Mercosur- EU Trade Negotiations: Ending Trade Diversion, Strengthening Trade Institutions

Abstract

After a long impasse, Mercosur and the European Union are once again negotiating to reach a Free Trade Agreement. The benefits from such a trade liberalization would be significant since these are essentially complementary economic regions. An agreement would also end decades of costly trade diversion effects and few of these are quantified in this paper. But, trade is only one of the important issues in these negotiations. The biggest Mercosur countries are making efforts towards leaving behind a decade long experiment with populism that violated several World Trade Organisation rules while Europe is increasingly being threatened by right wing populism that is outspoken in favor of inward-looking economic and social policies. A Mercosur-EU would create a significant economic region with enormous potential for trade creation; such an agreement would also serve to strengthen western trade institutions and challenge the populist threats that is hanging over both of these regions.