirectly. Agriculture in Mercosur is characterised by a very competitive and modern commercial agriculture, alongside traditional family farms and landless farmers. Mercosur countries, especially Argentina and Brazil, are considered as major players of world agricultural production, both for crops and animal products. Mercosur represents 8% of world maize supply, and accounts for around 40% of soya bean world production. Brazil is the major world producer of sugar cane, whose production has tripled since 1999. Mercosur produces almost 20% of world beef meat. Chicken meat production is increasing in Brazil, and accounted for 13% of the world production in 2004.

8.2. Trade flows

Food and agricultural commodities represent over half Mercosur exports to the EU, and Mercosur is one of the main suppliers of food products to the EU (accounting for a fifth of EU agricultural and food imports). By contrast, EU agricultural exports to Mercosur represent less than 3% of EU exports. Intra-regional trade is another difference between EU and Mercosur. Most of the imports and exports of individual EU Member States are intra-EU, whereas intra-Mercosur trade represents only 10% of exports. Whiskies, wines, olive oil and malt are among the main European agricultural products exported to Mercosur.

8.3. Trade and measures and support measures

53 Hermelin and Faucheux (2007)


Both the EU and Mercosur have significant import barriers for some agricultural goods.

Many products exported by Mercosur countries such as soya bean, soya bean oilcake or any kind of tropical products (coffee, cocoa, mangoes) are subject to few or no tariffs when entering the European market. For some Mercosur exports which compete with European production, market access to the EU is restricted by import tariffs, entry prices (for certain fruits and vegetables and preparations thereof), and seasonal tariff rates. Mercosur products also have to comply with EU import requirements, which include a range of standards to ensure a high level of security as regards public health, animal and plant health and the environment. The Common Agricultural Policy (CAP) also influences trade. The process of CAP reform involves cuts in guaranteed prices, import tariffs and export subsidies, and changing support to farmers to decouple it from levels of agricultural production. The reforms have gradually encompassed all the major agricultural commodities, beginning with cereals and beef and moving on to dairy production and finally sugar production in 2006. Since the implementation of CAP reform and the WTO agreement on agriculture, the EU share of world markets of wheat, beef meat, poultry meat, sugar and milk powder has decreased, while exports of more competitive exporters (including Brazil and Argentina) have increased.

In Mercosur the goal of a common external tariff has led to a decrease of upper tariff levels. Currently, no Mercosur tariff applied on agricultural products theoretically exceeds 20%, although higher or lower tariffs are permissible under certain conditions. Whiskies and wines, which are among the EU’s main exports to Mercosur, are subject to the rate of 20%. Olive oil and malt are subject to a 10% tariff, except in Argentina where a 31.5% import duty is applied to olive oil. EU exports need also to comply with Mercosur regulations, including sanitary and phytosanitary (SPS) standards for movement of live bovine animals, beef, pig meat and poultry. Various other restrictions apply in some of the Mercosur countries, including automatic and non-automatic import licensing, specific labelling requirements and technical regulations. All four Mercosur Member States have national laws that define the geographical origin of products, allowing them to be marketed with geographical indications.

Mercosur has no pan-regional agricultural policy, and each Member State has its own national policy. In Paraguay there is little government intervention in agriculture, and all measures are classified in the green box. An export tax of 4% was introduced in 2004 to promote local processing, with the income linked to fund rural development projects. Most Argentinean domestic support is classified as green box, with some in the amber box. In order to stabilise domestic prices, export limits or prohibition may be applied on certain products such as beef meat or wheat. In Brazil minimum agricultural prices are maintained and rural credit has preferential rate. The national food supply company, CONAB, is state-owned and responsible for market intervention to stabilise prices, often below the world market price. Brazil uses no export subsidies, and its aggregate measure of support is below the de minimis threshold. Most domestic support in Uruguay is in green box measures.

8.4. Model results

The Copenhagen Economics Trade Model (CETM) aggregates agricultural production into four product groups as shown in Table 8.1.

Table 8.1. Product aggregation used in the economic model

Sector GTAP sector Corresponding ISIC/CPC codes


Grains Paddy rice; Wheat; Cereal grains nec. CPC 0111-0116, 0119 Crops Vegetables, fruit, nuts; Oil seeds; Sugar

cane, sugar beet; Plant-based fibers; Crops nec

CPC 012-017, 019

Animal Products Bovine cattle, sheep and goats, horses; Animal products nec; Raw milk

CPC 0211-0212, 0291-0295, 0297-0299

Processed Foods Bovine meat products; Meat products nec; Vegetable oils and fats; Dairy products; Processed rice; Sugar; Food products nec; Beverages and tobacco products

CPC 2111-2114, 216-218, 22-25

The results of the modelling indicate that liberalisation would globally increase agricultural and food output in the Mercosur region, while output would decrease in the EU. The potential outer bound magnitudes of the changes in output are indicated by the modelling results for full liberalisation given in table 8.2. Lesser degrees of liberalisation, including the introduction or revision of tariff rate quotas, would have smaller effects but generally in the same direction.

Table 8.2: Changes in agricultural and processed food output, perfect competition model, full liberalisation. Result of the CETM (percentage changes).

Argentina Brazil Paraguay Uruguay EU15 EU10 Grains 11.3 15.1 10.8 8.6 -4.4 -1.5Other crops 1.7 0.4 -7.8 1.2 0.2 -0.4Animal Products 4.1 31.9 36.6 4.6 -3.5 -1.0Processed foods 6.1 46.6 72.9 17.1 -5.1 -2.7

Source: CETM

The output changes are associated with an overall increase in Mercosur agricultural exports to the EU and a decline in EU exports to Mercosur. The modelling estimates for full liberalisation are given in Table 8.3.

Table 8.3: Change in agricultural exports, full liberalisation. Result of the CETM (percentage change)

Argentina Brazil Paraguay Uruguay EU15 EU10 Grains 15.8 -26.1 -22.7 25.9 -2.8 -0.2Other crops 0.8 -33.2 -36.1 -3.6 1.2 1.0 Animal Products -17.3 -54.9 -75.5 -35.7 2.1 -2.3Processed foods 40.5 339.9 608.7 131.2 0.5 -5.3

Source: CETM

The large percentage changes indicated for animal products are not expected to be significant in practice, since this sub-sector covers primarily live animals, whose trade volume is small, and more strongly influenced by sanitary measures than by tariffs. The rise in output of animal products is more significant, since the rearing of live animals is part of the production of the meats that are traded under the heading of processed foods.

The model indicates a fall in exports of grains and other crops for most of the Mercosur countries, but a small rise in output except for the other crops group in Paraguay. This is


associated with the use of grains and other crops as inputs to the animal products and processed food groups, and differences in competitiveness between the Mercosur counties. In the EU a high proportion of grains are fed to cattle, while in Mercosur grass and grass forage currently form a higher proportion of beef cattle diets. An increase in animal product exports to the EU, and a corresponding fall in EU livestock production, will therefore see a fall in EU demand for grains fed to livestock. This is likely to account for the projected decrease of grains output in the EU, as well as an increase of wheat imports from Mercosur (primarily from Argentina).

In the other crops category the main EU exports to Mercosur are wines, spirits, malt and olive oil. The model result tends to indicate that expansion of those products will compensate a cut in sugar beet production.

The model results for employment are similar in magnitude to those for output, with large rises in the animal products sector in Brazil and Paraguay (Table 8.4). This is likely to occur mainly in poultry farming and cattle breeding. Employment in the grains sector is also estimated to grow significantly, varying between countries. This may be the result of increasing wheat production for export to the EU, and increasing maize production for animal feeding. Employment in the processed food industry is projected to increase mainly in Brazil and Paraguay.

Table 8.4: Employment Effects, full liberalisation. Result of the CETM (% change)

Argentina Brazil Paraguay Uruguay EU15 EU10 Grains 14.2 19.1 14.2 11.1 -4.8 -1.9Crops 3.6 3.3 -6.1 3.0 -0.1 -0.7Animal Products 6.3 37.6 43.3 6.7 -3.9 -1.4Processed foods 5.9 47.4 76.7 17.1 -5.2 -2.6

Source: CETM

For the EU the model projections for employment in the agricultural and food sector follows an opposite trend. Employment is projected to decrease in all agricultural sectors, somewhat more in the EU-15 than the EU-10. Contraction is seen in particular in the grains sector (probably the impact of higher wheat exports from Mercosur and lower animal production). Employment in animal products is projected to fall as a result of increased meat imports from Mercosur.

8.5. Case study findings

Following consultation on the inception report for the SIA study, two agricultural products were selected for detailed examination in the Agriculture SIA because of their potentially significant sustainability impacts: ethanol and beef. Ethanol is of particular interest because of its contribution to replacing fossil fuels in response to climate change, and the potential for increased EU imports from Mercosur through the trade agreement. Beef is a major export product of Mercosur countries, whose production has potentially significant environmental and social effects.


Concerns have been expressed that particularly significant impacts may be experienced in the two most recent EU Member States, Bulgaria and Romania. Potential impacts in these two countries have therefore been examined in Annex 4.

The findings of these three case studies are summarised below.

Ethanol case study

Economic impact

A significant increase in exports of ethanol from Mercosur to the EU is expected to occur as a result of the proposed trade agreement. Much of this will contribute to satisfying growing EU demand. However, the reduction of EU tariffs may be sufficient to reduce the price of Mercosur ethanol below the cost of EU production. This could result in a significant decline in EU ethanol production.

Social impact

Mixed social effects are expected in Mercosur, particularly in Brazil, varying between the short term and the longer term. In the short term a rise in employment in the sector is expected, with some improvement in wages and working conditions in order to attract workers. However, an increase in labour costs may increase incentives for mechanisation, resulting in higher skill levels in the longer term, and lower employment. Current labour productivity is low, with a considerable increase available from mechanisation. Employment in the sector may therefore decline in the longer term, despite increased production, but with higher wages and better conditions.

The increase in production will call for an increase in land area, which is expected to come from small farms producing other crops. This may result in a loss of livelihoods for small scale farmers. Brazilian government policy already includes measures to address the problems of small scale farming. It will become increasingly important to ensure that these are effective, in order to prevent greater rural poverty and an increase in migration to the cities. The introduction of a certification system which includes both social and environmental sustainability criteria could add further impetus for such measures.

The case study indicates potential for a significant decline of ethanol production in Europe. Adverse impacts are not expected to be large, but could be significant in sugar beet growing areas during the transitional period.

Environmental impact

The case study compares the greenhouse gas (GHG) emissions and energy balances of the different types of biofuels produced in Mercosur and the EU. It concludes that, even when allowing for transportation effects, sugarcane ethanol from Mercosur has a better energy balance than EU biofuels and also produces lower direct GHG emissions in its production. There will therefore be a significant beneficial impact on climate change from reducing EU trade barriers.

The expected expansion of sugar cane production in Mercosur may have a spillover effect on deforestation in the Amazon, with a significant adverse impact on biodiversity. The


introduction of an effective certification system addressing biodiversity issues may therefore be an important mitigating action.

Biodiversity impacts in Europe are not expected to be significant.

There may be adverse impacts on air pollution and water pollution in Mercosur in areas where sugarcane production rises, which may be locally significant in the absence of effective regulation. A certification system for biofuel imports may help to address this issue. In Europe the pollution impact would be beneficial, but as regulation is relatively strong this is not expected to be significant.

Beef case study

Economic impact

The raising of beef cattle and meat processing are expected to increase significantly in Mercosur, mainly in Brazil, with a siginficant increase in Paraguay. Production would decline in the EU, more in the EU15 than in the accession countries.

Social impact

Beef cattle for export from Mercosur are mainly raised in large farms, where most of the new employment is expected to occur. The study identifies serious concerns over the use of forced labour for cattle rasing in Brazil, which the Brazilian government is endeavouring to combat. The trade agreement would exacerbate the problem. Without effective mitigation, the number of forced labourers can be expected to increase, without any improvement in wages or working conditions above those of the existing workforce. Disputes over land tenure are also expected to increase, with further adverse social impacts for small scale farmers who lose their land. The action being taken by the Brazilian government is therefore critical in mitigating potentially serious adverse social effects.

Employment in the sector in the EU is expected to contract more in the EU15 than in new accession countries. Impacts will be localised, but could be significant in some rural areas of countries such as France, Spain and Ireland, with negative spillover effects on rural development.


Expansion of cattle in Brazil will require new pasture, much of which is likely to be taken from available lands in the Amazon and the Cerrado. In the Amazon, land has traditionally been made available by deforestation. In the Cerrado, intensification is expected to lead to the cultivation of more natural pasture in seeded grasslands. Stronger measures of public control will be necessary in both regions to avoid potentially signficant adverse impacts on biodiversity.

In Argentina the expected production increase is smaller, and environmental impacts are expected to be localised. The only region with potential for development of beef production is the semi-arid central area, where water is scarce, and significant local impacts could occur. The construction of infrastructure for export production could also have negative environmental impacts, depending on the effectiveness of regulatory controls.


In the EU, beef production is expected to concentrate in regions where the costs of production are lowest, while agriculture in other regions will tend to move to different products. Both positive and negative environmental impacts could occur. Some land may go out of production, allowing a rise in semi-natural habitat. However, farmers in regions where beef production declines would expand their use of other fertilisers to compensate for reduced fertilisation by cattle. With relatively strong regulation, the potentially adverse environmental effects are not expected to be large.

The overall impact on greenhouse gas emissions is expected to be neutral, except for the adverse effect of increased international transport and a small increase in overall production.

Bulgaria and Romania case study

Economic impact

The continued high reliance of the Bulgarian and Romanian economies on agro-food activities will translate into lower gains for manufactures and services compared with other EU countries, as they are overall less competitive in these sectors relative to their more developed (Western) EU counterparts. Hence, in terms of economic impacts, further trade liberalisation between EU and Mercosur is likely to negatively affect to a greater extent agriculture and food processing in Romania and Bulgaria, and to limit the potentially positive impact (in terms of increased output through increased exports) on their manufactures and services. From a dynamic point of view, manufactures and services will play an increasing role in Bulgaria and Romania, as their economies grow at an accelerated pace, are better integrated into EU markets, and benefit from increased investments. This will render them more able to capitalise on and benefit from further EU-Mercosur trade liberalisation measures.

Social impact

Employment effects will be closely correlated to output impacts. Since the agricultural and food sectors in Romania and Bulgaria may be negatively affected by further EU-Mercosur trade liberalisation and since they tend to display higher unskilled to skilled labour ratios than manufactures and services, employment perspectives for unskilled labour are likely to deteriorate. Once again, net impacts on employment and real wages will mostly depend on the dynamics of economic structures, and the extent to which the labour made redundant by the highly labour-intensive Romanian and Bulgarian agricultural sectors is effectively absorbed through growth in services and manufactures.


The net impact of greater trade flows between EU and Mercosur on the environment in Romania and Bulgaria will largely depend on the type of environmental problem under investigation. If agro-food output in Romania and Bulgaria is hypothesised to contract (though to a small extent) from EU-Mercosur trade liberalisation, this may then result in agro-food activities exerting less scale-wise pressure on the environment. However, farm income losses incurred from losing EU export markets to Mercosur producers will translate in less funds being available to farmers to protect their environment. Overall, potential environmental threats and benefits, against the background of further EU-Mercosur trade


liberalisation, are difficult to assess mainly due to the complexity of the agriculture-environment linkages and the localised and contextualised nature of their impacts. Net impacts will ultimately depend on the appropriateness of regulatory measures adopted and the ability of the institutional framework to identify beforehand any potential direct and indirect environmental threats resulting from the trade policy measure. Changes in the energy intensity of output and in the carbon intensity of the respective energy will depend on the extent to which manufactures as opposed to services are favoured to agricultural activities. In other words, since services tend to be overall less energy and carbon intensive (excepting transport heavily relying on oil) than industry, higher EU-Mercosur trade liberalisation-induced growth in the former over the latter may lead to less energy consumption and reduced GHG emissions in Romania and Bulgaria. In addition, from a dynamic point of view the transfer of clean technology from the old EU countries coupled with higher imports of for example bio-fuel from Brazilian (sugar cane) crops favoured under an EU-Mercosur trade agreement may improve the perspectives in developing a lower-carbon transport sector in the two new EU member states.

8.6. Sustainability impacts in the EU

Economic indicators

Real income

The CETM model indicates a total static welfare gain of 0.1% GDP in both the EU15 and the EU10 for full liberalisation, of which about a third would come from goods liberalisation (agriculture and manufacturing combined). The impact is positive, as expected from conventional trade theory, but not significant in terms of normal growth rates. The principal long term welfare impact would come from the dynamic effects of switching resources to more competitive sectors of the economy, with a decline in the agriculture sector.

Increased imports from the Mercosur region will compete with domestic products, reducing prices to EU producers and processors. This impact is likely to be felt most at the lower, commodity, end of the market. In many parts of the EU there are important cultural associations between food and drink and geographical identity, with consumer demand placing a premium on products from particular production systems and locations, often favouring traditional products from their own territories. While the strength of these associations has been declining at the undifferentiated commodity end of the market, it is growing at the top of the market. This suggests that increased imports from the Mercosur region would reduce EU prices for commodity products but this would be partly offset by increasing consumption of products that are differentiated by their EU provenance and production systems.

In products most likely to be imported in volume from the Mercosur region, competition is likely to be felt most keenly for sugar and chicken, with EU producers having greater potential for securing markets for domestically produced beef and fruit. While EU chicken producers would benefit from lower wheat prices arising from greater imports, this is unlikely to offset the competitive advantage (particularly lower labour costs) of chicken producers in the Mercosur region. A decline in EU chicken production would therefore reduce demand for grain production, particularly wheat, resulting in lower domestic prices.


The market for apples and pears is already segmented by the different seasons of production (southern and northern hemisphere) but improving storage techniques are prolonging the seasons and increasing competition.

One product area for which competitive displacement of EU agricultural products is not likely to occur is for increased ethanol and biodiesel imports, derived from sugar cane and oilseeds grown in the Mercosur region. The EU Biofuels Strategy54 seeks to increase consumption of transport fuels produced from renewable feed stocks, reducing consumption of fossil fuels. While the EU targets for biofuels present an opportunity for EU producers, it is widely anticipated that the majority of these targets will be met, at least initially, by imports from overseas feed stocks.

The modelling results are broadly in line with these expectations. They indicate that Mercosur agricultural products will tend to replace EU products, particularly for processed foods including meats, and ethanol from Mercosur cane sugar. EU grain output is also projected to decline. The estimated decline is not large (up to 5% for full liberalisation and less for a more realistic agreement), but could be significant in local areas where production of the affected goods is high and competitiveness is low.

Although the overall effect for EU agricultural production is adverse, liberalisation of the Mercosur market would be beneficial for some EU products such as wine, olive oil and spirits. All these products are likely to enter at the top of the consumer market. If this is associated with stronger protection of geographical indications, European wine producers are expected to gain further market share in Mercosur.

Employment

EU employment in the farm and agricultural processing sectors will follow the output changes, and again may be significant in local areas. Employment in primary commodity production in the sugar, wheat, chicken, beef and fruit sectors is likely to fall, particularly in the areas of economically marginal production such as the uplands and mountainous regions where production is less competitive. These agriculturally marginal areas are those most likely to receive rural development support from the CAP for economic adaptation and the maintenance of high nature value areas which will tend to reduce the impact of trade competition. Sugar beet presents something of a special case since its production is highly concentrated in regions that are relatively agriculturally productive, usually in regions with strong economies. While these areas are less likely to receive favoured status for rural development support, it is likely that declining agricultural employment will be absorbed by other economic sectors.

It is likely that opportunities for re-employment would be lower in the EU-10 compared to the EU-15. The CETM model results suggest that the EU-15 will be somewhat more affected than the EU-10, but qualitative considerations suggest that some of the new member states are more vulnerable for some of the affected products. In Europe as a whole domestic markets are likely to react to provide increased opportunities for employment in the food processing sectors producing higher value products sold with strong geographical indications. This will present opportunities for increased employment in food and drink processing and distribution.

54 February 2006, implementing the EU Biofuels Directive of May 2003.


The overall effect on agricultural employment in the EU-15 is expected to be a small addition to the long term trend towards lower agricultural employment. For the new member states the employment opportunities associated with accession will be somewhat reduced by greater competition from Mercosur.


The reduced competitiveness of EU agriculture is expected to reduce land prices, and hence a fall in its capital value. The effect is not expected to be significant in comparison with the larger changes occurring through CAP reforms. Some processing facilities for products such as beef and sugar may suffer from closures and a decrease in capital stock. There will be some compensatory effects for products benefiting from greater exports (wine, olive oil and spirits), but the overall effect of the trade agreement is expected to be a transfer of investment out of agriculture into more competitive economic sectors. The overall effect for the EU economy as a whole is expected to be beneficial.

Social indicators

Poverty

The economic impacts on employment will have corresponding social effects, with a possibility of short term adverse effects on poverty in localised areas. Areas depending strongly on meat, cereal and sugar are the most likely to be affected, particularly in the agriculturally marginal areas and in the EU-10. For beef production, France, Spain and Ireland are expected to be among the most affected. In the new member states, and to some extent in the EU-15, existing problems of unemployment and poverty could increase in the short term, depending on social policies at national level. The additional difficulties could be significant in accession countries where social policies have been dismantled and new systems are not yet fully in place.


Imports from Mercosur will continue to comply with EU sanitary and phytosanitary standards (SPS), and no adverse health impact is expected from increased imports. Concerns that have been raised regarding plant diseases and animal welfare are discussed below in relation to environmental quality.

No significant impacts on education are expected in the EU.

Equity

The adverse employment effects are likely to be felt by the least competitive farmers and processing facilities. Some rural areas will be negatively affected, and small farms may be more affected than large ones. As already noted, producers involved in undifferentiated commodity production and in agriculturally marginal areas will be most affected, increasing geographic disequilibrium. More competitive and entrepreneurial farmers will be in a stronger position to decrease their production costs, while less competitive ones will experience greater difficulties. Income inequalities among EU farmers could therefore increase in the short term. Rural development support to maintain traditional agricultural systems, where this is needed to maintain cultural landscapes and nature value, and to


encourage diversification into new non-agricultural activitives would reduce negative impacts. The longer term impact on income distribution is not expected to be significant.

No significant gender impacts are anticipated.


Natural resource stocks

Impacts on the stocks of water and soil will depend on the changes to agricultural production systems. Reductions in the intensity of production or complete agricultural abandonment, which is likely to occur in the agriculturally marginal areas (for instance uplands and mountainous regions) and in value adding production systems (such as organic), will decrease pressure on natural resources. In these areas water supplies and quality could be ameliorated and soil erosion decline. On the other hand, the increased competition from Mercosur imports may stimulate higher intensity of production, which could place greater demand on ground and river water and on soils. The EU Water Framework Directive and the EU Action Plan for Soils will both result in policy measures to address threats to water and soils.

The overall impact of the trade agreement is expected to be less agricultural production in the EU, and decreased pressure on water supply, with a beneficial effect in those areas where the resource is scarce. Loss of competitiveness may encourage greater intensity of production in order to increase yield, but the overall effect on soil and water resources is expected to be small and beneficial.


The factors outlined above on natural resource stock also apply to environmental quality. Policy interventions through Pillar II of the CAP (particularly the agri-environment programmes) will seek to address any threats to environmental quality. The quality of water may improve in some areas through reduced use of agrochemicals, although in others there may be adverse pollution impacts associated with a decline in livestock farming and an increase in use of chemical fertilisers. The overall effect is not expected to be significant.

Concerns have been expressed that increased imports of Mercosur produce may increase the likelihood of plant diseases being introduced, particularly for citrus fruits55. EU phytosanitary standards have been designed to prevent impacts of this nature. The EC maintains regular surveillance of exporting countries’ compliance with these standards, and so it is not anticipated that the EU-Mercosur trade agreement would entail a significant increase in risk.

Concerns have also been expressed in respect of animal welfare, in that standards which relate to methods of production rather than to the characteristics of a product are not permissible under normal WTO requirements. Imports from Mercosur countries would be produced under their own standards rather than EU standards. It has been suggested that EU producers could become uncompetitive, through the higher costs of producing to high standards56, or that there would be an economic incentive for the EU to relax its animal welfare standards57.

55 EUCOFEL (2007) 56 van Horne and Bondt (2003) 57 CIWF (2000), EAW (2000)


During the WTO negotiations the EU has proposed that compensation should be permissible for the additional costs of meeting legal standards58. Any such arrangement in the EU-Mercosur agreement would be a matter for negotiation, and would need to be WTO-compliant.

For the potential impact on climate change, the case study for ethanol concludes that increased imports of sugarcane ethanol from Mercosur will have a significantly beneficial impact on EU greenhouse gas emissions. For beef production, the case study indicates that the combined impact in EU and Mercosur on greenhouse gas emissions will be neutral, except for the adverse effect of increased international transport and a small increase in overall production. For other agricultural products the impact of higher production in Mercosur and lower production in the EU is also expected to be neutral.

The modelling results support this. For full liberalisation of all goods and services they indicate that the production changes would reduce CO2 emissions in the EU and Mercosur combined (including Venezuela) by less than 0.1%. This does not include emissions of methane, ammonia and nitrogen oxides, which are significant for cattle raising and other agricultural activities. Here too it is expected that an increase in Mercosur will be approximately cancelled by a corresponding decrease in the EU.

An additional factor not allowed for is the effect of forest clearance on carbon sequestration. However, a greater impact on climate change is expected to come from the increase in carbon emissions arising from increased international transport. The CETM results for full liberalisation indicate a decline of about 0.1% of EU-Mercosur CO2 emissions from the re-allocation of production, and an increase in total global CO2 emissions of about 0.15% from the increased transport.

Biodiversity

Increased competitive pressure on EU agriculture, particularly on beef, chicken and cereal production, will tend to increase the specialisation of production systems, reducing diversity of habitats. Agriculture specialization is expected to increase, with a concentration of production in some sectors, and a possible small decline in agricultural biodiversity.

Agricultural abandonment could also reduce biodiversity of ‘semi-natural’ habitats such as hay meadows, but will provide opportunities for recolonisation of ‘climax’ vegetation. A move to less intensive production systems (such as organic) could increase biodiversity. Once again, policy interventions such as the CAP agri-environment schemes will be available to reduce negative impacts.

The overall fall in EU agricultural output is expected to result in an overall impact on biodiversity in the EU that is small but beneficial.

Process indicators

The agricultural component of the proposed EU-Mercosur trade agreement is judged to be highly consistent with principle 12 of the Rio Declaration, in promoting a supportive and open international economic system. There is however a potential conflict with Rio principle

58 CEC (2003)


8, for reducing and eliminating unsustainable patterns of consumption. Except in this area, the scenario is judged to be relatively neutral for the EU in respect of sustainable development principles.

In relation to consumption and production patterns, the scenario aims to accelerate economic growth in both the EU and Mercosur. To the extent to which it achieves this goal, it will add to the underlying processes which drive increasing consumption and associated wastes. Regulation in the EU is considered to be strong enough to prevent significant adverse impacts in the EU, but increased EU consumption will also have potential adverse impacts in Mercosur and globally. In order to achieve a sustainable balance between economic growth and environmental degradation, stronger global environmental regulation will be needed, along with stronger regulation in Mercosur. The EU-Mercosur trade liberalisation scenario adds incrementally to existing needs for stronger environmental regulation.


EU-Mercosur agricultural liberalisation is judged to be neutral in its influence on the EU’s institutional capacity for strategic sustainable development planning.

8.9. Sustainability impacts in Mercosur

Economic indicators

Real income

The CETM model indicates a static welfare gain from full liberalisation of agriculture and manufacturing combined of about 0.3% GDP in Argentina, 0.9% in Brazil, 1.2% in Uruguay and 6% in Paraguay. Over the expected ten year implementation period the estimated effect in Paraguay is significant, with a large contribution from agricultural liberalisation. The static welfare gains in the other Mercosur countries are small in comparison with normal growth rates. The principal long term welfare impact is likely to come from the dynamic effects of the trade agreement.

Output is expected to rise significantly for the agricultural sector as a whole, with little adverse impact from reduced barriers to EU imports. Mercosur production is particularly competitive for meat, cereals, sugar, ethanol and fruits, for which exports to the EU are expected to increase. Production in Mercosur is expected to expand in these sectors, allowing the development of agriculture and of the food industry. Exports of soya products to the EU may fall in response to a fall in EU beef and chicken production.

It is important to consider the impacts that increased exports could have on domestic supply of basic food commodities in Mercosur. Recent experience in Argentina indicates that an increase in beef exports led to severe restrictions in domestic supply and rising prices, followed by political agreement to restrict exports. More generally, rising Mercosur exports have been accompanied by rising production, without which they could become politically unsustainable.

The model projections for full liberalisation incidate a rise in output for grains of the order of 10% for all the Mercosur countries. For animal products, which includes cattle rearing, the projected increase is significant in Argentina and Uruguay at around 4%, and considerably


higher in Brazil and Paraguay at over 30%. Similar but larger increases in production are projected for meat and other processed foods, of nearly 50% in Brazil and over 70% in Paraguay. A significant increase is also projected for fisheries in Argentina and Uruguay, at around 5%. These modelling estimates are for full liberalisation rather than the more limited agreement likely to be reached, and are strongly dependent on the assumptions made in the model. As reported above, agricultural output in Mercosur has been growing rapidly in recent years, with increasing exports to the EU and other countries. The sector is already highly competitive and is in the process of responding to market opportunities that already exist. The CGE model inherently assumes that the economy is currently in equilibrium, which it clearly is not. It is possible that production would not be able to respond to a further increase in incentives any more rapidly than it is responding to existing ones. Nonetheless, the model results give an indication of the possible magnitude of the effects that could occur over the ten year period in which an EU-Mercosur trade agreement would come into effect.

Employment

Employment in agriculture is expected to rise approximately in proportion to the output changes, as indicated by the modelling results. The model assumes fixed total employment, with the increase in agriculture coming from a decline in other sectors. In practice most of the increase is expected to come from the rural informal sector and the rural unemployed. This will apply for most of the extra employment in agricultural production and for some processing industry (sugar or ethanol for instance), with a smaller increase in urban areas for other processing and transport (including harbour services for the increased exports).

In Brazil and Paraguay, where the percentage increase in output is greatest, the recorded level of rural unemployment is below the national average59, reflecting the existing trend of rising production and its demand for extra labour. The additional output due to EU-Mercosur liberalisation will encourage a further decrease in umemployment. In Argentina and Uruguay rural unemployment is considerably higher than the national average. The additional demand for agricultural labour in these countries will help to address this problem.

As noted in the case study for ethanol, these effects may change in the longer term through increased incentives for mechanisation, resulting in higher skill levels and lower agricultural employment. The effect of the EU-Mercosur agreement would be an incremental addition to existing pressures in this direction.


The expected increase in agricultural output will stimulate additional investment in the sector. This is is expected to include new infrastructure and machinery as well as the acquisition of land. Total agricultural fixed capital should increase.

Social indicators

Poverty

To the extent that the increased employment in the sector comes from the pool of unemployed, it will have a beneficial impact on rural poverty, which is particularly high in

59 IARC (2006)


Paraguay and Brazil60. There may however be an adverse effect associated with the need for additional land. Land tenure is weak in many areas, particularly in Paraguay, where the overwhelming majority of peasants have no formal land titles. Informal farmers are likely to be displaced by the expansion of commercial farming. Depending on the labour productivity of the new commercial activities, the number of employment opportunties may not be sufficient for the number of people displaced, and the standard of living provided by formal employment may be lower than in informal farming. In Brazil in particular, some of the extra land is expected come from forest clearance, with loss of livelihoods for indigenous people.

For expanding production of sugar cane and ethanol, some of these potentially adverse impacts may be countered by the introduction of a certification scheme for ethanol imports into the EU.

The case study for beef has identified a potentially serious concern. Much of the employment in cattle raising is forced labour. The Brazilian government is endeavouring to combat the problem, but the trade agreement would exacerbate it. Without effective mitigation the number of forced labourers would increase, without any improvement in wages or working conditions above those of the existing workforce, and a significant decrease for the people affected. The case study also identifies a potential increase in disputes over land tenure, with further adverse impacts on poverty for small scale farmers who lose their land.

It is therefore concluded that liberalisation offers potential for a reduction in rural poverty throughout the region, but that there could instead be significant adverse effects in some areas in the absence of strengthened regulation.


The impact on poverty, positive or negative, can be expected to have a corresponding beneficial or adverse effect on health. Improved export performance should in principle help to strengthen Mercosur economies overall, which would help enable increased public finance and higher health expenditure. This is particularly the case in Paraguay, where the modelling results indicate a significant increase in overall welfare. In the other Mercosur countries the static welfare gains are too small to be significant in this respect. Dynamic effects offer greater potential in all the countries, but depend strongly on other aspects of government policy that interact with trade liberalisation.

Similar considerations apply to education, with potential for both positive and negative effects.

Equity

Expansion of production will lead to an increase of total farm income, but not necessarily to a reduction of income inequalities in the farm sector. Increased incentives for mechanisation may in the long term lead to higher skill levels in the sector and hence to reduced inequalities for those in employment. This would however be associated with a decline in agricultural employment. The overall impact would depend on increasing quantity and quality of employment in other sectors. In the absence of structural changes leading to higher skill levels overall, a decrease in inequality typically requires redistributive public policies.

60 IARC (2006)


The effects on poverty discussed above may, in the absence of effective mitigation, have significant adverse impacts on equity. Competition between farmers for new arable lands is expected to increase land prices, and also land conflicts in areas where land tenure is weak. Small scale farmers could be the losers of that process, including women. Adverse gender impacts may arise through the loss of traditional livelihoods and limited opportunities for women in the formal sector. Working conditions have to be watched with scrutiny. Forced labour in Brazil is already a problem in the bovine sector. Although the government is working to combat it, liberalisation could amplify this problem.

The problems for sugar cane production are smaller, but could be significant. Both sugar and ethanol are expected to develop in new regions where land is available, but where workers are not organised in trade-unions and may have difficulty in obtaining good working conditions. A certification scheme for EU ethanol imports, with appropriate social as well as environmental criteria, could help to address this.

More generally, agricultural export development on its own is not expected to reduce structural income inequalities in Mercosur.



Agricultural production is expected to rise significantly in all the Mercosur countries, placing pressure on both land a water. The modelling results indicate a significant rise in grain production in all the countries, with a large increase in meat production in Brazil and Paraguay. The animal products sector also rises significantly in Argentina and Uruguay. As discussed in the case studies for ethanol and beef, there are potentially significant adverse effects from both intensification and extensification.

In Argentina the projected increase in beef production is relatively small. Production is likely to be intensified, with less available land than in Brazil. Significant adverse impacts on water resources are expected to be restricted mainly to the semi-arid central area where water is scarce.

In Brazil the expansion of beef production is expected to have a direct impact on deforestation, while the expansion of sugarcane would have an indirect spillover effect by taking land from products which would move into forested areas. For sugarcane, certification of EU ethanol imports could help to address the problem. For beef and other products the expansion would add to existing long term pressures on forests which need to be addressed by a stronger regulatory regime.

Other potential impacts which may occur from increased production unless adequately regulated may include flooding, especially on the plains such as the Pampas (arising from disruption of soil hydrology), and soil erosion from cultivation of steep slopes.


In many of the areas where agricultural production would increase, such as the Cerrado, soils are relatively infertile. Conversion of these lands to arable cropping or intensive grassland


management would require application of artificial fertiliser and irrigation, both of which would have impacts on soil and water quality. Some adverse pollution impacts may occur in this and other areas where production rises, which may be locally significant in the absence of effective regulation. The use of agrochemicals potentially affects both water and soil pollution. A increase in poultry meat production could also have an impact on water contamination, depending on production methods. Effective regulation will be required in order to avoid locally significant impacts of this nature.

As discussed in the ethanol case study, the increased production of sugar cane for ethanol exports to the EU would have an overall beneficial impact on GHG emissions.

Biodiversity

Large areas of the Mercosur region are of global environmental significance, particularly the Amazon and Cerrado. Global attention is, understandably, focussed on the threats to the Amazon rainforest, the majority of which lies within the Mercosur region. Although timber logging has been the major driver for deforestation in the Amazon, subsequent conversion of land to soya bean production has ongoing impacts on biodiversity and enforces more permanent changes to soils and hydrology.

The Brazilian Cerrado is South America’s largest, and one of the world’s most biologically rich, areas of savannah. Conversion to monoculture crop production (particularly soya beans) and intensification of beef production is reducing the area of natural and semi-natural habitat, but there remain large areas of relatively undisturbed cerrado where coversion to soya bean production or cattle ranching would significantly reduce biodiversity.

The region includes extensive areas of wetland at the Deltas of the Orinoco, Parana and Tigre rivers. Conversion to plantation forestry is the main threat to biodiversity but once drained that land is suitable for cattle ranching and arable crop production.

In other areas such as the Pampas of Argentina, Uruguay and southern Brazil and the Brazilian sertão, centuries of extensive agriculture, particularly cattle ranching, have already replaced the climax natural vegetation with more open grassland. Conversion of grassland to soya bean and cereal production, particularly on the fertile soils of the Pampas has an impact, particularly on areas of pampas that retain diverse semi-natural vegetation.

The last ten years have seen the conversion of the majority of soya bean production to genetically modified (GM) varieties. Fears have been expressed about the impact that the transfer of novel genes from GM crops could have to natural organisms and systems. Perhaps because the soya bean is not closely related to any South American plants these fears have not yet been realised.

Any conversion of pristine habitats and natural resources to agricultural production, whether it be cattle ranching, sugar cane plantations or arable cropping, would have significant negative impacts. The increased intensification of the most agriculturally areas, such as the Parana plain and the Pampas, is likely to have fewer negative impacts but, in common with any such intensification of land use, issues of pollution, both difuse and point source, and reductions in soil quality, would need to be addressed.


As discussed above in relation to natural resource stocks, the projected expansion of beef production and sugarcane are both expected to have adverse impacts on deforestation in the Brazilian Amazon unless countered by effective mitigation. This would have adverse impacts on biodiversity. In the case of sugarcane, a certification system for EU ethanol imports could be an important mitigating measure.

There is the potential for environmental benefits arising from production of biofuels (principally from sugar cane and oilseeds) provided the systems of production and processing avoid the significant negative impacts outlined above.

The beef case study also identifies a potential adverse impact on biodiversity through production development in the Cerrado, where intensification is expected to lead to the cultivation of more natural pasture in seeded grasslands. Stronger measures of public control will be necessary in both regions to avoid potentially signficant adverse impacts.

Process indicators

As for the EU, the proposed trade agreement is judged to be highly consistent with principle 12 of the Rio Declaration, in promoting a supportive and open international economic system. There are however potential conflicts with the Rio principles of reducing and eliminating unsustainable patterns of consumption (principle 8) and enhancing technology transfer (principle 9). Except in these areas, the scenario is judged to be relatively neutral in respect of sustainable development principles.

In relation to consumption and production patterns, the scenario aims to accelerate economic growth in both the EU and Mercosur. To the extent to which it achieves this goal, it will add to the underlying processes which drive increasing consumption and associated wastes. Stronger environmental regulation will therefore be needed, to achieve a sustainable balance between economic growth and environmental degradation. The EU-Mercosur trade liberalisation scenario adds incrementally to this general need.

In relation to technology transfer, the scenario encourages a movement of capital into low added value agricultural production and out of higher added value industrial production. While some aspects of agricultural production have a high technology content, the overall effect may be to inhibit technology transfer rather than enhance it.


EU-Mercosur agricultural liberalisation is judged to be neutral in its influence on institutional capacity for strategic sustainable development planning.

8.10. Summary of sustainability impacts

The impacts discussed above are summarised in the following tables.

Table 8.5. Sustainable development impacts of agricultural liberalisation in the EU





shor

t te

rm

long

te

rm

Economic

Real income All Lower consumer prices

Long term gain depends on growth of other sectors

� �?

Employment Areas of economically marginal production. Sugar, wheat, chicken, beef, fruit.

Competition from Mercosur imports

Rural development support

� �

Fixed capital formation All Fall in land value and closure of facilities


� �?

Social Poverty Areas of economically

marginal production. Accession countries most vulnerable.

Fall in employment

Social policies � -


Equity Less competitive small farms

Fall in employment

Rural development support

� -

Environmental

Natural resources Water and soils Reduced production

Water Framework Directive and Action Plan for Soils

� �


Water and air pollution Mixed effects Reduced production, higher intensity

Regulatory framework - -

Plant diseases and animal welfare

Lower Mercosur standards

Border monitoring of EU standards and surveillance

- -

Greenhouse gas emissions

Global Benefit from Mercosur ethanol. Smaller adverse transport effects

Certification of biofuel production

��

Biodiversity All, mixed effects, benficial overall

Specialisation, abandonment.

Policy interventions in CAP reforms

� �

Process

SD principles Positive for international cooperation, otherwise neutral except for increased consumption

Acceleration of underlying processes

Global environmental regulation and support for Mercosur regulation

- �

SD strategies Neutral impact - -

Legend: � beneficial greater significant impact, � adverse greater significant impact, � beneficial lesser significant impact, � adverse lesser significant impact, �� beneficial and adverse impacts likely to be experienced according to context (may be lesser or greater as above), - non-significant impact compared with the base situation.


Table 8.6. Sustainable development impacts of agricultural liberalisation in Mercosur




shor

t te

rm

long

te

rm

Economic

Real income Paraguay, less significant in others

Export development, lower consumer prices


�(�) �?

Employment Greatest in Brazil and Paraguay. Meat, grains, ethanol production.

Export development Long term effect depends on overall structure of economy

� -

Fixed capital formation Land acquisition, machinery, infrastructure

Export development Long term gain depends on overall growth of economy

� �?

Social

Poverty Greatest in Brazil and Paraguay.

Demand for agricultural labour

Land tenure, forced labour

�� -

Health and education Paraguay beneficial, others mixed.

Poverty, government expenditure

Long term effect depends on overall growth of economy

�� -

Equity Mixed effects, potentially adverse for women

Land conflicts, mechanisation

Employment in other sectors, redistributive policies

�� -

Environmental

Natural resources Greatest in Brazil and Paraguay for land. Argentina for water

Increased agricultural production

Regulatory regimes, ethanol certification

� �


Water and air pollution All Increased production, agrochemicals

Production methods, regulatory framework

� �

Greenhouse Gas emissions

Global. See impacts for EU

� �

Biodiversity Greatest in Brazil, Amazon and Cerrado

Deforestation and monocultures for increased production

Regulatory regimes, ethanol certification

� �

Process

SD principles Positive for international cooperation, adverse for consumption and production and for technology transfer, otherwise neutral.

Acceleration of underlying processes. Capital movement out of higher technology industries

Environmental regulation. Development planning

- �

SD strategies Neutral impact - -

Legend: � beneficial greater significant impact, � adverse greater significant impact, � beneficial lesser significant impact, � adverse lesser significant impact, �� beneficial and adverse impacts likely to be experienced according to context (may be lesser or greater as above), - non-significant impact compared with the base situation.

Greater and lesser significance are defined by the SIA methodology as: • lesser significant impact – marginally significant to the negotiation decision, and if

negative, a potential candidate for mitigation


• greater significant impact – significant to the negotiation decision, and if negative,merits serious consideration for mitigation.


9. IMPACT ASSESSMENT: SERVICES

9.1. Services trade between the EU and Mercosur

The services sector accounts for a large share of GDP in both developed and developing countries, including Mercosur (Table 9.1). The performance of the services sector is an important contributor to economic growth. The availability of efficient financial services, for example, has been shown to be a key input to economic advancement.61 Infrastructural services are also an essential factor for rapid economic growth. 62

Table 9.1: Share of Services Sector in GDP (%)

Country\Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Mercosur 58.2 60.0 60.3 60.5 63.1 63.3 60.6 56.9 53.6 53.0 Argentina 65.8 65.1 64.8 65.3 66.9 66.9 68.1 56.8 54.3 54.0

Brazil 54.3 62.3 62.4 62.8 65.3 64.7 53.9 53.3 50.0 49.6 Paraguay 49.3 48.2 48.9 48.8 52.1 53.5 51.1 51.3 48.5 48.5 Uruguay 63.6 64.5 65.0 65.3 68.3 68.1 69.2 66.1 61.8 60.0

Source: World Development Indicators (Edition: April 2006)

Barriers to services trade are typically those defined in GATS Article XVI:

• limitations on the number of service suppliers;• limitations on the value of service transactions or assets;• limitations on the number of service operations or quantity of output;• limitations on the number of people employed in a particular service;• measures which restrict the types of organisation that may supply a service;• limitations on the participation of foreign capital, in terms of a limit on foreign

shareholding or the total value of individual or aggregate foreign investment.

The further liberalisation scenario assumes a significant reduction of barriers in GATS mode 1 (cross-border trade), mode 2 (consumption abroad), mode 3 (commercial presence) and mode 4 (movement of people). The liberalisation assumed for mode 4 is limited to temporary employment of professional staff. Liberalisation under mode 3 includes the right of establishment for foreign direct investment (FDI) in service delivery. The reduction of these barriers will influence trade and economic performance through three main effects:

• Allocative efficiency: when a regulatory change allows foreign firms with superiortechnology and lower costs and prices to supply the domestic market;

• Dynamic efficiency: when the removal of barriers raises the level of competition andstimulates innovation within the services sector;

• Economic performance: the contribution of stronger service provision to theperformance of other sectors of the economy.

The first two effects will lower prices for services, and have benefits in the form of lower consumer prices and lower business operation costs. This in turn would enhance service provision to other sectors of the economy, producing further benefits.

61 See Jalilian and Kirkpatrick (2005). 62 World Bank (2004), Jalilian, Kirkpatrick, Parker (2006)


Liberalisation within the EU-Mercosur agreement is expected to lead greater competition from EU providers in Mercosur, particularly in banking, insurance, telecommunications, computer and related services, distribution services, environmental services and construction and engineering services. Exports of services from Mercosur to the EU are weak, and it has expressed its major offensive interest in Mode 463.

9.2. Model results

Modelling the impact of trade liberalisation in the services sector is difficult and the results of modelling studies need to be interpreted cautiously. The nature of liberalisation in services is fundamentally different to liberalisation in goods. In the latter case, the discussion centres on changes in the level of effective trade barriers expressed in quantitative terms. In the case of services, liberalisation is mainly about qualitative measures, such as regulation changes, which have to converted to quantitative equivalents in order to be modelled. Second, most services are consumed at the point of production, which means that trade in services is closely linked to movement of capital and labour.64 Trade liberalisation in services often therefore raises issues of national economic and social policy and concerns about policy autonomy.

Most global CGE trade liberalisation models estimate large economic welfare gains from services liberalisation. For example, Hertel and Keeney (2006) argue that welfare gains within a static and constant returns to scale framework double if trade in services is liberalised (and more than triple if trade facilitation is additionally included). This conclusion tends to be confirmed by empirical evidence for developed countries, while the evidence on the effects on services liberalisation in developing countries is more mixed. Financial sector liberalisation has been linked to increased financial instability; utility sector liberalisation has sometimes been accompanied by increased market concentration and higher prices for consumers; liberalisation of environmental services has raised issues of national regulatory capacity and autonomy65; and liberalisation of distribution services has been associated with job losses and social unrest66.

The modelling study predicts that for full liberalisation, the liberalisation of Mode 1 services would account for about 8% of the real income gains in Mercosur (Table 9.2).

Table 9.2: Decomposition of Real Income Effects, (Millions of US$) Total gain

of which from Goods

liberalisation

of which from Service

Liberalization

of which from Trade

Facilitation Argentina 1 255 411 138 705 Brazil 6 883 4 510 465 1 908 Paraguay 643 502 12 129 Uruguay 369 272 21 76 Total Mercosur 9150 5695 636 2818

EU15 3 700 1 306 558 1 836 EU10 201 39 18 144 Total European Union 3 901 1 345 576 1 980


63 Valladao and Guerrieri (2006) 64 Stiglitz and Charlton (2006) 65 George, Kirkpatrick and Scrieciu (2006) 66 WTO (2002)


The modest gain in static comparative economic welfare is associated with changes in sectoral output as shown in Table 9.3, with negative impacts predicted for financial services and business services in all Mercosur countries. The retail and wholesale services sector is also projected to be adversely affected by trade liberalisation in Argentina and Paraguay. The large fall in domestic output projected for finance and business services in Paraguay is associated with a larger increase in static economic welfare than in the other Mercosur countries.

Table 9.3: Changes in Services Output, Mercosur (percentage change) Argentina Brazil Paraguay Uruguay

Wholesale, Retail -0.4 0.7 -2.7 0.7 Communications 1.1 -0.2 1.3 -2.5Transport Services 0.8 0.7 0.1 -3.2Finance -2.1 -1.4 -23.1 -0.6Business Services -1.0 -1.2 -12.5 -2.0Other Services 0.2 0.3 1.5 0.7Source: Model simulations

The changes in output shown in Table 9.3. are reflected in changes in employment (Table 9.4).

Table 9.4: Employment Effect, % Argentina Brazil Paraguay Uruguay

wholesale, retail -0.7 0.9 -0.6 0.6 communications 0.1 -0.5 0.1 6.4 transport services 0.5 0.9 0.8 -3.2finance -2.3 -1.3 -23.6 -0.8business services -1.3 -0.7 -11.5 -2.2other services 0.0 0.6 0.8 0.6

Other CGE studies have attempted to model the liberalisation of all four modes of service delivery, and indicate larger welfare gains. However, the level of uncertainty is high. For example, Hoekman and Konan point out that no reliable information is available for many of the key parameters, and that no comparable cross-country empirical analyses have been undertaken to give reliable estimates of tariff equivalents for the actual trade barriers67. In view of the large error margins for any computational work of this nature, they go no further than to observe that the results suggest that the economic impact of services liberalisation may be significant, beyond the small gains or losses in static comparative welfare arising from tariff elimination for merchandise trade. They conclude that regional or bilateral agreements on services trade can give some gains beyond those available from unilateral liberalisation and domestic reforms, but that these should be pursued multilaterally through the WTO.

Rutherford, Tarr and Shepotylo (2006) have used a CGE model to analyse the potential effects of Russia’s accession to the WTO with special attention to the liberalisation of barriers against foreign direct investment in services. Their model incorporates all 55,000 households from the Russian Household Budget Survey, and also includes endogenous productivity effects from liberalisation of import barriers against service delivery and FDI. The results strongly support the view that Russia’s own liberalisation is more important than improvements in market access to other countries. However, the authors highlight that the

67 Hoekman and Konan (1999)


analysis did not account for the transition costs associated with such trade reforms, and acknowledge that the process of adjustment is likely to result in losses for many households.

9.3. Dynamic effects of services liberalisation

Despite the high levels of uncertainty inherent in modelling studies of services liberalisation, increased openness to international trade in services does offer large potential benefits through dynamic effects on overall economic performance. These potential benefits need to be judged against other policy measures which may be necessary in order to stimulate development of a modern domestic service sector in competition with global suppliers. Service sector liberalisation is in general highly consistent with the EU’s Lisbon Strategy for economic development68. In Mercosur countries the potential long term gains are unlikely to be delivered by trade liberalisation alone, and will be strongly dependent on the development of complementary development policies.

Arnold et. al. (2006) have undertaken an empirical analysis of the impact of services liberalisation in the Czech Republic on the productivity of downstream manufacturing industries. Opening services sectors to foreign investors was one of a range of far reaching reforms of services industries during the 1990s. The results suggest a positive association between services liberalisation and manufacturing productivity. The authors conclude that services policy contributes significantly to the productivity of manufacturing firms relying on services inputs, and that there seems to be evidence that opening services sectors to foreign providers can be an important component of the necessary measures.

Most of the potential benefits of modernising services are expected to accrue through domestic reforms, with further potential benefits from multilateral services liberalisation. The gains are likely to be strongly dependent on country-specific aspects of the relationships between particular types of service and other sectors of the economy. This is particularly so for those services which provide a platform for development of other parts of the economy, such financial and telecommunication services. Mattoo et al (2001) have undertaken a cross-country econometric analysis of the relationship between growth rates and trade openness in these two service sectors. They find a strong correlation for financial services, and although the link is less strong for telecommunications, the results suggest that countries with fully open telecommunications and financial services sectors grow up to 1.5% a year faster than other countries. As with the other studies, the results must be used with caution. They give no indication of which effect, if either, is the cause of the other. Nor do they give information on the potential adverse effects on growth if liberalisation is undertaken inappropriately. These issues are discussed below for individual services sub-sectors.

9.4. Impacts in individual sub-sectors

Business services (including professional, computer and electronic services)

Professional services tend to be fairly highly regulated, including legal, accountancy, architectural, urban planning, engineering, and scientific and technical consulting. Significant market entry barriers are applied in the form of residency requirements or qualification requirements, either by state regulation or through self-regulating professional bodies, in some

68 Commission of the European Communities (2005)


cases for consumer protection69. In general, professional qualifications obtained in Mercosur countries are less acceptable in the EU than vice versa. The EU is therefore likely to gain economically from employment of professional staff in Mercosur, with a corresponding decrease of professional employment in Mercosur. The effect is likely to be small however, since Mercosur professionals can charge lower fees and have greater experience of the local business environment.

Other business services include computer and electronic services, research and development, real estate, management consulting, technical testing and analysis, and services incidental to specific industries. Many of these services are less highly regulated. Services that can be provided electronically provide significant opportunities for Mercosur countries to export services to the EU and to each other, with a language advantage for provision to Spain and Portugal. Further liberalisation by the EU would provide economic gains both in the EU and Mercosur countries.

Communication services

Communications services, particularly telecommunications, play an increasingly important role in enhancing business competitiveness in Mercosur as well as in the EU. As suggested by the Mattoo et al (2001) study on growth rates, improving communications may make a major contribution to Mercosur economic development. However, the relatively weak statistical correlation noted in that study may reflect adverse effects such as noted in a World Bank review of the sector70. When India liberalised its local telecommunications market in the mid-1990s, ineffective regulation created conflicts over interconnection and licensing terms, delayed network expansion, and adversely affected private investment. These difficulties have now been overcome, and the sector is growing strongly. Strong growth has also occurred in China, which maintained its state monopoly, but with an ambitious public investment program that led to a more than tenfold expansion of the telecommunications network.

In those Mercosur countries that have not already modernised their telecommunications services, significant gains are available, either though liberalisation or public investment. The studies suggest that if the sector is liberalised, effective regulation is a key factor in achieving the potential benefits. Further efficiency gains may be available from regulatory convergence with the EU. However, careful management would be needed to ensure that the benefits outweigh the potential negotiation, transition and compliance costs of convergence71.

Construction and related engineering services

Construction and civil engineering are essential components of many aspects of development, and can help to generate large economic benefits. In this sub-sector the potential static welfare gains from complete liberalisation may be greater in the EU than in Mercosur, through increased mobility of Mercosur workers to the EU. However, the scenario for mode 4 liberalisation is restricted primarily to professional staff, and so the gains to the EU would come mainly from the sale of services to Mercosur. Gains in Mercosur would come largely from productivity improvements or reduced rents. The sector is however one in which Brazil and Argentina already have highly experienced firms using modern techniques, and so the

69 WTO (2000) 70 Hodge (2002) 71 Müller-Jentsch (2005)


gains may not be large. Relaxed entry requirements may result in a small loss of employment of Mercosur professionals, but salary differentials would limit this effect.

Distribution services

The scenario for services would expand the ability of EU distribution companies to establish outlets in Mercosur, where their technological capability is likely to give them a competitive advantage over local distributors. The EU would gain economically from the return on investment, while Mercosur would experience welfare gains from increased economic efficiency.

Most of the increase in efficiency in Mercosur is likely to come from reduced employment in the industry. The number of small traders can be expected to decline, with a smaller number of jobs becoming available in new outlets. The welfare gain will come mainly from lower consumer prices, particularly for higher income urban communities. Beneficial and adverse impacts have been observed in a study of the actual effects of retail services liberalisation in Thailand, where they have been the subject of social unrest and intense political debate72. The SIA of the WTO negotiations on distribution services concludes that in many developing countries the potential gains are likely to be compromised by small retailers being squeezed out of the market and pressures exercised on suppliers by big international retail chains73. Effective regulation and appropriate phasing of reforms would be needed in order to mitigate such effects.

In the longer term, liberalisation can be expected to improve the effectiveness of those distribution services which supply modern industrial and commercial equipment to other sectors of the economy. This may have a significant beneficial long term effect on Mercosur growth rates.

Educational services

Education services are partially exempt from liberalisation under GATS Article I.3, which provides a general exception for services provided in the exercise of government authority that are not supplied on a commercial basis or in competition. This is expected to apply similarly in the services scenario for EU-Mercosur liberalisation. The scenario will provide some additional freedom to offer private sector education, but no major economic impacts are anticipated.

Environmental services

The effects of liberalising environmental services in the EU-Mercosur agreement are expected to be similar to those identified in the SIA for the WTO negotiations74. For water and wastewater, the EU would achieve a significant economic benefit from increased overseas investments, with smaller gains for solid waste management. An economic benefit is also expected in Mercosur, through increased efficiency due to greater competition. This may be associated with possible social and health impacts, which may be positive or negative, depending on the nature of accompanying regulation and government subsidy programmes.

72 WTO (2002) 73 Arkell and Johnson (2005) 74 Bisset et al (2003), Kirkpatrick and Parker (2005)


Other environmental services include air quality protection, remediation services for contaminated land and water, noise abatement, and services to protect biodiversity and landscape75. These are not large markets, and the effects are expected to be small.

Energy services

Supply of natural gas and oil is less influenced by trade liberalisation than electricity supply. As with water supply services, the increased efficiency arising from increased competition is likely to improve availability as well as saving costs. Similar improvements have been achieved, however, in state owned utilities, through appropriate public investment76. Privatised utilities have however proved more efficient in extending coverage. Trade liberalisation can help to improve the performance of the energy services sector, but effective regulatory frameworks are also needed, in order to prevent the formation of private monopolies and maintain access for poorer communities.

Large numbers of professional and skilled staff are employed in the energy industry. Liberalisation may entail some loss of local employment associated with greater entry of EU firms, but this may be more than offset by a high degree of skill transfer. This may in turn lead to increased competitiveness of domestic energy services, depending on the country’s development strategy and its success in building the appropriate technological infrastructure.

Financial services

Financial services can contribute to economic growth and poverty reduction (Jalilian and Kirkpatrick 2005), and to the growth of a wide range of activities, from the smallest (microfinance) to the largest (merchant banking) and the most innovative (venture capital). The Mattoo et al (2001) study shows a strong correlation with growth rates.

Experience with liberalisation in other countries is mixed, and depends strongly on effective regulation (Brownbridge and Kirkpatrick 2002). The experience of the Asian financial crisis in 1997 demonstrated the dangers of financial liberalisation which is not supported by a strong regulatory framework. The crisis can be ascribed to liberalising prematurely, long-term foreign borrowing, fragmented financial regulation and supervision, unclear division of responsibilities, and a restrictive regime regarding foreign bank entry. In Africa it is argued that restructuring was insufficient to change the behaviour of the financial institutions, that uncontrolled fiscal deficits combined with liberalisation to increase public debt, and that regulatory and supervision mechanisms were inadequate to monitor the working of the system77.

The World Bank’s report on Finance for Growth78 presents a strong case that entry of foreign financial institutions improves the efficiency of the domestic financial sector (through competition and international expertise), strengthens its stability, and increases access to lending for small and medium-sized enterprises (SMEs). The report cites Argentina as a prime example of the positive impact foreign entry has had on the efficiency and competitiveness of local banking systems, and as a case where foreign-owned banks have

75 WTO (2000a) 76 UNECE (2004) ; Kirkpatrick, Parker and Zhang (2005) 77 Hodge (2002) 78 World Bank (2001)


proved a stabilising force. The report was written in 2001, shortly before the Argentinian economic crisis. It has been argued that domination of Argentina’s domestic banking industry by foreign ownership, and its reluctance to lend to SMEs, played a major role in the collapse79. Domestic banks may be more sensitive than international ones to local cyclical pressures for credit management, and more likely to address gaps in the credit system for disadvantaged groups and regions. Strong regulation and a controlled pace of liberalisation are likely to be key factors in mitigating potential adverse impacts.

Health-related and social services

As with educational services, health and social services are partially exempt from liberalisation under the GATS exception for government services, which applies also in the services scenario for EU-Mercosur. Qualification requirements, residency requirements or economic needs tests apply for example to doctors, nurses and pharmacists, and mode 4 liberalisation under the scenario will be limited. The opening of markets to foreign health service companies is largely a matter for individual governments’ choice.

It has been suggested that health care services are an area in which developing countries could become major exporters, either by attracting foreign patients, or by migration of health personnel80. Other studies have suggested that it is only in countries with high health standards and a surplus of medical personnel where such exports would not have an adverse effect on the health of the country’s own population81. A review by UNCTAD82 concludes that health services liberalisation has had a beneficial effect in most cases, by exercising downward pressure on health service costs. The report notes however that poorer countries are not well placed to benefit, and that direct action is needed to improve health services for the poor.

Recreational, audio-visual, cultural and sporting services

If liberalisation were to occur as part of the EU-Mercosur agreement it can be expected to have economic benefits. Since the EU has the more highly developed industries it would tend to gain from the return on foreign investment, while Mercosur would experience efficiency gains.

Tourism and travel-related services

The growth of the tourism industry is determined mainly by market opportunity and government policy, and so the effects of further liberalisation are expected to be small. The principal economic impacts of EU-Mercosur liberalisation are likely to come through greater European involvement in local travel agencies, hotels and restaurants, but the sector is already highly competitive. Economic gains to the EU from foreign earnings and to Mercosur from greater competition are not expected to be significant.

Transport services

79 Stiglitz (2002) 80 World Bank (2002) 81 Hilary (2002) , Kinuthia (2002) 82 UNCTAD (1997)


Transportation services can be a significant barrier to realising the potential benefits of other aspects of trade liberalisation. Inefficiencies can include slow and cumbersome procedures as well as direct costs, which can have serious adverse effects on economic performance in other economic sectors. However, trade liberalisation is unlikely to release very much of the available efficiency gains, since domestic reforms are the main requirement for improving the performance of the sector. Any additional influence through EU-Mercosur services liberalisation are likely to be small by comparison.

9.5. Impacts on core sustainable development indicators

Economic impact

Real Income

As indicated by the model results the overall impact on static economic welfare of the services component of the EU-Mercosur agreement is likely to be positive but small. Much greater long term gains are available from the dynamic effects of domestic reforms, which the EU-Mercosur agreement should assist. However, such gains cannot be attributed directly to trade liberalisation.

For many service sectors appropriate regulation would entail significant costs, which Mercosur governments will have to weigh against the emerging benefits in a carefully phased programme of reforms.


The exposure of Mersosur’s services industries to foreign entry and competition can be expected to encourage investment in establishing a commercial presence on the part of foreign firms, particularly from EU companies.

Domestic investment in services provision may also increase over time, as local firms establish an export capacity in services sector activities. In most cases, successful examples tend to be Asian or Latin American countries that have themselves acquired technological and services capacities. This may come from participating in joint ventures in their own countries, but in some cases, including Brazil, the export capacity is based mainly on indigenous knowledge and experience (Zarrilli, 2003).

Employment

No significant adverse impacts on employment are expected in the EU. In Mercosur countries there will be negative adjustment effects on employment in the short-run, as sectors become more efficient and productive. Impacts are expected to be small overall, and restricted to service sub-sectors such as distribution, in which productivity may increase rapidly. In comparison with similar changes associated with privatisation and other domestic reforms, impacts from services liberalisation are not likely to be more than minor in significance.

Social impact

Poverty


The increase in investment in infrastructure services provision, such as water and sanitation, and electricity has the potential for improving the access of the poor to essential services. This will require an effective regulatory institutional structure which can ensure that the services provided to the poor are affordable and accessible. In the short term, the liberalisation of distributional services may have adverse effects if not appropriately mitigated, through the loss of incomes earned in small scale retailing. Some losses may also occur in financial services, business services, transport services, water and wastewater industries, and energy and construction industries. In these sub-sectors however, much bigger effects would arise from domestic reforms designed to increase efficiency and competitiveness.

The long term effects on employment in Mercosur are expected to be neutral, with unemployment levels determined primarily by growth rates, economic stability and other influences of domestic policy. Most of the anticipated employment changes arise through increases in productivity, which are likely to be associated with a beneficial long term effect on wage levels. Transitional unemployment would have an adverse effect in the short term.


There is a substantial body of empirical evidence showing that improvements in the quality of basic infrastructure services has a positive impact on the health of the poor83. Trade liberalisation may contribute to this, provided that the new investment in infrastructure results in improved quality, affordability and accessibility for the poor. Liberalisation of environmental services may have significant social and health impacts, depending on the nature of associated reforms. Potential efficiency improvements may have significant beneficial effects, but adverse effects can occur for poorer social groups if the reforms are not accompanied by effective regulation and government subsidies.

Equity

The overall gender impact of the anticipated employment changes will depend on the relative degrees of growth in each sub-sector. Women’s representation varies signficantly between the different service sectors. On balance, the effect of EU-Mercosur liberalisation is expected to be fairly neutral.


Biodiversity

No significant impacts on biodiversity have been identified.


Services liberalisation is expected to help increase the use of environmentally efficient management techniques and technologies, and add to the pressures on government to improve environmental regulation and enforcement. This will provide a fairly small addition to the promotion of such techniques by international agencies.

83 Clarke et al (2004), Kirkpatrick and Parker (2005, 2006)


Liberalisation of distribution services is expected to lead to goods being sourced from a wider area, with consequent adverse impacts on local pollution and climate change associated with increased transport. Changes in packaging techniques may have adverse impacts on waste generation, requiring stronger regulation to encourage recycling.


Greater use of environmentally efficient management techniques and technologies will tend to reduce pressures on consumption of water and other resources. The impact is not expected to be significant in relation to other effects in this area.

Process Indicators

Some of the service sectors affected, particularly telecommunications, can have important beneficial influences on processes of economic and social transformation.

Liberalisation will also help to enable stronger environmental management, but this effect not expected to be big enough to counter the increased pressure in the opposite direction, towards greater economic growth, resource dependency, pollution and waste generation. Increased transport associated with distribution services liberalisation will additionally add to climate change pressures.

Consistency with sustainable development principles

The effects will be similar to those identified for industrial products. All are beneficial or neutral, except for the principle of reducing and eliminating unsustainable patterns of production and consumption (Principle 8).


The effects on sustainable development strategies will be similar to those for industrial products. These are all relatively neutral in that they neither add to nor detract from Mercosur countries’ capacity to implement effective sustainable development strategies.

9.6. Summary of sustainability impacts

The impacts discussed above are summarised in the following tables.


Table 9.5. Sustainable development impacts of services liberalisation in the EU




sho

rt

term

lon

g

term

Economic

Real income International companies investing abroad

Greater market access

Level of liberalisation � �

Fixed capital form. Overseas investment

� �

Employment - -

Social - -

Poverty - - Health and education

- -

Equity - -

Environmental Biodiversity - -


- -


Process - -

SD principles - -

SD strategies - -

Legend: � positive greater significant impact, � negative greater significant impact, � positive lesser significant impact, � negative lesser significant impact, �� positive and negative impacts likely to be experienced according to context (may be lesser or greater as above), - non-significant impact compared with the base situation.

Table 9.6. Sustainable development impacts of services liberalisation in Mercosur




sho

rt

term

lon

g

term

Economic

Real income Strongest in Transportation, Finance and Telecom.

Static welfare Competitiveneness of domestic service providers Regulatory capacity

� �

Higher growth Other aspects of economic policy

- �?

Fixed capital formation Market access for FDI commercial presence Service sector exports

Domestic regulation Business environment

- �

Employment Distribution, smaller effects in other sectors

Production, labour productivity.

Education and training; labour

� -





sho

rt

term

lon

g

term

market flexibility and retraining

Social

Poverty Unemployment in short term, better long term economic performance

��

Health and education More efficient services, potential adverse effects for access to services

Strong regulation ��

Equity Mixed small effects - -

Environmental

Biodiversity No significant impacts identified

- -

Environmental quality Environmental services, energy services.

Greater use of improved management techniques

Government willingness to revise legislation

� �

Distribution services Increased packaging

stronger regulation, recycling

� �

Natural resources Environmental services, energy services etc.

Minor beneficial impacts

- -

Process

SD principles Consistent with most principles. Small incremental consumption pressures

Effective regulation - �

SD strategies Consistent with most strategic objectives. Concern for adverse effects on telecoms

Technology strategy - -

Legend: � positive greater significant impact, � negative greater significant impact, � positive lesser significant impact, � negative lesser significant impact, �� positive and negative impacts likely to be experienced according to context (may be lesser or greater as above), - non-significant impact compared with the base situation.


10. IMPACT ASSESSMENT: RULE-BASED MEASURES

The negotiations on the EU Mercosur trade agreement include a number of areas relating to domestic regulatory rules. Liberalisation in these areas is seen as complementing the traditional market access measures by providing an ‘enabling environment’ for the expansion of international trade and investment flows. The following rule – based measures are included in the SIA:

• Investment• Trade facilitation• Government procurement

10.1. Investment

The inclusion of investment in trade negotiations is intended to minimise the conditions and regulations on foreign investors entering and operating in the host countries, to improve the transparency and consistency of the regulations that are applied to foreign investors, and to grant them national treatment. This would typically involve the removal of performance requirements and the adoption of a range of investor rights. The underlying premise in favour of an investment agreement is that it will increase the flow of foreign investment. In addition, by improving investor protection and confidence, domestic investment may be stimulated. Proponents of investment agreements argue, therefore, that the improvement of the investment environment and the liberalisation of investment would be of mutual benefit to both parties in the trade agreement.84 However, the inclusion of investment provisions in trade agreements has been contentious since investment provisions affect domestic policy space with possible implications for the domestic economy.

An investment agreement can include a number of different provisions, depending on the objectives of the agreement (Te Velde and Fahnbulleh, 2006):

• Investment promotion and co-operationThis is intended to stimulate investment flows through increased cooperation andharmonisation of certain rules. Such provisions may include:- commitment to investment promotion and harmonisation of rules (simplification andharmonisation of investment rules and administrative practices),- provision of investment guarantees and insurance,- commitment to future liberalisation of investment

• Liberalisation and market accessThese provisions seek to reduce or eliminate barriers to entry, establishment andoperation of cross border investment. The provisions could include:

- right of entry and establishment for investment in certain areas of the economy.The strongest form guarantees investors from member countries the right ofestablishment. A second common approach provides for national or MFNtreatment with respect to the right of establishment, with a negative list ofexceptions. The final approach is to provide for future rights (as in the Euro Medagreements).- Market access for services. Services are often delivered through commercialpresence. Therefore, agreements regarding trade in services affect investment. An

84 The following paragraphs are taken from Te Velde and Fahnbulleh (2006)


agreement that liberalises trade in services is likely to provide what in effect constitutes a right of establishment in the services sector that may overlap any right of establishment of investment elsewhere in the agreement. - Provisions that grant transfer of funds- Provisions for the entry of foreign personnel in relation to investment- Provisions prohibiting the imposition of performance requirements

• Investment ProtectionThis establishes legally binding protection for investments. These include:

- non –discrimination provisions guaranteeing national treatment or most favourednation treatment post-establishment- general protection provisions which guarantee ‘fair and equitable treatment’ or‘full protection and security’- provisions on expropriation- provisions addressing the protection of intellectual property rights- provision for settlement disputes

An investment agreement can combine elements of these approaches simultaneously. In the case of the EU – Mercosur negotiations, discussions on an investment agreement have focused on the improvement of the investment environment and a progressive liberalisation of investment, complemented by appropriate domestic regulations.85

There is an extensive literature on investment agreements, particularly in the context of developing countries.. There are opposing theoretical arguments on investment provisions. Proponents argue that the inclusion of investment provisions within trade agreements will increase FDI, by fostering an enabling environment and strengthening the credibility and security of government commitments to investors. Opponents are sceptical of the influence of investment provisions on the inflow of FDI, or are concerned about the potential loss of control over domestic policy space (UNCTAD, 2006)

The empirical evidence on the impact of investment provisions in regional trade agreements is generally positive. Dee and Gali (2003) find that FDI responds positively to the non-trade provisions within RTAs. Similarly, Te Velde and Bezemer (2006) find that regions with more investment provisions provide US and UK investors with positive signals about how different regions will treat them. Furthermore, the type of regional grouping matters for attracting FDI (ie whether or not the RTA includes certain trade and investment provisions). The OECD (2006) finds that investment provisions in RTAs are positively associated with both trade and investment flows, and that they matter more for FDI flows than trade flows. The impact with investment provisions have on the inflow of FDI depend on the quality of domestic institutions, such as the rule of law and governance. 86

The provisions in an investment agreement would depend in part on existing commitments on investment. Investment promotion measures may already be included as part of trade facilitation measures and may also form part of an agreed aid for trade programme of flanking measures. With respect to investment liberalisation, the provisions within the FTA will need to take into account any existing commitments in GATS services sectors. It would also need

85 EU FTAs have in general, been concerned with investment cooperation, promotion and to some extent liberalisation, rather than investment protection 86 There is the possibility of reverse causation, where investment agreements have a positive impact on the quality of domestic institutions, thereby increasing FDI.


to take account of any TRIMS commitments. With respect to investment protection, the legal implications of the RTA investment agreement would need to take into account any existing international commitments on investment protection.

Sustainability Impact Assessment for Investment Agreement

Economic Indicators

Real Income

Will an agreement on investment promotion and liberalisation have an impact on real income in Mercosur? European investment in the region is already very substantial and an investment agreement is expected to confirm investor confidence in the region. Given the substantial inflow of FDI to the services sector, the liberalisation component of any agreement will be of particular importance to foreign investors. An investment agreement will also act as a signal to non- EU investors. The additional inflow of FDI that can be attributed to the agreement is unlikely to be significant, but any agreement can be expected to stabilise the long term flow of FDI. Over time, the inflow of new FDI is expected to contribute to economic growth.

Fixed capital investment

An investment agreement is expected to have positive impact on foreign direct investment and may also increase domestic investment.

Employment

The increase in growth resulting from FDI inflows is expected to have a positive long term impact on employment

Social Indicators

Poverty In the long run, the increase in real income attributable to higher FDI inflows may have a indirect trickle down effect on poverty. The inflow of FDI into the basic utilities sector is also likely to contribute to poverty reduction, provided that domestic regulatory offices are able to regulate for accessibility and affordability criteria in the delivery of services by private utility operators (Kirkpatrick and Parker, 2007).

Equity

An investment agreement is not expected to have a significant impact on equity.


If FDI results in learning by doing and skills enhancement externalities, the quality of the labour force may be positively affected. Similarly, if the health safety standards in foreign owned enterprises are superior to domestic enterprises, there may be some marginal improvements in health for employees. Neither of these potential externalities of FDI is likely to be significant in the context of the middle income Mercosur countries.


Environmental Indicators

Biodiversity

An investment agreement is not expected to have any significant impacts on biodiversity


The impact of increased FDI on the environment has been widely discussed in the literature (see section 4 above), particularly in the context of pollution havens and a ‘race to the bottom.’ Any liberalisation of FDI market access should be conditional on an effective environmental regulatory capacity and where necessary, a strengthening of environmental regulatory capacity. There is also evidence to suggest that FDI can introduce improved environmental control technology, thereby contributing to improvements in environmental quality. FDI in environmental services can also contribute positively to environmental quality (George, Kirkpatrick and Scrieciu, 2006)..The impact of an increase in FDI resulting from an investment agreement is expected to be confined to the long run scale effect associated with increased output.

Natural resources

Increased foreign investment in extractive industries and in sectors that use natural resources as inputs can be expected to put additional pressure on the natural resources capital stock and may require appropriate flanking measures in terms of environmental controls and regulation.

Process Indicators

Increased FDI may contribute to Principle 9, the exchange of scientific and technological knowledge, and enhance the development, adaptation, diffusion and transfer of technologies, including new and innovative technologies.. This is consistent with the other principles of sustainable development. In terms of the criteria for effective national sustainable development strategies, an investment agreement which was linked to the provision of environmental services and environmental technology transfer would contribute to criteria A.3, ‘the integration of the maintenance of sustainable levels of resource use and the controlof pollution to maintain a healthy environment into economic policy’ An agreement ofinvestment would not be contrary to the other criteria for effective national developmentplanning.

Table 10.1: Summary of Sustainability Impacts for Investment Agreement: Mercosur




shor

t te

rm

long

te

rm


Investment led economic growth

coverage of the investment agreement; quality of domestic

�? �





shor

t te

rm

long

te

rm

investment environment

Fixed capital formation Inflow of FDI

Domestic regulation; Business environment

� �

Employment Increase in output Sectoral pattern of investment and growth

_ �

Social

Poverty _ �


Equity - -

Environmental Biodiversity - -

Environmental quality Sectoral allocation of FDI; use of environmental control technology in production

Effective environmental regulation

�? �?

Natural resources increased investment in resource intensive industries

Effective environmental regulation

- �?

Process

SD principles Contribution to development and diffusion of environmental technologies. Consistent with other principles.

Effective regulation � �

SD strategies Consistent with strategic objectives.

- -


� positive greater significant impact � negative greater significant impact� positive lesser significant impact � negative lesser significant impact


�� positive and negative impacts likely to be experienced according to context (may be lesser or greater as above)

- impact has been evaluated as non-significant compared with the basesituation.

10.2. Trade Facilitation

There is no standard definition of trade facilitation. In a narrow sense, trade facilitation efforts simply address the logistics of moving goods through ports or more efficiently handling documentation associated with cross-border trade. The definition has also been broadened to include the quality of the transport infrastructure, transparency and professionalism of customs and regulatory environments, as well as harmonization of standards and conformance to international or regional regulations (OECD, 2005a). The OECD (2005a) outlines several effects of high trade transaction costs: ‘Weak and inefficient customs procedures have negative effects at both the national and corporate level. Countries may experience problems related to smuggling, corruption, customs valuation and tax collection while companies may suffer from slow and unpredictable goods delivery and direct costs in terms of rent payments and the compliance with strenuous customs procedures. There may also be significant indirect costs related to foregone business opportunities and the need to hold excessively high levels of stock’.

The CETM model includes trade facilitation as part of the full liberalisation scenario, by modelling the impact of a 1% reduction in trade costs. For Mercosur, trade facilitation accounted for approximately 30% of the aggregate welfare gains from full trade liberalisation (Table 10.2). Trade liberalisation accounted for a further 60% of the total real income gains. For the EU, trade facilitation was shown to be the single most important trade liberalisation measure, accounting for approximately half the increase in real income for EU25.

Table 10.2: Decomposition of Real Income Effects, (Millions of US$) Total gain of which from

Goods liberalisation


of which from Trade

Facilitation

Argentina 1 255 411 138 705 Brazil 6 883 4 510 465 1 908 Paraguay 643 502 12 129 Uruguay 369 272 21 76 Venezuela 91 -267 61 297 Total Mercosur 9 241 5 428 697 3 115

EU15 3 700 1 306 558 1 836 EU10 201 39 18 144 Total European Union 3 901 1 345 576 1 980


Other modelling studies of trade facilitation as part of trade liberalisation also indicate significant gains (Engman, 2005).

While the modelling studies indicate that the static welfare gain from trade facilitation may be large, there is a high degree of uncertainty in the estimates. Most modelling studies interpret trade facilitation largely in terms of trade transaction costs. These are modelled in some case directly through an assumed amount of savings, as a percentage of the total value of trade likely to emerge due to trade facilitation and a consequent lowering of such non-tariff barriers to trade. In other cases, trade facilitation is indirectly modelled through a slight increase in the


assumed trade elasticities. Some other modelling studies consider trade facilitation measures from a broader perspective (border and inside the border elements), and include, for example, infrastructural and regulatory issues

Considerable uncertainties arise in modelling the actual trade facilitation measures and the costs of implementing them87. The measures being negotiated consist largely of increased transparency, which will not necessarily generate the level of procedural simplification or reduction of fees and charges which the models attempt to simulate. Even if a model gives a good indication of the potential benefit of trade facilitation, it may over-estimate what can actually be achieved through the measures being negotiated, and under-estimate the costs. In order to reap the benefits for themselves, developing countries need to undertake significant investments in training of personnel, continuing administrative activities, and other institutional-related measures. These up-front and ongoing economic costs are not considered in such models, and it is possible that they could cancel out most of the potential benefits88. It has been argued that, where the implementation of trade facilitation measures causes a diversion of scarce resources from higher priorities, the gains to developing countries could be negligible, or outweighed by the losses89. A review of studies of these effects90 concludes that insufficient information is available to draw firm conclusions. Most modelling studies (particularly CGE models) remain silent on the type and scope of regulatory and institutional policy measures, their relationships with the intended outcomes, and the magnitude of resources and international cooperation required to effectively facilitate trade, especially in poor landlocked countries.

There may however be other significant benefits. In some developing countries an immediate gain may come from increased government revenue, through more efficient and reliable tax collection and reduced corruption91. Larger long term gains may occur by increasing the ability of developing countries to attract foreign direct investment and integrate into global supply chains, and hence accelerate their rate of growth92. Investing companies typically require cheap, quick, transparent and predictable customs services93. However, many other factors also contribute to the investment climate, so that the effect of trade facilitation on its own may be small (Iwanow and Kirkpatrick, 2006).

Despite the modelling and other uncertainties, there is a broad consensus that trade facilitation does have the potential to contribute significantly to smoother and intensified trade between countries, particularly in terms of eliminating burdensome trade procedures, increasing transparency, improving business opportunities and security, and generally enhancing competitiveness and economic development to the benefit of both the government and the private sector94. Landlocked countries in particular can expect to benefit from reduced border delays and transit costs.

OECD (2005) summarizes the main conclusions from the trade facilitation studies:

87 Francois et al, (2005), Kleitz, (2002) 88 Hertel and Keeney (2006), Ackerman (2005) 89 Winters (2002) 90 WTO (2001h) 91 Engman (2005) 92 OECD (2005a) 93 Engman (2005) 94 Hellqvist (2003), UNECE (2002)


o All the studies indicate that there is a positive link between trade facilitation and trade.This translates into significantly increased trade for even modest reductions in tradetransaction costs.

o The studies also indicate that trade in both developed and developing countries standto gain from trade facilitation. In relative terms, trade gains would be higher indeveloping countries than in developed countries. This finding reflects theircomparatively less efficient customs administrations and ports.

o Both the country improving its customs procedures and the countries exporting to thiscountry stand to benefit from the efficiency measures. The country that improves itsborder procedures benefits most and this underscores the value of unilateral action.

o The potential gain from increasing port efficiency is considerably larger than forincreasing efficiency of customs procedures.

o The quantitative results confirm the results from business surveys: inefficientmovement of goods across borders is a serious impediment to trade and growth.

Studies on the costs of implementing trade facilitation measures are scarcer. Analysis of such costs is important in designing assistance programs, as priority should be given to the most cost-effective element of trade facilitation. The OECD conducted a series of country surveys in 2004 and 2005 that addressed this issue of particular concerns to developing countries and LDCs member of the WTO. Data on implementation approaches and costs of eleven trade facilitation measures selected among those proposed by WTO members for negotiations was collected in fourteen developing countries (OECD, 2004; OECD, 2005c). While the OECD cost study does not include any conclusive quantitative cost estimates for the measures examined, it provides very useful information on the relative complexity of the various measures examined and some of the major issues associated with their implementation. The study focused specifically on implementation costs for Government and considered the following 4 cost components (1) Regulatory costs, (2) Institutional costs, (3) Training costs and (4) Equipment/Infrastructure costs specifically and directly related to a given TF measure. However, the study notes that overall implementation costs of specific measures will be affected by the current level of infrastructure development in each country, which may need to be improved before a particular measure, may be effectively implemented. While the study did not attempt to compare costs of various measures examined, risk assessment, audit-based controls, and special procedures for authorized persons are identified as the most complex and costly measures, followed by advance lodgment and processing of data. In contrast, advance rulings and security for duties and taxes reportedly have minimal implementation costs. The study concludes that the costs of even the most technically demanding measures were by no means large, observed inter-linkages between various trade facilitation measure require the need for a coherent implementation plan of the trade facilitation measure to be included in the negotiations (cited from Duval, 2006)

Similarly, Finger and Wilson (2006) point out that there are a number of administrative reform measures that are at the center of the negotiations on GATT Articles V, VIII, and X that would likely not require large-scale investments or new infrastructure projects to support modified GATT rules. These include, for example, more explicit rules on publication of fees for imports and exports, and more rapid response mechanisms to adjudicate customs disputes, among others.

Finger and Schuler,2000, cited in Finger and Wilson, 2006 ), based on analysis of World Bank projects, estimated that each of the 16 areas of the customs valuations agreement would cost more than $2.5 million to implement. They find that the costs of implementing the


customs valuation agreement together with agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) amounted to millions of dollars in middle-income developing countries.

It is widely agreed that trade facilitation does offer potential benefits to all countries, but the measures ‘present much less scope for tradeoffs than other areas of negotiation’, so that ‘a capacity-building approach to this issue may be more effective than taking a strict-rules-based approach subject to the dispute settlement processes’95. In order to reap the potential benefits, many developing countries have embarked on customs modernisation unilaterally as part of a broader programme of reforms, with assistance from international agencies such as the World Bank and UNCTAD96. Experience suggests that factors essential for success include ‘properly identifying problem areas and coherently designing reform programs’97.

These considerations suggest that trade facilitation does offer significant potential economic benefits although these cannot be quantified with any certainty. They are probably fairly small in the short term, but may make a significant qualitative contribution to longer term development processes. Effective technical assistance is likely to make an important contribution in ensuring that the benefits outweigh the costs.

Much of the expected benefit of pursuing trade facilitation in the Mercosur negotiations is expected to come from moving towards standardisation and simplification of customs and other procedures in the Mercosur countries, where EU imports are required to comply with different customs procedures in each country. Table 10.3 shows that the time required to complete customs precedures in Latin America is higher than in East Asia and in the OECD countries.

Table 10.3. Days to Complete each stage of importing

World Bank (2006)

The total time required to complete import and export procedures in the four Mercosur countries is show in Table 10.4.

Table 10.4: Time Required to Complete Import and Export Procedures

95 IISD (2003) 96 OECD (2005b) 97 OECD (2003)


Argentina Brazil Paraguay Uruguay Documents to export (number)

6 7 9 9

Signatures for export (number)

6 8 7 10

Time for export (days)

23 39 34 22

Documents for import

7 14 13 9

Signatures for import (number)

9 16 11 12

Time for import (days)

30 43 31 25

Source: World Bank (2006)

Sustainability Impact Assessment for Trade Facilitation

Economic Impacts

The main economic benefit to developing countries from trade facilitation will be in the efficiency gains from customs and related procedural reforms. These gains can be expected to contribute to an improvement in the business environment and will facilitate the growth of investment and employment in traded goods production. There could also be gains in economic efficency associated with a reduction in rent seeking activities. The size of these gains will be lower, however, in the short run, as costs are incurred in implementing the reforms.

Social Impacts

The social impacts of trade facilitation reforms are likely to accrue in terms of an improvement in the quality of public administration.


The environmental impact of trade facilitation reforms are unlikely to be significant. It has been argued that the detailed design of a trade facilitation agreement ‘should not be allowed to have any impact on environmental, human health and other public welfare legislation and regulation’, and that a potentially beneficial impact on implementing border-related multilateral environmental agreements (MEAs) could be outweighed if trade facilitation measures were to become a barrier to the effective implementation and further development of these MEAs98. In the context of the assumed negotiation scenario, these effects are not expected to be significant.

98 IISD (2003)


Table 10.5: Summary of Sustainability Impacts for Trade Facilitation: Mercosur




shor

t te

rm

long

te

rm


�? �

Fixed capital formation - �?

Employment

- �?

Social

Poverty - -


Equity - -

Environmental Biodiversity

- - Environmental quality

- -


Process SD principles

- �

SD strategies - �-





10.3 Government Procurement

Government purchases of goods and services are a significant proportion of world GDP. Recent analysis by the OECD indicates that total central government expenditure of OECD countries was almost US $2 trillion in 1998. In developing countries the figure is US$300 billion – equal to six times the total annual multilateral and bilateral aid currently given to developing countries (Stiglitz and Charlton, 2005). Much of this expenditure is made on a discriminatory basis, where domestic suppliers are advantaged compared to foreign suppliers. Government procurement was initially excluded from the GATT: Article III (national treatment does not apply to government procurement. On completion of the Tokyo Round a code of conduct for central government procurement was introduced into the GATT which only bound its signatories. During the Uruguay Round the coverage of the Government Procurement Agreement was extended to include services and additional government entities. The WTO Government Procurement Agreement which entered into force in January 1996 is a pluralateral agreement that binds only signatories. It establishes a framework of rights and obligations regarding parties’ national procurement laws, regulations and procedures. Governments are required to apply the principle of national treatment to the products, services and suppliers of other parties to the GPA and to abide by the most-favoured nation rule, which prohibits discrimination among goods, services and suppliers of other parties. The agreement emphasises transparency of laws, regulations, procedures and practices regarding government procurement. Membership remains limited mainly to OECD countries (Evenett, 2002).

There is continued interest, particularly on the part of exporting firms in OECD countries, in the inclusion of government procurement in trade liberalisation negotiations, in order to negotiate access to overseas procurement markets. On the other hand, government procurement has been widely used as a tool for domestic policy in both developed and developing countries. In developed countries, it has been used as an instrument for fiscal management. In developing countries it is used as tool for industrial and social policy, with government procurement expenditures being used to develop infant or strategic industries, and to support employment growth, , small firm development or regional growth. Liberalisation of government procurement remains a contentious issue, and a move towards a rule based agreement may be perceived by some stakeholders as a potential weakening of domestic policy autonomy.

A significant share of government procurement is in services, where foreign supply would require the movement of people across national boundaries. The scope of negotiations on trade liberalisation in government procurement therefore extends beyond issues of relating to domestic policy towards foreign direct investment, joint ventures and foreign mergers and acquisitions of domestic firms, and includes liberalisation of cross border movement of services and labour flows.

There are two potential sources of benefit from liberalisation of government procurement (Evenett, 2003). First, as a result of the transparency requirements the government will be required to demonstrate better value for money in its contracting and purchases. Second, exports could expand as a result of purchases of goods and services by governments in the partner countries. The general perception is that the second gain is likely to be small for developing countries. It is important therefore to estimate the gains from achieving transparency in procurement procedures. Hockman (1998) estimates that competitive tendering and outsourcing could produce savings of about 20% without comprising quality.


Estimates of the economic impact of improvement transparency and accountability suggest significant savings in the reduction of economic rents and corruption.

The coverage of an agreement of government procurement could range from an agreement on greater transparency in government contracting with the private sector to formal agreement on national treatment of foreign firms. In the context of the EU - Mercosur negotiations, given the sensitivity and importance of government procurement for Mercosur industrial policy, it is assumed that a realistic liberalisation scenario would focus mainly on improving transparency in relation to the extent of national treatment and non-discrimination in government procurement and public works concessions. This is of particular interest to EU companies that invested in the utilities sectors and established a commercial presence in Mercosur, following the privatisation of this sector in the 1990s.

Sustainability Impact Assessment of Government Procurement

Economic impacts

An agreement on greater transparency in Mercosur governments’ procurement procedures may generate gains from increased competition for government contracts. Further economic efficiency gains might be expected to result from the improvement in the quality of public sector governance. The ‘demonstration effect’ of improvements in transparency and accountability in government procurement may spillover in improvements in other areas of public regulation and policy affecting the private sector. There may be additional gains to Mercosur exporting firms if an agreement assists Mercosur firms in competing for public sector contracts for the supply of goods and labour services, in the EU countries. A significant share of the economic gains from liberalisation of government procurement is expected to accrue to EU companies with a commercial presence in Mercsour.

Technical assistance and capacity building in public sector reform, including procurement and contracting procedures, could have a significant role to play in ensuring the sustainability of the transparency reforms to government procurement.

Social Impacts

The liberalisation of government procurement could have a significant impact on the use of procurement to support social objectives, for example, in terms of SME development or regional development.. It is unlikely that the economic gains from the liberalisation of government procurement could immediately be secured by the fiscal system and redistributed to support these social goals. Over time, tax revenues from corporate taxation could increase as the dynamic effects of liberalisation of government procurement are realised in terms of increased economic performance and growth in the private sector.


The reforms to government procurement procedures are not expected to have any significant environmental impacts.


Table 10.6: Summary of Sustainability Impacts for Government Procurement: Mercosur




shor

t te

rm

long

te

rm


� �

Fixed capital formation - -

Employment - -

Social � �?

Poverty


Equity

Environmental

Biodiversity


Natural resources

Process SD principles

SD strategies


� positive greater significant impact � negative greater significant impact� positive lesser significant impact � negative lesser significant impact�� positive and negative impacts likely to be experienced according to context (may be lesser or

greater as above) - impact has been evaluated as non-significant compared with the base situation


11. MITIGATION AND ENHANCEMENT MEASURES

The assessment of potential sustainability impacts in this Mid Term report has identified various measures that may contribute to enhancing the beneficial impacts that have been identified for an EU-Mercosur trade agreement, and for avoiding or mitigating adverse ones. The final stage of the study will assess alternative mitigation and enhancement measures in more detail. Recommendations will be developed for three types of actions: those actions that may be taken within the proposed trade agreement; actions by other policy-makers in the EU and Mercosur; and actions as part of EU development assistance to Mercosur countries. This section provides a preliminary assessment of the potential areas for flanking measures, which will be assessed in detail in the final report.

The main finding of the mid term report assessment of the potential economic, social and environmental impacts in Mercosur following trade liberalisation, is that a rapid and over ambitious liberalisation programme will give rise to significant economic adjustment costs, particularly for labour in the non-agricultural goods sector in Mercosur, but also in some parts of the agriculture sector in the EU. These adjustment costs will have further adverse social and environmental impacts. A phased process of liberalisation over a period of up to ten years provides opportunties for the potential benefits to be enhanced, by allowing labour and capital markets to respond positively to the new market opportunities presented by the phased opening of the economy. Furthermore, by avoiding a sudden and immediate downturn in those sectors facing increased import competition, investor confidence is maintained and the longer term dynamic benefits from investment-driven productivity and competitiveness can be realised.

A important flanking measure for detailed examination in the final report therefore relates to the design and phasing of the liberalisation measures that are agreed in the EU- Mersosur trade negotiations. There is a considerable body of evidence available on the results of trade liberalisation in a wide range of countries, and on the lessons that can be learned from these experiences for the optimal design of trade liberalisation programmes (World Bank, 2006).

The assessment results in the mid term reports confirm that trade liberalisation can have adverse environmental and social consequences, both for the partner countries and globally. In assessing these potential negative impacts no allowance was made for regulatory interventions which could prevent or mitigate the negative effects attributable to trade liberalisation. International experience confirms that an effective regulatory framework is important in each of the three spheres of sustainable development in preventing or mitigating negative impacts. In the environmental sphere, the potential negative impacts can be reduced through the application of appropriate environment regulation measures on production and consumption. In the social sphere, the use of targeted assistance to labour affected by trade liberalisation restructuring can be used as an effective mitigation measure. In the economic sphere, there is robust evidence to show that the quality of the domestic regulatory environment affecting business can have a significant effect on investor confidence and on the attraction of inward direct foreign investment (Kirkpatrick, Parker and Zhang, 2006).

The application of these regulatory flanking measures depends on having an effective regulatory institutional capacity to ensure compliance. Strengthening of existing regulatory capacity though the provision of technical assistance and economic regulation methods is a further area for flanking interventions supported by the EU.


A third area for detailed assessment in the final report relates to the cumulative impacts of EU Mercosur trade liberalisation in relation to the underlying processes of environmental change, social transformation, structural change and economic growth in Mercosur and the EU. While the cumulative impacts resulting from the trade agreement may in themselves, appear to be marginal, considered in the broader context of the sustainable development trajectories of the EU and Mercosur, the need to develop an effective set of flanking measures as an integral part of the EU–Mercosur trade and investment liberalisation agreement assumes much greater importance and significance (George 2007).


12. CONSULTATION AND DISSEMINATION ACTIVITIES

7.1 Consultation Process

Consultation processes are an integral part of the SIA methodology. The Inception Report for the SIA of EU-Mercosur Trade Negotiations set out the proposed procedures for consultation with stakeholders, and for providing regular updates on the development of the experts network, website usage, dissemination activities, and contributions made by the consultants to SIA policy debates with experts in other countries and organisations.

These procedures have been progressed during the current phase of the programme. A Civil Society meeting was held on the Inception Report on 18 July 2006 in Brussels, and a report on the consultations is available on the project website. In response to this meeting, a Final Revised version of the Inception Report was submitted on 1 September 2006. The Experts Network and List of Consultees were notified of the draft Inception Report and comments received by email have been responded to (see below). The Reports are available on the project website (www.sia-trade.org). Further consultation will take place on publication of the draft Mid-Term Report.

The comprehensive nature of the global overview SIA is such that dialogue with stakeholders representing all these constituencies should cover all the areas of the trade negotiations. The principal mechanism for achieving this will be through the experts network database which has been accumulated through the SIA programme. This includes stakeholder organisations and individuals in the European Community member states and Mercosur, including experts with knowledge in a wide range of environmental, social and economic areas. The number of participants in the database has increased from about 500 in April 2004, to nearly 1300 as of November 2006.

Electronic communication with stakeholder representatives is being supported by the posting of reports and other information on the project website, and through the website’s feedback facility and email correspondence with participants.

Comments from stakeholders on the Inception Report have been responded to, and the responses posted on the website.

Direct dialogue with stakeholders will continue to be pursued through attendance at international events involving civil society and governmental representatives.

Stakeholders are invited to respond to a specific set of questions on all Reports, or on any other issue:

• Is there any important evidence of which you are aware that has not been taken intoaccount, such that the assessment of impacts is misleading or incorrect?

• Are there faults in the analysis which may have led to incorrect conclusions?• Do you have any suggestions for the analysis of prevention, mitigation and enhancing

measures? Do you have any suggestions for further development of communicationwith experts and other stakeholders?

Do you have any additional suggestions or issues for consideration in the Final Report?


Comments and suggestions may be sent to the project email address:

[email protected]

7.2 Website Use

The contractors have continued to run the open access website at www.sia-trade.org. The existing database of nearly 1300 stakeholder organisations and individuals was used to distribute electronically an announcement of the commencement of the current phase of the work programme. Details of the dates for completion of the inception, midterm and final reports, and the timetable for consultation on the reports, have been provided. All interested parties, whether individuals or organisations have been invited to participate in the current phase of the SIA programme, using the dedicated email address for comments – [email protected]

The contractor will continue to respond to the comments received, using the feedback-comment function that is incorporated in the website to facilitate dialogue with stakeholders and other interested parties.

The project website has had over 12,000 visits from May-October 2006 as seen in Table 61. Table 62 shows the number of times that online reports have been accessed from May to October 2006.

Table 61: Numbers of visits to the Mercosur website (May 06 – October 2006)

Month May June July August September October Total Hits

May-Oct 06

Hits per month

197 312 6052 1969 1513 2170 12,213

Consultation - 14 165 277 138 204 798

Phase 1 - 13 544 170 82 89 898

Table 62: Number of times that online reports have been accessed from May 06 – October 06

Report May June July August September October Total Hits

May-Oct 06

Inception Report (6 July 2006)

n/a n/a 292

140 86 57 575

Revised Inception Report (1 September 2006)

n/a n/a n/a n/a 54 75 129


7.3 Networking and Contributions to Policy Debate

The contractor has continued to engage in the wider policy debate on issues relating to trade policy analysis, impact assessment and sustainability impact assessment. Networking activities during the current phase of the EU Mercosur SIA programme include:

• Presentation at the Easy-Eco Conference in Saarbrucken Germany, 11-14 October, 2006on ‘Improving the quality of Sustainable Development’

• Paper presented at International Workshop on the Use of Research in Trade Policy,Buenos Aires, 31 July – 1 August 2006-11-15

• Evidence presented to UK House of Commons Environmental Audit Committee, 24October 2006

• Discussions at Mercosur Chair Annual Seminar, EU-Mercosur Trade Negotiations:Make or Brake, Working Group on EU-Mercosur Negotiations, Mercosur Chair ofSciences Po, Paris, 25 January 2007

The contractors have continued to disseminate the results of the SIA programme through academic publications. These include:

George, C. and Goldsmith, B. (editors) (2006) Impact Assessment and Project Appraisal volume 24, December, Special Issue on ‘Trade Assessment and Sustainable Development’.

George, C. (2007) ‘Sustainable Development and Global Governance’, Journal of Environment and Development, vol 16 no 1

Kirkpatrick, C. and George, C. (2006) ‘Methodological Issues in the Impact Assessment of Trade Policy: Experience from the European Commission’s Sustainability Impact Assessment (SIA) Programme’ Impact Assessment and Project Appraisal, volume 24, December

Franz, J. and Kirkpatrick, C. (2006), ‘Integrating Sustainable Development into EC Policymaking: An Evaluation of Recent Impact Assessments’, IARC Working Paper

Kirkpatrick, C. and Scrieciu, S. (2007) ‘Trade Liberalisation and the Environment: Assessing the Evidence’, IARC Working Paper

George, C. and Kirkpatrick, C. (eds) (2007), forthcoming, Impact Assessment for Sustainable Development: European Perspectives and Experience. Edward Elgar: Colchester

Kirkpatrick, C., George, C. and S. Scrieciu (2006) ‘Trade liberalisation in environmental services: why so little progress?’ Global Economy Journal, Vol. 6, Issue 2 (May) (electronic journal: www.bepress.com/gej/).

Lee, N. and C. Kirkpatrick (2006) ‘Evidence-based policy-making in Europe: an evaluation of European Commission integrated impact assessments’, Impact Assessment and Project Appraisal, Vol. 24 (1): 23-33.


George, C. and Kirkpatrick, C. (2006) ‘Assessing national sustainable development strategies: strengthening the links to operational policy’, Natural Resources Forum, 30 pp.146-156

Two issues of the SIA Newsletter have been produced and widely disseminated in paper and electronic copy. A further Trade-SIA newsletter will be issued on completion of the programme.


13. WAY FORWARD AND CONTENTS OF FINAL REPORT

Further work:

The final stage of the study will:

• refine the assessment presented at this mid-term stage;• assess alternative measures for mitigation and enhancement;• prepare recommendations.

Final report:

The final report will include the following elements:

• A summary of the methodology used for the trade SIA• The outcomes and results of the assessment• Proposals for flanking measures• A summary of communication actions and networking• The final outcomes and results of the assessment• Conclusions• References and key sources

The Final Report will be submitted in April 2007.


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ANNEX 1: TERMS OF REFERENCE

Task specifications to Specific Contract No 1 (implementing framework contract No Trade 05-G3-01)

This annex specifies the tasks, activities and reporting which will be carried out during this specific agreement.

Requirements and timetables defined by the Commission must be strictly respected by the contractor.

For information related to the objectives and content of the Trade SIA methodological framework, see the terms of reference of the call for tender of the framework contract.

A) Main tasks and services of this specific agreement

This specific agreement 1 should assess how the trade aspects of the Association Agreement could affect sustainable development in the EU and beyond, in particular in the MERCOSUR countries.

The aims of this specific agreement are the following:

1) to up date the Overall Preliminary Trade SIA EU-MERCOSUR2) to conduct three Trade SIAs including Automotives-Motor Vehicles and Agriculture

1) Up dated overall preliminary Trade SIA EU-Mercosur

The study will provide an overall assessment of the potential impact on sustainability of the trade aspects for an Association Agreement between the European Communities and Mercosur. The overall preliminary Trade SIA will allow for the cross-sectoral and cumulative impacts likely to result from the implementation of the trade aspects of the Association Agreement between the European Communities and Mercosur as a whole. The assessment will build on the preliminary overview Trade SIA done in 2003. The up dated overall preliminary Trade SIA will be based on an assessment of two scenarios:

i.) a baseline scenario, without agreement ii.) a scenario with trade agreement

The overall preliminary Trade SIA will:

• Draw together the results of the earlier study and complement this with furtheranalysis in order to up date the preliminary overall Trade SIA results in light of theprogress made so far in trade negotiations.

• On this basis, identify, as far as possible in quantitative terms, the likely impacts onthe three key areas of sustainability – economic, social and environmentaldevelopment – of the different aspects of the proposed EU-Mercosur trade agreement.

• On the basis of identified impacts, propose mitigation and enhancement measures indifferent areas of public policy, including trade policy.


• Identify the generic issues (potential sustainability impacts and policy options foroptimising outcomes) which can inform negotiators and policy-makers.

• Evaluate the Trade SIA methodology and identify areas for further development andrefinement in future Trade SIAs.

• Provide proposals for the ongoing monitoring of key sustainability indicators affectedby trade liberalisation and for ex-post evaluation of the overall preliminary Trade SIAEU-Mercosur.

• Contribute to enhancing the dialogue concerning the overall preliminary Trade SIAEU-Mercosur with interested stakeholders, inside and outside of the EU.

• Produce an SIA-Trade Newsletter and distribute in electronic and paper format.• Contribute to the development of a credible international network of Trade SIA

experts in other countries and within other international organisations, particularly inrelation to Mercosur.

2) Three Sectoral Trade SIAs including Automotive-Motor Vehicles and Agriculture

Each of the sectoral Trade SIAs should aim to achieve:

• An update of the Trade SIA methodology for these sectors and assessment tools to beused.

• A clear overview of the current trade situation in the three sectors, together with adefinition of the options/scenarios to be considered and a clear analysis of causal chainanalysis and the mechanisms through which the different options will affect social,economic and environmental areas.

• An analysis of the expected significance of these impacts for the sector, usingappropriate measures and indicators for assessment of impacts and making use ofappropriate qualitative and quantitative techniques.

• Identification cross-cutting links between these sectors and other sectors.• Propose preventive as well as flanking measures or other adjustments that would

prove effective in tackling any adverse impacts of liberalisation, and/or in promotingits positive impacts, in these three sectors.

• Contribute to enhancing the dialogue concerning the above Trade SIA with allinterested stakeholders: inside and outside of the EU, particularly in Mercosurcountries.

• Contribute to the development of a credible international network of Trade SIAexperts through participation in policy debate on Sustainability Impact Assessmentswith experts in other countries and within other international organisations.

B) Preliminary sustainability assessment of the overall preliminary Trade SIA andof the three sectoral Trade SIAs

The aim of preliminary assessment of the trade aspects of the Association Agreement EU-MERCOSUR is to present an overview of all the three dimensions of sustainable development (economic, social and environmental) at stake in the trade aspects of the Association Agreement between EU and Mercosur for each of the Trade SIAs to be developed in the scope of this specific agreement 1.


Attention should be paid to building a coherent and rigorous assessment framework. This should include quantitative analysis and modelling as set out in the consultant offer for the framework contract No Trade 05-03-01.

These preliminary assessments should rely on:

1) scenarios and findings delivered by the previous economic and trade analysis;2) an analysis of the underlying sustainability context (economic, social and environmentalcontext);3) a clear analysis of the mechanisms through which the different scenarios of the agreementwill affect social, economic and environmental areas.

The specific preliminary assessments should provide an analysis in the EU at a regional/national and if appropriate sub national (regional, NUTS 2) level with:

• a preliminary assessment of possible economic impacts of the trade aspect of theAssociation Agreement between EU and MERCOSUR;

• the preliminary social, and environmental impacts of the trade aspects of AssociationAgreement between EU-MERCOSUR with an analysis of the causal chains whichidentify the significant cause-effect link between a proposed change in trade policyand its social (including gender and poverty), environmental (including all media) andeconomic impacts. This analysis should as far as possible combine qualitative andquantitative approaches and a wide range of indicators.

This analysis should cover all trade-related aspects of each sector, highlighting the potential positive and negative effects on sustainability as well as preliminary reflections on possible complementary measures which such effects require.

The main output will comprise:

1) a first identification of key sustainability issues and most potentially-affected socialgroups and geographical areas;2) as a next step, proposal of a set of sector studies for study in the next phase of the contract,to be agreed in consultation with the Commission and Civil Society.

C) Detailed study of sub-sectors and case studies

Sub-sectors will be analysed in detail notably with the help of at least one case study for each sector. This work will include:

• Quantitative analysis informed by modelling results according to the consultant offerfor the framework contract No Trade 05-03-01 as well as qualitative assessments ofthe impact of potential outcomes in the sub-sector concerned. This work should beundertaken on the basis of case studies and economic, social and environmentalanalysis (including environmental impact assessment(s), using appropriatemethodology, measures and indicators, and making use of both qualitative andquantitative techniques as appropriate. Impacts shall be as much as possibledifferentiated amongst EU regions (in particular for the weakest regions of theenlarged EU) - NUTS 2 level.

• Analysis of cross sectoral effects.


• Suggest possible amendments or adaptations (including phasing in) of the assessedtrade measures or new rules whose potential sustainability impacts are expected to beimportant, taking into account the existing regulatory frameworks and domesticpolicies.

• Based on the existing regulatory frameworks and domestic policies of thecountries/regions under review, suggestions on what complementary measures mightbe introduced to best address the negative impacts and maximise the positive impactof further liberalisation / changes in rule-making. This should include an assessmentof the various options for mitigating and enhancing measures, including those whichcould be introduced on a domestic or regional level, in international fora, or in otherareas of the ongoing negotiation processes. Identify inherent trade-offs where theyexist and specify on which basis and principles the choices on measures have to bemade (e.g. precaution, prevention, cost-effectiveness, internalisation of externalenvironmental costs, Treaty obligation of a high level of environmental protection).

The consultants shall select an adequate team of local experts to assist them for the geographical case studies. The list of local experts should reflect the three dimensions of sustainable development in a balanced manner. Particular attention should be paid in finding suitably qualified environmental local experts (in Mercosur countries).

D) Process and consultation

Particular attention should be paid to the involvement of stakeholders, not only from the EU but also from developing countries, in particular Mercosur countries.

Recent experience of the Trade SIA shows a deficit of information and consultation both inside and outside the EU and in particular difficulty in involving third country representatives and stakeholders.

This need for better local consultation was also confirmed at the Trade SIA seminar organized by DG Trade in Brussels on 6-7 February 2003 (see more information on http://trade-info.cec.eu.int/civil_soc/docconsult.php?action=list).

Consultation in the EU and abroad is a major challenge which must be met in order for the EU’s Trade SIA process to ensure its credibility and legitimacy.

The objectives of the consultation process are:

a) to ensure a better understanding of the Trade SIA process by society inside and outsideEurope;

b) to disseminate the Trade SIA methodology, process and results inside and outside theEU. Trade SIA results should also be validated and complemented with opinions fromexperts in order to improve the analytical work and next steps;

c) to contribute to the identification of priority areas and key issues (see previous section);d) to extend the network of Trade SIA expertise.

This specific agreement should look at maintaining and strengthening the existing Trade SIA consultation process by which the Commission can ensure transparency of the Trade SIA process and enable civil society and other stakeholders to provide inputs during the study. This will include:


• Presentations of the inception, mid-term and final reports at public meetings inBrussels.

• Electronic dissemination of the inception, mid-term and final report, using ExpertsNetwork and project website.

• Produce a SIA-Trade Newsletter and distribute in electronic and paper format.• Participate in international meetings and consultations on impact assessment, and

make oral or written presentations on the Trade SIA Trade methodology and workprogramme.

E) Composition and competence of the working team of the overall preliminary TradeSIA and of the three sectoral Trade SIAs

Before starting the work on this specific agreement the consultant should provide an indicative list which sets up a minimum qualification team for the overall preliminary Trade SIA and for the three sectoral Trade SIAs.

F) Working meetings in Brussels

The Contractor will be required to attend meetings in Brussels with Commission officials. These will include: working meetings at the launch of both studies, presentations and explanations by the Contractor of work completed, further information from the Commission on negotiating developments and discussion of future work.

This will usually entail, as a minimum, one meeting at the start of the specific contract 1 and thereafter one meeting for each phase of the Trade SIAs work (inception, mid-term and final reports), with other meetings arranged on an ad hoc basis as necessary. A set of six working meetings of one day should be foreseen within this specific agreement.

The consultant will be asked to draft a complete report for each of these meetings.

G) Public meetings

The Contractor will be required to participate in public meetings organised by the Commission involving representatives of Member States, the European Parliament and Civil Society. It must present and explain work completed and provide the opportunity for interested stakeholders to provide direct input.

This will usually entail a minimum of three meetings (held back-to-back with the meetings with the Commission).

The consultant will be asked to draft a complete report for each of these meetings.

H) Electronic documentation

The Contractor must create and maintain a web-site dedicated to the above SIA project with a link to the DG Trade web-site. All reports, meeting reports, outputs presented to the Commission including the news letter, the list of consultant networks and consultation documents will be published by the Contractor on this web-site.


The web-site should incorporate a feedback function allowing all interested parties to provide input and setting up of a forum of discussion to further stimulate the involvement of civil society.

I) Deliverables

i) Content of the reports for each of the four Trade SIAs:

The two first reports (interim and midterm) should aim to describe 1) the state of play of the study and 2) the way ahead and to propose some further developments to be discussed with the Commission. The Commission draw the attention of the consultant to a necessity of transparency in reports which must include all the references, analytical paths needed to understand fully the outcomes and results of the study.

Interim report:

This interim report will provide the Commission with:

• An overview of the consultant’s proposed approach to the study, including apresentation of the conceptual framework of the sustainability assessment analysis.

• A description of preliminary methodological developments or changes from paststudies.

• A review of literature, list of tools and references to be uses, list of contact inMercosur countries.

• A preliminary screening exercise for the key sustainability issues/impacts associatedwith the trade agreement, based as far as possible on quantitative indicators.

• A preliminary discussion on the selection of sector specific indicators relevant for thisstudy.

• Outlines of the contents for both the mid-term and final reports.

Midterm report:

The midterm report summarise the work that has been undertaken on the project and its principal outcomes in September.

In particular, it will describe:

• Implementation of the methodology: a summary of the process by which themethodology has been implemented in the case of EU-Mercosur negotiations

• Information on communication activities:- Creation of the web site and links to other web sites. Number of hits.- Consultations and dialogue with external experts ad civil society: summary of

comments and suggestions received (via e-mail, web site comment function,ordinary mail, meetings etc.) and the uses made of these.

- Development of network of Trade SIA experts: contacts undertaken,information supplied and comments received.

• State of play of study underway, outcomes regarding the screening phase, design ofsector studies


• The way ahead to complete the study

Final report:

The final report will entail the following elements

• The methodology used for the Trade SIA• The outcomes and results of the assessment• Proposals of flanking measures• Communication actions, networking• Conclusions• References and key sources

ii) Timing:

Deliverables for this preliminary, will be produced in accordance with the following timetable:

Inception Report Mid-Term Report Final Report Overall preliminary Trade SIA

July 2006 November 2006 March 2007

Sectoral Trade SIAs: July 2006 November 2006 March 2007


ANNEX 2. KEY STATISTICS FOR THE MERCOSUR COUNTRIES

Table 1 Argentina .

Argentina 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Real Income

GDP annual growth rate (%) 5.8 -2.8 5.5 8.1 3.8 -3.4 -0.8 -4.4 -10.9 8.8 9

GDP/capita growth %) -4.13 4.2 6.75 2.54 -4.6 -2.02 -5.54-

11.95 7.54 7.69

GDP $USb 257 258 272 293 299 284 284 269 102 130

GINI Coefficient - - 48.58 - 49.84 - 52.24 52.52 52.75 - -


Gross capital formation (% annual growth) -6.8 -

15.66 -

36.45 38.17 34.5

Gross fixed capital (% of GDP) 16 14 12 15 19

FDI net inflows (% of GDP) 3.66 0.81 2.11 1.27 2.67

Employment Urban Unemployment (% total) 17.5 17.2 14.9 12.9 14.3 15.1 17.4 19.7 17.3 13.6

Unemployment (%) 12.1 18.8 17.2 14.9 12.8 14.1 15 17.4 19.6 - -

Development Assistance

% of GNI 0.06 0.06 0.05 0.05 0.03 0.04 0.03 0.06 0 - -

US$/Capita 4.36 4.21 3.9 3 2.4 2.82 2.13 4.19 0 - -

External Debt

% of GDP 19.67 21.41 22.97 22.93 25.85 29.82 31.03 32.93 90.23 76.54 19.67

Debt Service/Exports (%) 25.2 30.2 39.4 49.9 57.5 75.4 70.8 42.3 16.5 37.9 25.2

Trade (2004)

Exports (% of total) Imports (% of total) Manufactures 28.6 87.2

Fuels/Mining 20 6.6

Agriculture 49.6 5.1

Table 2 Brazil

Brazil 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Real Income

GDP annual growth rate (%) 5.9 4.2 2.7 3.3 0.1 0.8 4.4 1.3 1.9 0.5 5.2

GDP/capita growth %) 5104 5248 5614 5719 5650 5620 5778 5795 5798 5754 5983

GDP $USb 546 704 775 808 788 537 602 508 461 492 546

GINI Coefficient 61.51 59.98 59.05 59.8 59.19 59.25 - 58.75 58.12 56.99 61.51


Gross capital formation (% annual growth) 9.98 -1.14 -4.27 -4.48 10.9

Gross fixed capital (% of GDP) 21.54 21.2 19.76 19.76 21.31

FDI net inflows (% of GDP) 5.45 4.43 3.6 2 3.01

Employment Urban Unemployment (% total) - 4.6 5.4 5.7 7.6 7.6 7.1 6.2 11.7 12.3 11.5

Unemployment (%) - 6.1 7 7.8 9 9.6 - 9.4 - - -


% of GNI 0.05 0.04 0.04 0.04 0.04 0.04 0.06 0.07 0.09 - -

US$/Capita 1.61 1.71 1.78 1.76 2.02 1.11 1.9 2.02 2.15 - -


External Debt

% of GDP 17.46 13.96 12.44 10.81 12.47 17.21 15.58 18.47 21.05 19.29 -

Debt Service/Exports (%) 30 36.6 42.2 62.7 79.4 117.8 93.5 75.5 68.9 63.8 -

Trade (2004)

Exports (% of total) Imports (% of total) Manufactures 32 6.7

Fuels/Mining 13.5 22.5


Table 3 Paraguay

Paraguay 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Real Income

GDP annual growth rate (%) 3.1 4.7 1.3 2.6 -0.4 0.5 -0.4 2.7 -2.3 2.6 2.1

GDP/capita growth %) - 2.03 -1.29 0.04 -2.87 -1.96 -2.76 0.26 -4.63 -0.17-

0.57

GDP $USb 7.85 9.02 9.63 9.61 8.6 7.74 7.72 6.85 5.59 5.81 -

GINI Coefficient - 59.13 - 56.52 - 56.85 - - 57.98 - -


Gross capital formation (% annual growth) -4.76 -17.5-

10.76 7.96 2.69



Employment Urban Unemployment (% total) - 5.3 8.2 7.1 6.6 9.4 10 10.8 14.7 11.2 10

Unemployment (%) 4.4 3.4 8.2 - 5.4 6.8 - - - - -


% of GNI 1.2 1.53 0.91 1.13 0.89 1.01 1.05 0.9 1.01

US$/Capita 20.75 29.7 18.49 22.04 15.24 15.16 15.52 11.39 10.29

External Debt

% of GDP 17.31 16.12 14.7 15.23 18.5 26.91 26.79 29.18 36.7 38.25

Debt Service/Exports (%) 6.3 5.6 5.1 6.6 5.7 7.7 10.9 12.7 12.4 9.9

Trade (2004)

Exports (% of total) Imports (% of total) Manufactures 86 8




Table 4 Uruguay

Uruguay 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Real Income

GDP annual growth rate (%) 7.3 -1.4 5.6 5 4.5 -2.8 -1.4 -3.4 -11 2.5 12

GDP/capita growth %) -1.22 4.94 3.53 3.41 -3.3 -2.27 -3.49-

12.05 2.74 10.67

GDP $USb 17.44 19.3 20.52 21.7 22.37 20.91 20.09 18.56 12.28 11.18

GINI Coefficient 43.76 45.18 44.56 44.96 44.83


Gross capital formation (% annual growth) -13.1 -9.41-

32.49 -11.4 32.07



Employment Urban Unemployment (% total) - 10.3 11.9 11.5 10.1 11.3 13.6 15.3 17 16.9 13.1

Unemployment (%) 9.2 10.2 - - 10.1 11.3 13.6 15.3 18.6 - -


% of GNI 0.55 0.77 0.43 0.36 0.17 0.16 0.12 0.11 0.09 0.09 0.11

US$/Capita 22.01 35.76 23.27 21.05 10.79 10.52 7.75 6.74 5.25 4.63 3.99

External Debt

% of GDP 21.5 19.86 19.91 20.99 22.86 24.31 27.76 32.83 56.03 66.45 -

Debt Service/Exports (%) 15.2 22.1 15.4 15.6 23.8 24.7 29.4 35.9 40.3 26.3 -

Trade (2004)

Exports (% of total) Imports (% of total) Manufactures 63 12.7


Agriculture 30.2 62

Table 5 Mercosur’s agriculture, manufacture and service sectors value added (% of GDP)

Year 1995 1998 2000 2002 2004

Country/Sector Agr Man Ser Agr Man Ser Agr Man Ser Agr Man Ser Agr Man Ser

Mercosur 12 19 58 11 17 61 10 16 63 13 16 57 15 18 53

Argentina 6 19 66 6 19 65 5 18 67 11 22 57 10 24 54

Brazil 9 24 54 8 17 63 7 17 65 9 13 53 10 11 50

Paraguay 25 15 49 24 15 49 20 13 54 24 14 51 27 14 49

Uruguay 8 19 64 7 18 65 6 16 68 9 16 66 11 21 60 Source: World Development Indicators (Edition: April 2006)


ANNEX 3. DETAILED MODEL RESULTS

Contents

Sectors and regions Economic welfare Value added Employment Real price change Trade Energy use and CO2 emission


Sectors and regions

Table 2: Sector aggregation in the model Sector GTAP sector Corresponding ISIC/CPC

codes Grains Paddy rice; Wheat; Cereal grains

nec. CPC 0111-0116, 0119

Crops Vegetables, fruit, nuts; Oil seeds; Sugar cane, sugar beet; Plant-based fibers; Crops nec

CPC 012-017, 019

Bovine Bovine cattle, sheep and goats, horses; Animal products nec; Raw milk

CPC 0211-0212, 0291-0295, 0297-0299

Forestry Forestry CPC 03 Fishing Fishing ISIC 015 Energy, minerals Coal; Oil; Gas; Minerals nec ISIC 101-103, 111-112, 12-

14 Food Products Bovine meat products; Meat

products nec; Vegetable oils and fats; Dairy products; Processed rice; Sugar; Food products nec; Beverages and tobacco products

CPC 2111-2114, 216-218, 22-25

Textiles and wearing

Wool, silk-worm cocoons; Textiles; Wearing apparel; Leather products

CPC 0296, ISIC 17-19, 243

Wood and paper Wood products; Paper products, publishing

ISIC 20-22

Chemicals Petroleum, coal products; Chemical, rubber, plastic products

ISIC 23-25

Metal products Mineral products nec; Ferrous metals; Metals nec; Metal products

ISIC 26-28

Motor vehicles and parts

Motor vehicles and parts ISIC 34

Transport equipment Transport equipment nec ISIC 35 Machinery Electronic equipment; Machinery

and equipment nec; Manufactures nec

ISIC 29-33, 36-37

Electricity, gas, water

Electricity; Gas manufacture, distribution; Water

ISIC 40-41

Construction Construction ISIC 45 Trade Trade ISIC 50-55, Communication Communication ISIC 64 Transport service Transport nec; Water transport; Air

transport ISIC 60-63

Financial services Financial services nec; Insurance ISIC 65-67 Business services Business services nec; ISIC 70-74 Other services Recreational and other services;

Public Administration, Defense, Education, Health; Dwellings

ISIC 75, 80, 85, 90-99



Table 3: Regions in the model

Regions

Argentina Brazil Paraguay Uruguay Venezuela MERCOSUR associates:

Boliva, Chile, Columbia, Equador, Peru

Other South America: Rest of South America, Central America,

Rest of FTAA, Rest of Caribbean

European Union 15: Old Eu member states

European Union 10: New EU Members

Rest of world

Economic welfare

Table 4: Welfare Effects, millions of dollars

tariff cuts services trade

facilitation total

total excluding

trade facilitation

Argentina 411 138 705 1.255 549 Brazil 4.510 465 1.908 6.883 4.975 Paraguay 502 12 129 643 514 Uruguay 272 21 76 369 294 Venezuela -267 61 297 91 -206MERCOSUR associates -165 -12 4 -173 -177Other South America -65 -7 5 -67 -72EU15 1.306 558 1.836 3.700 1.864EU10 39 18 144 201 57 ROW -2.594 -199 -189 -2.982 -2.793

Table 5: Welfare Effects, % of GDP


facilitation total

total excluding

trade facilitation

Argentina 0,2 0,1 0,3 0,5 0,2


Brazil 1,0 0,1 0,4 1,5 1,1 Paraguay 7,8 0,2 2,0 10,0 8,0 Uruguay 1,6 0,1 0,4 2,1 1,7 Venezuela -0,2 0,1 0,3 0,1 -0,2MERCOSUR associates -0,1 0,0 0,0 -0,1 -0,1Other South America 0,0 0,0 0,0 0,0 0,0EU15 0,0 0,0 0,0 0,1 0,0EU10 0,0 0,0 0,0 0,1 0,0ROW 0,0 0,0 0,0 0,0 0,0

Table 6: GDP, % change in quantity index

tariff cuts services trade facilitation total total excluding trade facilitation Argentina 0,0 0,0 0,3 0,3 0,0 Brazil 0,3 0,1 0,4 0,8 0,3 Paraguay 1,6 0,1 0,8 2,5 1,7 Uruguay 0,5 0,1 0,4 0,9 0,6 Venezuela -0,1 0,0 0,3 0,3 0,0 MERCOSUR associates 0,0 0,0 0,0 0,0 0,0 Other South America 0,0 0,0 0,0 0,0 0,0 EU15 0,1 0,0 0,0 0,1 0,1 EU10 0,0 0,0 0,0 0,1 0,0 ROW 0,0 0,0 0,0 0,0 0,0

Table 7: Tariff Revenue Effects, millions of dollars

base revenue new revenue change Argentina 1.984 1.044 -940Brazil 5.609 3.185 -2.424Paraguay 151 164 13 Uruguay 246 129 -117Venezuela 2.175 1.308 -867MERCOSUR associates 3.625 3.558 -67Other South America 6.725 6.995 270EU15 20.861 18.306 -2.556EU10 6.207 2.152 -4.055ROW 183.166 184.642 1.476

Value added

Table 8: Share of total output in benchmark


associates

Other South

America EU15 EU10 ROW grains 1,5 0,5 2,3 1,9 1,0 1,2 0,9 0,4 0,8 0,9 crops 2,5 2,8 13,2 1,6 2,7 5,1 4,6 1,0 2,2 2,2 animal products 1,8 1,9 4,7 7,0 3,3 2,7 2,3 0,8 1,4 1,0 forestry 0,2 0,2 2,1 0,5 0,1 0,5 0,3 0,2 0,5 0,3 fisheries 0,1 0,0 0,1 0,3 0,7 0,7 0,4 0,3 0,1 0,3 mining 2,2 1,5 0,1 0,3 12,6 4,9 1,3 0,5 1,5 2,3


processed foods 3,9 3,5 4,8 7,4 5,0 6,5 5,1 3,2 6,1 2,5 textiles and clothing 1,6 1,5 1,9 2,2 1,5 3,0 4,3 1,2 2,6 1,5 wood, pulp, paper 1,8 1,7 1,4 1,4 1,6 3,0 2,2 2,3 3,5 2,7 chemicals 2,6 3,5 0,6 3,1 4,6 2,8 2,8 3,2 3,8 2,9 metals 2,3 2,7 2,6 2,4 3,1 3,9 2,9 3,5 5,3 3,2 motor vehicles 0,9 0,9 0,0 0,5 1,3 0,6 0,6 1,8 1,8 1,3 transport equipment 0,2 0,9 0,0 0,1 0,4 0,2 0,5 0,5 0,5 0,6 machinery 1,6 4,4 1,0 1,1 0,8 2,3 3,4 6,1 6,4 5,6 utilities 2,2 3,2 18,8 4,5 3,9 3,2 1,7 2,3 4,0 2,4 construction 4,3 10,0 4,6 3,1 5,6 6,3 5,7 5,9 6,4 6,4 wholesale, retail 14,7 8,5 18,6 8,5 14,0 9,5 11,0 13,1 13,8 13,4 communications 2,3 1,7 1,3 2,2 2,2 2,3 2,4 2,5 2,4 2,2 transport services 5,3 2,2 3,3 10,4 11,9 5,7 6,3 4,3 6,0 4,6 finance 3,9 8,1 2,6 3,6 2,9 4,0 4,7 4,3 2,3 6,5 business services 6,6 13,4 3,0 5,4 5,6 6,1 7,0 12,8 12,4 7,6 other services 37,6 26,7 12,9 32,7 15,2 25,2 29,6 30,0 16,2 29,5 Sum 100 100 100 100 100 100 100 100 100 100

Table 9: Share of total output in scenario Argentina Brazil Paraguay Uruguay Venezuela EU15 EU10

grains 1,7 0,6 2,9 1,9 1,0 0,4 0,8 crops 2,6 2,8 13,5 1,6 2,8 1,0 2,2 animal products 1,9 2,5 7,1 7,3 3,2 0,7 1,4 forestry 0,2 0,2 2,1 0,5 0,1 0,2 0,5 fisheries 0,1 0,0 0,1 0,4 0,7 0,3 0,1 mining 2,2 1,4 0,1 0,3 12,8 0,5 1,5 processed foods 4,1 5,2 9,2 8,6 4,9 3,1 5,9 textiles and clothing 1,5 1,4 1,5 1,8 1,5 1,2 2,6 wood, pulp, paper 1,7 1,6 1,3 1,2 1,6 2,3 3,5 chemicals 2,6 3,3 0,6 2,9 4,7 3,3 3,8 metals 2,2 2,3 2,3 2,1 3,2 3,5 5,3 motor vehicles 0,8 0,6 0,0 0,3 1,3 1,8 1,8 transport equipment 0,2 0,8 0,0 0,1 0,5 0,5 0,5 machinery 1,4 3,3 0,4 0,7 0,8 6,2 6,5 utilities 2,2 3,2 8,8 4,6 3,9 2,3 4,0 construction 4,3 10,1 4,7 3,2 5,6 5,9 6,4 wholesale, retail 14,6 8,6 22,4 8,6 13,9 13,1 13,8 communications 2,4 1,7 1,4 2,1 2,1 2,5 2,5 transport services 5,4 2,2 3,7 10,1 12,0 4,3 6,1 finance 3,8 7,9 2,8 3,6 2,9 4,3 2,3 business services 6,5 13,3 2,6 5,3 5,4 12,8 12,4 other services 37,6 26,8 12,5 33,0 15,1 30,0 16,2 Sum 100 100 100 100 100 100 100

Table 10; Value Added and Output Changes, Argentina


facilitation total

total excluding

trade facilitation

grains 11,0 0,1 0,2 11,4 11,2


crops 1,4 0,1 0,1 1,7 1,5 animal products 3,2 0,4 0,6 4,1 3,6 forestry -1,5 -0,1 0,3 -1,2 -1,5fisheries 3,7 0,3 0,5 4,4 4,0mining -0,2 0,0 0,2 -0,1 -0,2processed foods 4,8 0,5 0,7 6,1 5,3textiles and clothing -2,1 -0,1 0,9 -1,4 -2,3wood, pulp, paper -1,9 -0,2 0,3 -1,8 -2,1chemicals -1,2 -0,2 1,3 -0,1 -1,4metals -4,3 -0,4 1,0 -3,7 -4,7motor vehicles -12,1 -0,8 3,2 -9,7 -13,0transport equipment 1,9 -0,2 2,3 4,0 1,7machinery -15,3 -1,2 1,3 -15,3 -16,6utilities -0,3 -0,1 0,0 -0,4 -0,4construction 0,4 0,1 -0,1 0,3 0,5wholesale, retail -0,1 0,0 -0,3 -0,4 -0,1communications 0,1 0,0 1,0 1,1 0,1transport services 0,2 0,0 0,5 0,8 0,2finance 0,0 0,0 -2,1 -2,1 0,0business services 0,2 0,0 -1,3 -1,0 0,2other services 0,2 0,0 -0,1 0,2 0,2

Table 11: Value Added and Output Changes, Brazil


facilitation total

total excluding

trade facilitation

grains 14,4 0,3 0,3 15,1 14,7 crops -0,1 0,3 0,2 0,4 0,2 animal products 30,6 0,7 0,6 32,0 31,3 forestry 7,3 0,3 0,3 7,8 7,5 fisheries 2,0 0,1 0,1 2,2 2,1 mining -2,7 0,0 0,4 -2,2 -2,6processed foods 44,6 1,1 0,9 46,6 45,7textiles and clothing -7,2 0,0 0,7 -6,5 -7,2wood, pulp, paper -5,6 0,0 0,6 -5,0 -5,6chemicals -5,3 -0,3 0,5 -5,1 -5,6metals -14,8 -0,5 1,3 -14,1 -15,3motor vehicles -29,2 -0,8 0,9 -29,1 -30,0transport equipment -18,5 -0,5 1,4 -17,6 -19,0machinery -24,3 -1,2 1,1 -24,3 -25,5utilities -1,1 0,0 -0,9 -2,0 -1,1construction 1,0 0,1 0,1 1,2 1,1wholesale, retail 0,8 0,0 -0,1 0,7 0,8communications -1,1 0,0 1,0 -0,2 -1,1transport services 0,3 0,0 0,4 0,7 0,3finance -1,0 0,0 -0,3 -1,4 -1,1business services -0,1 0,0 -1,1 -1,2 -0,1other services 0,3 0,1 0,0 0,3 0,4

Table 12: Value Added and Output Changes, Paraguay



facilitation total

total excluding

trade facilitation

grains 11,7 0,4 -1,3 10,8 12,1 crops -6,0 0,1 -1,9 -7,8 -5,9animal products 39,6 0,3 -3,0 36,9 39,9forestry -5,3 0,0 -3,4 -8,6 -5,3fisheries 1,3 0,0 -0,1 1,2 1,3mining -20,2 -0,1 -3,3 -23,6 -20,3processed foods 79,0 0,6 -6,1 73,4 79,6textiles and clothing -22,6 0,0 -5,1 -27,8 -22,7wood, pulp, paper -16,1 -0,2 -5,1 -21,3 -16,2chemicals -14,5 -0,2 -5,3 -20,1 -14,8metals -16,3 -0,2 -2,6 -19,1 -16,5motor vehicles -52,7 -1,9 -11,8 -66,4 -54,6transport equipment -45,2 -0,6 -17,2 -63,0 -45,8machinery -44,9 -1,3 -11,6 -57,8 -46,2utilities -22,2 -0,2 14,5 -7,8 -22,4construction 6,8 0,2 1,7 8,6 6,9wholesale, retail 1,8 -0,1 -4,4 -2,7 1,7communications 3,0 0,0 -1,7 1,4 3,0transport services 2,0 0,0 -1,8 0,2 2,0finance -3,7 -0,1 -19,3 -23,1 -3,8business services -7,2 -0,1 -5,3 -12,6 -7,3other services 2,0 0,1 -0,5 1,5 2,1

Table 13: Value Added and Output Changes, Uruguay


facilitation total

total excluding

trade facilitation

grains 8,4 0,2 0,0 8,6 8,6 crops 1,1 0,2 0,0 1,2 1,2 animal products 4,6 0,1 -0,2 4,6 4,8 forestry -4,8 0,6 -0,3 -4,6 -4,3fisheries 6,9 0,2 -0,1 6,9 7,0mining -4,5 -0,1 -0,3 -4,8 -4,5processed foods 17,2 0,3 -0,5 17,1 17,6textiles and clothing -15,2 -0,2 -0,3 -15,7 -15,4wood, pulp, paper -6,9 -0,3 -0,6 -7,8 -7,2chemicals -4,9 -0,2 -0,4 -5,4 -5,1metals -12,3 -0,5 -1,0 -13,8 -12,8motor vehicles -37,3 -1,8 -2,5 -41,6 -39,1transport equipment -32,7 0,1 -3,1 -35,7 -32,6machinery -34,8 -1,6 -1,6 -38,0 -36,3utilities -3,8 -0,1 5,6 1,7 -3,9construction 0,3 0,1 -0,1 0,3 0,4wholesale, retail 0,8 0,0 -0,1 0,7 0,8communications -2,3 -0,1 -0,2 -2,5 -2,4transport services -3,0 -0,1 -0,1 -3,2 -3,1finance -1,3 0,0 0,8 -0,6 -1,4business services -0,3 0,0 -1,8 -2,0 -0,3other services 0,7 0,1 0,0 0,7 0,7


Table 14: Value Added and Output Changes, Venezuela


facilitation total

total excluding

trade facilitation

grains -1,3 -0,1 0,5 -0,9 -1,3crops 1,2 0,0 0,3 1,5 1,2animal products -0,8 0,0 0,1 -0,7 -0,8forestry -0,3 -0,1 0,8 0,3 -0,4fisheries -0,7 0,0 0,2 -0,5 -0,7mining 0,8 0,0 0,4 1,3 0,8processed foods -2,5 -0,1 0,4 -2,2 -2,6textiles and clothing -0,7 0,0 0,7 0,0 -0,7wood, pulp, paper -0,5 -0,1 0,7 0,2 -0,6chemicals 1,2 0,0 1,1 2,2 1,1metals 1,0 0,0 2,6 3,5 0,9motor vehicles -1,1 -0,1 1,5 0,3 -1,2transport equipment 0,9 -0,2 1,5 2,2 0,7machinery 0,5 -0,5 3,2 3,2 0,0utilities 0,2 0,0 0,8 0,9 0,2construction -0,2 0,0 -0,1 -0,3 -0,2wholesale, retail -0,2 0,0 -0,2 -0,4 -0,2communications 0,0 0,0 -1,7 -1,7 0,0transport services 0,1 0,0 0,5 0,6 0,1finance 0,1 0,0 -1,3 -1,2 0,1business services 0,4 0,0 -3,3 -3,0 0,4other services -0,1 0,0 -0,6 -0,7 -0,1

Table 15: Value Added and Output Changes, EU15


facilitation total

total excluding

trade facilitation

grains -4,2 -0,2 0,0 -4,4 -4,4crops 0,3 -0,1 0,0 0,2 0,2animal products -3,4 -0,1 0,0 -3,5 -3,5forestry 0,1 0,0 0,0 0,0 0,1fisheries -0,2 0,0 0,0 -0,3 -0,3mining 0,0 0,0 0,0 -0,1 0,0processed foods -4,9 -0,2 -0,1 -5,1 -5,1textiles and clothing 0,9 0,0 -0,1 0,9 1,0wood, pulp, paper 0,2 0,0 0,0 0,1 0,2chemicals 0,4 0,0 0,0 0,4 0,5metals 0,8 0,0 -0,1 0,7 0,8motor vehicles 1,8 0,1 -0,1 1,8 1,8transport equipment 0,2 0,0 -0,2 0,1 0,3machinery 1,5 0,1 -0,1 1,4 1,5utilities 0,1 0,0 -0,1 -0,1 0,1construction 0,0 0,0 0,0 0,0 0,0


wholesale, retail 0,0 0,0 0,0 0,0 0,0 communications 0,0 0,0 0,0 0,0 0,0 transport services 0,2 0,0 0,0 0,2 0,2 finance -0,1 0,0 0,1 0,0 -0,1business services 0,1 0,0 0,0 0,1 0,1other services 0,0 0,0 0,0 0,0 0,0

Table 16: Value Added and Output Changes, EU10


facilitation total

total excluding

trade facilitation

grains -1,4 -0,1 0,0 -1,5 -1,5crops -0,3 0,0 0,0 -0,4 -0,4animal products -1,0 0,0 0,0 -1,0 -1,0forestry -0,1 0,0 0,0 -0,1 -0,1fisheries -0,5 0,0 0,0 -0,5 -0,5mining 0,0 0,0 0,0 0,0 0,0processed foods -2,5 -0,1 0,0 -2,7 -2,6textiles and clothing 0,3 0,0 -0,1 0,2 0,3wood, pulp, paper 0,1 0,0 0,0 0,0 0,1chemicals 0,2 0,0 0,0 0,2 0,2metals 0,6 0,0 -0,1 0,6 0,6motor vehicles 0,7 0,0 0,0 0,7 0,7transport equipment 1,1 0,0 -0,2 1,0 1,2machinery 0,8 0,0 -0,1 0,8 0,9utilities 0,2 0,0 -0,1 0,2 0,2construction 0,0 0,0 0,0 0,0 0,0wholesale, retail 0,0 0,0 0,0 0,1 0,0communications 0,0 0,0 0,0 0,0 0,0transport services 0,3 0,0 0,0 0,3 0,3finance 0,0 0,0 0,0 0,0 0,0business services 0,1 0,0 0,0 0,0 0,1other services 0,0 0,0 0,1 0,1 0,0

Employment

Table 17: Share of employment in benchmark


associates

Other South

America EU15 EU10 ROW grains 1,3 0,2 2,1 2,4 1,2 1,1 0,8 0,2 0,8 0,7 crops 2,1 1,1 11,8 2,0 3,2 5,0 4,2 1,1 2,2 1,8 animal products 1,5 0,7 4,2 8,7 3,8 2,7 2,1 0,7 1,4 0,8 forestry 0,1 0,1 0,2 0,4 0,0 0,5 0,2 0,1 0,3 0,2 fisheries 0,0 0,0 0,0 0,4 0,4 0,4 0,2 0,2 0,0 0,2 mining 1,7 0,6 0,1 0,3 3,6 2,0 0,9 0,2 1,2 0,6 processed foods 4,2 2,7 2,4 8,3 4,9 4,1 3,7 2,7 6,5 1,9 textiles and clothing 1,2 1,7 2,5 2,0 2,2 1,9 2,5 1,5 3,7 1,5 wood, pulp, paper 1,9 2,4 2,0 2,3 2,1 1,7 1,6 2,8 3,2 2,9 chemicals 2,7 2,4 0,9 3,8 4,7 2,1 2,3 3,6 3,5 2,5 metals 2,8 2,5 2,4 3,6 3,6 2,8 2,8 4,3 6,5 3,2


motor vehicles 1,0 0,5 0,1 0,9 2,1 0,3 0,5 2,5 1,5 1,3 transport equipment 0,2 1,1 0,0 0,1 0,6 0,2 0,6 0,7 0,8 0,8 machinery 2,0 3,5 1,1 1,6 1,1 1,2 2,4 8,6 7,1 5,5 utilities 1,8 3,1 16,1 3,1 2,9 1,9 1,2 1,3 3,3 1,1 construction 2,0 3,9 7,3 6,0 5,2 5,8 3,3 6,3 5,7 8,3 wholesale, retail 7,3 13,0 14,3 9,4 14,1 13,3 10,3 12,4 9,3 15,2 communications 1,2 1,1 0,9 2,6 0,9 1,6 1,5 2,2 1,6 1,5 transport services 4,2 3,5 4,6 10,8 11,4 8,3 7,5 4,5 6,4 4,7 finance 3,9 12,1 4,1 6,5 2,5 4,8 5,7 4,7 2,5 8,2 business services 3,2 11,5 2,4 4,9 1,6 5,7 5,0 6,8 6,5 8,8 other services 53,6 32,5 20,5 20,0 28,2 32,5 40,7 32,8 26,0 28,4 Sum 100 100 100 100 100 100 100 100 100 100


Table 18: Share of employment in scenario Argentina Brazil Paraguay Uruguay Venezuela EU15 EU10

grains 1,4 0,3 2,4 2,6 1,1 0,2 0,8 crops 2,2 1,1 11,2 2,0 3,2 1,1 2,1 animal products 1,6 1,0 6,0 9,3 3,8 0,7 1,3 forestry 0,1 0,2 0,2 0,4 0,0 0,1 0,3 fisheries 0,0 0,0 0,0 0,4 0,4 0,2 0,0 mining 1,7 0,5 0,0 0,3 3,7 0,2 1,2 processed foods 4,4 3,9 4,3 9,8 4,8 2,5 6,3 textiles and clothing 1,2 1,6 1,8 1,7 2,2 1,5 3,7 wood, pulp, paper 1,8 2,2 1,6 2,2 2,1 2,8 3,2 chemicals 2,7 2,3 0,7 3,6 4,8 3,6 3,5 metals 2,7 2,2 2,0 3,1 3,7 4,3 6,5 motor vehicles 0,9 0,3 0,0 0,6 2,1 2,5 1,5 transport equipment 0,2 0,9 0,0 0,1 0,6 0,7 0,8 machinery 1,7 2,6 0,5 1,0 1,1 8,7 7,1 utilities 1,8 3,1 15,1 3,1 2,9 1,3 3,3 construction 2,0 3,9 8,0 6,0 5,1 6,3 5,7 wholesale, retail 7,2 13,2 14,3 9,4 14,0 12,4 9,3 communications 1,2 1,1 1,0 2,5 0,8 2,2 1,6 transport services 4,3 3,5 4,6 10,5 11,5 4,5 6,5 finance 3,8 11,9 3,2 6,5 2,4 4,7 2,5 business services 3,2 11,4 2,1 4,8 1,5 6,8 6,5 other services 53,7 32,7 20,9 20,1 28,0 32,7 26,0 Sum 100 100 100 100 100 100 100

Table 19: Employment Changes, Argentina


facilitation total

total excluding

trade facilitation

grains 13,7 0,2 0,3 14,2 13,9 crops 3,1 0,2 0,2 3,6 3,4 animal products 5,1 0,5 0,7 6,3 5,6 forestry -1,6 -0,1 0,3 -1,4 -1,7fisheries 7,4 0,6 0,9 8,9 8,0mining -0,3 0,0 0,2 -0,1 -0,4processed foods 4,8 0,5 0,6 5,9 5,3textiles and clothing -2,2 -0,1 0,7 -1,6 -2,3wood, pulp, paper -1,9 -0,2 0,2 -1,9 -2,2chemicals -1,3 -0,2 1,2 -0,3 -1,4metals -4,4 -0,4 0,9 -3,8 -4,7motor vehicles -12,2 -0,8 3,1 -9,9 -13,0transport equipment 1,8 -0,2 2,2 3,9 1,7machinery -15,3 -1,2 1,2 -15,4 -16,6utilities -0,4 -0,1 -0,1 -0,6 -0,5construction 0,4 0,1 -0,3 0,1 0,4wholesale, retail -0,1 0,0 -0,5 -0,7 -0,1communications 0,0 0,0 0,8 0,8 0,0transport services 0,2 0,0 0,3 0,5 0,2finance -0,1 0,0 -2,2 -2,3 -0,1business services 0,1 0,0 -1,4 -1,3 0,2other services 0,1 0,0 -0,2 0,0 0,2


Table 20: Employment Changes, Brazil


facilitation total

total excluding

trade facilitation

grains 18,2 0,5 0,4 19,1 18,7 crops 2,6 0,4 0,3 3,3 3,0 animal products 35,9 0,9 0,7 37,6 36,8 forestry 8,5 0,3 0,3 9,1 8,8 fisheries 3,4 0,1 0,1 3,6 3,5 mining -4,1 0,1 0,6 -3,4 -4,0processed foods 45,4 1,1 0,9 47,4 46,6textiles and clothing -6,8 0,0 0,7 -6,1 -6,8wood, pulp, paper -5,4 0,0 0,6 -4,8 -5,3chemicals -4,7 -0,3 0,5 -4,5 -5,0metals -14,4 -0,5 1,2 -13,6 -14,9motor vehicles -28,7 -0,8 0,9 -28,6 -29,4transport equipment -18,2 -0,4 1,4 -17,2 -18,6machinery -23,8 -1,2 1,1 -23,9 -25,0utilities -0,6 0,0 -0,9 -1,6 -0,6construction 1,9 0,1 0,1 2,1 2,1wholesale, retail 1,0 0,1 -0,2 0,9 1,1communications -0,4 0,0 0,9 0,5 -0,4transport services 0,6 0,0 0,3 0,9 0,6finance -0,8 0,0 -0,5 -1,3 -0,8business services 0,4 0,0 -1,2 -0,7 0,5other services 0,7 0,1 -0,1 0,6 0,8

Table 21: Employment Changes, Paraguay


facilitation total

total excluding

trade facilitation

grains 15,8 0,5 -2,0 14,2 16,3 crops -3,7 0,2 -2,7 -6,1 -3,5animal products 46,9 0,4 -3,9 43,3 47,3forestry -5,6 0,0 -3,5 -9,0 -5,6fisheries 3,0 0,1 -0,2 2,8 3,0mining -22,8 -0,1 -3,9 -26,8 -22,9processed foods 81,1 0,6 -4,9 76,7 81,6textiles and clothing -22,7 -0,1 -4,5 -27,3 -22,8wood, pulp, paper -16,2 -0,2 -4,5 -20,9 -16,3chemicals -14,8 -0,3 -4,8 -19,8 -15,1metals -16,1 -0,2 -1,7 -18,0 -16,3motor vehicles -53,0 -1,9 -11,6 -66,4 -54,9transport equipment -45,5 -0,6 -16,9 -63,0 -46,1machinery -45,0 -1,3 -11,0 -57,3 -46,3utilities -22,2 -0,2 15,8 -6,6 -22,4construction 6,4 0,1 2,2 8,8 6,6wholesale, retail 2,6 -0,2 -3,0 -0,6 2,4communications 3,2 0,0 -0,4 2,8 3,2transport services 1,8 0,0 -1,0 0,8 1,8finance -4,8 -0,1 -18,7 -23,6 -4,9


business services -7,2 -0,1 -4,1 -11,5 -7,3other services 0,4 0,0 0,3 0,8 0,4

Table 22: Employment Changes, Uruguay


facilitation total

total excluding

trade facilitation

grains 10,9 0,3 -0,1 11,1 11,2 crops 2,9 0,2 -0,1 3,0 3,1 animal products 6,8 0,2 -0,2 6,7 7,0 forestry -5,4 0,6 -0,4 -5,2 -4,8fisheries 13,8 0,3 -0,3 13,8 14,1mining -5,0 -0,1 -0,3 -5,4 -5,1processed foods 17,1 0,3 -0,3 17,1 17,4textiles and clothing -15,4 -0,1 -0,2 -15,7 -15,5wood, pulp, paper -7,1 -0,3 -0,6 -7,9 -7,3chemicals -5,1 -0,2 -0,3 -5,5 -5,2metals -12,5 -0,4 -0,9 -13,8 -12,9motor vehicles -37,5 -1,8 -2,4 -41,6 -39,3transport equipment -32,9 0,1 -3,0 -35,7 -32,8machinery -34,9 -1,5 -1,5 -38,0 -36,5utilities -4,0 -0,1 5,8 1,6 -4,1construction 0,2 0,1 0,0 0,2 0,2wholesale, retail 0,6 0,1 0,0 0,6 0,6communications -2,6 0,0 0,0 -2,7 -2,7transport services -3,2 -0,1 0,1 -3,2 -3,3finance -1,7 0,0 0,9 -0,8 -1,8

business services -0,6 0,0 -1,6 -2,2 -0,6other services 0,4 0,1 0,1 0,6 0,5

Table 23: Employment Changes, Venezuela


facilitation total

total excluding

trade facilitation

grains -1,3 -0,1 0,5 -0,9 -1,4crops 1,3 0,0 0,3 1,6 1,3animal products -0,9 0,0 0,1 -0,7 -0,8forestry -0,3 -0,1 0,8 0,4 -0,4fisheries -0,9 0,0 0,2 -0,8 -1,0mining 1,3 0,1 0,6 1,9 1,3processed foods -2,4 -0,1 0,2 -2,3 -2,5textiles and clothing -0,6 0,0 0,5 -0,1 -0,6wood, pulp, paper -0,4 -0,1 0,5 0,0 -0,5chemicals 1,3 0,0 0,8 2,1 1,2metals 1,1 0,0 2,4 3,4 1,1motor vehicles -1,0 0,0 1,3 0,2 -1,1transport equipment 1,0 -0,2 1,2 2,0 0,8machinery 0,6 -0,4 2,9 3,1 0,1utilities 0,3 0,0 0,5 0,8 0,3construction -0,1 0,0 -0,4 -0,5 0,0wholesale, retail -0,1 0,0 -0,5 -0,6 -0,1communications 0,2 0,0 -2,0 -1,8 0,2


transport services 0,2 0,0 0,2 0,4 0,3 finance 0,2 0,0 -1,7 -1,4 0,2 business services 0,5 0,0 -3,7 -3,1 0,5 other services -0,1 0,0 -0,9 -1,0 0,0

Table 24: Employment Changes, EU15


facilitation total

total excluding

trade facilitation

grains -4,6 -0,2 0,0 -4,8 -4,8crops 0,0 -0,1 0,0 -0,1 -0,1animal products -3,7 -0,1 -0,1 -3,9 -3,9forestry 0,1 0,0 0,0 0,0 0,1fisheries -0,4 0,0 0,0 -0,4 -0,4mining 0,0 0,0 0,0 -0,1 0,0processed foods -5,0 -0,2 -0,1 -5,2 -5,1textiles and clothing 0,9 0,0 -0,1 0,9 0,9wood, pulp, paper 0,1 0,0 0,0 0,1 0,1chemicals 0,4 0,0 0,0 0,4 0,4metals 0,7 0,0 -0,1 0,7 0,7motor vehicles 1,8 0,1 -0,1 1,8 1,8transport equipment 0,2 0,0 -0,2 0,1 0,2machinery 1,4 0,1 -0,1 1,4 1,5utilities 0,0 0,0 -0,1 -0,1 0,0construction -0,1 0,0 0,0 -0,1 -0,1wholesale, retail -0,1 0,0 0,0 -0,1 -0,1communications 0,0 0,0 0,0 0,0 0,0transport services 0,1 0,0 0,0 0,1 0,2finance -0,1 0,0 0,1 0,0 -0,1business services 0,0 0,0 0,0 0,0 0,0other services -0,1 0,0 0,0 0,0 -0,1

Table 25: Employment Changes, EU10


facilitation total

total excluding

trade facilitation

grains -1,8 -0,1 0,0 -1,9 -1,8crops -0,6 0,0 0,0 -0,7 -0,7animal products -1,3 0,0 0,0 -1,4 -1,4forestry -0,1 0,0 0,0 -0,1 -0,1fisheries -0,9 0,0 0,0 -1,0 -1,0mining 0,0 0,0 0,0 -0,1 0,0processed foods -2,5 -0,1 0,0 -2,6 -2,6textiles and clothing 0,3 0,0 -0,1 0,3 0,3wood, pulp, paper 0,1 0,0 0,0 0,1 0,1chemicals 0,2 0,0 0,0 0,2 0,2metals 0,6 0,0 0,0 0,6 0,6motor vehicles 0,8 0,0 0,0 0,7 0,8transport equipment 1,2 0,0 -0,2 1,0 1,2machinery 0,8 0,0 -0,1 0,8 0,9utilities 0,3 0,0 -0,1 0,2 0,3construction 0,0 0,0 0,0 0,1 0,0


wholesale, retail 0,1 0,0 0,1 0,1 0,1 communications 0,1 0,0 0,0 0,0 0,1 transport services 0,4 0,0 0,0 0,4 0,4 finance 0,0 0,0 0,0 0,1 0,0 business services 0,1 0,0 0,0 0,1 0,1 other services 0,0 0,0 0,1 0,1 0,0

Real price change

Table 26: Real Price Changes for Domestic Output in %, Argentina


facilitation total

total excluding

trade facilitation

grains 6,4 0,2 0,5 7,2 6,6 crops 5,0 0,3 0,5 5,7 5,2 animal products 5,9 0,3 0,7 6,9 6,3 forestry -0,8 0,0 0,4 -0,5 -0,8fisheries 8,9 0,8 1,2 10,9 9,7mining -0,6 0,0 0,5 -0,2 -0,6processed foods 1,8 0,1 0,1 2,0 1,9textiles and clothing -0,4 0,0 0,1 -0,3 -0,4wood, pulp, paper -0,6 0,0 0,1 -0,5 -0,6chemicals -0,7 -0,1 -0,3 -1,0 -0,8metals -0,6 0,0 0,1 -0,5 -0,6motor vehicles -1,5 -0,1 -0,3 -1,9 -1,6transport equipment -0,9 -0,1 -0,1 -1,1 -1,0machinery -1,3 -0,1 0,1 -1,3 -1,4utilities -0,2 0,0 0,0 -0,2 -0,2construction -0,6 0,0 0,2 -0,4 -0,6wholesale, retail 0,0 0,0 0,2 0,2 0,0communications -0,2 0,0 -1,2 -1,5 -0,2transport services -0,3 0,0 0,0 -0,3 -0,3finance -0,2 0,0 0,1 0,0 -0,1business services -0,3 0,0 0,1 -0,1 -0,3other services -0,1 0,0 0,0 -0,1 -0,1


Table 27: Real Price Changes for Domestic Output in %, Brazil


facilitation total

total excluding

trade facilitation

grains 9,6 0,3 0,6 10,5 9,9 crops 7,9 0,3 0,6 8,7 8,2 animal products 12,7 0,4 0,6 13,8 13,2 forestry 4,6 0,2 0,5 5,2 4,7 fisheries 5,4 0,2 0,5 6,2 5,6 mining -3,2 0,1 0,4 -2,7 -3,1processed foods 3,4 0,1 0,2 3,7 3,5textiles and clothing -0,5 0,0 0,2 -0,3 -0,6wood, pulp, paper -0,3 0,0 0,1 -0,2 -0,3chemicals -1,1 0,0 0,3 -0,9 -1,1metals -0,7 0,0 0,1 -0,7 -0,8motor vehicles -1,0 -0,1 0,2 -0,9 -1,1transport equipment -0,7 0,0 0,2 -0,5 -0,7machinery -1,2 -0,1 0,2 -1,0 -1,2utilities 0,1 0,0 -1,0 -0,9 0,1construction 0,1 0,0 0,3 0,4 0,1wholesale, retail 0,3 0,0 0,2 0,5 0,3communications 0,4 0,0 -0,1 0,3 0,4transport services -0,7 0,0 0,2 -0,4 -0,7finance 0,4 0,0 0,0 0,4 0,4business services 0,6 0,0 0,3 0,9 0,7other services 0,5 0,0 0,2 0,7 0,5

Table 28: Real Price Changes for Domestic Output in %, Paraguay


facilitation total

total excluding

trade facilitation

grains 16,1 0,4 -1,0 15,4 16,4 crops 9,9 0,3 -0,6 9,6 10,2 animal products 18,2 0,3 -1,0 17,5 18,5 forestry 2,0 0,1 1,3 3,4 2,1 fisheries 6,2 0,1 1,5 7,9 6,4 mining -3,7 0,0 -0,3 -4,0 -3,7processed foods 6,0 0,1 0,4 6,6 6,1textiles and clothing 3,0 0,1 0,8 3,9 3,1wood, pulp, paper 1,3 0,0 1,2 2,5 1,3chemicals 0,6 0,0 0,9 1,4 0,6metals 1,4 0,0 1,4 2,9 1,4motor vehicles 2,6 0,0 1,5 4,2 2,7transport equipment 2,6 0,0 1,5 4,2 2,7machinery 1,4 0,0 1,3 2,7 1,4utilities 2,2 0,0 2,1 4,3 2,2construction 1,1 0,0 1,3 2,5 1,1wholesale, retail 3,1 0,1 1,6 4,8 3,1communications 1,9 0,0 2,1 4,0 1,9transport services -1,3 0,0 0,4 -0,9 -1,3finance 2,2 0,1 1,9 4,1 2,2


business services 2,9 0,0 2,1 5,0 3,0 other services 1,3 0,0 1,6 3,0 1,4

Table 29: Real Price Changes for Domestic Output in %, Uruguay


facilitation total

total excluding

trade facilitation

grains 6,6 0,2 0,1 6,9 6,8 crops 4,8 0,2 0,1 5,1 5,0 animal products 7,2 0,2 0,0 7,5 7,5 forestry -2,5 0,2 0,0 -2,2 -2,2fisheries 21,3 0,5 -0,2 21,6 21,8mining -1,3 0,0 0,1 -1,2 -1,3processed foods 2,2 0,1 0,1 2,4 2,3textiles and clothing -1,0 0,0 0,0 -1,0 -1,0wood, pulp, paper -2,0 -0,1 0,1 -2,0 -2,1chemicals -2,7 -0,1 0,0 -2,8 -2,8metals -0,9 0,0 0,2 -0,7 -0,9motor vehicles -3,5 -0,2 0,1 -3,6 -3,7transport equipment -0,5 0,0 0,3 -0,2 -0,5machinery -1,0 0,0 0,2 -0,8 -1,0utilities 0,6 0,0 0,3 1,0 0,7construction -1,3 -0,1 0,1 -1,2 -1,3wholesale, retail 0,5 0,0 0,1 0,5 0,5communications 0,5 0,0 -0,3 0,3 0,5transport services 0,0 0,0 0,1 0,1 0,1finance 0,6 0,0 -0,9 -0,3 0,7business services 0,0 0,0 -0,3 -0,2 0,0other services 0,2 0,0 0,0 0,3 0,3

Table 30: Real Price Changes for Domestic Output in %, Venezuela


facilitation total

total excluding

trade facilitation

grains -0,2 0,0 0,6 0,4 -0,2crops 0,3 0,0 0,5 0,9 0,3animal products -0,2 0,0 0,5 0,3 -0,2forestry 0,0 0,0 0,4 0,5 0,0fisheries -1,1 0,0 0,4 -0,7 -1,1mining 1,7 0,1 1,0 2,7 1,7processed foods -0,4 0,0 0,4 0,0 -0,4textiles and clothing -0,1 0,0 0,2 0,1 -0,1wood, pulp, paper -0,1 0,0 0,2 0,1 -0,1chemicals 0,5 0,0 0,4 1,0 0,6metals 0,1 0,0 0,2 0,3 0,1motor vehicles -0,5 -0,1 0,4 -0,2 -0,6transport equipment -0,1 0,0 0,3 0,1 -0,2machinery -0,3 -0,1 0,3 0,0 -0,4utilities 0,2 0,0 0,1 0,4 0,3construction 0,2 0,0 0,1 0,3 0,2wholesale, retail 0,1 0,0 0,1 0,2 0,1communications 0,2 0,0 0,0 0,2 0,3


transport services 0,2 0,0 0,0 0,2 0,2 finance 0,2 0,0 -0,6 -0,3 0,3 business services 0,2 0,0 -0,2 0,0 0,3 other services 0,1 0,0 0,0 0,1 0,1

Table 31: Real Price Changes for Domestic Output in %, EU15


facilitation total

total excluding

trade facilitation

grains -0,8 0,0 0,0 -0,8 -0,8crops -0,6 0,0 0,0 -0,6 -0,6animal products -0,8 0,0 0,0 -0,8 -0,8forestry 0,1 0,0 0,0 0,1 0,1fisheries -0,4 0,0 0,0 -0,4 -0,4mining 0,1 0,0 0,0 0,1 0,1processed foods -0,2 0,0 0,0 -0,2 -0,3textiles and clothing 0,1 0,0 0,0 0,1 0,1wood, pulp, paper 0,1 0,0 0,0 0,1 0,1chemicals 0,1 0,0 0,0 0,1 0,1metals 0,1 0,0 0,0 0,1 0,1motor vehicles 0,1 0,0 0,0 0,1 0,1transport equipment 0,1 0,0 0,0 0,1 0,1machinery 0,1 0,0 0,0 0,1 0,1utilities 0,1 0,0 0,0 0,1 0,1construction 0,1 0,0 0,0 0,1 0,1wholesale, retail 0,1 0,0 0,0 0,1 0,1communications 0,1 0,0 0,0 0,1 0,1transport services 0,1 0,0 0,0 0,1 0,1finance 0,1 0,0 0,0 0,1 0,1business services 0,1 0,0 0,0 0,1 0,1other services 0,1 0,0 0,0 0,1 0,1

Table 32: Real Price Changes for Domestic Output in %, EU10


facilitation total

total excluding

trade facilitation

grains -0,8 0,0 0,0 -0,8 -0,8crops -0,7 0,0 0,0 -0,7 -0,7animal products -0,6 0,0 0,0 -0,6 -0,7forestry 0,0 0,0 0,0 0,0 0,0fisheries -0,7 0,0 0,0 -0,7 -0,7mining 0,1 0,0 0,0 0,1 0,1processed foods -0,1 0,0 0,0 -0,1 -0,1textiles and clothing 0,1 0,0 0,0 0,1 0,1wood, pulp, paper 0,1 0,0 0,0 0,1 0,1chemicals 0,1 0,0 0,0 0,1 0,1metals 0,1 0,0 0,0 0,1 0,1motor vehicles 0,1 0,0 0,0 0,1 0,1transport equipment 0,1 0,0 0,0 0,1 0,1machinery 0,1 0,0 0,0 0,1 0,1utilities 0,1 0,0 0,0 0,1 0,1construction 0,1 0,0 0,0 0,1 0,1wholesale, retail 0,1 0,0 0,0 0,1 0,1


communications 0,1 0,0 0,0 0,1 0,1 transport services 0,1 0,0 0,0 0,1 0,1 finance 0,1 0,0 0,0 0,1 0,1 business services 0,1 0,0 0,0 0,1 0,1 other services 0,1 0,0 0,0 0,1 0,1

Table 33: Real Price Changes for Imports in %, Argentina


facilitation total

total excluding

trade facilitation

grains 0,3 -0,1 0,4 0,6 0,2 crops 1,1 -0,1 0,4 1,4 1,0 animal products 1,0 -0,2 0,4 1,2 0,8 forestry -1,0 -0,4 0,4 -1,0 -1,4fisheries -0,5 -0,4 0,4 -0,4 -0,8mining -0,6 0,0 0,4 -0,2 -0,6processed foods -3,2 -0,3 0,3 -3,2 -3,5textiles and clothing -3,2 -0,3 0,3 -3,1 -3,5wood, pulp, paper -3,7 -0,4 0,3 -3,8 -4,2chemicals -3,2 -0,4 0,4 -3,2 -3,5metals -3,9 -0,4 0,3 -4,0 -4,2motor vehicles -6,6 -0,5 0,3 -6,8 -7,2transport equipment -0,9 -0,2 0,4 -0,8 -1,2machinery -5,7 -0,5 0,4 -5,9 -6,2utilities 8,0 0,0 2,0 10,0 8,0construction -0,3 -0,1 -16,0 -16,4 -0,4wholesale, retail -0,3 -0,1 -13,3 -13,7 -0,4communications -0,3 -0,1 -13,6 -13,9 -0,3transport services -0,3 -0,1 0,4 0,0 -0,4finance -0,3 -0,1 -14,2 -14,5 -0,3business services -0,3 -0,1 -15,1 -15,4 -0,4other services -0,3 -0,1 -11,5 -11,8 -0,4

Table 34: Real Price Changes for Imports in %, Brazil


facilitation total

total excluding

trade facilitation

grains 3,7 0,2 0,6 4,5 3,9 crops -0,3 -0,1 0,5 0,2 -0,3animal products -4,9 -0,5 0,4 -4,9 -5,4forestry -3,2 -0,3 0,6 -3,0 -3,5fisheries -0,2 -0,1 0,4 0,2 -0,3mining -3,0 -0,1 0,4 -2,6 -3,1processed foods -9,4 -0,5 0,4 -9,5 -9,9textiles and clothing -7,6 -0,4 0,4 -7,5 -7,9wood, pulp, paper -8,2 -0,5 0,4 -8,3 -8,7chemicals -5,5 -0,4 0,4 -5,5 -5,9metals -8,3 -0,5 0,4 -8,5 -8,9motor vehicles -12,2 -0,6 0,3 -12,5 -12,8transport equipment -3,3 -0,4 0,4 -3,3 -3,7machinery -8,6 -0,5 0,4 -8,7 -9,1utilities -1,2 -0,1 -12,1 -13,4 -1,3


construction -2,9 -0,1 -13,8 -16,8 -2,9wholesale, retail -2,9 -0,1 -13,3 -16,2 -3,0communications -2,9 -0,1 -10,9 -13,8 -2,9transport services -2,9 -0,1 0,4 -2,5 -2,9finance -2,9 -0,1 -12,3 -15,3 -2,9business services -2,9 -0,1 -12,5 -15,5 -3,0other services -2,9 -0,1 -11,0 -14,0 -2,9

Table 35: Real Price Changes for Imports in %, Paraguay


facilitation total

total excluding

trade facilitation

grains 0,5 0,3 -0,9 -0,2 0,7 crops -5,6 0,0 -0,9 -6,5 -5,6animal products -0,3 0,0 -0,9 -1,2 -0,3forestry -8,1 -0,3 -1,0 -9,4 -8,4fisheries -7,2 -0,5 -1,0 -8,8 -7,8mining -7,4 0,0 -0,9 -8,3 -7,4processed foods -8,8 -0,2 -1,1 -10,1 -9,0textiles and clothing -7,5 -0,1 -1,1 -8,7 -7,6wood, pulp, paper -7,3 -0,2 -1,2 -8,6 -7,5chemicals -7,8 -0,2 -1,3 -9,2 -7,9metals -7,2 -0,1 -1,3 -8,5 -7,3motor vehicles -11,3 -0,4 -1,1 -12,7 -11,7transport equipment -7,1 -0,1 -1,1 -8,2 -7,2machinery -9,5 -0,3 -1,1 -10,8 -9,8utilities -7,1 -0,1 -22,1 -29,3 -7,1construction -7,1 -0,1 -15,9 -23,0 -7,1wholesale, retail -7,1 -0,1 -7,6 -14,7 -7,2communications -7,1 -0,1 -16,8 -24,0 -7,1transport services -7,1 -0,1 -1,0 -8,2 -7,1finance -7,1 -0,1 -21,8 -29,0 -7,1business services -7,1 -0,1 -21,5 -28,6 -7,2other services -7,1 -0,1 -10,7 -17,8 -7,1

Table 36: Real Price Changes for Imports in %, Uruguay


facilitation total

total excluding

trade facilitation

grains 5,5 0,2 0,0 5,7 5,7 crops 3,5 0,0 0,1 3,6 3,5 animal products -1,5 -0,1 0,0 -1,5 -1,5forestry -2,4 -0,3 0,7 -2,0 -2,7fisheries 1,3 0,4 0,5 2,1 1,7mining -4,9 -0,1 -0,1 -5,1 -5,0processed foods -9,1 -0,4 -0,1 -9,5 -9,5textiles and clothing -6,9 -0,3 -0,1 -7,3 -7,2wood, pulp, paper -6,7 -0,3 -0,2 -7,3 -7,1chemicals -7,3 -0,4 -0,3 -7,9 -7,7metals -8,0 -0,4 -0,2 -8,6 -8,4motor vehicles -12,7 -0,7 -0,2 -13,6 -13,4transport equipment -6,9 -0,3 -0,1 -7,4 -7,3machinery -9,6 -0,6 -0,1 -10,3 -10,1


utilities -4,7 -0,1 -25,9 -30,7 -4,8construction -4,8 -0,1 -17,2 -22,1 -4,9wholesale, retail -4,8 -0,1 -12,5 -17,4 -4,9communications -4,7 -0,1 -13,5 -18,4 -4,9transport services -4,7 -0,1 -0,1 -5,0 -4,9finance -4,7 -0,1 -13,9 -18,8 -4,9business services -4,8 -0,1 -14,0 -18,9 -4,9other services -4,7 -0,1 -12,1 -17,0 -4,9

Table 37: Real Price Changes for Imports in %, Venezuela


facilitation total

total excluding

trade facilitation

grains 2,1 0,0 1,0 3,1 2,1 crops 2,2 0,0 1,0 3,2 2,2 animal products 1,9 -0,1 1,0 2,8 1,8 forestry 0,7 -0,2 1,0 1,4 0,5 fisheries 1,0 -0,4 1,0 1,7 0,7 mining 0,9 -0,1 1,0 1,8 0,8 processed foods -5,9 -0,4 1,0 -5,4 -6,4textiles and clothing -2,0 -0,2 1,0 -1,2 -2,2wood, pulp, paper -1,0 -0,2 1,0 -0,3 -1,2chemicals -0,3 -0,2 1,0 0,4 -0,5metals -3,1 -0,3 1,0 -2,4 -3,4motor vehicles -1,6 -0,2 0,9 -0,8 -1,7transport equipment 0,3 -0,2 1,0 1,1 0,1machinery -1,0 -0,3 1,0 -0,3 -1,3utilities 1,8 0,0 -26,1 -24,3 1,8construction 1,8 0,0 -18,1 -16,3 1,8wholesale, retail 1,8 0,0 -14,6 -12,8 1,8communications 1,8 0,0 -15,1 -13,2 1,8transport services 1,8 0,0 1,0 2,8 1,8finance 1,8 0,0 -14,8 -13,0 1,8business services 1,8 0,0 -15,5 -13,7 1,8other services 1,8 0,0 -13,0 -11,2 1,8

Table 38: Real Price Changes for Imports in %, EU15


facilitation total

total excluding

trade facilitation

grains -1,7 -0,1 0,0 -1,8 -1,8crops 0,2 -0,1 0,0 0,1 0,1animal products -0,3 0,0 0,0 -0,3 -0,3forestry 0,2 0,0 0,0 0,2 0,2fisheries -0,2 0,0 0,0 -0,2 -0,2mining 0,1 0,0 0,0 0,0 0,0processed foods -3,2 -0,1 0,0 -3,4 -3,3textiles and clothing 0,1 0,0 0,0 0,1 0,1wood, pulp, paper 0,1 0,0 0,0 0,1 0,1chemicals 0,1 0,0 0,0 0,1 0,1metals 0,1 0,0 0,0 0,1 0,1motor vehicles 0,1 0,0 0,0 0,1 0,1transport equipment 0,1 0,0 0,0 0,1 0,1


machinery 0,1 0,0 0,0 0,1 0,1 utilities 0,5 0,0 -1,5 -1,0 0,5 construction 0,1 0,0 0,0 0,1 0,1 wholesale, retail 0,1 0,0 -0,2 0,0 0,1 communications 0,2 0,0 -0,4 -0,3 0,2 transport services 0,1 0,0 0,0 0,1 0,1 finance 0,2 0,0 -0,2 -0,1 0,2 business services 0,2 0,0 -0,4 -0,2 0,2 other services 0,1 0,0 -0,3 -0,1 0,1

Table 39: Real Price Changes for Imports in %, EU10


facilitation total

total excluding

trade facilitation

grains -0,8 -0,1 0,0 -0,8 -0,8crops -0,6 0,0 0,0 -0,6 -0,6animal products -0,4 0,0 0,0 -0,4 -0,4forestry 0,1 0,0 0,0 0,1 0,1fisheries -0,2 0,0 0,0 -0,2 -0,2mining 0,1 0,0 0,0 0,0 0,1processed foods -0,5 0,0 0,0 -0,5 -0,5textiles and clothing 0,1 0,0 0,0 0,1 0,1wood, pulp, paper 0,1 0,0 0,0 0,1 0,1chemicals 0,1 0,0 0,0 0,1 0,1metals 0,1 0,0 0,0 0,1 0,1motor vehicles 0,1 0,0 0,0 0,1 0,1transport equipment 0,0 0,0 0,0 0,0 0,0machinery 0,1 0,0 0,0 0,1 0,1utilities 1,0 0,0 -3,2 -2,2 1,0construction 0,1 0,0 0,0 0,1 0,1wholesale, retail 0,1 0,0 -0,2 -0,1 0,1communications 0,2 0,0 -0,4 -0,2 0,2transport services 0,1 0,0 0,0 0,1 0,1finance 0,2 0,0 -0,2 0,0 0,2business services 0,2 0,0 -0,3 -0,2 0,2other services 0,1 0,0 -0,3 -0,2 0,1

Trade

Table 40: Share of export Argentina Brazil Paraguay Uruguay Venezuela EU15 EU10

Argentina 0,0 43,6 3,0 5,0 1,8 45,0 1,6 100 Brazil 18,8 0,0 2,6 2,4 4,0 69,4 2,8 100 Paraguay 15,8 40,7 0,0 7,0 1,0 30,0 5,4 100 Uruguay 17,7 28,7 4,9 0,0 3,2 42,8 2,7 100 Venezuela 1,1 17,4 0,1 3,7 0,0 76,9 0,8 100 EU15 5,2 15,6 0,3 0,7 3,1 0,0 75,2 100 EU10 0,3 0,8 0,0 0,0 0,1 98,7 0,0 100


Table 41: Share of import Argentina Brazil Paraguay Uruguay Venezuela EU15 EU10

Argentina 0,0 37,9 2,5 2,4 0,3 54,8 2,1 100 Brazil 20,1 0,0 2,8 1,7 1,7 71,1 2,6 100 Paraguay 26,6 43,6 0,0 5,5 0,2 23,5 0,6 100 Uruguay 27,4 24,6 5,7 0,0 4,2 37,0 1,0 100 Venezuela 4,2 18,4 0,4 1,0 0,0 73,5 2,5 100 EU15 5,0 14,6 0,5 0,6 1,8 0,0 77,5 100 EU10 0,2 0,7 0,1 0,0 0,0 98,9 0,0 100


Table 42: Change in Imports %, Argentina

Share of import (benchmark) tariff cuts services

trade facilitation total

total excluding trade facilitation

grains 0,0 53,9 2,7 1,4 57,9 56,6 crops 0,9 17,8 1,9 0,8 20,4 19,6 animal products 0,1 34,7 3,8 2,2 40,8 38,6 forestry 0,0 -1,6 0,7 0,4 -0,5 -1,0fisheries 0,0 9,1 1,1 1,0 11,2 10,2mining 1,5 -2,2 -0,2 2,1 -0,4 -2,5processed foods 4,0 61,6 5,1 -1,6 65,1 66,7textiles and clothing 4,7 17,3 1,3 -1,1 17,5 18,6wood, pulp, paper 6,1 15,4 1,6 -0,9 16,1 17,1chemicals 16,5 6,2 0,5 -0,9 5,8 6,7metals 8,1 16,2 1,4 -0,5 17,1 17,6motor vehicles 9,3 33,1 2,1 -2,8 32,4 35,2transport equipment 0,8 0,7 0,7 -1,8 -0,4 1,4machinery 23,4 21,0 1,4 -0,7 21,8 22,4utilities 2,0 -21,3 -0,1 -6,4 -27,8 -21,4construction 0,1 -0,6 0,2 47,0 46,7 -0,3wholesale, retail 2,7 -1,4 0,1 25,5 24,2 -1,3communications 0,8 0,2 0,2 14,9 15,2 0,3transport services 8,3 -0,7 0,1 -0,5 -1,1 -0,6finance 2,3 0,0 0,2 29,6 29,9 0,3business services 3,7 -0,4 0,2 28,4 28,1 -0,3other services 4,5 0,7 0,3 25,5 26,5 1,0

Table 43: Change in Imports %, Brazil




grains 3,6 64,9 1,5 0,9 67,3 66,4 crops 1,5 68,6 2,5 0,7 71,9 71,2 animal products 0,1 302,6 12,0 3,7 318,3 314,7 forestry 0,0 59,7 2,8 0,3 62,8 62,5 fisheries 0,0 42,4 1,2 0,9 44,5 43,6 mining 2,1 -8,3 1,2 0,5 -6,6 -7,1processed foods 3,3 274,4 11,8 -2,8 283,5 286,3 textiles and clothing 1,8 58,3 2,7 -0,7 60,3 61,0 wood, pulp, paper 1,8 49,0 2,8 -1,2 50,6 51,8 chemicals 17,0 10,4 0,7 0,1 11,1 11,0 metals 5,4 45,8 2,9 -1,5 47,2 48,7 motor vehicles 9,2 114,0 4,8 -0,7 118,1 118,8 transport equipment 3,8 -8,7 1,6 -0,7 -7,8 -7,1machinery 24,7 38,1 2,1 -0,8 39,4 40,1utilities 4,8 0,7 0,1 4,9 5,7 0,8construction 0,0 14,0 0,5 41,3 55,8 14,5wholesale, retail 1,6 13,5 0,5 37,5 51,5 14,0communications 0,4 0,2 0,0 -3,3 -3,1 0,2transport services 5,5 5,9 0,2 -0,1 6,0 6,1finance 2,1 10,7 0,4 31,7 42,9 11,1business services 8,6 15,5 0,5 30,6 46,5 16,0other services 2,6 10,4 0,4 21,9 32,6 10,8






grains 0,6 184,9 1,2 -4,6 181,6 186,1 crops 2,4 185,0 2,0 -5,0 182,1 187,1 animal products 0,4 359,6 3,7 -9,3 354,0 363,3 forestry 0,0 52,5 1,9 7,5 61,8 54,4 fisheries 0,0 40,9 1,3 6,5 48,8 42,3 mining 1,0 0,9 -0,2 -1,7 -0,9 0,8 processed foods 13,5 221,2 4,1 16,7 242,0 225,3 textiles and clothing 4,7 77,2 1,4 11,8 90,4 78,6 wood, pulp, paper 6,1 34,8 0,6 9,9 45,4 35,5 chemicals 31,6 11,9 0,1 1,6 13,7 12,1 metals 8,7 48,9 0,6 16,2 65,7 49,5 motor vehicles 2,9 55,1 1,5 10,8 67,3 56,6 transport equipment 0,3 14,0 0,2 3,5 17,7 14,2 machinery 20,2 32,0 0,6 7,2 39,8 32,6 utilities 0,0 59,9 0,6 92,0 152,4 60,4 construction 0,0 54,4 0,7 59,7 114,8 55,1 wholesale, retail 0,7 32,4 0,4 17,3 50,1 32,8 communications 0,1 57,1 0,5 58,8 116,4 57,6 transport services 2,9 26,8 0,2 3,0 30,0 27,0 finance 2,1 41,6 0,4 42,5 84,5 42,0 business services 0,6 47,2 0,4 68,2 115,8 47,6 other services 1,3 36,4 0,5 31,3 68,2 36,9





grains 0,6 17,9 0,4 0,1 18,4 18,3 crops 5,5 7,6 0,6 -0,3 7,9 8,2 animal products 0,9 41,0 1,4 -0,2 42,2 42,4 forestry 0,0 -5,3 2,0 -3,5 -6,9 -3,3fisheries 0,2 45,2 0,2 -1,6 43,8 45,4mining 5,2 -4,5 -0,2 -0,4 -5,0 -4,7processed foods 9,6 162,1 6,3 2,1 170,4 168,4 textiles and clothing 7,8 22,8 1,0 0,7 24,5 23,8 wood, pulp, paper 6,7 15,5 0,6 0,6 16,6 16,0 chemicals 20,4 4,3 0,1 0,2 4,5 4,4 metals 7,4 22,5 0,9 1,3 24,7 23,4 motor vehicles 5,4 16,4 0,4 0,0 16,7 16,7 transport equipment 0,3 1,1 -0,1 -0,1 1,0 1,0 machinery 18,0 12,0 0,4 0,4 12,8 12,4 utilities 0,2 25,3 0,9 89,5 115,7 26,2 construction 0,0 15,8 0,5 54,0 70,2 16,3 wholesale, retail 0,9 15,4 0,5 23,2 39,1 15,9 communications 0,8 14,7 0,5 23,2 38,4 15,2 transport services 5,4 11,5 0,4 0,1 12,0 11,9 finance 1,3 9,8 0,3 13,2 23,4 10,1 business services 1,4 14,1 0,5 24,8 39,3 14,6 other services 2,0 20,3 0,7 32,1 53,1 21,0


Table 46: Change in Imports %, Venezuela




grains 0,1 -4,7 -0,1 -0,2 -4,9 -4,7crops 1,1 -5,2 0,0 -0,6 -5,8 -5,2animal products 0,2 -7,7 0,2 -1,1 -8,6 -7,5forestry 0,0 -1,0 0,0 -0,2 -1,2 -1,0fisheries 0,0 -4,2 0,2 -0,7 -4,7 -4,0mining 0,1 3,8 1,1 0,5 5,4 4,9processed foods 9,0 38,9 2,1 -3,0 37,9 41,0textiles and clothing 3,6 4,6 0,2 -1,1 3,7 4,8wood, pulp, paper 4,0 2,6 0,4 -1,9 1,1 3,0chemicals 13,3 1,2 0,2 -0,5 0,9 1,4metals 8,9 14,5 1,0 -2,7 12,9 15,6motor vehicles 9,6 7,1 0,2 -1,6 5,8 7,4transport equipment 2,3 -1,6 0,3 -2,0 -3,3 -1,3machinery 26,5 1,5 0,2 -0,5 1,1 1,6utilities 0,0 -8,1 0,1 92,5 84,5 -8,0construction 0,1 -7,0 0,1 53,5 46,6 -6,9wholesale, retail 2,6 -6,7 0,0 39,2 32,5 -6,7communications 1,1 -6,1 0,1 38,4 32,3 -6,0transport services 6,7 -5,2 0,0 -2,7 -7,9 -5,1finance 1,7 -4,5 0,0 24,3 19,9 -4,5business services 4,7 -5,1 0,0 33,3 28,3 -5,0other services 4,4 -6,3 0,0 31,4 25,2 -6,2

Table 47: Change in Imports %, EU15




grains 0,3 -1,6 -0,1 -0,1 -1,8 -1,7crops 3,7 -3,6 0,0 0,0 -3,6 -3,6animal products 0,5 -5,7 -0,1 0,0 -5,8 -5,8forestry 0,5 -0,7 0,0 0,0 -0,6 -0,6fisheries 0,0 -2,3 -0,1 0,0 -2,4 -2,4mining 2,8 0,4 0,0 -0,1 0,4 0,4processed foods 6,6 23,4 0,7 0,2 24,4 24,1textiles and clothing 8,1 0,2 0,0 0,0 0,3 0,2wood, pulp, paper 8,2 -0,1 0,0 0,0 0,0 0,0chemicals 6,5 0,2 0,0 0,0 0,2 0,2metals 10,9 0,7 0,1 0,0 0,8 0,8motor vehicles 12,7 0,4 0,0 0,0 0,5 0,5transport equipment 2,2 0,1 0,0 0,0 0,1 0,1machinery 22,2 0,4 0,0 0,0 0,5 0,5utilities 1,1 -1,1 0,0 3,0 1,8 -1,1construction 0,4 0,0 0,0 0,1 0,1 0,0wholesale, retail 1,7 0,0 0,0 0,4 0,4 0,0communications 0,6 -0,1 0,0 0,6 0,6 -0,1transport services 3,8 0,0 0,0 0,0 0,0 0,0finance 0,6 -0,2 0,0 0,5 0,3 -0,2business services 4,4 -0,1 0,0 0,7 0,6 -0,1other services 2,3 0,0 0,0 0,6 0,6 0,0


Table 48: Change in Imports %, EU15




grains 0,2 -1,1 0,0 0,0 -1,1 -1,1crops 1,3 -1,4 -0,1 0,0 -1,5 -1,5animal products 0,2 -2,5 -0,1 0,0 -2,6 -2,6forestry 0,0 -0,4 0,0 0,0 -0,4 -0,4fisheries 0,0 -2,3 -0,1 0,0 -2,4 -2,4mining 0,2 0,3 0,0 0,0 0,2 0,3processed foods 3,4 1,7 0,1 0,1 1,9 1,8textiles and clothing 7,0 0,1 0,0 0,0 0,1 0,1wood, pulp, paper 5,2 -0,1 0,0 0,0 -0,1 -0,1chemicals 16,2 0,1 0,0 0,0 0,1 0,1metals 11,2 0,3 0,0 0,0 0,3 0,4motor vehicles 10,6 0,5 0,0 0,0 0,5 0,5transport equipment 1,0 0,4 0,0 0,0 0,5 0,4machinery 33,9 0,3 0,0 0,0 0,3 0,3utilities 0,3 -2,6 0,0 6,2 3,6 -2,6construction 0,5 0,0 0,0 0,1 0,1 0,0wholesale, retail 1,0 -0,1 0,0 0,6 0,5 -0,1communications 0,4 -0,1 0,0 0,9 0,7 -0,1transport services 1,6 0,0 0,0 0,1 0,1 0,0finance 1,1 -0,1 0,0 0,4 0,2 -0,1business services 3,4 -0,1 0,0 0,7 0,6 -0,1other services 1,2 -0,1 0,0 0,7 0,6 -0,1

Table 49: Change in Exports %, Argentina

Share of export (benchmark)

tariff cuts services



grains 8,7 16,0 -0,1 -0,2 15,8 15,9 crops 7,6 1,3 0,0 -0,5 0,8 1,3 animal products 0,5 -16,4 0,5 -1,5 -17,3 -15,8forestry 0,1 1,9 3,3 0,1 5,3 5,2fisheries 0,1 17,3 -0,5 -1,6 15,2 16,8mining 4,8 1,2 0,3 -1,1 0,3 1,4processed foods 21,7 34,7 3,1 2,7 40,5 37,8textiles and clothing 3,7 6,0 0,7 2,2 8,9 6,7wood, pulp, paper 2,2 3,9 0,5 1,4 5,8 4,4chemicals 14,1 1,3 0,0 2,5 3,9 1,3metals 4,8 8,5 0,9 2,1 11,4 9,4motor vehicles 9,4 -5,0 0,0 5,6 0,5 -5,0transport equipment 0,1 6,5 0,4 5,2 12,0 6,8machinery 8,7 -4,4 0,1 2,3 -1,9 -4,2utilities 2,1 5,1 -0,1 -14,9 -9,9 5,0construction 0,0 1,0 -0,2 9,1 10,0 0,8wholesale, retail 0,5 -0,9 -0,3 25,8 24,6 -1,2communications 0,9 -0,2 -0,3 34,5 34,0 -0,5transport services 4,8 0,4 -0,2 1,1 1,3 0,2finance 0,3 -0,4 -0,3 23,2 22,4 -0,8


business services 1,9 0,1 -0,3 28,5 28,3 -0,2other services 2,8 -0,5 -0,3 24,5 23,7 -0,8

Table 50: Change in Exports %, Brazil

Share of export (benchmark)

tariff cuts services



grains 0,5 -24,6 -0,9 -0,7 -26,1 -25,4crops 12,5 -33,1 0,3 -0,4 -33,2 -32,8animal products 0,3 -53,4 -0,5 -0,9 -54,9 -54,0forestry 0,1 -28,2 1,2 -0,3 -27,3 -27,1fisheries 0,0 -12,8 -0,2 -0,2 -13,3 -13,1mining 6,3 3,2 2,5 -0,1 5,6 5,7processed foods 14,5 327,0 8,9 4,0 339,9 335,9textiles and clothing 5,5 -8,8 1,0 1,4 -6,4 -7,8wood, pulp, paper 7,3 -12,0 1,0 1,5 -9,5 -11,0chemicals 7,7 -7,2 0,1 0,5 -6,7 -7,1metals 9,8 -9,1 1,0 2,3 -5,9 -8,1motor vehicles 6,9 -19,3 1,0 1,7 -16,6 -18,3transport equipment 3,5 -15,3 1,8 2,3 -11,2 -13,5machinery 11,1 -19,4 0,6 2,0 -16,8 -18,8utilities 0,0 -12,9 -0,4 67,5 54,1 -13,4construction 0,0 -10,2 -0,3 20,7 10,1 -10,5wholesale, retail 1,3 -11,4 -0,4 28,8 17,0 -11,8communications 0,5 -11,6 -0,4 29,3 17,3 -12,0transport services 2,5 -4,7 -0,1 0,5 -4,4 -4,8finance 1,0 -11,4 -0,4 24,4 12,6 -11,8business services 8,0 -12,5 -0,4 27,9 15,0 -12,9other services 0,7 -10,9 -0,4 13,3 2,0 -11,3

Table 51: Change in Exports %, Paraguay

Share of export (benchmark) tariff cuts services



grains 2,6 -24,2 0,8 0,6 -22,7 -23,4crops 18,6 -35,0 0,2 -1,3 -36,1 -34,8animal products 0,2 -74,7 0,2 -1,0 -75,5 -74,6forestry 0,2 -24,6 2,4 -8,5 -30,6 -22,2fisheries 0,0 -21,3 0,6 -4,1 -24,8 -20,7mining 0,0 -31,3 0,0 -4,4 -35,6 -31,2processed foods 6,3 627,5 6,9 -25,7 608,7 634,4textiles and clothing 3,7 -44,5 1,4 -11,2 -54,3 -43,1wood, pulp, paper 1,9 -31,8 0,1 -10,7 -42,3 -31,6chemicals 1,4 -24,7 0,3 -6,8 -31,2 -24,4metals 0,7 -35,3 0,1 -12,9 -48,2 -35,2motor vehicles 0,0 -31,7 5,7 -23,0 -49,0 -26,0transport equipment 0,0 -48,5 -0,4 -18,8 -67,7 -48,9machinery 0,5 -46,5 0,7 -16,9 -62,7 -45,8utilities 57,6 -26,1 -0,2 17,2 -9,1 -26,3construction 0,0 -23,6 -0,3 9,7 -14,1 -23,9wholesale, retail 2,6 -30,5 -0,3 20,3 -10,5 -30,8communications 0,3 -26,7 -0,2 16,4 -10,5 -27,0transport services 1,2 -9,2 0,0 -2,7 -11,9 -9,2finance 0,5 -25,7 -0,3 8,0 -18,1 -26,0


business services 1,1 -29,0 -0,3 15,2 -14,1 -29,3other services 0,5 -23,0 -0,3 3,9 -19,3 -23,2

Table 52: Change in Exports %, Uruguay




grains 3,1 24,5 0,9 0,5 25,9 25,4 crops 3,2 -4,8 1,7 -0,5 -3,6 -3,1animal products 1,6 -35,6 0,3 -0,4 -35,7 -35,3forestry 2,8 -7,5 1,3 -0,5 -6,7 -6,1fisheries 0,3 -19,9 -0,5 0,6 -19,7 -20,3mining 0,1 -34,9 -0,1 -0,8 -35,8 -35,0processed foods 25,8 129,6 3,6 -2,0 131,2 133,2textiles and clothing 8,5 -19,6 0,5 -0,7 -19,8 -19,1wood, pulp, paper 4,7 -13,8 0,0 -1,2 -15,0 -13,8chemicals 14,1 -9,0 -0,2 -0,7 -9,9 -9,2metals 3,5 -23,0 0,6 -2,0 -24,4 -22,4motor vehicles 4,8 -34,2 -1,4 -3,6 -39,2 -35,6transport equipment 0,5 -31,7 1,2 -3,5 -34,0 -30,5machinery 3,5 -36,3 0,3 -2,4 -38,3 -35,9utilities 3,4 -21,1 -0,7 64,9 43,1 -21,8construction 0,0 -11,6 -0,3 18,4 6,5 -11,9wholesale, retail 1,8 -17,5 -0,6 25,5 7,4 -18,0communications 1,4 -17,9 -0,6 28,1 9,5 -18,5transport services 10,9 -10,5 -0,4 -0,4 -11,3 -10,9finance 2,1 -18,3 -0,6 28,5 9,6 -18,9business services 0,7 -16,0 -0,5 26,1 9,5 -16,5other services 2,9 -16,4 -0,5 21,2 4,2 -16,9

Table 53: Change in Exports %, Venezuela




grains 0,0 17,5 0,4 2,5 20,4 17,9 crops 1,0 104,8 2,7 2,9 110,3 107,4 animal products 1,0 12,9 4,7 3,3 20,9 17,6 forestry 0,0 7,8 1,0 2,4 11,2 8,8 fisheries 0,2 6,8 0,7 1,2 8,7 7,5 mining 41,2 0,7 0,1 0,1 0,9 0,8 processed foods 4,2 50,3 3,5 6,2 60,0 53,8 textiles and clothing 1,2 17,1 2,1 6,8 26,0 19,2 wood, pulp, paper 0,2 11,3 0,5 4,2 16,0 11,8 chemicals 19,7 4,8 0,1 2,3 7,3 5,0 metals 14,4 12,6 0,9 5,4 18,9 13,5 motor vehicles 0,3 25,1 1,2 6,5 32,8 26,3 transport equipment 0,1 22,8 2,9 8,2 33,9 25,7 machinery 2,6 23,1 2,9 7,1 33,0 26,0 utilities 0,0 7,2 0,0 65,7 72,8 7,1 construction 0,0 5,7 0,0 8,3 13,9 5,7 wholesale, retail 0,9 6,5 0,0 26,8 33,3 6,5 communications 0,3 6,0 -0,1 27,2 33,1 5,9 transport services 8,6 5,1 0,0 2,9 8,0 5,1


finance 0,2 5,8 -0,1 20,5 26,2 5,7 business services 1,1 5,9 0,0 24,2 30,0 5,9 other services 2,9 6,3 0,0 18,7 25,0 6,3

Table 54: Change in Exports %, EU15




grains 0,1 -2,7 -0,1 0,0 -2,8 -2,8crops 1,0 1,3 0,0 0,0 1,2 1,2animal products 0,2 2,0 0,1 0,0 2,1 2,1forestry 0,0 -0,1 0,0 0,0 -0,1 -0,1fisheries 0,0 -1,1 0,0 0,0 -1,2 -1,1mining 0,2 0,0 0,0 0,0 0,0 0,0processed foods 3,2 0,6 0,1 -0,1 0,5 0,6textiles and clothing 5,7 1,7 0,1 -0,1 1,7 1,8wood, pulp, paper 4,6 0,9 0,0 -0,1 0,9 0,9chemicals 16,2 0,8 0,1 -0,1 0,8 0,8metals 9,9 1,6 0,1 -0,1 1,5 1,7motor vehicles 9,8 3,2 0,1 -0,1 3,2 3,3transport equipment 1,6 0,3 0,1 -0,2 0,1 0,3machinery 32,8 2,5 0,1 -0,1 2,5 2,6utilities 0,5 0,5 0,0 2,5 3,0 0,5construction 0,4 0,0 0,0 0,2 0,1 0,0wholesale, retail 1,5 0,2 0,0 1,3 1,5 0,2communications 0,5 0,0 0,0 0,6 0,6 0,0transport services 3,4 0,8 0,0 0,0 0,8 0,8finance 1,6 0,2 0,0 1,5 1,7 0,2business services 4,9 0,4 0,0 1,1 1,5 0,4other services 2,0 0,2 0,0 1,9 2,1 0,2

Table 55: Change in Exports %, EU10




grains 0,1 -0,2 0,0 -0,1 -0,2 -0,2crops 0,7 1,1 0,0 0,0 1,0 1,0animal products 0,4 -2,1 -0,1 0,0 -2,3 -2,2forestry 0,5 0,1 0,0 0,0 0,0 0,1fisheries 0,0 -0,9 0,0 0,0 -1,0 -0,9mining 0,9 -0,2 -0,2 0,0 -0,4 -0,3processed foods 2,5 -5,0 -0,2 -0,1 -5,3 -5,2textiles and clothing 9,2 0,6 0,0 -0,1 0,5 0,6wood, pulp, paper 9,0 0,2 0,0 0,0 0,2 0,2chemicals 7,2 0,3 0,0 0,0 0,3 0,4metals 11,7 1,1 0,0 -0,1 1,0 1,1motor vehicles 15,3 0,9 0,0 -0,1 0,8 0,9transport equipment 2,0 2,6 0,1 -0,2 2,6 2,8machinery 27,1 1,2 0,1 -0,1 1,2 1,3utilities 1,2 0,8 0,0 4,3 5,1 0,8construction 0,5 0,0 0,0 0,2 0,3 0,0wholesale, retail 1,7 0,2 0,0 1,4 1,6 0,3communications 0,5 0,0 0,0 0,6 0,7 0,0


transport services 3,3 0,9 0,0 0,0 0,9 1,0 finance 0,5 0,2 0,0 1,4 1,6 0,2 business services 3,3 0,2 0,0 1,0 1,2 0,2 other services 2,4 0,2 0,0 1,9 2,1 0,2

Energy use and CO2 emission

Table 56: Consumtion in Mtoe from firms and households Benchmark Scenario

Coal Oil Gas Coal Oil Gas Argentina 0,7 25,9 17,4 0,7 25,9 17,3 Brazil 12,3 81,8 7,1 11,6 77,6 6,8 Paraguay 0,0 0,1 0,0 0,0 0,1 0,0 Uruguay 0,0 1,7 0,0 0,0 1,6 0,0 Venezuela 0,0 54,6 27,6 0,1 55,8 28,1 EU15 215,0 569,4 230,9 215,1 571,8 230,9 EU10 92,3 43,2 34,6 92,4 43,3 34,6 SUM 320,3 776,8 317,6 319,8 776,1 317,7

Table 57: Consumption in percentage (benchmark) Coal Oil Gas sum

Argentina 1,6 59,0 39,5 100 Brazil 12,2 80,8 7,0 100 Paraguay 0,3 99,6 0,1 100 Uruguay 0,0 98,9 1,1 100 Venezuela 0,1 66,3 33,6 100 EU15 21,2 56,1 22,7 100 EU10 54,3 25,4 20,3 100 SUM 22,6 54,9 22,5 100

Table 58: Mio tons CO2 emission

Benchmark Scenario Argentina 124 124 Brazil 319 302 Paraguay 0 0 Uruguay 5 5 Venezuela 235 240 EU15 3164 3172 EU10 582 583 SUM 4430 4426

Coal 1272 1270 Oil 2403 2401

Gas 755 756


ANNEX 4. THE IMPACT OF FURTHER TRADE LIBERALISATION BETWEEN EU AND MERCOSUR ON ROMANIA AND BULGARIA

Notes by Serban Scrieciu99

Romania and Bulgaria are “fresh” EU members, having joined the European Union as of 1st of January 2007. The economic structure of the two countries differs significantly from that of the other new EU-10 members and to a much greater extent to that of the old EU-15 members. This is partly because the agricultural sector in Romania and in Bulgaria plays by far a greater role in their national economies absorbing a greater amount of human resources and producing a greater volume of each of the country’s total output. For instance, in 2000, Bulgarian agriculture contributed to the formation of GDP with a share (12 percent) that was the closest to the Romanian counterpart (almost 14 percent), both significantly exceeding the shares corresponding to the other new EU-member states (see chart based on data from OECD, 2002). The same applies for the high share of agriculture in employment that by large exceeds the average European values. For example, in 2000, the share of agriculture in total employment amounted to 22 percent for CEE and 4.3 percent for EU, whereas for Romania this stood above 40 percent (EC, 2002).

Therefore, Romania’s and Bulgaria’s relative greater dependence on agricultural activities (including up- and down-stream sectors) may represent a key feature in exacerbating the negative impacts on their agro-food production, as hypothesised to occur for EU countries according to the CGE modelling exercise. In other words, the modelled negative impact on EU’s agricultural and food processing output is likely to be of a greater magnitude in the case of Romania and Bulgaria, as these countries are dependent to a greater extent on farming-related activities. Romania’s and Bulgaria’s agricultural and food products will face greater competition on EU markets from Mercosur’s corresponding increased export flows. By furthering trade liberalisation between EU and Mercosur, one may expect increasing competition for Western EU markets between Romanian and Bulgarian agro-food exporters on one hand, and Mercosur exporters (particularly Brazil and Argentina that are main suppliers to EU15) on the other hand. Hence, potential losses incurred by their domestic agro-food producers are more likely to result from their future loss of (Western) EU markets and tougher competition between exports (i.e. impacts on domestic production via changes in exports). Impacts on domestic production via changes in Mercosur imports flows directly targeting Romanian and Bulgarian markets will probably be insignificant as the value of Mercosur’s trade flows to and from these two economies tend to be very low.100 Put

99 Research Associate, Cambridge Centre for Climate Change Mitigation Research (4CMR), Department of Land Economy, University of Cambridge; E-mail: [email protected] 100 For example, imports from and exports to EU candidates (including Romania, Bulgaria, Turkey and Croatia) in total Mercosur’s imports, and respectively, exports represent only 0.2 percent, and respectively, 0.7 percent, compared to the share of imports from and exports to EU25 of 22 percent, and respectively, 18 percent (EC, 2006). Furthermore, Mercosur agro-food exports to Romania and Bulgaria include products that


differently, the potential gains in terms of increased agro-food output, exports and income that the two countries are likely to experience form EU accession, may be to some extent diminished or partly offset with further trade liberalisation between EU and Mercosur. For instance, Scrieciu (2007) also employs CGE modelling to assess the impact of Romania adopting EU’s Common Agricultural Policy on the country’s trade, production and welfare patterns. The author emphasises three main findings. First, the adoption of the CAP may expand agro-food output and trade, promote higher farm incomes, and increase overall economic welfare provided that producers are able to correspondingly respond, in the medium term, to the incentives offered with EU accession (i.e. assuming no major structural impediments). Second, CAP application results in increased production specialisation effects for Romania, particularly for sugar and sugar beet, bovine meat products, ruminant live animals, dairies, and cereal grains. Third, the identified impacts are driven by changes in trade-related measures, particularly enhanced access to EU markets, and less by alterations in production-related domestic support. A similar potentially realisable growth in the agro-food sector may be hypothesised for Bulgaria’s EU accession, since its agriculture displays similar characteristics to that of Romania.

The continued high reliance of these economies on agro-food activities will also translate in less gains for manufactures and services, as the two countries are overall less competitive in these sectors relative to their more developed (Western) EU counterparts. Hence, in terms of economic impacts, further trade liberalisation between EU and Mercosur is likely to negatively affect to a greater extent agriculture and food processing in Romania and Bulgaria, and to limit the potentially positive impact (in terms of increased output through increased exports) on their manufactures and services. Nevertheless, the net impacts across Romania’s and Bulgaria’s sectoral outputs, trade flows and overall welfare will largely depend upon differences in comparative advantages between the respective countries across the range of products for which trade is liberalised. Moreover, from a dynamic point of view, manufactures and services will play an increasing role in Bulgaria and Romania, as their economies grow at an accelerated pace, are better integrated into EU markets, and benefit from increased investments. This will render them more able to capitalise on and benefit from further EU-Mercosur trade liberalisation measures.

Social impacts in terms of employment effects will be closely correlated to output impacts. Since the agricultural and food sectors in Romania and Bulgaria may be negatively affected by further EU-Mercosur trade liberalisation and since they tend to display higher unskilled to skilled labour ratios than manufactures and services, employment perspectives for unskilled labour are likely to deteriorate. Once again, net impacts on employment and real wages will mostly depend on the dynamics of economic structures, and the extent to which the labour made redundant by the highly labour-intensive Romanian and Bulgarian agricultural sectors is effectively absorbed through growth in services and manufactures.

The net impact of greater trade flows between EU and Mercosur on the environment in Romania and Bulgaria will largely depend on the type of environmental problem under investigation. If agro-food output in Romania and Bulgaria is hypothesised to contract (though to a small extent) from EU-Mercosur trade liberalisation, this may then result in agro-

are not grown by local producers due to climatic conditions, such as cocoa and coffee products. However, a potential increase in the presence of Mercosur exporters on Bulgarian and Romanian markets may exacerbate the already existent trade deficits and contribute to macro-economic imbalances. According to Miclea (2006), in 2004, Brazil’s exports to Romania amounted to 397 million dollars (around 1.2% of Romania’s total imports), whereas Romania’s exports to Brazil stood only at 10.3 million dollars (around 0.4% of Romania’s total exports).


food activities exerting less scale-wise pressure on the environment. However, farm income losses incurred from losing out EU export markets to Mercosur producers will translate in less funds being available to farmers to protect their environment. Overall, potential environmental threats and benefits, against the background of further EU-Mercosur trade liberalisation, are difficult to assess mainly due to the complexity of the agriculture-environment linkages and the localised and contextualised nature of their impacts. Net impacts will ultimately depend on the appropriateness of regulatory measures adopted and the ability of the institutional framework to identify beforehand any potential direct and indirect environmental threats resulting from the trade policy measure. Changes in the energy intensity of output and in the carbon intensity of the respective energy will depend on the extent to which manufactures as opposed to services are favoured to agricultural activities. In other words, since services tend to be overall less energy and carbon intensive (excepting transport heavily relying on oil) than industry, higher EU-Mercosur trade liberalisation-induced growth in the former over the latter may lead to less energy consumption and reduced GHG emissions in Romania and Bulgaria. In addition, from a dynamic point of view the transfer of clean technology from the old EU countries coupled with higher imports of for example bio-fuel from Brazilian (sugar cane) crops favoured under an EU-Mercosur trade agreement may improve the perspectives in developing a lower-carbon transport sector in the two new EU member states.

References:

European Commission (2002): Agricultural Situation in the Candidate Countries. Country Report on Romania, Brussels: Directorate General for Agriculture, European Commission.

European Commission (2006): MERCOSUR-EU bilateral trade, fact-sheet, DG Trade 15 September 2006

Miclea (2006): “MERCOSUR and the regionalisation process in Latin America” (MERCOSUR in cadrul regionalismului din America-Latina), PhD thesis, Academy of Economic Studies, Faculty of International Economic Relations, Bucharest, Romania (available in Romanian at: http://www.biblioteca.ase.ro/catalog/detalii.php?c=3&q=regionalizare&st=s&tp1=0&tp2=0&tp3=0&tp4=0&tp5=0&tp6=0&ct=125920)

OECD (2002): Agricultural Policies in Transition Economies: Trends in Policies and Support, Paris: Organisation for Economic Co-operation and Development.

Scrieciu, S. S. (2007): “Economic Impacts of Adopting the Common Agricultural Policy of the European Union: A CGE Approach to the Case of Romania”, Journal of Economic Integration (in print)