For three years, people have been waiting for the ratification of the trade agreement with South American countries that environmentalists hate. With the Ukraine war, the pressure to overcome the deadlock in the negotiations is increasing.
In order to stop the deforestation of the Amazon rainforest, the EU and EFTA are demanding additional guarantees from the Mercosur states.
Free trade is currently in a difficult position. The economy is pushing for an update of the trade agreement with China. But the negotiations about a renewal and expansion of the contract are on hold. Those in power in Beijing don’t like the fact that the Federal Council is now addressing human rights violations more openly. The Federal Council’s creed of “change through trade” seems long outdated. That is why even middle-class politicians are demanding that Switzerland should only engage in free trade with states that respect democratic values.
China is not the only construction site in foreign trade policy. The supposedly greatest success of Swiss trade diplomacy in recent years is also in danger of disappearing into thin air: the agreement with the Mercosur countries Brazil, Argentina, Uruguay and Paraguay. In August 2019, Economics Minister Guy Parmelin happily announced in Buenos Aires that Switzerland, together with the EFTA states of Norway, Iceland and Liechtenstein, had agreed on a trade agreement with the South American bloc. According to the original timetable, the contract should definitely be signed and sealed in the same year.
Pandemic slowed the deal
But things turned out differently. The Swiss export industry is still waiting for the trade package to be signed. First it was said that the Corona crisis, which had hit South America particularly hard, had slowed down the conclusion. Because of the travel restrictions, it was not possible to complete the outstanding work. Gradually, however, it became clear that significant differences of opinion among the contracting parties were preventing a deal. “It has been shown that there are different interpretations of some content points,” says Michael Wüthrich, spokesman for the State Secretariat for Economic Affairs (Seco). It is still unclear by when these could be clarified.
There are two main reasons why the agreement could still fail on the home stretch. First, there was a change of government in Argentina. After the lost elections, the economically liberal President Mauricio Macri handed over the baton to Alberto Fernandez, who comes from the centre-left camp. Fernandez has far less to do with free trade than his predecessor. Within the Mercosur bloc, this weakened Brazil and Uruguay, which advocated more trade openness and opposed protectionism.
Secondly, the European Union is also struggling to reach an agreement with Mercosur. Like EFTA, Brussels reached an agreement in principle three years ago. However, the EU Parliament and many member states made it clear that they did not want to accept the treaty in its existing form because there were no binding obligations on environmental and social standards and the protection of human rights. This is especially true now that the deforestation of the Amazon rainforest has reached new highs under Brazilian President Jair Bolsonaro.
EU and EFTA demand guarantees against deforestation
As a result, the Europeans demanded further guarantees in an additional agreement – and demanded concrete steps from the South Americans to stop the ongoing deforestation of the rainforest. In return, Argentinian and Brazilian representatives accused the EU of using environmental concerns as a pretext for trade protectionism.
The trade dispute between the EU and Mercosur is a major factor in the fact that the ratification of the EFTA agreement is dragging on. Because Switzerland and the other Mercosur countries first want to wait and see which additional guarantees Brussels will demand from the Mercosur countries before deciding on how to proceed. “We basically share the EU’s concerns about the environmental situation in the Mercosur countries – especially in Brazil,” says Seco spokesman Wüthrich. We are in contact with the EU about this.
However, there are now hopeful signs that the deadlock in negotiations can be overcome. The outbreak of the war in Ukraine and the growing concerns of Europeans about their security of supply in the areas of raw materials, food and energy seem to bring new momentum to the negotiations.
The environmental problems that would stand in the way of a trade agreement could be solved by the end of the year, said EU Commissioner Virginijus Sinkevicius recently. And in May, German Chancellor Olaf Scholz, in the presence of the Argentine President, also urged progress in the negotiations. If the EU and the Mercosur states agree on these controversial points, the negotiations between the EFTA states should also gain new impetus.
Agreements without negative consequences for the environment
According to Wüthrich, however, the environmental impacts of the two agreements are not directly comparable. He refers to a study by the University of Bern. The authors come to the conclusion that the EFTA agreement – in contrast to the EU trade pact – has no significant impact on the environment and climate. According to a model calculation, the deforestation of the rain forests would increase at most in the per thousand range. This is because the agreement would hardly change the trade flows for products with a negative impact on the environment – such as soy for animal feed or even gold – since trade is already fully liberalized today.
In contrast, according to the study, the benefits for the economy would be significant. According to their forecast, Swiss exports could be increased by more than half by 2040 with an agreement. At the same time, the savings potential for local companies is CHF 180 million. The reason for this is that the Mercosur economic area with its 295 million inhabitants is now protected by high customs walls.
For Switzerland, however, it is not just about freeing the exports of Swiss companies from customs hurdles. The question of security of supply is becoming increasingly important. “The Mercosur countries are among the largest producers of agricultural commodities,” emphasizes Jan Atteslander, head of foreign trade at the Economiesuisse association. The agreement ensures that Switzerland can fall back on more different sources of supply. During the war in Ukraine, this circumstance acquired a much higher priority.