A closer look at the Mercosur-EU trade deal

Hello! This is The Brazilian Report‘s Weekly Report. In this issue: How Brazilian markets have performed. Confidence levels v. economic growth. A closer look at the Mercosur-EU trade deal.

The week in review

China 1. Despite Jair Bolsonaro’s historical anti-Beijing stances, his administration intends to facilitate the entry of Chinese citizens to Brazil. The idea, sponsored by the Tourism Ministry, is to eliminate visa requirements for Chinese citizens who already hold visas for the U.S., Japan, Canada, or Australia. The Brazilian government lifted visa requirements for citizens of the five countries in March.

China 2. After three straight years in the red, meat giant BRF should be back in the black in 2019, thanks to a swine fever outbreak in China. The Asian country’s hog herds, the world’s largest, has shrunk by 26% from June 2018, according to a survey of pig farms in 400 Chinese counties. Negative effects may be felt there for the next decade. That scenario has pushed BRF stocks up 50% since January—and the company projects BRL 170m in new investments to boost exports.

Truckers’ strike? Infrastructure Minister Tarcísio de Freitas will meet next week with disgruntled truckers to avoid a new strike, after one in May last year nearly paralyzed the country. Drivers have threatened to stop working after the government published a new minimum freight pricing table, which they considered to be too low, factoring in only operational costs, without taking wages into account.

Heating up the economy. The government initially announced its intention to allow workers to withdraw money from their FGTS severance fund—usually only available to someone when laid off. The move was aimed at stimulating consumption and helping families reduce their debts. But FGTS is also used to finance infrastructure projects—so construction firms successfully lobbied against it. After meeting with sector representatives, President Bolsonaro decided to put the project on hold.

Money laundering. Supreme Court Chief Justice Dias Toffoli decided to suspend all investigations that use information from Coaf—Brazil’s money laundering enforcement agency—without a court order. The ruling came after a request by defense lawyers representing Senator Flavio Bolsonaro, the president’s eldest son, suspected of money laundering. Per online magazine Crusoé, the case involves a strange coincidence: three weeks ago, revenue authorities started to scrutinize companies that have hired the law firm of the justice’s wife.

FaceApp. The São Paulo consumer defense service has notified the company behind FaceApp, a popular app that simulates how people would look when they get older. The firm will have to disclose how it collects, stores, and uses personal data from consumers who download the app. Experts claim FaceApp represents a major risk to user data privacy, though its owners told TechCrunch, “most images are deleted within 48 hours.” Google and Apple were also notified as it is available in their online stores.

Confidence levels back to pre-election levels

After Jair Bolsonaro won the 2018 election promising to lead a pro-business administration, industrialists grew more confident about the Brazilian economy. But 200 days after taking office, confidence levels have dipped to somewhere close to pre-election levels—when markets feared the return of the Workers’ Party to power. In Mr. Bolsonaro’s favor is the latest economic activity index published by the Central Bank, showing a slight rise of 0.54%—which narrows the risk of a recession.

Markets

A couple of weeks ago, Petrobras announced it would sell up to 33% of its distribution company, BR Distribuidora, as part of the government’s attempt to break the public monopoly in the fuel market. Since then, BRDT3 stocks have climbed 11.2%, turning positive for the year. Investors have until July 22 to participate in the offer. Levante Investimentos sees the moment as a good opportunity, as long as the price is no higher than BRL 30 per share. As a market leader in Brazil, BR Distribuidora may surf on the economic recovery. According to the research house’s calculations, the growth in the volume of fuel sold by BR could be twice the Brazilian GDP growth rate, from 2020 onwards. In sum, they see a low debt level, at 0.9 times the company’s EBITDA (earnings before interest, tax, depreciation and amortization), opening room for dividend payments in the future. Moreover, the company has recently improved compliance with new governance measures.

Natália Scalzaretto, TBR markets reporter

A closer look at the Mercosur-EU trade deal

After dominating news cycles for a few days after being announced, the Mercosur trade deal with the European Union has apparently already fallen into oblivion. With the euphoria around the signing of the deal now passed—it was celebrated by the Brazilian government as an unquestionable victory—the Brazilian Institute of Applied Economic Research (Ipea) has taken a closer look at the terms of the deal.

And, yes, while we should expect some economic gains, there will be losers from the deal.

An Ipea team, led by José Ronaldo de Castro Souza Júnior, performed a comprehensive study on the impacts of the deal, not only on trade, but also on investment, policymaking and cooperation in important fields such as sanitary measures, competition, and the environment.

The team of researchers concluded that although the tariff cuts obtained by Mercosur countries are less than the ones obtained by the EU (especially for agricultural products), it is important to remember that trade deals are not perfect zero-sum equations.

“The liberalization presents gains for all parts involved. For Brazil, it will allow a significant reduction in the price of manufactured goods, i.e. capital goods, chemicals, and pharmaceutical products, which are a significant tranche of Brazilian imports from the EU.”

Who won: the EU or Mercosur?

According to experts, Mercosur has higher average tariffs for imports (13%) than the EU (4.7%). The bulk of Mercosur exports to the EU are commodities and agricultural products, while imports are mostly industrialized goods. For some experts, this explains the bigger concessions by the South Americans. According to this logic, all countries involved will gain from focusing on their competitive advantages. “The deal will allow Mercosur countries to purchase cheaper capital goods and intermediate goods, reducing production costs, benefitting the economies and increasing productivity.”

Automakers on the trade deal

This is one of the most sensitive points of the deal. In Mercosur, the full liberalization of imports will take 15 years—and tariff reduction for fully-assembled vehicles will happen only after the deal’s eighth anniversary. Until then, the EU will have a 50,000-vehicle quota, paying a 17.5% fee for anything exceeding that.

Where the EU gains

Ipea showed that Mercosur’s highest average import tariffs concern textiles, clothing and shoes—but imports from the EU in those categories are usually low (less than USD 100 million per year). So, while tariff reductions may help to boost EU exports, they will have to face more competitive Asian players. 

On the other hand, goods that face “medium-level” tariffs and are purchased in higher amounts have more chances to thrive. So this category would include iron and steel, cosmetics, boats, and furniture. Vehicles would also be on the list, but only after the full liberalization process.

The biggest gain will come in sectors where the EU already faces lower tariffs (below 13%) since it’s where Europeans are more competitive. That includes machinery, pharmaceutical products, aircraft, and optical and photographic equipment.

Untangling the agricultural trade knot

Agriculture is one of Europe’s most protected economic sectors, and while Mercosur obtained significant advances, many products remain under quotas. Ipea experts foresee effective gains for poultry and pork meat, ethanol, and honey, because Mercosur exports are currently lower than the established quotas. For other important products, like beef and sugar, benefits will be lower tariffs under the volumes currently exported.

“It is likely that part of these gains become price cuts for European consumers and part become higher profit margins for Mercosur exporters,” wrote the economists, adding that, since most quotas will be established with a long deadline and European demand tends to grow, gains may be limited.

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