Introduction

The strategic association between Mercosur and the European Union (EU) seems to be an elusive idea. After missing the October 2004 target, the negotiations of a bi-regional agreement are, in practical terms, almost paralyzed.

At the official level, however, both parts consider that the negotiations could be concluded in a relatively short term. Recently, both the President of the European Commission and President of Uruguay – acting Pro-Tempore President of Mercosur – have expressed their will to conclude the negotiations. Most probably, this will continues to be the official position of both sides, at least on the immediate future. Still, many observers and analysts maintain some doubts about the possibility of concluding an agreement within the next months. At least, if it intends to be an agreement that includes an ambitious free trade component.

Those doubts reflect the prevailing mood on the fate of the Doha Round. It is known that both, the bi-regional and the multilateral trade negotiations are de-facto related by a common element: the possibility of articulating a reasonable trade-off between what Mercosur could obtain in agriculture and the EU in access for industrial goods and services. It involves also the scope of exceptions that each part needs to include, as a result of their main sensitive sectors and products.

For that reason, it is difficult – but not impossible – to imagine that an ambitious bi-regional agreement could be signed before the conclu- CM_Briefnote.fm Page 11 Mardi, 25. septembre 2007 5:26 17 12 sion of the Doha Round. And the possibility of success, does not depend only on an eventual agreement between the two regions. Other protagonists are crucial and the United States above all.

Three related questions require some analysis. They are:

• Concerning the present situation: Why a negotiation process that was launched with such enthusiasm, raising great expectations, became almost paralyzed in the last three years?
• Concerning the future: Which are the most possible outcomes of the bi-regional negotiations within a foreseeable future?
• Concerning the role of the business sector: Could the MEBF play an active role in promoting the idea of a more intense cooperation among the two regions?

Which is the actual situation of the bi-regional negotiations?

The negotiations of a Mercosur-EU bi-regional strategic association were launched at the first LAC-EU Summit, at Rio de Janeiro in 1999. Previously, a framework co-operation agreement was signed at Madrid in 1995. It is still in force. Eventually, it could be a useful framework for a more intense bi-regional Mercosur-EU partnership that does not include trade preferences.

Formal negotiations began in 2000. According to the original concept that still prevails, they should be conclude by a bi-regional strategic association with three related pillars: political dialogue, economic cooperation, and free trade commitments consistent with WTO rules. After almost eight years, what is missing to finalize the negotiations is mainly the third pillar. No agreement was achieved in October 2004. Since then the negotiation is, in practical terms, in a stalemate. However, low transparency make it very difficult to evaluate the real progress obtained in any of the areas of the negotiations, including those apparently concluded – political dialogue and economic cooperation. Draft texts and substantial information are not included in the official Web page of any of the two parts. In some way, the negotiations have had a flavor of old fashion secret diplomacy.

As mentioned before, difficulties for the conclusion of Doha Round appear as the most common explanation for the actual situation of the bi-regional negotiations. However, other factors have had also an influence in the lack of results or in the difficulties to explore alternatives.

Those other factors could explain what appears to be an insufficiency of incentives, on both parts, to afford some of the main costs of concluding the negotiations (sensitivities in the agriculture sector in the case of the EU, and in the industrial sector in the case of Mercosur countries).

Among them, three factors could be mentioned as being apparently more relevant:

• Deep changes in the international landscape since the original idea of a bi-regional strategic cooperation was launched. Not only those changes have been dramatic at the global level (recalling only some of them: the emergence of new relevant protagonists on the economic competition field and, increasingly, on international trade negotiations; the new strategic relevance of energy and bio-energy; the environment agenda due, mainly, to the increasing evidence of weather changes). But also important developments could be observed at each of the two regions. Some of them are the result of the impact of global changes in their external priorities. Others are the result of the fact that nor the EU not even Mercosur, are the same they were in the nineties. The EU is larger, but also Mercosur has entered in a process of enlargement with the inclusion of Venezuela, not yet completely formalized.
  
  
• The erosion of the initial enthusiasm for a strategic partnership. On the European side, that enthusiasm had something to do with the earliest day idea that Mercosur was following the European model of regional integration. Together they could strengthen a multipolar multilateral global system. Gradually this image of Mercosur and its potential has been replaced by an increasing perplexity about its goals and its capacity to deliver what was promised, particularly in terms of an effective customs union. The recent incorporation of Venezuela, in some way has contributed to the European perception of what is even considered to be the failure of Mercosur. What is really Mercosur in terms of real economic integration? This is one frequent question raised by Europeans businessmen and economic integration specialists. Mercosur seems to have in Europe a strong identity and credibility problem. And on the Mercosur side, the original enthusiasm had a lot to do with the fact the EU was expected to promote a new model of relations involving a highly developed region and a group of developing countries. This enthusiasm diminished in view of what was considered to be a highly mercantilist approach on the European negotiating proposals, that were not perceived as taking in consideration the huge asymmetries of economic dimension and CM_Briefnote.fm Page 13 Mardi, 25. septembre 2007 5:26 17 14 of degree of development among both sides. This approach didn’t appear to be compensated with a more substantial effort of economic and financial cooperation.
  
  
• The fact that the idea of a Free Trade Area of the America’s (FTAA) has failed. In some way, the initial interest of the EU and its firms in a strategic association with Mercosur, had something to do with the possibility that a preferential treatment for American firms, would eventually affect their relative competitive positions within the markets of Brazil and Argentina. What is clear is that the virtual paralysis of the bi-regional negotiations since 2004, coincide with the collapse of the hemispheric negotiations.

Which are possible scenarios for the future development of the bi-regional Mercosur-EU association?

At least three scenarios are foreseeable for the future of the biregional association. They are:

• A successful or relatively successful scenario: It would imply a conclusion of the bi-regional negotiations, before the next May LAC-EU Lima Summit or during 2008 as a result of a substantial political impulse eventually received at Lima. It would require, previously, the untying of the main agriculture knots that have paralyzed, until now, both the Doha and the bi-regional negotiations. Or it could require the acceptance of the idea of a two step negotiation at the bi-regional level, with step one including the strategic association agreement and a first stock of WTO consistent trade preferences, and then a “Doha-plus” second step, that could result from the conclusion of the present WTO trade negotiations.
  
  
• A stalemate or “quasi-failure” scenario: It would imply a “sine die” postponement of the actual bi-regional trade negotiations. The formal argument would be, in this case, that the negotiations should wait for the final conclusion of the Doha Round. Assuming that the DDA could eventually be concluded in 2009 or 2010, this would imply a similar delay for the bi-regional negotiations. Meanwhile the EU will concentrate its action toward Mercosur, in some economic cooperation programs, in their bilateral relations with each member State and, particularly, in the development of the strategic partnership with Brazil. An eventual bilateral preferential negotiation between the EU and Brazil has been excluded until now by both parts. But obviously, it is a hypothesis that should not CM_Briefnote.fm Page 14 Mardi, 25. septembre 2007 5:26 17 15 be completely excluded in the future, depending on the evolution of Mercosur within the next years, particularly on the development of its customs union and on the degree of flexibility that could finally prevail concerning trade negotiations of its member states with third countries.
  
  
• A pragmatic scenario: It would imply a development of the main elements that characterizes a strategic association, temporarily excluding trade preferences and the signing of a new agreement. In this case, pending the conclusion of the present negotiations, strong action would be concentrated in the development of various elements that were included in the 1995 Madrid Framework Agreement. In most cases the full potential of the Agreement was not developed due to the high concentration off efforts since 1999 – both at the official and at the business sector level – in the biregional trade negotiation. Through the use of all the potential of the Madrid Agreement, a large part of the non-preferential elements of the Mercosur-EU relation could be covered. It would be even possible to introduce further developments taking advantage of its evolution clause. A political decision to takes advantage of all the potential of the Madrid Agreement, could be complemented by an invitation extended by Brazil to its Mercosur partners, to participate in its bilateral strategic partnership with the EU.

In any of those scenarios – specially the first and the third one – and due to the asymmetries in the economic dimensions and the levels of development of both sides of the bi-regional relation, economic and financial cooperation should be considered the central pillar of a strategic association concept and program. It would have the effect of strengthening the functional interaction among the three pillars of the relation. The cooperation pillar would also facilitate the transition toward a more integrated economic space between the two regions. Within this idea of strengthening the cooperation pillar as a central element of the association strategy, the instrument of trade and business facilitation should be included as a central element.

What could be the role of the business sector in deepening Mercosur-EU relations?

The business sector through the institutional framework of the MEBF could play a leading role in the development of more intensive relations between the two regions, even if the negotiations do not CM_Briefnote.fm Page 15 Mardi, 25. septembre 2007 5:26 17 16 conclude in the 2007-2008 period. The role of the business sector as driving force of other special relations of the EU – for example, the Transatlantic Business Dialogue with the US or the ASEM Business Forum – should be taken in consideration.

It’s contributions should be identified in a way that it could be implemented in any of the above mentioned scenarios. They should cover a very few high priority fields of action with a great potential of synergies among them. Energy and trade facilitation should be some of them. The main objective would be to introduce a new dynamic in the bi-regional process and, at the same time, to draw some lessons from other experiences, including those of the EU with Asia (ASEM). The selected priorities should also contribute to generate synergies with other business sector initiatives undertaken as a result of association agreements of the EU with other LAC countries – including those under negotiation with Central America and the Andean countries.

In any case, it seems convenient for the MEBF not to be limited to the trade negotiations agenda. Instead, it should be perceived by key businessmen of relevant countries of both regions and by the business associations, as the forum where to meet and to really talk about common concerns with high level officials of the Commission and governments – including the Ministers of Economy as in the case of ASEM. Obviously, issues related with the trade negotiations and the implementation of eventual agreements should be included. But particularly, it should be the forum to discuss substantive issues related with the long term agenda of economic competition and cooperation of the two regions, i.e. within the scope of the Madrid Framework Agreement, including the issues originated in their relations with China, India and other emergent economies.

How could be strengthen the capacity to work together in the energy field? Is an instrument similar to the Energy Chart Treaty useful to attract European investments to South America? Which is the real potential for bi-regional cooperation in the field of food production and of bio-energy? Should competitiveness and innovation be a main focus of the common agenda of firms and governments of the two regions? How firms of both regions could cooperate to take advantage of what China and India means as a source of opportunities in the new global economic competition landscape? Is it possible to have in the new regional political situation a real friendly environment for investments? How to strengthen cooperation in the field of trade facilitation and infrastructure development (for example within the IIRSA framework)? How to develop trilateral cooperation with least developed countries, for example through the participation of the EU in FOCEM?

Those are only examples of the kind of issues that could be discussed within the framework of MEBF. In this broader agenda, MEBF could also take advantage of the technical analyses of relevant issues by several academic bi-regional networks. The role of MEBF in that case would be also to raise to the academic community some action-oriented questions related with substantive long term issues, as those mentioned before.

MEBF could eventually play a significant role in deepening the biregional relationship. But that role will largely depend on the dynamic interaction – between the EU Commission, the governments, the business sector and the academic institutions or social networks – that could be stimulated by a long term vision of the bi-regional association.

Perhaps that long term vision is what is missing in this moment, eventually explaining the relative anomy of the bi-regional strategic association process.