Summary
The main products of concern to ACP countries where quota restricted duty free access is to be phased in for Mercosur exporters are sugar; ethanol; beef; poultry meat; and rice. The TRQ granted for sugar will reduce the margins of tariff preference enjoyed by ACP sugar exporters on EU27 markets and intensify price pressure on ACP sugar suppliers. It will make supplying the EU27 market increasingly difficulty for all but the most competitive ACP sugar exporters, unless some form of quality differentiated offering is on sale. In contrast the TRQ for ethanol is likely to have little impact on current ACP exports which are marginal. The TRQ for beef could generate increased competition on beef market components which Namibian exporters are increasingly targeting, although further investment in quality based product differentiation could serve to insulate Namibian exporters from any adverse price effects. In the poultry meat sector the new TRQ could serve to further fuel the growth in EU exports of frozen poultry parts to African market. In the rice sector given the relatively small size of the TRQ granted to Mercosur exporters it is unclear to what extent this poses a threat to ACP rice exporters in Guyana and Suriname.
Use of TRQs
The EU’s focus on careful market opening towards Mercosur exporters is manifested through the use of tariff rate quotas (TRQs) in sensitive agri-food products. The main TRQs established for Mercosur exports to the EU of interest to ACP exporters cover: sugar; ethanol; beef; poultry meat; and rice.
These TRQs will be phased in over six years, starting at the date of entry into force of the agreement. However EU ratification of the trade component of the agreement could take up to two years or even more. It is unclear whether the EC will go ahead with provisional implementation of these TRQs in the absence of formal approval by EU member states, given the concerns which have been raised by EU farmers’ organisations.
Sugar
The sugar TRQ involves the elimination of the in-quota tariff rate applied to the 180,000 tonnes of raw cane sugar for refining in the ‘Brazil-specific WTO quota’ (1). Currently this quota attracts an in-quota tariff of €98/tonne. In addition a TRQ of 10,000 tonnes of raw cane sugar for refining has been established for Paraguay.
These TRQs compare to total EU imports of sugar from Mercosur countries in 2018 of 274,433 tonnes (2). To put this in context these newly agreed sugar TRQs represent duty free access for 2/3 of current Mercosur sugar exports to the EU28 and represent a 37.3% increase in total current duty free TRQ restricted access for sugar imports to the EU28 market.
Ethanol
The ethanol TRQ involves the introduction of a duty free access for 450,000 tonnes of ethanol for chemical use and 200,000 tonnes of ethanol for all uses (including fuel). These TRQs will have an in-quota tariff 1/3 of the MFN duty (1). These ethanol quotas cover 39% of current Mercosur exports of total ethanol/biodiesel to the EU28. A market in which 9 ACP countries have a small export interest (30,716 tonnes, of which 14,154 comes from South Africa).
However it is unclear to what extent the extension of the ethanol TRQs will encourage Brazil to expand its exports of undenatured ethyl alcohol (CN Code 22071000) and biodiesel (CN Code 3826).
Representatives of the European renewable ethanol association (ePURE) have criticised the EC for opening up the EU market to imports of ethanol in a context where the EC is encouraging the phasing out of crop based biofuels in the EU in favour of biofuels based on waste and residues. It has been suggested the EU-Mercosur deal will create another disincentive for investors, ‘already reeling from the long history of policy uncertainty that has hindered the development of the EU ethanol industry’. The Secretary General of ePURE Emmanuel Desplechin earlier raised the question: Where would you build your new advanced ethanol plant: in a region with a stable biofuels policy that enjoys duty-free access to the EU? Or in the EU itself, which has a notoriously uncertain biofuels policy environment and no competitively available export markets as an alternative outlet? (3)
Beef
The beef TRQ granted Mercosur exporters covers imports of 99,000 tonnes carcass weight equivalent (CWE). Of this TRQ 55% is allocated to fresh beef imports and 45% to frozen beef imports, This involves the elimination of the in-quota tariff rate of 7.5% applied under the current Mercosur-specific WTO “Hilton” quota (1). This TRQ for beef is equivalent to 56% of imports of fresh beef cuts from Mercosur in 2018 and 68% of imports of frozen beef cuts.
Nevertheless French cattle farmers are concerned they will ‘be unable to compete with large South American livestock farms, mainly in Argentina, Uruguay and Brazil’ (4). Particular concerns arise from the fact Mercosur exporters generally first fill available quotas with higher value cuts (filet, entrecote and rump steals) before exporting other cuts (hindquarters, topside and silverside) (5). There are thus concerns exports under the TRQ could be focussed on the premium end of the market.
As a result of a process of cross subsidisation arising from the availability of a duty free TRQ, Copa-COGECA estimates under the influence of the agreement imports from Mercosur countries could reach 1 million tonnes of high quality beef cut in the coming years, worth €16 billion. Copa-Cogeca puts the direct cost to EU beef farmers at an estimated €16 billion with indirect costs of €9 billion (5).
Poultry
The poultry meat TRQ provides duty free access for 180,000 tonnes (CWE), with this being evenly divided between bone-in chicken meat and boneless chicken meat imports (1). This TRQ is equivalent to 184% of 2018 Mercosur exports of poultry meat to the EU (2).
However over the past 6 years the share of Mercosur suppliers of poultry meat to the EU market has fallen from 80.5% in 2013 to 42% in 2018. This is largely a result of the increase in EU imports from Ukraine, where poultry meat TRQs have been progressively expanded as part of the EU’s political response to the Russian seizure of the Crimea. Between 2013 and 2018 EU poultry meat imports from the Ukraine increased from 210 tonnes to 105,173 tonnes (45% of EU imports by 2018) (2). This strongly suggests the granting of duty free access TRQs can have important effects on patterns of EU poultry meat imports.
While this duty free TRQ access for Mercosur poultry meat exports will be phased in over 6 years, the granting of this TRQ needs to be seen in the context of the disruptions to UK-EU27 poultry trade which will arise under a ‘no-deal’ Brexit. Thus we find the initial first year increase in Mercosur access is equivalent to only 3.7% of the volume of EU27 poultry meat exports to the UK which could be disrupted under a ‘no-deal’ Brexit.
Rice
The rice TRQ involves the granting of 60,000 tonnes of duty free access, which as in all other sectors is to be phased in over 6 years in equal annual stages (1). Here imports from Uruguay are seen as a potential threat to EU rice producers. This needs to be seen in a context where EU safeguard measures have already been introduced on rice imports from the principal LDC suppliers Myanmar and Cambodia (6). However in the rice sector the duty free TRQ access granted under the Mercosur Agreement is equivalent to only 3% of total extra-EU28 rice imports in 2018 (total extra-EU imports in 2,024,059 tonnes).
Other TRQs
Additional tariff rate quotas granted to Mercosur include: Honey (15,000 tonnes duty free); Sweetcorn (1,000 tonne duty free; Pigmeat (25,000 tonnes CWE, duty free). In addition reciprocal TRQs are to be phased in for 30,000 tonnes of duty free access for cheese; 10,000 tonnes of duty free access for milk powders and 5,000 tonnes of duty free access for infant formula. However ACP countries have no export or domestic market interests in these products which could be affected by increased access for Mercosur exports to the EU market (1).
| Comment and Analysis In the sugar sector the TRQs agreed under the EU-Mercosur Agreement takes the total tonnage covered by EU duty free TRQs to 1,010,653 tonnes (when South Africa is included). This needs to be seen in a context where in 2018 the EU28 imported 1,643,445 tonnes of sugar, with 1,186,058 tonnes being destined for EU27 markets. Factoring out imports of refined sugar, the TRQs for raw cane sugar imports alone would be sufficient to meet the EU27s import needs in 2018.This will reduce the margins of tariff preference enjoyed by ACP sugar exporters on EU27 markets and intensify price pressure on ACP sugar suppliers. This will make supplying the EU27 market increasingly difficulty for all but the most competitive ACP suppliers, unless some form of quality differentiated offering is on sale (e.g. Fair trade or organic raw cane sugar).Viewed slightly differently the Mercosur sugar TRQs are equivalent to almost 50% of the EU27 sugar exports which would be driven back onto EU27 markets as a result of the imposition of standard MFN duties on UK sugar imports from EU27 suppliers under a no-deal Brexit. The Mercosur agreement will thus provide a further source of disruption to the functioning of EU27 sugar markets, after the impact of a ‘no-deal’ Brexit has been absorbed. This being stated, this additional disruption will be phased in and may not be fully felt until 2028. This will thus provide time for ACP exporters to adjust. This is in sharp contrast to the impact of a no-deal Brexit on the functioning of E27 sugar market. In terms of ethanol, while 10 ACP countries have some interest in exporting ethanol to the EU, this involves only small volumes and hence the EU-Mercosur agreement is likely to have a marginal impact on current trade, although it will discourage any future development of ethanol exports to the EU market. In terms of the beef sector given the focus of Mercosur’s TRQ utilisation on the export of high value cuts the new arrangements for Mercosur beef exports to the EU are potentially a matter of concern to Namibian beef exporters. The Namibian beef sector has increasingly focussed its exports of beef to the premium end of the EU beef market. This would suggest the new TRQ will generate increased competition on beef market components which Namibian exporters are increasingly targeting. This would be particularly the case if Copa-Cogeca fears over the eventual level of Mercosur beef exports were to be realised. Such large scale Brazilian beef exports to the EU could profoundly impact on the market for Namibian and Botswanan beef in the EU. Of more immediate concern however will be the impact of a ‘no-deal’ Brexit on EU27 beef market prices, if current EU27 exports of beef to the UK market (mainly from Ireland and France) are disrupted by a ‘no-deal’ Brexit This being noted the investments already made in the marketing of quality differentiated Namibian beef cuts could well serve to partially insulate Namibian beef exports from any adverse price effects. An expansion of marketing efforts to clearly differentiate Namibian beef cuts from the general beef market would however appear to be worthy of consideration. In terms of poultry meat, ACP countries have no export interest in trade with the EU. However the EU is a major source of imports of poultry parts into sub-Saharan African countries, with this trade having seen a phenomenal expansion since 2012. In this context the market effects of the new TRQ access granted Mercosur exporters could serve to fuel the further growth in EU exports of frozen poultry parts to African market. Of far more importance however in the immediate future is likely to be the trade displacement effects in the poultry sector of a ‘no-deal’ Brexit, which is looking increasingly likely come 1st November 2019. In the rice sector given the relatively small size of the TRQ granted to Mercosur exporters it is unclear to what extent this poses a threat to ACP rice exporters in Guyana and Suriname. This being noted the TRQ allocated Mercosur exporters is equivalent to almost 30% of the volume of rice exported by Guyana and Suriname to the EU in 2018 (198,164 tonnes). In this context, some level of increased competition will occur. This impact however fades into insignificance compared to the impact of the UK’s withdrawal from the EU on the functioning of the EU rice market, since this will see the withdrawal of import demand from the EU market equation of 359,889 tonnes. |
Sources:
(1) EC, ‘EC, ‘New EU-Mercosur trade agreement: The agreement in principle’, Brussels, 1 July 2019
http://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157964.pdf
(2) EC, Market Access Data Base
https://madb.europa.eu/madb/statistical_form.htm
(3) euractiv.com, ‘What the EU risks by opening up its market to Brazilian sugar cane ethanol, 15 September 2017
https://www.euractiv.com/section/agriculture-food/opinion/what-the-eu-risks-by-opening-up-its-market-to-brazilian-sugar-cane-ethanol/
(4) euronews.com, ‘EU-Mercosur deal: Is the agreement a threat to European agriculture?’, 3, July
https://www.euronews.com/2019/07/03/eu-mercosur-deal-is-the-agreement-a-threat-to-european-agriculture
(5) Copa-Cogeca, ‘The agricultural impact of an EU-Mercosur agreement’
https://www.euronews.com/2019/07/03/eu-mercosur-deal-is-the-agreement-a-threat-to-european-agriculture
(6) EC, ‘EU imposes safeguard measures on rice from Cambodia and Myanmar’, 16 January 2019
http://trade.ec.europa.eu/doclib/press/index.cfm?id=1970&utm_source=dlvr.it&utm_medium=facebook