Going against the tide of populist tendencies, the signing of the association agreement with the EU, aimed at helping the relatively closed markets of South America, especially Brazil and Argentina, stimulate economic growth, is the first significant trade agreement signed by Mercosur since its establishment in 1991. It represents the largest tariff reduction agreement ever the EU has ever achieved in terms of tariff reduction, with import duties on 91% of goods exported to Mercosur to be phased out. The European Commission estimates that this will save more than 4 billion euros on an annual basis, i.e. four times the savings estimated by theEU free trade agreement with Japan. Finally, the pact will offer better access to public procurement and maritime services, with an improvement in the transparency of procurement procedures.
The agreement in principle, announced last July, still needs to be approved by the European Council and the European Parliament, as well as by the national legislative bodies of the member countries of both blocs. For Mercosur countries, the agreement eliminates customs duties on 93% of exports to the EU and grants preferential treatment to the remaining 7%. As reported by Atradius, if ratified the agreement will increase competitiveness, investment and productivity, thus benefiting the potential for economic growth in member states. Agriculture is the commercial sector that will benefit the most: Brussels has agreed to reduce barriers on 82% of agricultural imports, although quotas will be applied on some sensitive agricultural products such as beef (a ceiling of 99.000 tonnes per 'year).
Meat, fruit, orange juice, sugar and ethanol in particular will have better market access. And better access to overseas markets is of great importance for South American markets, given the central role that the agricultural sector plays in local economies. However, in addition to the approval of the Council and the Commission, the road still appears to be uphill, since the agreement faces the opposition of European farmers, especially those from France. Furthermore, there is still the risk that Argentina could decide not to participate should President Macri lose the October elections against former President Kirchner's coalition.
As regards the Made in Italy, chemical and pharmaceutical driven, in Brazil the two sectors, despite the still slow economic recovery, are expected to further improve results and margins during the year. The level of competition is high and there is an ongoing process of concentration, particularly among medium and large operators. The segment remains solid, despite the downside risk due to the austerity policies that the Brazilian government plans to impose: value added in the secondary pharmaceutical sector increased by more than 7% in 2018 and is expected to increase by around 3% over the course of this year. Demand for innovative/specialist medicines will continue to increase, supported by urbanization and an aging population, with good opportunities to generate income. Large pharmacy chains continue to expand and open new stores, further increasing the offer of over-the-counter products such as cosmetics and natural and healthy foods.
atradius underlines how chemical products have been affected by the reduction in demand from China, however the prospects for 2019 appear to be more promising. It should never be forgotten that if, on the one hand, the agrochemical sector remains subject to sudden changes in exogenous factors such as climate, market prices and exchange rates, on the other hand, in the secondary sector of basic chemicals most of the raw materials it must be imported and production costs therefore remain exposed to the volatility not only of exchange rates but also to the constant threat of trade restrictions and tariffs.
