EU-Mercosur Free Trade Agreement

POSITION PAPER

EU-Mercosur Free Trade Agreement – Recommendations of German Industry

8 December 2017 Mercosur Member States have historically been important trading partners and investment locations for German industry. An ambitious and balanced free trade agreement (FTA) would therefore strengthen existing value chains between the European Union and Germany on one side and Mercosur countries on the other side, as well as enabling new value chains between the two regions.

A free trade agreement would also be welcome against the background of increasing competition with other trading partners, above all China and the USA. Lastly, as Mercosur’s first comprehensive FTA, a free trade agreement between Mercosur and the European Union could also make a substantial contribution to integration of Mercosur’s single market.

Both sides can benefit from an ambitious and balanced free trade agreement. It would give fresh impetus to a market with around 800 million people.

Sigrid Zirbel | Internationale Märkte | T: +49 30 2028-1559 | s.zirbel@bdi.eu | www.bdi.eu

EU-Mercosur Free Trade Agreement 08/12/2017

List of contents Recommendations .............................................................................................................................. 3 1

Introduction: Use the Window for Conclusion now .................................................................. 5

2

Importance of Mercosur for European and German Industry ................................................. 5

3

Current Situation: Numerous Trade Barriers ............................................................................ 7

4

Priorities of German Industry ..................................................................................................... 8 4.1 Progressively Dismantle and Eliminate Industrial Customs Duties ....................................... 8 4.2 Improve Customs Procedures and Trade Facilitation ............................................................ 8 4.3 Strengthen Internal Mercosur Integration and Implement the Customs Union ..................... 9 4.4 Simplify and Harmonise Rules of Origin ................................................................................ 9 4.5 Remove Non-tariff Barriers to Trade ..................................................................................... 11 4.5.1 Technical Standards .................................................................................................... 11 4.5.2 Regulations and Procedures ........................................................................................ 11 4.5.3 Tax System .................................................................................................................. 12 4.6 Agree on Clear Rules for Digital Trade ................................................................................ 12 4.7 Devise more Efficient Procedures for Protection of Intellectual Property ............................ 13 4.8 Enable Better Access to Public Procurement ...................................................................... 14 4.9 Facilitate Foreign Investments ............................................................................................. 14

Colophon ............................................................................................................................................. 14

2

EU-Mercosur Free Trade Agreement 08/12/2017

Recommendations 

Progressively Dismantle and Eliminate Industrial Customs Duties The average external tariff of 14 percent for industrial goods in Mercosur is particularly high in international comparison. With 30 percent for certain customs lines, customs rates are even among the highest in the world. BDI therefore calls for a complete elimination of all industrial customs duties – immediately if possible, otherwise progressively. By dismantling high industrial customs duties and improving access for European high technology, Mercosur Member States could modernise and make their economies more competitive.



Dismantle Technical Barriers to Trade Technical barriers to trade constitute a considerable obstacle in economic relations with Mercosur. On the basis of the free trade agreement (FTA), technical standards should be harmonised and there should be mutual recognition of equivalent safety tests and certificates. Relevant documents as well as procedures for registration and licensing should also be harmonised and standardised. The negotiating partners should work towards ISO, IEC and UNECE standards being endorsed and international standards being recognised in Mercosur. Market entrance barriers to protect domestic businesses which are incompatible with the rules of the World Trade Organisation (WTO) – via tax policy, for example – must be abolished.



Enhance Mercosur Integration and Implement the Customs Union German industry is in favour of consistent implementation of the Mercosur customs union. Remaining tariffs in trade between Mercosur countries should be dismantled and a harmonised external tariff should apply for all goods. This would markedly increase Mercosur’s attractiveness as a single market. Until this objective is being achieved, it is necessary that customs procedures at the external borders and between the individual Member States are simplified and harmonised.



Harmonise and Simplify Rules of Origin Rules of origin should be further harmonised and should reflect rules of origin comprised in other EU free-trade agreements in order to create uniform and workable rules for businesses. To keep red tape to a minimum, a harmonised cross-sectoral origin rule for industrial goods is desirable. When sector-specific rules of origin are being determined, the individual industrial sectors should be closely involved in the drafting.



Clear Rules for Digital Trade The free trade agreement should also take into account the growing importance of new ways of doing business and improve the conditions for digital trade and the digital transformation in the economy. Discriminatory and incompatible national rules should be dismantled and superseded by international rules on digital trade. In this area, EU and Mercosur can together play a leading role in setting international data protection standards.

3

EU-Mercosur Free Trade Agreement 08/12/2017



More Efficient Procedures for Protecting Intellectual Property Rights Processes for lodging patent applications should be structured more efficiently and more transparently. In addition, the regime for protection of intellectual property rights should be harmonised in the various Mercosur countries. An important step towards improving procedures would be the signature of the patent cooperation treaty (PCT), which has so far only been done by Brazil.



Improve Access to Public Procurement A modernisation and opening of public procurement in Mercosur countries is needed.

An important point – relatively simple to implement – would be the abolition of local content requirements, enabling foreign bidders to take part in tender procedures.



Facilitate Foreign Investments BDI calls for national treatment of foreign investments in Mercosur countries; in particular, non-discriminatory access to support funds, research and development programmes should also be ensured. Free movement of employees in connection with investments is of particular importance, especially in the areas of intra-corporate exchanges, and avoidance of double taxation.

4

EU-Mercosur Free Trade Agreement 08/12/2017

1 Introduction: Use the Window for Conclusion Now A modern and ambitious free trade agreement between the EU and Mercosur is one of the top priorities of German industry in the field of trade policy.

The EU and Mercosur opened negotiations on an FTA in 2000, suspended them in 2004 due to a lack of progress, briefly resumed talks in 2010 and intensified them in 2016. As a result, it has been possible to make good progress in the negotiations over the last eighteen months, which BDI welcomes as an important step for conclusion of a free-trade agreement.

Both sides are invited to demonstrate the necessary flexibility in the negotiations. The aim must be to arrive at the successful conclusion of an ambitious, responsible and sustainable agreement.

2 Importance of Mercosur for European and German Industry Mercosur is the EU’s most important trading partner in Latin America. In 2016, 43.3 percent of the EU’s total trade in goods with Latin America was conducted with the trade bloc. EU firms exported goods worth around € 42 billion to Mercosur. At the level of roughly 20 percent, the EU is also the most important trading partner of Mercosur countries, ahead of the USA (16.8 percent) and China (19.4 percent). 60 percent of direct investments into Mercosur come from the EU and flow in particular into important industrial sectors such as automotive, mechanical engineering and chemicals (source: European Commission “European Union, Trade in goods with Mercosur” and “European Union, Trade in goods with Latin American countries”, 3 May 2017).

Within the EU, Germany is Mercosur’s largest trading partner and investor. In the opposite direction, Mercosur is also German industry’s most important trading partner in Latin America. In 2016, around 40 percent of German goods exports to Latin America flowed into the trade bloc. Given the strong presence of German firms locally, turnover in the market exceeds German exports many times over.

German companies have traditionally exported industrial goods such as machinery and vehicles to Mercosur whereas 30 percent of Mercosur exports to Germany is comprised of raw materials and 40 percent of agricultural products. The potential arising from this complementary production structure for trade and investments is considerable and far from being fully exploited. Conclusion of an EU-Mercosur free-trade agreement is an important instrument for maintaining and developing German industry’s and Mercosur’s strategic partnership.

5

EU-Mercosur Free Trade Agreement 08/12/2017

Germany’s trade in goods with Mercosur

Source: European Commission data

EU’s trade in goods with Mercosur 70000 60000

Mio €

50000 40000 30000 20000 10000 0 2008

2009

2010

2011 Importe

2012

2013

2014

2015

2016

Exporte

Source: European Commission data

6

EU-Mercosur Free Trade Agreement 08/12/2017

3 Current Situation: Numerous Trade Barriers Import duties – sometimes at a very high rate – have to be paid on a large proportion of German exports to Mercosur. However, trade and investments by German companies are impeded by numerous technical barriers to trade, import levies and bureaucratic procedures. In Brazil especially, this is compounded by a complicated and opaque tax system which additionally cumulates taxes on the value of exports on which duty has already been paid. The situation is also exacerbated in many areas by thickets of red tape with wide scope for arbitrary decisions. Taken together, this markedly increases prices for imported goods and makes it difficult to import goods at competitive prices.

Import duties on industrial goods in Mercosur countries 40 35

34

33

34

33

33

30 25 20 16

15 13

14

Uruguay

Average

15 11 10 5 0 Argentina

Brazil

Paraguay

Average bound tariff rates for industrial goods Average applied MFN tariff rate for industrial goods Source: WTO, Tariff Profiles

Above all in Brazil, a large number of very high import levies are collected alongside customs duties.

Trade with Mercosur, in particular with Argentina and Brazil, is impaired by frequent changes to the restrictive import provisions. The great effort this entails for adjusting procedures, for example to IT systems, and the deployment of advisers often make economically viable market entry difficult, especially for small and medium-sized enterprises.

International economic relations have altered greatly since the negotiations were launched. These new developments, for instance in the area of digital trade, should be taken into account in the negotiations and captured in the agreement. Among others, we need clear rules which encourage digital trade and restrict digital protectionism.

7

EU-Mercosur Free Trade Agreement 08/12/2017

4 German Industry’s Priorities German industry’s priorities for an EU-Mercosur free-trade agreement relate first and foremost to the dismantling of tariff and non-tariff barriers to trade. Alongside a progressive elimination of customs duties, this includes in particular facilitations in customs procedures, removal of technical barriers and local content requirements as well as simplification and harmonisation of rules of origin.

German industry calls for: 

Progressively dismantle and eliminate industrial customs duties



Improve customs procedures and trade facilitations



Strengthen internal Mercosur integration and implement a customs union



Simplify and harmonise rules of origin



Remove non-tariff barriers to trade: regulations, standards, taxes



Agree on clear rules for digital trade



Devise more efficient procedures for protection of intellectual property



Enable better access to public procurement



Facilitate foreign investments

Detailed recommendations:

4.1

Progressively Dismantle and Eliminate Industrial Customs Duties

At an average of 14 percent, Mercosur’s external tariff rates are very high on an international comparison. Customs duties are charged on 85 percent of EU exports to Mercosur, in particular on the products which are of interest for German industry. For instance, the duty on some machines and machine parts is up to 20 percent and on cars as much as 35 percent (figures from the Brazilian Finance Ministry).

BDI position: BDI calls for a complete elimination of industrial customs duties, with no exceptions.

Transitional arrangements over three to five years could be considered for individual goods.

4.2

Improve Customs Procedures and Trade Facilitations

Unwieldy customs procedures at Mercosur’s external borders and between the countries are a major obstacle in trade relations. In Argentina and Brazil in particular, there exist restrictive import regimes.

Trade with Mercosur, especially with Argentina and Brazil is impaired by frequent changes to import provisions, and high import levies are collected. Market entry involves long and complicated customs procedures, high requirements on documentation and unclear rules which give authorities wide discretion. There are also different customs procedures in the individual Mercosur countries, for example with respect to the required product information, validity of documentation or even the use

8

EU-Mercosur Free Trade Agreement 08/12/2017

of electronic signatures. Moreover, the procedures for acquiring import licences are cumbersome and time-consuming. In addition, the EU plans to enshrine the Registered Exporter System (REX) also in the framework of Mercosur and accordingly replace the status of “approved exporter” in the longer term.

BDI position: BDI calls for a simplification and further modernisation of Mercosur customs procedures. Also particularly important is a standardisation and harmonisation of customs procedures between the individual Mercosur countries. The provisions of the WTO Trade Facilitation Agreement (TFA) should also form part of the Mercosur customs rules. Insofar as the Mercosur countries have not yet ratified TFA, this should be done rapidly. So far, only Paraguay and Brazil have ratified (as at 23 October 2017). Capacity-building measures should also be implemented promptly. In this regard, stronger digitalisation of processes would be particularly welcome. On the European side, the simplified “approved exporter” procedure should continue to apply.

4.3

Strengthen Internal Mercosur Integration and Implement a Customs union

The high investments which German companies have made in Mercosur countries should also be seen in conjunction with an expected further regional integration and the emergence of a common market. Against this background, German industry is concerned about a standstill or retrogression in internal integration. Independent of the Mercosur common external tariff (CET), each country is allowed to set customs duties autonomously for a certain number of tariff lines, in other words there is no uniform external tariff for various categories of goods. Above all in the automotive sector, there are numerous suspensions of free trade, even within the trade bloc.

BDI position: German industry looks on at retrogression in Mercosur integration with concern and is in favour of consistent implementation of a customs union. The customs duties that continue to apply between individual Mercosur countries should be abolished as rapidly as possible. Creation of homogeneous interests in trade policy presupposes effective coordination of economic policy.

Development of supranational institutions in Mercosur would accelerate the ongoing integration process. The EU should actively encourage this process with technical and financial support.

4.4

Simplify and Harmonise Rules of Origin

Rules of origin are of great interest for German industry. Only products where at least 60 percent of their customs value is originating in the trade bloc are currently exempt from customs duties in Mercosur.

BDI position: Rules of origin should reflect rules of origin comprised in other EU free-trade agreements, for instance the FTA with Korea, with a view to reducing red tape for companies and creating workable rules. The affected industrial sectors should be closely involved in determining specific rules of origin.

9

EU-Mercosur Free Trade Agreement 08/12/2017

Detailed comments: 

Uniform cross-sectoral value-added rules: German industry is in favour of a uniform, crossindustry value-added rule of 50 percent based on the EU calculation method (EEU). This excludes the agricultural products covered in chapter 1-24 CN. As an alternative to the EEU calculation method, a calculation using a Mercosur method should also be possible if the results of the origin calculation are comparable. Economic actors can then choose between the different calculation methods.



Sector-specific alternative rules: As an alternative to the cross- industry value-added rule, the criterion of “change of tariff classification should apply. As a further alternative, selected productspecific processing rules should apply for certain products as defined by the sectors. When these rules are being determined, the affected sectors should be closely involved.



Averaging: The possibility of averaging should be allowed. By contrast with the product specific calculation of origin, averaging enables a summary view of series, calculation periods and/or production sites. A calculation based on average material prices should be allowed.



Proof of origin: Proof of origin should be simplified. Exporters should be able to choose freely whether they submit an invoice declaration or a formal movement certificate. In addition, use of a non-formal origin certificate should always be possible up to a given amount (e.g. € 6,000 as in the EU-Korea free-trade agreement). In relation to proofs of origin, it should also be possible in the longer term to submit proofs for a period of up to two years.



Direct transport: Goods should maintain their preferential status irrespective of the transport route. Proof of preferential status shall be considered adduced, as long as customs authorities do not cast or claim reasonable doubts on the non- manipulated condition/status of a good. This adjustment is necessary in times of global value chains. In modern logistics networks, goods are often not delivered directly from the country of origin to the destination country offering preferential treatment. Rather, they are first delivered to a regional hub which /provides for the region’s needs at short notice and generally falls outside the application area of the preference agreement. Such a distribution system makes an essential contribution to better flows in the supply system and enables widespread just-in-time deliveries. Accordingly, transport via a hub should also be recognised as direct transport.



No extraterritorial verification of proofs of origin: Direct verifications and inspections of EU proofs of origin by Mercosur authorities on European soil should be explicitly ruled out in the agreement. In particular, exterritorial action by authorities is highly incompatible with the need to protect business secrets. Because verification of the origin of goods and of origin details gives a deep insight into sensitive production know-how. Rather, there should be mutual recognition of control measures by customs authorities in the framework of reciprocal administrative assistance. Doubts about a good’s preferential origin status in the importing country can be addressed via a verification request to the exporting country.



Duty drawback: Duty drawback should be broadly permissible. The possibility to ban duty drawback should exist for individual sectors. Under a duty drawback ban, a contracting country may not reimburse, defer or cancel customs levies already paid or still due for the import of a non-origin good in certain cases of re-export. This is the case if the good itself, a similar good or

10

EU-Mercosur Free Trade Agreement 08/12/2017

its substitute was imported as an input for incorporation in another good and is then exported to the customs area of the other contracting party in application of the preferential customs rate contained in the agreement. Conversely, the duty drawback ban does not apply if the reduction, cancellation or remission of levies in the contracting party’s customs system is not expressly made dependent on re-export of a good. The three-year transition rule is not applicable.

4.5

Remove Non-Tariff Barriers to Trade

For many companies, technical barriers to trade constitute a major obstacle to economic relations with Mercosur.

4.5.1 Technical Standards In many industrial sectors, goods are produced to North American standards and can be sold only where these standards are applied.

BDI position: Products which are manufactured to international standards have the best chance of being exported worldwide. North American standards are not international standards and should be used in ISO and IEC Member States only where there are no relevant ISO and IEC standards. As a rule, that is the case only in narrow niche areas such as oil and gas, defence equipment and aerospace. Efforts should be made for Mercosur to endorse ISO, IEC and UNECE standards and recognise international standards. In the automotive sector, the negotiations should be used to encourage Mercosur countries to sign the 1958 and 1998 UNECE agreements.

4.5.2 Regulations and Procedures There are long-winded, complex and unpredictable processing times for authorisation, registration and licensing procedures in all Mercosur countries (this is particularly manifest for pesticides, products of animal origin and medical technology but also for special products such as industrial nitrocellulose in Brazil). In addition, certificates attesting European standards (EN) for imports of industrial products are often not recognised, for example in Argentina, even though these EN usually have an identical content to international ISO and IEC standards which should be published and in force in the Mercosur countries as the de facto national language version. The Mercosur countries are ISO and IEC members.

BDI position: On the basis of the FTA, technical standards should be harmonised and equivalent safety tests and ratings carried out by public or private institutions should be mutually recognised.

The aim should be to harmonise and standardise the relevant documents and procedures for registrations and licences in order to remove unnecessary barriers to trade between Mercosur and the EU. Moreover, negotiators should press for recognition of certificates attesting European standards for imports of industrial products insofar as these EN have an identical content to international ISO and IEC standards which have been issued in the Mercosur countries (ISO and IEC members) as the national language version. The free-trade agreement should lay the foundations for simplification of regulatory requirements at sectoral level.

11

EU-Mercosur Free Trade Agreement 08/12/2017

4.5.3 Tax System In Brazil, trade is rendered difficult by national tax rules which are subject to frequent changes. At the same time, tax policy is deployed to promote domestic production, as in the “Inovar-Auto” programme. The tax system is very complicated; transfer prices are not oriented on international standards. Furthermore, there are different systems for customs and taxes between the individual federal states. Home-produced products are given preference through a higher tax burden on imported products as well as through tax breaks for the use of home-produced goods and subsidies for export quotas.

BDI position: Protectionist measures to protect the domestic economy which are incompatible with WTO rules distort competition and should be scrapped. Tax discrimination against imported products as compared with home-produced products must be eliminated. As an important locational factor, the tax system must not render cross-border trade difficult but should promote it. Good tax framework conditions also include a German-Brazilian double taxation agreement. In this regard, efforts must once more be intensified on both sides. Brazil’s May 2017 application for OECD membership must be taken as an opportunity and incentive to reform the country’s tax system and adjust to international standards.

4.6

Agree on Clear Rules for Digital Trade

Electronic commerce and the digital transformation are increasingly becoming more important. At the same time, there are not yet adequate rules for this area which underpin electronic commerce and prevent digital protectionism. This legal and planning uncertainty for companies makes it impossible to realise the full potential of e-commerce. In this regard, data protection is gaining in importance.

Company data and personal information are not currently adequately protected in Mercosur. In particular, enforced data localisation impedes trade in Internet services as well as digital services, which leads to disadvantages for the majority of German companies. In addition, restrictions on data transfer have the consequence of effectiveness losses and hence reduce willingness to invest.

BDI position: The free-trade agreement should improve the conditions for digital trade and digital transformation in the economy. Discriminatory and incompatible national rules should be dismantled and replaced by international rules on digital trade. In this area, the EU and Mercosur can assume a leading role in international data protection standards. Furthermore, the EU and Mercosur countries should together strive for investments in ICT infrastructure and for development of capacities and skills.

The agreement should broadly guarantee cross-border access, transfer and storage of data. Stateenforced restrictions with respect to data localisation and ICT infrastructure should be prohibited.

Cross-border data transfer and free choice of location for data processing and storage must not be made dependent on whether this is necessary for companies to conduct their business.

The aim should be to export the EU’s high data protection standards and to establish an adequate level of data protection in Mercosur countries. The provision of the EU general data protection regulation must not be hollowed out or circumvented by the trade agreement. Exemptions from data and ICT infrastructure localisation bans intended to protect the private sphere and national security are legitimate. Nevertheless, it should be possible to derogate from free data exchange only in

12

EU-Mercosur Free Trade Agreement 08/12/2017

clearly delineated exceptional cases which are clearly defined, non-arbitrary, non-discriminatory and transparent in every case. In this regard, the provisions should be oriented on GATS article XIV, reflect the importance of data protection as a fundamental EU right and maintain effective protection of the general ability to engage in cross-border data transfer. The burden of proof that measures which restrict the cross-border data flow are legitimate and non-protectionist should lie with the governments which apply them. A burden of proof for companies would undermine the objective of an effective limitation of digital protectionism.

4.7

Devise more Efficient Procedures for Protection of Intellectual Property

German industry complains that patent application procedures in Mercosur are too long and sometimes too complicated. It sees a need for improvement in the restrictive grant and number of licences. In particular, it is critical of additional patentability rules and obstacles which sometimes completely rule out or sharply reduce the patentability of innovations in certain sectors (biotechnology, chemical-pharmaceutical sector) and which appear difficult to reconcile with TRIPS standards. This also relates to Argentina where a stronger international harmonisation of IPR rules would be desirable. In Brazil, the processes carried out by the patent office INPI are still felt to be inefficient, although some progress has been made here in recent years. National patent offices in Mercosur are insufficiently networked with each other. Of the Mercosur countries, only Brazil has so far signed the Patent Cooperation Treaty (PCT).

BDI position: Patent application procedures must be structured more efficiently and more transparently. It would be an advantage if the Mercosur countries were to harmonise their IPR regimes along the lines of the EU model. Currently only Argentina and Uruguay have harmonised systems which enable data exchange. First and foremost, an important step with a view to lower costs, harmonisation, efficiency and transparency would be the signature of PCT by all Mercosur countries.

4.8

Enable Better Access to Public Procurement

Local suppliers and companies from Mercosur are markedly better positioned for government contracts than EU companies. Above all, high local content requirements and high threshold values make it difficult for German companies to participate in public procurement in all Mercosur countries.

Procedures are deemed to be not very transparent and bureaucratic. They also offer scope for corruption.

BDI position: A modernisation and opening of public procurement in the Mercosur countries is urgently needed. It would be desirable to increase transparency in the procedures. A central point is the removal of local content requirements in order to enable foreign suppliers to take part in tendering procedures.

4.9

Facilitate Foreign Investments

Given the high level of German investments in the trade bloc, investment rules are of great importance. German industry bemoans the complex and long procedures for company creation,

13

EU-Mercosur Free Trade Agreement 08/12/2017

especially in Brazil. There are great difficulties with short-term postings of employees due to complicated, opaque and costly procedures for obtaining work permits and visas. Capital transfers from and to Brazil involve a high bureaucratic effort.

In addition, there is only limited access for foreign investors in a number of sectors, for instance in the aeronautic sector in Brazil. The Brazilian development bank BNDES discriminates against foreign companies by financing only national firms or firms with a high share of national capital. This has a negative effect on German investment plans.

BDI position: BDI calls for full and progressive liberalisation of investment conditions for all sectors.

In addition, national treatment should be ensured for all investors and investments, in particular nondiscriminatory access to research and development programmes should be secured. Free movement of employees in connection with investments is of particular importance, especially in the areas of intra-corporate exchanges and avoidance of double taxation.

Colophon Bundesverband der Deutschen Industrie e.V. (BDI) Breite StraĂ&#x;e 29 | 10178 Berlin | Germany www.bdi.eu T: +49 30 2028-0 Responsible BDI departments International Markets External Economic Policy Editorial team Sigrid Zirbel T: +49 30 2028-1559 s.zirbel@bdi.eu Eckart von Unger T: +32 2 792 1011 E.vonUnger@bdi.eu Verena Kantel T: +49 30 2028 1518 V.Kantel@bdi.eu

D 0890

14