Potential EU-Mercosur Free Trade Agreement: Impact Assessment

Abstract

This report presents the simulations made with two different models of two alternative hypothetical versions of a bilateral free trade agreement between the EU and Mercosur. The two versions of the agreement are based on the final negotiating positions of each party in the previous unresolved negotiating round. A global CGE model, GLOBE, simulates the economy-wide impacts of the trade policy changes involving all sectors of the two regional blocks. A global partial equilibrium model, CAPRI, simulates only the impacts generated by changes in agricultural trade policy and incurred by the agricultural sectors of the two regions. However, CAPRI considers individual agricultural products in more detail and can generate the territorial distribution of their production within the EU at the NUTS 2 regional level.

The simulation results show that the economic losses and the adjustment pressures arising from a bilateral trade agreement between the EU and the countries of Mercosur would, as far as the EU is concerned, fall very heavily on the agricultural sector. The gains to other sectors would be widely diffused and, given the very small magnitude of these gains relative to the EU economy as a whole, would be easily absorbed without imposing an adjustment burden. The aggregate welfare changes for the EU, whether measured across the whole economy or on a partial basis with respect only to the activities agricultural production and food consumption, would be small. However, the trade-off involved in the redistribution of income between agriculture and the rest of the economy is steeper in the scenarios depicting the terms requested by Mercosur than in those involving the terms offered by the EU. The Mercosur request provokes a much greater downward impact on EU agriculture whereas the additional gains elsewhere (to non-agrifood sectors or to consumers in the EU) are relatively smaller.