Quantitative assessment of a free trade agreement between MERCOSUR and the European Union

Abstract

Using a GTAP CGE model/database, this paper assesses the possible effects of a free trade agreement (FTA) between the MERCOSUR and the European Union (EU). The study takes into consideration the most important recent free trade agreements signed among the Latin American countries, as well as the  latest European Union enlargements. With a 2004+ benchmark base scenario where tariffs were updated by the addition of information on trade agreements just signed by Latin American countries, two different policy simulations are addressed: (i) full liberalization, (ii) liberalization excluding sensitive  products.  The  global  CGE  model  allows  analyzing  direct  and indirect socio-economic impacts on subscriber countries as well as on other countries in the region.

From the point of view of the MERCOSUR countries, the results suggest that the FTA would be beneficial to foster their exports, especially in the case of Light manufactures. Imports to MERCOSUR from the EU would be increased, particularly in heavy manufactures sectors. In terms of GDP  the results remain positive in the case of all the MERCOSUR countries in  all simulated scenarios. However, welfare implications are unevenly  distributed in favor of all the MERCOSUR countries in the simulated scenarios. The inclusion of sensitive products in the agreements seems to  reduce the magnitude of the results but does not change the direction of the impacts. In any case, active public policies to mitigate the negative effects on sectors, enhance positive impacts and seize dynamic opportunities  towards sustainable development must be undertaken. The main conclusion points out a potential complementary trade relationship among these two regions.